CHINA AGRI PRODUCTS EXCHANGE LTD v. WANG XIU QUN AND ANOTHER

HCA 1807/2011

[2021] HKCFI 137

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1807 OF 2011

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JUDGMENT

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1.  This action was commenced by the Plaintiff, China Agri-Products Exchange Ltd, against the 1^st Defendant, Madam Wang Xiu Qun (“Wang”) and the 2^nd Defendant, Wuhan Tianjiu Industrial Trade Company Limited (“Tianjiu”) for breaches of two sale and purchase agreements by which they sold their shares in one Wuhan Baishazhou Agricultural By-Product Grand Market Co Ltd (“BSZ”) to the Plaintiff.

2.  As I see it, the final submissions of the Plaintiff provide a good structure for me to approach the numerous issues raised in this case.  Hence, I will adopt a similar framework in this Judgment.

PART A: BACKGROUND

A.1   The Plaintiff’s acquisition of BSZ

3.  In December 2003, Wang and her husband, Mr Zhou Jiu Ming (“Zhou”), caused BSZ to be incorporated in the Mainland.  Zhou and Wang have at all times been in control of Tianjiu.

4.  BSZ operated a market in Wuhan selling a variety of food and other products (the “Market”).  Despite several changes in its shareholding, BSZ had remained in the control of Zhou and Wang.  Zhou was a director of BSZ until 12 August 2010.

5.  In May 2007, the parties entered into the following agreements by which the Plaintiff, which was a listed company in Hong Kong, was to acquire a 90% interest in BSZ from Wang and Tianjiu^[1]:

(i)   a sale and purchase agreement dated 2 May 2007 (the “1^st SPA”) by which Wang agreed to sell her 70% interest in BSZ to the Plaintiff for a consideration of HK$900,000,000 to be paid by cash, a “promissory note” and convertible notes issued by the Plaintiff; and

(ii)  a sale and purchase agreement dated 2 May 2007 (the “2^nd SPA”), as amended by a supplemental agreement dated 10 May 2007, by which Tianjiu agreed to sell its 20% interest in BSZ to the Plaintiff for a consideration of HK$256,000,000 to be paid by a “promissory note”.

6.  The execution of the 1^st SPA and 2^nd SPA (collectively the “SPAs”) took place in Hong Kong.  The 1^st SPA was signed by Mr Fu Jie Pin (“Fu”), then an executive director and chief executive officer of the Plaintiff, and Wang.  The 2^nd SPA was signed by Fu and one Mr Li Jun (“Li Jun”) who, according to the payroll list of BSZ in June 2007, was a driver of “Director Zhou”, i.e. Zhou.  Both SPAs were witnessed by Mr Yang Zong Lin (“Yang”), an executive director of the Plaintiff since 29 April 2007.

7.  For the purpose of the present action, the material terms of the SPAs relate to the following matters:

(i)  conditions precedent to the completion of the acquisition;

(ii)  warranties given by the Defendants to the Plaintiff regarding, inter alia, the management accounts of BSZ which were included in Annex 2 to each of the SPAs (the “Management Accounts”), which cover the financial years ended on 31 December 2004, 31 December 2005 and 31 December 2006 and the first three months of 2007 ended on 31 March 2007;

(iii) Wang’s guarantee that the audited net profit of BSZ for the year ending 31 December 2007 (the “Profit Guarantee Period”) would not be less than HK$150,000,000 (the “Profit Guarantee”); and

(iv) the Defendants’ warranties and obligations regarding the use of the land in which the Market is situated.

8.  In an announcement (the “10 May Announcement”) issued by the Plaintiff’s board of directors (the “Board”), which at the time included Fu and Yang, on 10 May 2007:

(i)  the material terms of the SPAs were set out;

(ii)  it was stated that the consideration under the SPAs was negotiated on an arm’s length basis and was agreed between the parties on normal commercial terms by reference to, among other things, the recent operating and financial performance of BSZ and the potential growth in the profitability of BSZ in the near future;

(iii) it was stated that the Plaintiff’s directors (the “Directors”) were of the view that the consideration and the terms of the acquisition were fair and reasonable, they were optimistic about the future development of BSZ, and the acquisition was in the interest of the Plaintiff and its shareholders as a whole; and

(iv) the unaudited net asset value of BSZ as at 31 December 2006 according to the management accounts of BSZ, and the unaudited results of BSZ for the three financial years ended 31 December 2006 were set out.

9.  On the first page of the 10 May Announcement and in bold it was stated that:

“Shareholders shall note that in arriving at the consideration for the Proposed Acquisition, no valuation had been performed on the properties owned by or the business of [BSZ]. The Directors has only made reference to an acquisition of a similar business in another province of the [Mainland] by a listed company in Hong Kong”.

10.  Later, in a circular issued by the Board (the “8 June Circular”), which again included Fu and Yang, on 8 June 2007, the Plaintiff’s shareholders were further presented with an accountant’s report on BSZ and an analysis of BSZ’s financial situation for the years ended 31 December 2004, 2005 and 2006, both of which were, according to the Plaintiff, prepared on the basis of the Management Accounts annexed to the SPAs.

11.  The SPAs and the transactions contemplated thereunder were approved by the Plaintiff’s shareholders at a special general meeting on 27 June 2007 (the “SGM”).

12.  It is common ground that the Plaintiff by that time did not have the resources to finance the acquisition.  Hence, the acquisition was conditional upon, inter alia, the Plaintiff raising HK$600 million to finance the transaction and the Mainland government granting approval for the shares transfer.  The financing was raised with Cazenove Asia Limited (“Cazenove”) which was an investment bank acting as the placing agent to place 300 million new shares at $2 per share.  The placing exercise was completed in around July 2007 and the proceeds were held in escrow pending completion of the transaction.

13.  It was stated in the SPAs that the shares transfer had to be approved by the relevant Mainland authority.  Pursuant to the SPAs, the approval of the Ministry of Commerce of the Mainland for the transfer of shares in BSZ from the Defendants to the Plaintiff (the “MOFCOM Approval”) was granted on 26 November 2007.  A Certificate of Approval (批准證書) for Establishment of Enterprises with Investment of Taiwan, Hong Kong, Macao and Overseas Chinese in the Mainland (the “Certificate of Approval”) was granted to the Plaintiff on 27 November 2007.

14.  The Board also made an announcement on 27 November 2007 (the “27 November Announcement”) announcing that the MOFCOM Approval had been obtained, all the conditions precedent had been fulfilled and the Plaintiff would proceed to completion of the transaction.  Another announcement was issued on 28 November 2007 (the “28 November Announcement”) holding back the earlier announcement of the satisfaction of all conditions precedent to the SPAs.  On 3 December 2007, the Board made a third announcement to extend the long stop date for completion to 5 December 2007 by reason that “[the] approval of the [MOFCOM] for the Proposed Acquisition has been obtained and the Board requires further time to discuss with its [Mainland] legal advisors as to whether all conditions precedent to [the SPAs] have been fulfilled.  The [Plaintiff] will proceed to complete those agreements only if all conditions have been fulfilled.”

15.  Following a Board meeting held on 5 December 2007 where the contents of a legal opinion (the “Mainland Legal Opinion”) from a firm of Mainland lawyers appointed by the Plaintiff (the “Mainland Legal Advisers”) were discussed amongst the Directors present, the Plaintiff made the announcement on 5 December 2007 (the “5 December Announcement”) that all conditions precedent had been fulfilled and completion of the SPAs had taken place.

16.  In fact, completion of the Plaintiff’s acquisition of the 90% interest in BSZ from the Defendants took place on the same day.

17.  Pursuant to the SPAs, the Plaintiff paid the consideration for the shares transfer in cash in the total amount of HK$270,883,158 on 10 May, 7 and 26 December 2007 respectively.

18.  The Plaintiff also issued convertible notes to Wang in the amount of HK$360,000,000 on 5 December 2007. Wang converted all the convertible notes into 180,000,000 ordinary shares of the Plaintiff on 8 January 2008, and became the Plaintiff’s second largest shareholder between 8 January 2008 and 21 April 2010.

19.  Further, the Plaintiff executed the two “promissory notes” (承付票據) (the “Instruments”) in the favour of the Defendants on 5 December 2007, including the “promissory note” issued in favour of Wang in the sum of HK$120,000,000 (“Wang’s Instrument”) and another “promissory note” issued in favour of Tianjiu in the sum of HK$256,000,000, which had been booked in the Plaintiff’s financial statements. 

20.  An amount of HK$150,000,000 was paid to an escrow agent on escrow as security of the Profit Guarantee provided by Wang under the 1^st SPA.  In the audited report of BSZ dated 28 April 2008 prepared by Deloitte Touche Tohmatsu (the “Deloitte Report”), the former auditors of the Plaintiff, the audited net profit of BSZ for the Profit Guarantee Period was stated to be HK$94,162,000.  On 3 June 2008, the Plaintiff refunded HK$74,967,575 to Zhou from the escrow amount after the deduction of net profit shortfall pursuant to the Deloitte Report.  However, it is the Plaintiff’s case that the figure was arrived at on the basis of the Management Accounts, which contain sets of income that are fictitious.

21.  At the time of the events set out above, the chairman and largest shareholder of the Plaintiff was Mr Chan Yeung Nam (“Chan YN”), who held his shares in the Plaintiff through a company called Velocity International Limited.  In October 2008, Chan YN sold his 27.14% interest in the Plaintiff to a subsidiary of a Hong Kong listed company named Leroi Holdings Limited, which was later renamed PNG Resources Holdings Limited (“PNG”).  This resulted in subsequent changes in the Board and the Plaintiff’s management.

22.  Fu and Yang ceased to be directors of the Plaintiff in February and June 2009 respectively, although Yang remained a director of BSZ from December 2007 until August 2010.  New directors, including Mr Chan Chun Hong Thomas (“Thomas Chan”) who is the current chairman of the Plaintiff, and independent non-executive directors (“INEDs”) were appointed to the Board on 10 February 2009 in the place of the old Board.

A.2  Difficulty in gaining control of BSZ and the Market

23.  It is the Plaintiff’s case that the new Board encountered tremendous difficulties and resistance in seeking to gain control over the operation and management of BSZ and access to BSZ’s financial information and documents, which is not seriously disputed by the Defendants. In fact, such resistance on the part of Zhou and the management of BSZ has been supported by various contemporaneous records.

24.  On 10 August 2009, the Plaintiff had to issue an announcement to inform shareholders that, despite repeated requests, the Plaintiff had not received BSZ’s financial information for the preparation of interim results for the six months ending 30 June 2009.

25.  The Plaintiff then sought assistance of the Mainland authorities including the Police.  In August 2010, the Plaintiff managed to replace the directors and legal representatives of BSZ.  In September 2010, the relevant authorities issued BSZ with new company chops and business registration certificates.

26.  In August or September 2010, the Mainland Police inspected the office premises of BSZ and seized various accounts, books and records and other documents. Among them was a document entitled “detailed schedule of fictitious construction works” (虛擬工程明細)(the “Schedule of Fictitious Construction Works”) seized from the office of one Mr Zhou Guobin (“Zhou GB”), then BSZ’s vice president, and imprinted with his fingerprint.  As explained below, it subsequently came to the Plaintiff’s knowledge that the Management Accounts of BSZ, which were annexed to the SPAs, had been falsely and substantially inflated by reason of, inter alia, the incorporation of inflated and fictitious construction costs to third parties.

27.  The Plaintiff claims that it also discovered in around August 2010 that, despite Wang’s obligation under the 1^st SPA to assist the Plaintiff and BSZ and to acquire the necessary Land Use Certificate (土地使用權證) and Property Ownership Certificate (房產證) for 318 mu of land neighbouring the registered address of BSZ, such certificates were in fact absent.  This means that, of the 721 mu of land which is the total area of the Market, only 403 mu of land had the requisite certificates.

28.  It is also the Plaintiff’s case that during its quest to gain control of BSZ, various persons representing Zhou, including Zhou GB and Yang, made it clear to members of the Plaintiff’s new Board that Zhou would not relinquish his control over BSZ.  The Plaintiff was also told that Zhou, with his powers and connections in Wuhan, would resort to extreme measures to maintain his control over BSZ and the Market.  The Plaintiff also claims that members of the new Board (including Thomas Chan) became the subjects of threats and blackmailing, and four employees of the Plaintiff were physically assaulted at the Market on 20 October 2010.

29.  According to the Plaintiff, on 1 November 2010, its representatives, along with security guards, government representatives and the Police went to the Market to negotiate and request for the handover of BSZ.  The Defendants’ representatives asked for 20 days for a “proper handover”.  It transpired that nearly all fixtures and fittings in the Market were destroyed and valuables including computers were removed before the Plaintiff finally managed to gain physical control over the Market on 21 November 2010, with the assistance of the Mainland authorities and the Police.

30.  In December 2011, the Mainland Police commenced criminal proceedings (the “Mainland Criminal Proceedings”) against Zhou GB and other members of BSZ’s former management for misappropriation of the assets of BSZ.  These individuals were found guilty by the Wuhan Intermediate People’s Court of Hubei Province (the “Wuhan Court”) in October 2013.  The Wuhan Court identified fictional transactions relating to BSZ which were calculated to, and did in fact significantly, inflate its income.  It is the Plaintiff’s case that, from the evidence accepted by the Wuhan Court, it is clear that in many instances the orchestration of an artificial flow of funds was conducted by Zhou to and from companies he controlled.

A.3    The Plaintiff’s investigations and follow-up actions

31.  After taking over control of BSZ and reviewing its accounts, books and records, the Plaintiff alleged that many financial documents were missing.  Upon gaining control, the Plaintiff’s current management was able to obtain the electronic ledgers of BSZ (the “Electronic Ledgers”) and compile an analysis of assets register (the “Analysis of Assets Register”).  The Electronic Ledgers are records of the transactions entered into by BSZ which are stored in electronic form; whereas the Analysis of Assets Register is a database compiled by the current management of BSZ based on raw data in the assets register (which in turn is an accounting record of BSZ’s assets) and the Electronic Ledgers.  In the Analysis of Assets Register, BSZ’s assets are re-categorised by reference to their nature and substance.  These documents were later supplied to the Plaintiff’s experts on quantity surveying and forensic accounting for investigation.

32.  According to the Plaintiff, it was found after the investigation that both the assets and income of BSZ as stated in the Management Accounts had been falsely inflated by the incorporation of inflated or fictitious construction costs and the inclusion of income which was not genuine in the Management Accounts. The extent of falsification was substantial.  The Plaintiff claims that it had paid considerably more for the 90% interest in BSZ than it was actually worth.

33.  Furthermore, the Plaintiff claims that BSZ did not have the necessary certificates for 318 mu of land.  In April 2014, BSZ managed to obtain the Land Use Certificate for 67 mu of land in a public auction.  However, the Plaintiff still cannot obtain the certificates for the remaining 251 mu of land.

A.4    Proceedings in Hong Kong

34.  The Plaintiff therefore commenced the present action in 2011 against the Defendants making the following 6 claims:

(i)  For the overpayment claim (the “Overpayment Claim”), the Plaintiff claims for loss and damages suffered in that the value of BSZ’s shares was substantially less than what the Defendants warranted because of the inflation of assets and income in the Management Accounts.  The amount of the Plaintiff’s Overpayment Claim is RMB 510,000,000.

(ii)  For the claim of fraudulent misrepresentation and/or under the Misrepresentation Ordinance (Cap. 284) (the “Misrepresentation Claim”) which is an alternative claim to the Overpayment Claim, the Plaintiff claims for the same RMB 510,000,00 or such sum to be assessed for being fraudulently induced to purchase the shares of BSZ at a consideration of HK$1,156,000,000 in total.

(iii)  For the profit guarantee claim (the “Profit Guarantee Claim”), the Plaintiff seeks a declaration that Wang’s Instrument in the sum of HK$120,000,000 is to be set off by the amount of HK$54,211,000 being the net profit shortfall.

(iv)  For the claim relating to the Instruments (the “Instruments Claim”), the Plaintiff seeks an order that the Defendants be restrained from enforcing payment under both Instruments for the reasons, inter alia, that: (a) Wang’s Instrument is not a promissory note or a bill of exchange in law; (b) the Defendants are not entitled to enforce the Instruments which were executed by the Plaintiff in consideration for shares in BSZ; and (c) the Defendants are liable to indemnify in cash on demand to the Plaintiff by reason of, inter alia, Clause 6.3 of the SPAs.

(v)  For the dishonest assistance claim (the “Dishonest Assistance Claim”), the Plaintiff claims that:

(a)  on the case of the Defendants[2], Fu and Yang would have been in breach of their fiduciary duties to the Plaintiff, and the Defendants would have dishonestly assisted in the breach of fiduciary duties by Fu and Yang; and

(b) the Defendants are liable to account to the Plaintiff for the same RMB 510,000,000 or such sum to be assessed as constructive trustees on the ground of their dishonest assistance.

(vi)  For the land indemnity claim (the “Land Indemnity Claim”), the Plaintiff claims:

(a) RMB 224,870,000 or RMB 112,550,000 (depending on the valuation date), being the costs of obtaining the Land Use Right Certificates for the 318 mu of land (the “Land Use Certificates Claim”);

(b) RMB 30,650,000, being the penalty costs for failure to obtain the Property Ownership Certificates for buildings illegally constructed in the Market (the “Penalty Costs Claim”); and

(c) RMB 1,200,000, being the costs associated with the demolition of structures built outside the permitted site area (the “Demolition Costs Claim”).

35.  The Plaintiff was granted leave to serve out of jurisdiction the Concurrent Amended Writ of Summons on the Defendants.  After the Plaintiff was able to effect service on Wang on 2 April 2012 following several failed attempts, Wang’s solicitors refused to accept service on Tianjiu’s behalf.  The Plaintiff then applied for leave to serve on Tianjiu by way of substituted service.  Eventually, on 22 June 2012, service was acknowledged on behalf of Tianjiu by those acting on behalf of Wang.

36.  On 3 September 2012, the Defendants took out an application to, inter alia, set aside service on them on forum non-conveniens and other grounds.  The application was dismissed by DHCJ Marlene Ng (as she then was) on 5 November 2013.  As part of the application, the Defendants alleged, for the very first time, that the MOFCOM Approval was invalid and the relevant conditions precedent in the SPAs had not been fulfilled.

37.  In the Defence filed on 13 January 2014, the Defendants contend, inter alia, that:

(i)  Prior to the signing of the SPAs, Fu and a representative of Cazenove considered the draft Management Accounts which contained the figures proposed to be included in the Management Accounts to be annexed to the SPAs. All substantively unfavourable facts or issues regarding BSZ’s financial position or prospects, of which the Defendants were aware, were disclosed to the Plaintiff.

(ii)  Fu and Cazenove proposed and the Defendants agreed that certain figures in the draft Management Accounts should be amended. Such figures included items in the construction costs and income of BSZ.

(iii) On the instructions of Yang, a sale and purchase agreement between the Plaintiff and the Defendants in respect of 90% interest in BSZ was prepared for obtaining the MOFCOM Approval (the “89.8 Million Agreement”).  The 89.8 Million Agreement fixed the price of acquisition at RMB 89,817,930 in cash, which was less than the actual price stated in the SPAs, and included the signatures of Fu and Wang.

(iv) The MOFCOM Approval was granted on the basis of the 89.8 Million Agreement instead of the SPAs. As such, the conditions precedent in Clause 4.1(g) of the 1^st SPA and Clause 4.1(e) of the 2^nd SPA had never been satisfied, and the SPAs terminated or ceased to have any legal effect in accordance with Clause 4.4.  The Plaintiff therefore has no right under the SPAs to claim damages and the transaction under the SPAs should be reversed.

(v)  Regarding the issue about the Land Use Certificate and Property Ownership Certificate of the land, Wang does not claim that she had taken any steps to obtain the necessary certificates for BSZ, but contends that the Plaintiff had not requested her assistance.  She further alleges that the Plaintiff had in fact acquired 243.98 mu of land for use as opposed to just 67 mu.

38.  In the witness statements filed on behalf of the Defendants, it is further alleged that:

(i)  Before the signing of the SPAs, Fu had agreed and requested that the figures in the Management Accounts be amended, exaggerated or otherwise falsified.

(ii)  Fu and Yang knew at all times that the said figures had been so amended, exaggerated or falsified pursuant to the understanding or agreement among Fu, Cazenove, the Defendants, Zhou and Zhou GB, and it was impossible that the Profit Guarantee would be met.

(iii) Fu had requested BSZ to cooperate in creating a revenue of RMB 150 million in 2007, i.e. falsely inflate a revenue of RMB 70 million.  Zhou GB then fabricated some contracts to inflate about RMB 70 to 80 million of contracting income of BSZ from December 2007 to January 2008.

(iv) Fu had assured Zhou and Wang that the Defendants would not in the future question or seek compensation in respect of the amendment, exaggeration or falsification of the Management Accounts.

(v)  Yang had requested BSZ’s employees to forge the 89.8 Million Agreement and the signatures of Fu and Wang thereon.

A.5    Proceedings in the Mainland

39.  Apart from this action in Hong Kong, the parties had been embroiled in various proceedings in the Mainland.

40.  In about January 2011, the Defendants commenced an action in the Mainland against the Plaintiff (the “Mainland Action No 1”) seeking: (i) a declaration that the 89.8 Million Agreement was invalid; and (ii) the reversal of the transfer of shares in BSZ.  Wang testified that it was Zhou who arranged for the Defendants to take out such proceedings.

41.  It is not seriously disputed that the Defendants had not made any complaint about the validity of the transaction before the commencement of the Mainland Action No 1.  To the contrary, they actively performed the SPAs and received substantial benefits therefrom.

42.  Then, in September 2011, the Defendants filed an administrative complaint with the Mainland Ministry of Commerce, commonly known as “MOFCOM”, and asked MOFCOM to revoke the MOFCOM Approval.

43.  In May 2014, the Higher People’s Court of Hubei Province (the “Hubei Court”) dismissed the Defendants’ claim in the Mainland Action No 1.  The Defendants appealed to the Supreme People’s Court.

44.  In December 2014, the Supreme People’s Court ordered that the judgment given by the Hubei Court be revoked, and held that the 89.8 Million Agreement was void.  According to the Judgment of the Supreme People’s Court:

(i)   Wang not only knew about the signing of the 89.8 Million Agreement but she also gave her approval for the making of such agreement; and

(ii)  the Defendants were jointly in charge of the operation and management of BSZ and controlled the appointment of its directors and managers in the period from 2 May 2007 to 10 December 2007 when they remained as shareholders of BSZ.

45.  In January 2015, the Defendants submitted an application to MOFCOM and requested that the MOFCOM Approval be revoked.

46.  In May 2015, the Defendants commenced administrative proceedings against MOFCOM (the “Administrative Proceedings No 1”) and asked for an order that MOFCOM should perform its statutory duty and revoke the MOFCOM Approval.

47.  In May 2015, the Plaintiff commenced legal proceedings against the Defendants in the Hubei Court (the “Mainland Action No 2”) seeking an order that the Defendants should assist BSZ to discharge its contractual duties under the SPAs to make the necessary filing with MOFCOM for their approval of the SPAs.

48.  In respect of the Administrative Proceedings No 1, the Second Intermediate People’s Court of Beijing, in December 2015, ordered MOFCOM to perform its statutory duty and reconsider the application by the Defendants for revocation of the MOFCOM Approval within 30 days.

49.  MOFCOM then conducted a hearing on 15 February 2016 for reconsideration of the MOFCOM Approval. On 19 May 2016, it announced its decision that the validity of the MOFCOM Approval and the Certificate of Approval were maintained and not to be revoked (“MOFCOM Decision”).  MOFCOM took the view that:

(i)   By signing the 89.8 Million Agreement and submitting it to MOFCOM, the parties obtained the MOFCOM Approval illegally contrary to Article 69(2) of the Mainland’s Administrative Approval Law (行政许可法).  All parties involved including the Defendants should bear the legal consequences for their actions in accordance with Article 79 of the Administrative Approval Law.

(ii)  However, revoking the MOFCOM Approval might cause great harm to the public interest given the importance of the Market in supplying agricultural products to its surrounding areas. Further, the transfer of the interest in BSZ had been executed 7 years ago and had remained the status quo ever since.

(iii) Therefore, given the above circumstances and pursuant to Article 69(3) of the Administrative Approval Law, MOFCOM decided that the MOFCOM Approval was not to be revoked.

50.  In August 2016, the Defendants commenced a further set of administrative proceedings in the Beijing court against MOFCOM (the “Administrative Proceedings No 2”) to seek to set aside the MOFCOM Decision.

51.  In March 2017, the Second Intermediate People’s Court of Beijing dismissed the application by the Defendants in the Administrative Proceedings No 2.  The Defendants appealed to the Higher People’s Court of Beijing.

52.  By its Final Judgment (終審判決) dated 20 December 2018 (the “Final Judgment”), the Higher People’s Court of Beijing dismissed the appeal.  It was held in the Final Judgment that:

(i)   The Higher People’s Court of Beijing agreed with MOFCOM’s evaluation that the conditions of BSZ had undergone significant changes over the past 10 years while extensive, complicated and irreversible economic and legal relationships have been established. In the event that the MOFCOM Approval is revoked, such that the shareholding structures of the parties are to be restored to the status prior to the acquisition, significant impacts may result for matters such as validity of such economic and legal relationships and performance of the relevant contracts. This will disturb the stability of transactions and protection of legal rights of innocent third parties which have relied on the MOFCOM Approval over the past 10 years.

(ii)  The Higher People’s Court of Beijing also agreed that if the shareholding structures of the parties are to be restored to the status prior to the acquisition, an agreement shall have to be reached on matters such as the return of payments made for the acquisition and the distribution of the proceeds subsequent to the acquisition.  In view of the conflicting interests between the parties in the present case, the operation of BSZ will become seriously unstable and may even cease entirely or go into liquidation should the parties fail to reach an agreement on the above matters. This will cause material impacts on the stable operation of the Market, which serves an important role in supplying agri-products to cities and provinces of the Mainland, such as Wuhan and the Central Mainland area.

(iii) MOFCOM’s evaluation that revoking the MOFCOM Approval and the Certificate of Approval may cause great harm to the public interest is correct and adequately justified. MOFCOM had followed the correct legal procedure in deciding not to revoke the MOFCOM Approval and the Certificate of Approval.

(iv) The decision of the Second Intermediate People’s Court of Beijing to dismiss the application by Wang and Tianjiu to revoke the MOFCOM Decision is correct and to be upheld.

B    FACTUAL EVIDENCE AT THE TRIAL

53.  From the pleadings, it is clear that one of the main issues in this case is the validity of the SPAs.  The Defendants claim that as the conditions precedent agreed by the parties have not been fulfilled, the SPAs shall cease to have effect and the position of the parties should be restored to that before the making of the SPAs.  Without the SPAs, the court does not need to begin to assess the merits of the other different claims brought by the Plaintiff.

54.  I will therefore address this particular issue first.  But before I do so, I must first deal with the factual evidence in this case.

55.  At the trial, the Plaintiff’s factual witnesses were Thomas Chan, Mr Ng Cheuk Wing Eddie (“Ng”) and Mr Tong Ka Ming Patrick (“Tong”).  On the other hand, the Defendants’ factual witnesses were Wang and Yang.

56.  Shortly before the trial, there was an application by the Defendants for Yang to testify via video link.  I refused the application due to the lack of supporting evidence about his medical condition.  Yang eventually decided to come to Hong Kong to testify in person at the trial.

57.  The Plaintiff also had difficulty in securing the attendance of Mr Sin Ka Man (“Sin”), who was the company secretary of the Plaintiff at the material time, to testify at the trial.  Sin had made a witness statement for the purpose of the trial and he was one of the witnesses in the Plaintiff’s list.  At the time of the trial, Sin was in Sydney in Australia.  For some “family reasons”, he did not fly back to Hong Kong to testify for the Plaintiff.  In view of such new development, the Plaintiff had issued hearsay notice in respect of the contents of his witness statement, which was opposed by the Defendants.  Following the court’s ruling rejecting Yang to testify via video link, Mr Ho, SC, counsel for the Plaintiff, withdrew the hearsay notice in respect of Sin’s witness statement.  In other words, the court would ignore his witness statement for the purpose of the trial.

58.  From the list of witnesses, one can immediately see that a number of key players in the transaction are missing, such as Chan YN, Fu, Zhou and Zhou GB.  I would discuss the implications of the absence of these potential witnesses in the latter part of this Judgment.

B.1    Credibility of the Plaintiff’s factual witnesses

59.  Thomas Chan has been the Plaintiff’s chairman since February 2009.  Since he only joined the Plaintiff after the shares acquisition in 2007, he could not provide the court with any first-hand knowledge about what happened in 2007 about the making of the SPAs. Nevertheless, I find him to be an honest witness.  He was forthcoming in his answers, while fairly acknowledging that he had no personal involvement in the material events.  His evidence is helpful in assisting the court to understand the quantum of the Plaintiff’s claim.

60.  Thomas Chan also gave the court a reliable account of what happened to BSZ after he joined the Plaintiff.  He also provided the court with the reasons as to why Sin and Fu could not come to court to testify.  There is no reason for the court to doubt the credibility of his explanations.

61.  I also reject the submission of Mr Chan, SC, counsel for the Defendants, that, just because of Thomas Chan’s experience as a seasoned accountant well conversed in the takeover field, he was evasive in the discovery exercise and the selection of witnesses to be called or not to be called.  There is simply no basis to support these allegations.

62.  There is one specific attack on the credibility of Thomas Chan’s evidence.  In a hearing apparently held in MOFCOM on 15 February 2016 relating to the present dispute, Thomas Chan seemed to say that he was only aware of the 89.8 Million Agreement when the Defendants sued the Plaintiff in the Mainland, presumably referring to the Mainland Action No 1 in 2011.  Mr Chan submits that this could not be right as the Plaintiff must have been aware of the 89.8 Million in December 2007.

63.  In my judgment, one should not read too much into the record of the hearing.  In any event, Thomas Chan was not involved in the actual management of the Plaintiff before PNG acquired the shares of the Plaintiff, and so he would not be able to tell when the then management of the Plaintiff was first aware of the 89.8 Million Agreement.  Furthermore, it is clear that the Plaintiff was keen to uphold the MOFCOM Approval when the hearing was conducted in February 2016.  As the SPAs had been performed and the consideration for the shares acquisition had been paid, one cannot criticise Thomas Chan for his effort in upholding the MOFCOM Approval.

64.  I then turn to the evidence of Ng.  Ng was since April 2009 the Plaintiff’s senior business development manager and later general manager until he left the Plaintiff’s employment in August 2017.  His answers were consistently clear, direct and forthright.  He was well-versed in the procedures and practicalities of land acquisitions in the Mainland and was directly involved in matters pertaining to the Plaintiff’s Land Indemnity Claim. He is also the person who compiled records of meetings between the parties at the relevant time.  Again, I have no reason to doubt the credibility of Ng’s evidence or the reliability of the contemporaneous records made by him at the material times.

65.  There is an outstanding issue about the admissibility of §§9-17 of Ng’s 2^nd witness statement.  While the remaining of the statement concerns only the competing markets claim which the Plaintiff no longer pursues, §§9-17 refer to entities that feature in the Plaintiff’s case on the inflation of BSZ’s accounts.  Hence, there is no reason for the court to exclude his evidence in this regard.

66.  Tong was the Plaintiff’s INED and member of the Plaintiff’s audit committee from 23 June 2006 to 21 December 2007.  He did not attend the Board meeting on 5 December 2007 (i.e. the completion date of the SPAs), and he resigned about 2 weeks thereafter.  He is and was a professional accountant.  When he was acting as an INED of the Plaintiff, he was also the financial controller of Ocean Grand Chemicals Holdings Limited (海域化工集團有限公司).

67.  After hearing his evidence, it is clear that Tong’s performance as an INED was far from satisfactory.  In respect of the operation of the Plaintiff, he relied very much on the information provided by Sin who was his friend, without taking any active steps in verifying the information concerned.  There is certainly weight in the criticism that “he did nothing more than rubber-stamping the acquisition of [BSZ] by the Plaintiff”. Due to his limited participation, it is only natural that his memory of the events back in 2007 is hazy and limited.

68.  Despite these criticisms, I agree with Mr Ho that this is not a trial of Tong’s performance as an INED.  For our present purpose, I accept that Tong had not made any attempt to exaggerate his evidence or to cover up his poor performance as INED.  He was a candid witness giving straightforward and spontaneous answers.  So far as the events that he could recollect, I accept his evidence as the truth.  Nor was he defensive when criticised by Mr Chan many times in cross-examination.  Further, there is nothing surprising that he did not know about the case until November 2018 when he was asked to be a witness in this case.  Though he might have business association with Thomas Chan and Sin, they might not have discussed everything relating to the Plaintiff, in particular Tong was not keen to know about the operation of the Plaintiff.

B.2    Credibility of the Defendants’ factual witnesses

69.  I then turn to the Defendants’ factual witnesses.

70.  Wang was a poor witness, and her evidence cannot assist the court in understanding the background of the case.  I agree with the observation made by Mr Ho that she was either genuinely clueless about the transaction and the parties’ litigation, or extremely evasive and economical with the truth depending on the issue that was asked of her. 

71.  Firstly, she could not explain why she did not file a witness statement in these proceedings until January 2019, which to me is very surprising.  If she was clearly involved in the transaction, it is hard to explain why she filed her witness statement so late.  I therefore have reason to believe that she was only put forward as a “puppet” with a view to protect those who were mainly responsible for the transaction including her husband.  Secondly, she was very evasive when asked about the role of her husband.  She was “unsure” if Zhou was the person in control of Tianjiu, and asked if she could refrain from replying on whether she represented Zhou in these proceedings.  Thirdly, she purportedly could not remember where the signing of the SPAs took place and who were present.  Fourthly, there were remarkable inconsistencies between her oral and written evidence.  For example, she could not even relate the crux of the alleged promise made by Fu referred to in §7 of her witness statement, i.e. the promise not to sue the Defendants or Zhou for the falsification of the Management Account, which forms an important part of the Defendants’ case.  In the latter part of this Judgment, there are also other instances showing that Wang is not a reliable witness.

72.  Having heard the evidence in this case, I have strong reasons to believe that Zhou was the mastermind and the person behind the scene conducting the shares acquisition transaction.  That is the reason why Wang knew so little about the transaction itself and was evasive when she was asked about the role of Zhou.  That also explains why her testimony is full of inconsistencies.

73.  Yang was even a worse witness.  His answers and attitude show him to be a thoroughly unreliable and untrustworthy witness.  He maintained a completely cavalier attitude about the submission of false documents to MOFCOM, which was done on his instructions.   As I will demonstrate in the latter part of this Judgment, he disowned his testimony to the Mainland court but showed no sign of worry or remorse.  When asked about the consequences of the Defendants’ alleged scheme on the minority shareholders of the Plaintiff, he contended, rather perversely, that such shareholders had benefited from the acquisition of BSZ albeit at a substantial overvalue.

