AACHEN (ASIA PACIFIC) CONSULTANTS LTD v. KHOO EE LIAM

HCA 4354/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 4354 OF 2003

____________

_____________________

J U D G M E N T

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Background

1.  The plaintiff was a company in Hong Kong which carried on business of providing services in corporate finance, acquisition, investment and general business consultancy.  Andrew A Chen (“Chen”) was described as a director of the plaintiff.  In November 2003, the plaintiff commenced proceedings against the defendant for recovery of a sum of A$4,322,468.30, claimed to be the outstanding balance of a consultancy fee (“Fee”) payable by the defendant to the plaintiff under a Mandate Agreement in writing dated 5 December 1997 (“Mandate Agreement”). 

2.  The Mandate Agreement provides that in consideration of the services to be rendered by the plaintiff for, inter alia, sourcing an Australian listed company for the defendant’s acquisition, the defendant would pay to the plaintiff the Fee of 10% of the net tangible assets of the listed company.

3.  By way of defence, the defendant claims that:

(1)  the plaintiff has failed to prove its entitlement to the sum of A$4,322,468.30 which it claims as the Fee due under the Mandate Agreement ;

(2)  the plaintiff and/or Chen at all material times carried on the business of advising the defendant concerning securities, but neither the plaintiff nor Chen was registered as an investment adviser or investment representative, as required under sections 49 and 50 of the Securities Ordinance, Cap 333 (“Ordinance”), since repealed and replaced by the Securities and Futures Ordinance, Cap 571;

(3)  the plaintiff at all material times acted as the defendant’s investment adviser, and under section 143(1)(b) and (3) of the Ordinance, the plaintiff was prohibited from entering into and performing the Mandate Agreement as an investment advisory contract within the meaning of the Ordinance;

(4)  the Mandate Agreement was induced by misrepresentations that Chen was a director of the plaintiff, when he was not;

(5)    Chen had failed to disclose to the defendant that he was an undischarged bankrupt;

(6)  the Mandate Agreement was subject to an express, or alternatively implied, term that the shares of the listed company to be acquired by the defendant was to be traded on the Australian Stock Exchange after completion of the acquisition, and the plaintiff was in breach of such term, such that there was a total failure of consideration;

(7)  the plaintiff was in breach of the express, or alternatively implied, fiduciary duty of good faith under the Mandate Agreement, by permitting its personal interests to be in conflict with its duty to the defendant;

(8)  the plaintiff was in breach of the Mandate Agreement, or was negligent, in failing to exercise reasonable care or skill in providing its services and/or advice under the Mandate Agreement. 

4.  The defendant claims that by reason of the matters referred to in (2), (3), (4) or (5) above, he was entitled to rescind the Mandate Agreement, and is not liable to pay the Fee claimed under the Mandate Agreement.  The defendant further counterclaims for the loss and damage he had suffered as a result of the plaintiff’s breach of the Mandate Agreement or its negligence, including wasted professional fees of US$72,000 and A$25,327.52 which he had paid to professionals engaged under the Mandate Agreement, as well as the sum of A$550,000 he had paid to the plaintiff under the Mandate Agreement. 

5.  Detailed submissions have been made meticulously by counsel for both parties.  I will not deal with each and every point they have conscientiously raised, but will focus on the major issues and the reasons which have led me to the conclusions which I have drawn on these issues.  If my judgment is brief, it should not be taken to mean that I have not considered all the submissions which Counsel have made, with the care that they deserve. 

The underlying transactions

6.  To put matters simply, the defendant and his wife were the beneficial owners of a BVI company called HCK China Investment Ltd (“HCK”).  HCK held 100% of the shares in Golden Glory International Ltd (“Golden Glory”), which in turn held 86.2% of the issued capital in a PRC company known as Beijing Badaling Cable Car Company Ltd (“Badaling”).  Badaling had interests in a cable car business at Badaling in Mainland China.

7.  The defendant wished to inject his interests in the cable car business into a public listed company, to raise finance from the public and to enhance the value of his interests.  Through the introduction of his brother Ee Ping (“Ping”) and a friend Phuan, the defendant came to know Chen in late 1997.  The defendant sought Chen’s help to identify a Hong Kong listed company to purchase, but was persuaded by Chen that the premium for the shell of a Hong Kong listed company was too expensive, and Chen recommended an Australian listed company instead.

8.  Chen recommended an Australian listed company to the defendant, because he was aware that Wah Nam Group Ltd (“WNG”) and its associates held the majority shareholding in an Australian listed company called Investment Austasia Ltd (“IAL”), and was interested in selling their shares in IAL. WNG and its associates held a total of 83.57% shareholding in IAL, with a further 5.86% held in the name of other associates, ie Charmlink and Wise Spencer. Chen had apparently been involved before in WNG’s takeover of IAL.

9.  The main asset of IAL was its shares in a subsidiary, Wah Nam Infrastructure Investment Ltd (“WNII”), which held interests in toll road projects in Mainland China.

10.  The proposal made by Chen to the defendant (“Acquisition”) was that the defendant would purchase the bare shell of IAL, and then inject the shares in Golden Glory into IAL by a sale.  Golden Glory would then become a subsidiary of IAL.  At the same time, IAL would sell its original assets, ie the shares in WNII, back to WNG.

11.  In relation to all issues in this case, I have borne in mind that the relevant events took place as early as in 1997 to 1999. The witnesses did not profess to have clear recollection of these events, which is understandable. When dealing with the disputed evidence, I prefer to place more reliance on the written documents and the contemporaneous correspondence and notes produced in evidence.

12.  The evidence shows that it was Chen who took the lead and played a key role in discussing the terms and structure of the Acquisition with WNG, IAL and the professionals Chen selected and engaged for the Acquisition.  As a result of such negotiations, on 5 December 1997, the Mandate Agreement was signed between the plaintiff and the defendant.  On the same day, the Heads of Agreement was also signed between the defendant and 2 associated companies of WNG (Tascott and Yen Sheng), whereby not less than 50% but not more than 85% of the shares in IAL were to be sold to the defendant.  The Heads of Agreement contemplated the sale of IAL’s subsidiaries to WNG for A$46 million, IAL’s acquisition of Golden Glory for A$46 million, and WNG’s sale of its shares in IAL to the defendant, based on the net tangible assets value of IAL after the sale of its subsidiaries.

13.  On 8 December 1997, the plaintiff also agreed with WNG to reimburse WNG its expenses to be incurred in the Acquisition, up to a maximum of 3% over and above the consideration on the sale of IAL (“Costs Reimbursement Agreement”). There is a dispute as to whether the defendant was aware of such an agreement.

14.  As the Mandate Agreement between the plaintiff and the defendant acknowledges, the Acquisition was by an exchange of assets.  The structure of the Acquisition agreed was that WNG was to sell the shares in IAL on the value of its net tangible assets (“NTA”) plus 3 percent.  WNG would buy back the assets held by IAL, also at NTA value, with deferred terms of payment in relation to 15% of the price of the assets.  IAL would then use the proceeds of the sale of its assets to purchase the cable car business. 

15.  The approval of the shareholders of IAL by general meeting was required for the Acquisition, and for such purpose, shareholders who were interested in the Acquisition, such as WNG and Wah Nam Holdings Co Ltd (“WNH”), could not vote.  It was hence agreed that HCK was to purchase part of the IAL shares from parties associated with WNG but through the use of nominees, such that the nominees would be able to vote at the general meeting.

16.  The Heads of Agreement was intended to be replaced by formal agreements. After further negotiations between Chen, IAL and WNG, the formal agreements for the Acquisition were signed in April 1998 (“Acquisition Agreements”), between HCK on the one part, and WNG, WNH and other associated parties on the other part, for HCK’s purchase of 83.6% of the shares in IAL for a total consideration of A$40,721,282.88, and for IAL’s sale to WNG of WNII and another subsidiary, IALHK, at a consideration of A$49 million.  A$7.35 million of the A$49 million was to be paid within 15 months, secured by a deposit of all the WNII shares and by 8 promissory notes issued by WNG, 4 in favor of IAL and 4 in favor of HCK.

Any contravention of sections 49 & 50?

17.  According to the defendant’s case, at all material times, the plaintiff and/or Chen was an investment adviser within the meaning of the Ordinance, since they were advising the defendant concerning securities when they performed services under the Mandate Agreement.  Neither the plaintiff nor Chen was registered as an investment adviser or an investment representative, as required under sections 49 and 50 of the Ordinance.  The defendant therefore claims that the Mandate Agreement is illegal and unenforceable, and void.

18.  Mr Lam, counsel for the plaintiff, argued that neither the plaintiff nor Chen was required to be registered under the Ordinance.  I do not agree.

19.  Section 49 of the Ordinance provided that:

“49. Registration as an investment adviser

(1) A person (whether an individual or a body corporate, or a member of a partnership or director of a body corporate) shall not in Hong Kong act as an investment adviser or hold himself out to be an investment adviser unless he is registered as an investment adviser under this Part.

(1A) A corporation shall not in Hong Kong act as an investment adviser, or hold itself out to be an investment adviser, unless a least one of the directors of the corporation, or, in the case of a corporation having only one director, that director, actively participates in, or is directly responsible for the supervision of, the corporation’s business as an investment adviser and is registered as an investment adviser under this Part.

