GRAND FIELD GROUP HOLDINGS LTD v. CHU KING FAI AND OTHERS

CACV 140/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 140 OF 2014

(ON APPEAL FROM HCA NO. 771 OF 2009)

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J U D G M E N T

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Hon Cheung JA :

I. The appeal

1.1  This is an appeal by the plaintiff against the judgment of Deputy High Court Judge Yan SC in which he dismissed the plaintiff’s claim against the 1^st, 2^nd and 7^th defendants on the ground that they had acted in breach of the fiduciary duties owed by them as directors to the plaintiff.  The 3^rd, 4^th, 5^th, 6^th and 8^th defendants were also directors of the plaintiff.  The plaintiff had made a similar claim against them.  The plaintiff withdrew its claim against the 4^th defendant before trial and at trial the plaintiff discontinued its claim against the 3^rd, 5^th 6^th and 8^th defendants.  

1.2  After lodging the appeal the plaintiff withdrew its appeal against the 7^th defendant.  The 2^nd defendant did not take part in this appeal.  The 1^st defendant is represented by Mr Raymond Fong and Mr Keith Lau in this appeal.

II.  Background of the case

2.1  The plaintiff is a listed company in Hong Kong.

2.2  The action was commenced by Mr Tsang Wai Lun Wayland (‘Mr Tsang’) on behalf of the plaintiff pursuant to leave granted by Kwan J (as she then was). 

2.3  Mr Tsang and his wife (‘the Tsangs’) were the founders of the plaintiff and were formerly executive directors of the plaintiff and its subsidiaries.  The Tsangs together with their company Rhenfield Development Corporation (‘Rhenfield’), hold about 22% of the plaintiff’s issued share capital. Mr  Tsang was also formerly the Chairman and Managing Director of the plaintiff.  The 1^st defendant was the Chairman of the Min Tai Group Company Limited (‘Min Tai Group’) which carried on the business of property development in Mainland China.

2.4  In 2006 and 2007 the plaintiff was experiencing financial difficulties.  The Tsangs were under investigation by the Independent Commission Against Corruption (‘ICAC’) in 2006. 

2.5  At the end of December 2006 Mr Tsang representing the plaintiff and the 1^st defendant representing the Min Tai Group met to discuss possible business co-operation between the plaintiff and the Min Tai Group.  The discussions centered on two matters :

(1) The injection of capital by the Min Tai Group into the plaintiff by acquiring new shares which would be issued by the plaintiff so that the Min Tai Group would become the majority shareholder of the plaintiff.  One point expressly discussed in relation to this was that part of the capital injected into the plaintiff would be used to repay a loan (stated to be in the sum of RMB 21 million) owed by the plaintiff to the Industrial and Commercial Bank of China.  Another point which was raised was that upon the Min Tai Group becoming the majority shareholder in the plaintiff, the 1^st defendant would be appointed the chairman of the board on which the representatives of the Min Tai Group would constitute the majority. 

(2) The particular projects the plaintiff and the Min Tai Group could co-operate and work on included the acquisition by the plaintiff of Min Tai Development Company Limited (‘Min Tai Development’) into which the Min Tai Group would consolidate and inject all of its investment interests in the Yi Zheng Economic Development Zone (the ‘Yangzhou Project’). 

2.6  Eventually the Min Tai Group invested in the plaintiff through a company called Hong Kong Zhongxing. 

2.7  On 29 January 2007, the Tsangs were arrested by the ICAC in relation to the matters for which they had been under investigation.  On the following day trading of the shares of the company was suspended by the Hong Kong Stock Exchange.

2.8  On 17 April 2007 Mr Tsang proposed that the 2^nd defendant be appointed as the CEO and COO of the plaintiff.  The 2^nd defendant was then duly appointed.   

2.9  On 1 July 2007, the plaintiff and the 2^nd defendant entered into a Target Responsibility Agreement (‘TRA’).  Mr Tsang signed the TRA on behalf of the plaintiff.  The TRA provided for, inter alia, various targets which should be achieved within the term of the TRA (which was stated to be of a period of two years and six months from 1 July 2007 to 31 December 2009).  These targets included minimum annual target profits, minimum annual sales targets and minimum turnover targets.  It was also a term of the TRA that the 2^nd defendant would guarantee a minimum return of 10% on investments and that he would personally be liable to compensate the plaintiff if this could not be achieved or if the plaintiff suffered any losses on investments or other economic losses by reason of the fault of the 2^nd defendant.  For its part, the plaintiff agreed that in order to assist the 2^nd defendant to meet the agreed targets, it would increase the available operational capital by HK$50 million or RMB 50 million before September 2007, by HK$100 million or RMB   100 million before March 2008 and by HK$200 million or RMB 200 million by September 2008. 

2.10  On 11 July 2007, the Tsangs resigned from the positions held by them in the plaintiff and the plaintiff’s subsidiaries.  The Tsangs were employed as consultants of the plaintiff with immediate effect. Trading of the shares of the plaintiff resumed on the Hong Kong Stock Exchange.  Alison Kwok, a sister of Mrs  Tsang, was appointed a director of almost all the subsidiaries of the plaintiff and also became the ‘A’ signatory of the bank accounts of the plaintiff and of Grand Field HK.

2.11  In the meantime Hong Kong Zhongxing itself injected further capital into the plaintiff and acquired further shares.  Eventually it invested over HK$130 million in the plaintiff. 

2.12  On 27 September 2007 the directors of the plaintiff agreed to set up a new company Yuan Cheng Real Estate (Shenzhen) Limited (‘Yuan  Cheng’) with a capital of HK$50 million in Shenzhen in order to obtain ‘profit-making opportunities before the end of that year’.

2.13  On 14 January 2008 the directors of the plaintiff approved (the ‘Remittance Resolution’) the remittance of HK$50 million to Yuan  Cheng. The $50 million was transferred on 21 January 2008. 

2.14  On 15 March 2008 the directors of the plaintiff approved the entry of a Management Services Agreement (‘Management Services Agreement’) by Yuan Cheng with Dongguan City Hua Jia Fu Industry and Trading Ltd (‘DCHJF’) and Dongguan City Min Tai Industry and Investment Ltd (‘DCMT’), which involved an upfront payment of RMB 8 million by Yuan Cheng (the ‘Management Services Resolution’).  Two further sums of RMB 10 million and 7 million were paid by Yuan Cheng (the ‘Hua Jia Fu transactions’).

2.15  On 27 May 2008 the directors of the plaintiff approved the acquisition of the Yangzhou project from Min Tai Development (the ‘Yangzhou Project Resolution’).

2.16  Also on 27 May 2008 the directors of the plaintiff approved the making of a Co-operation Framework Agreement (the ‘Co-operation Framework Agreement’) by Yuan Cheng with Shenzhen Zhong Cheng Construction Engineering Company Ltd (‘Zhong Cheng’), which required an upfront payment of RMB 8 million by Yuan Cheng (the ‘Zhong Cheng Resolution’).    

2.17  From 30 April to 23 June 2008 RMB 33.1 million were channelled between Yuan Cheng and Shenzhen Hua Ke Nano-Technology Development Company Limited (‘Hua Ke’) which were booked as loans in the accounts of Yuan Cheng. 

2.18  The plaintiff alleged that the 1^st defendant had wrongfully sought to improperly influence the directors of the plaintiff to vote at board meetings in favour of the Min Tai Group for the benefit of the 1^st defendant and his family by, among other things, adopting a practice of paying monies for attending meetings, which practice had begun even before the 1^st defendant became a director of the plaintiff.  Specifically, the plaintiff contended that these payments were made for the purposes of influencing the 2^nd, 3^rd, 4^th and 7^th defendants to pass the resolutions mentioned above (‘the bribery allegation’).

