PANCO INDUSTRIAL HOLDINGS LTD v. DING PENG AND OTHERS

cacv 35/2004 & CACV 43/2004

CACV 35/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 35 of 2004

(on appeal from HCCL NO. 98 of 1995)

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CACV 43/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 43 of 2004

(on appeal from HCA NO. 5370 of 1993)

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BETWEEN

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J U D G M E N T

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Hon Rogers VP:

1.  These were appeals relating to two actions which had been tried together before Deputy High Court Judge Carlson.  The judge handed down a written judgment in both actions on 27 January 2004.  There was a supplemental judgment of 30 January dealing with the relief and consequential orders.  The plaintiff in the first action was Prosperfield Ventures Ltd (“Prosperfield”) and in the second action was Panco Industrial Holdings Limited (“Panco”).  The defendants in the first action were a company by the name of Tripole Trading Limited (“Tripole”) which is in effect the creature of the other defendants, a Madam Ding Peng and a Mr Zheng Lie Lie (“the personal defendants”).  In the second action the personal defendants were also defendants but the other major defendant in that action was China Projects Ltd.

2.  In the first action (“the Prosperfield action”) the judge held that an agreement and deed of assignment, both dated 11 June 1993, made between Prosperfield and Tripole relating to Prosperfield’s holding of the entire share capital of Crofton Profits Ltd (“Crofton”) and one share in Panco and a debt of HK$160.5 million was void and rescinded.  He also held that Tripole held those shares and that debt as constructive trustee of the plaintiff and that the personal defendants were liable for breach of fiduciary duties.

3.  In the second action (“the Panco action”) the judge held that the agreement of 17 June 1993 between the plaintiff and China Projects Ltd be rescinded.  That agreement had transferred Panco’s holding of 45,661,500 shares in Shenzhen Champaign Industrial Company Ltd (“SCIC”) and the debt of $160.5 million owed by SCIC to Panco (“the Panco debt”) to China Projects Ltd.  Although the judge held that China Projects Ltd held the SCIC shares and the Panco debt and any property or benefit that had accrued as a result as constructive trustee for Panco, he declined to order the transfer of the SCIC shares and he also declined to order any injunctions to prevent any of the defendants dealing with or enabling the dealing with those shares.  He did however order that the defendants should pay damages to be assessed and interest.

4.  At the conclusion of the hearing of this appeal judgment was reserved which we now give.

Background

5.  Apart from the personal defendants the main person involved in this case and, no doubt, the moving light behind these cases was Mr James Peng.  The judge found that Mr Peng was a highly industrious and successful entrepreneur who had succeeded in building up a considerable corporate empire from scratch.  For the purposes of this appeal there is no need to go into the details save that the most important company in that corporate empire was SCIC.  In March 1990 SCIC had been the first Sino foreign company to be listed on the Shenzhen stock exchange.  Panco had been the “foreign enterprise” in this company.  Panco had been controlled by Mr Peng through a series of companies of which Prosperfield and Crofton were two.  Mr Peng controlled Prosperfield through another of his companies Hark Herald Limited (“Hark Herald”).  Hark Herald, and through it Mr Peng, controlled more than 50% of the shares in SCIC, which were, of course, held in the name of Panco.

6.  The events which gave rise to these actions were precipitated by investigations by the Shenzhen authorities into the conduct of SCIC and in particular Mr Peng’s actions in that respect.  The judge considered that it was unnecessary for the purposes of the case to examine in detail the allegations which had been made against Mr Peng and Panco and he made no findings in respect thereof.  Those allegations had included fraud and embezzlement including allegations of money due to SCIC being siphoned off to Panco.  Whatever the rights and wrongs of the situation were, it ultimately resulted in Mr Peng being kidnapped in Macau in 1993 and taken across the border to the Mainland.  He was sentenced to 18 years imprisonment in 1995 but was eventually released after 6 years.

7.  Mr Peng’s difficulties with the Shenzhen authorities in 1992 led him to seek the assistance of those whom he considered would have influence with the authorities for the purpose of extricating himself and Panco and its investment, namely SCIC, to his and their best advantage.  Madam Ding was the niece of Deng Xiao Ping, who was still alive at the time.  He was commonly referred to as the paramount leader.  As such, it was considered that Madam Ding could bring considerable influence to bear over the authorities.  Mr Zheng, the other of the personal defendants, was an associate of Madam Ding.