(a) that corporation;

(b) a registered dealing partnership, in which that corporation is a partner; or

(c) another corporation of which he is a dealing director and which is also a registered dealer.

(2)  Any person who knowingly acts in contravention of subsection (1) shall be guilty of an offence and shall be liable on conviction to a fine of $50,000 and, in the case of a continuing offence, to a further fine of $500 for each day during which the offence continues.” 

20.  Section 50 of the Ordinance provided that:

“50. Registration as a representative

(1) No person shall –

(a) act as a dealer’s representative in Hong Kong unless he is registered as such under this Part: or

(b) act as an investment representative in Hong Kong unless he is registered as such under this Part.

(c) a certificate of registration authorizing him to carry on business as an investment adviser; or

(d) a certificate of registration authorizing him to act as a representative of a registered investment adviser.

(1A) Subject to sections 50A and 53 and to subsection (5), the Commission shall, on application by any partnership in the prescribed manner and on payment of the prescribed fee, issue to the partnership a certificate of registration –

(a) authorizing the partnership to carry on the business of dealing in securities; or

(b) authorizing the partnership to carry on business as an investment adviser.

(2)   A certificate of registration shall be subject to such reasonable conditions as the Commission considers necessary.”

21.  An “investment adviser” is defined in section 2(1)(a) of the Ordinance as any person who “for remuneration carries on a business of advising other persons concerning securities …”.

22.  In my judgment, “securities” by definition in the Ordinance extend to the shares of a company incorporated outside Hong Kong, such as the Australian listed company to be acquired by the defendant under the Mandate Agreement.

23.  “Securities” is defined in section 2(1) (b) of the Ordinance to mean “any shares, stocks, debentures, loan stocks, funds, bonds, or notes of, or issued by, any body, whether incorporated or unincorporated, or of any government or local government authority” (emphasis added).

24.  Although the definition of “securities” in section 2 of the Ordinance expressly excludes the shares of any company which is a private company within the meaning of section 29 of the Companies Ordinance, there is no express exclusion of the shares of a company incorporated outside Hong Kong.

25.  Further, “share” is defined in section 2 of the Ordinance to mean “a share in the capital of a corporation”.  “Corporation” is in turn defined in section 2 to mean “any company or other body corporate formed or incorporated either in Hong Kong or elsewhere” (emphasis added). 

26.  For the reasons elaborated in the following paragraphs, I also consider that in rendering their services under the Mandate Agreement, the plaintiff and Chen were giving to the defendant advice “concerning securities”. 

27.  The Mandate Agreement acknowledges, by its recitals, that the plaintiff was engaged for the purpose of: “sourcing an Australian listed company (“Listed Company”) for acquisition” by the defendant by an exchange of its assets; “negotiating with the principal shareholders and the management of (the Listed Company)”; “proposing the appropriate structure and strategies for such acquisition and in providing advice with respect to the regulatory and Australian Exchange requirement”. 

28.  The plaintiff and Chen were engaged to, and did, advise the defendant on the suitable listed company to be acquired by the defendant.  Their services did not end there, as they were also to advise, and did advise, the defendant on the structure for the Acquisition and, as the evidence shows, on its pricing. The structure was based on an exchange of the assets of the companies controlled by the defendant with the assets of the Listed Company or the entities controlling the Listed Company, but was to result in the defendant directly or indirectly holding shares in the Listed Company to be acquired.  The Mandate Agreement acknowledges that the plaintiff was to provide advice on the rules and regulations of the Australian Stock Exchange (“ASX”), and this can only mean advising on such rules and regulations as are applicable to the Acquisition, and how they were to be complied with for the Acquisition. 

29.  It was argued on behalf of the plaintiff that there is no evidence that it was the plaintiff, as opposed to Chen himself or some other registered or exempt investment adviser, who was involved in giving advice concerning securities under the Mandates Agreement.

30.  At all material times, it was Chen who was the key person representing the plaintiff in the performance of the services undertaken by the plaintiff under the Mandate Agreement.  There is no evidence that any other representative of the plaintiff (registered or not) was involved in the provision of services to the defendant under the Mandate Agreement, besides Chen.  As Mr Chan SC, who appeared for the defendant, pointed out, Chen himself admitted in his cross-examination that in conducting negotiations on the Acquisition under the Mandate Agreement, he had to advise the defendant on the terms of the Acquisition, and the pros and cons of the terms.  He made proposals for the structuring of and the strategies in the Acquisition, and the steps to take in order to implement the Acquisition.  Such advice clearly concerned and related to the defendant’s Acquisition of the shares in the Listed Company, which are “securities”. Even though lawyers, accountants and corporate finance advisers were retained by Chen on the defendant’s behalf in Australia to prepare documents for, and to advise on, the Acquisition, it is clear from the evidence that Chen was the key person leading the negotiations, and liaising and corresponding with these professionals on behalf of the defendant in the course of such negotiations. 

31.  Chen was closely involved in the advice, being the person who directly corresponded and liaised with the solicitors and the consultants.  He was also the person directly in contact with the senior management of IAL and of WNG in the negotiations.  Chen was certainly not a mere conduit for communications between WNG/IAL on the one part and the defendant on the other part, and between the solicitors and corporate advisers on the one part and the defendant on the other part.  Many of the meetings and correspondence with the Australian lawyers were attended or conducted by Chen only.  On occasions when instructions were sought or a decision had to be made by the defendant, the evidence shows that it was Chen to whom the defendant turned for advice and that it was effectively Chen who was advising the defendant on the matters raised by and discussed with the professionals. 

32.  All these services described in the Mandate Agreement, which were acknowledged to be provided by the plaintiff, and which were in fact shown on the evidence to have been provided by the plaintiff through Chen under the Mandate Agreement, constituted or involved the plaintiff, and Chen acting for the plaintiff, giving advice “concerning securities”.  “Advising other persons concerning securities” is a wide term.  In my view, this includes giving any advice in connection with, or relating to, securities, which term by definition includes the shares in a listed company or a corporate formed or incorporated in Hong Kong or elsewhere. 

33.  It was argued on behalf of the plaintiff that it had not carried on any business of advising others concerning securities.  Relying on Chung Fai Holdings Ltd v D H International Ltd, HCA 3351 /1998 22 July 1999, Counsel for the plaintiff argued that a degree of continuity is required before an entity can be said to be carrying on business, and that such continuity is missing in the plaintiff’s activities said to constitute its business.

34.  In GE Capital Bank Ltd v Rushton [2006] 3 All ER 865, the English Court of Appeal considered various cases, including Conroy v Kenny [1999] 1 WLR 1340 and Davies v Sumner [1984] 3 All ER 831, in which the courts had accepted that a one-off adventure may be part of a business or itself constitute a trade or business.  The court agreed that in an appropriate context, the expression “carries on a business” may be apt to refer to a single transaction in the way of business.

35.  It is clear from the evidence that the plaintiff had set up an office in Hong Kong, and had produced and issued the brochure (“Brochure”) of the AP Capital Group (“Group”),of which the plaintiff forms part.  The Brochure describes Chen as a principal of the Group offering advice on investment projects, and on other principals and consultants of the Group offering services to investors in the fields of project financing, mergers and acquisitions and other investments.  The Mandate Agreement was prepared and signed by the plaintiff for the Acquisition.  The services covered by the Mandate Agreement were to be provided with a view to profit.  The services were clearly an integral part of, and not merely incidental to, the services of the Group (including the plaintiff) and held out to be available to the public, as described in the Brochure.  The plaintiff issued an invoice to the defendant for the services provided by Chen under the Mandate Agreement.  Chen himself admitted in cross-examination that he was conducting business in Hong Kong in the name of the plaintiff.

36.  On the evidence which I have seen, I am satisfied that by the time when the Mandate Agreement was signed, the plaintiff was clearly offering its services and the services of Chen as part of its business.  As such, the plaintiff and Chen were acting as investment advisers and they ought to have been registered under sections 49 and/or 50 of the Ordinance.

Effect of contravention of sections 49/50

37.  The Ordinance does not provide that a contract entered into in breach of sections 49 and 50 would be void, or unenforceable.

38.  Mr Lam for the plaintiff relies on a line of cases (Richardson Greenshields of Canada (Pacific) Ltd v Paul Chow [1989] 1 HKC 261, Hughes v Asset Managers plc [1995] 3 All ER 669, Yango Pastoral Co Ptd Ltd v First Chicago Australia (1978) 139 CLR 410, Tullett & Tokyo International Securities Ltd v APC Securities Co Ltd [2001] 2 HKLRD 356 and Chung Fai Holdings Ltd v D H International Ltd CACV 229/1999 3 February 2000), to argue that despite any contravention of sections 49 and 50 of the Ordinance, the Mandate Agreement is not rendered void or unenforceable as a result.

39.  Richardson Greenshields is distinguishable from the present case. In the present case, the plaintiff whose business should have been registered but which is not is suing for fees for the very services which are regulated by sections 49 and 50 of the Ordinance.  There are no third party interests involved, since the defendant is not seeking to avoid trades entered into by an unregistered adviser or dealer on the customer’s behalf. 