74.  Yang is an important witness for the Defendants’ case who gave evidence about the alleged scheme of reverse takeover and inflation of the Management Accounts.  When I deal with the specific factual findings in the following part of this Judgment, I will explain why I find Yang to be an untruthful and unreliable witness.  I also find him to be a close associate of Zhou taking care of his interests in the whole transaction.

B.3   Unavailability of certain witnesses

75.  It is clear that some of the key persons who may shed light as to what really happened in 2007 are missing in the present case. Both camps ask the court to draw adverse inferences against the other side for the unavailability of certain witnesses.

76.  In Pacific Electric Wire & Cable Company Limited v Texan Management Limited & Ors[3], Kwan JA approved the dicta of Brooke LJ in Wisniewski v Central Manchester Health Authority[4] about the principles governing the drawing of adverse inference where a party fails to call a particular person as witness:

“(1) In certain circumstances a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action.

(2) If a court is willing to draw such inferences, they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness.

(3) There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue.

(4) If the reason for the witness’s absence or silence satisfies the court, then no such adverse inference may be drawn. If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence or silence may be reduced or nullified.”

77.  In Li Sau Keung v Maxcredit Engineering Ltd[5], it was held by the Court of Appeal that where a person without explanation fails to call as a witness a person who he may reasonably be expected to call, it is open to the court or the jury as appropriate to infer that that person’s evidence would not help that party’s case.

78.  I deal with the Plaintiff’s complaint first.

79.  For myself, I am very surprised as to why Zhou did not come forward to testify at the trial.  The evidence overwhelmingly points to Zhou as the mastermind of BSZ and the related entities.  It is quite clear that Wang was not directly involved in the operation of BSZ or made the decision to sell the shares under the SPAs.  From her testimony, she did now know much about these matters.  She was only put forward by Zhou as the front for the making of the SPAs, and for dubious reasons, Zhou was not willing to come forward to testify in the court.

80.  I agree with Mr Ho that Zhou’s absence is conspicuous and inexplicable, especially when Mr Chan is at pains to deny that Zhou has been subject to an Interpol notice.  His wife Wang could not explain his failure to testify, but admitted that he has been handling the present litigation. Further, unlike persons such as Chan YN and Sin, Zhou has an interest in the outcome of the proceedings and this makes his absence more difficult to explain.

81.  Another notable potential witness for the Defendants’ case is Zhou GB.  He was the deputy general manager of BSZ at the material time.  The Defendants filed his statement in August 2014, but subsequently informed the court their decision not to call him at trial.  Unlike Tao Xin, another witness that Defendants did not call, the Defendants did not tender Zhou GB for cross-examination or ask to adduce his statement by hearsay notice.

82.  Again, Zhou GB’s absence is inexplicable given the serious allegations against him, including that his fingerprint was imprinted on the Schedule of Fictitious Construction Works retrieved from his office.  He never refuted the allegation.  Further, by reason of his position in BSZ at the material time, he would have known about the various matters which are relevant to the Plaintiff’s claim on quantum of the various heads of claim.  As the Plaintiff had been put in a very difficult position in trying to ascertain the wrongdoings of the management of BSZ before the takeover and the quantum of its loss, the court would be safe to draw adverse inferences on quantum against the Defendants by reason of Zhou GB’s absence.

83.  It is an important part of the Defendants’ case that the “beautification” of the Management Accounts was made with the knowledge or at the instigation of the Plaintiff.  The Defendants would have the evidential burden to establish the alleged knowledge or instigation.   Zhou, given his role in the transaction, must have had direct knowledge about such matter.  His absence, together with my rejection of the evidence of Wang and Yang, lead to my factual finding that the Defendants have failed to discharge the burden of establishing such serious allegation.

84.  The Plaintiff also complains about the absence of certain directors and employees of BSZ at the material time, including Mr Luo Hong who was a director and legal representative of BSZ and Mr Zhou Jun who is Zhou’s nephew and was also a shareholder of related entities such as Jiang Nan Seafood[6] and Rui Tian Properties[7].  They were not the key players in the making of the SPAs.  Yet, they would have direct knowledge of the circumstances in which the Management Accounts came to be inflated.  Further, the Defendants have pleaded that they were the ones instructed by Yang to forge signatures and company seals of the documents submitted to MOFCOM.[8]  No reason has been given as to why they were not asked to testify.  The court will certainly take into account their absence in assessing the evidence on the relevant issues.

85.  On the other hand, the court is also concerned with the absence of certain potential witnesses for the Plaintiff’s case.

86.  The first one is obviously Fu who was the chief executive officer and executive director of the Plaintiff at the material time.   The Defendants claim that he was actively involved at all stages of the acquisition and he was named as one of those who were privy to the request to BSZ to “beautify” its accounts.  Fu and Chan YN were on record the 2 directors who approved the making of the SPAs.  His signature appears on the 89.8 Million Agreement as well as many other documents submitted to MOFCOM for its approval.

87.  Yet his absence is understandable.  Thomas Chan approached Fu in 2014, who was upset and did not want to have anything further to do with this matter after the sulphuric acid attack on him in November 2008 that caused permanent injury to his face.  According to a letter by Fu’s lawyer, three persons were arrested for the attack and sentenced to 13 years’ imprisonment in the Mainland.  One of them, Li Jun, was apparently Zhou’s driver.  This was confirmed in BSZ’s payroll list and by Wang on the stand.  Li Jun also appears to be the person who signed the 2^nd SPA on behalf of Tianjiu.  In any event, Fu is out of the jurisdiction in the Mainland and the Plaintiff would not be able to serve a subpoena on him.

88.  Mr Chan submits that the sulphuric acid attack occurred in November 2008 which was well before the change of the control of the Plaintiff in February 2009.  The relationship between the Plaintiff and the Defendants under the leadership of Fu had always been a smooth one, and the conflict only occurred after the change of control of the Plaintiff with the new management wanting to take over the running of the Market, and so the allegation that the Defendants or Zhou was the mastermind of the crime simply cannot stand.  Further, Mr Chan argues that there is no direct evidence to show that the attacker Li Jun was the same Li Jun who was Zhou’s driver.

89.  Despite such contentions, it has all along been the Plaintiff’s case that one of the offenders who participated in the sulphuric acid attack was Zhou’s driver or was closely associated with Zhou, or at the very least Zhou was behind the attack.  Yet the Defendants have called no evidence to rebut such allegation.  Under such circumstances, I have reason to believe that the same Li Jun was involved in the attack.  In any event, it is understandable that Fu would have genuine concern if he were to come to Hong Kong to testify at the trial, as he believed that the attack was related to his involvement in the shares acquisition transaction and Zhou was behind the attack.  Though he might be a key witness, I am satisfied that the Plaintiff had made all the necessary effort to secure the attendance of Fu at the trial but without success.  Hence, I would not hold against the Plaintiff for his absence at the trial.

90.  The second potential witness is Chan YN who was the chairman and the major shareholder of the Plaintiff at the material time.  Chan YN has been the Chairman of the listed company Huayu Expressway Group Limited (華昱高速集團有限公司)(“Huayu”) since 2 July 2009.  According to the explanation of Thomas Chan, he has not thought about approaching Chan YN who is a busy businessman, has no further commercial dealings with the Plaintiff and Chan YN is really under no obligation to help. However, without further details about the background of Chan YN, it is difficult for the court to decide whether there is good reason to explain his absence, in particular the Plaintiff has not even asked him to testify at the trial.

91.  Despite that, most of the allegations made by the Defendants are not directed against Chan YN.  Some allegations may concern him, such as the allegation of reverse takeover, and the court will certainly take into account his absence in the deciding the relevant factual issues in the latter part of this Judgment.

92.  The third one is Sin who was the company secretary of the Plaintiff from 1 April 2004 to 12 February 2009.  The Plaintiff called Sin as a witness and filed his statement back in October 2014 when parties filed their first round of statements.  There is no real dispute that Sin has emigrated to Australia for years, though he would return to Hong Kong occasionally.  As confirmed by the affidavits by both Thomas Chan and Sin, the Plaintiff had made efforts up to the eve of the trial to secure Sin’s attendance but could not do so due to “family reasons” on his part.

93.  “Family reasons” is obviously a vague term.  Further, Sin is currently the company secretary of Huayu and an INED of another listed company Easy One Financial Group Limited (易易壹金融)(“Easy One”) since January 2007.  The current chairman and managing director of Easy One is Thomas Chan. Given that Sin still has ties with these companies in Hong Kong and without knowing the details of the “family reasons”, it is difficult for the court to decide whether there is good reason for Sin not to fly back to Hong Kong to testify, in particular he was still in Hong Kong at least a month before the trial.  Despite that, the evidence of the case does not suggest that Sin was the person who could make material decisions regarding the deal itself.  There are some allegations made against Sin, in particular as to whether he knew about the inflation of the Management Accounts.  In determining these issues, the court will take into account his absence in assessing the evidence concerned.

94.  The fourth one is Mr Yiu of Cazenove (“Yiu”) which was the placing agent for the Plaintiff’s placing exercise in July 2007.  Yang alleged that a Mr Yiu from Cazenove had “proposed” to them that certain figures in the Management Accounts should be “amended”.  However, as I shall demonstrate in the latter part of this Judgment, Yang’s evidence is always shifting and there is no basis for the court to believe his allegation.  In any event, Thomas Chan had approached Yiu and relayed the allegation. Yiu denied it, but politely declined to be involved in the case after seeking legal advice. Thomas Chan explained that he did not wish to subpoena Yiu, whom he considered a fellow professional and businessperson, in these circumstances.

95.  Mr Chan suggests that the reason given by Yiu for not testifying is indicative of something improper on his part, but it would not be right for the court to speculate on the real reason behind his absence.  It may be the case that Cazenove just wants to avoid any possible civil claim against it for breach of professional duty and not because of any deliberate wrongdoing on its part.  In any event, based on the aforesaid considerations and the further analysis in the latter part of this Judgment, the absence of Yiu is not material in determining the final outcome of the case.

96.  Neither can the Defendants rely on the absence of the other formers directors of the Plaintiff in support of their case, as Thomas Chan does not know them and some are now staying in the Mainland. Further, the Defendants have not put to Thomas Chan that he should have called the then financial controller of the Plaintiff and other witnesses from Deloitte and CCIF CPA Ltd (“CCIF”) to testify[9], and so no serious argument can be advanced by the Defendants for their absence.

B.4    The relevant factual findings

97.  It is clear that some of the persons who may have direct knowledge of or participation in the material events are either unavailable or wholly unreliable as demonstrated in the latter part of this Judgment.  Under such circumstances, contemporaneous documents play an important part in assessing the evidence in the present case.  Inherent probabilities is also a relevant consideration.[10]

98.  In considering some of the Defendants’ serious allegations, such as those concerning the wider “scheme” of conspiracy as mentioned below, the more serious the allegation, the more cogent the evidence relied upon to support it must be.[11]

99.  I then proceed to make certain factual findings which I believe are material in determining the overall merits of the claim.

B.4.1  The making of the deal and the roles of Zhou and Yang

100.  The evidence suggests that Yang first acted as a middleman between Zhou and the Plaintiff.  Yang’s hometown is Wuhan, where he is well-connected, and he claimed to know BSZ’s management.  On the other hand, Yang was acquainted to Fu who was the Plaintiff’s then executive director.  At the time, Yang occupied no position in the Plaintiff. There is no evidence that there was other prior connection between Yang and the Plaintiff.

101.  The documentary evidence indicates that the parties had decided on a deal by April 2007.  There was a shareholders’ resolution of BSZ dated 24 April 2007 ostensibly signed by Wang and on behalf of Tianjiu.  It was resolved that Wang and Tianjiu would transfer their respective 70% and 20% shares in BSZ to the Plaintiff at HK$89,817,930. The stated consideration is different from that in the SPAs.

102.  The evidence clearly shows that Zhou was all along the mastermind behind BSZ.  He was a director until December 2007.  The Plaintiff’s witnesses who had dealt with him directly or indirectly, including Thomas Chan and Ng, all understood him to be the “real boss”.  Yang also said BSZ was Zhou’s company.  Wang accepted that Zhou remained in control until November 2010.  This was confirmed by Ng’s contemporaneous records of the meetings post-completion in which Zhou sent his representatives to negotiate with the Plaintiff.

103.  Wang accepted in the stand that Zhou has had many other businesses in Wuhan and is very well-connected.  This shows that Wang was evasive when she described herself and Zhou as “average Mainland peasants” in her statement.

104.  There is much controversy about the role of Yang in the whole transaction, but I agree with Mr Ho that the evidence tends to suggest that he had been acting for Zhou all along.

105.  As mentioned above, Yang had no prior positions in or connections with the Plaintiff.   He became a director of the Plaintiff on 26 April 2007^[12], just two days after BSZ’s shareholders’ resolution dated 24 April 2007 on the acquisition and shortly before execution of the SPAs on 2 May 2007.  Both Yang and Wang said in their statements that Zhou and Wang would appoint their management into the Plaintiff’s Board upon the acquisition.  While Yang denied being the person so appointed, the evidence of the case as elaborated below shows that Yang was a person trusted by Zhou.

106.  Yang signed both SPAs as a witness.  Although he was already a director of the Plaintiff, he witnessed not the signatures of Fu (who signed on the Plaintiff’s behalf) but those of Wang and Li Jun (who signed on Tianjiu’s behalf).

107.  Yang was appointed a director of BSZ on 10 December 2007.  He remained in the position until 12 August 2010.  This was more than a year after he ceased to be the Plaintiff’s director on 8 June 2009, and at a time when the Plaintiff and the Defendants were at an impasse over the control of BSZ.  Yang could not possibly have maintained his directorship in BSZ unless he was trusted by Zhou or at Zhou’s service.

108.  Indeed, the evidence shows that Yang was doing Zhou’s bidding even while he was a director of the Plaintiff.

109.  First, as evidenced by the correspondence exchanged on behalf of Thomas Chan and Wang, they together with Yang met in Melbourne in March 2009.  When asked, Wang’s spontaneous response was that Zhou had instructed Yang and herself to attend the meeting.  She also accepted that Yang had to fly from the Mainland to Melbourne for that purpose.  She then claimed that Yang had arranged the meeting.  Despite such oral testimony, she denied in re-examination that Yang was representing her husband altogether.  This inconsistency certainly undermines the credibility of her evidence, and I agree with Mr Ho that Wang’s desperate attempts to retract her evidence must be rejected.  Further, Yang himself, after long struggles and multiple attempts to evade the question, had to accept that it could only be Zhou or Wang who asked him to go to Melbourne on that occasion.

110.  Secondly, it was recorded in Ng’s record of a meeting on 12 April 2009 (when the parties were still negotiating for the takeover of BSZ) that, according to Mr Gong Li Bun (“Gong”) who was the then director and general manager of BSZ, Zhou (though he was still in Australia) had actively arranged Yang to station in BSZ with a view to dissipate the cash and assets of BSZ.  Though it was denied by Yang, there is no reason for the court to doubt the credibility of such contemporaneous record.

111.  Thirdly, Yang continued to serve and represent Zhou after ceasing to be the Plaintiff’s director.  On 23 June 2009, Yang conveyed Zhou’s requests and proposals to the Plaintiff’s representatives including Thomas Chan.  Yang said Zhou did not behave like a normal person and would resort to violent measures.  Further on 9 September 2009, Gong told the Plaintiff’s representatives that Zhou, tough he was not in the Mainland, had already arranged Yang to be the “actual operator” (全盘操作人).  Zhou was the mastermind behind the scene.  Through his connections and influence in Wuhan, he could instruct Yang to control BSZ and the Market.

112.  For these reasons, though the Plaintiff is not able to prove any actual monetary incentives provided by Zhou to Yang which would have been something between themselves, I find that Yang should have been very much involved with Zhou throughout.  He had been conducting the shares acquisition transaction on behalf of Zhou.  He was the “agent” of Zhou taking care of his interest.  Further, I have reason to believe that, taking into account the timing of the transaction and his appointment, his appointment as a director of the Plaintiff was made specifically for the purpose of overseeing the shares acquisition transaction.

113.  In the course of his testimony, Yang tried to distance himself from Zhou and he was evasive when asked about their relationship.  In my judgment, his denial does not sit well with the evidence mentioned above and that is another reason as to why I do not find Yang to be a truthful witness.

B.4.2  The allegation of reverse takeover

114.  Both Wang and Yang alleged that the SPAs were “part of a scheme for the reverse takeover” of the Plaintiff.  Specifically, they claimed that Chan YN agreed to sell his shares to Zhou and Wang after the acquisition of BSZ so that they would become the Plaintiff’s largest shareholders and remain in control of BSZ.  Apparently, the object of this alleged “secret agreement” for reversal takeover was to avoid the regulatory requirements for formal “reverse takeover” imposed by the regulatory authority of the Hong Kong stock market.  Mr Chan also submits the whole arrangement for the payment of consideration for the shares transfer was designed in such a way so as to give the impression that the transaction was not a reverse takeover but in fact it was one.

115.  Fu may have knowledge about such matter but it is understandable why he did not want to testify in court.  Two of the other key persons who may have more information about such matter are Chan YN and Zhou.  Both of them, for some reasons, were not present in court to testify. As they were representatives from each side of the transaction, I cannot draw any adverse inference against either side for their absence in court.

116.  In such circumstances, the court can only determine such allegation in light of the existing evidence.  Having carefully considered the matter, I reject such serious allegation by the Defendants.

117.  Firstly, it directly contradicts the terms of the SPAs, which made it a condition that the transaction was not to be a reverse takeover.[13]  As further elaborated below, the SPAs also obliged the Defendants to hand over the control of BSZ to the Plaintiff on completion.

118.  Secondly, it is wholly unbelievable.  The alleged agreement was made only orally according to Wang.  There was no mention of the price at which Chan YN was to sell his shares.  Yang said these were due to the “good relationship” and “trust” Zhou or Wang had with Chan YN, but it does not make much commercial sense given the supposed critical importance of the agreement to Zhou and Wang and their lack of any prior dealings with Chan YN.  One must not forget that Zhou is also an experienced businessman.

119.  Thirdly, Wang could not explain why they took no action whatsoever against Chan YN for breach of the alleged agreement when he sold all his shares in the Plaintiff to PNG in October 2008.

120.  Fourthly, as with other parts of his testimony, Yang’s evidence on the alleged agreement was ever-shifting.  Initially he accepted that this was a side deal between Chan YN and Zhou and Wang which the Plaintiff did not know about.  Then he said persons like Fu, Sin and the Plaintiff’s senior management (高管) “should” know.  A short while later he said the scheme of reverse takeover was actually “designed” by the “investment bank” (投行), presumably referring to Cazenove.  Coupled with the other observations made earlier about the credibility of Yang’s evidence, it would be dangerous for the court to rely on his ever-shifting evidence to establish such serious allegation.

121.  For these reasons, I reject the allegation of reverse takeover.

B.4.3  Inflation of BSZ’s Management Accounts

122.  The inflation of BSZ’s Management Accounts, whether it was done at the instigation of the Plaintiff or with its knowledge, whether the parties had made a collateral agreement not to sue on the falsification of the Management Accounts, whether the Plaintiff had actually relied on the Management Accounts in entering into the shares acquisition transaction, are some of the main factual issues in this case.

123.  It is the Defendants’ admitted case that the Management Accounts attached to the SPAs had been inflated.  Specifically, the Defendants plead that the inflated items were included in the construction costs and income of BSZ.[14]  The inflation has been repeated multiple times in the Defendants’ Reply to Request for Further & Better Particulars of the Defence.  It is also what Yang said in his statement (“夸大了一些资产及利润”, translated as “exaggerating certain assets and profit”).

124.  In examination-in-chief, Yang changed the said evidence to “收入及利润” (translated as “income and profit”).  When asked about the inflation of construction costs, he simply refused to provide an answer.

125.  The fact that the construction costs, income and profit of BSZ had been inflated is also supported by the evidence concerning the quantum of the Overpayment Claim which will be further elaborated in the latter part of this Judgment.  The issue here is whether the “beautification” of the Management Accounts was done at the instigation of the Plaintiff or with its knowledge.

126.  In Wang’s statement, she said Fu was the one who requested BSZ to beautify its accounts.  But in her oral evidence, she admitted that she had not heard Fu saying such a thing.  She also claimed she was confused and had no clear recollection about such matter.

127.  Yang’s statement, on the other hand, pointed fingers at Cazenove, Fu, Sin, the Plaintiff’s then chief financial officer Choi Mun Tuen (蔡敏端)(“Choi”). These people were said to have laid down certain indicative figures (指針性的數字), with which BSZ was to cooperate (配合) in inflating the accounts.  Yang also alleged that the Plaintiff had its auditor to cooperate and accept (配合接受) BSZ’s accounts as representing a true and fair view of BSZ.

128.  In his oral evidence, Yang tried to cast his net even wider to implicate the Plaintiff’s “VP” (presumably referring to vice-president), other members of senior management (高管) and “4 to 5 members” in the Cazenove division^[15], none of whom he was able to name, even when specifically prompted to do so in re-examination.  Yang sought to describe an elaborate process in respect of the inflation of accounts, involving meetings with investment bankers and due diligence in Wuhan by an unidentified auditing firm prior to the deal.   Quite surprisingly, these purported details appear nowhere in his witness statement, and so I have reason to believe that Yang was fabricating the evidence as the needs arouse.

129.  In his final submissions, Mr Chan submits that Chan YN was plainly aware of the falsity of the Management Accounts.  Yet, such allegation is wholly unsupported by evidence or pleading.

130.  It is also hard for me to believe that so many professional as alleged by Yang, including investment bankers and accountants, were involved in such a massive exercise with the ultimate effect of deceiving the shareholders of the Plaintiff.  More concrete evidence has to be produced to substantiate such wide and serious allegation.

131.  Yang sought to maintain in the stand that the Plaintiff’s auditor had cooperated and accepted the inflated figures.  Yet he could not even identify CCIF, which was the Plaintiff’s accountant at the time, had not read CCIF’s report (which formed part of the Plaintiff’s circular to shareholders)[16] and ultimately had to admit that he was only speculating.  Yang also had to accept that it was not clear to him whether the Plaintiff’s INEDs were involved.

132.  Further, the Defendants have not identified any figures and produced no document to substantiate Yang’s extravagant allegations.  They have chosen not to call anyone from BSZ, not even Zhou GB (who filed a statement in this action) who were supposed to know what the alleged “indicative figures” were and who had proposed them, and to be intimately involved in “cooperating” and beautifying the accounts.  Hence, the Defendants have failed to establish that the inflation of the Management Accounts was done at the instigation of the Plaintiff or with its knowledge.

133.  In reaching such conclusion, I have already taken into account that the Plaintiff has not called anyone from the then management of the Plaintiff, Cazenove and CCIF to rebut the allegation. However, the Defendants bear the evidential burden to prove that the Plaintiff instigated or was aware of the falsification.  As the Defendants’ evidence is so weak and not capable of being believed, no adverse inference should be drawn against the Plaintiff on such issue for the absence of witnesses.

134.  I must also emphasise here that, as further elaborated in the latter part of this Judgment[17], the result of the case would be the same even if the Plaintiff’s management was guilty of participating in the falsification exercise.

135.  The Defendants further allege that the Plaintiff had agreed not to enforce the SPAs against them for breaches of warranties relating to the truth and fairness of the Management Accounts.

136.  On the facts, I do not find that there was indeed such an agreement.  Wang said in her statement that the promise was allegedly made to her, her husband and Tianjiu by Fu.  She resiled from this in her oral testimony, saying that she might have heard about it from her husband but could not remember any details.  She could not even recount in broad terms what her own witness statement says to be the content of the alleged promise.  This is wholly unbelievable when the promise forms such a critical part of the Defendants’ pleaded case.  Hence, I accept that the alleged collateral agreement was only a fabrication made up by the Defendants as a defence to this action.  Indeed, if there were any truth in such allegation, it is Zhou who should have come forward to testify on such issue, as one cannot expect Fu to be a witness in view of the sulphuric acid attack.

137.  Further, even if such agreement had indeed been made, the Defendants would be precluded to rely on such agreement as a defence to the Plaintiff’s claim by reason of the “entire agreement” clause in the SPAs.[18] This is a classic case for the application of the “entire agreement” clause, as it would prevent the parties from making any under-table agreement at the expense of the shareholders of the Plaintiff.

138.  I then deal with the issue as to whether the Plaintiff had, as a matter of fact, relied on the Management Accounts in making the deal.  Obviously, this issue is based on the premise that the inflation of the Management Accounts was not done at the instigation or with the knowledge of the Plaintiff’s management.  If the Plaintiff’s management was aware of the falsification, one cannot possibly say that it had relied on the accuracy of the Management Accounts in the decision making process.  However, the position may be very different if the Plaintiff’s management was not guilty of participating in the falsification exercise.

139.  There is no serious argument that the Plaintiff’s other shareholders were not aware of the inflation of the Management Accounts at the time of the SGM.  The Defendants may seek to argue that the shareholders might have relied on the CCIF Report and not the Management Accounts in approving the deal.  But as I will demonstrate below, there is absolutely no merit in such contention.

140.  According to the Defendants, the Plaintiff must have carried out its own due diligence investigation on BSZ, and so the Plaintiff had not relied on the Management Accounts in making the deal.

141.  In asking the court to draw adverse inferences against the Plaintiff, the Defendants rely on the following:

(i)   The Plaintiff has given no discovery of any document relating to its due diligence study of BSZ or any other earlier documents concerning the acquisition.

(ii)  The Plaintiff cannot explain why the Plaintiff’s Board meeting authorizing the signing of the SPAs was not held until 3 May 2007 and this Board meeting was only attended by Chan YN and Fu.  There is also no evidence adduced by the Plaintiff as to how the SPAs came to be agreed and how the Board came to approve of the transaction.

142.  In contending that the Plaintiff had not relied on the Management Accounts in making the deal, the Defendants also rely on the following:

(i)   The bold passages in the 10 May Announcement to the effect that, in arriving at the consideration for the proposed acquisition, the Board stated that no valuation had been performed on the properties owned by or the business of BSZ, and the Board had only made reference to an acquisition of a similar business in another province of the Mainland by a listed company in Hong Kong.

(ii)  The 8 June Circular, which gave notice for the holding of the SGM to obtain the shareholders’ approval of the SPAs, contained an accountants’ report on BSZ issued by CCIF (the “CCIF Report”).  The CCIF Report made it clear that CCIF had “carried out an independent audit procedures on the Financial Information in accordance with the Hong Kong Standards on Auditing issued by the HKICPA”, and there was also the usual statement that, in the opinion of CCIF, the financial information in the report gave a true and fair view of the state of affairs of BSZ as at the end of 2004, 2005 and 2006 and of the cash flows of BSZ for the relevant periods.  In the CCIF Report, the financial information on BSZ was allegedly different from that set out in the 10 May Announcement, and was also not the same as that set out in the Management Accounts.  There is also suggestion in the report that, in preparing the CCIF Report, CCIF had access to the audited financial statements of BSZ for the years 2004 to 2006.  Hence, the Defendants contend that the shareholders of the Plaintiff had relied on the CCIF Report and not the Management Accounts in deciding whether to enter into the deal.

(iii) Since Chan YN was holding 74.89% of the shares of the Plaintiff at the material time and he was one of the only 2 directors present at the Board meeting on 3 May 2009 approving the making of the SPAs, it is reasonable to infer that he must have voted in favour of the acquisition of BSZ at the SGM.  Hence, the resolution to approve the acquisition of BSZ would have been passed at the SGM anyway irrespective of any opposition from the minority shareholders who would not have any means of blocking the acquisition.

143.  The Plaintiff has not called any witness to deal with this particular issue.  The person who may have direct knowledge on such matter are Fu and Chan YN.  As mentioned above, the court can understand why Fu did not testify in court, and so no adverse inference should be drawn against the Plaintiff for his absence.  The absence of Chan YN is more conspicuous. However, it has never been the Defendants’ case, whether by way of pleading or evidence, that Chan YN instigated or was aware of the falsification, and so his absence has to be considered in such context.  Another potential witness is Sin, but there is no evidence that he, being only the company secretary at the time, had played any material role in deciding whether to make the acquisition, and so his absence is not significant.

144.  Despite the absence of these potential witnesses, Mr Ho submits that there is ample documentary evidence to support the Plaintiff’s case in this regard.

145.  On 23 April 2007, the Plaintiff issued an announcement on the possible acquisition of interest in a company operating an agricultural products exchange in the Mainland.

146.  The resolutions of the Board which approved the SPAs and various related matters are contained in the minutes dated 3 May 2007 of a meeting attended by Fu and Chan YN.  Both Thomas Chan and Tong frankly accepted that they did not understand why the minutes were dated 3 May rather than 2 May 2007, i.e. date of the SPAs.

147.  Despite such confusion in the date, it was clearly recorded in the minutes that:

“(a) the Directors considered the Proposed Acquisition can diversify the [Plaintiff’s] investment into the agricultural exchange business in the [Mainland], in addition, the geographical advantage of [BSZ] can help the [Plaintiff] to develop itself into a supply and logistic centre in the central part of the [Mainland]. Moreover, the Proposed Acquisition will broaden the income base and strengthen the cash flow of the [Plaintiff]. As such, the Directors consider that the acquisition of [BSZ] is consistent with the [Plaintiff’s] business strategy and in the interest of the [Plaintiff] and its shareholders as a whole;

(b) consideration for the Proposed Acquisition was negotiated on an arm’s length basis and was agreed between the parties to the [SPAs] on normal commercial terms by reference to, among other things, the recent operating and financial performance of [BSZ], the financial performance and valuation of other companies engaging in similar businesses in the [Mainland] and their future prospects”.

148.  Later, the 10 May Announcement set out the terms of the acquisition and explained that the consideration under the 1^st SPA^[19] “was negotiated on an arm’s length basis and was agreed between the parties…on normal commercial terms by reference to, among other things, the recent operating and financial performance of [BSZ], the financial performance and valuation of another company engaging in similar business in the [Mainland].”

149.  The 10 May Announcement also set out the historical information of BSZ, including the following:

“[BSZ] is principally engaged in the operation of an agricultural products exchange in the city of Wuhan, Hubei Province, the [Mainland] since 2003. According to the management accounts of [BSZ], its unaudited net asset value as at 31 December 2006 was approximately RMB150 million. The unaudited results of [BSZ] for the three financial years ended 31 December 2006 are set out below”.

150.  The unaudited results tally with the figures in the Management Accounts attached to the SPAs, as illustrated in the following table:

	For financial year ended 31 December
	2004 RMB (‘000)	2004 income statement	2005 RMB (‘000)	2005 income statement	2006 RMB (‘000)	2006 income statement
Net profit (loss) before taxation etc.	(2,713)	-2,713,135.41	8,750	8,748,703.91	87,460	87,460,647.02
Net profit (loss) after taxation etc.	(2,713)	-2,713,135.41	8,750	8,748,703.91	74,148	74,147,618.49

151.  Hence, the financial information of BSZ based on its Management Accounts had been presented to the Plaintiff’s shareholders.

152.  In trying to establish that the Plaintiff had not relied on the Management Accounts in making the deal, the Defendants rely heavily on certain bold passages in the 10 May Announcement.  They are similar and one of the passages reads as follows:

“Shareholders shall note that in arriving at the consideration for the Proposed Acquisition, no valuation had been performed on the properties owned by or the business of [BSZ]. The Directors has only made reference to an acquisition of a similar business in another province of the [Mainland] by a listed company in Hong Kong. However, taken into account (i) progress of the transformation of the agricultural products exchange operated by [BSZ] from a fixed rental exchange platform to a transaction-based exchange platform; (ii) potential growth in the profitability of [BSZ] in the near future; and (iii) valuation of other agricultural products related listed companies in Hong Kong, the Directors are of the view that the consideration for the Proposed Acquisition is fair and reasonable”.

153.  The Defendants interpret the above bold passages as meaning that the Directors had referred “only” to an acquisition of a similar business in the Mainland and nothing else, and that they simply took into account forward-looking considerations and not the past financial history of BSZ in the decision making process.  There is also a suggestion that the Directors included the statements in bold to avoid liability.

154.  Despite the able submissions of Mr Chan, the 10 May Announcement, when read as a whole, does not suggest that the Plaintiff’s Directors had “only” referred to the acquisition of a similar business in the Mainland and nothing else.  The announcement clearly included the historical information of BSZ, including its unaudited financial results,and so it would be absurd to suggest that the Board had only referred to a similar acquisition in determining the purchase price.  If that was the case, there was simply no need to make reference to such additional information in the announcement.

155.  Further, as explained by the Plaintiff’s business valuation expert, Mr Mark Bezant (“Mr Bezant”), one does not consider a similar transaction in the abstract, but uses it as a reference point or benchmark and applies it to the actual circumstances of the company in question in order to arrive at a price.  In any event, it is wrong to say the Plaintiff’s Directors considered only a similar transaction, as the 10 May Announcement and 8 June Circular expressly stated that the Directors took into account, among other things, the valuation of other agricultural products related listed companies in Hong Kong.

156.  According to Mr Bezant, any projection of the future profit or growth of a company must be made upon a baseline, which is the level of its historic profits, and so it is illogical and unrealistic for the Defendants to divorce the past performance of a company from an assessment of its current value or future prospects.^[20]  As summarised by Mr Bezant, “you have the historic baseline of profits that you expect to improve upon if you’re growing your business and changing your business model, so you can’t jettison the historic position when deciding what this business is worth”.  The information presented to shareholders about BSZ and the acquisition was a “package of expectations for the future informed by the performance in the past”.

157.  In my judgment, the evidence of Mr Bezant makes a lot of commercial sense, which only reflects what a reasonable businessman would have taken into account in making the decision on an acquisition.  On the basis that the Plaintiff’s management was not aware of the inflation of the Management Accounts, it would be quite unrealistic to suggest that any sensible businessman would have ignored the past financial performance of the target company before determining the acquisition price, in particular the Plaintiff is a listed company subject all sorts of regulatory control.  Further, if the Defendants’ contention were true, there would have been no point for the SPAs to include the Management Accounts of BSZ for the past years.

158.  In the 8 June Circular which informed shareholders of an upcoming SGM for voting on the transaction, similar information was presented.  The 8 June Circular also contained detailed business review of BSZ for the years 2004 to 2006.  It further provided that various documents, including the SPAs (defined as “Material contracts” therein), would be made available to shareholders for inspection. 