2.19  The plaintiff alleged that documents for the establishment of Yuan Cheng, which was incorporated as an indirect wholly owned subsidiary of the plaintiff, had been forged upon the instruction and authorisation of the 4^th defendant. The original position of the plaintiff was that the payment of money was not in the interests of the plaintiff.  They were to be applied for the personal benefit of the 1^st defendant, his family or related companies and not-for-profit commercial purposes.  This position was later changed to that of the defendants having caused Yuan Cheng to be set up and HK$50 million to be transferred to it so that this money could be used by the 1^st and 2^nd defendants to provide rolling facilities to companies related to or controlled by them.

III.  The judgment below

3.1  In a careful and detailed judgment the Judge rejected the plaintiff’s allegation of bribery and forgery.  He held that Yuan Cheng was bona fide set up by the plaintiff’s board for proper purposes because a corporate vehicle which ostensibly had no connection with the plaintiff needed to be set up due to the poor reputation of the plaintiff (by reason of its poor track record and the fact that the Tsangs were being investigated by the ICAC).

3.2  The Judge rejected the plaintiff’s case that the setting up of Yuan Cheng was not authorised and was not known to the Tsangs.  The Judge held that the Tsangs had been fully informed of the board’s decision to set up Yuan Cheng and to remit HK$50 million by way of capital injection in Yuan Cheng.

3.3  Since the plaintiff’s allegation regarding the setting up of Yuan Cheng and the remittance of HK$50 million to it was rejected, the Judge held that the failure of the plaintiff to establish this basic premise means its allegation in relation to the other matters relating to the Yangzhou project, Hua  Jia  Fu,  Zhong Cheng and Hua  Ke must fall away.  This is what the Judge held :

‘ 206. It is important to note that the plaintiff’s allegations and case regarding the setting up of Yuan Cheng and the remittance of the HK$50 million to it is the first and the most integral part of its overall case that Yuan Cheng had been set up and HK$50 million transferred to it so that this money could be used by the 1^st and 2^nd defendants to provide rolling facilities to companies related to or controlled by them. The Yangzhou Project Contentions, the Hua Jia Fu Contentions, the Zhong Cheng Contentions and the Hua Ke Contentions relate to how the plaintiff contends that the alleged HK$50 million rolling facilities were allegedly misused by the defendants. It is also an essential element of the plaintiff’s case that the directors of the plaintiff had been compromised by the bribes allegedly paid to them by the 1^st defendant. Accordingly, my rejection of the plaintiff’s case regarding the setting up of Yuan Cheng and the remittance of the HK$50 million is effectively a rejection of the plaintiff’s overall case against the defendants, in particular in view of my rejection also of the plaintiff’s allegations of bribery. Put another way, with my rejection of the plaintiff’s case regarding the setting up of Yuan Cheng and the remittance of the HK$50 million, the basic foundations for the Yangzhou Project Contentions, the Hua Jia Fu Contentions, the Zhong Cheng Contentions and the Hua Ke Contentions fall away. It is therefore not necessary for me to consider these aspects of the plaintiff’s case which must also fail. However, for the sake of completeness, I will also deal with these other contentions.’

3.4  It should be noted at this juncture that the plaintiff is no longer pursuing the bribery and forgery allegations.  Furthermore it does not challenge the Judge’s finding on the Yangzhou project.  For the sake of completeness I will briefly state the Judge’s finding on the Yangzhou project.  The Judge accepted the defendants’ contentions on this project and found that :

‘ 209. ….Min Tai Development was at all material times a valuable investment holding company which acted as a “land bank” holding significant amounts of land in Mainland China for potential development. This land included the land for the Yangzhou Project.’

3.5  The Judge held that the Yangzhou project was not a rubbish project as contended by the plaintiff.

3.6  The Judge further separately considered the disputes concerning Hua Jia Fu, Zhong Cheng and Hua Ke.

1) Hua Jia Fu

3.7  Under the Hua Jia Fu transactions, DCHJF appointed Yuan Cheng to provide management services for the retail shops (the ‘Shops’) located at a development of which DCHJF was the registered owner and developer.  DCHJF agreed to pay Yuan Cheng 25% of the rental on the Shops but if the rental exceeded RMB 4.03 million per annum, the rental in excess of this amount would be shared 50:50 between DCHJF and Yuan Cheng.  Further, DCHJF guaranteed that Yuan Cheng would receive a minimum of RMB 1.45 million per annum.  In return, Yuan Cheng agreed to pay DCHJF a refundable security deposit of RMB 9 million (later lowered to RMB 8 million) which would be returned to Yuan Cheng in full without interest within 30 days after the expiry of the Management Services Agreement or within 90 days upon receipt of a notice of termination of the Management Services Agreement by DCHJF from Yuan Cheng.  Even in the event that the Management Services Agreement was terminated by DCHJF due to the breach of Yuan Cheng, the security deposit would be immediately returned to Yuan Cheng in full without interest upon the date of termination.  DCMT irrevocably and unconditionally guaranteed to Yuan Cheng the performance by DCHJF of its obligations to repay the security deposit to Yuan Cheng and to pay the agreed service fees due to Yuan Cheng in accordance with the Management Services Agreement.  DCHJF made payments of RMB 362,500 each to Yuan Cheng on 30 April 2009, 27 July 2009 and 2 November 2009.  In accordance with the terms of the Management Services Agreement, it was terminated on 31 March 2010. 

3.8  The Judge accepted the testimony of the 3^rd defendant that the then board of directors of the plaintiff honestly and genuinely considered that whilst the transaction under these agreements departed somewhat from the core conventional business of the Grand Field Group as a real estate developer, this project would increase the revenue of the plaintiff and it would also be in the best interests of the plaintiff to diversify its business.  The board also genuinely considered the business venture was commercially sensible and advantageous to the plaintiff since Yuan Cheng would be entitled to a guaranteed annual consultancy fee of RMB 1,450,000 in any event.  Further, DCHJF was obliged to repay in full the security deposit to Yuan Cheng upon termination of the engagement whether by DCHJF or by Yuan  Cheng and even if the termination was caused by a breach on the part of Yuan Cheng.  The board also took into account the fact that additional protection would be provided for Yuan Cheng by DCMT unequivocally and unconditionally guaranteeing to Yuan Cheng the performance by DCHJF of its obligations to repay the security deposit to Yuan Cheng and to pay the agreed service fees due to Yuan Cheng in accordance with the Management Services Agreement.  The 3^rd defendant’s explanations in this regard were not challenged by the plaintiff in cross-examination.

3.9  In the 2011 annual report of the plaintiff it was stated that of the RMB 8 million deposit, RMB 2.5 million had been refunded in cash.  There was an issue between the parties as to whether the balance of the deposit had been repaid.  The plaintiff claimed that it had not been repaid but the 7^th  defendant said that it had.  The Judge made no finding on this issue because of the unsatisfactory way in which the plaintiff raised this matter.  This is what the Judge said :

‘ 244. ….I make no finding on this issue, which, in my view, has been raised in a highly unsatisfactory manner by the plaintiff. Not only had it not been pleaded but even in the plaintiff’s opening submissions, no positive assertion was made by the plaintiff that the security deposit had not been repaid. Instead, the plaintiff’s written opening only contained an assertion that there was no suggestion or evidence that the security deposit of RMB8 million had been refunded to Yuan Cheng when it must have been known to the plaintiff that it had been stated in its own 2011 Annual Report that RMB2.5 million had been refunded. Further, it was only in re-examination that Mr Tsang asserted that the security deposit had not been refunded.’

3.10  The Judge added that :

‘ 245. …. I should add that even if I had found that part of the security deposit had not been repaid, this would not have caused me to reject the defendants’ case that they had honestly and genuinely considered that the transaction was in the best interests of the plaintiff. It is pertinent to bear in mind in this context the principle that if a director honestly believes that he is acting in the best interests of the company, then he is not in breach of his fiduciary duty merely because his actions happen, in the event, to cause injury to the company.’