8.  Time was not on the side of Mr Peng or his companies.  Trading in SCIC shares was suspended in 1992.  At the end of December 1992 a judicial proposal was made to the Shenzhen Government that SCIC should be restructured.  On 9 January 1993 there was an EGM of SCIC, from which Mr Peng’s representatives were excluded.  The outcome was a request to the Shenzhen Government to restructure SCIC.  On 12 March 1993 Pacific Innovest Limited (“PIL”) was incorporated.  That was used as a vehicle to hold Mr Peng’s shares in Hark Herald.  Its use was twofold: it was another layer to disguise Mr Peng’s involvement in SCIC and it was used as the vehicle by which Madam Ding could be introduced into the affairs of SCIC.  The judge found that Mr Peng came to an arrangement in early 1993 with Madam Ding that she would be paid a fixed salary of $80,000 per month and expenses and would be given an 18% shareholding in Hark Herald represented by a 30% stake in PIL.  The judge held that in return Madam Ding would have the task and financial incentive “to use her influence in Shenzhen in order to iron out SCIC’s difficulties as best she could.”  On 16 March 1993, Madam Ding and Mr Zheng together with Ernest Sin, who was employed by Mr Peng as an accountant and office manager, were also appointed as directors of PIHL (renamed from PIL).  In addition, Madam Ding and Mr Zheng were also appointed directors of Panco, Crofton and Prosperfield.

9.  The complaint in the Prosperfield action was that the personal defendants had used their positions as directors to execute a written agreement between Prosperfield and Tripole on 11 June 1993 which purported to sell the entire share capital of Crofton and the one issued share in Panco for a price of HK$450 million and to assign to Tripole the benefit of the debt of HK$160.5 million.  That written agreement did not end there, because it provided that Prosperfield would provide 2 loans: the first of HK$450 million and the second of HK$160.5 million.  The first loan would only be repaid if all the shares in SCIC that were charged, mortgaged or pledged to any bank or financial institution would be released and that Panco’s rights, benefits and advantages as the beneficial and registered owner of 50.735% of the issued capital of SCIC remained unaffected and unharmed by any action or order or measure taken or made by the relevant authorities in the Mainland.  The second loan would only be repaid if the debt was recovered in full by Tripole without any deduction or set off made against any debt owed by Panco to SCIC.  It was said that it was for all intents and purposes practically certain that the loan of HK$450 million would never be repaid.  Not only had Prosperfield lost control of the shares when on 7 May 1993 the High Court of the Guangdong Province ordered that shares of SCIC which had been charged should be placed under the custody of the Securities Management Bureau of Shenzhen City, but the personal defendants were almost immediately responsible for the sale on 17 June 1993 of all Panco’s SCIC shares to China Projects Ltd.  In addition, the Shenzhen Government had on 9 March 1993 by decree 117 of 1993 ordered that SCIC be restructured and it appeared likely that Panco’s shareholding in SCIC would be reduced.  The net effect, therefore, was that Prosperfield had advanced to Tripole the entire purchase price of HK$450 million on terms that it would never be repaid.  Furthermore, since Tripole controlled Panco and SCIC and the personal defendants controlled Tripole, the loan too would never be repaid.

10.  In the Panco action the complaint was in respect of the sale on 17 June 1993 whereby Panco, on whose behalf the Madam Ding signed, sold Panco’s entire shareholding in SCIC, stated in the sale and purchase agreement to be 50.73% of the total equity namely 45,661,500 shares, to China Projects Ltd for the sum of HK$450 million.  The agreement also included a provision that Panco sold the debt of HK$160.5 million to China Projects Ltd, the debt being a debt owed by SCIC to the plaintiff and the sale price being HK$60 million.  Similar provisions prevailed in respect of this sale.  There was a loan by Panco to China Projects Ltd to finance the contract price, the total amount of the loan being HK$510 million.  In this respect too there were provisions that the loan would not be repaid unless all the charged shares were released from the charges and only if the rights benefits and advantages which Panco had in respect of the shares remained unharmed.  Likewise in this action, for similar reasons as in the Prosperfield action, it was averred that the terms, in effect, precluded repayment of the loan. 

11.  The judge heard the case over some 22 days.  He rejected the evidence of Madam Ding and Mr Zheng, in effect holding that their evidence seeking to justify their actions on the basis that on 18 March 1993 they had entered into an oral agreement with Mr Peng to transfer the whole interest in SCIC which was controlled through his companies but that they had been deceived by him, had been a pack of lies.  He went on to accept the plaintiffs’ evidence.  He held that the personal defendants had used unlawful means to divest Prosperfield of its shareholding in Crofton and Panco and to divest Panco of its shareholding in SCIC.  Quite understandably, the judge was highly critical of the defendants’ conduct.