159.  Mr Ho submits that the Board in the 8 June Circular had referred to the audited results of BSZ for 2004 to 2006[21] which do not on their face match with those in the Management Accounts. 

160.  I accept the submission of Mr Ho that the simple explanation for this is that: (a) the audited figures came from the accountant’s report on BSZ prepared by CCIF at Appendix II to the 8 June Circular; (b) CCIF had applied accounting adjustments according to the Hong Kong accounting standards.  Yet, according to Thomas Chan, Tong and Mr Bezant, the Management Accounts remained the starting point and the source data.  In Mr Bezant’s words, the audited figures in the 8 June Circular are simply “the Hong Kong accounting-standards-based presentation of the same information as in the [Management Accounts]”.  The Defendants have simply not put forward any positive analysis to demonstrate that the difference in the figures was due to anything other than accounting adjustments.

161.  More importantly, the Management Accounts and the audited results set out in the 8 June Circular show the same trajectory of BSZ as explained by Mr Bezant:

“they both show a business whose turnover is growing strongly and whose profits are growing strongly. They’re produced on different presentational formats for accounting purposes but they are describing what is understood to be the same underlying business performance and business economics…

…you have a business whose being…described – to shareholders as growing strongly at the revenue line and moving from losses to profits and then increasing profits at the profit line. That’s information being described to shareholders and it’s the same, in effect, it’s the same picture as to the performance of this business whichever set of accounts you use. It’s this same broad picture.”

162.  Hence, the said financial information of BSZ formed the basis on which the Plaintiff’s shareholders approved the SPAs and the transactions thereunder at the SGM on 27 June 2007.[22]  Indeed, if the Defendants contend that the then management of BSZ had supplied further or different documents to CCIF for the preparation of the CCIF Report, they should have been able to produce documents or evidence to substantiate such allegation.

163.  If it were true that the Plaintiff’s Board and CCIF had instigated or were privy to the inflation of BSZ’s accounts as contended by the Defendants, it would virtually mean that what was stated in the 10 May Announcement and 8 June Circular, about the acquisition being negotiated on an arm’s length basis and agreed on normal commercial terms etc., would have been deliberate misstatements.  There were public documents. Without solid evidential foundation supporting such serious accusations against members of the Plaintiff’s Board (some of whom, such as Tong, were qualified professionals) and a professional accounting firm, it is difficult for me to accept that they would have made such deliberate public misstatements.  In this regard, even Yang, who was a member of the Board at the material time, could not provide a satisfactory explanation about his involvement in the issue of these public documents.

164.  Mr Chan complains about the lack of discovery of documents such as due diligence reports, documents on the deliberation of the Plaintiff’s Board on the acquisition and documents as to how the shareholders had voted in the SGM.  However, the Board’s consideration and resolutions were already set out in the relevant minutes.  Further, as explained by Thomas Chan, based on his experience, such minutes do not have any standard form and need not necessarily be detailed or elaborate.  It is also hard to understand the relevance of documents as to how the shareholders had voted in the SGM.  What is important is that the SPAs were approved in the SGM.   In any event, the Defendants had not asked for specific discovery of these documents.  Thomas Chan had also caused further searches to be conducted through the Plaintiff’s records, and no further relevant documents was retrieved.  There is simply no basis for the court to doubt his explanation or to suggest that the Plaintiff had deliberately concealed the relevant documents such as due diligence reports.

165.  Mr Chan also submits that the deal would have proceeded in any event as Chan YN, being the controlling shareholder, would have approved the deal irrespective of whether the Management Accounts had been inflated.  However, as mentioned above, it is no part of the Defendants’ pleaded case or evidence that Chan YN was privy to the falsification exercise. Hence, the Defendants have no basis to contend that he was somehow different from the other shareholders of the Plaintiff when it came to the voting at the SGM.

166.  Mr Chan also complains that Mr Bezant could not give evidence on how the CCIF Report was prepared.  He was not called as expert on how the said report was prepared and the terms of his appointment did not cover this area at all.  However, there was no challenge to his evidence in the course of Mr Bezant’s testimony and so the court is entitled to take into account his evidence in this regard.  In any event, the Defendants have simply not put forward any positive analysis to demonstrate that the difference in the figures was due to anything other than accounting adjustments.  As mentioned above, if the CCIF Report was prepared based on some additional or different documents, the Defendants should have been able to provide evidence to substantiate such allegation.

167.  Finally, Mr Chan has raised an argument, apparently for the first time in the reply final submissions, that according to the purported minutes of the shareholders’ meeting of BSZ on 27 April 2007, the assets of BSZ was only RMB 89,817,980 which was less than the amount shown in the Management Accounts.  This was one of the documents submitted to MOFCOM for approving the shares transfer.  Hence, at least by time of the completion on 5 December 2007, the Defendants say that the Plaintiff must have been aware that the Management Accounts could not be accurate.

168.  Again, the Plaintiff was not offered an opportunity to deal with such allegation, which had never been raised in pleading or witness statements.  Apart from the fact that it is not clear whether the Plaintiff was actually aware of such document before completion, it is also difficult to see the basis for the Defendants to say, just because of such figure in the minutes, the Plaintiff must have been aware of the falsities in the Management Accounts.  The Plaintiff must not have been taken to know the context in which such figure was presented in the shareholders’ meeting, and so there is no merit in such argument.

169.  For the above reasons, I find as a matter of fact that the Plaintiff, including its management and its shareholders, had relied on the Management Accounts in deciding whether to enter into the deal for the shares acquisition.  However, as I will elaborate in the latter part of this Judgment[23], the result of the case would be the same even if the Plaintiff’s management was aware of the falsification of the Management Accounts.

B.4.4  The alleged wider “scheme” of conspiracy

170.  In their oral testimony, the Defendants’ witnesses even went further and raised a new allegation about a massive conspiracy involving the following:

(i)   The acquisition under the SPAs was a pretext for the Plaintiff to raise financing by way of placement and drive up its share price.

(ii)  The exercise enabled Chan YN to sell his interest in the Plaintiff to PNG on attractive terms.

(iii) The “beautified” Management Accounts of BSZ served the dual purposes (一物二用) of: (a) supporting the acquisition price; and (b) allowing the Plaintiff’s new management to turn around and sue the Defendants.

(iv)  The INEDs turned a blind eye to the scheme (視而不見).  The misstatements in the accounts were left deliberately undetected.

171.  The Defendants also claim that the Plaintiff, though a listed company, had very little assets in 2007.  As at 31 December 2006, its total assets less liability was only HK$61,511,000 and the Plaintiff had been suffering loss for at least 3 consecutive years.  The bank balance and cash of the Plaintiff’s group was about HK$2.1 million only.  On 2 May 2007 when the SPAs were signed, the Plaintiff was not in a position to pay for the acquisition and had no banking facilities in place for the acquisition.

172.  I do not find that there is any basis to support such serious allegation.

173.  In my judgment, the alleged scheme simply defies commercial sense.  On the Defendants’ logic, the Plaintiff entered into the acquisition just so that it could raise circa HK$591 million through a placement, the bulk of which (HK$410 million) it had to pay over to Wang or Zhou. The Plaintiff was then left with less than HK$200 million and a total liability of HK$376 million under the two “promissory notes”.  Further, the Plaintiff would also have no control of BSZ.  As Thomas Chan aptly put it, this smacks of a ridiculous business venture.

174.  The alleged scheme would also expose the Plaintiff and all persons involved to grave risks including potential criminal liability. Should any party to the scheme such as the Plaintiff’s INEDs, Cazenove and CCIF deflect, the whole scheme would fail and everyone would be losers.  One would certainly ask why these persons (professionals included) would assume or turn a blind eye to such risks just so to benefit Chan YN and the Plaintiff’s coffers. Under such circumstances, Tong’s adamant response that he would have objected and immediately resigned had he known the figures in the accounts were false had the distinct ring of truth.

175.  Another reason is that the Defendants’ extremely serious allegations were not even backed up by Yang.  As mentioned above, Yang’s evidence on the CCIF Report is confusing, and even he was unable to say whether the INEDs were implicated.  There is also not a shred of evidence that Chan YN’s sale of his stake to PNG (which happened in October 2008) was contemplated back in May 2007 when the Plaintiff entered into the SPAs.

176.  As to why the falsities in the Management Accounts were not detected, the simple reason is that they were not examined by forensic accountants at the time.  As explained by Thomas Chan and Tong, both of whom are qualified accountants, and Mr Kenneth Chen (“Mr Chen”) who is the Plaintiff’s forensic accounting expert, the scope of work and expertise of general accountants or auditors do not include uncovering falsities such as forged documents.

177.  Indeed, from the beginning, the SPAs specifically provided that the Plaintiff was to secure financing in order to fund the acquisition and not the other way around.  This was also highlighted in the 10 May Announcement.  Further, a Board meeting attended by, inter alia, Fu, Yang, Tong and Sin was held on 4 July 2007 to approve the intended placement.

178.  Mr Chan queries why there are so few documents on the discussions relating to the placement terms.  Further, the placing agreement was conditional on the Plaintiff having entered into service agreements with the executive directors for not less than 2 years, and all 6 Directors took part in voting unanimously for approving the placing agreement without any declaration of interest or query by any Director.  Mr Chan therefore submits that the said meeting on 4 July 2007 was nothing more than a formality to pass the resolutions to approve the placing agreement and there was no genuine discussion amongst the Directors in the said meeting about the placing.

179.  However, I agree with Mr Ho that it is neither unusual nor inherently suspicious that all the details of such discussions were not minuted.  The Board held a meeting on 4 July 2007 to discuss the placement terms, which was attended by 7 persons including Fu, Chen Hong Bo who was the nephew of Chan YN, Yang, Tong and Sin.  The minutes show that that the Directors held discussions on the finalised draft of the placing agreement (which was tabled before them) and considered the placing price to be fair, reasonable and in the Plaintiff’s best interest.  It was not unusual that they did not record all the details leading to the final decision.  Further, it would be one thing to say that the Directors had not followed the rule in making declarations of their interests, it is another to allege that they were involved in a conspiracy using the placement exercise to raise fund for the Plaintiff for improper purposes.  More evidence needs to be adduced to substantiate such serious allegation, not just by raising some queries about the meeting itself by reference to its minutes.

180.  Subsequently on 5 July 2007, the Plaintiff issued an announcement to inform the shareholders of the terms of the placement.  It is worth noting that, though Cazenove was specified to be the Plaintiff’s placing agent, sole bookrunner and lead manager, the Plaintiff’s financial advisor was a separate entity called Somerley Limited, which was already stated to be the Plaintiff’s financial advisor back in the 8 June Circular.  This again undermines the Defendants’ case that Cazenove was somehow involved from the start in advising on the structure and terms of the acquisition.

181.  For these reasons, I do not find that the Plaintiff’s placement exercise was conducted for some other ulterior purposes or there was a conspiracy as alleged by the Defendants.

B.4.5  The application for the MOFCOM Approval

182.  The obtaining of the approval of MOFCOM for the shares acquisition was one of the conditions precedent specified in the SPAs.

183.  According to the documents, BSZ made the application to MOFCOM for such approval on 15 June 2007.  A number of documents were submitted to MOFCOM for such purpose.

184.  There is no serious dispute that the 89.8 Million Agreement allegedly made between Tianjiu, Wang and the Plaintiff was submitted to MOFCOM for consideration of the application.  It provided that Tianjiu and Wang were to transfer 90% of the interest in BSZ to the Plaintiff at a total consideration of RMB 89,817,930.[24] It was ostensibly signed by Fu on behalf of the Plaintiff (with the Plaintiff’s company chop), Wang and one Zhong Ling (锺翎) on behalf of Tianjiu. 

185.  Probably because of the delay in the decision of MOFCOM, the parties entered into agreements on 2 August 2007 to extend the long stop date for the SPAs to 2 October 2007, namely, 5 months after the signing of the SPAs.  On 2 October 2007, the long stop date was again extended to 30 November 2007, and later to 2 December 2007 and finally to 5 December 2007.

186.  On 27 September 2007, the Plaintiff issued a public announcement stating that: (i) the long stop date in the SPAs had been extended; (ii) the application had already been made to MOFCOM for approval of the shares transfer; and (ii) according to the Plaintiff’s Mainland legal advisers, there were no legal obstacles to obtaining the relevant approval under Mainland law.

187.  The MOFCOM Approval was obtained on 26 November 2007.  The Plaintiff initially published the 27 November Announcement saying that the approval of MOFCOM had been obtained and the Plaintiff would proceed to complete the shares transfer under the SPAs.  Then one day later, the Plaintiff published the 28 November Announcement stating that the Plaintiff need to have further time to discuss with its Mainland legal advisers regarding the conditions precedent.  By then the latest, the Plaintiff’s Board should have been aware of the existence of the 89.8 Million Agreement.

188.  On 5 December 2007, the last extended date of the long stop date, the Plaintiff held a Directors’ meeting.  According to the minutes produced by the Plaintiff, with the exception of Tong, all Directors of the Plaintiff were present.  Amongst the documents tabled in the meeting were the MOFCOM Approval and also the Mainland Legal Opinion dated 5 December 2007. After discussing the Mainland Legal Opinion, the Plaintiff’s Board decided to complete the transaction and to issue the 5 December Announcement that all the conditions precedent to the completion of the SPAs were fulfilled.

189.  Though a few supporting documents were ostensibly signed by Fu on behalf of the Plaintiff, it is clear that the Defendants and Zhou were privy to, and their subordinates in BSZ intimately involved in, the steps leading up to the granting of the MOFCOM Approval and Certificate of Approval on 26 and 27 November 2007.

190.  Firstly, most of the documents submitted to MOFCOM or relevant to the application came into being before completion of the acquisition when BSZ was in the Defendants and Zhou’s ownership and exclusive control.  It is worth noting that BSZ’s shareholders’ resolution dated 24 April 2007 pre-dated even the SPAs.

191.  Secondly, Yang admitted to both this court and the Mainland court that he instructed BSZ personnel, notably Luo Hong and Zhou Jun, to put together the application materials.  This part of his evidence was corroborated by Luo Hong and Zhou Jun in their evidence in the Mainland proceedings.  According to Luo Hong, it was Zhou Jun who forged the signature of Fu in the 89.8 Million Agreement.

192.  Thirdly, the first instance Hubei Court in the Mainland Action No 1 commenced by the Defendants had found against Wang on her disclaimer of knowledge and responsibility in relation to the 89.8 Million Agreement.[25]  While the first instance judgment was reversed by the Supreme People’s Court, the said finding about Wang’s knowledge and responsibility was upheld by the appellate court.[26]  The court also accepted that, at the time when BSZ was still under the control of Wang and Tianjiu, BSZ was involved in the preparation and submission of the 89.8 Million Agreement.

193.  In Wang’s witness statement in this action, she completely sidestepped the 89.8 Million Agreement and matters concerning the MOFCOM Approval.  In her oral testimony, she sought to disclaim knowledge of the documents and deny that the signatures on them were hers, which she never disputed in the Mainland Action No 1.  There is an issue between the parties as to whether Wang is bound by the Mainland court’s findings by reason of the principle of estoppel per rem judicatam.  For my part, I do not find it necessary to resolve such difference between the parties.  After all, whether Wang herself knew about the 89.8 Million Agreement is neither here or there.  If necessary, I would arrive at the same findings about Wang’s role for the reasons given by the Mainland courts in the Mainland Action No 1.

194.  In her oral evidence, Wang also sought to question Zhou’s signatures on the cover page of BSZ’s application materials to MOFCOM and his 2^nd statutory declaration dated 6 December 2007 (“Zhou’s 2^nd Statutory Declaration”)[27].  Earlier, Mr Chan had put to Thomas Chan that the contents of the documents involved in the application process, including the letter dated 9 October 2007 by BSZ (the “9 October Letter”), the supplemental information dated 11 October 2007 by the Plaintiff and the confirmation dated 1 December 2007 by BSZ, were all false.  However, one of these documents, ie. the 9 October Letter, was exhibited to Zhou’s 2^nd Statutory Declaration, and the confirmation dated 1 December 2007 was actually issued by BSZ.  Without having Zhou or anyone in BSZ at the time to testify on such issue, I reject such challenges lodged by the Defendants.

195.  There is an issue about the extent of the Plaintiff’s involvement in the application process.  Mr Chan points out that the impediments leading to the withholding of approval would appear to be the provision on the convertible notes and also the provision for the governing law to be Hong Kong law contained in the SPAs.  To get the approval, some flexibility (變通) was therefore required.  Having realized the problem, Yang so informed the Plaintiff and Cazenove and he was asked to take some flexible measures.  In that context, everyone would understand that to take flexible measures would mean something improper would have to be done.  It is Yang’s evidence that the Plaintiff did not know how he would effect the flexible measures.  Presumably this would mean that Yang did not in fact tell the Plaintiff what exactly would be done to obtain the approval.  What Yang then did was to tell Luo Hong, the legal representative of BSZ and the director in charge of making the application, that they should do whatever would be required by MOFCOM for the purpose of getting the approval, and where necessary even to create some false documents.  According to Yang, even though he so authorised the staff of BSZ, he, at the time, did not know exactly what was to be done and what document was to be created.   The Defendants therefore say that in the circumstances, Yang as director of the Plaintiff must have known that something illegal would be done in order to obtain the approval.

196.  Although Yang suggested that Fu was involved in something improper, such allegation does not sit well with the contents of 2 statutory declarations: (i) the one made by Fu dated 5 December 2007; and (ii) Zhou’s 2^nd Statutory Declaration made by him in the capacity as being a director of BSZ.

197.  The main purpose of the statutory declaration of Fu was to exhibit a copy of a letter from the Plaintiff to the Mainland Foreign Exchange Authority (“FEA”), informing the FEA of the details of the payment of the price for the acquisition to the Defendants as provided for in the SPAs and also informing the FEA of the Plaintiff’s intention to raise further capital in the 2^nd half of 2008.  In other words, the Plaintiff had informed the FEA the correct purchase price which does not suggest any wrongdoing on its part.

198.  In Zhou’s 2^nd Statutory Declaration, Zhou exhibited the 9 October Letter from BSZ to the FEA, informing the latter the reason as to why the purchase price in the 89.8 Million Agreement was different from the purchase price stated in the Plaintiff’s public announcements in Hong Kong.  According to the 9 October Letter, the purchase price stated in the 89.8 Million Agreement was set based on the valuation of the assets made in the Mainland, adopting valuation principles different from those outside the jurisdiction.  Apparently, this explains the difference in the purchase prices set out in the SPAs and the 89.8 Million Agreement.  As I see it, this explanation has some truth as there was indeed a valuation report (评估报告) by Wuhan Rai Fung Asset Valuation Firm (武汉瑞丰资产评估事务所) dated 30 April 2007, valuing 100% of BSZ as RMB 99,797,700 and 90% at RMB 89,817,930.

199.  Mr Chan queries the genuineness of these 2 statutory declarations.  Firstly, from the reference printed at the bottom left of these statutory declarations, they were all prepared by the same person who prepared the minutes of the board meetings of the Plaintiff, and Sin, being the company secretary of the Plaintiff at the time, was the one responsible for the preparation of the Plaintiff’s minutes.  It is therefore reasonable to infer that these statutory declarations should also have been prepared by him. Secondly, there is no evidence to suggest that the two letters to the FEA were in fact sent, or that MOFCOM was aware of such correspondence with the FEA. Neither has the Plaintiff given any reason as to why these communications were necessary.  Hence, Mr Chan submits that the purported communications were only to create a façade as if the Mainland authorities were made aware of the SPAs when the key Mainland authority for the transaction, namely, MOFCOM, was not.

200.  In my judgment, there is simply insufficient basis to support such serious allegation.  Firstly, the presence of the reference is neither here or there.  I can think of many administrative reasons as to why the same reference appeared in all these documents.  Secondly, the statutory declarations were made on oath or affirmation, and so there is no reason for the court to doubt the genuineness of these documents on their face value. Thirdly, such kind of transaction involved cross-jurisdiction monetary transfer and so it is not surprising that the FEA was involved.  If there was no need for such exchanges, the Mainland Legal Advisers should have known about that.  Whilst I agree that there is no evidence to suggest that MOFCOM was aware of such exchanges, these documents at least support that no one had made any attempt to conceal the existence of the 89.8 Million Agreement.

201.  Yang had testified unequivocally in the Mainland Action No 1 that the Plaintiff had no knowledge of the matter at the time.  According to Yang, the Plaintiff only knew about the 89.8 Million Agreement after the granting of the MOFCOM Approval in late November 2007.  Further, in his deposition by Wang’s Mainland lawyers, Luo Hong confirmed that the Plaintiff did not provide any instruction or authorisation on the compilation of the application materials.  Further, it was Zhou Jun who forged Fu’s signatures in the relevant documents.

202.  In Yang’s witness statement in this action, he departed from his testimony to the Mainland court.  He claimed that the Plaintiff first became aware that the transaction might not be approved by MOFCOM given the restrictions in the No 10 Document under the Regulations Concerning the Acquisition of enterprises within the jurisdiction by Foreign Investors (《关于外国投资者并购境内企业的规定》的10号文)(“No 10 Document”) after signing of the SPAs.  In his evidence to the Mainland court, Yang said the Plaintiff only knew about the situation in December 2007.  Further, Yang alleged that the Plaintiff’s Directors including Fu considered bypassing the No 10 Document, and Fu agreed that he would take charge of the matter and liaise with Luo Hong of BSZ.  Although Yang mentioned “the Plaintiff’s directors”, he only named Fu specifically in his statement.  Yet Yang failed to explain why it was necessary for Zhou Jun to forge Fu’s signature or the Plaintiff’s company chop in the application materials if Fu had all along agreed to the course.

203.  Again this shows that Yang was always prepared to shift his evidence whenever he wanted to achieve different purposes.  His latest version is that the Plaintiff’s Directors, senior management, Hong Kong lawyers, Mainland lawyers and investment bankers had known all along about the difficulties of obtaining MOFCOM approval and authorised him to improvise in order to bypass any restrictions.  However, when Yang was pointedly asked in re-examination who had authorised him to improvise, he could name no one but Fu.  He also had to accept that he was only guessing that Sin and Choi might know about the matter.

204.  Yang’s evidence on the MOFCOM application vividly demonstrates that he had no hesitation to lie and mislead.  In addition to the examples above, Yang insisted that the shareholders’ resolution of BSZ was a document prepared for the Plaintiff’s financing.  When the absurdity of that answer was pointed out to him, he said the document was “problematic” and fake, and sought to dismiss any further questions on it.  Further, he claimed that the MOFCOM application process only started after the Plaintiff’s placement which took place in July 2007.  This was again refuted by the application materials which were all dated 15 June 2007.  Even if those materials were forged, there would have been no reason (and Yang could supply none) to put down a false date.

205.  The Defendants rely on the Mainland Legal Opinion with a view to show that the Plaintiff must have been aware of the existence of the 89.8 Million Agreement much earlier, or the Plaintiff was directly involved in the preparation of such document.  Firstly, they complain that the Plaintiff had not disclosed all the documents listed out in the Mainland Legal Opinion or sent to the Mainland Legal Advisers for consideration.  Neither had the Plaintiff disclosed the instructions given to such legal advisers. Secondly, the Plaintiff must have been in possession of the 89.8 Million Agreement before 5 December 2007, as this would have been a document supplied to the Mainland Legal Advisers for consideration.  Thirdly, the Mainland Legal Opinion contained an express disclaimer of liability relating to accounting reports, auditing and profit forecast, which suggested that some of these documents might have been supplied to the Mainland Legal Advisers and they might be aware of some matters which might show that these documents might not be accurate.  Fourthly, the Plaintiff gave an express assurance that the documents supplied to the Mainland Legal Advisers were genuine, and so the Plaintiff was prepared to vouch for the authenticity of the 89.8 Million Agreement.

206.  Further, Mr Chan complains that the Plaintiff should have disclosed more documents about the MOFCOM application to the court.  For instance, according to the terms of the placing agreement as recorded in the Plaintiff’s Board minutes of 4 July 2007, the Plaintiff would have to produce to the placing agent a copy of the letter from MOFCOM confirming that the application for approval had been received and also a legal opinion to confirm that it was likely that the application would be approved. The Plaintiff should be in a position to produce copies of these documents which would undoubtedly shed more light on the stage of the application.

207.  Again I have to reject Mr Chan’s submissions in this regard.  The Mainland Legal Opinion had been disclosed by the Plaintiff in its 1^st List of Documents filed back on 17 June 2014.  It is true that the Plaintiff had not disclosed other documents which may relate to the Mainland Legal Opinion, such as the instructions given to the Mainland Legal Advisers and all the documents supplied to them for advice, and perhaps the documents sent to the placing agent.  However, without any request for specific discovery of these documents, one should not criticise the Plaintiff for not disclosing further documents which may not be relevant or necessary for the determination of the issues in this case.   It lies ill in the mouth of the Defendants to say that some other documents are relevant without taking steps to pursue for their discovery.  In particular, the documents are voluminous in this case and it would be difficult for a party to judge the relevance of a particular document without knowing the precise challenge.  Further, it is not appropriate or indeed fair to the Plaintiff by construing the disclaimer or assurance given in the Mainland Legal Opinion in a particular manner.  The Defendants’ suggestions about these matters are nothing more than mere speculation.

208.  In my judgment, the overall evidence is consistent with the fact that, as admitted by Yang in the Mainland proceedings, the Plaintiff only knew about the 89.8 Million Agreement when the MOFCOM Approval was granted on 26 November 2007.  This also explains the series of announcements in late November 2007 when the Plaintiff was grappling with the issue on an urgent basis with the assistance of its Mainland Legal Advisors.

209.  As mentioned above, it would be very difficult to expect Fu to have come forward to clarify the matter, in particular as to why his alleged signature appeared in the 89.8 Million Agreement.  But equally important is that Zhou had not made any attempt to explain the matter.  Neither had the Defendants called anyone from the then management of BSZ who should have known about the matter.  Hence, I have reason to believe that, as confirmed by Luo Hong in the Mainland proceedings, it was Zhou Jun who forged the signature of Fu in the 89.8 Million Agreement.

210.  Mr Chan also complains that the Plaintiff’s position on the 89.8 Million Agreement was not consistent.  According to him, Thomas Chan admitted that when litigating in the Mainland, the Plaintiff’s stance was that the 89.8 Million Agreement was valid, thereby impliedly admitting that Fu’s signature on the document was genuine.  However, the Plaintiff’s stance in the present proceedings is that the document was forged. Again, I do not accept such submission.  It is clear from the evidence that the Defendants were privy to the MOFCOM application.  Even Yang admitted in the Mainland proceedings that the Plaintiff did not know about the 89.8 Million Agreement before December 2007, and it has been pleaded by the Defendants that Yang had instructed Zhou Jun and Luo Hong to take care of the matter including falsifying the supporting documents.  As mentioned in §§62 and 63 above, the Plaintiff was eager to uphold the MOFCOM Approval after the payment of consideration and the performance of the SPAs, and so one cannot criticise the Plaintiff for its then effort in protecting its interest in the transaction. 

211.  For these reasons, I reject the evidence of Yang and Wang in its entirety.  In respect of the MOFCOM application, I find that: (i) the Defendants and their subordinates in BSZ were all along privy to how the MOFCOM Approval and Certificate of Approval came about; and (ii) the Plaintiff’s Board, with the exception of Yang, only became aware of the matter, in particular the existence of the 89.8 Million Agreement, around the time when the MOFCOM Approval was granted.

B.4.6  Wang’s allegation about the dilution of her shares

212.  There is no dispute that, as part of the consideration for the shares transfer, the Plaintiff issued convertible notes to Wang in the amount of HK$360,000,000 on 5 December 2007.  Wang converted all the convertible notes into 180,000,000 ordinary shares of the Plaintiff on 8 January 2008, and became the Plaintiff’s second largest shareholder between 8 January 2008 and 21 April 2010.

213.  As part of her case, Wang claimed that, after the acquisition by PNG, the Plaintiff had conducted various placement and allotment exercises which resulted in substantial dilution of her shares.  However, I do not see how such allegation, even if true, would be relevant to the issues in the present case.  In any event, Wang could have chosen to redeem the convertible notes instead of converting.  She was also fully entitled to participate in the said exercises to maintain her level of shareholding upon conversion.  Either way it was entirely her choice.  Wang claimed she did not understand her options, but pleading ignorance surely does not assist her.  In particular, it is quite clear that Zhou was the mastermind of the deal, and it would be absurd to suggest an experienced businessman like him would not have taken the necessary steps to protect his business interest.  Further, as Thomas Chan explained, the Plaintiff had required the financing from those exercises for various legitimate purposes such as expanding its working capital and acquiring further lands and markets in the Mainland.  The Plaintiff cannot be faulted for doing what was in its commercial interests.

B.4.7  Difficulty on the part of the Plaintiff in obtaining control of BSZ and the Market and the Plaintiff’s investigation

214.  It is clear to me that the Plaintiff had encountered tremendous difficulties and resistance in seeking to gain control over the operation and management of BSZ and access to BSZ’s financial information and documents.  Such findings can be supported by the following:

(i)  the oral testimony of Thomas Chan and Ng;

(ii)  the Plaintiff’s contemporaneous records of various meetings made by Ng or one Mr Ying Yat Man, including the meetings on 12 April, 14 May, 21 May, 23 June and 9 September 2009;

(iii)  the documents and public announcements relating to the delay in announcing the interim results of the Plaintiff caused by the unavailability of financial information about BSZ;

(iv)  the steps taken by the Mainland Police and authorities, including the issue of the new company chops and business registration certificates;

(v)  the chaotic conditions of the Market as shown in the photos taken post-handover;

(vi)  the assault of 4 Plaintiff’s employees in the Market on 20 October 2010; and

(vii)  the dissipation of the assets and funds of BSZ.

215.  In fact, the Defendants are not seriously challenging the Plaintiff’s case in this regard.

216.  After the Plaintiff gained control of BSZ and the Market, the Plaintiff’s current management was able to obtain the Electronic Ledgers and compile the Analysis of Assets Register.

217.  Mr Chan raised queries on the provenance of the Electronic Ledgers and Analysis of Assets Register for the very first time in this action during cross-examination of the Plaintiff’s experts.  These documents were explained in Thomas Chan’s first witness statement filed back in October 2014.  They were also specifically referred and exhibited in full to the expert report of Mr Kenneth Chen filed back in January 2015.   No questions were ever raised about them.  No expert was engaged by the Defendants to examine them.  Indeed, Mr Chan had not even put their queries to Thomas Chan, which is the least that they should have done as a matter of basic fairness. Under such circumstances, the Defendants’ challenge to these documents has no substance at all.  Coupled with the fact that the Defendants had not arranged anyone from the then management of BSZ to contradict the information in these documents, there is no reason for the court to doubt the accuracy of these documents.

218.  Mr Chan also challenges the authenticity of the Schedule of Fictitious Construction Works allegedly seized from Zhou GB’s office.  He queries whether a person would document his own fraudulent acts in full and stamp his own fingerprint on the same document.  The way in which Thomas Chan obtained the document is also open to question.

219.  Again I reject all these challenges.  It is the Defendants’ pleaded case that the Management Accounts had been inflated and falsified, including items in construction costs and income.  The Plaintiff, or at least the existing management, had great difficulty in quantifying the extent of the inflation.  There was ample opportunity to the Defendants to adduce evidence to challenge the data in the Schedule of Fictitious Construction Works, and yet they decided not to do so.  Further, as I will further elaborate in the latter part of the Judgment, the data in such documents tally with the figures of inflation assessed by the Plaintiff’s experts.  Hence, there is no basis to these challenges.

C    DEFENCE AND COUNTERCLAIM FOR THE NON-FULFILMENT OF THE CONDITIONS PRECEDENT AND THE “REVERSAL” OF THE SPAS

220.  Having made the aforesaid factual findings, I then deal with the defence and counterclaim for the non-fulfilment of the conditions precedent and the “reversal” of the SPAs.  Without the SPAs, there is no point in discussing the other claims of the Plaintiff.

C.1    The plea of the Defendants

221.  In §24 of the Re-Re-Amended Defence and Counterclaim, the Defendants plead that:

“By reason of the matters pleaded above, the conditions precedent specified in Clause 4.1(g) of the 1^st SPA and Clause 4.1(e) of the 2^nd SPA had never been satisfied. The SPAs terminated and/or ceased to have any legal effect in accordance with Clause 4.4. In the premises, the Plaintiff has no right under the SPAs to claim any damages as alleged or at all. The transaction under the SPAs should be reversed in accordance to the terms of the SPAs, including reversing the transfer of the shares and the repayment of the consideration”.

222.  The plea is repeated at §26H:

“In any event the refusal to revoke the MOFCOM Approval would not affect the termination of the SPAs in accordance with Clause 4.4 as aforesaid.  In the premises, the transaction under the SPAs should be reversed in accordance with the terms of the SPAs, including reversing the transfer of the shares as pleaded in paragraph 24 hereinabove which the Plaintiff has wrongfully failed to do, and the Plaintiff has since been holding all the shares in the Company so transferred by the Defendant to the Plaintiff under the SPAs (the “Baishazhou Shares”) on constructive or resulting trust for the Defendants”.

223.  The Defendants counterclaim for, inter alia, the following reliefs:

(i)  a declaration that the Plaintiff has been holding the BSZ shares on constructive or resulting trust for the Defendants and is liable to account the same to the Defendants and an order that the Plaintiff do transfer or dispose of the same at the direction of the Defendants;

(ii)  an order that the Plaintiff do cause and/or procure the BSZ shares to be transferred to the Defendants; and

(iii)  an account of all the money received and/or profits made by the Plaintiff from the BSZ shares and an order for payment to the Defendants of all sums found due on the taking of the account.