2)  Zhong Cheng

3.11  On 17 June 2008, resolutions were passed by the boards of Grand Field HK and Yuan Cheng that they should enter into and execute the Co-operation Framework Agreement with Zhong Cheng.  The Co-operation Framework Agreement was duly executed for and on behalf of Grand Field HK, Yuan Cheng and Zhong Cheng on the same day.  Under the Co-operation Framework Agreement, it was agreed, among other things, that during the ten year term thereof, Grand Field HK (or third parties specified by Grand Field HK) would appoint Zhong Cheng as the contractor for property development projects and Zhong Cheng would accept such appointments.  It was further agreed that Yuan Cheng would provide various management services in relation to these property development projects for which Zhong Cheng would pay Yuan Cheng 90% of the after-tax profit from the projects.  Additionally, it was agreed that Grand Field HK would pay Zhong Cheng RMB 5 million as deposit to secure the performance of Grand Field HK under the agreement within seven days of the commencement thereof and that on each anniversary date of the commencement of the agreement, RMB 500,000 would be automatically transferred from the deposit to Zhong Cheng towards payment or prepayment of amounts due to Zhong Cheng under the property development projects undertaken by it pursuant to the agreement.  It was further agreed that if Grand Field HK acted in breach of or failed to perform its obligations under the agreement, Zhong Cheng would have the right to forfeit the deposit or the remainder thereof.  Conversely, if Zhong Cheng acted in breach of or failed to perform its obligations under the agreement, Zhong Cheng would be required to refund to Grand Field HK an amount equal to twice the deposit or the remainder thereof.  It was also agreed that if the agreement was terminated before the end of the term thereof, Zhong Cheng would refund the remainder of the deposit to Grand Field HK.

3.12  The Judge accepted the evidence of the 3^rd and 7^th defendants that the Co-operation Framework Agreement was a genuine transaction entered into for the benefit and in the best interests of the plaintiff.  It was not disputed that in order to participate in real estate development in Mainland China, various different licences are required.  Zhong Cheng was an entity which held such valuable licences.  By entering into the Co-operation Framework Agreement with Zhong Cheng, the plaintiff would indirectly benefit from the licences held by Zhong Cheng and its rights thereunder to carry on different real estate construction projects.  The Judge accepted their testimony that the board of directors honestly and genuinely considered that the terms of the Co-operation Framework Agreement, including, in particular, the provision of the payment of the deposit of RMB 5 million (from which RMB 500,000 would be deducted annually) was in the best interests of the plaintiff, given that the plaintiff (or rather Grand Field HK, the vehicle used by the plaintiff) would be entitled to 90% of the after-tax profits from construction projects undertaken by Zhong Cheng.

3.13  The plaintiff complained that the defendants had caused a sum of RMB 10 million to be paid by Yuan Cheng to Zhong Cheng pursuant to an agreement entered into between Yuan Cheng and Zhong Cheng on 15 July 2008 (the ‘Tender Agreement’) for the purpose of satisfying a third-party venture partner of Zhong Cheng’s creditworthiness in relation to another construction project in which Zhong Cheng had been invited to participate.  The plaintiff further complained that the defendants had caused another sum of RMB 7 million to be paid by Yuan Cheng to Zhong Cheng on 29 August 2008 for the purpose of enabling Zhong Cheng to satisfy another third-party venture partner of its creditworthiness.

3.14  The Judge held that the Tender Agreement was a genuine transaction entered into for the benefit and in the best interests of the plaintiff and that the RMB 10 million paid to Zhong Cheng was for the purpose provided for under the Tender Agreement.  Further the payment of RMB 7 million by Yuan Cheng to Zhong Cheng was for a similar purpose and under a similar, but separate, arrangement as the Tender Agreement. 

3.15  The Judge held that the burden of proving that the payment of RMB 7 million was improper, and that in causing such payment to be made the defendants had acted in breach of their duties to the plaintiff, rests on the plaintiff.  He was of the view that the plaintiff failed to discharge such burden as it failed to adduce any relevant evidence.

3.16  The Judge observed at paragraph 251 of the judgment that the sums of RMB 5 million, 10 million and 7 million paid to Zhong  Cheng had been repaid to Yuan Cheng but the plaintiff appeared to be labouring under the mistaken belief even as at the date of the plaintiff’s written opening, that these sums had not been repaid.  However, by the time of the plaintiff’s closing submissions, the plaintiff accepted that such sums had been repaid and the position it took then was that the matters complained of in respect of Zhong  Cheng were another illustration of and part of the alleged misuse by the 1^st and 2^nd defendants and entities connected with them of the alleged rolling facilities created by the incorporation of Yuan Cheng and the transfer of HK$50 million to it.  Mr Fong described this as a change of tack on the part of the plaintiff.

3)  Hua Ke

i)  The plaintiff’s case

3.17  The plaintiff contended that the transfer of RMB 33.1 million was not make bona fide in the interest of the plaintiff in that :

(1) The amounts transferred to Hua Ke were booked as loans in the account of Yuan Cheng with no security or interest.

(2) Of the sum transferred by Yuan Cheng to Hua Ke, RMB 27 million was borrowed by Yuan Cheng from a bank at a commercial rate of interest with security put up by Yuan Cheng.

(3) These transfers were fictitious transactions purportedly created to make mispresentation to the authorities that the money of Yuan Cheng was not lying idle in the banks.

(4) The plaintiff was put in serious jeopardy of possible default by Hua Ke of not repaying the substantial funds transferred.

(5) The alleged loans to Hua Ke were unlawful according to PRC law.

3.18  A further complaint is that the 1^st and 2^nd defendants failed and refused to disclose their interest in Hua Ke at the first opportunity at a meeting of directors or in writing to the directors.

ii)  The defendants’ case

3.19  The defendants’ case on the transfer of funds was summarised by the Judge as follows.  The Fund Transfers were carried out lawfully for the purpose of enabling Yuan Cheng to convert its working capital from Hong Kong dollars to Renminbi (the ‘Forex Arrangements’).  The Forex Arrangements were necessary in light of Yuan Cheng’s operational needs amid the tightened foreign-exchange regulations in Mainland China.  The defendants relied in particular on the following matters in support of their case :

(1) Since the plaintiff’s injection of HK$50 million into Yuan Cheng in or around January 2008, this amount had been deposited in Hong Kong dollars in a foreign currency account held by Yuan Cheng with the China Construction Bank.  Under the then prevailing foreign exchange control regulations in Mainland China, any conversion of such funds from Hong Kong dollars to Renminbi was subject to a limit of US$200,000 per week.

(2) In the period between January and April 2008, Yuan Cheng converted part of the Hong Kong dollars in its account to Renminbi on ten occasions.  The total amount converted was about RMB 14.15 million.  The conversion of the funds from Hong Kong dollars to Renminbi was commercially sensible in view of the appreciating value of the Renminbi.

(3) After the tenth conversion, the China Construction Bank tightened its foreign exchange policy and refused to allow Yuan Cheng to further convert its funds from Hong Kong dollars to Renminbi on the ground that such conversion was not justified by actual operational needs.  As a result, about HK$34 million remained in Yuan Cheng’s account.  This posed a serious problem for Yuan Cheng since the amount already converted into Renminbi was insufficient for its various working capital needs at the time.

(4) After strenuous negotiations with various banks and officials from the State Administration of Foreign Exchange, by a loan agreement and a pledge agreement both dated 3 June 2008 entered into between Yuan Cheng and the Shanghai Pudong Development Bank (‘SPDB’), Yuan Cheng successfully obtained RMB 27 million by way of a loan from SPDB in return for pledging the unconverted HK$34 million as security.