12.  That finding disposed of the major part of the case.  Certainly, the major defence on the part of the defendants had rested upon the alleged oral agreement of 18 March 1993.  Indeed, Mr Thomas SC, who appeared on behalf of the defendants, opened his case on the basis that he did not seek to challenge any of the findings of fact by the judge but he argued that the plaintiffs were not entitled to any relief, and certainly not the relief which the judge had ordered.  The cross-appeals by the plaintiffs on the other hand, were that the judge should have gone further and should have granted relief to the plaintiffs that not only included an order directing the return of the shares which had been wrongfully taken but should have allowed the plaintiffs to trace the proceeds of those shares and to seek compensation based on the fact that the plaintiffs had been wrongfully deprived of the shares and loan.  In order to consider the issues that arise on this appeal, however, it is necessary to understand what had happened and the actions taken both by Madam Ding and the Shenzhen authorities at the relevant time.

The manipulation of the shareholding in SCIC

13.  The difficulties in relation to SCIC and Mr Peng’s involvement in it probably commenced around 1991.  It was at that time that it is said that irregularities came to the attention of the authorities in that there was a re-examination by the Institute of Certified Public Accountants of previous audit reports on capitalisation and asset revaluation.  It was on 7 April 1992, however, the Shenzhen People’s Bank issued a public notice suspending all dealings in SCIC shares by financial institutions and that included shares held by institutions as security.  There was a further notice issued on 20 June 1992 relating to Panco’s investments in SCIC.  On 7 July trading in SCIC shares was suspended as a result of SCIC’s delisting.  Since at that time banks were calling in loans, Mr Peng found himself in difficulties.  The first measure which he took was on 12 June 1992.  In an effort to alleviate the financial difficulties Mr Peng sought to raise capital by entering into an agreement through Hark Herald to sell 67% of Prosperfield to Jadegarden Limited (“Jadegarden”) for HK$300 million.  That arrangement, however, was amended.  An agreement of understanding was entered into between Hark Herald and Jadegarden on 8 March 1993 to settle their disputes for a 50:50 ownership of Prosperfield.  That was superseded by a deed of amendment dated 25 May 1993 between Hark Herald and Officentre which, like Jadegarden, was 100% owned by China Weal, such that China Weal through Officentre came to own only 49% of the share equity of Prosperfield and Hark Herald 51%.  As will be seen Madam Ding was instrumental in arranging for the deed of amendment.

14.  Matters became more serious because in September 1992 there had been a report from the People’s Bank to the Intermediate Court in an action concerning loans to SCIC secured by Panco shares. That report concluded that an investment of 3 million RMB by Panco in SCIC had been fictitious and Panco had never injected that amount.  Following on that there were 2 judgments of the Intermediate Court on 17 December 1992 in which it was held that Panco’s shareholding in SCIC had been obtained illegally and any charging agreement in respect of those shares was therefore void.

15.  That was followed on 25 December 1992 by the Intermediate People’s Court advancing a judicial proposal to Shenzhen People’s Government on the restructure of SCIC.  As already noted, on 9 January 1993 there was an EGM of SCIC at which a motion was passed to request the restructuring of SCIC and on 9 March 1993 the Shenzhen People’s Government issued the decree number 117 of 1993 ordering the restructuring of SCIC.  The restructuring was to be completed within 180 days.  At the end of section 1 of the decree it was expressed to be “so that the property of SCIC and the immediate interests of the mass of shareholders can be protected.”

16.  According to the “Restructuring Report” dated 9 August 1993 the restructuring group moved into and took over the daily management of SCIC on 19 March.  Meanwhile, there was an appeal to the Higher People’s Court of Guangdong Province and a judgment was issued on 7 May 1993.  That court held that whether Panco had invested in SCIC and whether it held any shareholding in SCIC was a matter between SCIC and its shareholders.  Accordingly, that court held that the issues of Panco’s investment and shareholding in SCIC did not fall within the relevant issues in the case and that they were matters to be handled by the “competent authority of the government according to statutory procedures.”

