DA VINCI (HK) LTD v. WONG CHI SUN AND OTHERS

HCA 1600/2017
HCA 1602/2017
(tried together)

[2025] HKCFI 4140

HCA 1600/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1600 OF 2017

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AND

HCA 1602/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1602 OF 2017

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____________________

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J U D G M E N T

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Background

1.  HCA 1600/2017 (“HCA 1600”) and HCA 1602/2017 (“HCA 1602”) have been ordered to be tried together. The Plaintiffs in both actions are within what has been referred to as the “DV Group” of companies. The Plaintiff in HCA 1600 is Da Vinci (HK) Limited, a company incorporated in Hong Kong (“DVH”). The Plaintiff in HCA 1602 is Da Vinci Home Collection (Hong Kong) Limited (“DV HK”), also incorporated in Hong Kong. DVH and its subsidiaries were co-founded by Mr Tony Phua and Mrs Phua Siew Hua (“Phuas”). It is common ground that DV HK is an indirect subsidiary of DVH. DV HK is in fact wholly owned by Da Vinci Home Corporation Ltd (“DV Shanghai”), a company established on the Mainland which is owned by DVH. At the material time, the DV Group and the direct subsidiaries of DV Shanghai included companies in Beijing, Shenzhen, Guangzhou, Hangzhou, Chongqing, Chengdu and Singapore. The business of the DV Group was the distributorship and licensing of high-end international brands of furniture.

2.  The claims made by the Plaintiffs in the actions relate to 17 transfers of funds made between July 2011 and April 2012 (“Impugned Transfers”), of total sums of US$3,570,876.73 (from DVH), HK$49,504,383.27 (from DVH and DV HK), €5,126,955.30 (from DVH), and HK$5,400,000 from DV HK.

3.  DVH and DVHK claim that these Impugned Transfers were all made without authority and were not for any proper or commercial purpose of the companies. The claims in HCA 1600 are made against Wong Chi Sun (“Wong”), Zhou Ming Yan (“Zhou”) and Chow Choi Man Lorraine (“Chow”), the recipient of the funds, for dishonest assistance and knowing receipt, whereas the claims in HCA 1602 were made by DV HK against its former directors, the Phuas, Wong and Cheong Thiam Hock (“Cheong”), for their breach of fiduciary duties in effecting the Impugned Transfers.

4.  These are serious allegations involving misappropriation and dishonesty. The legal burden is on the Plaintiffs to prove, on the balance of probabilities, that the Impugned Transfers were unauthorized, that the recipients were dishonest, and that the directors had acted in breach of fiduciary duties as trustees of company property. The directors of the companies only have the evidential burden to raise a prima facie case that the transfers were authorized, and were for the proper purposes of the companies.

5.  It is not disputed that the transfers of funds took place.

6.  Nor is it in dispute that Mr and Mrs Phua and Wong were at the material time of the Impugned Transfers the directors of both DVH and DV HK, and Wong was also the authorized bank signatory of the HSBC bank accounts of DVH and DV HK from which the Impugned Transfers were made. Chow (one of the recipients of the transfers) is Wong’s wife. Essentially, her claim is that she had received and dealt with the transfer for and on behalf of Wong, and the Phuas.

7.  The question in dispute at trial is simply whether the Impugned Transfers were made for the proper or legitimate commercial purpose of the companies, as the Defendants claim they were, but which DVH and DV HK deny.

8.  Whereas the Statement of Claim (“SOC”) filed in the proceedings refer to the Impugned Transactions as being unauthorized, and were made without any commercial or proper purpose, or otherwise for the business or interest of the companies, and claims that neither DVH nor DV HK had any business transaction with any of the transferees of the funds, the SOC fails to refer to the relevant background and the proper context of the Phuas’ dealings in DVH and the DV Group just before and at the relevant time of the Impugned Transfers.

9.  At the relevant time of the Impugned Transfers, the Phuas together with their 4 children (the “Phua Family”) together owned 100% of the shareholding of DVH. The Phua Family (through DVH), together with Wong and Cheong, held also 98.58% of DV Shanghai and, through DV Shanghai, the underlying subsidiaries including DV HK.

10.  Wong was the authorized signatory of DVH’s bank account, and was also a minority shareholder of DVH (until 17 November 2009). Wong was a director of DVH from 23 October 1997 to 10 September 2009, and was at all material times a member of the senior management of DVH and its subsidiaries forming the DV Group. Wong was the person responsible for overseeing the business of the DV Group in Hong Kong, Shenzhen and Guangzhou. Wong was also a director of DV Shanghai (from 26 February 2009 to 25 October 2011) and of DV HK (from 21 October 2009 until 30 June 2013).

11.  There is no dispute, that Zheng Xiankun (“Zheng”) used to be a major client of the DV Group of companies, and had purchased goods from the DV Group on the Mainland. Obviously, he came to know of and became interested in the business of the DV Group, and by an agreement dated 29 September 2011 (“SPA”), Zheng agreed to purchase from the Phua Family their entire shareholding of DVH. Upon completion of the sale and purchase under the SPA on 21 May 2012 (“Completion”), Zheng became the sole owner of DVH through his subsidiaries, Mr and Mrs Phua resigned as directors of DVH, and in their stead, Zheng and Li Linlin were appointed to the board. It was only on 30 June 2013 that Mr Phua, Wong, and Cheong resigned as directors of DV HK.

12.  By a separate agreement dated 30 April 2014, Mr and Mrs Phua agreed to sell their 32.58% shareholding in DV Shanghai to another company owned by Zheng, with the completion of the sale taking place on 30 January 2015. Upon completion, Mrs Phua resigned from DV HK as director.

13.  It is indisputable, that all of the 17 Impugned Transfers took place prior to the Completion (on 21 May 2012) of the sale of the 100% shareholding in DVH, and 8 of them had taken place before the date of the SPA (on 27 September 2011). At that time, Mr and Mrs Phua were still the owners of the shares in DVH. Mr and Mrs Phua maintain that all the Impugned Transfers, including without limitation the first transfer of the significant sum of US$3,570,876.73 from DVH to Wong, were all authorized, and were for the proper and commercial purposes of the DV Group of companies.