(5) Despite such loan and pledging arrangements, Yuan Cheng was informed by its Mainland Chinese bank that it could not simply keep the funds idle in its accounts but had to utilise the funds for its operations, since that was its stated purpose of foreign exchange when making the application under the said agreements.

(6) Under such circumstances, the plaintiff’s board agreed with Hua Ke to make the Funds Transfers in Renminbi on a temporary basis, such that Hua Ke would re-transfer the same to Yuan Cheng when demanded within a short period of time.

(7) The choice of Hua Ke as a transferee company was a pure commercial decision based on its trustworthiness and reliability as a company, as well known by the 1^st and 2^nd defendants at the time.  Under the arrangement, no financial assistance in substance or consideration was given to Hua Ke, and only Yuan Cheng benefited from the Fund Transfers.

(8) The legality of the Forex Arrangements was confirmed by a legal opinion issued by the Guangdong Wansheng Law Firm which stated that the Fund Transfers were legal and proper.

(9) The sums transferred to Hua Ke under the Fund Transfers were fully repaid to Yuan Cheng.  In view of the commercial benefits to Yuan Cheng, it suffered no loss whatsoever under the Forex Arrangements.

(10) The Fund Transfers made under the Forex Arrangements were fully disclosed to the plaintiff’s shareholders by way of a public announcement dated 10  October 2008. Although the disclosure was slightly delayed, such delay was not deliberate or otherwise in breach of the duties owed by the defendants to the plaintiff. 

iii)  The Judge’s view

3.20  The Judge accepted the defendants’ case on the Fund Transfers and Forex Arrangements.

IV.  The principles

4.1  The following principles are relevant for the purpose of this appeal.

1)  Conflict of interest

4.2  No fiduciary shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which may possibly conflict, with the interests of those whom he is bound to protect, per Lord Cranworth LC in Aberdeen Rly Co v Blaikie Bros (1854) 1 Macq 461 at 471, [1843-60] All ER Rep 249 at 252.  Lord Herschell in Bray v Ford [1895-99] All ER Rep 1009 at 1011, [1896] AC 44 at 51, described the rule as inflexible.  This rule was applied in Bhullar v. Bhullar[2003] 2 BCLC 241 (CA) at [27] per Parker LJ.  Ma J (as he then was) observed in Kao Lee & Yip v. Koo Hoi Yan & Others [2003] 3 HKLRD 296 at paragraph 50 that the non-conflict duty imposed on the fiduciary involves an objective test, meaning that a reasonable man looking at the relevant facts would think there to be a real sensible possibility of conflict: Phipps v Boardman [1967] 2 AC 46 at page 124 (per Lord Upjohn).

2)  Disclosure of interest

4.3  No director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and approved by the shareholders. 

4.4  A director in breach of this strict rule will be called upon to account no matter whether the company has in fact been damaged or benefited by his action, and no matter how honest and well-intentioned he is.

4.5  As Rich, Dixon and Evatt JJ of the High Court of Australia held in Furs Ltd v Tomkies (1936) 54 CLR 583 at 592 :

‘ ... the inflexible rule that, except under the authority of a provision in the articles of association, no director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and by resolution a general meeting approves of his doing so or all the shareholders acquiesce. An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company. It is no answer to the application of the rule that the profit is of a kind which the company itself could not have obtained, or that no loss is caused to the company by the gain of the director. It is a principle resting upon the impossibility of allowing the conflict of duty and interest which is involved in the pursuit of private advantage in the course of dealing in a fiduciary capacity with the affairs of the company. If, when it is his duty to safeguard and further the interests of the company, he uses the occasion as a means of profit to himself, he raises an opposition between the duty he has undertaken and his own self interest, beyond which it is neither wise nor practicable for the law to look for a criterion of liability. The consequences of such a conflict are not discoverable. Both justice and policy are against their investigation.’ (emphasis added)

4.6  As Lord Russell observed in Regal (Hastings) Ltd v. Gulliver [1967] 2 AC 134 (HL) at 144 G-145 A :

‘ The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.’

4.7  This second principle was applied in Gwembe Valley Development v. Koshy [2004] 1 BCLC 131 (CA).

3)  Academic view

4.8  The following discussion in Fiduciary Duties: Directors and Employees 2^nd Ed by Andrew Stafford  QC and Stuart Ritchie QC on the question of personal interest is also relevant :

‘ 2.124 The existence of a personal interest, whether direct or indirect, is common to the operation of the ‘no conflict’ and ‘no profit’ duties and the requirement to disclose information under ss 177 and 182 which govern the situation where a director is interested in proposed or existing transactions or arrangements with the company. Statute has not provided any definition of what constitutes an ‘interest’ for these purposes, nor does case law provide any significant illumination. An ‘interest’ has been said to signify the presence of a personal concern of possible significant pecuniary value in a decision taken, or transaction effected, by a fiduciary, whether immediate (a sale of property to the company) indirect (a shareholding in a supplier to the company) or contingent eg a prospective role at a competitor or expectant (where a dealing with an agent proceeds on the assumption that a success fee is to be paid if a transaction is effected).

2.125 Where a transaction is not between the company (or employer) and the fiduciary but is instead with his wife, partner or other relative, the question arises as to whether the fiduciary is to be considered as having an ‘interest’ so as to engage the principles of the ‘no conflict’ rule.  The court will have regard to the substance of the transaction, not the form.  In Newgate Stud Co v Penfold David Richards J held that the ‘no conflict’ rule does not automatically apply, as ‘spouses and domestic partners are not nominees’.  However, he held that in any such relationship there was the potential for the exercise of fiduciary duties to be influenced by personal considerations.  If a director caused his company to enter into a transaction with a close relation or a spouse or other partner, there was a significant risk that the director would be compromised by a desire to favour the other party.  Accordingly where the fiduciary does not have a personal interest in the transaction, but on the facts there exists a real risk of conflict between duty and personal loyalties, in the absence of fully informed consent the fiduciary has the burden of proving that the transaction was demonstrably in the best interests of the company or others to whom he owes his duties.’

4)  Causation

4.9  Another relevant principle on the liability of the fiduciary is the requirement of a causal connection between the breach of fiduciary duty and the loss to the principal for which compensation is recoverable.  In other words, what is the profit or benefit that the fiduciary has made in consequence of that breach?  This principle has been affirmed by this Court in the recent case of Tang Ying Loi v. Tang Ying Ip and Others CACV 36/2015, 6 November 2015 (unreported) applying cases such as Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 and Warman International Limited and Another v Dwyer and Others (1995) 128 ALR 201.

V.  The plaintiff’s position on appeal

5.1  As mentioned earlier, the plaintiff does not in this appeal challenge the Judge’s finding on the bribery and forgery allegations.  He also does not challenge the Judge’s finding on Yuan Cheng and the Yangzhou Project.  Instead, Mr   Anson Wong SC (together Ms  Lorinda Lau and Ms Karen Ma) focused on the Hua Jia Fu, Zhong Cheng and Hua Ke transactions. 

1)  Hua Jia Fu

5.2  Mr Wong contended that in respect of the Hua Jia Fu transactions, the 1^st defendant had interest in or was closely connected with DCHJF and also the 2^nd defendant had knowledge of the 1^st defendant’s interest in or close connection with DCHJF. Further, the 2^nd defendant was once a 70% shareholder of DCMT which was the 51% shareholder of DCHJF.  Mr Wong submitted that there is no evidence of the 1^st defendant or the 2^nd defendant disclosing any of their interest or connection with DCHJF or DCMT.  On the contrary, it was positively asserted in an announcement dated 27 March 2008 that, to the knowledge of the directors (including the 1^st defendant and the 2^nd defendant), each of DCHJF and DCMT and their respective ultimate beneficial owners was ‘independent third party’.  The Judge summarised the announcement at paragraph 82 of his judgment :

‘ 82. An announcement giving notice of the Management Services Agreement and the Supplemental Agreement was published by the board of the plaintiff on the same day. In addition to giving details of these two agreements, the announcement stated that the entering into of these two agreements constituted a discloseable transaction for the plaintiff under the Listing Rules of the Hong Kong Stock Exchange (“Listing Rules”) and that a circular containing details of the agreements would be dispatched to the shareholders of the plaintiff within 21 days after publication of the announcement.’