40.  There is much attraction in Mr Chan SC’s argument that if the law does not allow an unregistered investment adviser to give investment advice, the law should not permit the unregistered adviser to sue for his fees.

41.  Nevertheless, the courts emphasized in the cases referred to in paragraph 38 above that “it is not lightly to be inferred that the legislature intended sanctions beyond the penalties it laid down” ( as per Bokhary J, as he then was, in Richardson Greenshields of Canada (Pacific) Ltd v Paul Chow [1989] 1 HKC 261, at 269).  Section 76 and section 143 of the Ordinance made express provisions for civil consequences of breach of the statutory provisions, whereas other provisions such as sections 20, 48, 49 and 50 only provided for criminal sanctions and penalties, and were silent on the civil consequences.  The fact that a statute expressly provides for civil consequences in regard to some breaches tends to suggest that the Legislature did not intend civil consequences in regard to breaches for which no such consequences are expressly provided.  This is the conclusion to which I have come, albeit with some reluctance.

Any contravention of section 143?

42.  Section 143 (1) of the Ordinance provided as follows:

“143. Investment advisory contracts

(1) No investment adviser or investment advisers’ partnership shall enter into an investment advisory contract with any person in Hong Kong (in this section referred to as his client), or extend or renew any such contract, or in any way perform any such investment advisory contract entered into, extended, or renewed after the commencement of this section, if the contract –

(a) provides for remuneration to be paid by the client to the investment adviser or investment advisers’ partnership on the basis of a share of capital gains of the funds or any part of the funds of the client;

(b) does not include a provision to the effect that an assignment of the contract by the investment adviser or investment advisers’ partnership shall be made only with the consent of the client; or

(c) does not include a provision –

(i) if entered into by an investment advisers’ partnership, to the effect that the partnership will notify the client of any change in the partners thereof; or

(ii) if entered into by an investment adviser who is a corporation, to the effect that the corporation will notify the client of any change in the directors thereof,

within a reasonable time after change.” 

43.  An “investment advisory contract” is defined in section 143 (3) to mean “a contract or agreementwhereby a person agrees to act as investment adviser”. 

44.  I have already found that the plaintiff, acting through Chen as its purported director, was an “investment adviser” who for remuneration carried on a business of advising other persons concerning securities, within the meaning of the Ordinance.  Accordingly, the Mandate Agreement was at all material times an “investment advisory contract” within the meaning of section 143 of the Ordinance.

45.  Any investment adviser who knowingly enters into a contract in contravention of the provisions of section 143 (1) is guilty of an offence and is liable on conviction to a fine of $2000. 

46.  Section 143 (5) expressly provides that any contract which is entered into in contravention of section 143 (1) “shall, notwithstanding anything in the contract, be voidable at the option of the client”.

47.  Clearly, section 143 (1) prohibits not only the making of the contract for investment advice which does not include a provision that an assignment of the contract can only be made with the consent of the client (“Required Provision”), but further, by its express terms, prohibits the performance of such a contract. 

48.  There is no dispute that the Mandate Agreement does not contain the Required Provision.  Leading Counsel for the defendant submits that, following the reasoning of Kerr LJ in Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd [1988] QB 216, the Mandate Agreement is void and cannot be enforced by the court, since the Ordinance expressly prohibits such a contract from being made and from being performed.  The defendant claims that the plaintiff had purported to assign the Mandate Agreement to WNG.

49.  I agree that the present case is distinguishable from Hughes v Asset Managers PLC [1995] 3 All ER 669.  The reservations expressed by the court in Hughes against transactions being rendered void which may produce hardship and injustice on wholly innocent parties do not arise in the present case.  The defendant does not seek to avoid deals which were made by the plaintiff in reliance on the Mandate Agreement.  He only seeks to avoid payment of the Fee claimed by the plaintiff in reliance on the services rendered by the plaintiff under the Mandate Agreement, the making and performance of which is prohibited under section 143 (1) of the Ordinance.  No third party interests are affected.

50.  In any event, under the express provisions of section 143 (5) of the Ordinance, the Mandate Agreement is voidable at the option of the defendant.  In his Amended Defence and Counterclaim, the defendant pleads that the Mandate Agreement was annulled by the service of his Amended Defence and Counterclaim.

51.  Mr Lam argued that even if the Mandate Agreement contravened section 143 (1) (b), it cannot be avoided by the plaintiff, because the Ordinance (which was in force when the Mandate Agreement was made in 1997 and when the services thereunder were performed) was repealed by the Securities and Futures Ordinance with effect from 1 April 2003, which was before the service of the Amended Defence and Counterclaim on 29 August 2008.

52.  Section 23 of the Interpretation and General Clauses Ordinance (“section 23”) provides that:

“Where an Ordinance repeals in whole or in part any other Ordinance, the repeal shall not –

(a) revive anything not in force or existing at the time at which the repeal takes effect;

(b) affect the previous operation of any Ordinance repealed or anything to be done or suffered under any Ordinance repealed;

(c) affect any right, privilege, obligation or liability acquired, accrued or incurred under any Ordinance so repealed;

(d) affect any penalty, forfeiture or punishment incurred in respect of any offence committed against any ordinance so repealed; or

(e)  affect any investigation, legal proceedings or remedy in respect of any such right, privilege, obligation, the liability, penalty, forfeiture or punishment as aforesaid; and any such investigation, legal proceedings or remedy may be instituted, continued or enforced, and any such penalty, forfeiture or punishment may be imposed, as if the repeating Ordinance had not been passed.”

53.  Leading Counsel for the defendant argued that as clearly provided in section 23 (b), the repeal of the Ordinance shall not affect the previous operation of the Ordinance, and this means that the effectiveness of the previous operation of the Ordinance continues (Aitken v South Hams District Counsel [1955] 1 AC 262).

54.  In reliance upon the judgment of Lord Rodger in Wilson v First County Trust Ltd (No 2) [2004] 1 AC 816, it was further argued by Mr Chan SC that the presumption is against legislation impairing rights that are described as “vested”, and that the basis of the presumption is simple fairness. It was argued that it cannot be fair for the plaintiff to say that the statutory right to avoid a contract which contravened 143 (5) should come to an end on 1 April 2003 when the Ordinance was repealed. 

55.  It is important to bear in mind the purpose of the Ordinance.  As set out in section 1, the Ordinance is to “make provision in relation to stock markets and dealers in securities, to control trading in securities and the business of advising on making investments, and to provide for the protection of investors and associated matters”.  Clearly, the aim and object of the Ordinance is to protect investors in the regulated businesses of advising on making investments and the trading in securities. 

56.  I agree that since the Mandate Agreement was entered into without the Required Provision on 5 December 1997, before the repeal of the Ordinance, the repeal should not affect the operation of the Ordinance in relation to the parties’ making and performance of the Mandate Agreement, as something “duly done or suffered” under the Ordinance before its repeal.

57.  Mr Lam for the plaintiff argued that any “right” which the defendant may have, in relation to the Mandate Agreement or under the Ordinance, is only a right to avoid the Mandate Agreement under section 143 (5), and that any such right had not yet “accrued” or become vested before the repeal of the Ordinance. Mr Lam argued that such right, if any, is to be distinguished in nature from the right acquired and dealt with on the facts of Chief Adjudication Officer v Maguire [1999] 2 All ER 859, where the claimant had suffered an industrial disease in 1985, which entitled him to claim a serious hardship allowance under the Social Security Act 1975, but no claim was made by the claimant before the repeal of that allowance in October 1986.  The court held in Maguire that the claimant had acquired a right under the relevant section of the statute when he satisfied the substantive criteria for the allowance.

58.  Mr Lam referred to a decision of the Court of Appeal of the Supreme Court of Queensland in Australand Corporation (Qld) PTY Ltd v Johnson [2007] QCA 302, in which the Australian court dealt with a right to avoid a contract under section 1073 (2) of the Corporations Law, which right was repealed by a subsequent Act.  In Australand, the court had to consider whether the appellants in the case had an acquired or accrued right under a provision similar to our section 23. 

59.  When considering the decision in Maguire, Jerrad JA observed in Australand that the claimant in Maguire was held to have acquired the right under the repealed statute, because he had experienced the injury or ill health, but that such right differed in quality from the right to avoid a contract.  Jeraad JA considered that “an unexercised right to affect legal relations with another party” was not an acquired right of the sort in Maguire, but was only a “commercial choice available” to the appellants at the date of the repeal. 

60.  In Australand, the court found that as the option conferred on the appellants remained an unexercised one at the date of the repeal of the statutory provision, the appellants had no right which could be enforced by any order of the court against the respondent, so as to change any of the rights and duties which constituted the relationship between the parties.  There was no act or event which could convert the right to take advantage of the statutory provision into an accrued or acquired right.  The right to avoid the contract was contingent on the giving of the notice, which was a mere right in the appellants to take advantage of an enactment, without any acts done towards abating themselves of that right before the repeal of the enactment.  In those circumstances, it was held that the right asserted fell short of an “accrued right”.  It was further held that when the statutory provision was repealed, there was “no source” for the right to avoid the contract, and that the right to take advantage of the enactment did not survive the repeal of the enactment.