14.  Counsel for the Defendants has highlighted the unusual features of this case, in that the Plaintiff companies have been procured by their new management after Completion of the SPA (headed by Zheng) to pursue what Counsel described as “extraordinary” claims arising out of transfers of funds which had never been considered as problematic by the former shareholders of the Plaintiffs at the time when they were made, and further, had been plainly affirmed as being proper by the new shareholders of the Plaintiff companies through Zheng’s decision to proceed with the Completion on 21 May 2012.

15.  As Counsel pointed out, the SPA and Zheng’s acquisition of DVH was for a significant sum of RMB 137 million. It is reasonable to expect that in the course of such an acquisition, there would have been due diligence performed by and for Zheng before Completion. Indeed, it is common ground that prior to the Completion under the SPA, Zheng’s team had been given the full opportunity to perform due diligence on not only DVH (as the target company) but also all the subsidiaries within the DV Group, including DV Shanghai and all its subsidiaries such as DV HK (as expressly provided for in clause 8 of the SPA). Under clause 8 of the SPA, Zheng had “absolute discretion” to decide whether he was satisfied with the results of the due diligence, and if he was not so satisfied, he may cancel the SPA and was entitled to a full refund of any sum paid. Counsel further pointed out that the SPA did not provide for any fixed date for completion, since clause 8 states that Completion shall only take place within 10 days after Zheng confirms his satisfaction with the results of the due diligence exercise.

16.  In fact, it is the evidence of the Plaintiffs’ only witness that there had been no obstruction to Zheng’s due diligence, and that the parties had been open and transparent throughout the process.

17.  I agree that the more unusual aspect of the case is that there has been no claim made at all under the SPA for either rescission of the SPA, or damages as a result of any misrepresentation, or breach of warranty, relating to the disclosed accounts or finances of, and the transactions made by, either DVH or DV HK at or before the time of the SPA. If it was the case that the Impugned Transactions which took place before the SPA and Completion were unauthorized, improper, or unrelated to the commercial or proper purposes of DVH or DV HK as is now alleged, one would expect Zheng to have made claims against the Phuas under the SPA, but no such claims have been raised at all. These are relevant to the Court’s assessment of the inherent probabilities of the Plaintiffs’ case and the credibility of the assertions made.

18.  It is in fact the Plaintiffs’ evidence that a report had been prepared after the due diligence exercise conducted by Zheng under the SPA. For the purpose of completing such a report, the professionals appointed by Zheng had in fact considered the underlying documents concerning the Impugned Transactions, questions had been raised in relation to a large number of transfers which were not supported by underlying documents, including at least some of the Impugned Transactions, and that those concerns were identified, reported to Zheng, and addressed in the due diligence report. One would therefore expect the due diligence report to at least support some of the Plaintiffs’ claims as to the impropriety or dubious nature of the relevant Impugned Transfers. However, as Counsel for the Defendants have emphasized, the due diligence report has not been disclosed by the Plaintiffs in these proceedings, and no satisfactory explanation has been given for this. The Defendants contend that the Court should draw an adverse inference against the Plaintiffs, that the contents of the due diligence report do not support the Plaintiffs’ assertions in this case.

19.  On behalf of the Defendants, Counsel has also drawn attention to the fact that it is only the Plaintiffs’ bare assertion that all of the Impugned Transactions were made for no proper or commercial purpose, and involved funds which were misappropriated to transferees which the Plaintiffs allege had no business connection whatsoever with them. It is the Plaintiffs’ case that the 2^nd Defendant, Zhou trading and receiving the funds as Xintong Trading Company and Shuntong Technology Company (the “Tong Companies”), were complete strangers to the Plaintiff companies. Yet, the evidence at trial shows that these bold assertions have been contradicted by the documentary evidence, many of which were produced by the Plaintiffs themselves. It would have been natural to expect Zheng, the purchaser under the SPA, and relatively easy for him, to give evidence as to how he had come to purchase DVH to gain control of the companies within the DV Group at a substantial acquisition price, only to find that millions of dollars had been siphoned away from the companies, despite the lengthy due diligence conducted, and despite his having been satisfied with the results of the due diligence and with the disclosed accounts and finances of the companies. Yet, Zheng never adduced any evidence at all in these proceedings.

20.  The only witness called for the Plaintiffs was one Madam Ye Wen (“YW”), who had played no role in and had no personal knowledge of any aspect of the operation of the business of DVH, DV HK, DV Shanghai or any company within the DV Group at the relevant time of the Impugned Transfers and the SPA. YW only became a director of DV Shanghai in November 2012, and could only give evidence on the basis of what she had been told or could gather from the documents which she was given to review and which related to the Impugned Transactions. Members of staff of DVH/DV HK who were seen from the paper trail to have played a role in arranging for or instructing the Impugned Transfers, how they were to be booked, how the funds were to be channeled, and who were responsible for the financial matters of DV SH and its subsidiaries (such as one Madam Li Jing (“LJ”), the financial officer of DV SH who handled the financial operations of the entire DV Group) were not called. YW could only give extremely limited first hand evidence, whether to contradict the contemporaneous documents relied upon by the Defendants, or to put forward any positive case for the Plaintiffs at all.

21.  In the context of the relevant background facts of this case, having heard the witnesses, and reviewed the documentary evidence adduced and the paper trail of the transfers as accounted by the Defendants, I am satisfied that the Defendants have given a truthful and proper account of the Impugned Transfers and the transactions to which they related, that they were all for the purposes and business of the Plaintiffs as part of the DV Group, and were not misappropriation of the Plaintiffs’ funds.

22.  The Judgment should not be a transcript or record of the evidence adduced, nor of the arguments made by the parties at trial. I have no intention to set out the detailed accounts given by the witnesses called by the parties, nor the entire paper trail of the fund flows, but will summarize my conclusions and findings made on the evidence given, and explain why I accept them in deciding the issues in dispute.