5.3  When it was put to the 2^nd defendant in cross-examination the reason why he got rid of his shares in DCMT in July 2007 was that he and the 1^st defendant did not want any future dealings between DCHJF and the plaintiff to be regarded as connected transactions, the 2^nd defendant was very evasive and refused to answer the question directly.  If the 2^nd defendant had no interest in DCHJF and had no knowledge of the 1^st defendant’s interest in it, he could have given a straightforward answer to the question.

5.4  In respect of the close connection between the 1^st defendant and DCHJF Mr Wong relied on the following evidence before the Judge which supported such a prima facie case :

(1) The 1^st defendant was the Chairman of Min Tai Group until he resigned from such position in January 2008, and that after the 1^st defendant’s resignation, it was his son who was appointed to such position in his place. 

(2) DCMT (which had ‘Min Tai’ as part of its company name) was a 51% shareholder of DCHJF.

(3) As to DCMT, before 25 July 2007, the 2^nd defendant was its 70% shareholder.  After 25 July 2007, the 2^nd defendant ceased to be a shareholder of DCMT and Madam Cheng became a 40% shareholder of DCMT.

(4) Regarding Madam Cheng, it is Mr Tsang’s evidence that it was the 1^st defendant who introduced Madam Cheng to him as his niece and that such relationship was confirmed by Madam Cheng herself.

(5) Thus, there is a prima facie case that DCHJF and DCMT were owned or controlled by the 1^st defendant.

5.5  Mr Wong submitted that although the 1^st defendant denied in his affirmation having any relationship with Madam   Cheng, he, however, declined to testify at the trial.  He submitted that given this prima facie evidence, and also the 3^rd defendant’s oral evidence that Madam Cheng ‘seems like’ or ‘should be’ the 1^st defendant’s niece, the Judge should have drawn the adverse inference against the 1^st defendant that Madam Cheng was the 1^st defendant’s niece and that the 1^st defendant had interest in or was closely connected with DCHJF.

5.6  In respect of the 2^nd defendant, after three days of cross-examination he lost his temper and refused to attend court to continue his cross-examination.  Mr Wong submitted that the Judge should have also drawn the adverse inference against both the 1^st defendant and the 2^nd defendant that the Management Services Agreement was a means designed to channel funds in the sum of RMB 8 million to DCHJF.  He submitted that :

(1) On the face of the Management Services Agreement, it is difficult to see why Yuan Cheng would pay a security deposit of RMB 8 million in exchange for a guaranteed return of RMB 1.45 million per annum for two years.

(2) More significantly, the 2^nd defendant under cross-examination said that Yuan Cheng did not have to do anything in order to get the 20% return under the Management Services Agreement.  Subsequently, when being asked whether the realities of the arrangement between Yuan Cheng and DCHJF had not been set out in any truthful manner in the announcement, the 2^nd defendant said that he was not sure and he dared not answer.

(3) The objective circumstances and the oral testimony given by the 2^nd defendant (before his walking out from the witness box) are supportive of the plaintiff’s case that the Management Services Agreement was effectively a means to channel RMB 8 million to the benefit of the 1^st defendant, his family or related company.

5.7  The Judge refused to accept this aspect of the 2^nd defendant’s evidence for two reasons.  First, that the Management Services Agreement was a sham was not pleaded.  Second, the oral evidence given by the 2^nd defendant was unclear.

5.8  Mr Wong submitted that the Judge was wrong to refuse accepting this aspect of the 2^nd defendant’s oral evidence based on his two reasons :

(1) It is the plaintiff’s pleaded case that Yuan Cheng was used as a vehicle to channel funds for the benefit of the 1^st defendant, his family or related companies.  The admission given by the 2^nd defendant that no service was in fact provided by Yuan Cheng to DCHJF under the Management Services Agreement was covered by and supportive of the plaintiff’s pleaded case.

(2) The plaintiff’s evidence is clear.  In any event, if there was anything unclear, adverse inference should be drawn against the 2^nd defendant since it was his decision to walk out in the middle of cross-examination which deprived the parties of the opportunity to explore or clarify the matter.  The 2^nd defendant cannot have the benefit of doubt by choosing to leave the witness box before finishing his evidence.

2)  Hua Ke

5.9  Mr Wong submitted that the 1^st defendant had an interest in or was closely connected with Hua Ke :

(1) The 1^st defendant was once a 77.78% majority shareholder of Hua Ke.  On 15 January 2008, the 1^st defendant transferred his 77.78% shareholding in Hua Ke to Mr Hui, who was the 1^st defendant’s chauffeur.

(2) Not only was Mr Hui a chauffeur working for the 1^st defendant, the social insurance record also shows that it was Min Tai Property who paid for Mr Hui’s social insurance.

5.10  Despite this prima facie case that Hua Ke was owned or controlled by the 1^st defendant, he chose not to testify about his relationship with Mr Hui.  As to the 2^nd defendant, he admitted in his first affirmation that he was the supervisor of Hua Ke.  Further, it is noted in the Baker Tilly report that Hua Ke was controlled by among others the 2^nd defendant. Mr Wong submitted that there is no evidence of the 1^st defendant or the 2^nd defendant disclosing any of their interest or connection with Hua Ke.  On the contrary, in the announcement dated 10 October 2008, the plaintiff’s then directors only disclosed the Hua Ke transactions for the reason that Mr Hui was a director of four subsidiaries of the plaintiff.  Nothing was said in such announcement about the involvements of the 1^st defendant and/or the 2^nd defendant in Hua Ke.

3)  Zhong Cheng

5.11  In respect of Zhong Cheng, Mr Wong submitted that there is evidence before the Judge supporting a prima facie case that the 1^st defendant had an interest in or was closely connected with Zhong Cheng.  The 2^nd defendant was once a 15% shareholder of Zhong Cheng until he transferred his shares to Mr Lin.  On 15 January 2008, Mr Hui became a 85% majority shareholder of Zhong Cheng.  Mr   Hui was effectively the 1^st defendant’s foot soldier.  On 21 May 2008, Mr Hui disposed of his 85% shareholding in Zhong Cheng, and Mr Ren became a 60% shareholder of Zhong Cheng.  Mr Ren was the 1^st defendant’s personal friend and had assisted the 1^st defendant with his business for many years.  Similar to Mr Hui, there is also evidence showing that it was Min Tai Property who paid for Mr Ren’s social insurance.  As to the 2^nd defendant, these matters show that the 1^st defendant and the 2^nd defendant had close collaboration in many business dealings.  It was Min Tai Property who paid for the 2^nd defendant’s social insurance.  There is no evidence of the 1^st defendant or the 2^nd defendant disclosing any of their interest or connection with Zhong Cheng.  On the contrary, the 1^st defendant and the 2^nd defendant positively asserted at the plaintiff’s board meeting held on 27 May 2008 that they had no connection with Zhong Cheng, and it was also asserted in the plaintiff’s announcement dated 17 June 2008 that each of Zhong  Cheng and its ultimate beneficial owners was ‘independent third party’. 

5.12  Mr Wong submitted that based on the principles on fiduciary duty referred to above, the question as to whether a particular director acted in breach of his fiduciary duty has to be answered by reference to his particular circumstances in the particular subject transaction.  Even when the board as a whole had considered a transaction was in the best interest of the company, a particular director may nevertheless be in breach of fiduciary duty in relation to that particular transaction if he was in a position of conflict or potential conflict, or derived some undisclosed profits or benefits from the transaction, or exercised his power for improper purpose.

