CYBERLAND (CHINA) LTD v. ZHANG WEI BING CODE AGRICULTURE (HOLDINGS) LTD

HCCL 3/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 3 OF 2014

(TRANSFERRED FROM HIGH COURT ACTION NO. 776 OF 2013)

_______________

_______________

________________

JUDGMENT
________________

INTRODUCTION

1.  This action concerns the beneficial ownership of a convertible bond (namely, “the 3^rd CB” hereinafter mentioned) issued by the 2^nd defendant to the 1^st defendant.

2.  The plaintiff’s case is that the bond was transferred by it to the 1^st defendant solely for the purpose of enabling him to raise funds for the plaintiff, and the 1^st defendant was to return the bond after completion of the fund raising exercise (whether successful or not).  The plaintiff further alleges that the bond was transferred to 1^st defendant for no consideration or, alternatively, the consideration for the transfer of the bond had totally failed.  Accordingly, the plaintiff claims that the 1^st defendant held the bond on trust for the plaintiff.

3.  On the other hand, the 1^st defendant’s case, in a nutshell, is that the bond was transferred to him as payment for consultancy services rendered by him in relation to the sale by the plaintiff of a wholly owned subsidiary to the 2^nd defendant, and he was therefore entitled to the bond beneficially.

4.  In support of their respective cases, the plaintiff and the 1^st defendant each relies upon an oral agreement or oral agreements.  Before I turn to consider their respective cases and various issues raised by the parties, I shall first set out the relevant background facts.

5.  I should mention at this stage that in the course of the trial, the parties have raised numerous factual disputes.  It is not, in my view, necessary to resolve all those disputes for the purpose of determining the issue of beneficial ownership of the convertible bond.  In this judgment, I do not propose to make findings on all factual disputes raised by the parties, save those which I consider to be necessary or essential for disposing of the claim raised by the plaintiff against the 1^st defendant in the present action.

Background facts

(i) The parties

6.  The plaintiff, Cyberland (China) Limited (“Cyberland”), formerly known as Easy Profit (China) Limited, is a private company incorporated in Hong Kong on 3 January 2003.

7.  The 1^st defendant, Zhang Wei Bing (“Zhang”), is a financial consultant.  According to Zhang, he has a Bachelor of Arts degree and a Master’s degree in International Economics from Peking University, and a Ph D degree in International Finance from Si Chuan University.  He has more than 20 years of experience in the finance and securities industry and an extensive business network and connections in the Mainland and Hong Kong.  He was a representative of China Securities Market Research and Design Center (SEEC), and one of the first batch of securities traders in the Mainland when the Shanghai Stock Exchange was established in 1990.  He found Shanghai Jinhui Information System Co Ltd, which was amongst the first investment advisory companies approved by the China Securities Regulatory Commission.  He has worked in various major institutions, and held the following positions: (i) Officer of The State Planning Commission of the PRC (now known as National Development and Reform Commission of the Government of the PRC), (ii) Director in the Banking Department and Securities Department of China Agricultural Development Trust and Investment Corporation, (iii) General Manager of East China Group of China Life Insurance Trust and Investment Company, (iv) Vice President of Qinghai Securities Company, (v) Executive Director of Ling Yun, (vi) Executive Director of Westralian Resources Pty Ltd (whose holding company is listed on the London AIM[1]), and (vii) Director and Chairman of Haton Polymer & Fibre Group (a China-based specialty chemicals manufacturer).

8.  The 2^nd defendant, Code Agriculture (Holdings) Limited (“Code Agriculture”), formerly known as China Chief Cable TV Group Limited, is a company listed on the GEM Board of the Stock Exchange of Hong Kong (stock code: 8153).

9.  Cyberland had, at all material times, 10,000 issued shares.  In the annual returns filed by Cyberland made up to 3 January 2010, 2011 and 2012 respectively, it was reported that Cyberland had the following shareholders:-

(1) Rise Enterprise Limited (“Rise Enterprise”): 4,500 shares;

(2) Stepwise International Holdings Limited (“Stepwise”): 4,000 shares; and

(3) Wealth Way Investment Limited (“Wealth Way”): 1,500 shares.