The Impugned Transfers

23.  As related in paragraph 2 above, the Impugned Transfers comprised 17 sums transferred from DVH and DV HK. Parties have separated and identified them as:

(1)  the “USD Sum” totaling US$3,570,876.73 transferred to Wong;

(2)  the “HKD Sum” totaling HK$49,504,383.27 transferred to the Tong Companies;

(3)  the “EUR Sum” of €5,126,955.30 transferred to Chow; and

(4)  a further sum (“Further HKD Sum”) totaling HK$5,400,000 transferred to Chen Yu Feng (“Chen”) and Huang Chuang Ran (“Huang”).

24.  They will be dealt with separately, below.

The USD Sum

25.  There is no dispute, that this transfer from DVH to Wong took place on 8 July 2011, before Zheng’s acquisition under the SPA, and before YW had any role within the DV Group, such that YW who gave evidence at trial had no personal knowledge about the purpose or reason for the transfer of the USD Sum, and whether it was in fact authorized by the directors and/or shareholders of DVH at the material time. This observation regarding YW applies equally to the others of the Impugned Transfers. It is the Defendants’ case that the USD Sum was transferred with the knowledge and authority of the directors and shareholders of DVH, and that after the transfer to Wong, the USD Sum was applied by Wong exclusively for the purpose of the business operations of DVH and the DV Group.

26.  The evidence of Wong, who testified for the Defendants as to their case in these proceedings, was in my judgment honest, direct, consistent, and credible. According to Wong, the USD Sum was transferred to his personal bank account on the instructions of Mr Phua. This was after Mr Phua and LJ (the financial officer of DV SH responsible for the financial matters of DV SH and its subsidiaries) were made aware of the fact that Zheng, as purchaser of goods from DV Shenzhen, had made a payment into the bank account of DVH. It appears that it was commonplace for payments to be made by customers of the DV Group of companies into the bank accounts of DVH or DV HK in Hong Kong, since these are companies incorporated and operated in Hong Kong and hold bank accounts in Hong Kong. It can readily be understood, and accepted, that customers of DV SH, DV Shenzhen and other Mainland companies of the DV Group would wish to effect payment in Hong Kong due to the absence of restrictions on foreign exchange and the facility of movement of funds in and out of Hong Kong.

27.  Wong’s evidence is that when Mr Phua and LJ became aware of a deposit into DVH, they gave him the instructions that the money should be transferred to Wong’s account to be exchanged into another currency for transfer to DV SH or DV Shenzhen, or pending usage for the purposes of DV SH or of the DV Group.

28.  One of the challenges put forward by Counsel for the Plaintiffs, for this and others of the Impugned Transfers, was the necessity or reason for the payments to be transferred to Wong, or any other third party, before payments could be effected to companies within the DV Group allegedly for their purposes. It was claimed that there was no reason to interpose Wong into the fund flows, and that these indirect transfers made the purposes put forward by Wong and the Defendants dubious.

29.  According to Wong, DVH had to make payments in RMB and/or Hong Kong dollars for a large number of its business transactions and for business purposes. It was more convenient and efficient to use Wong’s bank account to carry out currency exchanges and payments. Wong explained in his testimony that there were money exchangers he had trusted, and had customarily dealt with. A number of the Impugned Transactions involved funds being transferred from either DVH or DV HK to the account of either Wong or his wife (Chow), and then from these accounts to other money exchangers, for the purpose of converting US dollars or Hong Kong dollars into RMB, and vice versa.

30.  In his testimony, Wong explained the practice of DVH and companies within the DV Group, and the practice of their customers, of using the Plaintiffs and their bank accounts in Hong Kong for the purpose of exchanging RMB into foreign currency including Hong Kong dollars. This is relevant to the payments relating to the Tong Companies, which will be dealt with below. It is also relevant to the manner in which the Euro Sum and the Further HKD Sum were paid out, all of which involved exchanges in currencies or payments to third party money changers. It is clear from the evidence that DVH and DV HK were employed by the DV Group to facilitate the conversion of RMB to foreign currency, for payments out of the Mainland, and that this usage was for the purposes and operation of the DV Group and of the business of the companies in the Group. The practice or usage was recognized by the Plaintiffs, and was consented to and authorized by the directors and shareholders of the Plaintiffs. On the evidence, the practice and usage was also known to and accepted by Zheng as the purchaser under the SPA.

31.  At trial, no claim was made that the above practice is in any way illegal under the law of the PRC.

1. The use of the USD Sum for public relations

32.  For the USD Sum, Wong’s evidence is that although the USD Sum had been transferred from DVH to his personal account on Phua’s instructions, on 8 July 2011, for currency exchange and pending further instructions as to how the money was to be used for the DV Group, an unexpected incident relating to a CCTV report on DVH occurred, which led to a chain of events and payments being made for DVH and the Group. 

33.  On 10 July 2011, CCTV on the Mainland broadcast a report on the business operations of the DV Group (“Broadcast”), in which allegations of fraud were made against DVH and the DV Group, concerning whether there were misrepresentations by the Group as to the source or place of manufacture of the allegedly high-end furniture sold by the DV Group. There was a great deal of negative publicity against the DV Group as a result of the Broadcast, and significant financial losses were suffered by the Plaintiffs and the Group. The DV Group’s sales revenue between July and October 2011 plummeted by over 85%. The negative effect of the Broadcast had to be controlled and managed urgently.

34.  According to the Defendants, the USD Sum paid into Wong’s account just before the Broadcast was used to effect payment to various parties as expenses to settle the dispute and the negative publicity which resulted from the Broadcast, as part of a crisis management/public relations exercise undertaken on the decision of the Phuas and Wong. Payments were made on about 18 July 2011, 21 July 2011, 25 July 2011, 27 and 28 July 2011, and 5 August 2011, of sums in RMB, HK dollars and US dollars, equivalent to approximately the USD Sum, to 7 individuals. On the evidence of Wong, they were all “public relations expenses” and “settlement expenses”, made through intermediaries to a reporter responsible for the Broadcast, to a disgruntled purchaser who had initiated the complaint relating to the furniture purchased from the DV Group, and to some facilitator who had assisted in procuring the “settlement”. The Defendants claimed that all these payments for the settlement of the dispute and to manage the negative publicity directed against the DV Group were for the legitimate purposes of the DV Group including the Plaintiffs, and had been authorized by the shareholders and directors at the relevant time. Wong maintained in particular that the transfers from the USD Sum received from DVH were all made pursuant to the directions of and with the authorization of Mr Phua, in response to the negative effects of the Broadcast.