17.  It was shortly after that, namely on 25 May, that the deed of amendment amending the 12 June 1992 agreement between Prosperfield and Jadegarden was executed.  That had been negotiated by Madam Ding.  At around that time Madam Ding and Mr Zheng were busy in other respects.  On 20 May Madam Ding was appointed a director of Hark Herald.  On 25 May Madam Ding and Mr Zheng, as well as Mr Ng and Mr Deng, 2 other defendants in the Panco action who are no longer involved in these proceedings, were appointed directors of Panco, Crofton and Prosperfield.

18.  It was then that the agreements of 11 and 17 June were executed.  As the judge recorded in his judgment Mr Zheng was responsible for the preparation of the necessary documents “by means of ‘home-made’ drafting of share transfers and board resolutions.”  Having secured all the shares of SCIC that had previously been in the name of Panco to be fraudulently transferred into the names of a company, China Projects Ltd, which she and Mr Zheng owned and controlled, Madam Ding then wrote to the Deputy Mayor of Guangdong a letter dated 27 June 1993.  The letter was marked confidential and secret.  The purpose of the letter was to indicate that Madam Ding, ably assisted by Mr Zheng, had succeeded in obtaining control of Panco, and as a result “effectively suppressed the bad motives and actions of the original Champaign personnel”.  The purport of the letter was that they were ready and willing and able to cooperate with the restructuring committee and, perhaps most tellingly, the letter concluded with the paragraph:

“By making use of Peng’s lack of understanding of the 28 May change in shareholding of Hark Herald Co. Ltd, launch a counter-attack with this contract to nullify the injunction against our 11 June contract, and consequently retain total control over Panco and divert the litigation in Hong Kong to a level above that of Pacific Innovest Holdings Ltd, in an effort to ensure a smooth resolution of the re-listing problem of the Champaign (SCIC) for ourselves and the new company of China Weal.”  (emphasis added)

Madam Ding and Mr Zheng were removed as directors of Panco, Prosperfield and Crofton on 8 July 1993.

The Restructuring Report

19.  The Restructuring Report in respect of SCIC was issued on 9 August 1993.  It was addressed to the Municipal Government.  In paragraph 2.2 of the report it assessed the net asset value per share of SCIC as 2.04 yuan.  In section 3 of the report problems concerning the changes in the share equity were considered and proposals were put forward in respect of what were considered to be the problems. 

20.  In section 3.1.1.1 reference was made to an increase in May 1988 of the capital of SCIC held by Panco.  In brief the conclusion was that Panco had obtained an increased shareholding of 2.7 million yuan but had not paid for it since the money to pay for the shares was remitted on its behalf and returned to the remitter by SCIC.  It was said that the investment had been without approval and registration with the relevant departments of the government.  It was then said that Xinye Co. Ltd., which was the Sino-enterprise of the Sino-foreign enterprise, had had 0.9 million shares converted to non-participating preference shares.  The effect had been that when there was a distribution following a valuation of the assets showing an appreciation in the assets of 27 million yuan, Xinye had only received 0.4 million yuan, whereas Panco had received more than 24,672,006.18 yuan of which 13.6 million was converted into capital and the rest long-term loan.  It was also noted that the individual shareholders benefited from 2.4 million yuan 2.2 million of which was converted into capital and the rest into long-term loan.  That had happened in September 1988.

21.  In April 1989 there had been another valuation of SCIC’s assets and the appreciation in asset value after that valuation was some 45.5260 million yuan.  Following that, on 28 April it was said that the directors of SCIC had converted 45 .5 million yuan into shares allotted to Panco.  23,128,594 of such shares were attributable to that portion of the appreciation found to have been inflated.

22.  The report then went on to record that Mr Peng had transferred Hark Herald to Pacific Innovest Holdings Ltd, controlled by Madam Ding, and that on 25 May that company had transferred 49% of Panco’s share equity to China Weal Limited.  The report recorded the fact that Madam Ding and Mr Zheng were directors of Panco. The report also went on to record the fact that on 18 June 1993 the directors of Panco had approved the transfer of its 50.73% shareholding of SCIC to China Projects Ltd.  It also recorded the fact that Madam Ding was authorised to apply for approval of the transfer from the Shenzhen Municipal Government.

23.  The report made a number of recommendations.  The first, in section 3.3.1, was to cancel the 2.7 million yuan capital which had been obtained by Panco in October 1988.  The second was to redistribute the premium asset appreciation which had occurred on the first valuation.  The calculation was made that because of the increased shareholding in SCIC to which Panco was not entitled it had received 7.14 million yuan in extra premium.  It was said that this was a State asset and the extra premium would have to be returned but would be converted at 3 yuan per share into 2.308 million State-owned shares which would then be allotted to the Shenzhen Urban Construction Development (Group) Company Ltd.  The report says of that company that it “… will later take part in the production and operation of Champaign Industrial Co. Limited”.