C.2    The relevant contractual terms

224.  The following provisions in Clause 4 of the SPAs (which bears the heading “Conditions Precedent”) are relevant:

(i)  Clause 4.1(g) of the 1^st SPA (similar provision in Clause 4.1(e) of the 2^nd SPA):

“完成目标权益买卖的先决条件为……

“所有买方、卖方及目标公司有关本协议的签署、执行及完成交易或履行其各自在本协议项下的任何责任所必要的 (包括任何政府、官方机构或监管机关 (包括但不限于中华人民共和国商务部)) 同意均已取得，且无任何政府、官方机构或监管机构提出、颁布或采纳的法令、法规、规章或决定禁止、限制目标权益之转让；”

(ii)   Clause 4.2 of the 1^st SPA(similar provision in Clause 4.2 of the 2^nd SPA):

“买方可随时以书面方式通知卖方，放弃第4.1条中所列的全部或任何先决条件 (第4.1(b)至(g)和(j)款中所列的先决条件除外)。卖方无权放弃第4.1条中所列的任何先决条件。”

(iii)  Clause 4.3 of the 1^st SPA (similar provision in Clause 4.3 of the 2^nd SPA):

“在交易完成日或該日之前，賣方應盡其最大努力促使第 4.1(g), (i) 和 (k) 款中所列的先決條件被滿足，而買方應盡其合理努力促使第4.1(a)至(h)和(j)款中所列的先決條件在第4.1 條中所列的其他所有先決條件被滿足時實現。”

(iv) Clause 4.4 of the 1^st SPA (similar provision in Clause 4.4 of the 2^nd SPA):

“如果至远期终止日或在各方书面约定的更晚的日期之前，第4.1条中所列的任何先决条件未能被满足 (或按照第4.2条的规定被放弃)，或者第4.1(b)至(g)款中所列的先决条件在其他所有先决条件已被满足或被放弃时未能实现，则除继续保持有效的第1、4.5、10、11、12、13、14、15和16各条外，以及除就因先前对本协议的违反而引起的索赔外，本协议不再有任何效力。”

C.3 The Defendants’ case

225.  It is common ground that, under the Mainland regulation[28], the transfer of the shares in BSZ from the Defendants to the Plaintiff, being an acquisition of shares in a Mainland company by a foreign investor, required the approval of MOFCOM.

226.  It is the Defendants’ case that the SPAs now sued upon had not been submitted to MOFCOM for approval.  Instead, it was the 89.8 Million Agreement that was submitted.  The 89.8 Million Agreement differs from the SPAs in a number of respects, e.g. the amount of the consideration, the manner of payment of the consideration, the governing law and the forum for dispute resolution.

227.  Given that Clause 4.1(g) of the 1^st SPA and Clause 4.1(e) of the 2^nd SPA expressly provided for “all relevant governmental consent to be obtained in relation to this SPA” (有關本協議…所必要的…同意均已取得), no MOFCOM approval was obtained in relation to the SPAs, and the MOFCOM Approval obtained on the basis of the 89.8 Million Agreement cannot satisfy the conditions precedent as set out in Clause 4.1(g) of the 1^st SPA and Clause 4.1(e) of the 2^nd SPA.  This is so irrespective of whether MOFCOM is to revoke the MOFCOM Approval dated 26 November 2007 or not.

228.  Further, the Defendants claim that, by taking out the Mainland Action No 2, the Plaintiff had acknowledged that the 89.8 Million Agreement had been declared to be void, and as a result the Plaintiff was asking the Defendants to render assistance to make another application to MOFCOM.  The conditions precedent specified in the SPAs have never been satisfied.  The SPAs have therefore been terminated or ceased to have any legal effect in accordance with Clause 4.4 of the SPAs.  As a result, the Plaintiff has no right under the SPAs to claim damages and the transaction under the SPAs should be reversed in accordance to the terms of the SPAs, including reversing the transfer of the shares and the repayment of the consideration.

C.4    The alleged non-fulfilment of the conditions precedent

229.  Despite the able submissions of Mr Chan, there is simply no basis to substantiate the Defendants’ contentions.

230.  Firstly, it is wrong to contend that the conditions precedent in Clause 4.1(g) of the 1^st SPA and Clause 4.1(e) of the 2^nd SPA were not satisfied.  These clauses make it a condition precedent for all approvals necessary for the execution, implementation, completion of or performance by the parties or BSZ of any obligation under the SPAs to be obtained (所有买方、卖方及目标公司有关本协议的签署、执行及完成交易或履行其各自在本协议项下的任何责任必要的…同意均已取得). While the MOFCOM Approval was granted on the basis of the 89.8 Million Agreement, what it approved was the same transaction (transfer of 90% interest in BSZ) between the same parties, i.e. the Plaintiff and the Defendants.

231.  Although the 89.8 Million Agreement had been declared void in the Mainland Action No 1, it can be seen from the history of the Mainland proceedings above that MOFCOM had not formally revoked the MOFCOM Approval.  After the adjudication of the Mainland Action No 1 and the Administrative Action No 1, the matter was revisited by MOFCOM.  Eventually, MOFCOM decided that the MOFCOM Approval was not to be revoked, which was upheld by the Final Judgment of the Higher People’s Court of Beijing.  Whether MOFCOM or the Beijing court affirmed the MOFCOM Approval only on the ground of public interest or not, it did not alter the objective fact that the MOFCOM Approval had never been revoked.  That was the crux of the relevant conditions precedent, i.e. the granting the approval of the shares transfer by MOFCOM rather than the approval of the proper signing and due execution of the SPAs.

232.  There can be no doubt that the Final Judgment is the final verdict of the Mainland court on the matter. The judgment was expressly stated to be a “final judgment” (終審判決). Under Articles 7 and 88 of the Mainland Administrative Proceedings Law (中華人民共和國行政訴訟法), Mainland courts adopt a two-tier appellate system (兩審終審制度) in relation to administrative proceedings. The Final Judgment took legal effect immediately under the two-tier system.^[29] While there exists in theory a re-trial procedure under the Mainland law, to which the Defendants have alluded, such procedure is generally not open to parties to a final judgment in the absence of limited and exceptional circumstances, and the Defendants have simply failed to point to any such circumstances.^[30]

233.  Further, the Defendants are also precluded from challenging the effect of the MOFCOM Approval, a matter that has been determined conclusively against the Defendants in the Mainland’s Administrative Proceedings No 2.  All the conditions for an issue estoppel to arise have been satisfied[31], and so the Defendants cannot be allowed to undo the effects of the MOFCOM Approval in this action, having failed to achieve precisely that in the Mainland proceedings.

234.  One must bear in mind that the Plaintiff is not seeking to rely on any factual findings made by a court outside jurisdiction. What matters here is whether MOFCOM has granted the approval for the shares transfer.  It is solely a matter to be decided by MOFCOM and the Mainland court in case the MOFCOM’s decision is challenged by way of administrative proceedings.

235.  Mr Chan also seeks to rely on Advertasia Street Furniture Ltd v China Outdoor Media Investment (Hong Kong) Co Ltd[32], which was a case about whether the condition precedent set out in a contract relating to the granting of certain approval by the Mainland authority had been satisfied.  However, there are material differences between the two cases.  In Advertasia, completion never took place, and the issue was whether the defendant was entitled to refuse completion on the ground that the relevant joint venture contracts were invalid.  It is clear from the judgment that the discussion on whether the relevant approval from the Mainland authority had been obtained was highly fact-sensitive and based on the overwhelming evidence in that case.[33]  No general proposition can therefore be extracted from the decision and applied to this case.  In any event, the case differs materially from the present case in that the MOFCOM Approval has been upheld in the Mainland proceedings.

236.  There is also no merit in the argument that, by taking out the Mainland Action No 2, the Plaintiff had “acknowledged” that the 89.8 Million Agreement had been declared to be void, with the result that the Plaintiff also somewhat “acknowledged” that the conditions precedent have not been satisfied.  Apart from the fact that such issue had never been put to the Plaintiff’s witnesses^[34], it has always been the Plaintiff’s position that the Mainland Action No 2 was merely taken out as a protective measure done out of abundance of caution. Hence, there was no such “acknowledgment” as alleged by the Defendants.

237.  For the above reasons, the conditions precedent relating to the approval of shares transfer by MOFCOM have been satisfied as a matter of fact.

238.  Secondly, even if such conditions precedent were not satisfied as a matter of fact, the Defendants have lost the right to rescind or otherwise “reverse” the SPAs given their affirmation of the same. All the evidence points to the Defendants having affirmed the SPAs with clear knowledge that the MOFCOM Approval was granted on the basis of the 89.8 Million Agreement, and the Defendants were privy to the application process.  These were also the conclusions of the Mainland courts.

239.  In any event, the Defendants would have known about the content of the MOFCOM Approval, and hence their alleged “right to rescind”, by the time it was granted in November 2007.  Despite that, they continued to perform, and press for performance of, the SPAs with absolutely no qualm or qualification.  It was only in January 2011 and September 2012 that they sought for the very first time to impugn the SPAs in the Mainland and Hong Kong proceedings respectively.  By reason of the dicta of the Court of Appeal in Super Keen Investments Limited v Global Time Investments Limited & Anor^[35], the Defendants had lost the right of rescission by their affirmation of the SPAs.

240.  In his final submissions, Mr Chan submits that, since the conditions precedent relating to the MOFCOM approval had not been fulfilled, any completion of the SPAs could not have been done in pursuance of the terms of the SPAs and the completion could at most only be viewed as an ad hoc transfer of the shares for the consideration paid subject only to the normal implied term of any sale and purchase of shares.  However, I cannot see the basis for such argument.

241.  Thirdly, for the same reasons, the Defendants are also estopped from challenging the validity, subsistence or enforceability of the SPAs or contending that any condition precedent remains unsatisfied.

242.  In Unruh v Seeberger, Ribeiro PJ restated the essential elements of an estoppel by convention:^[36]

(i)  the parties entered into some transaction or legal relationship on the basis of an assumption that was shared by or common to them both, and it was the element of commonality of the assumption that marked out estoppel by convention as a distinct form of estoppel (§133);

(ii)  it must be shown that assumption was communicated between the parties and acted upon, and there must be some mutually manifest conduct by the parties (§135);

(iii)  there was no necessity for the parties to believe that the assumed state of affairs was true, nor was there any necessity for the parties to have been mistaken (§136);

(iv)  what is important is for them to act in the belief, manifested by words or conduct, that they are both proceeding with the transaction on the basis of the same shared assumption (§137);

(v)  the contents of the common assumption must be sufficiently certain to enable the court to give effect to it (§138);

(vi)  estoppel by convention is concerned with a common assumption relied upon as a basis upon which the persons sharing such assumptions enter into a transaction or legal relationship (§142); and

(vii) there must be an attempt by one party to depart from the common assumption which departure would be unjust because of the part taken by him in occasioning its adoption by the other party, and the other party would suffer detriment arising out of his having entered into the relevant transaction on the basis of the common assumption if the opposite party were afterwards allowed to set up rights inconsistent with the assumption (§150).

243.  I agree with Mr Ho that this is a classic case for the operation of the principle of estoppel by convention.  The Plaintiff and the Defendants have each completed and performed the SPAs on the shared assumption that the SPAs are valid and enforceable and all conditions precedent, including clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA, have been satisfied.  In particular, the Defendants were involved in the first application of the MOFCOM Approval, and they proceeded on the basis that the MOFCOM Approval, which was made based on the 89.8 Million Agreement, was good and proper.  Under such circumstances, the Defendants’ attempted unilateral departure from the common assumption would be unjust and detrimental to the Plaintiff, who has conducted its affairs in reliance on the assumption all along.

244.  In challenging the application of the principle of estoppel by convention, Mr Chan argues that:

(i)  without calling any evidence on why the Plaintiff proceeded to completion, the Plaintiff has not established that it had proceeded to completion on the alleged common assumption;

(ii)  the availability of this estoppel by convention is “subject to questions of illegality and any overriding public policy”[37], and “an estoppel by convention cannot make lawful a transaction that was unlawful” and  “public policy may exclude the raising of an estoppel”[38];

(iii)  the estoppel pleaded in §12 of the Re-Re-Re-Amended Reply and Defence to Counterclaim is not engaged, because what the Defendants are challenging is not the validity of the SPAs but rather whether the conditions precedent of the SPAs have been fulfilled; and

(iv)  the estoppel is not applicable because of the “non-waiver” clause provided in Clause 4.2 of the SPAs and the “entire agreement” clause in Clause 16.2 of the 1^st SPA and Clause 14.2 of the 2^nd SPA.

245.  I reject these challenges.  Taking into account the history of the transaction, it is quite clear that one of the main reasons delaying the completion was the pending MOFCOM Approval.  It would be absurd to suggest that, under such circumstances, the parties had not based on the said common assumption (i.e. the MOFCOM Approval, which was made based on the 89.8 Million Agreement, was good and proper) in completing the transaction. Further, MOFCOM and the Mainland court did not revoke the MOFCOM Approval and so there is no public policy preventing the application of the principle.  I also take the view the fulfilment of the conditions precedent and validity of the SPAs are two ways of saying the same thing.  In fact, Clause 4.4 links the two concepts together.  Finally, I do not accept that the “non-waiver” and “entire agreement” clauses prevent the application of the estoppel.  Though Clause 4.2 provides that the vendors, i.e. the Defendants, cannot waive the non-fulfilment of the conditions precedent, the present case is not one concerning waiver.  It is a case where the parties proceeded to completion on the common assumption that the conditions precedent had been satisfied.  Despite the knowledge of the 89.8 Million Agreement, the Defendants still went ahead with the completion. Further, this is not a case that the parties are trying to introduce new terms in the agreements, and so the “entire agreement” clause is not applicable to prevent the application of the estoppel. 

246.  Fourthly, the Defendants are under an obligation to satisfy clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA.  Assuming the conditions precedent were not satisfied, this would represent a failure by the Defendants to perform their obligation.  They would be prevented from avoiding the SPAs in these circumstances by the principle that a party is not permitted to take advantage of its own wrong.[39]

247.  One has to bear in mind that the Defendants were responsible to make the application to obtain MOFCOM’s approval for the shares transfer.  They proceeded with the performance of the SPAs on the basis that the MOFCOM Approval had been properly obtained and all the necessary conditions precedent had been properly satisfied.  To allow the Defendants to rely on their own wrongs to escape from their obligations under the SPAs is totally inappropriate.  In particular on the facts of the present case, there is no danger that the Mainland authority would block the shares transfer after so many years.

248.  Mr Chan complains that the Plaintiff is also not coming with clean hands as its management clearly knew about the 89.8 Million Agreement before the completion on 5 December 2007.  However, based on my findings in Section B.4.5 above, the Defendants and not the Plaintiff were privy to the MOFCOM application.  Before the completion, the Plaintiff had also obtained advice from the Mainland Legal Advisers about the matter.  Hence, I reject Mr Chan’s complaint in this regard.

249.  For these reasons, there is no basis to substantiate the Defendants’ contention as to the non-fulfilment of the conditions precedent.

C.5    The claim for the “reversal” of the SPAs

250.  The Defendants go further and ask for the “reversal” of the SPAs.

251.  I agree with Mr Ho that there is simply no basis for the pleaded request of a “reversal”.  The SPAs do not provide for “reversal” of the transaction.  All Clause 4.4 of the SPAs says is that if any of the relevant conditions precedent are not satisfied, then subject to the keeping in force of certain clauses and any existing claims for damages for breach of contract, the agreement no longer has any effect (本协议不再有任何效力).  It goes no further.

252.  There is thus no contractual basis at all for a “reversal” as alleged in the Defendants’ pleadings.  If the Defendants seek to invoke any common law ground (such as mistake or total failure of consideration) to unwind the SPAs, that ought to have been specifically pleaded.  There is no such plea.

253.  It is clear from Defendants’ pleaded reliefs that they are seeking to unwind the effect of the SPAs.  The language of Clause 4.4 makes it plain that the consequence of non-fulfilment of a relevant “condition precedent” is prospective as opposed to retrospective, i.e. the SPAs shall no longer have any effect (本协议不再有任何效力).  The SPAs had already come into force and became binding immediately upon execution by both parties on 2 May 2007.  The so-called “conditions precedent” relate only to the parties’ obligation to complete and provide no cause of rescission.  Further, the provision preserving the right to damages arising from any antecedent breach of the SPAs (除就因先前对本协议的违反而引起的赔偿外) leaves no room for any argument that a party may unravel the transaction by invoking the clause.

254.  In their opening submissions, the Defendants contend that their counterclaim is for the rescission or reversal of the transaction in which case the cash consideration, the Instruments and 180 million of the converted Plaintiff’s shares together with dividend (if any) would have to be returned to the Plaintiff and the Plaintiff would have to transfer back the 90% BSZ shareholding to the Defendants.  However, the purported counterclaim for rescission and the legal basis in support of it are nowhere to be found in the Defendants’ pleadings.

255.  In any event, it is difficult to see how the Defendants can claim rescission even if it were pleaded.  The essence of rescission is that a party to a contract has a right to avoid the contract because of some defect at the time the contract was made.[40] Usual examples are mistake, misrepresentation, duress etc.  Mere non-fulfillment of conditions precedent does not fall within the same category.

256.  In fact, a plea for rescission would also be fundamentally incompatible with the Defendants’ existing plea for termination. A contract cannot be rescinded and terminated at the same time.

257.  Mr Ho suggests that if there is a legal basis for the Defendants’ intended counterclaim, the closest one would appear to be restitution of an unjust enrichment. Yet such a claim, including the unjust factor the Defendants intend to rely on (which seems to be total failure of consideration here) must, again, be specifically pleaded.[41]  I agree with Mr Ho that the lack of a proper plea for rescission or restitution, whichever is intended by the Defendants, is therefore fatal.

258.  The Defendants make the same complaint against the Plaintiff for its lack of a proper plea of the impossibility of restitutio in integrum.

259.  In their opening submissions, the Defendants have offered to return, inter alia,“the 180 million of the converted Plaintiff’s shares” to the Plaintiff.  However, on their own case, these shares have substantially depreciated in value.  According to Wang[42], the shares were worth around HK$34 as at January 2019.  Mr Ho therefore submits that the Defendants would be barred from making a claim for rescission or restitution because restitutio in integrum would be impossible in this case.

260.  As I understand it, Mr Ho just raises such plea in case that the court were to conclude there is a proper plea for rescission or restitution in the Defendants’ pleadings in the first place.  Due to my earlier ruling on the lack of a proper plea for rescission, this court does not even need to address the plea of the impossibility of restitutio in integrum. 

261.  If I am wrong on such issue, I would make the following observations about such plea.

262.  The restitutio in integrum bar to rescission protects the defendant, i.e. the Plaintiff in the present case insofar as the Defendants’ claim for rescission is concerned, from being put, upon rescission, in an unjustifiably worse position than he occupied before the contract was made.[43] In the context of restitution and under the law of unjust enrichment, the relevant enrichment is tested and valued at the date of receipt.[44] This means that, prima facie, the Defendants’ enrichment is measured by the value of the convertible notes at the date of issuance, and the Defendants must restore the same under counter-restitution.

263.  There are indeed authorities suggesting that rescission is not barred merely because the property transferred under a contract had depreciated in value as a result of the ordinary play of market forces, and that upon rescission that person only needs to restore the value of the depreciated property surviving in his hands as counter-restitutio.[45] However, as explained in The Law of Rescission:[46]

“once a claimant sufficiently learns of his right to rescind, the position changes and any substantial depreciation in the value of the asset he must return occurring before he determines his election will usually render restitution in integrum impossible. This is particularly so where it is foreseeable that the asset might decline in value, as in the case of speculative assets. In cases of this type a claimant must act quickly once he learns of his rights or risk losing them. Certainly a claimant cannot knowingly speculate at the defendant’s risk, hoping to keep the asset if it performs well and return it if not”.

264.  It is clear that Wang decided to convert all the convertible notes on 8 January 2008, which was well after the Defendants learned of their “right to rescind”.  The said passage from The Law of Rescission therefore applies on all fours and the Defendants cannot offer the depreciated shares to the Plaintiff now as counter-restitution.

265.  In fact, according to the reasons identified in the Final Judgement of the Higher People’s Court of Beijing, there had been significant changes to the Market over the last 10 years since the acquisition.  Hence, it would be practically impossible to reverse the transfer of the BSZ shares to the Defendants.

266.  Mr Chan complains that the Plaintiff has failed to identify or particularise the changes of the Market which have made it impossible to reverse the transfer of shares to the Defendants.  Further, no such evidence has been adduced by the Plaintiff.  As I see it, all these issues arise due to the absence of a proper plea for rescission of the SPAs by the Defendants.  There is simply no basis for the Defendants to lodge such complaint when they themselves have not made out a case for the rescission of the SPAs in the first place.  There is no such provision for “reversal” of the position of the parties in the SPAs, and the Defendants have not pleaded any recognised principles for rescission in the pleadings.  Under such circumstances, if the court has to consider the issue of restitutio in integrum, there is no reason why the court should not also consider the plea of its impossibility based on the available evidence before the court.

267.  Further, the Plaintiff in §31 of its Re-Re-Re-Amended Reply and Defence to Counterclaim has expressly referred to the Final Judgment, including the specific findings that the conditions of BSZ had undergone significant changes over the past 10 years and that if the shareholding structures of the parties were to be restored to the status prior to the acquisition, it would cause serious impact on the stable operation of the Market, which serves an important role in supplying agri-products to cities and provinces of the Mainland.  The Defendants have failed to articulate any reason why the Plaintiff is not entitled to rely on the reasoning set out in the Final Judgment as part of its defence to Defendants’ counterclaim.  The allegation of lack of particularity is thus without substance. 

268.  In short, if the court were have to consider the plea of restitutio in integrum, the depreciation in the value of the converted shares and the change in the conditions of the Market make counter-restitutio impossible.

269.  For all the reasons given above, there is simply no basis for the Defendants’ claim for the non-fulfilment of the conditions precedent or “reversal” or rescission of the SPAs.

D   THE OVERPAYMENT CLAIM

270.  Having dealt with the validity and the effect of the SPAs, I then address the different claims of the Plaintiff.  I first start with the Overpayment Claim as the quantum involved is most substantial.

D.1    The relevant clauses in the SPAs

271.  Clause 6.3 of the SPAs is the contractual basis for the Overpayment Claim, which provides for compensation or damages to be paid in the case of any breach of warranties or promises made in the SPAs.  The amount of the compensation shall be such that it would place the BSZ in the same financial position as if there is no breach of such warranties or promises.  The compensation shall also include any reasonable expenses caused directly or indirectly by such breach.  The original text of the clause reads as follows:

“（在不以任何方式限制买方任何其他权利的情况下，包括买方以其他依据就卖方违反其承诺索取损害赔偿的权利），卖方承诺，如果卖方违反任何卖方承诺，其将以保证赔偿方式按买方要求立即用现金向买方（或如果经买方要求，向目标公司）（合称“受保障人”）支付一笔等同于以下各项总和的款项：（i）如果目标公司收到该款项，则能使目标公司处于有关卖方承诺未被违反时对本该存在之财务状况；及（ii）买方或目标公司因卖方违反卖方承诺而之直接或间接遭受或招致的一切合理费用。”

272.  The SPAs contain various warranties given by the Defendants as to the truthfulness, accuracy and completeness of the financial information of BSZ which they provided:

(i)  information provided to the Plaintiff for preparation of the Management Accounts is true, accurate and not misleading (Clause 1.1 of Schedule 3 to 1^st SPA and 2^nd SPA):

“准确性

为了编制管理账目向买方或其代表和顾问提供的关于所有目标公司的所有資料，均真实、准确、完整、不具误导性，并且未包括任何对某一重要事实的不真实陈述，或者对于需在資料中作出陈述的重要事实，或未在资料中作出陈述即会引致误导的重要事实未作陈述。”

(ii)  no fact or issue reasonably foreseeable to be substantively unfavourable to BSZ’s financial or trading position or prospects (Clause 1.2 of Schedule 3 to 1^st SPA and clause 1.1 of Schedule 3 to 2^nd SPA):

“违漏

不存在其他可能被合理地预期对目标公司的财务或营业状况或前景产生任何实质性不利效果的事实或事项。”

(iii)  the Management Accounts are a true and fair representation of the factual situation of BSZ’s financial results with regard to the dates and periods they cover (Clause 3.1(a) of Schedule 3 to 1^st SPA):

“管理账目

管理账目就其所列日期及期间呈列了真实公平的事实状况和目标公司的财务结果。”

(iv)  financial information provided to the Plaintiff is not in any substantive way misleading, has not substantively exaggerated BSZ’s assets and revenue, and has not substantively under-reported BSZ’s liabilities (Clause 3.1(c) of Schedule 3 to 1^st SPA):

“提交给买方或其代表和专业顾问的财务资料，没有在任何实质性方面令人误解，没有实质性地夸大截至该等資料编制日的目标公司资产价值，没有实质性地少报截至该等資料编制日的目标公司负债，也没有实质地夸大目标公司在有关财务期的利润。”

(v)  the financial and trading position and the prospects of BSZ did not significantly deviate from that of the Management Accounts, and no events had occurred that may cause such significant deviation (Clause 3.2(a) of Schedule 3 to 1^st SPA):

“自管理账目日以来，且和管理账目作比较，财务或交易状况或目标公司的前景均未有重大逆转 (同类事件在同等程度上有可能在总体上对从事类似业务的所有公司造成的影响除外)，而且未发生任何有可能导致任何该等转变的任何事件、事实或事项。”

(vi)  BSZ’s accounting books and other records include a full and accurate set of records that are required to be so recorded (Clause 3.5(a)(ii) of Schedule 3 to 1^st SPA):

“(a) 目标公司的帳册和其他记录：… …

(ii) 包含了要求在其中进行记录的所有資料的完整和准确的记录；”

(vii)  the aforesaid warranties (among others) are true, accurate and not misleading, and were repeated at completion (Clause 4.1(i) of 1^st SPA, 4.1(g) of 2^nd SPA):

“完成目标权益买卖的先决条件为：

(i)  所有卖方承诺保持真实、准确、无误导性，如同在交易完成时以及在自本协议日期起至交易完成止期间内所有时间重述一样；”

273.  It is the Defendants’ admitted case that the Management Accounts were falsely inflated.  There can thus be no dispute that the warranties mentioned above had been breached.

274.  In respect of the quantum of the Overpayment Claim, the Plaintiff claims for the amount necessary to put BSZ into the financial position it would have been in had the relevant sellers’ warranties not been breached.  To ascertain the financial position of BSZ that would have existed had the warranties not been breached, the court needs to determine the value of BSZ as warranted under the SPAs.  To arrive at the amount necessary to put BSZ into such a financial position, the court needs to determine the value of BSZ as was actually delivered.  The contractual formulation is therefore in line with the normal measure of damages for a breach of warranty claim under common law, which is the value of the shares as warranted less the value in fact at the date of the transaction.[47]

D.2    The Plaintiff’s alleged knowledge of the falsification of the Management Accounts and the Plaintiff’s reliance on the Management Accounts are irrelevant

275.  In opposing the Overpayment Claim, the main thrust of the Defendants’ case is that: (i) the inflation of the accounts was known to and even instigated by those representing the Plaintiff; (ii) there was a collateral agreement made between the parties that the Plaintiff would not sue the Defendants for the falsification of the Management Accounts; and (iii) the Plaintiff has failed to establish that it had relied on the Management Accounts in completing the shares transfer transaction.

276.  As mentioned in Section B.4.3 above, I find against the Defendants on all these factual issues, and so the Defendants’ defence to the Overpayment Claim must fail.  However, as I will demonstrate below, the result of the case would be the same even if I were to rule these factual matters in favour of the Defendants.

D.2.1 Contractual Estoppel

277.  Firstly, nothing in Clause 6.3 requires the Plaintiff to show: (a) causation (other than the financial position BSZ would have been in had there been no breach); or (b) reliance of the Plaintiff on any of Defendants’ warranties.

278.  I agree with Mr Ho that, as a matter of law, the mere fact that the purchaser knew of a defect in the subject matter of the contract or even instigated the defect will not provide a defence to the purchaser’s claim, unless the relevant knowledge or instigation amounts to a recognised defence, such as an express qualification of the warranty in the contract, an estoppel, a waiver or a collateral agreement varying the main contract. Failing the establishment of such a defence, it is hard to see how, under the principles of contract law, the presence of a defect would preclude a breach of warranty or an indemnity claim (such as one under Clause 6.3).

279.  In this regard, the Defendants allege that the Plaintiff is bound by an estoppel or alternatively a collateral agreement, both on the premise that the Plaintiff knew and had requested the Management Accounts to be inflated and had agreed not to take objection to them or enforce the relevant warranties in the future.  As mentioned above, I find against the Defendants on the issue of the collateral agreement.

280.  Further, these allegations are in conflict with the entire agreement clauses in the SPAs.[48] More importantly, the Defendants expressly acknowledged in Clause 6.1 that the Plaintiff was induced by and had relied upon their warranties in entering into the SPAs.  Clause 6.2 further provided that any Plaintiff’s knowledge, whether such knowledge was obtained from the investigation or due diligence conducted by the Plaintiff, would not affect its claims under any of the warranties.

281.  The original text of the said clauses reads as follows:

“6.1  卖方承认买方是依赖卖方承诺签订本协议，并且买方在签订本协议时受到了卖方承诺所劝诱。

6.2   买方已知悉的（事实或经推断）与卖方有关的任何资料及买方或代表买方作出的调查均不影响买方根据卖方承诺提出的任何索赔或用于扣减任何可应获得赔偿的款项，并且就此的责任不应限于在交易完成前所发现的违约。”

282.  I agree with Mr Ho that Clauses 6.1 and 6.2 of the SPAs create a contractual estoppel which precludes the Defendants from alleging that the actual facts are inconsistent with the state of affairs so specified in these clauses.  A convenient summary of the doctrine can be found in Chitty on Contracts (33^rd ed):[49]

“This form of ‘estoppel’ is said to arise when contracting parties have, in their contract, agreed that a specified state of affairs is to form the basis on which they are contracting or is to be taken, for the purposes of the contract, to exist. The effect of such ‘contractual estoppel’ is that it precludes a party to the contract from alleging that the actual facts are inconsistent with the state of affairs so specified in the contract.”

283.  The doctrine was recognised by the Court of Appeal in Nokia Corporation v TCT Mobile Limited^[50] as being firmly established in English law and has now been adopted as part of Hong Kong law for reasons that it would promote certainty in contractual relationships and reduce the scope for disagreement and disputes in the working out of the contract.

284.  As demonstrated by the facts of the present case, disapplying the doctrine would create much undesirable effect.  The transaction concerned an acquisition of shares of a company outside the jurisdiction by a listed company in Hong Kong.  The shareholders of the Plaintiff might not have a clear picture about the negotiation leading to the transaction and the various matters relating to the operation of the company outside jurisdiction, i.e. BSZ.  Apart from promoting certainty in contractual relationships and reducing the scope for disagreements and disputes, the application of the doctrine would reduce the possibility of malpractices and under-table promises.  For such kind of transactions, there is much benefit for holding the parties to their promises made in the written contracts.

D.2.2 Non-attribution of the alleged knowledge of the falsification of the Management Accounts to the Plaintiff

285.  I also accept the Plaintiff’s submission that, even assuming the issue of knowledge were somehow relevant to the Plaintiff’s claim, the alleged acts or knowledge of Yang, Fu, Sin, Choi and Cazenove^[51] cannot be properly attributed to the Plaintiff.

286.  In Moulin Global Eyecare Trading Ltd v Commission of Inland Revenue[52], Lord Walker NPJ explained that:

“Attribution means, in this context, the process of legal reasoning by which the conduct or state of mind of one or more natural persons (that is, human beings) is treated as that of a non-natural person (that is, a company) for the purpose of determining the company’s legal liability or rights in civil proceedings (in particular, its liability or rights in contract, in tort or for unjust enrichment) or its criminal liability.”

287.  In considering the issue of attribution, the court has to consider the following two questions:

(i)  whether, on the facts of the present case, the relevant actions or knowledge should, as a matter of general principle, be attributed to the Plaintiff; and

(ii)  if the answer is yes, whether the matter nevertheless falls within the “breach of duty” exception to the general principles of attribution.

288.  Though these are two separate questions, Lord Mance in Bilta (UK) Ltd (in liquidation) v Nazir[53] observed that the so-called “exception” is merely an aspect of the general rule.

289.  In any event, I answer both questions in favour of the Plaintiff.

290.  In Bilta, Lord Sumption JSC summarised the effect of the leading modern authority on the subject, Meridian Global Funds Management Asia Ltd v Securities Commission[54], as follows:[55]

“The question what persons are to be so far identified with a company that their state of mind will be attributed to it does not admit of a single answer. … The primary rule of attribution is that a company must necessarily have attributed to it the state of mind of its directing organ under its constitution, ie the board of directors acting as such or for some purposes the general body of shareholders. …The directing organ of the company may expressly or implicitly have delegated the entire conduct of its business to the relevant agent, who is actually although not constitutionally its “directing mind and will” for all purposes. … Such a person in practice stands in the same position as the board. The special insight of Lord Hoffmann … was to perceive that the attribution of the state of mind of an agent to a corporate principal may also be appropriate where the agent is the directing mind and will of the company for the purpose of performing the particular function in question, without necessarily being its directing mind and will for other purposes …”

291.  It is an important context of this case that the Plaintiff was a public listed company.  Fu and Yang did not constitute the majority of the Plaintiff’s Board and could not be regarded as the Plaintiff’s “directing mind and will” for the purpose of the acquisition.  Sin, Choi and Yiu of Cazenove were not even members of the Board.  Apart from these persons, there is no suggestion that the shareholders or other directors of the Plaintiff knew of the alleged inflation of BSZ’s accounts.

292.  This case is therefore readily distinguished from cases such as Stone & Rolls Ltd v Moore Stephens[56], Bilta[57] or Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd[58], which all concerned “one-man” or “puppet” companies, where there were no shareholders or directors who were not complicit in the fraud.

293.  Furthermore, despite Yang’s position as a director of the Plaintiff, the evidence clearly demonstrates that he was at all material times acting on instructions of Zhou and the Defendants and in their interest.[59]  One cannot therefore say that Yang was then a “directing mind and will” of the Plaintiff.

294.  In any event, even assuming that the conduct or knowledge in relation to the inflation of the Management Accounts could be attributed to the Plaintiff, the “breach of duty” exception would apply in this case to negate that attribution.

295.  This issue involves the consideration of two sub-questions: (a) whether the relevant conduct was such as to engage the “breach of duty” exception; (b) whether the “breach of duty” exception can apply in circumstances where (as in the present case) the company’s claim is against third parties (the Defendants for dishonest assistance) rather than against the defaulting directors (Fu and Yang).

296.  The starting point for the modern law in this area is the decision of the English Court of Appeal in Belmont Finance Corporation Ltd v Williams Furniture Ltd & Ors[60], the facts of which have certain resemblance with those of the present case.  As summarised by Lord Sumption JSC in Bilta:[61]

“… That case arose out of an elaborate scheme, to which Belmont's directors were party, to extract value from Belmont by causing it to buy the shares of a company called Maximum at a considerable overvalue. This was a breach of the fiduciary duties of the directors. Their object was to recycle the profit on the sale of Maximum so that it could be used to fund the purchase by three companies associated with the directors of Belmont's own shares. This was not only a breach of the directors' fiduciary duty but a criminal contravention of what was then section 54 of the Companies Act 1948. Belmont subsequently went into liquidation, and an action was brought in its name by receivers for damages for breach of duty against the directors who had authorised the transaction, and for an account on the footing of knowing receipt against the three companies. The plaintiff was met by the illegality defence. The judge dismissed the action at the close of the plaintiff's case on that ground, holding that the company was a party to the conspiracy. This was because it must be taken to have known, through its directors, that the asset was over-valued and that the purpose of the transaction was to fund the purchase of Belmont's shares. Reversing the judge, Buckley LJ said, at pp 261-262:

“But in my view such knowledge should not be imputed to the company, for the essence of the arrangement was to deprive the company improperly of a large part of its assets. As I have said, the company was a victim of the conspiracy. I think it would be irrational to treat the directors, who were allegedly parties to the conspiracy, notionally as having transmitted this knowledge to the company; and indeed it is a well-recognised exception from the general rule that a principal is affected by notice received by his agent that, if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal. So in my opinion the plaintiff company should not be regarded as a party to the conspiracy, on the ground of lack of the necessary guilty knowledge.”