61.  Leading Counsel for the defendant emphasized that under section 1073 (2) of the Corporations Law, the contract which could be avoided was expressed to be “voidable at the option of that person by notice in writing given”.  By contrast, no specific mode of avoiding the contract was prescribed under section 143 (5) of the Ordinance.

62.  Leading Counsel also highlighted the fact that in  Chief Adjudication Officer v Maguire, it was held that a right under an enactment could be acquired under the English equivalent of our section 23 (c), even though that right was contingent upon an event which occurred only after repeal of the enactment.  Thus, it was argued, the defendant could still rely upon the service of the Amended Defence and Counterclaim after the date of the repeal, as rescission and avoidance of the Mandate Agreement pursuant to section 143 of the Ordinance.

63.  I accept that the defendant has a right under section 143 to avoid the Mandate Agreement.  As Simon Brown LJ observed in his judgment in Maguire (at page 868):

“A mere hope or expectation of acquiring a right is insufficient. An entitlement, however, even if inchoate or contingent, suffices. The fact that further steps may still be necessary to prove that the entitlement existed before repeal, or to prove its true extent, does not preclude it being regarded as a right.

… But to my mind all these cases establish is essentially this: that whether or not there is an acquired right depends upon whether at the date of repeal the claimant has any entitlement (at least contingent) to money or other certain benefits receivable by him provided only that he takes all appropriate steps by way of notices and/or claims thereafter.”

64.  In my judgment, there is no basis to require the “right” or entitlement to be limited only to a right to money, or to “benefits receivable”.  The entitlement to avoid a contract, or an “option” as the plaintiff argued, suffices in my judgment to be a “right”.  The right to avoid the contract, conferred by section 143 (5) of the Ordinance, is more than a mere hope or expectation of being granted a remedy.  The section simply provides that where there is an investment advisory contract which is entered into and which does not include the Required Provision, then it shall be voidable at the option of the client.  No other formality or procedure is required.  Nor is the exercise of the right to avoid made subject to the discretion of the court.

65.  On the facts of this case, I am also satisfied that the right to avoid the Mandate Agreement had been exercised and vested in the defendant prior to the date of the repeal of the Ordinance.  On the plaintiff’s own pleaded case (paragraph 16.1 of the Re-amended Reply and Defence to Counterclaim), the defendant had served a notice on the plaintiff on 23 October 2002 to rescind the Mandate Agreement.

66.  As Mr Chan SC argued and I accept, a contract can be validly avoided or rescinded by clear and unequivocal communication or conduct (Zheng Chulin v Wo Kee Hong Kong Industrial Ltd CACV 56/2012 12 June 2012).  The notice of 23 October 2002 was a letter from the defendant’s former solicitors to the plaintiff and its solicitors, by which unequivocal notice was given that the Mandate Agreement was rescinded by the defendant pursuant to section 925A of the Corporations Act 2001.  I accept that it is open to the defendant to rely on this letter as notice of his rescission or avoidance of the Mandate Agreement under section 143 of the Ordinance.  In law, a wrong reason being given for an act of rescission or purported repudiation does not invalidate the rescission or repudiation, if in fact a valid reason or ground exists to justify the act of rescission or repudiation (para 20-014 Chitty, 30^th edition).

67.  Mr Lam advocates that the purpose of a notice to avoid is to communicate the defendant’s election, when he has an option whether or not to avoid the Mandate Agreement.  It is only upon an election being made, that the parties’ contractual rights and liabilities changed.

68.  The letter of 23 October 2002 is clear beyond doubt that the defendant sought to rescind and avoid the Mandate Agreement.  It cannot be said that he had not made clear his choice and decision in relation to the Mandate Agreement, and whether or not it should continue in effect.  If the defendant were to ask for the plaintiff’s performance of the Mandate Agreement after 23 October 2002, the plaintiff’s response would naturally have been that the Mandate Agreement had already been terminated by the defendant’s notice, and that their rights and liabilities had changed with effect from that date.  In fact, the plaintiff pleads in its Re-amended Reply that the Mandate Agreement had been repudiated by (inter alia) the defendant’s rescission of 23 October 2002, and that his repudiation had been accepted by the plaintiff.  The notice of rescission of the Mandate Agreement on 23 October 2002 must be termination of the Mandate Agreement for all purposes, and not just under the Corporations Act.

69.  Despite the defendant’s plea that the Mandate Agreement was rescinded by his service of the Amended Defence and Counterclaim, he may rely on, and the Court may find on the basis of, other acts of rescission pleaded by the plaintiff (Poon Hau Kei v Hsin Chong Construction Co Ltd [2004] 2 HKC 235).

70.  I reject the argument that the defendant had lost his right to rescind or avoid the Mandate Agreement by reason of delay, or because restitution was no longer possible since the plaintiff had already performed the Mandate Agreement.  There is no time specified in section 143 of the Ordinance for the avoidance of the contract, nor any requirement that it can only be avoided before the contract is performed.  In fact, since section 143 (1) expressly prohibits the performance of the contract, it would defeat the purpose of the section and would not make sense to find that avoidance of the contract is not possible under section 143 (5) after the contract has been performed.

71.  I also accept the valid distinction made by Leading Counsel for the defendant, between the Mandate Agreement which the defendant seeks to rescind, and the Acquisition Agreements entered into by the defendant and his companies. The Acquisition Agreements had been performed, the price thereunder paid for, and the defendant had kept and exercised control of the shares of IAL.  He does not seek to rescind those Agreements.  Even if there was any delay in the defendant’s rescission of the Mandate Agreement, no affirmation of the Mandate Agreement has been pleaded, and I do not consider that on the evidence there was any affirmation on the defendant’s part.

72.  My finding that the defendant had avoided the Mandate Agreement under section 143 (5) of the Ordinance is sufficient to dispose of the plaintiff’s claim for the Fee.  The Mandate Agreement having been rescinded and avoided by the defendant, the plaintiff is not entitled to payment of the Fee and the defendant is entitled to repayment of the amounts he had paid in advance to the plaintiff, or at the plaintiff’s requests.  If I should be wrong, however, I set out below my findings on the other issues raised.

The contract between the parties

73.  The Mandate Agreement sets out in its recitals the services to be performed by the plaintiff: the sourcing of an Australian listed company, negotiations with the principal shareholders and the management of such company, proposing the structure and strategies for the acquisition of the listed company, providing advice on the regulatory and Australian Exchange requirements, and the selection and engagement of professionals. 

74.  The defendant pleads that the agreement between the plaintiff and the defendant for the engagement of the plaintiff’s services (“Contract”) was in fact partly made orally, and partly made in writing as evidenced by the Mandate Agreement.  The defendant’s pleaded case is that under the oral agreement, which was made between Chen acting for the plaintiff and the defendant during various meetings held in Hong Kong between September and December 1997, the plaintiff agreed to achieve a listing for Golden Glory.  The defendant further claims that it was an express term of the oral agreement that the shares of the listed company to be acquired under the Mandate Agreement could be traded on the Australian Stock Exchange (“ASX”) after the completion of the acquisition (“Purpose”). 

75.  The Mandate Agreement acknowledges by its recitals that the engagement of the plaintiff was to source a listed company, and that the acquisition of such company was to be by way of an exchange of assets in Mainland China.  Chen never disputed this in his evidence.  According to the defendant, the listed company would not be suitable if he had to use a substantial amount of cash for the Acquisition, and what was envisaged was that the listed company to be acquired should have assets to be disposed of, and which assets should be of approximately the same value as the value of the business and assets to be injected by the defendant into the listed company.

76.  The defendant claims that the Purpose of the Acquisition had been made known to Chan at meetings which were held in September, October and December 1997.  The defendant claims that he had stressed the importance of the Purpose to Chen, and that Chen had repeatedly assured him that there would be no problem in the attainment of the Purpose.  Hence, it is the defendant’s case that the Purpose constitutes an express and fundamental condition of the Contract and of the Acquisition, and that the advice and services to be performed by the plaintiff and Chen were all to secure the attainment of the Purpose.

77.  Chen himself does not dispute in his evidence in court that the defendant was looking for a company whose shares could be traded in the ASX.  In his evidence, Chen admits that in the negotiations prior to the signing of the Mandate Agreement, he had been asked to source a company which would suit the defendant’s purpose, and that he had been informed that the defendant was looking for a company whose shares could be traded on the exchange.

78.  On the evidence adduced, and on the terms of the Acquisition as recited in the Mandate Agreement itself, I have no hesitation in accepting that the Purpose forms part of the oral agreement made between the plaintiff and the defendant in December 1997, or was implied as an obvious and necessary term of the Contract of engagement of the plaintiff, that the listed company to be sourced by the plaintiff for acquisition by the defendant must be able to be traded on the ASX immediately, or at least within a reasonable time, after completion of the Acquisition.  There is no commercial sense to pay for and to complete the purchase of the shares of a listed company, if its listing status cannot be maintained and trading in its shares cannot be resumed within a reasonable time after the Acquisition. 