35.  The Plaintiffs’ initial query as to why Wong had to be interposed for the Plaintiffs’/the DV Group’s “public relations/settlement” payments, was explained on the basis that it was the customary practice for the DV Group’s funds to be paid to Wong’s account for money exchange, before effecting payments for the DV Group to recipients, for the purposes of the DV Group. I accept Wong’s explanation as it is supported by contemporaneous documents and evidenced by emails from LJ, the financial controller.

36.  The Plaintiffs further queried why the alleged “settlement/public relations” payments were made to different individuals, rather than to the players involved in the alleged PR management exercise, being the disgruntled customer (one Tang) and/or the reporter of the Broadcast itself (one Li). Even if what the Defendants say about the use of the USD Sum for the public relations expenses were true, the Plaintiffs highlighted the fact that the payments in question were not made to either Tang or Li.

37.  The Plaintiffs have not disputed the evidence of the Broadcast, nor the fact that adverse claims had been made against the DV Group and the products the Group supplied, nor the negative publicity created. The “settlement/public relations payments” themselves were in fact the subject matter of another expose (published in about January 2012), which reported on these payments the DV Group had made in order to silence the media, and on the individuals involved in the media management campaign. The article in question, which was produced in evidence, referred to the payments made by the DV Group, Wong and Mrs Phua to (inter alia) the facilitator (one Cui), Tang (the disgruntled customer), and one Ma Zhong acting for Li (the reporter).

38.  I accept the Defendants’ evidence on the use of the USD Sum because, first and foremost, the payments out of the USD Sum to the individuals concerned were referred to and evidenced by the email sent by LJ to Mr Phua on 10 September 2011. By this email, which was copied to Mrs Phua, LJ attached payment records and transfer slips, reporting on and referring to the following payments:

(1)  US$155,200 to the reporter;

(2)  US$590,000 to Tang;

(3)  RMB 500,000 + RMB 3 million + RMB 2 million + HK$6 million + HK$2 million to Sun

39.  The payments are supported and evidenced by the bank records and transfer documents. I accept the explanation offered by Wong, that some of the payments had to be made to currency exchangers with whom the DV Group and Wong had been habitually dealing (of whom Huang was one). In relation to these “settlement” or “public relations” payments, including the ones paid to the facilitator for onward payment to other interested parties, and to the reporter being asked to refrain from making further adverse reports against the DV Group, it is easy to comprehend, if not obvious, that the payments would be made discreetly, and indirectly, without the actual recipient of the money being shown or named. I therefore find it credible that some of the clandestine payments would be made to nominees of the actual recipients. On Wong’s evidence, Tang had nominated Huang to receive the settlement sum and transfers on her behalf, and Sun (a facilitator, and one of the recipients named in LJ’s email) had nominated Ma Zhong and Leung Kwo to receive the money on his behalf. Sun was allegedly an intermediary who was able to put the DV Group’s representatives in contact with the right people to “settle” the matter.

40.  The Plaintiffs queried the fact that one Zhu Zuji was interposed for the alleged payment by DVH, out of Wong’s account, to Sun. According to Wong, Zhu was the trusted executive manager and a representative of DV Shenzhen, and the US dollars were first transferred through money changers to Zhu in RMB, for Zhu to make the further transfer of the RMB to Sun’s nominated accounts/payees.

41.  I accept Wong’s explanation as to these clandestine or “very secretive” arrangements for payment, that he had not asked Sun the reason for the indirect and partial transfers, nor Sun’s relationship with the recipients. Wong also explained that the details of the transfers and the currency exchanges had not been covered in his witness statement, because the aim of the statement was to explain how much in total had been paid out of the money he had received from DVH, in order to solve the problems relating to the Broadcast. He had not considered it material to give all the small details of the payment route.

42.  On behalf of the Defendants, Counsel pointed out that the article exposing the efforts made by the DV Group to “silence” the media and the adverse reports made against the Group referred expressly to payments made by the DV Group to: (1) Li (of RMB 1 million, equivalent to US$155,520), which tallies with the transfer to Ma Zhong (receiving same for Li); (2) Sun (of RMB 12 million), which tallies with the 5 payments made to Sun and his nominees (Leung Kwo and Ma Zhong); and (3) Tang (of the settlement sum of RMB 4.5 million). As contended by Counsel, the article coorborated the evidence of Wong to a great extent.

43.  In relation to the payment of RMB 4.5 million to Tang, the Plaintiffs pointed out that the US$590,000 was less than RMB 4.5 million. According to Wong’s evidence, the US$590,000 was only one part of the payment, as the agreement reached with Tang was for a sum to be paid to her in RMB (which corresponded with US$590,000), and a further sum of HK$700,000 to HK$800,000 was paid in cash to Tang’s intermediary in Hong Kong. Wong was not certain whether the Hong Kong dollar payments were meant for Tong herself, or were fees for other parties involved in the settlement.

44.  On the entirety of the evidence, I reject the submission made for the Plaintiffs, that Wong had simply plucked random figures or transfers to make up the USD Sum, to fabricate a purpose of payment. I accept Wong’s account of the USD Sum and the transfers made therefrom, and that the payments were for the benefit and purposes of the DV Group including the Plaintiffs.

45.  I also reject the Plaintiffs’ submissions as to any inadequacy of the Defendants’ pleadings. In my judgment, they have adequately pleaded the material facts of their Defence, that the Impugned Transfers were authorized and for the legitimate and business purposes and/or reasons of the Plaintiffs. In his witness statement, Wong had explained the purpose of the transfers he made, although as he acknowledged he had not set out each and every step involved in the transfers. Whether the further details he provided by way of elaboration in the course of cross-examination add strength to, or diminish his testimony, goes to credibility and weight and I have accepted his evidence as credible.