297.  This approach finds its modern expression in Bilta[62] in the statement of principle by Lord Neuburger of Abbotsbury PSC (seeking to synthesise the views of Lords Sumption, Toulson and Hodge JJSC) that:

“Where a company has been the victim of wrongdoing by its directors, or of which its directors had notice, then the wrongdoing, or knowledge, of the directors cannot be attributed to the company as a defence to a claim brought against the directors by the company's liquidator, in the name of the company and/or on behalf of its creditors, for the loss suffered by the company as a result of the wrongdoing, even where the directors were the only directors and shareholders of the company, and even though the wrongdoing or knowledge of the directors may be attributed to the company in many other types of proceedings.”

298.  In some earlier authorities, considerable stress was laid upon the idea that, for the “breach of duty” exception to apply, it was necessary that the company itself should be the intended victim of the breach. However, Bilta provides the answer to that.  In that case, it was argued by the defendants that the true victim of the fraud was HMRC (Her Majesty’s Revenue and Customs) and not the company, and so the “breach of duty” exception did not apply.  But the court accepted the following argument made by the claimants’ counsel:

“The argument that the victim was not the company, Bilta, but its creditor, the revenue, overlooks the fact that the wrong complained of is breach of fiduciary duty which is necessarily a wrong against the company because the duty was owed to the company and not to its creditors. The fraud is one which gives rise to a right of action by the company for breach of fiduciary duty: there is no right of action by the creditor and, had the revenue brought a claim for breach of fiduciary duty by the directors, it would have been struck out. The same would apply to claims for dishonest assistance or knowing receipt. The loss to creditors is a reflective loss in respect of which it would not be allowed to sue.” (§8E-F)

299.  Further, Lord Sumption, after observing that it was “unrealistic” to ignore the fact that the ultimate loser was HMRC[63], went on to state that his analysis of the true basis of the rule:

“… makes it unnecessary to address the elusive distinction between primary and secondary victimhood. That distinction could arise only if the application of the breach of duty exception depended on where the loss ultimately fell, or possibly on where the culpable directors intended it to fall. If, however, the application of the exception depends on the nature of the duty and the parties as between whom the question arises, the only question is whether the company has suffered any loss at all …”[64]

300.  In the present case, assuming Yang and Fu had known about or instigated the inflation of the Management Accounts, they would have been in breach of their fiduciary duties to the Plaintiff for the reasons elaborated in the latter part of this Judgment.[65]  The “breach of duty” exception is thus fairly and squarely engaged.  The said breaches have not been excused by any shareholders’ consent.  There can be no dispute that the Plaintiff and its shareholders, which were made to approve and pay for an acquisition that was significantly overpriced, were the true victims of the breaches of duties.

301.  As to whether the “breach of duty” exception remains applicable where, as here, the claim is against third parties rather than the delinquent directors, I agree with Mr Ho that the answer is clearly affirmative, as the third parties against whom the claim is made (i.e. the Defendants) were, by their own admission, complicit in the directors’ wrongdoing, rather than innocent third parties.

302.  In Bilta, Lord Sumption JSC identified three situations in which the question of attribution may arise:[66]

(i)  a third party may sue the company for a wrong such as fraud which involves a mental element;

(ii)  the company may sue either its directors for the breach of duty involved in causing it to commit that fraud, or third parties acting in concert with them, or (as in Bilta itself) both;

(iii)  the company may sue a third party who was not involved in the directors' breach of duty for an indemnity against its consequences.

303.  Lord Sumption’s discussion in §89 of the second of these three situations refers only to a claim by a company against its directors as “the paradigm case for the application of the breach of duty exception”, without expressly mentioning claims against “third parties acting in concert with [the defaulting directors] or … both”.  However, it is clear that the discussion is concerned not only with claims against the defaulting directors alone, but also (as presaged in §87) with claims against those who are regarded as having accessory liability in equity for the director’s primary wrongs.

304.  That position is even clearer in the judgment of Lord Toulson and Lord Hodge JJSC, who stated the central question in Bilta as follows:[67]

“When the directors of a company involve it in a fraudulent transaction, is the company barred by the doctrine of illegality from suing them and their accessories for losses caused by their breach of fiduciary duty?”

305.  Their Lordships proceeded to discuss the claim in conspiracy against those complicit with the fraudulent directors in the following terms:[68]

“For the reasons explained we have concentrated on the claim against the directors for breach of fiduciary duty, which the appellants are said dishonestly to have assisted. It is difficult to see that the claim for conspiracy adds anything. Mr Maclean argued that the real conspiracy was to injure HMRC and that it is artificial to regard there as having been a conspiracy against Bilta, when it was in truth nothing more than a vehicle for defrauding HMRC. It may be that Bilta will fail to establish the conspiracy alleged, but the merits of that argument are not fit for determination on a summary application. Bilta has a triable case, and the only issue before the court is whether it must fail for illegality. In that respect the appellants are on no stronger ground in relation to conspiracy than in relation to the breach of fiduciary duty relied on as the unlawful means. It is perhaps worth observing that in Berg Sons & Co Ltd v Mervyn Hampton Adams [1993] BCLC 1045 Hobhouse J noted that there was no allegation of conspiracy by the accountants and Mr Golechha to defraud the company (p 1066), implying that this would have made a potential difference. In this case there is an allegation of conspiracy between the directors and others to defraud the company. It does not alter the analysis to say that the aim of the dishonest director shareholders was to make a dishonest profit for themselves and their accomplices at the expense of HMRC, for this itself involved a breach of fiduciary duty towards Bilta (representing the interests of its creditors) and the intentional causation of loss to Bilta.”

306.  As regards attribution, their Lordships’ conclusion clearly supports Mr Ho’s submission:[69]

“… where the company claims against a third party, whether or not there is attribution of the director's or employee's act or state of mind depends on the nature of the claim. For example, if the company were claiming under an insurance policy, the knowledge of the board or a director or employee or agent could readily be attributed to the company in accordance with the normal rules of agency if there had been a failure to disclose a material fact. But if the claim by the company, for example for conspiracy, dishonest assistance or knowing receipt, arose from the involvement of a third party as an accessory to a breach of fiduciary duty by a director, there is no good policy reason to attribute to the company the act or the state of mind of the director who was in breach of his fiduciary duty. If the company chose not to sue the director who was in breach of his duty, the third party defendant could seek a contribution from him or her under the Civil Liability (Contribution) Act 1978. We have set out above why we consider that the defence of illegality is not available to a company's directors or their associates who are involved in a conspiracy against the company or otherwise act as accessories to the directors' breach of duty. Equally, there is no basis for attributing knowledge of such behaviour to the company to found an estoppel.”

307.  In conclusion, the application of the aforesaid principles means that the “breach of duty” exception is engaged in the present case, and the acts or knowledge of Fu or Yang should not be attributed to the Plaintiff in a claim against the parties who were complicit in those directors' breaches of the fiduciary duties owed to the Plaintiff, i.e. the Defendants.  Hence, even if Fu and Yang (or even other persons as suggested by the Defendants) knew of or instigated the falsification of the Management Accounts, it provides no defence to the Defendants for the Overpayment Claim.[70]

D.3    Preservation of the claim for loss

308.  I have already explained in Section C above why the Defendants have failed to show, or are estopped or precluded from contending, that the conditions precedent in clause 4.1(g) of the 1^st SPA and clause 4.1(e) of the 2^nd SPA had not been satisfied.

309.  Yet even supposing that the conditions precedent were unsatisfied and the SPAs ceased to have any effect (本协议不再有任何效力) pursuant to clause 4.4, the Plaintiff’s Overpayment Claim under Clause 6.3 for the Defendants’ breaches of warranties is expressly preserved by Clause 4.4, which provides that claims arising from any prior breach of the SPAs will survive (除就因先前对本协议的违反而引起的赔偿外).  The Defendants had been in breach of the relevant warranties (on the truthfulness, accuracy and completeness of the financial information of BSZ) since the SPAs were executed in light of the falsities in the Management Accounts which were specifically attached to the SPAs.  This was prior to the alleged non-fulfilment of conditions precedent and the purported cessation of effect of the SPAs.

D.3    Quantum of the Overpayment Claim

310.  The Plaintiff claims the sum of RMB 510,000,000 as damages for the Overpayment Claim.

311.  The Plaintiff tries to ascertain the quantum of the inflation of the Management Accounts.  After ascertaining such figure, the Plaintiff then seeks to establish the amount that it had overpaid for the acquisition of the BSZ’s shares caused by such inflation of the Management Accounts.

312.  The Plaintiff has called 3 expert witnesses to substantiate the quantum of the Overpayment Claim: (i) Mr Raymond Chu (“Mr Chu”) who is an expert in quantity surveying; (ii) Mr Chen who is an expert in forensic accounting; and (iii) Mr Bezant who is an expert in business valuation.  The Defendants have adduced no expert evidence on the issue of quantum.

D.3.1 Bird-eye view of the Plaintiff’s approach in assessing the quantum of the Overpayment Claim

313.  The Plaintiff’s current management had supplied BSZ’s Electronic Ledgers and Analysis of Assets Register to its experts for further analysis.  The data from these documents are organised and presented in Appendix 2F to Mr Chu’s report.  Item A9 in Appendix 2F is from the Management Accounts at Schedule 2 to the SPAs.

314.  Mr Chu’s report assesses the actual values of these various items of construction works and compares them against the purported costs of these works as were booked in BSZ’s accounts.  According to Mr Chu, remarkable discrepancies are identified.  For instance, up to 2006, the difference between the construction costs booked in BSZ’s accounts and Mr Chu’s assessment is RMB 76,254,142.[71] Even on his alternative calculation (on the basis that the overall site area of the Market was 721 mu as opposed to 702.1 mu which underpinned his original calculation), the difference is RMB 72,964,142.[72]

315.  Mr Chen’s report, in turn, presents the findings of his forensic investigation of BSZ’s accounting records and analyses how the Management Accounts came to be inflated.  In summary, the expert finds that there were: (a) inflation of construction costs in the pre-profit guarantee period (i.e. 2 December 2003 to 31 December 2006)(the “Pre-Profit Guarantee Period”); (b) inflation of income in the Pre-Profit Guarantee Period; and (c) inflation of income in the Profit Guarantee period (i.e. 1 January 2007 to 31 December 2007)(the “Profit Guarantee Period”) in BSZ’s accounts.[73]

316.  Insofar as BSZ’s construction costs are concerned, Mr Chen finds that the majority of such costs were purportedly paid to one Wuhan Long Xiang Trading and Development Company (武漢龍祥經貿發展有限公司)(“Long Xiang”) and one Hubei Huang Xin Construction Work Head Company/BSZ Branch Company/Wuhan Branch Company (湖北黃鑫建設工程總公司/白沙洲分公司/武漢分公司) (“Huang Xin”), the top two contractors of BSZ during the relevant period.  According to Mr Chen, Long Xiang and Huang Xin were related to Zhou or the Defendants.

317.  Since the books and records of Long Xiang and Huang Xin and the bank statements of BSZ during the relevant period are unavailable, Mr Chen cannot identify conclusively which of the transactions with Long Xiang and Huang Xin are misstated.  But according to the expert, there is nevertheless compelling evidence casting serious doubt on the genuineness of these transactions.

318.  To illustrate the extent of inflation, Mr Chen adopts the figures from Mr Chu’s report and apportions the inflated amount against the construction costs in relation to Long Xiang and Huang Xin.  Apportionment is needed as there were contractors other than Long Xiang and Huang Xin during the relevant period.^[74] For example, as mentioned above, Mr Chu finds that the difference up to 2006 between the construction costs booked in BSZ’s accounts and his original assessment is RMB 76,254,142.  Upon apportionment by Mr Chen, the figure becomes at least RMB 51,100,000.[75]  Based on Mr Chu’s revised assessment at RMB 72,964,142, Mr Chen’s apportioned figure is adjusted to RMB 48,316,000.[76]

319.  Insofar as BSZ’s income is concerned, Mr Chen finds that BSZ’s accounts included fictitious income in the amount of RMB 23,000,000 in the Pre-Profit Guarantee Period and RMB 80,350,000 in the Profit Guarantee Period.[77]  According to the expert, the agreements which purportedly generated such income are highly dubious, and he is able to identify circular flow of funds which suggests that certain “income” was parked into BSZ’s accounts during the Profit Guarantee Period but transferred out of BSZ shortly thereafter.

320.  Pausing here, one must not forget that it is the Defendants’ own pleaded case that the figures in respect of the construction costs and income/profit in the Management Accounts had been inflated.

321.  Mr Chen’s findings on the misstatements in BSZ’s accounts, including the said figures of RMB 48,316,000, RMB 23,000,000 and RMB 80,350,000, are in turn taken into account in Mr Bezant’s report.[78]  Mr Bezant adjusts BSZ’s warranted financial performance for these misstatements to identify its corrected financial performance and position.[79]

322.  Taking into account the difference between BSZ’s warranted and corrected financial performance and applying various valuation multiples, Mr Bezant values the shares of BSZ as warranted and as delivered.

323.  Having given such bird-eye view about the Plaintiff’s approach, I will deal with the methodology adopted by each expert in reaching their conclusions.

D.3.2 Mr Chu’s report

324.  Mr Chu’s report contains his assessment of the actual values of various items of construction works and compares them against the purported costs of these works as booked in BSZ’s accounts.

325.  Mr Chu assesses the estimated value of the construction works at the Market: (a) as at 31 December 2006; and (b) from 1 January to 31 December 2007.

326.  His assessment on the estimated construction costs is detailed in Part A of his report.  Part A is in turn divided into 5 sub-subsections, namely A1 (Site Formation Works), A2 (Road and Underground Services Works), A3 (Superstructures), A4 (Green Area Formation Works) and A5 (Miscellaneous).[80] Mr Chu has prepared 5 coloured tables summarising the methodologies and findings of his assessment on items A1 to A5.

327.  In these summary reports, Mr Chu indicates the methodology he adopted for each item by reference to the coloured legend at the top right-hand corner.  The details of these methodologies are explained in the body of his report, including the 6 methods used (the “6 Methods ”) being: (i) detail valuation[81], (ii) cost estimation[82], (iii) sanity check of the Defendants’ valuation reports[83], (iv) technical audit[84], (v) potential valid item but without details - allowed 50/50[85], and (vi) ambiguous items and without details – disallowed[86].

328.  In order to keep this Judgment to a reasonable length, I do not propose to set out how Mr Chu came to the figures in details, which can be found in the report itself.  I will only try to give a brief summary here.

329.  Item AI relates to Site Formation Works, consisting of both General Site Formation Works and Other Works.

330.  For the General Site Formation Works in item A1.1, Mr Chu is of the view that the figure in the Management Accounts is purportedly based on the valuation reports made by Tai Hua Valuation (the “Tai Hua Reports”). However, he disagrees with the Tai Hua Reports on two aspects, namely, quantities of filling and profit percentage.  For quantities of filling, Mr Chu used objective evidence, namely, the data in the site investigation report (the “Wuhan Surveying Report”) by one Wuhan Ground Construction Works Surveying Institute (武汉地质工程勘察院)(“Wuhan Surveying”), to determine the depth of formation.  For profit percentage, Mr Chu adopted 2%, which is in line with the local construction market, as opposed to the abnormally high level of 7% in the Tai Hua Reports.  According to Mr Chu, the rate of 7% was so out of line that led him to doubt whether the Tai Hua Reports were addressing the same subject matters as he was.

331.  For Other Works under item A1.2, Mr Chu is of the view that the valuations of work stated in the Tai Hua Reports are not substantiated with details.  He made certain adjustments and came to a lower figure.  As a result, he arrived at a lower figure for the General Site Formation Works: RMB 76.2 million as assessed as opposed to RMB 165.2 million booked in the Management Accounts.^[87]

332.  For Road and Underground Services Works under item A2, he explained the methodology used in his report including some of the 6 Methods.  Some of the figures he assessed under the sub-items are actually higher than the ones stated in the Management Accounts.  Having used some of the 6 Methods, he arrived at a lower figure for the Road and Underground Services Works: RMB 46.9 million as assessed as opposed to RMB 75.6 million booked in the Management Accounts.[88]

333.  For Superstructure Works under item A3, he explained the methodology used in his report including some of the 6 Methods. References were also made to the total construction floor area.  He also explained why he disallowed certain items.  As a result, he arrived at a lower figure for the Superstructure Works: RMB 111.5 million as assessed as opposed to RMB 128.3 million booked in the Management Accounts.[89]

334.  For the Green Area Works under item A4, Mr Chu explained the methodology used in his report including some of the 6 Methods.  As a result, he arrived at a lower figure for the Superstructure Works: RMB 1.6 million as assessed as opposed to RMB 2.7 million booked in the Management Accounts.[90]

335.  For the Miscellaneous Works under item A5, Mr Chu explained the methodology used in his report including some of the 6 Methods. As a result, he arrived at a lower figure for the Miscellaneous Works: RMB 16.4 million as assessed as opposed to RMB 24.4 million booked in the Management Accounts.[91]

336.  The total of A1 to A5 represents the findings of Mr Chu in Part A of his report on Estimated Construction Costs.  The findings are summarised as follows:

	Management Accounts	Mr Chu’s assessment	Difference
Part A – Estimated Construction Costs
2006 or before	304,187,142	231,223,000	(72,964,142)
2007 Q1	2,060,220	1,665,000	(395,220)
2007 Q2 to Q4	89,970,863	19,695,000	(70,275,863)
Total (A1 to A5)	396,218,225	252,583,000	(143,635,225)

337.  I agree with the observation made by Mr Ho that Mr Chu’s report is meticulous and thorough.  He conducted site visit and digital measurement for verification and cross-checking of the information in the layout plan and the data provided by Wuhan Xingxin Estate Mapping Company Limited (which was engaged by the Plaintiff to survey the superstructure in the Market).  On various occasions, Mr Chu gave the benefit of doubt to the Defendants and made assumptions in their favour, for examples: (i) in allowing 50% the costs in respect of potential valid items in the Management Accounts which were without details; (ii) in assuming the entire site was ponds which required filling.

D.3.3 Mr Chen’s report

338.  I then turn to Mr Chen’s report.  As mentioned above, his report contains his analysis and findings of BSZ’s accounting records in respect of the different periods.

339.  I first deal with the construction costs in the Pre-Profit Guarantee Period.[92]

340.  Mr Chen concludes that the transactions between BSZ and Long Xiang and Huang Xin were highly suspicious and the construction costs recorded in the accounts of BSZ (as fixed assets (at costs) and construction in progress (CIP)(at costs))[93] may not reflect the true value and may indeed have been materially misstated:

(i)  The authenticity of certain construction contracts between BSZ and Long Xiang or Huang Xin is highly doubtful.[94]

(ii)  A substantial number of the purported payments were not supported (as they should be) by tax invoices or official receipts.  Also, while the purported payments to Huang Xin were spread over 9 months, some of the receipts issued by Huang Xin were in sequence.[95]

(iii)  Abnormalities are identified in respect of various transactions between BSZ and Long Xiang or Huang Xin.  For example, certain payments by BSZ to other third parties for unrelated purposes were falsely recorded as payments of construction costs to Long Xiang or Huang Xin. In one instance, a RMB 300,000 was booked under construction payment to Long Xiang according to the relevant voucher, but it was in fact collected by Zhou for some “payment to the suburban government” (支付乡政府) as per the cash collection slip.  The sum was apparently collected by Li Jun on behalf of Zhou and approved by Luo Hong.[96]

(iv)  Long Xiang was related to the Defendants in that Zhou is the brother of one Zhou Huan Qing, who at the material time owned 98% of the equity interests in Long Xiang.  Long Xiang was furthermore a 86% shareholder of Tianjiu from September 2006 to October 2008.  Huang Xin was also related to the Defendants in that Zhou has been a 49% shareholder and the supervisor of Huang Xin since 10 August 2007.[97]

(v)  A substantial amount was paid to Long Xiang through accounts that do not belong to BSZ but to related companies.[98]

341.  Turning to the income in the Pre-Profit Guarantee Period[99], Mr Chen finds that two sums of respectively RMB 13,000,000 and RMB 10,000,000, recorded as Other Operating Income in the profit and loss accounts of BSZ for the year ended 31 December 2006, relate to the following contracts:[100]

(i)  an undated agreement between BSZ and one Jiang Nan Seafood Market Company (江南海鮮市場有限公司)(“Jiang Nan Seafood”), by which the operation rights of a seafood market owned by Jiang Nan Seafood (the “Seafood Market”) were purportedly sub-contracted to BSZ for the period from 1 March 2005 to 1 March 2009 for free (the “March 2005 Agreement”);

(ii)  an agreement dated 20 December 2005 among BSZ, one Zhang Song and one Yuan Zheng Wei, by which the operation rights of the Seafood Market were purportedly sub-contracted by BSZ to Zhang Song and Yuan Zheng Wei for RMB 13,000,000 per year from 1 January 2006 to 31 December 2008 (the “December 2005 Agreement”); and

(iii)  an agreement dated 30 September 2006 between Jiang Nan Seafood and BSZ, by which Jiang Nan Seafood was to pay RMB 10,000,000 to BSZ before 29 November 2006 for the transfer of the investment resources of the Seafood Market (招商資源的所有權) from BSZ to Jiang Nan Seafood (the “September 2006 Agreement”).

342.  The evidence, as analysed by the expert, shows that the above agreements were highly suspicious arrangements and the “income” derived from them to BSZ could not have been genuine:

(i)  The March 2005 Agreement and September 2006 Agreement were purportedly entered into and affixed with the company stamp of Jiang Nan Seafood before Jiang Nan Seafood was even incorporated.

(ii)  Under the March 2005 Agreement, BSZ was required to pay nothing for the operation rights of the Seafood Market, but it was then purportedly able to earn RMB13,000,000 per year by further sub-contracting the operation rights to Zhang Song and Yuan Zheng Wei.

(iii)  The March 2005 Agreement provided that the tenants’ resources (客戶資源) of the Seafood Market would be returned by BSZ to Jiang Nan Seafood at zero consideration upon the expiry of the agreement.  However, under the September 2006 Agreement, Jiang Nan Seafood had to purchase the investment resources of the Seafood Market, which should include the tenants’ resources, from BSZ at RMB 10,000,000.

(iv)  The March 2005 Agreement, December 2005 Agreement and September 2006 Agreement were drafted in vague terms.

(v)  The payment of RMB 13,000,000 to BSZ pursuant to the December 2005 Agreement was made by neither Zhang Song nor Yuan Zheng Wei, but by five different companies on divers dates.  At least one of the payers, Wuhan San Qing Demolition Company (武漢三青拆遷有限公司)(“San Qing Demolition”), was shown to be related to Zhou.  It has subsequently been proved that San Qing Demolition collaborated with the former management of BSZ to create fictitious transactions to inflate income in the Profit Guarantee Period.

(vi)  Jiang Nan Seafood was related to the Defendants in that it was at the material time controlled by parties related to Wang, Tianjiu or Zhou.

343.  Finally, I deal with the income in the Profit Guarantee Period.  In this regard, Mr Chen finds that “incomes” from the following contracts (the “7 Dubious Agreements”) had been recorded as Operating Income or Other Operating Income in the profit and loss accounts of BSZ:[101]

Agreement	Date	Amount (RMB)
The December 2005 Agreement among BSZ, Yuan Zheng Wei and Zhang Song	20 December 2005	13,000,000
Cooperative Agreement between BSZ and Hainan Yong Qing Agricultural Company Limited (“Hainan Yong Qing”) in relation to the sales of harmless fruits and vegetables from Hainan (“Hainan Yong Qing Agreement”)	18 October 2006	36,000,000
Sub-contracting Agreement between BSZ and Wuhan Jiu Hui Logistics Company Limited (“Jiu Hui Logistics”) in relation to the operation rights over a logistics centre and transport trunk lines (“Jiu Hui Logistics Agreement”)	25 November 2006	13,000,000
Sub-contracting Agreement between BSZ and Wuhan Hongshan District Feng Huo Steel Products Loading Team (“Feng Huo Steel Products”) in relation to the operation rights of secondary water supply and water filling stations at the Market (“Feng Huo Steel Products Agreement”)	25 November 2006	3,000,000
Sub-contracting Agreement between BSZ and Wuhan Chang Nian Hao Green Products (“Chang Nian Hao”) in relation to the operation right of intensive processing, distribution and testing of trading goods (“Chang Nian Hao Agreement 1”)	5 December 2006	8,300,000
Rental Agreement between BSZ and Wuhan Wuchang District Shuang Ying Oil Operating Department (“Shuang Ying”) in relation to land use right over an area at the western part of the District No.6 of the cereal and oil section in the Market (“Shuang Ying Agreement”)	16 December 2006	850,000
Sub-contracting Agreement between BSZ and Chang Nian Hao in relation to operation rights of auxiliary services for industrial development, product manufacturing, supply and sales (“Chang Nian Hao Agreement 2”)	28 December 2006	6,200,000
	Total	80,350,000

344.  The evidence, as analysed by the expert, shows that the 7 Dubious Agreements and the “incomes” derived from them are fictitious. They are arrangements deliberately put in place to create a false picture that BSZ had earned the relevant “income” as profits during the Profit Guarantee Period when it had in fact not.[102]

345.  Regarding the December 2005 Agreement:

(i)  The December 2005 Agreement is, as explained above, a fictitious agreement.  The alleged payment of RMB 13,000,000 during the Profit Guarantee Period was purportedly received by Tianjiu on behalf of BSZ.  The purported payment was recorded as profits to BSZ by virtue of the relevant accounting treatments, even though no real profits were in fact generated to BSZ.

(ii)  Both the December 2005 Agreement and the March 2005 Agreement were terminated by a termination agreement among BSZ, Jiang Nan Seafood, Zhang Song and Yuan Zheng Wei on 25 December 2007, shortly before the end of the Profit Guarantee Period.

346.  Regarding the Hainan Yong Qing Agreement and Jiu Hui Logistics Agreement:

(i)  The purported payment of RMB 49,000,000 (i.e. RMB 36,000,000 + RMB 13,000,000) to BSZ under the Hainan Yong Qing Agreement and Jiu Hui Logistics Agreement originally came from Wang or Tianjiu.  It was injected into BSZ via Hainan Yong Qing and Jiu Hui Logistics, and was subsequently transferred out of BSZ to San Qing Demolition. There were further transfers of funds from San Qing Demolition, some of which eventually went back to Wang or Tianjiu.  According to the expert, the circular flow of funds is therefore cogent evidence of the orchestration of fictitious payments, to which the Defendants never offered any countervailing explanation.[103]

(ii)  Both the Hainan Yong Qing Agreement and Jiu Hui Logistics Agreement were terminated prematurely, i.e. with effect from 1 April 2008 and 1 June 2008 respectively, for no apparent reasons.

(iii)  According to a defence (答辯狀) filed by San Qing Demolition in a Mainland action commenced by BSZ in 2012 against, inter alia, San Qing Demolition and one Rui Tian Properties Company (瑞天置業公司)(“Rui Tian Properties”), it was admitted that there was never any sub-contracting relationship between BSZ and Hainan Yong Qing or Jiu Hui Logistics, and the purported income of RMB 49,000,000 was fictitious income.

(iv)  Further, according to a list of evidence submitted by Rui Tian Properties in the aforesaid Mainland action, the purported income of RMB 49,000,000 from Hainan Yong Qing and Jiu Hui Logistics was fictitious.

(v)  Wang submitted a list of evidence (被告王秀群举证一览表)(“Wang’s List of Evidence”) in another Mainland action, in which she referred to a letter from Wuhan Zheng Hao Certified Public Accountants Co. Ltd (武漢正浩會計師事務有限公司)(“Zheng Hao”) to the Wuhan Public Security Bureau and stated that BSZ had entered into fictitious agreements (虛簽合同) with several entities, which included Hainan Yong Qing and Jiu Hui Logistics.[104]

347.  Regarding the Feng Huo Steel Products Agreement:

(i)  The purported payment of RMB 3,000,000 originally came from Long Xiang which was related to the Defendants.  It was injected into BSZ via Feng Huo Steel Products, and was subsequently transferred along with other funds out of BSZ to parties related to the Defendants.

(ii)  The Feng Huo Steel Products Agreement was terminated prematurely with effect from 1 January 2009, for no apparent reasons.

(iii)  The entities which Wang admitted in the Mainland proceedings to have entered into fictitious agreements with BSZ included Feng Huo Steel Products.

348.  Regarding the Chang Nian Hao Agreement 1 and Chang Nian Hao Agreement 2:

(i)  The purported payments of RMB 8,300,000 and RMB 6,200,000 originally came from Long Xiang.  The funds were injected into BSZ via Chang Nian Hao, and were subsequently transferred along with other funds out of BSZ to parties related to the Defendants.

(ii)  BSZ had waived the income payable to it under the Chang Nian Hao Agreement 1 in 2008 for no apparent reasons.  Further, there was no record in BSZ’s accounts of any income payable to it under either the Chang Nian Hao Agreement 1 or Chang Nian Hao Agreement 2 in 2009.

(iii)  The entities which Wang admitted in the Mainland proceedings to have entered into fictitious agreements with BSZ included Chang Nian Hao.

349.  Regarding the Shuang Ying Agreement:

(i)  The purported payment of RMB 850,000 originally came from Long Xiang.  It was injected into BSZ via Shuang Ying, and was subsequently transferred along with other funds out of BSZ to parties related to the Defendants.

(ii)  The entities which Wang admitted in the Mainland proceedings to have entered into fictitious agreements with BSZ included Shuang Ying.

D.3.4 Further corroborating evidence

350.  I also agree with the submission of Mr Ho that the analysis by Mr Chu and Mr Chen on the inflation of BSZ’s Managing Accounts is further corroborated by the following documentary evidence: (i) the Schedule of Fictitious Construction Works; and (ii) investigation report prepared by Zheng Hao, an accountants’ firm in the Mainland, as instructed by the Wuhan Security Bureau (the “Zheng Hao Report”).

351.  The Schedule of Fictitious Construction Works was seized by the Mainland Police in or around August and September 2010 during inspection of the office premises of BSZ.  It was signed by Zhou GB with his fingerprint imprinted thereon and stamped by the chop of the Mainland Police dated 20 November 2010.  In Section B.4.7 above, I have already rejected the challange against the authenticity of such document.

352.  Regarding the construction of the Food and Cooking Oil Building (粮油大楼)(the “FO Building”), the figure of “57,745,511” was stated in the Schedule of Fictitious Construction Works to be the final price payable to Huang Xin, which was the second largest contractor of BSZ and a company related to Zhou.  The figure of “57,745,511” corresponds to the total of “36,800,000” recorded as genuine payment (真實應付款) and “20,945,511” recorded as fictitious payment (虚擬應付款) in the same row.  The figure of “57,745,511” very much matches with the figure of “57,746,000” booked in the Management Accounts.  The above figures concern the construction costs relating to Huang Xin only.  The total amount of construction costs (including those relating to other contractors) booked in the Management Accounts in respect of the FO Building as at 31 December 2008 is “65,552,000”.  The figure of “65,552,000” matches with the figure as at 31 December 2008 stated in “A3.54 粮油大楼 (the FO Building)” in Appendix 2F of Mr Chu’s report.

353.  By reason of the above, Zhou GB essentially admitted in the Schedule of Fictitious Construction Costs that, out of the about RMB 57.7 million booked as construction costs of the FO Building by Huang Xin, RMB 36.8 million represents genuine construction costs whereas RMB 20.9 million represents fictitious construction costs.

354.  Such admission by Zhou GB is consistent with Mr Chu’s assessment of the relevant construction works concerning the FO Building by Huang Xin.  As explained in Mr Chu’s report, the construction of the FO Building (Structure Reference 105 to 111: see Table 4.3) was completed in 2007.  The corresponding figure in Appendix 2F for “A3.54 粮油大楼 (the FO Building)” as at 31 December 2007 is 35,589,000.  Mr Chu’s assessment for the construction costs of structure reference 105 to 111, i.e. the FO Building, can be found in Appendix 7 of his report.  In short, if one adds up the corresponding amounts of structure reference 105 to 111 on the last column, the total amount of the assessed construction costs is 17.3 million.  Reflecting the 53.9% adjustment which arises from the booking pattern as explained in Mr Chu’s report, the assessed figure of 17.3 million representing the position in 2007 translates into around 32 million (17.3 million / 53.9%), representing the cumulative position.  This amount of 32 million is comparable to 36.8 million, i.e. the genuine payment stated in the Schedule of Fictitious Construction Works.

355.  According to Mr Ho, this only serves as an example to show that the expert analysis on fictitious construction costs is consistent with available documentary evidence, and the same exercise can be carried out for the other expenses.  Based on such analysis, I agree with Mr Ho that the expert’s assessment is corroborated with the data in the Schedule of Fictitious Construction Works as admitted by Zhou GB.

356.  I then turn to the Zheng Hao Report, which was prepared after the arrest of Zhou GB and Luo Hong by the Mainland Police in or around October 2010.  Such report was prepared under the instruction of the Wuhan Security Bureau for the investigation into the financial records and other documents of BSZ.

357.  According to the findings of Zheng Hao: (i) certain payments between BSZ and Huang Xin were fictitious from 1 January 2005 to 30 June 2010; and (b) certain payments between BSZ and Long Xiang were fictitious.  These findings are summarised in the flow chart attached to the Zheng Hao Report.  Again, the Defendants have not proffered any innocent explanation for the evidence.