Whether breach of duty in failing to achieve Purpose or meeting spread requirement

79.  Chen does not dispute that he had a duty under the Mandate Agreement to exercise reasonable care and skill when carrying out the services undertaken under the Mandate Agreement.  However, it was argued that the plaintiff and Chen never guaranteed that the shares of the Australian Listed Company to be acquired by the defendant could be traded on the exchange after completion of the Acquisition, or that the Purpose would be achieved.  Counsel argued that it is inherently improbable that Chen would guarantee to the defendant, before any due diligence had been conducted on Badaling, that after the exchange of assets and the completion of the Acquisition, all ASX requirements would be satisfied and that the shares of IAL could continue to trade on the exchange.  It was pointed out that many factors affecting the terms of resumption of trading of IAL shares on the ASX would be outside the control of the plaintiff and Chen.

80.  I accept that the expressed and agreed Purpose of the Acquisition was to have a company the shares of which would remain listed and could be traded on the exchange after completion.  This means that Chen and the plaintiff had the duty to take reasonable care in advising on the structure and manner of implementation of the Acquisition, so that the Purpose could be achieved.  The Mandate Agreement acknowledges, and Chen himself accepts in his evidence, that the plaintiff and Chen were to advise on the structure for the Acquisition, and this includes corporate finance considerations.  It was also the duty of the plaintiff and Chen to advise on and to find a structure which had the basic features of an Acquisition by exchange of the defendant’s assets and business in Mainland China.

81.  Further, as it was within the contractual duty of the plaintiff and Chen to give advice on the regulatory and ASX requirements relating to the Acquisition, Chen had to advise the defendant on the steps required to be taken in order to comply with these regulations, and to achieve the Purpose.

82.  The defendant claims that the plaintiff and Chen were in breach of their contractual duties, and negligent, in failing to achieve the Purpose, and in failing to advise and warn the defendant that, after the Acquisition, IAL would not be able to meet the spread requirement of the ASX Listing Rules, such that the shares of IAL could not be re-listed and traded on the exchange after completion.

83.  On the documentary evidence, the Purpose and the spread requirement under the ASX Listing Rules had been highlighted right from the beginning of the negotiations in December 1997. 

84.  A letter dated 11 December 1997, from Shaw Stockbroking (“Shaw”) (the corporate advisers engaged by Chen on the defendant’s behalf in Australia) to the defendant, referred to a meeting which was held on 10 December 1997 and attended by Chen, Jonathan Tooth of Shaw, Phuan and the defendant.  The proposal to acquire IAL was referred to, and Tooth pointed out that his understanding from the discussions is that:

“As part of the process (the defendant and the nominee purchaser) seek to keep IAL as an Australian listed company with sufficient spread and liquidity”.

85.  Shaw’s letter referred to “two important elements in this transaction to ensure IAL becomes a successfully listed stock in the ASX”.  The first element identified referred to “the procedures and processes that must be undertaken to ensure the transaction outlined … is carried out efficiently whilst at the same time meeting the requirements of the ASX and the Australian Securities Commission”.  In this context, Shaw pointed out that:

“During the bid process it will be important to ensure that as many shareholders as possible remain as shareholders so that IAL can continue as a listed company. Whilst the number of shareholders can drop below the necessary 500 it will be important to convince the ASX that there is a plan for IAL to grow and in turn increase the number of shareholders and spread.”

86.  Shaw proposed that their engagement should involve two stages of work.  Stage One was to facilitate the process of the Acquisition of IAL and to coordinate and advise where possible on the requirements of the Australian Securities Commission and ASX.  In respect of Stage Two, Shaw pointed out :

“It is highly probable that post the acquisition of IAL by (the defendant) there will be less than 500 shareholders, liquidity will be poor and the share register will be dominated by one group of shareholders, namely (the defendant’s) family group. We will need to determine the best method to achieve the task of increasing liquidity and spread.

As discussed we not in favor of securing a number of shareholders with minimum parcels of shares as this will not benefit the Company in the long term.  We believe that a better method is to undertake a capital raising prior to, or at the time of, an acquisition or expansion plan by the company.  At this point the objectives of increasing liquidity and the number of shareholders can be conveniently addressed.”

87.  Shaw’s letter of 11 December 1997 was signed by the defendant to evidence his acceptance of Shaw’s engagement on the terms and conditions set out in the letter. 

88.  A day before, on 10 December 1997, at a meeting attended by Chen and (inter alia) John McAuley (“McAuley”), a chartered accountant advising the defendant at that material time, McAuley expressed reservations concerning the Acquisition and the scheme proposed.  In McAuley’s letter to the defendant after the meeting, dated 15 December 1997, McAuley highlighted that there was “an urgent need to find sufficient shareholders for IAL to comply with the continued listing requirements ie 500 shareholders of which some 150 should have Australian addresses”. 

89.  On 11 December 1997, Shaw wrote to IAL as the defendant’s corporate adviser and made a proposal in relation to the Acquisition.  In the letter, the intention of the defendant, “to retain IAL as a listed entity on the ASX”, was expressly referred to.

90.  Similarly, in the letter from Peter Lucas (“Lucas”), the non-executive director of IAL, to the defendant dated 22 December 1997, Lucas pointed out that IAL was “mindful” of the defendant’s intention “to establish a reputable and growth oriented listed company”.  After referring to how the proposed Acquisition could proceed, and the most likely price for Golden Glory’s assets being A$35 million, Lucas suggested that the defendant should “discuss the numbers with Chen”, with whom IAL could confer.

91.  On 5 February 1998, the ASX wrote to Lucas, referring to their meeting held on 4 February 1998, and confirmed that ASX was of the view that Listing Rule 11.1.3 would apply to the Acquisition.  ASX further confirmed in the letter that IAL would need to comply with chapters 1 and 2 of the Listing Rules, which include having at least 500 shareholders each with a parcel of shares with a value of at least A$2,000, in accordance with Listing Rule 1.1 Condition 7 (“Spread Requirement”).  Chen claims in his evidence that he had all along been aware of the spread problem. 

92.  Chen was further advised in writing by the Australian solicitors instructed to act for the defendant in the Acquisition (“B&M”) on 12 March 1998, that the Spread Requirement should be addressed before the Acquisition Agreements are finalized and executed, “so that (Chen and the defendant) can be comfortable that IAL will retain its ASX listing after the transactions have been completed”.  In reply, Chen e-mailed B&M to say that the Spread Requirement would be taken care of by him.

93.  The defendant claims that Chen had given assurances at different stages that the Spread Requirement would be taken care of and could be achieved to enable IAL to resume listing.

94.  It cannot be disputed that despite the efforts made by Chen in early 1998 to procure IAL shares to be transferred to and held by nominee companies, to support an application made to ASX in November 1998 for the resumption of trading in IAL shares, on the basis of there being purportedly a total of 513 shareholders of IAL, the application was rejected by ASX.  The ASX considered that the Spread Requirement was not met, as ASX did not accept the accounts of nominee holding as individual registered holders for the purpose of satisfying the Spread Requirement.

95.  The Spread Requirement was introduced in 1996, prior to WNG’s acquisition of IAL in 1995.  On the evidence, IAL had less than 300 shareholders in December 1997, less than the Spread Requirement.  It is not disputed that the ASX had the discretion to insist on, or to relax, compliance with the Spread Requirement. Counsel for the plaintiff accepted that in considering whether the plaintiff was negligent or in breach of its contractual duty of reasonable care and skill, the test is what a reasonable adviser should know about how the ASX would construe the Spread Requirement and how it could be satisfied, and what a reasonable adviser would have advised the defendant to do in the circumstances in order to meet the requirement.

96.  Mr Lam argued on behalf of the plaintiff that it was not reasonably foreseeable to Chen that ASX would take the stance that it did in November 1998, to reject the application for resumption of trading.  Mr Lam cautioned against being overly critical of Chen with the benefit of hindsight.

97.  The question therefore is: was it reasonably foreseeable by Chen that the Spread Requirement would not be met by IAL, and that ASX would not permit the resumption of trading in IAL shares, despite the only efforts Chen made in this regard, namely, to have some IAL shares transferred to nominees?

98.  Condition 7 of Listing Rule 1.1 of ASX provides as follows:

“There must be at least 500 holders each having a parcel of the main class of securities with a value of at least $2,000, excluding restricted securities and, if the entity has previously been removed from the official list, excluding securities not acquired by those holders under a recent prospectus. This requirement is not met if the spread is obtained by artificial means.”

99.  Listing Rule 1.1 Condition 7 carries the following footnote:

“The following ways of obtaining spread are examples of artificial means:

· giving shares away;

· offering non- recourse loans to prospective shareholders to acquire their shares;

·   using combinations of nominee companies and names.”

100.  The plaintiff sought to rely on the fact that ASX had an absolute discretion whether to waive the Spread Requirement.  The Introduction to the Listing Rules of ASX provides:

“ASX has an absolute discretion concerning the admission of an entity to the official list (and its removal) and quotation of its securities (and their suspension). ASX also has discretion whether to require compliance with the listing rules in a particular case (ie, apart from waiving the rules). In exercising its discretion, ASX takes into account the principles on which the listing rules are based.”