10.  In the annual return of Cyberland made up to 3 January 2013, it was reported that Rise Enterprise had transferred 1,463 shares in Cyberland to Stepwise.  Accordingly, the respective shareholdings of Rise Enterprise, Stepwise and Wealth Way in Cyberland became as follows:-

(1) Rise Enterprise: 3,037 shares;

(2) Stepwise: 5,463 shares; and

(3) Wealth Way: 1,500 shares.

11.  Cyberland had, at all material times (up to at least 14 February 2013), three corporate directors represented by three individuals, namely:-

(1) Wu Zhong Xin (“Wu”), representing Rise Enterprise;

(2) Shan Xiaochang (“Shan”), representing Stepwise; and

(3) Jing Quan Ying Zi (“Ying Zi”), representing Wealth Way.

12.  Stepwise was beneficially owned by Shan, while Wealth Way was beneficially owned by Ying Zi.

13.  In so far as Rise Enterprise is concerned, according to Ying Zi:-

(1) By December 2009, its shareholdings were held as follows –

(a) Eagle Bliss Limited, a company beneficially owned by Ying Zi – 42.5%;

(b) Wu – 19.5%;

(c) Deng Hui Zhong (“Deng”) – 5.5%; and

(d) Shan – 32.5%.

(2) In 2012, the shareholdings in Rise Enterprise were changed and became –

(a) Eagle Bliss Limited – 62.96%;

(b) Wu – 28.89%; and

(c) Deng – 8.15%.

14.  It is common ground that, at all material times, Shan was the largest indirect shareholder of Cyberland, followed by Ying Zi.

15.  According to Zhang, Shan was a successful and wealthy businessman with substantial investments in different sectors including agricultural, environmental and real estates in the PRC.  Shan and he were good friends, and Shan was impressed with his experience and market insights.  Shan would discuss and seek his views on Shan’s projects and business plans.

16.  Although Shan made an affirmation which was filed on behalf of Zhang in this action on 11 June 2013 and should be an important witness on various issues raised in the present action, he was not been called by either Zhang, or Cyberland, to give evidence at the trial.  According to Ying Zi, Shan is prohibited from leaving the Mainland because of some money disputes with various parties in the Mainland.  In the circumstances, I do not consider it appropriate to draw any adverse inference against either party for failing to call Shan as a witness.

17.  On the other hand, I am not prepared to give any weight to the contents of (i) Shan’s affirmation or (ii) any out of court statements made by Shan. This is because it is apparent, from the evidence before me, that Shan was quite prepared to say things which bore no resemblance to any truth whenever it suited his purposes.

(ii) Cyberland’s sale of Kang Yuan to Code Agriculture

18.  In or around 2009, Cyberland had a wholly owned subsidiary known as Kang Yuan Universal Investment Limited (“Kang Yuan”), a company incorporated in Hong Kong.

19.  Kang Yuan, which was an investment holding company, held 100% equity interest in a PRC company known as Jiangsu Kedi Modern Agriculture Company Limited (“Jiangsu Kedi”).  In Code Agriculture’s public announcement relating to the acquisition of Kang Yuan (referred to in paragraph 20 below) dated 8 December 2009, it was stated that Jiangsu Kedi was principally engaged in the production of tobacco drying machines in the PRC, had a standard production factory with approximately 20,000 square metres and a complex building with approximately 10,000 square metres in Jiangsu Province, PRC.  It was also stated that for the six months ended 30 June 2009, the revenue of Jiangsu Kedi was RMB 324,834,717, and the net profit before taxation was RMB 93,592,421.

20.  On 30 November 2009, Cyberland and Code Agriculture signed a Share Transfer Agreement, under which Cyberland (as vendor) agreed to sell and Code Agriculture (as buyer) agreed to purchase the entire issued share capital of Kang Yuan for the total consideration of HK$1,398 million (“the Transaction”), which was ultimately paid by Code Agriculture in the following manner:-

(1) a convertible bond in the principal amount of HK$1,098 million (“the 1^st CB”); and

(2) cash of HK$300 million.