46.  In the context of this dispute, I bear in mind the fact that the Plaintiffs have not called LJ to give evidence on their behalf, to explain the transfers referred to in her email. She was the financial officer of DV SH, the person who handled the financial operations of the entire DV Group, and the best witness to give evidence on the payments she had outlined in her email to the Phuas. The Plaintiffs have not given any explanation as to why LJ cannot give a statement, or testify remotely, even if she were not available to come to Hong Kong for the trial. I can only infer that her evidence will not assist the Plaintiffs’ case.

47.  Even if, as the Plaintiffs sought to suggest, the USD Sum originally represented payment made by Zheng for goods purchased, there is no pleading that the USD Sum was paid to and received by DVH on trust. As such, I accept the Defendants’ submission that DVH was entitled to use the USD Sum for its own purposes as it deemed fit.

2. The use of the USD Sum for settlement of DV SH’s debt

48.  On the Defendants’ case, a sum of RMB 8,114,266.46 was transferred from the USD Sum to DV Collection Pte Limited (“DV Collection”) in around 2012/2013 (“DV Collection Transfer”). DV Collection is not within the DV Group, but is a private company in Singapore which is owned by Mr Phua. Wong’s evidence is that this payment was to settle a debt due from DV Shanghai to DV Collection, and the DV Collection Transfer was made on the instructions and with the authorization of Mr Phua.

49.  The documents adduced at trial include a table setting out amounts paid to overseas suppliers/manufacturers of products ordered by and supplied to DV BJ and/or DV SH, amounting to a sum equivalent to RMB 8,114,266.46. There are also bank documents showing the payments made by DV Collection in euros. The Defendants have also produced in evidence a document dated 23 June 2016, issued by DV Collection to DV SH, confirming that DV Collection had made payment of a total sum of RMB 8,114,266.46 for and on behalf of DV SH, and that DV Collection had received payment of the said sum from Wong.

50.  It was put to Wong in cross examination that the USD Sum was in fact not sufficient to fully cover the DV Collection Transfer after the 7 alleged settlement/public relations payments. Wong was forthright in acknowledging that the shortfall was in fact paid by him out of his personal funds, on behalf of the DV Group, to settle the debt due by the DV Mainland companies to DV Collection. In essence, Wong’s evidence is that it was commonplace at the time for advances to be made by the DV Group companies to shareholders, including himself, and by shareholders including himself to the DV Group companies, with their accounts being settled periodically. It was in accordance with such customary practice that Wong had, in 2012/2013, advanced the shortfall required to make the DV Collection Transfer when requested by Mr Phua and LJ to do so.

51.  I accept Wong’s evidence on the DV Collection Transfer, that it was made for the purpose of DVH and the DV Group.

The HKD Sum

52.  Another controversial category of payments relates to payments made to DVH/DV HK by purchasers for products ordered to be supplied to them. These involve transfers of the HKD Sum.

53.  There is no dispute that there were payments made by Zheng and Mr Ma Xing Tian (“Ma”) (and parties related to Ma), as customers, for items of furniture which were ordered from companies within the DV Group, or specifically, from DV Shenzhen. The products were to be manufactured by overseas companies, pursuant to orders placed by the customers.

54.  Before DV Shenzhen would place corresponding orders with the manufacturers, Zheng and Ma (and his related parties) would make payment into the bank accounts of DVH and/or DV HK, for further payment or account to DV SH (presumably as the company holding DV Shenzhen and the other Mainland companies). According to LW of the Plaintiffs, the payment made by Zheng represented his full payment of the purchase price for goods under the orders. According to the Defendants, the payments received represented only a deposit or part payment of the total purchase price. On the Defendants’ case, Ma was a major customer who was involved in a substantial project on the Mainland which necessitated the purchase of substantial quantities of furniture from the DV Group, and Ma was supportive of the DV Group when it suffered a financial setback around the time of and after the Broadcast, to the extent of making payments of a substantial part of the purchase price for the goods he ordered, by way of deposit. Wong disputed YW’s claim that purchasers would pay 100% of the purchase price for furniture ordered. According to Wong, the deposit payable in the high-end furniture business was normally 30 to 50% of the value of the order.

55.  In this respect, Counsel for the Defendants highlighted the fact that whereas Zheng could have been called to give evidence on this disputed issue of the nature of the payment made by him, or as to the amount of the deposit paid by him or normally payable by purchasers to the DV Group for furniture ordered, the Plaintiffs have chosen not to adduce any evidence at all from Zheng. No explanation has been given for his unavailability. It can be inferred that any evidence from Zheng would not have assisted the Plaintiffs’ case.

56.  In gist, the Defendants’ case is that the transfers of the HKD Sum to the Tong Companies were refunds made to Ma of the advance payment of deposits which he had (through the Tong Companies) made to DVH/DV HK. Wong’s evidence on these deposit payments and their subsequent refunds when the furniture was delivered reflects the practice of the DV Group and its customers and parties related to the DV Group, of employing DVH and DV HK as a means to exchange currency, and to gain access in Hong Kong to the free use of money and foreign exchange.

57.  According to Wong, a practice had been in place since the beginning of 2011 (before the date of the SPA or completion thereunder) for Ma and his related companies to pay a substantial portion of the purchase price for the goods ordered, as a deposit.

58.  Wong explained that the deposits from Ma could be in renminbi, or in foreign currency (either Hong Kong dollars or US dollars), depending on the funds Ma and his related companies had at the time, but that at the relevant time of the Impugned Transfers, Ma had paid a substantial amount of deposits in Hong Kong dollars. Upon delivery of the furniture, if Ma preferred to settle the entire price in renminbi, DVH/DV HK would have to return the deposit Ma had paid in Hong Kong dollars, if that was what Ma preferred. Wong highlighted the fact that as Ma was a very major client, it was purely a matter of convenience for him, and it was for Ma to decide whether it would suit him to pay the deposit in foreign currency or renminbi, whether the ultimate payment for settlement would be in a particular currency, and the currency for the refund to be made.