24.  It was then said that the 45.5 million yuan asset revaluation in April 1989 had been inflated by 23,128,894 yuan because as at the valuation date the land use rights and ownership of some of the real estate property had not yet been granted.  As has already been noted Panco received all the 23,128,594 shares which were allotted as a result of the revaluation.  The report recommended that the shares which had been issued should be treated as approved but unissued shares.  It then went on to say:

“After negotiation, Shenzhen Urban Construction Development (Group) Company Ltd will subscribe of 5.807 million shares, and China Projects Ltd which took over the share equity of Champaign Industrial Co. Ltd from Panco Industrial (Holdings) Ltd, will subscribe 17.25894 million shares at the price of 3 yuan per share.  The total income of 69.387 million yuan should be transferred to Champaign Industrial Co Ltd as collective reserve fund.  The subscribers should pay up for the subscribed shares in Champaign Industrial Co Ltd within the prescribed time.”  (emphasis added)

25.  There was then a proposal to take back 3,000,000 shares which were said to have been fabricated at the time of listing.  It would seem that these would treated on the same basis namely that they were approved but unissued.  The proposal in the report was that they should be transferred from Panco to Shenzhen Urban Construction Development (Group) Company Ltd and then paid up at the price of 3 yuan per share.

26.  The conclusion as to this aspect in the report was as follows:

“By the restructuring of the share equity, China Projects Ltd should yield up 28.5088 million shares of its 45.6615 million shares, and bought back another 17.2588 million shares with 51.776 million yuan to keep 34.4115 million shares, comprising of 38.23% of the total shares.  Shenzhen Urban Construction Development (Group) Company Ltd would get 11.25 million shares, comprising 12.5%.  The general public share are 443.385 million shares, comprising 49.27% of the total.”  (emphasis added)

27.  One of the conclusions to be drawn from this is that the proposal was that SCIC should remain in existence but its capital would be restructured.  It was recognised that China Projects Ltd had acquired all the shares which Panco had originally held in SCIC.  Although China Projects Ltd would have to “yield up” some of its shares, those shares were not cancelled.  China Projects Ltd was permitted to make a capital payment in respect of some of the shares which were deemed not to have been paid for.  It was also recognised that China Projects Ltd remained in control of and owned more than 17 million other shares which it had acquired from Panco.

28.  The report then concluded with various recommendations including renaming SCIC as Shenzhen Fountain Group Holdings Ltd; converting some of the assets of the company into shares and distributing them on a 1 for 3 basis to the shareholders who would now be China Projects Ltd, Shenzhen Urban Construction Development (Group) Company Ltd and the general public; there was to be a new board of directors which would include Madam Ding and Mr Zheng; Madam Ding was to be the General Manager; the scope of business of the company was to remain the same as before and there was to be a revision of the articles of association.  That revision was set out in section 5.  It included amending the name of the company, the registered capital and the registered address; revising the members of the board of directors and the structure of the organisation; revising the articles in relation to the permitted number of shares; revising the articles to bring them in line with current accounting practices and other amendments which might be considered to be required.

29.  Those proposals were in effect accepted by the Shenzhen People’s Government on 19 August 1993.  Decree number 355 of 1993 was issued with a requirement that the Shenzhen Securities Management Office should monitor the execution of that decision.  It can be noted that paragraphs 5 and 6 of the decree state:

“	5.	Assent be given to China Projects Ltd. (Hong Kong) to apply the debts due to it by Champaign as security for the repayment of indebtedness due by Panco and its affiliated companies to Champaign; Assent be given to China Projects Ltd. (Hong Kong) to take over all the shares in Champaign held by Panco, and to execute the above decision.
	6.	Assent be given to Champaign to change its name, and in accordance with the change of share structure reorganize the board of directors and managing group, the nature of the company will remain unchanged after the change of name, the rights and liabilities of the former company will be assumed.	”

30.  The Shenzhen Industrial and Commercial Administrative Bureau issued the notice approving the various changes on 23 September 1993.  That notice, in itself, is instructive because it summarises the changes in SCIC making it clear that the change from Shenzhen Champaign Industrial Company Ltd to Shenzhen Fountain Corporation was a change in name.  It also refers to the foreign enterprise being China Projects Ltd.  Clearly the existence of a specific foreign enterprise was material in any “foreign invested enterprise” as the heading of the document referred to it.