101.  According to the defendant’s expert, David Clarke (“Clarke”), the principles on which the ASX Listing Rules are based include the maintenance of minimum standards of quality, size, operations and disclosure, and there being sufficient investor interest. 

102.  The introduction to the Listing Rules further provides that ASX may waive compliance with a listing rule, or part of a rule, unless the rule in question says otherwise.

103.  The meaning and effect of Condition 7 of Listing Rule 1.1 seem clear.  The requirement is set out in the rule.  The footnote to Condition 7 also sets out clearly that the use of combinations of nominee companies is one example of a spread being obtained by artificial means.  It should be clear to any adviser that the ASX takes the view that the use of nominee companies may be artificial, and that there is a risk of such use being scrutinized or rejected by the ASX for purposes of the Spread Requirement. 

104.  What is also clear from the Introduction to the Listing Rules is that if the ASX waives compliance with Condition 7, it is entirely at its discretion.  The meaning of “discretion” is similarly clear.  The ASX may, or may not, at its unfettered discretion waive the requirement spelt out in the Condition, and any applicant seeking the waiver of the Condition or any of the provisions of the Listing Rules faces a risk of such waiver not being granted. 

105.  It is also Clarke’s evidence that strict compliance with the Spread Requirements under the Listing Rules had always been observed by ASX.

106.  I do not agree that it is not reasonably foreseeable to Chen that there is a risk of the ASX not exercising its discretion to waive non-compliance with the Spread Requirement set out in Condition 7.  Chen must know of the Spread Requirement in Condition 7.  It is in my judgment incumbent on Chen, as the defendant’s adviser on compliance with ASX regulations and requirements, to at least warn and advise the defendant that if the Spread Requirement is not met, there is a risk of non-compliance with Condition 7 and a risk that the ASX will not exercise its discretion to waive such non-compliance.  There is no evidence of Chen having given such advice or warning to the defendant, whether on the use of nominees, or on the Spread Requirement not being met.

107.  In relation to the use of nominees to hold the IAL shares, Leading Counsel for the defendant emphasized that Chen had arranged for shares to be held by nominees for more than 100 parties who had not yet paid for the IAL shares, and had only agreed to take up the shares under a “gentleman’s agreement”, without any obligation to purchase the shares if they were not listed.  According to Leading Counsel, this was an attempt to mislead ASX, as the purchasers were not bona fide purchasers at all.  In my judgment, the nominee arrangement made by Chen had all the elements of artificiality which the ASX would be prone to guard against, and Chen should have known at least that the use of such an arrangement would increase the risk of ASX finding that the spread was obtained by artificial means.  This made it even more incumbent on Chen to warn the defendant of the risks of the Spread Requirement not being met.

108.  Further complications arose in relation to the structure of the Acquisition which had an effect on the fulfillment of the Spread Requirement.

109.  In December 1997, McAuley had advised that the value of Golden Glory was only A$44 million to A$45 million.  In his letter of 22 December 1997, Lucas had also stated already that the most likely price for Golden Glory’s assets was A$35 million.  As events transpired, it became apparent to Chen and the defendant by late March and mid-June 1998, at the latest, that the cable car business and assets of Golden Glory were not worth A$46 million as contemplated under the Heads of Agreement, but much less.  The independent experts, Deloitte, valued Golden Glory at A$22.6 to A$27.5 million. The directors of IAL agreed to pay A$35 million for the cable car business, but Deloitte did not consider this to be fair and reasonable.  Because of the discrepancy between the valuation of Golden Glory and the assets which were to be sold to WNG, which had a direct bearing on the price payable for HCK’s Acquisition of the IAL shares under the exchange of assets structure contemplated, a buyback arrangement from the existing shareholders of IAL, in respect of 20% of each shareholder’s holding, was raised and finally agreed, as an incentive to induce shareholders of IAL to approve the Acquisition.  Leaving aside the question of whether the need for the buyback arrangement rendered IAL an unsuitable company for acquisition under the Mandate Agreement, the buyback had a negative effect on the placement of shares and on the fulfillment of the Spread Requirement. 

110.  By February 1998, the ASX had clearly informed Lucas, and Chen accordingly knew at the latest by then, that the ASX considered Listing Rule 11.1.3 was applicable to the Acquisition, and that IAL would need to satisfy the Spread Requirement.  The valuation of Golden Glory and the disparity of the value of the assets for exchange under the Acquisition had become apparent as an issue by March 1998, and by June 1998, it had become a pressing matter and a potential problem to be addressed.  Prior to the execution of the Acquisition Agreements, a reasonably prudent adviser in the position of Chen should have given careful consideration to ensuring that there were safeguards in place to avoid the risk of the Spread Requirement not being satisfied, and IAL shares not being tradeable on the ASX.

111.  On 23 March 1998, Lucas officially informed the defendant and Chen by fax that he did not consider that the directors of IAL could recommend the purchase of Golden Glory and the cable car business at the price of A$45 million sought.  He indicated that the directors had thought that “A$25 million would be a good buy”, and that “at A$35 million it is probably justifiable”.  Lucas further pointed out that “any higher price might not be considered by an independent expert to be fair and reasonable to the shareholders”.

112.  On 15 June 1998, as evidenced by a note of that date, Chen knew that a value of A$35 million only had been put on the shares in Golden Glory.

113.  Chen had also been specifically warned by Lucas in June 1998 of the problems to be encountered as a result of the low valuation of Golden Glory as made by Deloittes.  In his e-mail to Chen dated 24 June 1998, Lucas stated:

“Deloittes will issue a report which we expect will say that their valuation of the sale assets ranges from $46.2 - 60.6 million. The IAL is agreeing to sell them for $49 million, ie marginally above the low end of the range.

The (Golden Glory) range will be between $23.6 -27.4 million … and IAL is paying well above (ie 25%) the higher range.

… Deloittes will therefore be concluding that the transactions are unfair and unreasonable. They cite the reduction in underlying value of IAL shares post the transactions compared to the status quo. Their work paper will accompany this message. The chances of a sell down on the face of the Deloittes report might not be great.

Having regard to the foregoing, let me pose some possibilities. The ASC and ASX are apparently unable to prevent an unfair and unreasonable report going forward to shareholders. But I suspect they do not like it, because it goes against the engrained principle that all shareholders should be treated equally, forget that the law permits it otherwise.

Given the disparity in IAL behavior in selling low and buying high they may decide to investigate the transactions; ie they will examine the proxy and voting papers to determine whether or not those voting for the resolutions are truly independent. We know they are, but the taint of inquiry would not be good for anyone….

… Because of the report, HCK cannot sell down or place; ASX, disenchanted by the transactions structure insists that the listing rules on spread are observed to the letter and checks each new shareholder for bona fides and revisits the rule say each 6 months.”

114.  The writing was on the wall, and the warning clear.  Yet, Chen’s response on 25 June 1998 was dismissive:

“The seller wants the best price and the buyer the lowest. There are two different views and if more experts are commissioned more views. ... There is always the possibility of a challenge, the likelihood depends largely on how the matter is presented.”

115.  If the problems posed by the discrepancies in the valuation are so obvious to Deloitte, and to Lucas, why would it not be reasonably foreseeable to Chen that the same issues would be just as apparent to ASX, and need to be addressed?

116.  There is no evidence of Chen explaining Lucas’ concerns or warning to either the defendant, or to B&M.  No is there evidence of Chen explaining to the defendant the risks of proceeding with the Acquisition in view of the escalating problem of the Spread Requirement not being met.  I consider that the plaintiff and Chen were negligent in these respects.

117.  The defendant claims that further evidence of the plaintiff’s negligence is that Chen failed to include in the Acquisition Agreements a condition for completion, that the IAL shares could be listed or traded.

118.  B&M had, in February 1998, inserted a condition in the draft agreement, that completion of the purchase of the IAL shares was to be conditional upon ASX confirming IAL’s activities and structure would be suitable for continued listing after completion (“Condition Precedent”). Obviously, ASX’s confirmation that the “structure” of IAL would be suitable for continued listing would only be given if the Spread Requirement was satisfied.

119.  As late as 14 April 1998, B&M were still seeking confirmation from Chen as to whether the Condition Precedent should be included in the draft Acquisition Agreements.  In the e-mail dated 14 April 1998 from B&M to Chen, the question was posed:

“On a different point, we note you have told us that no condition precedent should be included in the documents regarding ASX confirmation of continued listing. Are you still happy to proceed on this basis? Have you received any update from Shaw Stockbroking as to the efforts in achieving the necessary shareholder spread for IAL?”

120.  Chen had not instructed Shaw to deal with the spread, which was covered by Stage Two of Shaw’s engagement.  Chen also admitted that he instructed B& M not to include the Condition Precedent.  His explanation was that WNG would not be agreeable to it.

121.  It was the plaintiff’s duty, under the Mandate Agreement and at common law, to exercise reasonable care and skill, and to take all reasonable steps to safeguard the interests of the defendant, and not WNG. The inclusion of the Condition Precedent was reasonably required to protect the defendant’s interests in the attainment of the Purpose as a fundamental term of the Acquisition.  Even if Chen had considered, as he claims in court, that the Condition Precedent suggested would not be agreeable to WNG, he was under a duty to instruct B&M to include the Condition Precedent or a similar condition in the Acquisition Agreements, and at least to negotiate for their inclusion. If WNG should refuse to include any Condition Precedent in the Share Sale Agreement, then Chen could have advised the defendant on the effect of not having such a condition, and the risks involved.  It was then for the defendant to consider such advice, and to decide whether to accept the exclusion of the condition, or to insist on the condition at the risk of the Acquisition falling through.