358.  For these reasons, I agree with Mr Ho that the analysis made by the experts is corroborated by these materials.

D.3.5 Mr Bezant’s report

359.  The purpose of Mr Bezant’s report is to assess the difference between the value of the Defendants’ 90% interest in BSZ as warranted and the value as delivered.[105]

360.  The expert values BSZ on two bases: the “CAPE Basis” and the “Objective Basis”.[106]

361.  Under the CAPE Basis, the assessment was made on the basis of the difference between the amount the Plaintiff actually paid for the interest in BSZ (based on its warranted financial information) and the amount the Plaintiff would have been willing to pay for the interest in BSZ if the Plaintiff had been provided with true financial information.  According to Mr Bezant, the former figure is RMB 1,140,000,000 and the latter figure is RMB 630,000,000, and hence the difference is RMB 510,000,000.[107]

362.  The first figure is a factual figure.  It is what the Plaintiff had contracted to pay under the SPAs (RMB 1,140,000,000 being the equivalent of HK$1,156,000,000).[108]

363.  The second figure involves the expert determining the value of 100% of BSZ, based on its true financial information, and then determining the amount that a buyer would have been willing to pay for 90% of BSZ under the terms of the SPAs.[109]

364.  In determining the value of 100% of BSZ based on its true financial information:

(i)  The expert refers to BSZ’s warranted financial performance, which is presented at Table 7-1 of his report.  The figures came from BSZ’s Management Accounts and are set out in greater detail at Appendix 9.1-1 to Mr Bezant’s report (with updated version in the supplemental report).

(ii)  The expert considers the misstatements in BSZ’s accounts identified by Mr Chen[110], which are summarised in Table 4-3 of his report.  He then adjusts BSZ’s warranted financial performance for these misstatements to identify its corrected financial performance and position.[111]

(iii)  The difference between BSZ’s warranted and corrected financial performance is set out in Table 9-1 (updated version in the supplemental report) and (in greater detail) at Appendix 9-1.   According to Mr Bezant, there are very significant discrepancies in BSZ’s revenue, profits and growth rates on the basis of its warranted and corrected financial information.[112] The 2006 profit was around half of the warranted figure, and the 2007 profit fell short of the Profit Guarantee by RMB 127 million.

(iv)  The expert then works out the valuation ratios derived from the Plaintiff’s acquisition of BSZ.  The ratios (based on BSZ’s earnings, adjusted revenue, net assets, etc.) are set out in Table 9-2 of his report.

(v)  Based on a comparison between BSZ’s warranted and actual growth in 2006, the expert considers it reasonable to apply a 25% reduction to the valuation ratios.[113]  The Defendants have not offered any basis, whether by expert or factual evidence, to justify why 25% is not an appropriate discount in the circumstances.  The reduced multiples are applied by Mr Bezant to the corrected (a) revenue, (b) earnings and (c) net assets figures of BSZ.[114]  On the basis of the results, he concludes that the value of 100% of BSZ based on its true financial information would be RMB 650,000,000.[115]

365.  At the trial, it was discovered that the construction costs estimate made by Mr Chu need to be further revised. However, Mr Bezant has explained in §§17-20 of his supplemental report dated 11 March 2019 and in his oral testimony as to why his valuation of the shares as delivered under the CAPE Basis is unaffected by the revised construction costs estimate.  According to him, the assets were the means by which the company generated its profits and they could not be separately realised (unlike the situation of an investment property business).  The valuation based on profits is the most reliable means of assessing the value of the company.  Also, it would be wrong to adopt a value of higher than RMB 700 million, which was based on a valuation of 50.0, because that would imply BSZ was even more valuable in the delivered state than it was in the warranted state.

366.  Mr Bezant then calculates the amount that the Plaintiff would have been willing to pay for 90% interest in BSZ under the SPAs:

(1)	Taking the valuation of 100% of BSZ, as determined above	RMB 650,000,000
(2)	Reducing the amount by RMB 100,000,000. Under clause 8.3 of the 1st SPA, a buyer would have expected to incur an additional RMB 100,000,000 of costs in relation to the 318 mu of land. That reduces the amount that a buyer would be willing to pay for 100% of BSZ	–RMB 100,000,000
	Adjusted value (100% of BSZ)	= RMB 550,000,000
(4)	Calculating the pro-rata value of a 90% interest	x 90% = RMB 500,000,000
(5)	Adding the Profit Guarantee amount. Under clause 8.1 of the 1st SPA, a buyer of the 90% interest would also have expected to receive RMB 130,000,000 (the equivalent of HK$150,000,000) in this scenario as the payment under the Profit Guarantee, over and above the value of the business (by reference to its true financial position). This increases the amount that the buyer would be willing to pay	+RMB 130,000,000
	Value of 90% of BSZ under the SPAs	= RMB 630,000,000

367.  The difference between the amount paid (RMB 1,140,000,000) and the value of 90% of BSZ under the SPAs determined by the expert (RMB 630,000,000) under the CAPE Basis is therefore RMB 510,000,000.[116]

368.  I then turn to the Objective Basis.  Under this basis, the expert does not consider what was paid and what would have been paid as under the CAPE Basis.  Instead, the expert considers the warranted value and the true value in an objective sense.[117]  Under this basis, the Plaintiff’s loss is further assessed under two approaches, i.e. the “Primary” and the “Alternative”:[118]

		Primary	Alternative
(1)	The warranted value of 90% interest in BSZ, based on its warranted financial information	RMB 1,140,000,000	RMB 1,350,000,000
(2)	The true value of 90% interest in BSZ, based on its true financial information	–RMB 630,000,000	–RMB 850,000,000
	Difference between (1) and (2) = valuation on the Objective Basis	RMB 510,000,000	RMB 500,000,000

369.  Under the Primary Approach, the expert assumes that the Plaintiff’s acquisition of the interest in BSZ is the best evidence of the objective value of that interest.  There is no need to assess the objective value in any other way, and the value is HK$1,156,000,000 (RMB 1,140,000,000) because that is what was agreed between an actual buyer and seller.  The expert therefore repeats all of the same steps under the CAPE Basis, and the loss is identical, i.e. RMB 510,000,000.[119]

370.  Under the Alternative Approach, the expert assumes that the Plaintiff’s acquisition of the interest in BSZ does not provide evidence of value.[120]  The expert therefore performs his own valuation analysis of BSZ, based on both its warranted financial information and its true financial information.

371.  Mr Bezant first takes the following steps to assess the warranted value of BSZ under the Objective Basis/Alternative approach:

(i)     To estimate the value of the 90% interest in BSZ based on its warranted financial information, the expert considers valuation multiples observed in transactions in comparable companies.[121]   The expert considers transactions in both mature markets and new markets, and applies the valuation multiples in these transactions to the warranted 2006 financial information and guaranteed 2007 performance of BSZ.[122]

(ii)    The expert then cross-checks these valuation multiples analysis using: (i) discounted cash flow (DCF) valuation analysis based on information in the Plaintiff’s audited financial statements[123]; and (ii) the observed change in the Plaintiff’s market capitalisation following the acquisition.[124]

(iii)   The expert concludes on a value for 100% of BSZ, based on its warranted financial information, of RMB 1,600,000,000 or more. This implies a value for 90% of at least RMB 1,350,000,000.[125]

372.  To assess the true value of BSZ under the Objective Basis/Alternative approach:

(i)     The expert applies the same valuation multiples to assess the true value of BSZ, based on its true financial information.  The expert adopts various reference points for this purpose, including revenue, net asset and site area.[126]

(ii)    The expert concludes on a value for 100% of BSZ based on its true financial information, and ignoring the actual acquisition multiple, of RMB 900,000,000.[127]  For similar reasons as stated in §365 above, the expert considers that Mr Chu’s revised construction costs estimate does not affect his overall conclusion on value.[128]

(iii)   To calculate the value of 90% under the terms of the SPA, the expert repeats the calculation performed under the CAPE Basis as mentioned above and arrives at a value of RMB 850,000,00.[129]

373.  The difference between the objective value of the 90% interest as warranted (at least RMB 1,350,000,000) and the objective value of the 90% interest under the SPAs as received (RMB 850,000,000) is therefore at least RMB 500,000,000.[130]

374.  Hence, Mr Bezant’s quantifications assessed under each of the above approaches have turned out to be very similar.[131]

D.3.6 Relationship with the Profit Guarantee Claim

375.  As mentioned above, there is a profit guarantee clause in Clause 8.3 of the 1^st SPA.  The merits and quantum of the Profit Guarantee Claim will be addressed in the latter part of this Judgment. However, I find it convenient here to deal with the following issues about the relationship between the two claims:

(i)     whether there is double recovery and double counting between Mr Bezant’s assessments of the Overpayment Claim and the Profit Guarantee Claim; and

(ii)    the effect of Wang’s Profit Guarantee of HK$150 million on the expert’s valuation of the overpayment.

376.  In his oral testimony, Mr Bezant explained that there are no double counting between the two claims.  In assessing the value as warranted, the parties had already taken into account the warranties and guarantees as provided for in the SPAs.  In the case that the warranties are true, the “as-warranted” value is zero because they expected the warranties to be met.  On the other hand, in assessing “as-delivered” value, one has to look at the true profits.  If the profits do not meet the level as warranted, that has to be taken into account in assessing the loss.[132]

377.  As to the effect of the Profit Guarantee on his valuation, Mr Bezant explained that the profit guarantee, which signals the profit-generating potential of the business at large, is a very important factor in the valuation of a business.  It is also highly relevant as to how a purchaser would appraise the business and in assessing the purchase price.[133]  In the case of a false expectation as to the profit guarantee or profit potential, it would lead to an overvaluation of a company generally.  Hence, the Profit Guarantee would have an impact on the quantification of the Overpayment Claim.

378.  Ultimately, these are matters to be decided by the court with the assistance of expert evidence.  Having heard Mr Bezant’s testimony, I find his explanations both credible and reliable. In the absence of any contrary expert evidence, I accept these explanations by Mr Bezant as to how the quantum of the Overpayment Claim and the Profit Guarantee Claim should be assessed by the court.

D.3.7 Quantum claimed by the Plaintiff

379.  According to the Plaintiff, the quantum of its loss is to be determined under Clause 6.3 of the SPAs by ascertaining the amount necessary to put BSZ into the financial position it would have been in had the relevant sellers’ warranties not been breached, which involves assessing the objective value of BSZ as warranted and as delivered.  The Plaintiff claims that this is in line with the normal measure of damages for a breach of warranty claim under common law.

380.  Based on the above analysis, Mr Bezant’s valuation can be summarised as follows:

Value of 90% of BSZ (RMB million)	CAPE basis	Objective basis
		Primary	Alternative
As warranted	1,140	1,140	≥ 1,350
As delivered	(630)	(630)	(850)
Difference	510	510	≥ 500

381.  Mr Ho submits that the Objective/Primary Basis should be adopted by the court as the proper valuation of the Plaintiff’s loss, i.e. RMB 510,000,000.  This approach produces the objective valuation of BSZ as warranted and as delivered, as required by Clause 6.3 and under common law.  In so doing, it takes the Plaintiff’s acquisition of BSZ as the best evidence of the objective value of that interest.  It also defeats the Defendants’ argument in relation to the Objective/Alternative Basis, namely, that the “as warranted” value is (as Mr Chan argues) higher than what the Plaintiff (the purchaser) had in fact paid for the acquisition.  According to Mr Ho, the Objective/Primary approach produces a valuation that is identical or similar to those under the CAPE Basis and the Objective/Alternative Basis, which serve as useful cross-checks.

D.3.8 Challenges made by the Defendants against the expert evidence

382.  The Defendants have not called any expert evidence to rebut the Plaintiff’s case on quantum.  Yet Mr Chan seeks to challenge the expert evidence in the following ways.

383.  Mr Chan challenges Mr Chu’s evidence as follows:

(i)  Mr Chu is not qualified to give any opinion on the penalty liability for the illegal structures in the Market as this is outside the expertise of quantity surveyor or cost engineer.

(ii)  Mr Chu has not given his opinion on whether the amount claimed for the demolition of the illegal structures in the Market is reasonable.

(iii)  In relation to his valuation opinion on the cost of the reclamation and construction of the Market, Mr Chu was not able to carry out any survey on the original condition of the site before the reclamation work as the Market had already been built.

(iv)  Insofar as Mr Chu is seeking to rely on the site investigation report by other institution, i.e. Wuhan Surveying, there is no evidence about the authenticity of the report and the qualifications of the relevant experts.

(v)  The assumptions made by Mr Chu about the actual conditions at the site may not be correct.

(vi)  The profit percentage and the other assessment or allowance adopted by Mr Chu are open to question.

384.  On the other hand, Mr Chan challenges Mr Chen’s evidence as follows:

(i)  Mr Chen is not a qualified expert as he has not obtained any professional qualification as a forensic accountant.  He has no accounting or auditing qualification in the Mainland and he has no previous experience working in Wuhan.  He also lacks the qualification or experience to give his opinion on various matters of the case.

(ii)  Mr Chen’s expert evidence had been rejected by the court before.[134]

(iii)  Mr Chen’s report contains a number of general limitations[135], which in turn undermine the reliability of his conclusions.

(iv)  Mr Chen is a biased witness as he always assumes that the information provided by the Plaintiff is true.  He also failed to verify the truthfulness of the information and the basis of his assumptions.[136]  He was unable to verify the relationship between Zhou and some of the persons whom Mr Chen believed to be Zhou’s nominees or working under Zhou’s instructions.

(v)  Mr Chen has failed to specify the source of various information which forms the basis of his assessment.

(vi)  Mr Chen wrongly equates “red flags” as conclusive findings.  He was able to identify certain “red flags” associated with BSZ’s transactions with Long Xiang and Huang Xin, but given the limited information available, it is unreliable to rely on the accumulation of these “red flags” to draw the conclusion that the transactions with Long Xiang and Huang Xin were bogus.

(vii)  There is grave doubt as to the whether the method of apportionment adopted by Mr Chen is appropriate.  His methodology is not one that is supported by literature or any known arithmetic or accounting principle.  As such, there is no means of testing whether this is the proper mathematical formula to calculate the extent of overstatements and the accuracy of his conclusions.  Even if his methodology is correct, the percentage he adopts for his calculations represents Long Xiang and Huang Xin’s entire share of BSZ’s total construction costs.  By using these percentages, Mr Chen’s assumption is that all underlying contracts entered between BSZ and Long Xiang or Huang Xin and the transactions pertaining to it were entirely fictitious. Yet there is no basis to support such assumption.  Further, the results of his apportionment would unfairly attribute costs for items that are wholly unrelated to Long Xiang or Huang Xin.

(viii)  In assessing the fictitious income during the Pre-Profit Guarantee Period, Mr Chen raised a number of “red flags” and suspicions about the March 2005 Agreement, the December 2005 Agreement and the September 2006 Agreement. But these suspicions are not enough to support the conclusion that RMB 23,000,000 of the income recorded in BSZ’s accounts during the Pre-Profit Guarantee Period was fictitious.

(ix)  The same point can be made about the assessment of the fictitious income during the Profit Guarantee Period and Mr Chen’s reliance of the 7 Dubious Agreements in arriving in his conclusion that these were bogus transactions.  In particular, Mr Chen relied on one-sided allegations in making his assessment and he was not qualified on the accounting abnormalities in respect of some of these transactions.

385.  Finally, Mr Chan challenges Mr Bezant’s evidence as follows:

(i)  Mr Bezant’s findings are neither reliable or realistic as he has omitted to consider a number of pertinent factors which were crucial to the parties during the acquisition of BSZ:

(a)  Crucial documents relating to the acquisition were not made available to Mr Bezant and he had placed too much reliance on the information supplied by Sin but not Yang in reaching his conclusion.

(b) Mr Bezant would not have been able to know what would have been in the mind of the Plaintiff’s then Directors in deciding whether to make the acquisition.  In particular, the circulars and announcements issued by the Plaintiff are of limited value, and Mr Bezant had failed to take into account Yang’s evidence that the past financial history of BSZ played no or little part in setting the acquisition price of the shares.  Instead, the future potential of the Market (such as transforming BSZ from being a fixed rental exchange platform to being a transaction based exchange platform or expanding its business through consolidation with smaller players in the market) rather than its past performance might have carried more weight in the mind of the then Directors in deciding whether to proceed with the acquisition.

(c) In making his opinion, Mr Bezant has failed to take into account the fact that the Plaintiff would still have proceeded with the shares acquisition irrespective of the inflated Management Accounts.  In particular, Chan YN, Fu and Yang were aware of the falsification of the Management Accounts and Chan YN was holding 74.89% shareholding of the Plaintiff at the time of the SGM.

(d) Mr Bezant’s calculation is made by reference to the theoretical value of BSZ, and there are many factors, including the sentimental value to the Defendants, to support that the Defendants might not have sold BSZ to the Plaintiff at such a low value.  In particular, there were many distinctive and unique features that justified the Defendants to sell their shares with an additional premium on top of its minimum selling price, such as the Market’s unique and dominant position in the Central Mainland region.  Further, Thomas Chan confirmed that the Defendants had actually made the same offer to Wang On Group, who had considered but subsequently decided not to purchase BSZ back in 2007 given its high price.

(ii)  The comparables chosen by Mr Bezant are not appropriate comparables, and there is also no information on how exactly the comparable companies operated their markets.

D.3.9 Analysis of the expert evidence on quantum

386.  In my judgment, the Defendants’ approach to expert evidence is both unprincipled and unjustified.  On the issue of quantum, the Defendants have chosen not to advance any positive case, call any expert, or identify any issue of disagreement with the Plaintiff’s experts.  The Defendants only attempt to locate some conceivable gaps in the expert reports and then invite wholesale acceptance by the court of their theories or methodologies which have no factual or expert underpinnings.  The Defendants are also completely silent on what the court should do with those parts of the Plaintiff’s expert evidence which are completely unchallenged.  As further elaborated below, the Defendants’ challenges of the Plaintiff’s experts are either flawed or trivial in nature, and they should not in any way affect the overall reliability of the Plaintiff’s expert evidence.

387.  Firstly, the challenges against Mr Chu’s evidence are unjustified.  Mr Chan contends that Mr Chu was not given any information on which structures were to be demolished.  This is an incorrect reading of Mr Chu’s report.  In §5.1.1 of his report, Mr Chu explained that he was provided with a plan with boundary of the site outlined in red and that “on the south and north sites of the side, there are chains of superstructures which footprints are sitting beyond the red line, i.e. built on public roads”. Furthermore, the Defendants’ criticism that Mr Chu did not use his cost engineering expertise to give an opinion on whether the amount claimed by Plaintiff on demolition costs was reasonable is completely unfounded, since the question of reasonableness of the costs does not form part of the expert direction at all.  In any event, Mr Chu considered the receipts and payment records and confirmed that they are genuine records and have been paid.  The Defendants do not challenge this conclusion and have not specified which particular item of costs is unsupported by the documents specified in the table for demolishing expenses and compensation for the illegally constructed building.

388.  On Mr Chu’s reliance on the Wuhan Surveying Report, the Defendants contend that there is no information on the status and standing of the institution concerned, i.e. Wuhan Surveying, and challenge the “authenticity” of the report.  However, such contention ignores the fact that information such as “certificate number (证书编号)”, “qualification class (资格等级)” and “issue department (发证部门)” can be clearly seen at the top left-hand corner on the first page of the report.  It is Mr Chu’s evidence that these pieces of information show that the institution is an officially recognised institution.  As to the Defendants’ suggestion that the Wuhan Surveying Report was merely a template into which anybody could fill the relevant information, Mr Chu’s response, which makes eminent sense, is that procedures had to be performed in order to arrive at the relevant data and that the data, which themselves carry certain meaning, cannot be plucked out of thin air.  The Wuhan Surveying Report remains an objective piece of evidence to determine the depth of the site formation work.  Without adducing expert evidence on their own or informing the Plaintiff of such challenges before the trial, such kind of attacks are not fair to the Plaintiff and it can only be seen as a desperate attempt by the Defendants to find some gaps in the Plaintiff’s evidence.

389.  The Defendants challenge Mr Chu’s opinion on the volume of the earth fill in the Market by using the average depth of filling of 12 bore holes.  This challenge has no substance at all.  As explained by Mr Chu, it is common practice to use the average depth of the bore holes for projection.  More importantly, Mr Chu explained that these 12 bore holes were evenly distributed within the site in terms of location and covered different areas of the site.  Hence, it is Mr Chu’s considered opinion that the average of the 12 bore holes truly represents the earthwork fill information of the site.  With no contrary expert evidence, there is no reason for me to doubt the reliability of Mr Chu’s explanation.

390.  There are many instances where the Defendants simply invite the court to speculate the premise of Mr Chu’s report without any evidential basis to support whatever contrary conclusion which Defendants may seek to advance.  For example, the Defendants appear to suggest that the level of earthwork fill in 2012 when the site investigation report was made was not the same as the ground of the Market in 2007.  However, the Defendants have adduced no evidence to show that additional filling was carried out after 2007, bearing in mind that the Defendants were still in control of BSZ until at least November 2010 and should know or have access to information as to whether such additional filling in fact took place.  Similarly, the suggestion that both sides of the boundary line were covered by water is inconsistent with the aerial photos in Mr Chu’s report, which show that the site was never a body of open water.

391.  Another area of the Defendants’ challenge concerns Mr Chu’s assumption that the earthwork fill would be lower for roads and buildings.  As explained by Mr Chu, the Defendants’ challenge is itself based on another assumption, namely that there would be “double handling” of earthwork fill, and Mr Chu has explained that such “double handling” was unlikely to occur due to the additional time and costs that had to be incurred. Again, as the Defendants have adduced no contrary factual and expert evidence to contradict Mr Chu’s evidence, there is no reason for me to reject Mr Chu’s evidence in this regard.

392.  On the benefit of doubt given by Mr Chu for “potentially valid item but without details”, Mr Chu allows 50% of the items, which are taken from the Management Accounts.  The suggestion that Mr Chu allows 50% of the items found in the Tai Hua Reports is therefore an incorrect reading of his report.

393.  On the 2% profit percentage, Mr Chu has already explained why he considered the 7% level in the Tai Hua Reports is abnormally high.  As to the Defendants’ suggestion that the contractors concerned might have overcharged BSZ for the work done, there is no evidence from the Defendants to support this speculation or contradict Mr Chu’s evidence that the 2% figure was in line with the local construction market.  Further, Mr Chen has given evidence on the identity of these contractors and the questionable nature of the agreements signed between BSZ and these contractors.

394.  For the evidence on forensic accounting, the Defendants have persistently attacked Mr Chen’s independence and objectivity. Though Mr Chen’s evidence might have been rejected in HKSAR v Yip Kim Po & Ors^[137], his formal qualification as forensic accountant had not been challenged.  The Court of Appeal stated that what was in issue was whether he had sufficient knowledge to speak on matters about which there was no formal or recognised body of knowledge or experience.[138] In the present case, Mr Chen testified as a forensic accountant and there can be no doubt that he is properly qualified to do so and that forensic accounting is a recognised area of expertise.

395.  The Defendants also suggest that Mr Chen was unversed in the culture of business in Wuhan.   However, I cannot understand how “cultural difference” has any role to play in a case where there are admitted falsities in the financial accounts of a company.  Furthermore, “cultural difference” should not be a serious concern for a forensic accountant whose task is to find out from the accounts of a company the figures that have been inflated.

396.  Nor is there any basis to the Defendants’ allegation that the expert was favourably predisposed to the Plaintiff.  Mr Chen explained how he approached the documents, including those supplied by the Plaintiff’s current management, from a neutral standpoint and repeatedly tested his assumptions about them.  For instance, the expert had compared item by item in the Management Accounts against BSZ’s electronic trial balance and ledger and made certain reclassifications to align the two sets of data.  He explained how reconstruction of the documents by the Plaintiff’s management would not have been possible, given that the opening and closing balances for each accounting year, which provided a snapshot of BSZ’s financial position, were matching.  Hence, there is no basis to support the Defendants’ belated suggestion that the Plaintiff’s current management might somehow have tampered with BSZ’s accounts or financial documents before passing them to the experts.  This has never been part of the Defendants’ pleaded case and there is no basis to support such serious allegation.  In fact, Mr Chen fairly explained that he would welcome and actively consider any expert analysis or factual information from the Defendants that may affect his own analysis, but none had been forthcoming.

397.  As I see it, the limitations highlighted in Mr Chen’s report demonstrate precisely that the expert is committed to presenting his findings fairly and objectively to the court.  The Defendants ought to be in a position to proffer relevant evidence in respect of all three limitations, i.e. the lack of (a) bank statements of BSZ’s accounts, (b) opportunity to confirm or clarify findings with BSZ’s former management or employees and (c) access to books and records of related parties, but have chosen not to do so.  Mr Chen’s use of the method of apportionment was also necessitated by these limitations and represents the best the expert could do in the circumstances.  As explained in his report, given the limited documents available, such as there being no books and records of Long Xiang and Huang Xin, no bank statements of BSZ’s bank accounts from 2003 to 2007 and the absence of third party confirmation, he had difficulties in conclusively identifying which particular transactions with Long Xiang and Huang Xin were bogus transactions.  However, that should not undermine the credibility of his evidence.  Mr Chen considered multiple factors, such as commerciality of contract terms, relationships between parties to the transactions, flow of funds, inexplicable absence of tax invoices or official receipts in support of payments, before drawing conclusions about the available materials.  I accept his approach is a sound one.

398.  Indeed, the difficulties faced by Mr Chen was, to a great extent, caused by the Defendants’ failure to hand over BSZ’s records and documents to the Plaintiff on completion as required by Clause 5.2(A)(a)(ii) of the SPAs.  If there is any uncertainty resulting from the unavailability of the documents, facts should be presumed against the person responsible for the same, i.e. the Defendants.[139]

399.  As to Mr Chen’s view that certain persons were related to Zhou or working under his instructions, I accept that there is sufficient basis to support his view given the overall circumstances of the case including the shareholdings and positions held by these persons in the related companies.  Again, the Defendants have chosen not to adduce any evidence to rebut Mr Chen’s observations and conclusions in this regard.

400.  Finally, I accept Mr Ho’s submission that the Defendants’ criticisms do not do justice to the in-depth and comprehensive analysis presented in Mr Chen’s expert report.  Many of the Defendants’ arguments are in any event made without evidential basis or upon incorrect premises.  For example, it is asserted that Mr Chen accepted that a subsidiary may make payments on behalf of its parent company so long as there are proper booking records.  But the situations addressed in Mr Chen’s report are not about parent company and subsidiary.  More importantly, the issue is not about a company making payments on behalf of another company with proper booking records.  The issue is that BSZ used bank accounts of related companies for receipts and payments and recorded 189 banking transactions in BSZ’s ledger as if they were BSZ’s own bank accounts.

401.  Further, Mr Chen did not conclude there was fictitious income in the Pre-Profit Guarantee Period just because the relevant contracts were “too good to be true”.  Instead, the expert had considered multiple factors.  Even on the commercial realism of the contracts alone, the expert, unlike the Defendants, conducted a holistic assessment of all three contracts, i.e. the March 2005 Agreement, the December 2005 Agreement and the September 2006 Agreement.  In my judgment, there is sufficient basis for Mr Chen to say that the three contracts, when viewed together, do make very little commercial sense.

402.  The Defendants challenge that early termination of certain contracts did not mean that those contracts were fictitious.  As explained by Mr Chen, the problem lies not only in the early termination itself.  The early termination should be considered together with the lack of apparent reasons for not pursuing any penalty from the sub-contractors as a result of the early termination and the fact that so many sub-contractors decided to terminate the contract after the end of the Profit Guarantee Period.  These were very suspicious indeed.

403.  On the purported income of RMB 13,000,000 under the December 2005 Agreement, the Defendants seem to suggest that there is nothing wrong with this and that BSZ did not attempt to sue Tianjiu for the payment.  Mr Chen explained that the problem lies in that BSZ did not receive any real benefits from this transaction, yet the amount of RMB 13,000,000 was recognised as profits to BSZ.  It is difficult to understand why BSZ’s attempt (or the lack thereof) to sue Tianjiu has any relevance at all, and in any event there is no evidential basis to suggest that BSZ would have any basis to recover the purported sum from Tianjiu.

404.  There is also basis for Mr Chen to rely on certain documents filed in the Mainland proceedings.[140]  These documents were filed by the said parties in proceedings commenced by the current management of BSZ against them.  In stating that the relevant incomes or agreements were fictitious, these parties were not making self-serving statements.  They were making admissions which could potentially attract criminal liability.  Hence there is some truth in these admissions, and Mr Chen is certainly entitled to accord due weight to these documents.  If the Defendants seek to argue that these documents do not mean what they say, they should have produced evidence to support their case.

405.  In an attempt to challenge Mr Bezant’s evidence, Mr Chan submits that the expert was putting undue weight on Sin’s evidence, which should not have been admitted as evidence as he was not called as a witness. However, under the Objective Basis, which the Plaintiff commends to be the proper basis for valuation of the Plaintiff’s loss, how the Plaintiff arrived at the price for the shares in BSZ is not a relevant question in itself.  Mr Bezant relies upon the price as the “as warranted” value, on the basis that it was agreed in those circumstances, and then refers to that value in determining the objective “as delivered” value.  Adopting such approach, a full factual understanding of the circumstances in which the price was arrived at is not a necessary piece of the puzzle for this analysis to be performed.

406.  Notwithstanding the above, Sin’s evidence was consistent with the information in the 10 May Announcement and the 8 June Circular in relation to how the price of the acquisition was determined.  Hence, as confirmed by Mr Bezant, his evidence would be the same even without the consideration of Sin’s evidence.

407.  Indeed, both Sin’s evidence and the aforesaid documents refer to factors that were considered at the time, including market conditions, historical financial information and the Profit Guarantee.  These are factual matters which an objective valuer in Mr Bezant’s position is entitled to take into account.

408.  The Defendants also contend that the historical financial position of BSZ had little or no bearing on valuation.  However, as mentioned above and confirmed by Mr Bezant in his oral testimony, any projection of the future profit or growth of a company must be made upon a baseline, which is the level of its historic profits, and it is illogical and unrealistic to divorce the past performance of a company from an assessment of its current value or future prospects.  The way in which a reference point transaction is applied to the actual circumstances of the company in question is commonly by reference to historical financial information.

409.  The Defendants also contend that the Plaintiff’s Directors or shareholders would not have acted differently even if presented with the true information about BSZ.  This contention is premised on the Defendants’ factual case which has been rejected by me in the earlier part of this Judgment.[141] In any event, it is not part of Mr Bezant’s job, as valuation expert, to speculate on what a specific shareholder or director would have done with the true information.

410.  It is also submitted by Mr Chan that that Defendants would not have sold their shares at the “as delivered” valuation.  However, this point was neither raised in the Defendants’ evidence nor put to Mr Bezant during his cross-examination.  In any event, the point is irrelevant under the Objective Basis, where the measure of loss is by reference to the value of the shares received, and not the price that would hypothetically have been agreeable to the Defendants.  Mr Chan also refers to an earlier offer that the Defendants made to sell BSZ to another party at the same price.  However, it is not clear whether the Defendants had presented the same set of inflated Management Accounts to that party, and in any event that price had not been agreed by then.  Hence, this does not suggest that the price was the value as received.

411.  Finally, the Defendants seek to criticise Mr Bezant’s choice of comparables.  But, first of all, these comparables are only relevant to the Objective/Alternative Basis and not the Objective/Primary Basis which the Plaintiff commends the court to adopt.  As a matter of common sense, when one throws out the best piece of evidence (i.e. the transaction itself) for valuation under the Objective/Alternative Basis, one is bound to be left with less precise and relevant evidence.  In any event, while it is true and inevitable that the expert was only able to identify imperfect comparable companies about which limited information is available, there was a clear process to identify the comparables and they were all markets performing the same economic functions, which is relevant to value. As such, the Defendants’ criticisms have no merit.  In any event, the Defendants have not called expert evidence on other appropriate comparables.

412.  I therefore accept all the Plaintiff’s experts on quantum to be reliable witnesses.  There is no dispute that the Defendants had inflated the Management Accounts, and the Plaintiff is facing great difficulties in trying to ascertain the exact amount of the inflation as they do not have all the necessary documents.  With the passage of time, it is also not possible for the expert to know the exact condition of the site when the construction works were done.  Hence, the Plaintiff’s evidence on quantum cannot be perfect.  With the unknowns, the Plaintiff’s experts are bound to make assumptions and inferred factual basis based on the surrounding circumstances. The necessary documents should have been in the possession of BSZ, which was under the control of the Defendants and Zhou before the handover.  Yet the Defendants have adduced no factual evidence to challenge the factual basis or assumptions made by these experts in their investigation of the inflation of the Management Accounts or the reduced value of the acquired shares.  Neither have they adduced any expert evidence to put forward a different approach of the assessment and valuation.  Under such circumstances, the court is entitled to make adverse inferences against the Defendants on quantum based on the documents available to the Plaintiff and the sound methodologies adopted by the Plaintiff’s experts.

D.3.10  Whether the quantum of the Overpayment Claim is limited to the amount of the inflation in the Management Accounts?

413.  Finally, Mr Chan submits that the quantum of the Plaintiff’s claim for breach of warranties cannot exceed RMB 99,649,000 for the reason that the assets and the income of BSZ have been inflated by RMB 76,649,000^[142] and RMB 23,000,000^[143] respectively and that should be the extent of the damages payable to the Plaintiff.  According to Mr Chan, the present case was a warranty on the accuracy of the historical figures in the Management Accounts and not the warranty of the value of the shares.  Insofar as reliance is sought to be placed on the Profit Guarantee by Wang, the warranty of profit clause clearly set out what was the agreed consequences if the Profit Guarantee was not met, and so there should not be any further liability arising from the breach of that warranty.

414.  I agree with Mr Ho that there is no merit in such argument as the same is premised upon an erroneous construction of Clause 6.3 of the SPAs.

415.  By Clause 6.3, the Defendants undertake that if they are in breach of any of the sellers’ warranties under the SPAs, they will on demand immediately compensate the Plaintiff in cash as a guarantee indemnity (保证赔偿) in an amount necessary to put BSZ into the financial position (财务状况) which would have existed had such warranties not been breached.  The “financial position” in Clause 6.3 must be construed in its proper context, i.e. a sale and purchase agreement of the shares of BSZ.  Given such context, the “financial position” in Clause 6.3 can only refer to the value of the shares of BSZ as a whole, as opposed to merely the asset or income position of BSZ.  This makes perfect legal and commercial sense given that the Plaintiff, who is a party to the agreement, was purchasing the shares and not the asset or income in BSZ’s books as such.  Hence, to ascertain the financial position of BSZ which would have existed had the warranties not been breached, the court needs to determine the value of BSZ as warranted under the SPAs.

416.  There is accordingly no basis to construe Clause 6.3 of the SPAs in such a way as to confine the Plaintiff’s Overpayment Claim to the extent of the inflation in the asset and income figures in the Management Accounts. Such construction is unduly narrow, ignores the relevant contractual context and defies commercial sense.  Further, a claim based on Clause 6.3 is an indemnity claim, and there is nothing in such clause requiring the Plaintiff to show causation and reliance.