21.  On 1 February 2010, the Transaction was completed.

22.  On 25 March 2010, Code Agriculture issued the 1^st CB to Cyberland.  The terms and conditions of that bond provided (inter alia) that:-

(1) interest on the bond at the rate of 1% per annum was payable semi-annually in arrears on 30 June and 31 December respectively;

(2) subject to various stipulated restrictions, the bondholder might convert the whole or any part of the outstanding principal amount of the bond into shares of Code Agriculture at any time during the period commencing from the expiry of the 2^nd anniversary of the issue date of the bond until the business day before the maturity date (being the 5^th anniversary of the issue date) at the conversion price of HK$0.43 per share; and

(3) the outstanding principal amount of the bond, unless previously converted into shares of Code Agriculture, was to be repaid on the maturity date of the bond.

23.  On 11 August 2010, Code Agriculture cancelled the 1^st CB and issued in its place:

(1) a convertible bond in the principal amount of HK$1,048 million (“the 2^nd CB”) to Cyberland; and

(2) another convertible bond in the principal amount of HK$50 million (“the 3^rd CB”) to Zhang.

The 2^nd and 3^rd CBs were issued subject to the same terms and conditions as were applicable to the 1^st CB.

24.  The crux of the dispute between the parties in the present case relates to the circumstances under which Code Agriculture came to cancel the 1^st CB and issue the 3^rd CB to Zhang.

(iii) Cyberland’s case – the Alleged Bond Borrowing Agreement

25.  In its pleadings, Cyberland alleges (inter alia) as follows:-

(1) In or about July 2010, Shan introduced Wu and Ying Zi to Zhang at a meeting (“the July 2010 Meeting”) which took place on the 21^st Floor of International Hotel, Yixing, Jiangsu Province, PRC, to discuss how Zhang could assist Cyberland to raise funds (paragraph 8 of statement of claim).

(2) During the said meeting, Zhang, who was aware that Cyberland owned the 1^st CB, proposed that Cyberland should transfer part of the 1^st CB in the principal amount of HK$50 million to him so that he could “demonstrate his financial standing to the potential financial institutions” when seeking to raise funds of about HK$200 million for Cyberland.  Zhang also proposed that if he should succeed in the fund raising exercise, Cyberland was to pay 2% of the funds so raised to him as a commission and he would return the convertible bond to Cyberland; and if he should fail to raise any funds for Cyberland, he would not charge any fee and would immediately return the convertible bond to Cyberland.  Zhang further warranted to Cyberland that the proposed fund raising exercise would be completed in about one month’s time, and that the convertible bound was to be transferred to him solely for the purpose of showing his financial standing when seeking to raise funds for Cyberland and, in any event, it would not be used by him and would be returned to Cyberland.  Cyberland (through its 3 representatives, ie Shan, Ying Zi and Wu) agreed to the aforesaid proposal of Zhang (“the Alleged Bond Borrowing Agreement”) (paragraph 9 of statement of claim).

(3) On or about 5 August 2010, there was another meeting between Ying Zi and Zhang in Hong Kong. At that meeting, Zhang produced a transfer form (“the Transfer Form”) for the transfer of part of the 1^st CB in the principal amount of HK$50 million to him and asked Ying Zi to sign it on behalf of Cyberland.  Pursuant to the Alleged Bond Borrowing Agreement and not otherwise and having obtained the consent of Shan and Wu for her to sign the Transfer Form, Ying Zi signed it for and on behalf of Cyberland on condition that the convertible bond in the principal amount of HK$50 million was transferred to Zhang solely for the purpose of enabling him to raise funds for the Cyberland and it would, in any event, not be used by Zhang and would be returned to Cyberland (paragraph 10 of statement of claim and paragraph 5.15C of amended reply).

(4) Thereafter, Zhang submitted the Transfer Form to Code Agriculture.  On or about 11 August 2010, Code Agriculture cancelled the 1^st CB and, in its place, issued the 2^nd CB to Cyberland and the 3^rd CB to Zhang (paragraph 11 of statement of claim).