5.13  Mr Wong submitted that the Judge erred in his overall approach in dismissing the plaintiff’s claim against the 1^st defendant and the 2^nd defendant.  Instead of considering the issue of breach of fiduciary duty in light of the particular circumstances of each of the 1^st defendant and the 2^nd defendant, the Judge adopted a ‘broad-brush’ approach in dismissing the plaintiff’s claim against them (including the 7^th defendant) without drawing any distinction between them when the 1^st defendant and the 2^nd defendant clearly stood in a different position from the 7^th defendant.  Unlike the other directors, there is clear evidence in support of the plaintiff’s case that the 1^st defendant and the 2^nd defendant were behind or had close connection with the plaintiff’s counter parties in the subject transactions (i.e. Zhong Cheng and Hua Ke).  Such matters were not disclosed by the 1^st defendant and the 2^nd defendant.  Further, the 1^st defendant chose not to give evidence and the 2^nd defendant chose to walk out of court in the middle of his cross-examination.  The significance of this matter is that :

(1) Where a weak prima facie case is established, the Court should treat the case as proven to the necessary standard of proof by drawing every adverse inference against a party who omits to call evidence to rebut such case in determining each and every disputed fact (see Benham Ltd  v. Kythira Investments Ltd & Another [2003] EWCA Civ 1794 at paragraph 30 (per Brown LJ); Telings International Hong Kong Ltd v. John Ho & Others CACV 10/2010, 22 October 2010 (unrep) at paragraphs 78-81 (per Le Pichon JA)).

(2) Adverse inferences can similarly be drawn against a party who walks out of the hearing so as not to testify (see Gayle v. Gayle [2001] EWCA Civ 1910 at paragraph 13 (per Thorpe LJ); Lam Hong Ching Andy  v. Wong Kam Tong HCA 1144/2006, 12 October 2009 (unrep) at paragraph 61 (per Recorder Shieh SC)).

5.14  Mr Wong further submitted that possibly due to his ‘broad-brush’ approach, the Judge also erred in failing to draw the necessary adverse inferences against the 1^st defendant and the 2^nd defendant in relation to their interests or connection with the plaintiff’s counter parties in the subject transactions (i.e. Zhong Cheng and Hua Ke) and the purpose of their exercising the power.  The Judge’s errors are compounded by some important flaws in his analysis.  He viewed the plaintiff’s forgery allegation and bribery allegation as the ‘first and most integral’ and ‘essential’ elements of the plaintiff’s overall case against the defendants so much so that he took the view that his rejection of those allegations amounted to an effective rejection of the plaintiff’s overall case against the defendants.

5.15  Mr Wong submitted that the Judge’s analysis is wrong.  This is because even if Yuan Cheng was lawfully set up by the plaintiff’s board of directors, the 1^st defendant and the 2^nd defendant would still be in breach of fiduciary duty if funds were indeed channelled through Yuan  Cheng for the benefit of the 1^st defendant, his family or related companies.  By the same token, the 1^st defendant and the 2^nd defendant would still be in breach of fiduciary duty in such circumstances even if they did not offer any bribes to the other directors.

5.16  Irrespective of whether or not the forgery allegation and the bribery allegation are made out by the plaintiff, they are irrelevant and not determinative of the plaintiff’s breach of fiduciary claim against the 1^st defendant and the 2^nd defendant. But the Judge’s findings in relation to the subject transactions were tainted by his flawed analysis regarding the implication of the plaintiff not being able to prove those two allegations.

VI.  My view

1)  Foundation of the plaintiff’s case

6.1  In my view, the plaintiff’s appeal now presented by Mr Wong has shifted its focus from its original and all-embracing attack that the whole purpose of setting up Yuan Cheng and channelling HK$50 million into it was to enable the money to be used as rolling facilities for the benefits of the 1^st defendant, his family and his companies.  In order to achieve the original purpose the plaintiff had relied on the serious allegations of the 1^st defendant offering bribes to the other directors and the use of forged documents.  No matter how skillfully Mr Wong may now wish to play down these matters, the stark fact is that the allegations relied upon by the plaintiff had formed the central and fundamental theme of its case at the trial.  These allegations served as the foundation of the plaintiff’s case and once they were demonstrated to be unsustainable the case of the plaintiff collapsed just like a house of cards.  

6.2  The Judge has shown in his careful analysis that the whole purpose of setting up Yuan Cheng was to implement the agreement reached between the plaintiff and the 1^st defendant by which the 1^st defendant would invest in the plaintiff (which is a Hong Kong listed company) so that the plaintiff could expand its business opportunities through the 1^st defendant and his companies who had already been carrying out business of property development in the Mainland.  

6.3  In the circumstances, the plaintiff is really turning the whole arrangement on its head when it alleged that the money channelled from the plaintiff to Yuan Cheng was for the purpose of providing rolling facilities for the 1^st defendant and its companies. 

6.4  As the Judge had rightly observed, it did not make commercial sense for the 1^st and the 2^nd defendants to have invested over HK$130 million in order for them and their related entities to benefit from the use of a much smaller amount as alleged under the plaintiff’s various complaints.  This puts into focus the important requirement in this branch of the law that there must be a causal connection between the breach of fiduciary duty and the loss to the principal for which compensation is recoverable.  In other words, in order to succeed, the plaintiff must show that the loss would not have occurred but for the breach.  Bearing in mind the context of the case, the plaintiff had simply failed to demonstrate that if the board of directors was aware of the 1^st and 2^nd defendants’ interests, if any, in the Hua  Jia  Fu, Zhong  Cheng and Hua  Ke transactions, it would not have approved the transactions in question.  Looking at the whole history of the matter in perspective, it really is somewhat unreal to suggest that the board of directors would, in fact, come to a different view of the matter when it is clear that the plaintiff was in financial difficulties and its reputation was in tatters arising out of the ICAC’s investigation of the Tsangs.  The 1^st defendant came to its rescue as a substantial investor and had actually injected real money into the plaintiff in order to sustain it and develop its business opportunities.  Further, the 1^st and 2^nd defendants were invited to join the board of the plaintiff because of their vast experience and connections in the Mainland. As Mr Fong pointed out any complaint about actual or potential conflict of interest must be considered against such background.  

6.5  As to the position of the 2^nd  defendant, the Judge had made this pertinent observation :

‘ 187. Another important aspect of the background against which the plaintiff’s contentions must be considered is the position of the 2^nd defendant. Not only was his appointment as CEO and COO of the plaintiff proposed by Mr Tsang, the latter had, in making such proposal, spoke in glowing terms of the vast experience of the 2^nd defendant in conducting business in Mainland China and had stated that the appointment of the 2^nd defendant would assist in the development of the business of the plaintiff and improve its business performance. The 2^nd defendant had then entered into the TRA which exposed himself to personal liability to the plaintiff should his efforts at improving and developing the business of the plaintiff fail. It is therefore not without some irony that Mr Tsang, through the plaintiff, now complains that the efforts which the 2^nd defendant appears to have made to develop the business of the plaintiff were in fact instead efforts to benefit himself, companies connected to him and/or the 1^st defendant and/or companies connected to him.’

2)  Individual consideration

6.6  In any event, the Judge did not simply dismiss the plaintiff’s case in regard to Hua Jia Fu, Zhong Cheng and Hua Ke because he rejected the plaintiff’s case on the setting up of Yuan Cheng and the channelling of money into this entity.  After carefully analysing each of these transactions, he came to the view that they were bona  fide business transactions for the benefit of the plaintiff.  In my view the plaintiff simply has failed to show that this finding of fact is plainly wrong in order for the Court of Appeal to interfere under the well recognised principles.  