417.  In any event, the Defendants’ attempt to limit the Plaintiff’s loss to RMB 99,649,000 is unsound under common law principles.  Under common law, the normal measure of damages for a breach of warranty claim is the value of the shares as warranted less the value in fact at the date of the transaction.  The purpose of awarding damages is to put the Plaintiff into the same position had the contractual warranties not been breached.  The court therefore has to consider the value of BSZ as warranted by the Defendants to the Plaintiff under the SPAs and the value of BSZ as was delivered to the Plaintiff.  The breach of warranties has plainly caused loss to the Plaintiff. Further, as demonstrated in the earlier part of this Judgment, the Defendants’ argument that the Plaintiff would have entered into the acquisition at the same price anyway are unsupported by reliable evidence and untenable in law.

418.  For these reasons, I accept the submission of Mr Ho and adopt the Objective/Primary Basis and assess the quantum of the Overpayment Claim in the sum of RMB 510,000,000.  In any event, the other approaches produce more or less the same result.

E  THE MISREPRESENTATION CLAIM

419.  In view of my aforesaid decision on the Overpayment Claim, it is not necessary for me to consider the alternative Misrepresentation Claim.

420.  In any event, there can be no dispute that the representations by the Defendants as to the financial position of BSZ in its Management Accounts were made fraudulently or at least recklessly.  The measure of damages for misrepresentation is that the Plaintiff ought to be put back in the financial position it was in before the SPAs were made, i.e. the difference between the price paid and the fair value of the shares.  As such, the proper valuation for the Plaintiff’s loss under its claim for misrepresentation would be the same RMB 510,000,000, whether it is to be assessed according to the CAPE Basis (which assesses what the Plaintiff had contracted to pay for BSZ under the SPAs and the fair value of BSZ based on its true financial information) or the Objective/Primary Basis which I have adopted in assessing the quantum of the Overpayment Claim.

421.  As I see it, the only issues which may be relevant are: (i) whether the inflation of the Management Accounts was done under the instigation of the Plaintiff or with its consent; and (ii) whether the Plaintiff had been induced by the alleged misrepresentation in making the shares acquisition.

422.  As the Misrepresentation Claim may be classified as a tortious claim, the Plaintiff may not be able to rely on the provisions in the SPAs such as Clauses 6.1 and 6.2 to establish contractual estoppel against the Defendants.  In other words, the Plaintiff has to establish actual reliance on the alleged misrepresentation.

423.  Based on my ruling above, it is quite unnecessary for me to deal with these differences between the parties.  It suffices for me to say that, based on my analysis in Section B.4.3 above, I find as a matter of fact that the Plaintiff was not aware of and did not instigate the falsification of the Management Accounts, and the Plaintiff had relied on the inflated Management Accounts in entering into the shares acquisition transaction.  Further, based on my analysis set out in Section D.2.2 above, even if Fu or Yang was aware of the falsification of the Management Accounts, such knowledge should not have been attributed to the Plaintiff.

424.  For these reasons, there is also no defence to the alternative Misrepresentation Claim.  However, since this is an alternative claim and I have already found in favour of the Plaintiff on the Overpayment Claim, there is no need for me to make any further order under the Misrepresentation Claim.

F    THE PROFIT GUARANTEE CLAIM

F.1    The basis of the claim and the issues involved

425.  The Plaintiff’s Profit Guarantee Claim is based on the amended Clause 8.1 of the 1^st SPA, which provides for a warranty by Wang that the audited net profit of BSZ in the Profit Guarantee Period, calculated with generally accepted accounting principles, would not be less than HK$150,000,000, and in the event that the audited net profit is less, the Plaintiff would be entitled to claim against Wang for the shortfall and to make corresponding adjustment on the amount payable to Wang under Wang’s Instrument.

426.  The original text of the amended Clause 8.1 reads as follows:

“8.1 卖方于此不可撤回及无条件地保证，目标公司截至2007 年12 月31 日止的财政年度根据香港每没被接受的会计原则、标准及守则（包括所有适用的标准会计准则条文）计算出的经核算纯利将不少于港币150,000,000 元(“保证盈利”）。如根据上述方法计算的目标公司经核算纯利（“实际盈利”）最终低于保证盈利或目标公司出现实际亏损（“实际亏损”)，买方将有权根向卖方追讨保证盈利与实际盈利（或实际亏损）之间的差额，并据承付票据的条款及条件对承票据项下应付予卖方的金额作出相应调整。

卖方保证，若买方根据本条向卖方追讨的金额超出买方于承付票据项下应付予卖方的金额：卖方将在收到向买方通知后马上向买方支付超出的金额部分。

为免生疑，双方于此同意，买方根据本条向卖方追讨的款项可超过港币150,000,000元”

427.  The Plaintiff also relies on the following provisions:

(i)     Clause 4 of Schedule 6 of the 1^st SPA (or Clause 4 of Wang’s Instrument), which provides for the deduction of the shortfall from Wang’s Instrument in case that the audited net profit of BSZ during the Profit Guarantee Period is less than the Profit Guarantee:

“如王秀群根据股权买卖协议第8.1条项下所出的有关目标公司截至2007年12月31日止的财政年度根据香港一般被接受的会计原则、标准及守则 (包括所有适用的标准会计准则条文) 计算出的经核算纯利 (“经核算纯利”) 少于港币150,000,000元 (“保证盈利”), China Velocity有权从本承付票据项下需付[予]王秀群的金额中扣除保证盈利与经核算纯利两者之间的差额。”

(ii)    Clause 3.2(d) of the 1^st SPA, which provides for the remaining HK$120,000,000 for the purchase price shall be paid as deferred consideration upon Wang’s Instrument upon completion:

“就对价的其余部分港币120,000,000元，以延期对价的方式并于交易完成时以承付票据偿付。”

(iii) Clause 2 of Schedule 6 of the 1^st SPA (or Clause 2 of Wang’s Instrument), which provides for an undertaking by the Plaintiff to pay Wang the remaining purchase price of HK$120,000,000 plus interest at an annual interest rate of 5%:

“鉴于已收取代价，此承付票据的签署人，China Velocity，现承诺将向受益人王秀群支付一笔本金数额为港币壹亿贰仟万元正 (HK$120,000,000) 之款项 (“该本金总数”)，加上适用于每天结余的年利率为5%的利息 (利息以一年365天为基准)。”

428.  In summary, the effect of these provisions is that:

(i)  Should the audited net profit of BSZ be less than HK$150,000,000 for the Profit Guarantee Period, the net profit shortfall shall be deducted from the HK$120,000,000 which is payable to Wang by the Plaintiff under Wang’s Instrument.

(ii)  If BSZ suffers a net loss in the Profit Guarantee Period, the Plaintiff is entitled to be indemnified for the outstanding amount by Wang after deducting all HK$150,000,000 from Wang’s Instrument.

429.  The arrangements after the completion of the SPAs were that:

(i)  An amount of HK$150,000,000 was paid to an escrow agent on escrow as security of the Profit Guarantee provided by Wang under the 1^st SPA.

(ii)  In the Deloitte Report dated 28 April 2008 prepared by Deloitte, the former auditors of the Plaintiff, the audited net profit of BSZ for the Profit Guarantee Period was stated to be HK$94,162,000. It is unchallenged evidence that the Deloitte Report was prepared based on the financial information and documents supplied to Deloitte by the former management of BSZ which was under the Defendants’ control at the time.[144]

(iii)  The Plaintiff and Wang reached an oral agreement that certain items stated in the Deloitte Report, including the valuation gain in properties, government subsidies and certain travelling expenses incurred by Wang and Zhou, were not to be included in calculating the net profit of BSZ under the Profit Guarantee Period.

(iv)  Upon making the various adjustments, the net profit shortfall of BSZ came to HK$75,032,425, which the Plaintiff deducted from the HK$150,000,000 held in escrow.  At the Defendants’ request, the Plaintiff refunded the balance of HK$74,967,575 to Zhou.

430.  It is the Plaintiff’s case that it subsequently discovered that the figure of the Deloitte Report was arrived on the basis of the Management Accounts provided by the former management of BSZ, which contain sets of income that are fictitious.  The Plaintiff’s expert concludes that a total of RMB 80,350,000 had been wrongfully treated as the income of BSZ during the Profit Guarantee Period.

431.  As explained by Mr Bezant, upon adding back the turnover tax of RMB 4,660,000 and profits tax of RMB 24,978,000 to the fictitious income of RMB 80,350,000, the net profit of BSZ during the Profit Guarantee Period should be reduced by RMB 50,172,000 (i.e. HK$54,211,000).  The Plaintiff therefore claims a set-off of HK$54,211,000 against Wang’s Instrument pursuant to the amended Clause 8.1 of the SPA.

432.  The use of the phrase “irrevocably and unconditionally warrants (卖方于此不可撤回及无条件地保证)” in the opening sentence of the amended Clause 8.1 clearly means that the Profit Guarantee is a standalone warranty and not just a promise.  As the profit guarantee clauses only appear in the 1^st SPA and Wang’s Instrument, the Profit Guarantee Claim is only made against Wang and not Tianjiu.

433.  From the submissions made by the parties at the trial, the main issues under this head of claim are:

(i)  whether the Profit Guarantee Claim had been settled by the parties;

(ii)  whether the profit guarantee provision is some sort of a wager agreement, which is a suggestion raised by the Defendants only in the course of the evidence; and

(iii)  whether the Plaintiff’s expert evidence proves the alleged quantum of the Profit Guarantee Claim.

434.  I will deal with these issues in turn.

F.2    Alleged settlement of the Profit Guarantee Claim

435.  It is the Defendants’ case that the Plaintiff, with the consent or connivance of Wang, had appointed its auditors, Deloitte, to conduct an audit and made a report to ascertain the net profit of BSZ.  Such move was made with the intention of ascertaining the net profit of BSZ for the purpose of deciding whether the warranty as to the Profit Guarantee had been met.  By agreeing to the net shortfall of HK$75,032,425 and refunding the balance of HK$74,967,575 to Zhou after ascertaining the net profit of BSZ, the Defendants claim that the parties must have had made a settlement for the Profit Guarantee Claim.

436.  I do not find that the alleged settlement does provide a defence to the Profit Guarantee Claim.

437.  Firstly, the Defendants have not made out a proper case on the pleading. 

438.  In §58 of the Defendants’ Re-Re-Amended Defence and Counterclaim, it is pleaded that “the parties had reached an agreement … … … to treat the shortfall as HK$75,032,425.”  However, the Defendants have not gone further to plead that the effect of such agreement was to settle the Profit Guarantee Claim such that the Plaintiff would have no entitlement whatsoever to claim under the amended Clause 8.1 of the 1^st SPA.  In fact, the Defendants’ existing plea is consistent with the Plaintiff’s case that the adjustments made to the figure in the Deloitte Report were the result of the oral agreement between the Plaintiff and the Defendants on the calculation of the net profit shortfall.  However, in the absence of an express plea of a settlement agreement, the Defendants are not entitled to run an un-pleaded case of settlement in this trial.

439.  Secondly and more importantly, there is simply no evidence to substantiate the existence of any settlement agreement to the effect that the Plaintiff is not entitled to make the Profit Guarantee Claim. There is nothing in the witness statement of Yang or his oral testimony which supports the making of any settlement agreement.  Furthermore, the alleged settlement was, on the Defendants’ case, reached between Wang and the Plaintiff.  It is remarkable that the alleged settlement is not mentioned in Wang’s witness statement at all.  In fact, based on my observations made in the earlier part of this Judgment, it is extremely unlikely that Wang would have had any first-hand knowledge of the making of any settlement agreement between the parties.

440.  Thirdly, even if there was a settlement agreement which I do not find it to be the case, the agreement would have been set aside on the ground of fraud.

441.  It is trite that “fraud unravels all” and vitiates contracts and transactions.[145] The same applies to any alleged settlement agreement reached between the Plaintiff and the Defendants.  If the Plaintiff can establish that the income in the Profit Guarantee Period is fictitious, the alleged settlement agreement would have provided no defence to the Defendants.  Indeed, the discovery of the fictitious income is the basis upon which the current Board of the Plaintiff decided to pursue the Profit Guarantee Claim in the first place.

442.  For these reasons, the purported defence on the alleged settlement must fail.

F.3   Alleged wager

443.  In the course of the evidence, the Defendants suggested that the profit guarantee provision is a kind of wager in the sense that if the profit guarantee is not met, the known consequence would be that the purchaser in effect would pay a lesser purchase price for getting the benefit of the difference between the actual profit and the guaranteed profit.

444.  In his final submissions, Mr Chan does not pursue the “wager” argument.  In any event, such argument has no merit whatsoever.

445.  Firstly, this point is not pleaded in Defendants’ pleading as a defence to the Profit Guarantee Claim.  It was never part of Defendants’ pleaded case that the effect of the amended Clause 8.1 is that of a wager provision as suggested by the Defendants.  Nor was there any plea that the parties knew full well the alleged known consequences when the profit guarantee is not met.

446.  Secondly, this assertion of a wager is inconsistent with the wording of the amended Clause 8.1 of the 1^st SPA.  On a proper construction, the amended Clause 8.1 is a free-standing warranty by Wang on the financial performance of BSZ and spells out the consequences in the event of a failure to meet the Profit Guarantee.  Nothing in the amended Clause 8.1 or any other provision remotely suggests that Wang did not mean to warrant the profit prospect of BSZ for the Profit Guarantee Period.

447.  Thirdly, the wager argument is premised on Yang’s oral evidence that the profit guarantee provision is a wager agreement (對賭協議).  Apart from my general observations about the credibility of Yang’s evidence as mentioned in the earlier part of this Judgment, his evidence on such matter is also full of inexplicable gaps.  He was unable to give any satisfactory explanation on how the figure of HK$150,000,000 was arrived at if the effect of the profit guarantee provision is a wager.  His only explanation was that the figure was set by the investment bank.  Yang also could not explain why it was never disclosed to the public that the profit guarantee of HK$150,000,000 was never meant to be met or identify the individuals in the Plaintiff at the time who were aware of this.  Hence, I reject Yang’s evidence on this wager issue.

F.4    Quantum of the Profit Guarantee Claim

448.  The Plaintiff relies on the expert evidence of Mr Chen on the fictitious income in the Profit Guarantee Period.  Mr Chen concludes that BSZ’s income during the Profit Guarantee Period had been overstated by RMB 80,350,000.[146]

449.  The Defendants have adduced no contrary evidence to challenge the findings of Mr Chen.  In addition, the Defendants did not plead any positive case to contradict the Plaintiff’s case on the fictitious income of RMB 80,350,000 during the Profit Guarantee Period.  In fact, Defendants pleaded that Wang and/or Zhou had fully informed the Plaintiff of the “exact nature” of the 7 Dubious Agreements relied upon by Mr Chen in assessing the quantum of the fictitious income.[147] It must follow that it is not open to the Defendants to challenge that the RMB 80,350,000 income is not fictitious.

450.  Given that the Defendants were in control of BSZ at the time of the Profit Guarantee Period and that it was part of the Defendants’ pleaded case that they were aware of the nature of the 7 Dubious Agreements, the Defendants at least bear the evidential burden if they wish to contradict Mr Chen’s analysis of the nature of these agreements.  In this trial, the Defendants produced no evidence to support the genuineness of these agreements.  The Defendants’ challenge to Mr Chen’s evidence therefore lacks evidential foundation.

451.  In any event, some of the issues raised by the Defendants during the cross-examination of Mr Chen have been addressed by me in Section D.3.9 above.  Hence I accept Mr Chen’s evidence on the amount of the fictitious income during the Profit Guarantee Period.

452.  Mr Bezant quantifies the Profit Guarantee Claim by taking into account the fictitious income of RMB 80,350,000 identified by Mr Chen.  Upon adding back the turnover tax and profits tax to the fictitious income, Mr Bezant concludes that the net profit of BSZ in the Profit Guarantee Period should be reduced by HK$54,211,000.[148]

453.  Again the Defendants have adduced no contrary evidence to contradict Mr Bezant’s analysis.

454.  Apart from the issue of double recovery which I have addressed in Section D.3.6 above, the only substantive challenge by the Defendants on Mr Bezant’s analysis on the Profit Guarantee Claim is that a finding on fictitious income by Mr Chen does not necessary mean that there is an extra finding of profit reflecting the same sum of fictitious income.  The Defendants suggest that if the sole basis of a finding of fictitious income is the circular fund flow, then it would not result in any profits in the books.

455.  However, Mr Chen’s conclusion on the fictitious income was not derived solely from the circular fund flow.  As mentioned above, he also looked at other aspects of the 7 Dubious Agreements.  The premise of this challenge is therefore false.  In any event, Mr Bezant explains that if the circular fund flow is designed to misrepresent the revenues of the business, then the flow of funds does not alter the fact that the revenues and the profits of the business have been inappropriately overstated.  According to Mr Bezant, the Defendants’ challenge confuses what may be represented in the balance sheet and that in the profit and loss accounts. If the effect of the overall mechanism is to increase revenues and profits, then the profits would have been overstated.  It has got nothing to do with whether the funds have been moved around in a circle.  In the absence of contrary expert evidence, there is no reason for me to doubt Mr Bezant’s explanation in this regard.

456.  For these reasons, I accept the Plaintiff’s evidence on the quantum of the Profit Guarantee Claim and the Plaintiff is therefore entitled to set-off the amount of HK$54,211,000 from the sum due by the Plaintiff to Wang under Wang’s Instrument.

G       THE DISHONEST ASSISTANCE CLAIM   

457.  The Plaintiff’s Dishonest Assistance Claim only becomes relevant if the court were to accept the Defendants’ evidence that the figures in the Management Accounts were amended, exaggerated or falsified at the instigation of or otherwise with the knowledge of the Plaintiff.  Since I reject the evidence of the Defendants in this regard, it is quite unnecessary for me to consider the Dishonest Assistance Claim.  However, in the event that this case goes elsewhere and a contrary view is taken about my findings, the merits of the Dishonest Assistance Claim become relevant.

458.  In that scenario, the Plaintiff’s alternative case is that Fu and Yang would have been in breach of their fiduciary duties to the Plaintiff and that the Defendants would have dishonestly assisted in the breach of fiduciary duties by Fu and Yang.

459.  The Dishonest Assistance Claim was only introduced by way of amendment of pleading on 22 November 2018.  Though there was delay on the part of the Plaintiff in making the amendment application, I took the view that, based on the Defendants’ own case on their roles in the falsification of the Management Accounts, there would be great injustice if the Plaintiff would not be allowed to pursue such claim at the trial.  Further, the risk of the proposed amendments in derailing the trial was remote.  Apart from the introduction of expert opinion on Mainland law, other preparation works should have been minimal taking into account that the parties were familiar with the factual background and the allegations concerned.  I therefore allowed the amendment application introducing the Dishonest Assistance Claim in November 2018.

460.  Based on the contentions of the parties at the trial, the first issue for the Dishonest Assistance Claim is whether, based on the Defendants’ scenario, the Defendants committed dishonest assistance in Fu or Yang’s breach of fiduciary duties under Hong Kong law.  Further, as the Defendants take the point that the alleged dishonest assistance, if any, was committed outside Hong Kong, there is an additional issue as to whether the principle of double actionability applies, and if so, whether the Plaintiff’s claim is actionable under Mainland law.  I will deal with these issues in turn.

G.1    Whether the Defendants committed dishonest assistance?

461.  There are four requirements for the imposition of liability for dishonest assistance: (i) a breach of trust or fiduciary duty by someone other than the defendant, (ii) the defendant’s assistance, (iii) dishonesty, and (iv) resulting loss.[149]

462.  For the first requirement, it is beyond doubt that, as the Plaintiff’s directors, Fu and Yang owed fiduciary duties to the Plaintiff, including the duties to: (i) act honestly and in good faith in the interests of the Plaintiff; (ii) act for proper purposes; and (iii) disclose all relevant information to the Plaintiff and its shareholders, including any matter that could materially affect the interests of the Plaintiff and its shareholders.

463.  It is Defendants’ own case and evidence that: (i) Fu had agreed and requested that the figures in the Management Accounts be falsified; (ii) Fu and Yang knew at all material times that the falsification was pursuant to an agreement among Fu, Cazenove as the Plaintiff’s adviser and the Defendants and that the Profit Guarantee would be impossible to be met; and; (iii) Fu assured the Defendants that the Plaintiff would not in the future question or seek compensation in respect of the falsification of the Management Accounts.

464.  In such scenario, this would mean that Fu and Yang: (i) facilitated the conclusion of the SPAs in full knowledge of the matters mentioned above; (ii) were complicit in committing the Plaintiff to a transaction with a view to injure the interests of the Plaintiff; (c) acquiesced or failed to alert the Plaintiff or its shareholders to matters which were detrimental to the Plaintiff’s interest; and (d) issued the 10 May Announcement and the 8 June Circular which they knew containing false or misleading information.  Fu and Yang were thus clearly in breach of their fiduciary duties to the Plaintiff.

465.  For the second requirement as the Defendants’ assistance, the Defendants, on their own case, were involved in the falsification of the figures in the Management Accounts, and Wang knew that it was impossible that the Profit Guarantee would be met.  In Wang’s evidence, she claimed that the Defendants “co-operated” (配合) with the Plaintiff in accordance with the instructions of Fu.  In such scenario, the Defendants knew or must have known that entering into the SPAs on the basis of the falsified Management Accounts would be detrimental to the Plaintiff’s interests and they had assisted in deceiving the Plaintiff by entering into the SPAs, and the Defendants had clearly assisted Fu and Yang to act in breach of their fiduciary duties to the Plaintiff.

466.  For the third requirement as to dishonestly, it is trite that dishonesty is an objective standard and the court would apply the normally acceptable standards of honest conduct in determining whether the accessory is dishonest.[150] Once a person’s actual state of mind as to knowledge or belief as to facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the objective standards of ordinary decent people.  There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest.[151]

467.  In the present case, the evidence shows that Defendants knew that: (i) the figures in the Management Accounts were false and the Defendants were involved in the falsification; (ii) it was impossible that the Profit Guarantee would be met; (iii) there were other shareholders in the Plaintiff at the time of the transaction.

468.  In light of the Defendants’ knowledge of these matters, there can be no doubt that the Defendants’ conducts were plainly dishonest according to the objective standard.  Any ordinary decent people would conclude that the Defendants’ act of falsifying the figures in the Management Accounts in these circumstances was intended to deceive the Plaintiff and its shareholders as to the true financial position of BSZ and that the Defendants could receive a higher amount of consideration from the Plaintiff for the sale of their shares in BSZ.

469.  Mr Chan submits that, according to Wang’s testimony, she thought that the falsification of the Management Accounts was in best interest of the Plaintiff since Fu, being the chief executive of the Plaintiff, clearly knew better than what she did.  Without knowing the sophisticated listing rules in Hong Kong, the Defendants considered that they were only helping the Plaintiff with no viable business or assets to gain a substantial and promising business, and so there was no dishonesty involved. However, as I reject the Defendants’ evidence in its entirety, in particular their allegation about the wider “scheme” of conspiracy[152], there is no substance in such contention.

470.  For the last requirement as to resulting loss, based on the Defendants’ own scenario, it is clear that, but for the breach of fiduciary duties by Fu and Yang and the dishonest assistance of the same by the Defendants, the Plaintiff and its shareholders would not have been presented with the false or misleading information in the 10 May Announcement and the 8 June Circular.

471.  The court can also safely infer that, had the Plaintiff and its shareholders been aware of the true financial position of BSZ, the price to be paid by the Plaintiff would be substantially less than HK$1,156,000,000 for BSZ’s shares.

472.  To oppose the claim, the Defendants raise as a defence that the Plaintiff should have held a shareholders meeting to decide whether its shareholders would have in any event approved the SPAs on the same terms or would have paid the same price of HK$1,156,000 to the Defendants.[153]  However, not only is the holding of such a shareholders meeting irrelevant to the Dishonest Assistance Claim, it is commercially absurd to suggest that the Plaintiff and its shareholders would have entered into the transaction on the same terms had they been aware of the true financial position of BSZ, which is worth substantially less than what it had been warranted.

473.  It appears that the Defendants seek to rely on the CCIF Report at Appendix II to the 8 June Circular and assert that the Plaintiff’s accountant had carried out independent audit procedure.  Insofar as the Defendants are trying to contend that this somehow breaks the chain of causation between their dishonest assistance and the resulting loss, such contention is not pleaded.  In any event, the evidence shows that the Management Accounts remained the starting point and the source data for the accountant’s report.[154]  In the absence of any contrary evidence, the suggestion that the Defendants’ dishonest assistance had no role to play in the Plaintiff’s shareholders’ approval by reason of the CCIF Report is unfounded.

474.  For the other arguments raised by the Defendants about the lack of causation between the falsification of the Management Accounts and the eventual completion of the shares transfer transaction, I have already rejected them in Section B.4.3 above.  Hence, the loss resulting from the Defendants’ dishonest assistance is the loss arising from the Plaintiff overpaying the Defendants for the purchase of the 90% shares in BSZ.

475.  Since all the elements for imposing liability of dishonest assistance are satisfied, the Defendants are liable to account to the Plaintiff for RMB 510,000,000, being the same quantum as the Overpayment Claim, as constructive trustees for their dishonest assistance in the breach of fiduciary duties by Fu and Yang towards the Plaintiff.

G.2    The defence based on the double actionability rule

476.  The Defendants also rely on the double actionability rule and contend that, in order to succeed in its claim in dishonest assistance or constructive trust in Hong Kong, it is necessary at common law for the Plaintiff to plead and prove that the Defendants are civilly liable under Mainland law to the same extent as under Hong Kong law.

477.  According to the Defendants’ case as pleaded:

(i)  All the essential and predominant acts of the alleged dishonest assistance complained of including the falsification of the Management Accounts and the request made by Fu or Yang for doing so were committed or took place in the Mainland.[155]

(ii)  Fu and Yang are all Mainland nationals and Tianjiu is a Mainland company while the Plaintiff is a Bermudian company.  In the premises, the alleged dishonest assistance or breach of constructive trust was committed in the Mainland.[156]

(iii)  The Mainland law does not recognise any civil wrong or concept of “dishonest assistance” or “constructive trust” and so the Dishonest Assistance Claim is not actionable in Hong Kong.[157]

(iv)  Further, according to Articles 135 and 137 of the Mainland General Principles of the Civil Law (《中華人民共和國民法通則》), the time limit for a civil claim is 2 years which begins when the plaintiff has or ought to have knowledge of the violation of his rights.  In the present case, the Plaintiff has or should have known of the alleged violation of its right on 14 August 2014[158] by the latest, and yet the Plaintiff only amended the pleading on 22 November 2018 to introduce such claim for the first time.  Under such circumstances, the Plaintiff’s claim is not actionable under the Mainland law.

478.  There is no reference to Bermudian law in the pleadings, and so Bermudian law should not be an issue insofar as the defence of double actionability is concerned.

G.2.1 The double actionability rule

479.  The double actionability rule is a choice of law principle under the common law.  In the leading authority of Boys v Chaplin[159], Lord Wilberforce stated the basic rule as follows:

“I would, therefore, restate the basic rule of English law with regard to foreign torts as requiring actionability as a tort according to English law, subject to the condition that civil liability in respect of the relevant claim exists as between the actual parties under the law of the foreign country where the act was done.”

480.  In other words, for foreign tort to be actionable in Hong Kong, the matter must be actionable both under the lex fori and under the lex loci delicti.

481.  The basic rule is subject to an exception that a particular issue between the parties may be governed by the law of the country which, with respect to that issue, has the most significant relationship with the occurrence and the parties.[160]

482.  The double actionability rule was abolished in the United Kingdom after the enactment of the Private International Law (Miscellaneous Provisions) Act 1995.  In Hong Kong, there is no equivalent legislation and the common law double actionability rule continues to be applicable.[161]

483.  Based on the Defendants’ case as pleaded, the main issue here is whether the wrong of dishonest assistance was a foreign tort committed in the Mainland.

G.2.2 Whether the Defendants’ dishonest assistance was committed in the Mainland?

484.  I agree with Mr Ho that the wrong of dishonest assistance, whether it is characterised as a tort or not, was in substance committed in Hong Kong.

485.  For the purpose of deciding whether the relevant tort or wrong had been committed in the forum or some other country, one applies exclusively the lex fori and this involves the application of a “substance” test.  The court will look back over the series of events constituting it and ask the question: “Where in substance did this cause of action arise?”[162]

486.  The “substance” test was further elaborated in Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc ^[163]as follows (446A-447E):

“… if a person by an act or acts committed in a foreign country has caused injury or damage to a person in this country, we see no reason in principle why he should necessarily be able to invoke a plea that the act (or one or more of a series of acts) which caused the damage was performed in a country whose civil law rendered it non-actionable. Everything must depend on the facts of the case. …

In our judgment, in double locality cases our courts should first consider whether, by reference exclusively to English law, it can properly be said that a tort has been committed within the jurisdiction of our courts. In answering this question, they should apply the now well familiar “substance” test previously applied in such cases as Distillers Co. (Biochemicals) Ltd. v. Thompson [1971] A.C. 458 , Castree v. E.R. Squibb & Sons Ltd. [1980] 1 W.L.R. 1248 and Cordoba Shipping Co. Ltd. v. National State Bank, Elizabeth, New Jersey [1984] 2 Lloyd's Rep. 91 . If on the application of this test, they find that the tort was in substance committed in this country, they can thenceforth wholly disregard the rule in Boys v. Chaplin [1971] A.C. 356 ; the fact that some of the relevant events occurred abroad will thenceforth have no bearing on the defendant’s liability in tort. On the other hand, if they find that the tort was in substance committed in some foreign country, they should apply the rule and impose liability in tort under English law, only if both (a) the relevant events would have given rise to liability in tort in English law if they had all taken place in England, and (b) the alleged tort would be actionable in the country where it was committed.

We appreciate that the application of the substance test may give rise to difficult problems on the facts of some cases, but double locality cases are bound to give rise to difficult problems and we see no reason to suppose that it would be likely to give rise to injustice or greater difficulty than any other test.

The rule in Boys v. Chaplin is essentially a rule which defines the circumstances in which an act done abroad is actionable here as a tort. Whether as a matter of justice, comity or public policy, we see no reason why our courts should necessarily have to allow a person who does abroad something which is directed against persons in this country, or is foreseeably likely to injure persons in this country, to claim exemption from liability in tort under English law by reference to the laws of the country where some or all of his acts were performed. In such circumstances it may be by no means unreasonable to expect the doer to have some regard to the laws of this country as well as the laws of the place of the act. …

As to comity, while this is an important consideration, public policy surely requires that our courts should not in all cases, for the purpose of the law of tort, be obliged to turn a blind eye to damage intentionally or negligently caused to persons within this jurisdiction merely because the acts which did the damage were performed abroad in a country which rendered them non-actionable.

If in any given case the court concludes that under English law a tort has both been committed by the defendant and committed in this country, we see no reason either on principle or on authority why he should be entitled to claim exemption by reference to some foreign law, and we so decide.”

487.  In Yugraneft v Abramovic[164], a case relied on by Mr Chan, the court considered a number of factors in determining whether the dishonest assistance was in substance committed in Russia.  The connecting factors with Russia included: the place of the EGMs approving the transaction in breach of fiduciary duty, the nationality and residence of the individuals, and the loss sustained by the claimant.[165]

488.  Whilst Metall itself was overruled in Lornho v Al-Fayed[166] on a different point, the holding on the double actionability rule remains good law and has been followed in the local case of Hong Kong Exchanges and Clearing Ltd v Shi Huaifang[167].

489.  Applying the broad “substance” test, it is clear that the dishonest assistance committed by the Defendants took place in Hong Kong.

490.  Firstly, it is undisputed that the SPAs were signed in Hong Kong by Fu on behalf of the Plaintiff and Wang and Li Jun on behalf of the Defendants.  The place of signing the SPAs is obviously significant since it was the act of entering into the SPAs which committed the Plaintiff to the deal and caused substantial loss to the Plaintiff.

491.  Though it may be argued that the inflation of the Management Accounts and the alleged assurance by Fu were made in the Mainland (which might not be the case as the latest version of the Defendants’ case covered a lot of other people in Hong Kong), one cannot ignore the reality that the inflation and the assurance were not made in isolation.  They were made as part and parcel of the share sale transaction culminating to the SPAs, which were envisaged to be and were executed in Hong Kong and governed by Hong Kong law.

492.  Secondly, on Yang’s own evidence, the inflation of the Management Accounts would benefit the minority shareholders in Hong Kong and attract more investors into a Hong Kong listed company, even though he did not accept that this amounts to a deception on the minority shareholders.

493.  Clause 4.1(b) of each of the SPAs provided that the completion of the SPAs was conditional upon the approval of the Plaintiff’s shareholders.  On the basis of the circumstances surrounding the SPAs and the financial performance of BSZ as set out in the 10 May Announcement and the 8 June Circular, the Plaintiff’s shareholders approved the transaction at the SGM on 27 June 2007.  The shareholders’ approval and the factual background of such approval all took place in Hong Kong.

494.  On any view, the Defendants’ acts of falsifying the Management Accounts of BSZ were clearly directed against persons in Hong Kong or were foreseeably likely to injure persons in Hong Kong (i.e. the investing public in Hong Kong) in order to deceive them as to the true financial position of BSZ.  Wang also accepted in cross-examination, albeit evasively, that she was aware that there were other shareholders in the Plaintiff at the time of the transaction.  Hence, there can be no question that the injury resulting from the Defendants’ act of dishonest assistance was sustained in Hong Kong.

495.  Thirdly, Fu and Yang were the Plaintiff’s directors and owed directors’ duties to the Plaintiff.  Their conducts, if they amounted to any breach of duties, were subject to the regulation of listed companies in Hong Kong.  It can hence be said that the place where their fiduciary duties were breached is Hong Kong.

496.  The Defendants emphasise that Wang, Fu and Yang are Mainland nationals.  However, this factor is evened out by the fact that the Plaintiff, who is a party to the SPA, is a company listed in Hong Kong.  Hence, looking at the matter broadly and taking into account the series of events in question, I agree with Mr Ho that the substance of the Defendants’ dishonest assistance was committed in Hong Kong and not in the Mainland.

497.  Given that the “tort” was in substance committed in Hong Kong, the double actionability rule is not engaged in the present case.

498.  In the course of the arguments, there is an issue as to whether dishonest assistance is a tort for the purpose of the application of the double actionability rule.  Further, Mr Chan relies on Yugraneft v Abramovic[168] with a view to establish the proposition that double actionability rule applies to equitable dishonest claim, but Mr Ho asks me to limit the application of this case as it was only an English first instance decision which has never been applied in Hong Kong.  For myself, I do not find it necessary to resolve this particular academic issue.  Even if double actionability rule is applicable to a dishonest assistance claim, it can only be applied if the wrong was committed outside Hong Kong.  As mentioned above, I take the view that the wrong herein was in substance committed in Hong Kong, and so there is no room for the application of the double actionability rule even on the basis of the Defendants’ alleged scenario.