31.  Finally, on 29 December 1993, 2 documents were issued, the first was by the Shenzhen Stock Exchange.  That notice was headed “Re--listing Notice” and indicated that the application for re-listing SCIC shares under the new name to Shenzhen Fountain Company Ltd had been approved.  On the same date the Office of the Shenzhen People’s Government issued decree number 918 of 1993 headed “Reply regarding the restructuring of Shenzhen Champaign Industrial Company Ltd to Shenzhen Fountain Corporation”.  Nothing further of significance emerges from it other than the fact that it appears to have been the concluding formalised document of the restructuring.

32.  In those circumstances it is not surprising that when the judge came to consider the question of causation he said:

“Causation

93.    A much more substantial point, really of last resort, raised by Mrs Kaplan is that any breaches of duty on the part of Madam Ding and Mr Zheng are not the effective cause of any loss or damage to the Plaintiff’s companies.  The dominant and effective cause of any such losses was the Shenzhen Government order No. 355/95 which restructured SCIC and distributed Panco’s shares to new shareholders.  That potentially conclusive submission is also predicated on the factual basis that what had been done in June by Mr Zheng on behalf of himself and Madam Ding to remove Mr Peng’s shareholding in Panco and give it to their company China Projects was done under ‘the authority’ of what had been agreed by Mr Peng pursuant to the oral agreement of 18 March.  I am satisfied that but for what had been done unlawfully by Madam Ding and Mr Zheng they would not have been in a position to demonstrate to Shenzhen that their company China Projects was the owner, through Panco, of over 50% of SCIC’s shares.  The Defendants cannot therefore hide behind the, for present purposes, lawful acts of the regulatory authority when it was their wrongdoing which enabled that authority to allocate a proportion of Panco’s shares in the re-structured company.  The unlawful agreements of 11 and 17 June had the effect of depriving the Plaintiff companies of their beneficial interests in SCIC as well as a debt owed by SCIC to Panco.  It is difficult to see how that chain of wrongdoing has somehow been broken by what the Shenzhen authority did in its restructuring of SCIC.  The re-distribution of shares to China Projects by the authority could only have taken place by virtue of the illegality in June by Madam Ding and Mr Zheng.  The argument on causation must therefore also go.”

33.  This paragraph was the subject of considerable criticism by Mr Thomas on behalf of the defendants.  He said that the finding by the judge that it was the defendants’ wrongdoing which enabled the authority to allocate a proportion of Panco’s shares in the restructured company was wrong.  Likewise it was said that the finding that the redistribution of the shares to China Projects Ltd by the authority could only have taken place by virtue of the illegality in June by Madam Ding and Mr Zheng was also wrong.  It is a little difficult to see how these attacks on what the judge said could be maintained without attacking the judge’s findings of fact.  It was also said that in any event by the time the restructured company had been relisted Madam Ding and Mr Zheng were no longer directors of any of the relevant companies and therefore no longer owed any fiduciary duties to them.  It is also said that any breach of fiduciary duty by approaching the Shenzhen authorities to seek the new shares was not pleaded.

34.  These arguments, in my view, are unsound.  I have set out at some length the relevant details of the restructuring report.  As already noted, these were accepted and implemented.  Although Mr Thomas would not go so far as to argue that Shenzhen Fountain Company Ltd was a new company he tried to suggest that.  Indeed, many of his arguments were subtly based on that proposition.  But it is clear from the documents that Shenzhen Fountain Company Ltd was the same company as SCIC although there had been a considerable restructuring particularly of the shareholding.  That restructuring did not affect the shareholders who were members of the general public and it would seem that the restructuring proposals were designed to maintain the interests of the public shareholders in the proportion to which they should have been entitled.  Importantly, also, a considerable part of the shareholding which Panco held in SCIC was transferred to China Projects Ltd and was so recognised.  China Projects Ltd quite simply retained more than 17 million shares when the company was called Shenzhen Fountain Company Ltd.  In addition, those shares had attracted a 1 for 3 bonus issue.  In respect of the remaining part of the shareholding which China Projects Ltd held in Shenzhen Fountain Company Ltd after the restructuring, these were clearly part of the approved shares which had been originally held by Panco and had been held to have been not paid for.  In respect of these China Projects Ltd was permitted to pay for those shares and retain them.