(i)  Hua Jia Fu

6.7  In relation to the Hua Jia Fu transaction, unlike the other two transactions now complained of, the issue of disclosure was not pleaded by the plaintiff.  In this regard, the relevant part of the pleading is as follows :

‘ 56. Wrongfully and in breach of the Duties, the 1st to the 3rd and 7th Defendants proceeded to pass the Management Services Resolution on or about 15 March 2008, even though the transaction was not in the interests of the Company but was brought about because of the connection between DHJF and the Min Tai Group.’

6.8  As to the 1^st and 2^nd defendants’ interests in Hua Jia Fu, I have already pointed out the artificial nature of the allegation.  The whole idea of the plaintiff deciding to co-operate with 1^st defendant stemmed from the connection of the 1^st defendant which would provide the plaintiff with the opportunity to develop its business in the Mainland.  In any event, central to the determination of the plaintiff’s allegation that the 1^st and 2^nd defendants had an interest in Hua Jia Fu is whether Madam Cheng is a niece of the 1^st defendant.  The Judge had made an express finding that the plaintiff had not proved that Madam Cheng is the niece :

‘ 246. There is also a dispute between the parties as to whether or not Madam Cheng is the 1st defendant’s niece. The plaintiff contends that she is whilst the defendants deny this. The plaintiff was not able to adduce any evidence to prove that Madam Cheng is the niece of the 1st defendant. However, they contend that the 3rd defendant had admitted under cross-examination that Madam Cheng is indeed the niece of the 1st defendant.

247. I am of the view that the 3rd defendant’s testimony in this regard was not clear.  During the relevant part of his cross-examination, he was asked whether Madam Cheng’s father was one Zheng You Zhong.  His response was that he didn’t remember and needed to check.  He was then asked whether Madam Cheng’s mother was Madam YQ Weng.  His response was again not conclusive.  The notes of the testimony prepared by the plaintiff’s solicitors record that his answer was “Yes, should be”.  My notes record that he said “It seems like it”.

248. However, in an earlier part of his testimony, he had also said that the 1st defendant had provided the birth date of his wife and that of the father of Madam Cheng and that based on those dates, it was not logically possible that Madam Cheng was his niece.

249. Given this unsatisfactory state of the evidence, I am not satisfied that the plaintiff has proven that Madam Cheng is the niece of the 1st defendant. 

250. In any event, the plaintiff’s contention that Madam Cheng is the niece of the 1st defendant is essentially part of the plaintiff’s case that the defendants had created rolling facilities for use by the 1st and/or 2nd defendants and/or entities connected with them by the wrongful incorporation of Yuan Cheng and the remittance of the HK$50 million to it which I have already rejected.’

6.9  Mr Wong argued that the plaintiff had, in fact, adduced evidence in his 3^rd affirmation in which he said that :

‘ In Chu’s 1^st Affirmation at paragraph 16, Chu sought to deny any relationship with Zheng Li Yan（鄭麗煙）(“Zheng”). I disagree. According to my recollection, I met Zheng at least once late last year. That was a staff function of the Defendant in the Mainland China. Both Chu and Zheng were invited to attend the function. On that occasion, Chu introduced Zheng to me and mentioned (and confirmed by Zheng) that Zheng’s father is 鄭友忠and his mother is Weng Yuqiong (i.e. a sister of Chu’s wife).’

6.10  In my view, the Judge was clearly aware of the issue concerning Madam Cheng. The fact that he had not referred to the affirmation of Mr Tsang is not fatal to his finding on this point having regard to his reasoning.  

6.11  For the 2^nd defendant, I accept Mr   Fong’s submission that the plaintiff had adduced no evidence that the 2^nd defendant was a nominee of the 1^st defendant.  The 2^nd defendant disposed of his shares in DCMT on 24 August 2007 well before the Hua Jia Fu resolution was entered into on 15 March 2008.  Further, the plaintiff had adduced no evidence to establish a connection between DCMT and the Min Tai Group (apart from the fact that the words ‘Min Tai’ had been used in naming both companies).

6.12  The 2^nd defendant had walked out of court in the course of his cross-examination.  Whether any inference should be drawn by the Judge against the 2^nd defendant was clearly a matter for him in the first instance.  In any event, apart from the 2^nd defendant, the 3^rd and the 7^th defendants had also testified for the defendants.  The Judge had accepted the 3^rd and 7^th defendants as truthful witnesses.  By contrast, the Judge was clearly not impressed by the evidence of Mr Tsang.  He found his evidence to be incredible and unconvincing. Likewise, he rejected Ms Kwok’s evidence given on behalf of the plaintiff. The Judge also did not find the evidence given by Mr Lin on behalf of the plaintiff to be helpful.  This is a trial that lasted 19 days.  The Judge must be the best person to properly assess the evidence in terms of making findings and drawing inferences.  It is true that the judgment was only delivered 20 months after the trial and the Court has to adopt a higher degree of scrutiny as required by the Chow Sau Heiv.Ho Keung Yuen CACV 112-114/2013, 7 July 2014 (unrep) line of cases, but even with these cautions in mind I am not satisfied that the Judge was plainly wrong in his findings concerning the Hua Jia Fu transaction.  Mr Fong who appeared both at the trial and on appeal informed the Court that the cross-examination of the defendants’ witnesses had focused on the bribery and forgery allegations and not on the 1^st and 2^nd defendants’ connection with the companies in question.  The relevant parts of the transcripts were in any event not placed before us.

6.13  Mr Wong referred to the closing submission of the plaintiff concerning the connection between Zhong Cheng and the 1^st and the 2^nd defendants :

‘ The matters set out in the above was confirmed by Dr Wong [the 7^th defendant] who accepted that Zhong   Cheng was connected to Chu    [the 1^st defendant] and Huang [the 2^nd defendant] and stated that when the question as to whether there was any connection with Zhong Cheng was raised, the answer given was ‘no connection’: Dr Wong (XX), Day 12, 1:1 to 2:9, 2:14 to 3:15.  Au [the 3^rd defendant] takes the same line.  His evidence is that neither Chu nor Huang provided the Board with any information as to the relationship between Zhong Cheng and themselves or the Min Tai Group and that he would have expected them to make disclosure if there was any connection between them: Au (XX), Day 16 p 5. Au also testified that if Chu and Huang had made such disclosure, the Board would have made a lot more inquiries before approving the transaction: Au (XX), Day 16, p 6.’  (emphasis added)

6.14  Again the transcripts of the evidence of the 3^rd and 7^th defendants were not before us.  In any event, the 3^rd defendant only said that there would be further enquiries.  It is not an express statement that the board would definitely not have approved the transactions.

(ii)  Hua Ke

6.15  The plaintiff pleaded in paragraph 31 of its Re-Re-Amended Statement of Claim that :

‘ 31. Hui and Ren are, and were at all material times, holding the said shares in Hua Ke and Zhong Cheng as nominees for, and/or subject to the control or directions of, Chu or his family.’

6.16  This allegation was denied by the defendants in their defence.  The second affirmation of the 3^rd defendant further stated that :

‘ 25. To answer the first allegation [i.e. Zhong Cheng was previously owned by the 2^nd defendant and is now controlled by Mr Hui Zhihua, the chauffeur of the 1^st defendant], I have been informed by Mr. Huang and verily believe that he ceased to be a shareholder of Zhong Cheng in early 2007. In addition, I have consulted with Mr. Hui Zhihua, who is now a validly appointed director of Grand Field (Hong Kong) Ltd, that he is not in control of Zhong Cheng and does not have any interest whatsoever in Zhong Cheng as now alleged by the Plaintiff. If and insofar as the Plaintiff now seeks to infer from the alleged connection that the Directors or any of them has a personal interest in Zhong Cheng and for that reason approve the Co-operation Framework Agreement, I verily believe that any such inference is totally unfounded.’