122.  As Mr Chan SC pointed out, WNG had been prepared to sign the Heads of Agreement which contained a condition that “the shares of (IAL) remain listed on the Australian Stock Exchange following the Completion of the sale and purchase of the shares”.  Mr Lam argued that such condition in the Heads of Agreement was different in nature and effect to a Condition Precedent to completion of the Acquisition, to guarantee the resumption of trading in IAL’s shares, as the vendors under the Heads of Agreement only agreed to “negotiate with the directors of (IAL) to give effect to the fulfilment” of the condition.  Nevertheless, in my judgment, a reasonably prudent adviser would have included the Condition Precedent for negotiation, and would not have excluded it simply in the belief that it would not be acceptable to the other side.  Nor is there evidence from Chen that he had explained to the defendant the risk of the decision to exclude the Condition Precedent in the final Acquisition Agreements.  It is no answer for Chen and the plaintiff to say that the defendant had agreed to excluding the Condition Precedent, or had not insisted on its inclusion, when Chen had not explained the necessity for the Condition Precedent or the risk of its exclusion to the defendant.

123.  Nor is it an answer for a professional adviser to claim that the client had not asked for advice on the Condition Precedent, or the Spread Requirement, or the risks associated therewith.  The client looks to the adviser for advice, and it is for the adviser to proffer such advice as is required for the Acquisition and the protection of the client’s interests.

124.  The defendant claims that if he had been advised to include the Condition Precedent in the Share Sale Agreement, and WNG did not agree, he would not have proceeded with the Acquisition.  Mr Lam argued that such evidence is self-serving and not to be believed. 

125.  Bearing in mind the Purpose of the Acquisition, I accept that, on a balance of probabilities, if Chen had given advice on the risk of the Spread Requirement not being met, ie that the IAL shares could consequently not be traded after completion, the defendant would not have entered into the Share Sale Agreement on the terms as he did.  On the evidence, the defendant had trusted Chen and had followed his advice and recommendations throughout on the manner of proceeding.  If Chen had indeed advised the defendant that it would be prudent to include the Condition Precedent, in order that the Purpose could be achieved, or so as to give the defendant the option of not proceeding with the Acquisition when it was not clear that the IAL shares could resume trading within a reasonable time after completion, it is more probable than not that the defendant would have accepted such advice.

126.  In my judgment, in all the circumstances of his choice of IAL as a company with only about 300 shareholders, and the inclusion of the buyback arrangement in the structure of the Acquisition, Chen was negligent and in breach of the Contract, in failing to take timely steps to ensure that the Spread Requirement could be satisfied such that the Purpose could be achieved, for example by instructing Shaw to undertake the services set out in Stage Two of Shaw’s letter of engagement, which would involve Shaw finding sufficient investors to satisfy the Spread Requirement.  This may partly be due to the matters to be dealt with under the next heading.

Whether there was a conflict of interests

127.  The defendant claims that the plaintiff and Chen owed him a fiduciary duty, and that the plaintiff and Chen had allowed their personal interests to run in conflict with their duties to the defendant under the Contract.

128.  Chen and the plaintiff were clearly acting as the defendant’s agent under the Mandate Agreement to negotiate with WNG in relation to the sale of the IAL shares to the defendant.  The defendant reposed trust and confidence in Chen, entrusting him with power and discretion in the negotiation of the terms of the Acquisition, and the choice of professionals to be engaged, amongst other things.  As agent, Chen and the plaintiff (for whom Chen acted) were clearly under a fiduciary duty not to allow their interests to conflict with their duty to act in good faith and in the interests of their principal, the defendant.

129.  The mere fact of the plaintiff agreeing to pay for the defendant’s fees incurred for the engagement of professional advisers under the Acquisition already places the plaintiff in a position of potential conflict of interests.  It would obviously be in the best interest of the defendant, for the plaintiff as his agent to instruct professionals to advise the defendant on all aspects of the Acquisition and to consider all necessary and prudent measures in order to safeguard the defendant’s interest.  An example would be the engagement of Shaw under Stage Two of the letter of engagement, to work and advise on compliance with the Spread Requirement, by rights issue or placement.  However, this would inevitably increase the expenses to be incurred, and to be paid out of the Fee, by the plaintiff under the Mandate Agreement, contrary to the plaintiff’s own interests.

130.  It can be said that the defendant was aware of, and consented to, such an arrangement, even though the plaintiff might be in a conflict of interests position.  However, the defendant’s complaint is against the Costs Reimbursement Agreement which was made between the plaintiff and WNG. Under the Costs Reimbursement Agreement, the plaintiff was to reimburse WNG, the vendor of the IAL shares under the Acquisition, in respect of WNG’s expenses in the Acquisition, up to a maximum of “3% premium over and above the consideration on the sale” of IAL.  In my judgment, such an agreement between the plaintiff and WNG put the plaintiff in a situation of possible conflict between his duty to advise the defendant and to protect the defendant’s best interests, and the plaintiff’s own interest to minimise the fees and expenses to be incurred by WNG, so as to reduce the plaintiff’s own liability for such fees.  The more demands made on behalf of the defendant in relation to the conditions of the Acquisition and the terms of the Acquisition Agreements, the more professional fees would be incurred by WNG (and the defendant), and the less fees received by the plaintiff.  Moreover, if the defendant should be advised to abort the Acquisition, the Plaintiff would not earn the Fee but would have to reimburse WNG for its expenses incurred.

131.  The plaintiff claims that the defendant was aware of the Costs Reimbursement Agreement, or its effect.  Mr Lam for the plaintiff relies on the fact that the defendant agreed, in cross-examination, that he knew that WNG had demanded a premium on the price for the sale of the IAL shares, although he was not concerned with the exact amount or percentage, as this was to come out of the Fee that he had to pay to the plaintiff.  Mr Lam also pointed out that the defendant had also indicated in his affidavit that he was aware that a 3% payment was to be paid to WNG, and that it would come out of the Fee to be paid to the plaintiff under the Mandate Agreement.  The Acquisition budget sent to the defendant also discloses a 3% premium payable to WNG.

132.  Knowledge of the plaintiff’s payment of a 3% premium to WNG cannot be equated with knowledge of the plaintiff’s payment of and liability for WNG’s legal and other expenses incurred in the Acquisition.  The former may not disclose or evidence any possible conflict of interests, but the latter may well put the plaintiff and Chen in a position whereby their interests may conflict with the defendant’s, and the defendant is entitled to know such an arrangement and possible conflict before agreeing to or proceeding with the Acquisition.  The defendant should have been informed of the plaintiff’s liability to pay for the expenses including the professional fees of WNG, and the possible conflict of interests that may involve, and be given the opportunity to object to the plaintiff’s entry into such an arrangement with WNG whilst at the same time acting as the defendant’s agent.

133.  In failing to make such full disclosure to the defendant, I consider that the plaintiff was in breach of its fiduciary duty to the defendant.

Whether the defendant’s loss and damage was caused by the plaintiff’s breach of duty

134.  In breach of its duty to take reasonable care, and/or in breach of its fiduciary duty, the plaintiff failed to take adequate and timely steps to procure that at the completion of the Acquisition or within a reasonable time after completion, the Purpose could be achieved.  In early September 1998, on Lucas’ own reckoning, there were only 289 to 374 shareholders.  There was no realistic chance that the Spread Requirement could be met by 15 September 1998. Even on 23 November 1998, over two months after completion on 15 September 1998, there was no realistic chance that the IAL shares could be traded on ASX. There were only 161 shareholders which could satisfy the Spread Requirement, excluding the shares held by nominees not recognized by ASX.  I consider that by 23 November 1988, a reasonable time had elapsed after completion.

135.  The defendant claims that by reason of the plaintiff’s breach of duty and negligence, it should not be liable for payment of the Fee, and should be able to recover the wasted costs paid to the professional agents engaged by the plaintiff under the Mandate Agreement. 

136.  The plaintiff’s case is that even if there was any breach of duty on his part, such breach did not cause loss to the defendant.  It was argued on behalf of the plaintiff that the defendant’s claim for wasted fees can only be justified if it can be established that the services provided by the plaintiff and by B&M were of no value at all.  The plaintiff claims that the services of the plaintiff and of B&M had not been wasted, since the defendant had obtained a company with a listing status.  It was further argued that the suspension of trading in IAL shares after completion was due to various extraneous factors beyond the plaintiff’s control, such as problems in the IAL accounts, the defendant’s own decision to suspend application for resumption of trading in view of the litigation which had emerged by late 1998 and early 1999, in which HCK and IAL were involved, and the winding up proceedings of WNG. 

137.  In relation to the breach of fiduciary duty claim, it was argued for the plaintiff that there was no secret profit made by the plaintiff, and accordingly no damage sustained by the defendant even if the plaintiff was in breach of any fiduciary duty.