59.  Wong explained the practice on Day 4 of the trial, as follows (at p 66 lines 8 to 24 of the trial transcript):

“As I understand, (Ma and his related parties) prefer to settle in renminbi. Firstly, because if payment was settled in renminbi, we would have to issue an official invoice to them, including official value adding tax invoices which they could rely on to make deductions for the business.

Secondly, for all Hong Kong and Chinese businessmen, including our clients in China, if possible, they would try to retain foreign currencies. They would prefer to spend the renminbis because of the foreign-exchange control in China. It is relatively difficult to convert renminbi into foreign currency such as Hong Kong dollars and US dollars.

So relative to Mr Ma, the foreign currency he paid us was only a deposit. Because in 2011 he was having a very substantial project. Not only his housing project, but also office buildings and hotels projects. Meaning that he would have to spend quite a substantial amount of money on purchasing furniture…”

60.  Wong’s account of the refund is as follows (Day 4, p 68 lines 11 to 20 of the transcript):

“Eventually, how the payment was to be settled, upon delivery, it was Mr Ma’s decision. Which of his company would pay us in which currency, whether it is renminbi or Hong Kong dollars, as I said just now, most of the payments were made in renminbi. Because after deciding which company would pay us renminbi, we would have to issue invoice with the relevant company’s name in the heading.”

61.  From Wong’s evidence, it is clear that that Ma, like other people transacting business on the Mainland, would conceivably have wanted to make full payment of the purchase price upon delivery in renminbi, and seek a refund outside the Mainland, in Hong Kong dollars or US dollars, to facilitate a favorable and convenient foreign exchange. Any “double payment” can be explained in this way, and is not as extraordinary or unbelievable as YW or the Plaintiffs would suggest.

62.  The amounts of the initial deposits/advance payments and the refund may not be exactly the same, when it is accepted that the whole exercise was simply to facilitate Ma’s access to foreign currency or renminbi at the times he required them.

63.  On the evidence, the refunds of the deposits or partial payments Ma had made were made to him through his designated nominees, the Tong Companies. As Counsel for the Defendants highlighted, there had been deposits paid and refunds made to the Tong Companies before the date of the SPA in September 2011, before completion thereunder in May 2012, and before the meeting in December 2011 on which LW relied (“December Meeting”), as evidence of the Plaintiffs’ claim that the transfers to the Tong Companies were only a mechanism devised and agreed upon between Zheng and the Phuas at the December Meeting, after the Tong Companies transfers had been made, purely as a matter of account adjustment or reconciliation.

64.  It is true that the written memorandum (“Meeting Memo”) of the December Meeting which was held on 29 to 30 December 2011, and attended by (inter alia) Wong and YW, referred to the parties’ discussion and agreement on the manner of treating the HK$102 million received from Ma. The Meeting Memo refers to the HK$102 million as money received as agent (“代收”). It records that the money should be treated for accounting purposes as “security deposit” received as agent, and refers to a sum of RMB 49.5 million having been received by DV SH.

65.  As any purchase price for furniture sold to customers should be payable to DV Shenzhen, and not to DVH or DV HK, YW’s evidence is that it was only at the December Meeting that the parties had agreed, as a matter of accounting adjustment for the purposes of the SPA Completion, to treat the money received by DVH and DV HK as a deposit. YW claims that there had never been any actual practice of DVH/DV HK receiving money from Ma as deposits, for them to be refunded.

66.  On the documentary evidence, I accept the Defendants’ case that the agreement reflected in the Meeting Memo was only to formalize the procedure and practice which was already in existence, regarding DVH’s and DV HK’s receipt, and refunds, of deposits from/to Ma (through the Tong Companies).

67.  Counsel for the Defendants also referred to DVH’s ledgers as evidence corroborating the Defendants’ case. These ledgers were prepared by the Plaintiffs and were disclosed in the course of the Plaintiffs’ discovery, for the period from 1 January 2012 to 31 December 2012. On the Plaintiffs’ own evidence, the sums of HK$7,000,320 and HK$6,390,709, representing 2 of the Impugned Transfers to the Tong Companies in January 2012, were described in the general ledger of DV HK as “Xintong Trading Co, Settle Temp Receipts on behalf of (DV Shenzhen) 24/12/11”. The date of 24 December 2011 is referable to the corresponding entries in DV HK’s bank statement, which shows that there was a deposit in the sum of HK$13,319,389 into the bank account on 24 December 2011, which corresponds to the Defendants’ pleaded case that on that date, DVH transferred the same sum to DV HK for the purpose of refunding the deposits to Ma and his related companies. This deposit was followed by DV HK’s transfers of HK$7 million and HK$6,390,389 to Xintong Trading Co. As Counsel submitted, the entries in DV HK’s general ledger represent the Plaintiffs’ own acceptance of the nature of the money received and transferred: as a “temporary” receipt, which is refundable, and is consistent with the Defendants’ case, that the money received from the Tong Companies on behalf of Ma were deposits or part payments, and to be treated in the manner described by Wong.

68.  Counsel for the Defendants was quick to point out further that notwithstanding the relevance and cogency of the ledgers of DVH and DV HK in shedding light on the Plaintiffs’ contemporaneous treatment and nature of the transfers in question, none of the 2011 general ledgers of DVH, the 2011 general ledgers of DV HK, and the 2012 general ledgers of DVH were produced by the Plaintiffs. No explanation could be given by YW for this failure. Again, the court is entitled to infer that how each of the Impugned Transfers was contemporaneously treated in the relevant ledgers of the Plaintiffs would all be unfavorable to the Plaintiffs’ case.

69.  The Defendants have in fact produced an email from Ma to Mr Phua, dated 3 January 2017, whereby he confirmed that the approximate sum of HK$120 million paid to DVH and DV HK were related to the purchase of products from the DV Group. Ma confirmed that apart from a small amount which was paid for goods purchased directly from DV HK, the vast majority of the payment was as deposits for the purchase of products from DV Shenzhen. Ma explained that he and his related parties had made payment to DV HK to facilitate onward payment of the deposit payable to the manufacturers for the orders. Ma also confirmed that after the parties had separately settled payment for the goods, refund of the deposits had been made to Ma and his related parties. The Plaintiffs have referred to this as self-serving, but in my judgment, Ma’s written confirmation still has value in corroborating the Defendants’ case. This is particularly so when it would have been just as easy for the Plaintiffs to have procured confirmatory evidence from Zheng, or LJ, to support their case but have demonstrably failed to do so.