6.17  The evidence before the Judge was that the 1^st defendant transferred his 77.78% shares in Hua Ke on 15 January 2008.  Mr Hui was then appointed as the legal representative and a director of Hua Ke.  Mr Hui was the 1^st defendant’s chauffeur.  The 1^st defendant was only appointed as the Chairman and Executive Director of the plaintiff’s board on 31 January 2008.

6.18  Although the Judge did not make any finding as to the connection of Mr  Hui and the 1^st defendant, I have already referred to the evidence of the 3^rd defendant about his enquiry with Mr Hui.  Had the Judge been reminded of his evidence, I have no doubt that he would have accepted the 3^rd defendant’s evidence on this aspect as well since he had found the 3^rd defendant to be a truthful and credible witness.

6.19  In any event, the so-called prima facie evidence on the 2^nd defendant’s connection is extremely weak.  The plaintiff relied on the Baker Tilly report which noted that Hua Ke was controlled by among others, the 2^nd defendant. The Baker Tilly report was a report prepared by a firm of accountants for the plaintiff in regard to the cash flow statement of Yuan Cheng.  In a further schedule to this statement, Footnote (1) stated that, according to one Mr Song, Hua Ke is a company controlled by, among others, the 2^nd defendant. Plainly this evidence is unsatisfactory.  As Mr Fong rightly pointed out, this is a hearsay statement contained in a hearsay document. 

6.20  It is then said that the 2^nd defendant admitted that he was the supervisor of Hua Ke but there was no evidence at the trial as to what was meant by the 2^nd defendant being a supervisor of Hua Ke.

6.21  The plaintiff relied on a document which purported to show Min Tai Development paid for the social insurance of, among others, three persons, namely the 2^nd defendant, Mr Hui and Mr Ren.  This document was not produced by any of the plaintiff’s witnesses and there was no evidence given as to the nature of this document or the relationship between this entity and the Min Tai Group.  After the plaintiff closed its case, this document was used by the plaintiff’s counsel (not the plaintiff’s current team of lawyers) for the purpose of cross-examining the 2^nd defendant. The defendants objected to this statement and had asked the plaintiff to call the maker of this statement.  The document was a hearsay document.  Its authenticity and accuracy had not been proved or tested.  The Court should not and will not even begin to consider drawing inference from such evidence.

6.22  Mr Wong submitted that this document had been put to the 2^nd defendant in cross-examination and he confirmed that this entity was responsible for his social insurance.  At the same time, there was evidence from the 2^nd defendant that the social insurance was, as a common Mainland practice, only purchased for the purposes of obtaining entry permits to go to Hong Kong and it did not indicate that there was any employment relationship with Min Tai Property.

6.23  As pointed out by Ribeiro PJ in Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387 at paragraph 185 about drawing inference on the basis of circumstantial evidence :

‘ 185. …any such inference must be properly grounded in the primary facts found. The court guards against indulging in conjecture under the guise of drawing an inference where the primary evidence does not logically and reasonably justify the particular inference in question.’

6.24  Mr Wong did not ask for the case to be remitted to the Judge to consider the question of personal connection and conflict arising therefrom.  He only invited this Court to draw the inference ourselves.  This is plainly a case where different inferences may be drawn on the question of relationships.  Generally speaking, when a person acquired shares in his name, the starting position is that he is the beneficial owner of the shares.  In this case, in my view this Court cannot come to a reasonable and definite inference which is more probable than the other conflicting inference that Mr Hui or the 2^nd defendant must be a nominee of the 1^st defendant.  I will address the position of Mr Ren in the discussion about Zhong Cheng.

(iii)  Zhong Cheng

6.25  Mr Tsang in his 3^rd affirmation stated that :

‘ Zhong Cheng’s present major shareholder is 任春祥 (“Yam”) [i.e. Mr. Ren], who presently holds 60% of Zhong Cheng’s shares. I have met Yam a few times during the past two years. Yam was introduced to me by Chu and both of them confirmed to me that Yam has assisted Chu with his business for many years and that Yam has worked within the Mintai Group (which I believe is controlled by Chu) including Zhong Cheng for some years.’

6.26  The Judge was fully aware of the position of the 2^nd defendant, Mr  Hui and Mr  Ren in relation to their shareholdings in Zhong  Cheng. The plaintiff is really asking this Court to speculate that at the time the plaintiff passed the resolution regarding the Zhong   Cheng transaction, the 2^nd defendant or Mr Hui still had interests in Zhong Cheng and that they were holding such interests on the 1^st defendant’s behalf.  Likewise, Mr Tsang’s evidence regarding Mr Ren being a personal friend of the 1^st defendant do not give rise to a reasonable or more probable inference that Mr  Ren was holding shares in Zhong Cheng as a nominee of the 1^st defendant.  Many of the discussions above regarding Hua  Ke apply equally to Zhong Cheng.  For the reasons mentioned earlier, the social insurance record in relation to Mr Ren is also of limited probative value.  

3)  Requirement of disclosure not proved

6.27  As the plaintiff had failed to establish that the 1^st and 2^nd defendants had an interest in the Hua Jia Fu transaction, the plaintiff had failed to establish the 1^st and 2^nd defendants had an interest in Zhong Cheng.  As such, the requirement of disclosure simply does not arise.

6.28  Likewise, as the plaintiff failed to establish that the 1^st  and 2^nd defendants had an interest in Hua  Ke, the requirement of disclosure again does not arise.  Furthermore, as the Hua Ke transactions were businesses within Yuan Cheng, they did not require the approval of the plaintiff’s board.  The Judge further accepted the defendants’ case these transactions were bona fide transactions.

VII.  Conclusion

7.  Accordingly, the plaintiff’s appeal against the 1^st and 2^nd defendant is dismissed.

VIII.  Costs

8.  There will be a costs order nisi that,

(1) the plaintiff is to pay the 1^st defendant the costs of the appeal with certificate for two counsel,

(2) in respect of the 7^th defendant, the plaintiff is to pay his costs up to the date of the plaintiff’s withdrawal of the appeal against him, and

(3) there is no order as to costs between the plaintiff and the 2^nd defendant.

IX.  Costs of preparing appeal bundles

9.1  The Court will further disallow the costs of photocopying and preparing the eleven appeal bundles in the event Simon Ho & Co, the plaintiff’s solicitors, seeks to recover such costs from the plaintiff.

9.2  An extremely wasteful practice is prevalent in appeal hearings where all of the document bundles in the Court below (sometimes in massive volumes) are photocopied and reproduced as appeal bundles irrespective of what documents had actually been referred to and used below and irrespective of what documents are intended to be used on appeal.  The present case is an example of such wastage.  Shortly before the hearing and after the lodging of the eleven appeal bundles totalling 2,197 pages, the plaintiff’s solicitors, on the advice of counsel, lodged a two-volume core bundle.  These core bundles directed to be prepared under Practice Direction 4.1 (Civil Appeals to the Court of Appeal) should have been prepared and lodged in the first place instead of the eleven bundles. In respect of the core bundles, again only a few documents were actually used on appeal.  This wasteful practice must be put to a stop.  Solicitors in charge of appellate preparation must take a more active role in considering what documents have to be used on appeal.  They should not simply leave the task to their trainees, legal executives, clerks or secretaries.  As a starting point they should include in the appeal bundles only those documents that had actually been referred to at the trial.  They must be in a position to perform this task because they are expected to have actively participated in the trial by keeping notes and perusing counsel’s opening and closing written submissions below.  They should also consult counsel well in advance to see what documents need to be used on appeal.  A rule of thumb is to include only those documents that counsel intends to refer in the written submission for the appeal.  The Court will in the future take a more robust approach in dealing with the costs of wasteful preparation of documents whether between parties or between solicitors and client.

Hon Yuen JA :

10.  I agree with the judgment of Cheung JA.

Hon Chu JA :

11.  I agree with the judgment of Cheung JA.