35.  In my view, the judge was amply justified in coming to the conclusion which he did in respect of causation and it is hardly surprising that he dismissed the argument in the short and concise manner he did.  In effect, Madam Ding and Mr Zheng had taken Panco’s shares in SCIC and transferred them to China Projects Ltd for no consideration and the fact that such interest as China Projects Ltd received, namely an interest in SCIC, is now given a new name does not assist the defendants.

36.  Mr Thomas tried to gain some advantage by arguing that the judge had held that the agreements were void.  However, it will be noted that what the judge was indicating was that the various agreements made in June 1993 were made in breach of trust and indeed the judge said that they would be rescinded.  See paragraphs 95, 96 and 97 of the judgment.  Mr Thomas placed considerable reliance on Heinl and Others v Jyske Bank (Gibraltar) Ltd [1999] 1 Ll. Rep. 511 for the proposition that void agreements had no proprietarial effects so relief was not warranted.  It was said that the shares remained Panco’s shares and the same reasoning applied to the debt of $160.5 million.  But Heinl is not authority for the proposition that where there has been a breach of trust or fiduciary duty, the beneficiary is not entitled to relief against the defaulting trustee or fiduciary.  Relief could be in the form of a declaration, tracing, an account of profits and/or damages.  Indeed, in Heinl, tracing was available. 

37.  In some ways, it matters not a jot whether the agreements were void or rescinded.  If the defendants have obtained and retained some advantage as a result of those agreements, that advantage has to be given back to the rightful owners thereof.  As between a trustee and the beneficiary the trustee must account for all losses caused and all benefits he has gained.  He cannot set up a contract made in breach of trust as against the beneficiary.  As between the beneficiary and a third party, the beneficiary would be entitled to have contracts made in breach of trust rescinded, subject to the established rules.

38.  The judge refused to order the delivery up and return of the shares either in Panco or in Shenzhen Fountain Company Ltd.  In paragraph 98 of the judgment he said that he would have done so had he been dealing with an entirely domestic situation but for the reasons which he had given in the previous ruling on an application which had been made during the course of the trial he said that he felt he could not do so.  In that ruling he had said:

“	46.	The decisive factors are these: if such an order were now made in respect of SFC, which was a new company so far as the Shenzhen stock market authorities were concerned in 1993 and the other investors in its shares -- it is a substantial enterprise -- I am perfectly satisfied that an order from this court freezing China Projects’ shareholding in SFC would provide the basis for enormous disruption to the trade in, and inevitably the price of, SFC’s shares.
	…
	51.	The fact that it is a company listed outside Hong Kong is an added feature.  I apprehend that I should be particularly careful when making any order affecting the position of, in effect, an overseas company listed on an overseas stock market.
	52.	I regard the real risk of harm to a broad range of interests the main factor in my refusing to make the order.	”

39.  In the supplemental judgment of 30 January the judge said:

“	6.	My principal concerns, which I have already expressed in my ruling of 31 October, relate to the effects of such an order on third parties, such as creditor banks, other shareholders and investors.  The other aspect of my concern is that such an order would run across the regulatory regime of the Shenzhen stockmarket authority which no doubt has its own rules and regulations as to the terms under which shares are traded.  I apprehend that a court in a foreign jurisdiction should be very wary about making orders that would have a substantial impact on the trading of shares on the stockmarket of another jurisdiction.  I say that notwithstanding the fact that, as a Hong Kong company, China Projects is fully amenable to the effects of any order of this court.
	…
	10.	… ultimately I am brought back to the fact that these are shares in a Shenzhen company established by those authorities following a most careful enquiry into SCIC and Mr Peng.  I am told by Mr Whitehead that this authority enjoys a high reputation which it values. I am sure that is right.  Once these matters are properly drawn to their attention, I express the hope that they will feel able to take appropriate measures to consider how it was that Madam Ding and Mr Zheng were able to acquire Panco’s shares in SCIC and whether what was done by them should be allowed to sit easily with their well ordered corporate regime which demands integrity and high standards.
	11.	From what I have said, it must follow therefore that my judgment that this matter is essentially one for the Shenzhen regulatory authorities remains unchanged.  With very considerable regret, I must decline to make the injunction in the form asked for by the plaintiff.	”

40.  The judge however, went on to refer to “the strength of the court’s sense of indignation at what was done by Madam Ding and Mr Zheng” being a factor which might prompt the plaintiffs to pursue their request for relief. 