The Euro Sum

70.  Of the 17 Impugned Transfers, 2 are for the sums of €3,117,077.91 and €2,009,877.39 from DVH to Chow, Wong’s wife.

71.  First, it is Wong’s evidence that Chow was involved as a transferee, because he was the director and authorized signatory of the bank accounts of DVH and DV HK, but as he had to travel constantly, he had entrusted his wife to deal with transfers of money in and out of his account on his behalf during his absence. According to Wong, he had signed in advance bank transfer slips or documents to effect transfers from his bank account to Chow, so that Chow could manage transfers of money from his account in his absence, to payees as he may designate. Chow was simply acting as a conduit at all material times, for the channel of the Plaintiffs’ funds received in Wong’s account. At all material times, this was authorized and approved by Mr Phua and LG, the financial controller.

72.  The Euro Sum transfers are clearly explained and documented. I am satisfied on the evidence that they represent part of the proceeds of the sale of the shares under the SPA, of RMB 43 million, and belong to the Phuas. The Euro Sum totaling €5,126,955.30 does not even comprise funds of the Plaintiffs, for which the Defendants have to account. The reason for my acceptance of the Defendants’ case is as follows.

73.  According to Mr Phua, Zheng had originally offered to pay the sale proceeds under the SPA in US dollars. However, he later discovered that he did not have sufficient US dollars to do so, and requested to make payment in RMB instead. Mrs Phua agreed to this, and by a letter to Zheng which was jointly signed by Mr and Mrs Phua, Mrs Phua instructed Zheng to pay her the share proceeds in the sum of RMB 43 million.

74.  By 1 March 2012, Mrs Phua had received the share proceeds of RMB 43 million from Zheng. As evidenced by the bank form, Mrs Phua remitted the RMB 43 million to DV Beijing on 1 March 2012. According to Mrs Phua, this was done on the suggestion of Zheng and LJ, as a currency exchange arrangement whereby the share proceeds may be legitimately converted into foreign currency, and transferred out of the Mainland to the Phuas. Mrs Phua was clear and adamant in her evidence on cross-examination, that Zheng, LJ and she had discussed how the sale proceeds of RMB 43 million could be transferred to her, and the route of payment was proposed by Zheng, for the transfer to be made first to a DV Group company, then to Jumbo, then back to a DV Group company. According to Mrs Phua, she was told that the payment had to be described as a “payment for goods”, to enable the transfers and ultimate payment to her. She acknowledged that it was not any real “loan” as may be described, as the funds represented the sale proceeds for the shares sold by the Phuas, and the intention was for the transfers to be ultimately paid back to her. She had trusted Zheng when she agreed to the transfer arrangements he proposed.

75.  The utilization of and transfer out from the Mainland of the sum of RMB 43 million is evidenced by LJ’s email of 27 March 2012 to Mr Phua. This email attached a breakdown of the RMB 43 million, showing the sum of RMB 43 million as having been received from Zheng. Pertinently, the sum is noted as share amount (股權款), and to be “temporarily booked” as advance payment (預收款). According to the breakdown sent with the email, a sum of €3,120,351.40 (equivalent to RMB 26,016,865.90) was to be remitted to Jumbo, to be temporarily booked as “repayment to manufacturer”. Significantly, the balance of RMB 43 million, in the sum of RMB 16,983,134.10, was recorded as the balance “to be left on the accounts of the company”, as “a loan from Mr Phua to the company”.

76.  Following this, the bank records show a due remittance from DV SH to Jumbo in Italy of a sum of €3,120,351.40 on 6 March 2012. There is no dispute that Jumbo was one of the Italian manufacturers of the DV Group. The Defendants explained that the remittance from DV SH on the Mainland to Jumbo was again part of the currency exchange arrangement devised by LJ, for conversion of the renminbi received from Zheng into foreign currency, to be paid to Mrs Phua or her nominee outside the Mainland. LJ sent an email on 7 March 2012 to Gloria, an employee of DV Shanghai, with copies to Mr Phua and Wong, by which LJ instructed Gloria to inform Jumbo that upon receipt of the funds, a refund should be made to DVH (in Hong Kong).

77.  Jumbo duly complied with the request, and as evidenced by a remittance advice dated 13 March 2012, €3,117,077.91 was returned to DVH’s bank account in Hong Kong (with a small difference from the sum remitted).

78.  As evidenced by the transfer slip dated 14 March 2012, the €3,117,077.91 was transferred from DVH to Chow (one of the Impugned Transactions). In this regard, as Wong explained, Chow was merely acting as agent of Wong and Mrs Phua in the receipt.

79.  On 15 March 2012, LJ emailed Mr Phua’s personal assistant in Singapore (Miss Lim), informing her that €3,117,077.91 would be sent to Singapore, and that upon receipt, a part of the remittance (€2,010,000) should be sent back to Hong Kong. LJ sent a further email to Miss Lim on 16 March 2012, with more instructions on how the transfer of the €2,010,000 was to be made. She advised Miss Lim to remit €745,000 of the sum from Da Vinci Home (Singapore) Pte Ltd, €220,000 from DV Collection and €1,045,000 from Doris Da Vinci Jewellery Pte Ltd. On 19 and 20 March 2012, DVH duly received the 3 corresponding sums in Euros, totaling €2,010,000 less bank charges.

80.  With regard to the second remittance of €2,009,877.39 made on 22March 2012, Wong explained that this was made on the suggestion of LJ for the purpose of accounts settlement between Mr Phua and the DV Group. On the Defendants’ evidence, the transfer was for repayment of a short-term loan from Mr Phua for accounts settlement purposes.

81.  The Plaintiffs’ only claim by way of challenge is that the transfers of €2,010,000 from the 3 Singapore companies in March 2012 were in fact repayment of loans made by DVH on 30 September 2011 to the 3 companies.