138.  The defendant claims that it was as a result of the plaintiff’s breach of the Contract, that he lost the benefit of the Contract, in that the Purpose of obtaining a listed company the shares of which could be traded after completion of the Acquisition was not in fact achieved, such that there was a total failure of consideration. 

139.  I agree that the Contract between the plaintiff and the defendant, as partly evidenced by the Mandate Agreement, is an entire contract.  The Fee is based on the NTA of IAC at the date of completion of the Acquisition.  It is not for payment of sums allocated to separate and distinct works to be performed by the plaintiff independently of each other under the Mandate Agreement.  The Contract, as partly evidenced by the Mandate Agreement, was not divisible in the sense that it created an obligation to pay for a divisible part of the plaintiff’s performance which was independent of the plaintiff’s performance of the other parts of the Contract (Brainchild Productions Ltd v Kam Kwong Design Company HCA 311/1984, 16 October 1985).

140.  I have found that the Purpose of the Contract was not achieved, in that the defendant did not acquire a listed company, the shares of which could be traded on completion or within a reasonable time after completion.  In breach of the express terms of the Mandate Agreement, the plaintiff did not source for the defendant a company which was suitable for the Purpose in that it did not have sufficient shareholders so that the Spread Requirement could be satisfied upon or within a reasonable time after completion of the Acquisition Agreements.

141.  The evidence to which Counsel for the plaintiff referred, that the IAL shares could not be listed in or after 1999 due to the delay in the finalization of its accounts, is not relevant to the question of whether IAL shares could successfully be traded at completion, or within a reasonable time after completion of the Acquisition.  There is no evidence that at this material time (at completion or within a reasonable time after completion), the IAL shares could be traded, but for the matters unrelated to the plaintiff’s breach or negligence.

142.  Since the Purpose, being a fundamental term of the Contract was not achieved, all the services performed by the plaintiff and Chen under the Contract was valueless, and there was a total failure of consideration for the payment of the Fee (Heywood v Wellers [1976] QB 446).  The defendant is also entitled to recover from the plaintiff all the sums paid under the Mandate Agreement, as having been wasted.  These include the sums of A$500,000 and HK$530,000 paid to the plaintiff and the sums of US$72,000 and A$25,327.52 paid to B&M.

Amount due to plaintiff

143.  If I am wrong on the defendant’s right to rescind the Mandate Agreement under section 143 of the Ordinance, and on the plaintiff’s breach of the Contract and the defendant’s right to treat such breach as repudiation which has the effect of discharging the Mandate Agreement, I would also have been prepared to accept that the plaintiff has not proved its entitlement to the sum of A $4,322,468.30, claimed as the Fee of 10 % of the NTA of IAC at the date of completion of the Acquisition.

144.  The onus is of course on the plaintiff to prove its claim for the sum, which the defendant has not admitted and put the plaintiff to proof.  The defendant has denied (in paragraph 61 of the Amended Defence) that the amount claimed is 10% of the NTA.

145.  Leading Counsel for the defendant relies on Re Marriage of DR and KB Elsey (1996) 21 Fam LR 249, in which “net tangible assets” as a form of assessment of the worth of a company was described to be valuation on the basis of “the net realizable value of its assets after making due allowance for expenses of realization”.  In Quatro Ltd v Argo Investments Ltd (1998) BC 9903222 the NTA valuation method was described as “an estimate of the aggregate proceeds from an orderly realization of (the company’s) assets”.

146.  Leading Counsel submits that the NTA value of a company is not to be ascertained merely by lifting figures from the accounts of the company (see Pacific Century Regional Developments Ltd v Estate of Seow Khoon Seng [1997] 3 SLR 761).  It was emphasized that the realizable value of the assets of the company is not the same as its book value or the value carried in the accounts of the company, and that it is necessary to have an independent valuation of the market value of the assets of the company on the relevant date.

147.  In this case, the plaintiff has not produced any independent valuation of the realizable value of the assets of IAL for the purpose of proving the NAV of IAL.  I agree that the evidence relied upon by the plaintiff as showing the NAV is not reliable and should not be accepted for the purpose of its claim.  The NTA of A$48,724,683, relied upon by the plaintiff, is said to be supported by: a letter written by the defendant to a Chinese party; the information memorandum issued by IAL to its shareholders (“Information Memorandum”); the account statement of Deloitte of 27 March 1999; and the balance sheet of IAL as at 31 December 1998.

148.  The defendant’s letter to a potential Chinese investor, dated 5 August 1998, which referred to the NAV of IAL shares being A$0.97 per share, cannot be treated as reliable evidence of the NTA of IAL at completion of the Acquisition. It was a rough indication given by the defendant to attract the interests of a potential investor, and was not supported by any independent valuation. 

149.  According to the Information Memorandum and Deloitte’s report, the value of each IAL share after completion ranged from A$0.66 to A$0.78 per share, but this was not based on the NTA method of valuation.

150.  The statement in the Information Memorandum, of the NTA of IAL being approximately A$49 million, was based on the position of IAL immediately on completion after the divestment and sale of IAL’s subsidiaries, but without taking into account the expenses to be made for the acquisition of Golden Glory and in relation to the buyback arrangement.  The receivables of IAL were further given their full value, without any consideration as to their recoverability upon realization of the assets of IAL.

151.  As for the balance sheet of IAL, which gives the net assets of IAL at A$37,847,000 as at 31 December 1998, as Leading Counsel rightly pointed out, this is the figure for the consolidated accounts and includes the value of other companies within the IAL group.  The net assets of IAL itself should be A$38,781,000.  The balance sheet and accounts were qualified by Deloitte in relation to (inter alia) the receivables, with an express statement that they were unable to give an opinion as to whether the financial statements gave a true and fair view of IAL’s financial position as at 31 December 1998.

152.  With all the questions as to the recoverability of the promissory notes issued by WNG and as to the valuation of Golden Glory, I am not satisfied that the plaintiff has established on the evidence that the sum of A$4,322,468.30 represents 10% of the NAV of IAL as the “net realizable value of its assets”.

Whether there was misrepresentation

153.  I will briefly deal with the two remaining issues as to whether the Mandate Agreement had been induced by the plaintiff’s misrepresentation that Chen was a director of the plaintiff, and Chen’s failure to make disclosure of the fact that he was an undischarged bankrupt. 

154.  I do not consider that there had been any misrepresentation as to Chen’s appointment as a director of the plaintiff.  According to the defendant, he had understood Chen to be the “principal” of the plaintiff, which was not untrue.  Further, although Chen was not formally appointed as a director, he was held out by the plaintiff as a director.

155.  As to whether there was misrepresentation in the circumstances of Chen’s failure to make disclosure of the fact that he was an undischarged bankrupt, Mr Lam argued that the Contract evidenced by the Mandate Agreement does not fall within any category of contracts which are regarded in law as contracts umberrimae fidei.  However, I consider that there is a fiduciary relationship between the plaintiff and the defendant by virtue of the trust and confidence reposed by the defendant in Chen.  I would accordingly agree that, as an exception to the general rule that there is no duty to disclose, the plaintiff did have the duty as a fiduciary to make disclosure of material facts known only to the plaintiff and Chen (para 6-014 Chitty on Contracts Vol 1).  Such material facts would include the fact that Chen was, at the material time of his performance under the Mandate Agreement until 14 July 1999, an undischarged bankrupt in Singapore. 

Expert evidence

156.  In relation to the expert evidence adduced in this case, it is highly undesirable that at the time when the parties sought leave from the court to produce such evidence, they did not procure the order for leave to specify the issue or issues on which the experts were to give evidence. This resulted in a lengthy report from the defendant's expert on different issues, most of which are inadmissible and unhelpful to the court. In particular, the report deals with matters which are properly questions to be decided by the court, on the nature of, and ambit of the plaintiff's duties under, the Mandate Agreement, whether the plaintiff was negligent and in breach of its duty to act in the interests of the defendant, and on how the expert himself would have structured and proceeded with the Acquisition. It is recognized that in an appropriate case, expert evidence addressing the risks and special considerations to be borne in mind in fields of expertise in which the court may require assistance may be required. However, experts cannot usurp the function of the court in deciding on the facts and on questions of law such as the extent of the legal duty in any given situation, and whether there is breach. The expert report of Mr Chong has only been of very limited help.

Conclusion

157.  For all the reasons set out above, I dismiss the plaintiff’s claim and enter judgment on the defendant’s counterclaim, for the wasted fees of a total of US$72,000 and A$25,327.52 paid by the defendant and his wife on his behalf, and repayment of the sums of A$550,000 and HK$530,000 paid to the plaintiff under the Mandate Agreement.  On the evidence, I am satisfied that these sums had been paid by the defendant, and that the sum of A$550,000 had been received by the plaintiff.

158.  I will make an order nisi that the costs of the main action and the counterclaim are to be paid by the plaintiff to the defendant, to be taxed if not agreed, with certificate for 2 counsel.

159.  Finally, I wish to thank all Counsel involved, for their detailed and elaborate submissions.

 

 

	(Mimmie Chan)
	Judge of the Court of First Instance High Court