G.2.3 Whether the Dishonest Assistance Claim is actionable under Mainland law?

499.  This would have been sufficient to dispose of the defence.  However, in the event that this case goes elsewhere and a different view is taken about the application of the double actionability rule, I then have to deal with the question as to whether the Dishonest Assistance Claim is actionable under Mainland law.  Foreign law is an issue of fact and so the trial judge has a duty to determine this particular matter.

500.  It is common ground that there are no equivalent concepts of dishonest assistance and constructive trust under Mainland law. However, in the application of the double actionability rule, it is not necessary for the act or omission to be characterised as a tort or delict under the foreign law, provided there is a right of recovery to a similar extent by way of civil action.  So far as acts or omissions on the part of a defendant or defendants may give rise to a liability in tort under the lex fori, there is no requirement that such conduct must be tortious by the lex loci delicti.  All that is required is that it should be "civilly actionable" there.[169] Further, there is a presumption that foreign law is the same as the lex fori unless the contrary is proved as a fact, the burden lies upon the defendant to plead and prove that his conduct is not actionable under the lex loci delicti.[170]

501.  In relation to the question of whether the Defendants are civilly liable under Mainland law for the Dishonest Assistance Claim, the Plaintiff and the Defendants have called Mr Wang Fei (“Mr Wang”) and Mr Hong Qun Jun (“Mr Hong”) respectively as their experts.

502.  The key differences of opinion between Mr Wang and Mr Hong are:

(i)  whether the Mainland Tort Liability Law (中华人民共和国侵权责任法) is applicable; and

(ii)  whether the Dishonest Assistance Claim must be pursued as a contractual claim and governed by the Mainland Contract Law (中华人民共和国合同法), with the effect that it would preclude a claim under the Mainland Tort Liability Law.

503.  Regarding the applicability of the Mainland Tort Liability Law, Mr Wang’s opinion is that, on the pleaded facts, the Plaintiff has a cause of action under Mainland law against the Defendants for violation of civil rights (侵害民事权益), including property rights (财产权益), under the Mainland Tort Liability Law.  This is not a bare assertion as contended for by Mr Chan.  In fact, Mr Hong cannot rule out that the Dishonest Assistance Claim can in principle be classified as a tortious claim under Mainland law.  In his oral evidence, he accepted that the pleaded facts of dishonest assistance would amount to a tortious act.  It follows that such claim is civilly actionable under Mainland law.

504.  The present case is therefore different from Xiamen Xinjingdi Group Ltd (廈門新景地集團有限公司) v Eton Properties Ltd (裕景興業有限公司)[171],where it was held by the Court of Appeal that the plaintiff had failed to prove there was a civil wrong of inducing breach of contract in the Mainland, and since the act in question was not actionable in the Mainland, the plaintiff had failed to satisfy the double actionability rule.

505.  The Defendants challenge the applicability of the Mainland Tort Liability Law on the ground that the statute was passed in 2010 but the relevant tortious act occurred in 2007.  The Defendants rely on paragraph 1 of the Supreme People’s Court Notice relating to the Mainland Tort Liability Law (最高人民法院关于适用《中华人民共和国侵权责任法》若干问题的通知)(the “SPC Notice”).

506.  However, paragraph 2 of the SPC Notice also provides that if the tortious act took place before the passing of the Mainland Tort Liability Law but the consequences of the tort occurred thereafter, the Mainland Tort Liability Law is applicable.  Mr Wang confirmed that if a tortious act has been left uncompensated, the consequences of the tort are continuing (侵權的後果就一直持續存在) and that the present case falls squarely within the situation of paragraph 2 of the SPC Notice.  He therefore maintained the view that the Mainland Tort Liability Law is applicable.

507.  The purported response from Mr Hong was that the entirety of the consequences of the tort must take place after the enactment of the Mainland Tort Liability Law and that paragraph 2 of the SPC Notice is inapplicable to a situation where part of the consequences of the tort occurred before the enactment of the Mainland Tort Liability Law.  He also suggested that the word “出現” in paragraph 2 only means that the first appearance of the consequences of the tort (損害後果第一次出現). However, there is simply nothing in the text of paragraph 2 which supports these artificial distinctions drawn by Mr Hong.

508.  Mr Chan submits that Mr Hong’s view is actually consistent with the common law concept of the accrual of a cause of action as explained by McHugh NPJ in Kensland Realty Limited (in liquidation) v Tai, Tang & Chong (a firm).[172] Despite that, I wonder whether the Supreme People’s Court had actually referred to the common law principles when issuing the SPC Notice.  I agree with Mr Ho that the wordings used in the SPC Notice support Mr Wang’s view on the matter.

509.  For these reasons, I find that the Mainland Tort Liability Law is applicable and the Plaintiff, based on the facts of the Dishonest Assistance Claim, has a cause of action against the Defendants under the Mainland Tort Liability Law.

510.  Regarding the Mainland Contract Law, Mr Hong’s opinion is that the Plaintiff does not have a cause of action against the Defendants under the Mainland Tort Liability Law because the Plaintiff’s claim is a contractual claim and should be governed by the Mainland Contract Law instead of the Mainland Tort Liability Law.

511.  I agree with Mr Ho that this is a complete mischaracterisation of the Dishonest Assistance Claim, which is never based on contract.  The nature of the Plaintiff’s claim is that: (a) Fu and Yang, as the Plaintiff’s directors, were in breach of their fiduciary duties in committing the company to the transaction; (b) the Defendants dishonestly assisted in their breach; and (c) resulting loss was caused to the Plaintiff.

512.  Mr Hong further opined that the Plaintiff must choose between a contractual claim and a tort claim and cannot pursue both claims in the Mainland court.  However, this assertion is not supported by the marine case cited by Mr Hong , i.e. 2016年十大典型海事案例之瓦錫蘭芬蘭有限公司、西特福船運公司與榮成市西霞船業郵箱公司與穎勤發動機（上海）有限公司其他合同糾紛再審案 (the Wartsila case).  Firstly, the Wartsila case only provides that the court should insist to apply the Mainland Contract Law and refuse to grant relief for a claim brought under the Mainland Tort Liability Law when a plaintiff is “purely enforcing its contractual rights” (单纯合同履行利益).  In the present case, the Dishonest Assistance Claim has nothing to do with enforcement of the Plaintiff’s contractual rights.  Secondly, as admitted by Mr Hong, the Wartsila case does not address the present situation where a contracting party with the Plaintiff conspired with others to deceive the Plaintiff because the court in that case simply made no finding of such conspiracy.

513.  Mr Hong sought to get around this problem by suggesting that, in a conspiracy context, a plaintiff must still first pursue a claim under the Mainland Contract Law and later separately sue under the Mainland Tort Law.  In my judgment, this does not make a lot of sense, as this would lead to a curious result that a claim has to be pursued multiple times. In fact, Mr. Hong accepted that the Wartsila case itself does not lend support to the assertion that these claims must be separately pursued.  Further, the Plaintiff’s claim is not for “fraud between contractual parties” but against third parties, and so there is no basis for his conclusion that the Plaintiff must sue for “contractual fraud” and not “tortious tort”.

514.  For these reasons, there is no basis for insisting that the Plaintiff’s claim must be pursued as a contractual claim and governed by the Mainland Contract Law.  I therefore find that the Plaintiff has a civil cause of action against the Defendants under Mainland law in respect of the pleaded facts of the Dishonest Assistance Claim.

515.  The Defendants also argue that the Dishonest Assistance Claim is time-barred under Mainland law.  Again, I find no merit in such contention.

516.  Under the conflict of laws rules, matter of procedure is governed by lex fori and matter of substance is governed by lex causae.[173] As to the question on limitation, a distinction is drawn under the common law between two kinds of statutes of limitation: those which merely bar a remedy and those which extinguish a right.  Statutes of the former kind are procedural, while statutes of the latter kind are substantive.[174]  This distinction remains applicable in Hong Kong where there is no equivalent of the Foreign Limitation Periods Act 1984 in the United Kingdom.[175]

517.  In considering foreign rules as to limitation, the English courts traditionally applied their own classification based on the distinction between barring a right and extinguishing a remedy.[176]  In other words, the classification is to be determined by reference to the lex fori and not the foreign law.

518.  Difficulties can occur in deciding whether the true nature of the foreign rule is to bar a remedy or extinguish a right.  Mr Ho suggests that in cases where a right of the relevant nature may in principle (i.e. not necessarily on the facts of the particular case) still be asserted defensively after expiry of the relevant period, for example by way of set-off, or to resist dispossession, then the foreign rule is clearly of a procedural nature, whereas if a right of that nature may in no circumstances be asserted, then it has in substance been extinguished and the relevant rule should be regarded as substantive.[177]

519.  In the Mainland limitation statutes cited by the Defendants, the limitation rule is formulated by reference to seeking relief from the people’s court for protection of civil rights (向人民法院请求保护民事权利的诉讼时效期间).  Adopting the same differentiating principle, the limitation statutes fall within the category of statutes barring a remedy, as opposed to extinguishing a right.  As a result, the question of limitation period is a matter of procedure and should be governed by the lex fori, i.e. Hong Kong law.

520.  It is trite that any defence of limitation under Hong Kong law must be expressly pleaded.[178] In the absence of any plea of limitation periods under the Limitation Ordinance (Cap 347), the Defendants are not entitled to rely on any limitation defence.

521.  Even if the limitation period is a matter of substantive law, the time limit for bringing a civil claim in the Mainland court can be extended in special circumstances[179], and so the Plaintiff’s claim may not have been time-barred under Mainland law.

522.  As to the remedy of constructive trust, the fact that Mainland law does not have the remedy of constructive trust is irrelevant.  So long as the Plaintiff can establish that the Defendants are under a relevant substantive liability in the Mainland (in this case under the Mainland Tort Liability Law), the Hong Kong court may supply an appropriate remedy to give remedial effect to the Mainland substantive liability.  Hence, the court is entitled to hold the Defendants liable as constructive trustees.[180]

G.3    Conclusion on the Dishonest Assistance Claim

523.  For the above reasons, even if the figures in the Management Accounts were falsified at the instigation of or otherwise with the knowledge of the Plaintiff, which I do not find it to be the case, the Defendants are still liable to account to the Plaintiff for the same amount of RMB 510,000,000 as constructive trustees.

H    THE LAND INDEMNITY CLAIM

524.  As mentioned in §34 above, the Land Indemnity Claim consists of the following:

(i)  the Land Use Certificates Claim which includes the costs of obtaining Land Use Certificates for the 318 mu of land (the “Land Use Certificates Claim”);

(ii)  the Penalty Costs Claim which includes the penalty costs for illegal construction; and

(iii)  the Demolition Costs Claim which includes the costs associated with demolition of structures.

H.1    Costs of obtaining the Land Use Certificates for 318 mu of land

525.  For the Land Use Certificates Claim, the Plaintiff’s case is that Wang was in breach of her obligation under Clause 8.3 of the 1^st SPA, which provides that if before the completion date, BSZ failed to obtain the relevant Land Use Certificates or Property Ownership Certificates for the land and buildings that were by that time being used by BSZ, including the Land Use Certificates for the 318 mu of land neighbouring the registered address of BSZ which was by that time not yet in use by BSZ, Wang would, after the completion date, use her best endeavours to assist the Plaintiff and BSZ to acquire such certificates, however BSZ would have to bear the associated fees so incurred up to a limit of RMB 100,000,000, with any exceeding sum to be borne by vendor, i.e. Wang.

526.  The original text of Clause 8.3 reads as follows:

“卖方承诺,如在交易完成日或以前,目标公司仍未能取得其现时使用的土地及房产的所有相关土地使用权证或房产证,包括取得现时目标公司并未使用的、毗邻于目标公司注册地址的318亩土地的土地使用权证,其将会尽最大努力协助买方及目标公司在交易完成后继续申领并确保取得该等证书,但目标公司需承担因此而产生的费用,以人民币100,000,000元为限, 超出此金额的部分,则由卖方承担。”

527.  From such clause, it is clear that not all land being used by BSZ for the Market had Land Use Certificates and not every building in the Market had Property Ownership Certificates.  It was also envisaged that the 318 mu of the land within the Market had not yet been issued with the Land Use Certificates.  The obligation on the part of Wang was to use her best endeavours to assist the Plaintiff to continue to apply to obtain the Land Use Certificates for 318 mu of Land and the Property Ownership Certificates for the buildings within the Market.  Without the Land Use Certificates, there could be no question of obtaining the Property Ownership Certificates for the buildings on the land.

528.  It is part of the Plaintiff’s pleaded case that:

(i)  Wang had failed to use her best endeavours to assist the Plaintiff and BSZ to obtain the Land Use Certificates for the remaining 318 mu of land.

(ii)  As a result of Wang’s failure, BSZ was unable to obtain good title or valid rights to the 318 mu of land.

(iii)  In mitigation of its loss, BSZ acquired Land Use Certificates for an area of 67 mu from the 318 mu site in April 2014 in a public auction, paying a total cost of RMB 40.7 million, comprising RMB 37.05 million (50% of the total transaction price of RMB 74.1 million due to a 50% transfer compensation discount for the original land user) together with taxes and levies of RMB 3.65 million.

(iv)  As to the balance of the 251 mu of land, BSZ would have to bid for the same from the Mainland government and pay RMB 112,550,000 to the Mainland government for the acquisition of Land Use Certificates for the remaining part of the 318 Mu site.

(v)  The breakdown of the Plaintiff’s claim for RMB 112,550,000 is as follows:

Price for bidding 251 mu of land (estimated to be its market value in 2014 according to the valuation expert report of Mr Lau Chun Kong (“Mr Lau”))	RMB 325,000,000
Discounted by 50% (available to a purchase by the original land user)	RMB 162,500,000
Add (discounted) price paid for 67 mu	RMB 37,050,000
Subtotal	RMB 199,550,000
Stamp Duty payable at 4%	RMB 13,000,000
Less: RMB 100,000,000 to be borne by BSZ (pursuant to Clause 8.3)	(RMB 100,000,000)
TOTAL:	RMB 112,550,000

529.  The Defendants’ pleaded defence is that:

(i)  Neither the Plaintiff nor BSZ had ever requested Wang to assist the Plaintiff and BSZ to obtain the Land Use Certificates.  Wang was at all material times ready and willing to provide her assistance when required.

(ii)  The Defendants deny that the Plaintiff had only acquired the Land Use Certificate for 67 mu in April 2014.  Instead, the Defendants contend that the Plaintiff had acquired a land use of 243.98 mu out of the 318 mu site.

(iii)  The Defendants claim that the estimated market value of the 318 mu of land would be approximately RMB 97 million (ie. 74.1 million/243.98 mu x 318 mu), which would be extinguished by the agreed amount of RMB 100 million stated in Clause 8.3 of the 1^st SPA as borne by BSZ.

530.  The main issues of the Land Use Certificates Claim are therefore as follows:

(i)  on liability, whether Wang was in breach of her “best endeavours” obligation under Clause 8.3 of the 1^st SPA, and in particular whether the Plaintiff or BSZ was required to request Wang to provide assistance before her obligation was triggered; and

(ii)  on quantum, whether the Plaintiff was entitled to claim RMB 112,550,000 from Wang for her breach of Clause 8.3 of the 1^st SPA, and in particular whether the Plaintiff had acquired Land Use Certificates for 67 mu of land (as the Plaintiff contends) or 243 mu of land (as the Defendants contend).

H.1.1 Use of “best endeavours” to obtain the Land Use Certificates

531.  The authorities suggest that the person undertaking a “best endeavours” obligation is required to do all he or she reasonably can to obtain the result, including taking all reasonable steps which a prudent and determined person acting in his or her own interests and anxious to obtain the result would have taken.[181] A “best endeavour” obligation is more stringent than a “reasonable endeavour” obligation.[182]

532.  According to Wang, the Plaintiff had never asked her for any assistance and for that reason her obligation under Clause 8.3 of the 1^st SPA was not triggered.

533.  Mr Ho submits that such defence is misconceived as a matter of law.  Firstly, there is nothing in Clause 8.3 of the 1^st SPA stipulating that Wang’s obligation is conditional upon the Plaintiff first seeking her assistance.  Clause 8.3 sets out a standalone obligation to be discharged by Wang after completion and so the Plaintiff’s request for assistance does not come into play at all.  Secondly, Wang is required to take all reasonable steps which a prudent and determined person acting in his or her own interest would have taken in the pursuit of the object of the “best endeavours” obligation.  The initiative of the “best endeavours” obligation should come from Wang and not the Plaintiff. The essence of the “best endeavours” obligation is that Wang should treat the application for the Land Use Certificates of the 318 mu of Land as if it was in her own interest to do so, and so it is wrong to suggest that Wang’s obligation is not triggered until the Plaintiff has requested Wang for her assistance.

534.  Further, Mr Ho submits that, insofar as the Plaintiff’s lack of request for Wang’s assistance is of any relevance, the Defendants had, by their refusal to hand over the control of BSZ and the Market to the Plaintiff, evinced a clear intention not to provide any assistance as may be required under Clause 8.3 of the 1^st SPA.   According to Ng whose evidence I accept to be the truth, the Plaintiff was shut out from its use of the Market after completion and only managed to take physical control of the Market in November 2010.  The Defendants refused to co-operate with the Plaintiff at the time and the Plaintiff was unable to locate people from the Defendants’ side to assist in obtaining the Land Use Certificates after the Plaintiff had gained control of the Market.

535.  In fact, Wang, in her oral testimony, claimed for the first time that Zhou had asked someone from BSZ to assist the Plaintiff to obtain the Land Use Certificates.  This was never mentioned in Wang’s witness statements or any witness statements filed by the Defendants.  Nor was it ever mentioned in the Defendants’ pleadings.  When pressed upon the circumstances of the alleged telephone conversation in which Zhou asked the staff of BSZ to assist the Plaintiff, Wang was unable to provide any meaningful details.  Hence, I have serious doubt about the truth of such allegation.

536.  On the other hand, Mr Chan submits that, from the evidence of Ng, it is quite clear that it is for BSZ to decide when and whether to apply to the Mainland government for offering the land for purchase whether by auction or by tender.  Upon any successful tender or auction, BSZ would have to pay but meanwhile even before the obtaining of the Land Use Certificates, BSZ had in fact had the use of the land and had in fact erected some structures on it without any action taken against it.  The initiative of making the application for such certificates was on the Plaintiff, and the Defendants could not assist without the Plaintiff’s request for assistance or at least without the Plaintiff informing the Defendants that the Plaintiff had made the application and required the Defendants to assist in what way.  According to the evidence, the Plaintiff has never asked the Defendants for any assistance and has not communicated with the Defendants in relation to the application to obtain any certificate.  Accordingly, the Plaintiff is not entitled to make any claim under this head.

537.  Without knowing the procedures for the application of the relevant Land Use Certificates for the Market, for example whether Wang could have made the application for the necessary Land Use Certificates on her own or in her name after the completion of the SPAs, it would be very difficult for the court to know whether the Defendants should have proceeded with the application for the Land Use Certificates without being told or assisted by the Plaintiff.  However, taking into account the difficulties faced by the Plaintiff in gaining control of BSZ and the Market, it would be naïve to suggest that Wang would have offered any assistance to the Plaintiff even if such request was made by the Plaintiff.  Indeed, Ng testified that, after gaining control of the Market, he could not find anyone from the Defendants’ side who could assist the Plaintiff to make the application for the necessary Land Use Certificates.  As the Defendants had evinced clear intention not to allow the Plaintiff to gain control of the Market, I find that Wang was in breach of the “best endeavours” obligation under Clause 8.3.

H.1.2 Quantum of the Land Use Certificates Claim

538.  To me, the main difficulty with the Land Use Certificates Claim is quantum and causation.

539.  Ng claimed that Wang could have obtained the Land Use Certificates if she had done so earlier.  However, despite I find him to be a credible witness, no evidence about the procedures for the application of the Land Use Certificates has been adduced by the parties.  Neither is there any evidence before the court as to the policy of the Mainland government in granting Land Use Certificates for the land in the Market and the land use zoning or planning parameters within the Market.  In fact, according to Ng, there might be changes in terms of development of the city, state policies and costs. The planning parameters could be subject to negotiation with the relevant government authorities.  Whether any adjustment could be made depends solely on the indication of the government authorities.  Without such essential information, it would be difficult for the court to ascertain what would have been the case if Wang had offered the necessary assistance earlier.  It might very well be the case that, due to changes in the government policy, Wang would not have been able to obtain the necessary Land Use Certificates even if she wanted to.  Ultimately, it would be the burden on the Plaintiff to prove the quantum of loss and that Wang’s breach of the “best endeavours” obligation had caused such loss and damage alleged by the Plaintiff.

540.  Mr Ho submits that it has never been part of the Defendants’ pleaded case that it would be impossible for Wang to assist the Plaintiff or BSZ to obtain the Land Use Certificates for the entirety of the 318 mu of land or that she would have encountered any difficulties (including planning conditions imposed by the government) in doing so.  Nor was there any plea of mistake or frustration to that effect.  Mr Ho therefore argues that the Defendants are not entitled to run an un-pleaded case that it was impossible for Wang to obtain the Land Use Certificates for the 318 mu of Land in 2007 or that her obligation would be subject to the planning parameters.

541.  I disagree.  The evidence shows that the Plaintiff had tried to obtain the Land Use Certificates or the ownership of that 318 mu of land after the Plaintiff gained control of the Market.  It could only do so by auctioning for the land in question from the Mainland government. There is no suggestion that the Defendants could have done any other way.  Despite the effort made by the Plaintiff, the Mainland government was only prepared to allow the Plaintiff to obtain 67 mu of land through auction.  As the Plaintiff has to prove the causation of loss, the Plaintiff has to show to the court, irrespective of the absence of any positive case pleaded by the Defendants, what would have been the case had Wang used her “best endeavours” to assist the Plaintiff to obtain the Land Use Certificates earlier, and what would be the quantum of such loss if the Defendants had done so earlier.

542.  Without knowing the proper procedures for the application of the Land Use Certificates and the then policy of the government, it would be quite impossible for the court to know what and when the Defendants could have done to assist the Plaintiff.  Under such circumstances, the court can only award nominal damages to the Plaintiff for the Defendants’ breach of the “best endeavours” obligation.

543.  There are also other issues with quantum.  On 6 July 2016, the Plaintiff eventually admitted through its witness, Ng, that the Plaintiff in fact acquired 243.52 mu from the Mainland government.[183]  The aerial photos of the Market show that the land so acquired was part of the 318 mu of land which were already in use as part of the Market in 2007.  The only reason why the acquisition was for 243.52 mu was that in the Mainland government auction, certain parts of the 318 mu site were left out as they would be used for roads.  The evidence suggests that the Mainland government had offered 243.52 mu of land for acquisition and the Plaintiff caused BSZ to bid for it, but for whatever reason, when the contract was made for the grant of the land, the Mainland government only granted 67 mu and Land Use Certificate was accordingly issued for such 67 mu of land.   Again, there is nothing to suggest that had Wang used her best endeavours the result would be any different.

544.  Furthermore, it is clear from maps and the land auction document that out of the 243.52 mu of the land offered for purchase, the 67 mu of land, which is the subject matter of the Land Use Certificate, was those parts which could be used for building structures for the Market.  The remaining parts were zoned for green use, or protective green use or for road use.  Certainly it was never envisaged that the Market would only consist of land which could be built upon.  Land for parking and transportation would also be part of the Market.  Hence, it might very well be the case that the Plaintiff, even with the assistance of Wang, could not have obtained the Land Use Certificate for the entire 318 mu of land.

545.  Finally, though the Defendants have not filed expert evidence in valuation, there is simply no basis for saying that the claim should be assessed as on any one of the 3 valuation dates (i.e. 31 March 2008, 31 March 2011 or 13 October 2014) in relation to the quantum of this claim.  As mentioned above, without knowing the application procedures, there is no basis to adopt any of these valuation dates.  It is also clear from the evidence of Mr Lau that the comparables used for the valuation were all in relation to land zones for building and not just for the purpose of green area or protection green area or roads.  Further, without knowing the procedures for applying the relevant Land Use Certificates, it was unclear as to when the application would have been approved had the Defendants offered assistance earlier, or that there would not have been new planning restrictions at the time of the intended application.  Hence, the valuation evidence may not be applicable.

546.  For these reasons, I only award $1 as nominal damages against Wang for the Land Use Certificates Claim.

H.2    The Penalty Costs Claim

547.  In support of the Penalty Costs Claim, the Plaintiff relies on, apart from Clause 8.3 of the 1^st SPA, the following clauses in Schedule 3 of the 1^st SPA:

(i)  Wang has sufficient authority and title to own, rent and operate her properties and assets, and to carry out and fulfil her obligations under the SPA (Clause 2.4(a)):

“卖方拥有充分权力和授权拥有、租赁和经营其物业和资产以及执行和履行其在本协议项下的义务。”

(ii)  The assets have to be made available to BSZ after the completion date for BSZ to carry on its business after completion according to the business model prior to the completion date (Clause 6.3(b)):

“目标公司的资产和目标公司有合同权享受的设施和服务包括使目标公司能在交易完成后以和之前的经营方式实质相同的方式开展业务所必要的所有权利、设施和服务。”

(iii)  Other than as claimant in the collection of debts arising in ordinary course of business, BSZ was not a plaintiff, or defendant or a party in any going, threatened, or pending litigation, arbitration or administrative proceedings in connection with BSZ or any of its assets (Clause 9(a)):

“除作为正常业务过程产生债务的原告，目标公司不是任何正进行、可能进行或未裁决或有关目标公司或其任何资产的诉讼、仲裁或行政程序的原告或被告或一方。”

(iv)  There was no ongoing or pending investigations or inquiries of BSZ made by governmental or official agencies (Clause 9(b)):

“无有关目标公司的正在进行或未裁决政府或官方调查或问询。”

(v)  Wang is not aware of circumstances which may lead to any proceedings, investigations or inquiries (Clause 9(c)):

“卖方并不知悉任何可能引起上述(a)或(b)后规定的程序、调查或问询的情况。”

(vi)  BSZ had fully complied with all laws, rules, regulations, decrees, and directives of all relevant jurisdiction (including regional jurisdictions), statutory requirements regarding corporate tax, value added tax, business tax and stamp duty (Clause 12.2):

“遵守法规

目标公司已全面符合其各自司法管辖区的所有法定条款、法规、规定，法令和指令有关利润或公司纳税、增值税、营业税和印花税的法定规定。”

548.  It is the Plaintiff’s case that, as a result of Wang’s failure to use her best endeavours to assist the Plaintiff and BSZ to obtain the Property Ownership Certificates for any of the buildings constructed in the Market, these buildings were considered in the Mainland as illegal constructions:

(i)  As at the date of the signing of the SPAs, 146 buildings in the Market had no Property Ownership Certificates.

(ii)  Some buildings at the Market were illegally built on public roads outside the permitted “red line” area.  Penalties were levied on those illegal structures, while the rest of such buildings were ordered by Urban Planning Land and Resources Commission of Wuhan City Municipality to be demolished.

(iii)  With regard to those buildings on which penalties were levied, the Plaintiff had paid a total sum of RMB 30.65 million to various government authorities so that such buildings could be retained for business operation.

549.  Hence, the Plaintiff claims the sum of RMB 30.65 million against Wang as the penalty costs paid to the Mainland government for the lack of Property Ownership Certificates for buildings illegally constructed in the Market.

550.  On the other hand, the Defendants submit that the Penalty Costs Claim only arose because it is alleged that certain buildings in the Market were not constructed with the authority’s permission.  It is contended that had there been Land Use Certificates and Property Ownership Certificates, these structures certainly would not have been subject to any penalty claim.

551.  Further, Mr Chan submits that the clauses in Schedule 3 would have to be construed together with Clause 8.3 of the same agreement.  While Clause 8.3 makes it clear that there was no property ownership in the Market and that a large area of the Market was not covered by any Land Use Certificates and that the relevant certificates were yet to be obtained, it does not make sense to construe the warranty under the relevant clauses as extending to cover the illegality or lack of authorization arising from structures without Property Ownership Certificates or Land Use Certificates.  Hence, on true construction of the 1^st SPA as a whole, these structures in the Market should not be subject to the warranty covered by the relevant clauses, as Clause 8.3 has made it clear that Wang’s obligation was merely to use her best endeavours to assist the Plaintiff to obtain the relevant certificates and hence to legalise the use of the land and the construction of the buildings.

552.  Mr Ho submits that the Defendants are not entitled to run such construction argument because the same has not been pleaded. Further, he submits that the Defendants’ construction is an erroneous one.  Much clearer and precise wording in Clause 8.3 of the 1^st SPA would have been used if it was intended that the warranties in Schedule 3 would not be applicable.

553.  I disagree.  Since the Defendants have expressly pleaded that they would rely on the full terms of the SPAs, the Defendants should be entitled to advance their case on the construction of the various clauses in Schedule 3.  Further, it is quite clear to me that, at the time of the making of the SPAs, the parties were aware that the Land Use Certificates or land ownership had not been obtained for the 318 mu of land in the Market.  Under such circumstances, the parties could not have agreed that the relevant clauses as extending to cover the illegality or lack of authorization arising from structures without Property Ownership Certificates or Land Use Certificates.

554.  The Penalty Costs Claim is therefore part of the claim arising from the breach of the “best endeavours” obligation under Clause 8.3.  For the same reasons given in the last sub-section, I would only award nominal damages for the Plaintiff’s claim under Clause 8.3.

555.  Based on such ruling, it is not necessary for me to deal with the Defendants’ argument about the lack of evidence on when the illegal structures were built.  In any event, I agree with Mr Ho that such challenge has no merit.  BSZ and the Market had remained in the Defendants’ control for more than 3 years after the signing of the SPAs.  Evidence on the timing of the structures (if any) should have come from the Defendants and not the Plaintiff.  There is no attempt by the Defendants to identify which particular structure did not exist as at the date of the SPAs, and so the court should be entitled to draw the adverse inference against the Defendants that the penalty costs were related to all the illegal structures that were built in the Market before the completion date.

H.3    The Demolition Costs Claim

556.  For the Demolition Costs Claim, the Plaintiff relies on the same breaches of the provisions in the 1^st SPA as set out in last sub-section against Wang and also the corresponding provisions in the 2^nd SPA against Tianjiu.

557.  The Plaintiff claims against the Defendants for RMB 1.2 million:

Demolition Costs	RMB 349,000
Costs incurred in re-accommodating existing tenants	RMB 851,000
TOTAL:	RMB 1,200,000

558.  It is the Plaintiff’s case that the Urban Planning Land and Resources Commission of Wuhan City Municipality had ordered BSZ to demolish some of the buildings which were constructed on public roads illegally.  Demolition costs were incurred by the Plaintiff as a result, totalling a sum of RMB 1.2 million.

559.  After referring to the various notices, Ng clarified in his oral evidence that the correct particulars of the buildings demolished, pending demolition, or subject to the payment of penalties should be as follows:

Particulars	Number
Number of buildings demolished	18
Number of buildings pending demolition	76 (instead of 79)
Number of buildings retained subject to payment of penalties	52 (instead of 49)

560.  Again this claim arose from the fact that certain buildings were constructed on lands without Land Use Certificates.  In such circumstances, I am of the view that: (i) the Demolition Costs Claim is also part of the claim arising from the breach of the “best endeavours” obligation under Clause 8.3; and (ii) only nominal damages should be awarded for the Plaintiff’s claim under Clause 8.3.

I    CONCLUSION AND RELIEF TO BE GRANTED

561.  I do not propose to deal with the Instruments Claim under a separate heading.  There are issues between the parties as to the legal effect of the Instruments and whether they are promissory notes in the strict legal sense.  However, since Clause 4 of Wang’s Instrument makes it clear that the Plaintiff is entitled to set-off any net profit shortfall for the Profit Guarantee Period (which is the difference between the actual net profit for the Profit Guarantee Period and the Profit Guarantee of HK$150,000,000) against the HK$120,000,000 payable under Wang’s Instrument, Wang’s Instrument is not an unconditional order to pay falling within the definition of a promissory note or a bill of exchange as a matter of law.

562.  In any event, the Instruments are subject to set-off against the relief to be granted to the Plaintiff after the trial of this action.

563.  In Chu Tak Yin Winston v General-Tech Electronics Limited[184], the court held that the defendant could point to a “good reason to the contrary” for not honouring the cheques by virtue of a provision (Clause 3.03) in the contract for the purchase of shares between the parties, which provided that the defendant was entitled to withhold part of the consideration upon the happening of a specified event.  In that case, it was held that should “the management accounts reveal a particular picture”, the defendant had a right to withhold the consideration.

564.  The effect of Clause 6.3 of the SPAs herein is similar to the contractual provision in Chu Tak Yin Winston[185]. It is the Plaintiff’s case that the Defendants have breached various warranties in the SPAs and are liable to indemnify in cash on demand to the Plaintiff as required by Clause 6.3.  The Plaintiff also has a clear defence of set-off and counterclaim to any action by the Defendants for enforcing the Instruments. After trial, it is found that the Plaintiff’s claim exceeds the total sum payable under the Instruments, i.e. HK$376,000,000.

565.  For the above reasons, I grant judgment in favour of the Plaintiff against both Defendants in the sum of RMB 510,000,000 for the Overpayment Claim.  As the Misrepresentation and Dishonest Assistance Claims are alternative claims, I make no order for such claims.  I will also allow the Plaintiff to claim the sum of HK$54,211,000 under the Profit Guarantee Claim against Wang and there shall be set-off of such sum from the amount due to Wang under Wang’s Instrument.  I also allow the Land Indemnity Claim but I only award $1 as nominal damages for such claim.

566.  Obviously, the Plaintiff still owes the amounts due under the two respective Instruments plus any interests stipulated therein to Wang and Tianjiu.  The award granted in favour of the Plaintiff should therefore be reduced to reflect these liabilities.  As the quantum of the award is greater than the amounts due under the Instruments, the Defendants should not be allowed to enforce the Instruments against the Plaintiff.  Coupled with my ruling on the Defendants’ claim for the “reversal” or rescission of the SPAs, the Defendants’ counterclaim should be dismissed.

567.  I do not think that the parties have fully addressed me on the issue of interests, both on the Plaintiff’s claim and the amounts due under the Instruments.  I would leave room for further discussion between the parties on such matter.

568.  My provisional view is that the Plaintiff should also get the costs of the action.

569.  I therefore direct the parties to submit an agreed draft order to me for approval within 21 days, which should reflect the decisions I make in this Judgment.  In case of any disagreement on the issues of interests and costs, the parties are at liberty to restore the hearing before me for further argument.

570.  Finally, I am grateful to counsel for all the assistance they have provided to this court.