41.  In my view it would not be right to deny the plaintiffs the remedies which they seek.  They were entitled to have their property and the proceeds of the property returned to them.  The other shareholders’ interest would remain and not be affected by such an order.  Likewise banks who had taken shares as security would be able to retain that security subject to the usual rules.  If by reason of executive or other action beyond the control of this court that cannot happen, so be it.  But that should not cause this court to second-guess what might occur in other jurisdictions.  Nor to foist on some foreign authority the responsibility of affording appropriate and proper relief to which a Hong Kong litigant has been held entitled.  It must be borne in mind that the claims are made by Prosperfield and Panco and not by Mr Peng personally.  It is clearly not correct to say that Panco would not be permitted to retain the benefit of any SCIC shareholding.  All the authorities were well aware that Madam Ding was claiming to have control of Panco and that China Projects Ltd had acquired the SCIC shares from Panco and on that basis had been content to allow the shares to remain and the benefits to remain in the control of those whom they were under the impression had received the shares from Panco.

Clean hands

42.  The argument was raised during the course of this appeal that the plaintiffs were not entitled to relief on the basis that they had acted with unclean hands.  In the first place whatever wrongs the plaintiffs might have committed, whether under the direction of Mr Peng or otherwise, they were not wrongs in relation to the defendants.  It can be no justification for the denial of a remedy to a plaintiff simply that in respect of matters which have not affected the defendant, the plaintiff may have acted illegally.  The court of equity is not in the habit of denying relief against fraudulent defendants who give false evidence on the basis that the plaintiff has on another occasion acted improperly.

Relief

43.  In my view the plaintiffs are entitled not only to the relief but additional relief.  There is simply no merit in the arguments sought to be raised by Mr Thomas that the relief claimed in the statement of claim in the Panco action related to SCIC and not to Shenzhen Fountain Company Ltd.  The plaintiffs are clearly entitled to trace the proceeds of what has been wrongly taken from.  The fact that SCIC is now named as Shenzhen Fountain Company Ltd cannot affect the entitlement of the plaintiffs.  Even more devoid of merit was the suggestion that the defendants were confused because the numbers of shares claimed in the prayer for relief was not the same as the number of shares now held by China Projects Ltd.  This was based on the witness statement of Mr Zheng who alleged that pursuant to its powers under a loan agreement, BOC Trust and Investment Co. Ltd had sold 5 million out of 15 million SCIC shares pledged to it by Mr Peng on behalf of SCIC on 28 March 1992 so that the number of shares of SCIC held by Panco was 40,661,500 rather than 45,661,500 as recorded in the judgment.  However, the Restructuring Report which is dated 9 August 1993, recorded that China Projects Ltd had 45,661,500 million shares in SCIC.  It would therefore appear that the judge did not accept Mr Zheng’s evidence which he was entitled to do.  If some of the shares have been lost to the defendants and they no longer have derived any benefit therefrom then any tracing exercise would end there.

44.  During the course of the hearing Mr Whitehead SC, who appeared on behalf of the plaintiffs, put forward the formal order to which he said his clients were entitled.  I consider they are so entitled.  In my view these appeals should be allowed to the extent of varying the order below in the Panco action by deleting paragraphs 4, 5 and 6 thereof and including orders in the form set out in the schedule hereto. 

45.  As regards the Prosperfield action, the plaintiff is also entitled to relief granted by the judge, in effect, it clarifies the position.  The amount that the plaintiff in that action may succeed in establishing its claim to any monetary compensation may depend on whether Panco recovers all that is due to it.  I would make an order nisi that the costs of these appeals, including thereby the respondent’s notices be to the plaintiffs.

Hon Le Pichon JA:

46.  I agree.

Hon Sakhrani J:

47.  I also agree.

Schedule

Order (regarding the shares and debt) in the Panco action

1.    The 5^th Defendant do take all steps necessary to and do use best endeavour to cause the transfer 34,411,500 shares in the capital of Shenzhen Fountain Corporation (“SFC”), [formerly known as Shenzhen Champaign Industrial Company Limited (“SCIC”)] to the Plaintiff in the following manner:-

(1)	as for 17,152,606 shares, forthwith;
(2)	as for 17,258,894 shares,	)	after completion of the assessment of
		)	damages or taking of account
(3)	such further shares as shall be	)	previously ordered by Deputy Judge
	found to be held by the 5th	)	Carlson on 27 January 2004 and the
	defendant under paragraph 2(1)	)	inquiry hereinafter mentioned.
	SFC hereinbelow,	)