82.  I accept the Defendants’ evidence, and reject the Plaintiffs’ contention. The remittances relied upon by the Plaintiffs as evidence of the alleged 2011 loan from DVH to the Singapore companies do not even add up to €2,010,000, but to €2,190,000 instead, with a significant difference of €180,000. Even if this was to be disregarded, it is more significant that from the documentary evidence available, the remittances made by DVH to the 3 Singapore companies in September 2011 were themselves repayments, instead of loans as contended by the Plaintiffs. This is made clear in an email from LJ dated 17 January 2012, and the breakdown attached to the email. According to the breakdown, the transfers to the Singapore companies in September 2011 were described as being for “repayment to Singapore subsidiary of amounts paid”, “repayment to Mr Phua for amounts paid” and “repayment for jewellery coupons”. I fail to see how the description of the transfers in 2011 can, on any reading, be justified as loans from DVH to the Singapore companies, as the Plaintiffs allege.

83.  LJ’s email of 27 March 2012, and the breakdown she attached with regard to the utilization of the RMB 43 million received, clearly stated that the balance of the sale proceeds of RMB 43 million received by DVH after the remittance to Jumbo, in the sum of RMB 16,983,134.10, was to be retained by DVH/DV SH, and to be treated as a loan from Mr Phua. This amount was never returned to the Phuas, until the arbitration commenced by them on the Mainland for recovery, resulting in an award whereby the RMB 16,983,134.10 was ordered to be paid to Mr and Mrs Phua. As Counsel for the Defendants rightly pointed out, it is not their case (as argued by Counsel for the Plaintiffs) that the RMB 16 million was to be discharged by any Euro transfer.

84.  To repeat what is obvious, LJ is clearly the best witness to contradict the Defendants’ evidence and the emails relied upon by them, if what the Defendants claim is not the truth. The Plaintiffs chose not to adduce any evidence from LJ, and it must be inferred that there is no evidence from LJ which can contradict the Defendants’ case or assist the Plaintiffs’. On the evidence, it is clear that there was an established pattern of inter-company transfers and settlement within the DV Group, and between these companies and Mr Phua and his companies in Singapore. LJ was the person responsible for these transfers, and if the Plaintiffs dispute the account given by the Defendants, they should have adduced the direct evidence of LJ.

Further HKD Sum

85.  The last 2 Impugned Transfers were made on 11 April 2012, of HK$2 million to Chen and HK$3,400,000 to Huang. I accept Wong’s evidence that Chen and Huang were money exchangers, and that the transfers were part of a currency exchange process through which a sum of SGD 1,100,000 sent by Mr Phua from DV Collection to DV HK, was converted into RMB, and then remitted to DV Shanghai as a loan from Mr Phua.

86.  The paper trail shows the deposit of SGD 1,100,000 into DV HK’s account in Hong Kong on 11 April 2012, followed by 2 withdrawals on the same day in the respective sums of (1) SGD 131,675.30 and (2) SGD 974,332.32. The first sum was converted into US$104,000, and

87.  On the face of DV HK’s own accounting documents for 2012, the transfers and payment represented proper business expenses paid on behalf of DV HK, and no one from the Plaintiffs who had direct knowledge of the financial matters of DV HK or of the transfers of funds at the material time has come forward to give firsthand, reliable and direct evidence on the transfers, to cast doubt on the Defendants’ case. I accept the submissions made by Counsel for the Defendants, that the unaudited and unsigned financial statements of DV HK for 2023, which were expressly marked “for management purposes only” and were prepared long after the transfers in question, and when litigation has already begun, cannot reliably shed light or cast doubt on the DV HK’s accounting ledgers for 2012, or the transactions in April 2012.

Conclusion on the Impugned Transfers

88.  In the light of the disputes raised in this case, the only conclusion which I can come to on the totality of the evidence is that due diligence had been fully conducted by and for Zheng under the SPA and before Completion, in respect of DVH and the companies and assets comprising the DV Group, and in respect of the businesses and operations of these companies under the management and control of the Phuas and Wong.  YW accepted that under and pursuant to the SPA, the parties had contemplated that upon Completion, the only asset in DVH would be its 59.16% shareholding in DV SH and nothing else. It is inconceivable that the due diligence would not have extended to DV SH and the subsidiaries it held. Problems which had been identified and queries which had been made in the course of the due diligence, including transfers of monies between DVH/DV HK and the Tong Companies, and the customary inter-company transfers and account treatments, had been made known and explained to Zheng, who was satisfied with and accepted them, including how they had been treated, and how they were to be treated under the SPA. The evidence is that Zheng proceeded with Completion, and he has made no claims whatsoever of any breach of warranty under the SPA, or of misrepresentation inducing the SPA or its Completion.

89.  Viewed in its proper context, it is unbelievable that the purposes of the Impugned Transactions were unknown, or otherwise not for the purposes of DVH, DVHK or the companies within the DV Group acquired under the SPA, as the management of the Plaintiffs now seek to claim after the Completion of the SPA.

Disposition

90.  The Plaintiffs’ claims have not been proved, and they are dismissed in their entirety.

91.  Having considered the entirety of the evidence, I have to agree with Counsel for the Defendants that the Plaintiffs have been extremely selective in discovery, producing only those documents which may assist in supporting their claims. It needs no reminder, that that is not the touchstone for proper discovery. In the course of cross-examination, LW had to accept, when confronted with the relevant documents, many aspects of the Defendants’ case, such as (for example) the fact that the award in the Mainland arbitration dealt with a sum of RMB 16.98 million which was accepted as the loan principal from Mr Phua which was due from DV SH; the fund flow showing the source of the RMB 43 million as the proceeds of sale which properly “belongs to Mrs Phua”; and the fact that the shortfall in the payment of the consultancy fee of US$104,000 was made up by an additional SGB amount paid into DV HK’s bank account.

92.  With the dismissal of the action, the order nisi on costs is that the Plaintiffs should pay to the Defendants the costs of the action, with certificate for 2 counsel. Such order shall become absolute unless application for variation in made within 14 days.