(5) In or about November 2010, Zhang informed Ying Zi that the fund raising exercise for Cyberland had failed.  Ying Zi then demanded Zhang to return the 3^rd CB to Cyberland.  However, Zhang refused to return the 3^rd CB for the reason that he had previously helped Shan acquire a listed company in Hong Kong and incurred expenses of about HK$10 million but Shan had failed to repay him, or reimburse him for, the said expenses.  Despite Ying Zi’s protest that the 3^rd CB was the property of Cyberland and did not belong to Shan, Zhang continued to refuse to return the 3^rd CB to Cyberland (paragraph 15 of statement of claim).

26.  At the trial, Ying Zi gave evidence for Cyberland largely in line with its pleaded case.  There are some discrepancies between her oral evidence and Cyberland’s pleaded case which I shall mention later in this judgment.

27.  Wu also gave evidence for Cyberland at the trial, adopting part of Ying Zi’s witness statement (in particular her evidence regarding the July 2010 Meeting and the circumstances under which Ying Zi came to sign the Transfer Form) as part of his evidence.

(iv) Zhang’s case – the Alleged Bond Payment Agreement

28.  Zhang denies the Alleged Bond Borrowing Agreement and much of Cyberland’s aforesaid pleaded case.

29.  In his amended defence, Zhang alleges that:-

(1) In around June 2009, Shan requested Zhang to provide independent consultancy services to him and Cyberland on matters relating to the Transaction (“the Consultancy Services”) (paragraph 10(1)(a) of amended defence).

(2) In around July 2009, an oral agreement was entered into between Shan, Cyberland (represented by Shan) and Zhang whereby the parties agreed that the fee to be paid to Zhang for the Consultancy Services would be around 3% of the consideration under the Transaction (“the Service Fee”) (paragraph 10(1)(b) of amended defence).

(3) From about July to December 2009, Zhang provided the Consultancy Services, including but not limited to reviewing documents and/or advising on –

(a) the draft audit reports of Kang Yuan, the final draft Share Transfer Agreement, agreements, capital structures of the relevant parties, and general legal relationship between the relevant parties; and

(b) documents relating to the company’s valuation, company structure and internal materials (paragraph 10(1)(c) of amended defence).

(4) After completion of the Transaction on 1 February 2010, Cyberland was unable to pay to Zhang the Services Fee (paragraph 10(1)(e) of amended defence).

(5) In around February or March 2010, an oral agreement was entered into between Shan (representing Cyberland) and Zhang, whereby Cyberland agreed to transfer to Zhang a portion of the 1^st CB in the principal amount of HK$50 million in lieu of the Service Fee (paragraph 10(1)(f) of amended defence).

(6) The oral agreements made between Shan and/or Cyberland and Zhang mentioned in sub-paragraphs (2) and (5) above will hereinafter collectively be referred to as “the Alleged Bond Payment Agreement”.

(7) By virtue of his position as director and representative of Stepwise (a corporate director of Cyberland) and as director and majority shareholder of Rise Enterprise (another corporate director of Cyberland), Shan had actual or ostensible authority to represent Cyberland to enter into the Alleged Bond Payment Agreement with Zhang (paragraph 10(1A) of amended defence).

(8) At the July 2010 Meeting, Shan introduced Ying Zi to Zhang to discuss the transfer of a portion of the 1^st CB to him (paragraph 10(2) of amended defence).  I pause to mention that according to Zhang, Wu was not present at the July 2010 Meeting.

(9) On around 1 to 3 August 2010, Zhang met Ying Zi at Kowloon Shangri-La Hotel and had a brief discussion regarding the transfer of a portion of the 1^st CB to him (paragraph 11(1) of amended defence).

(10) On 4 August 2010, Ying Zi and Zhang had a meeting at the office of Code Agriculture, during which a number of staff members of Code Agriculture, including Rachel Hung, Leann Ho (financial controller of Code Agriculture) and Wong Man Hung Patrick (“Patrick Wong”) (then chairman of Code Agriculture), were also present. At that meeting, Zhang was told that time would be required for the preparation of documents to effect the transfer of a portion of the 1^st CB to him.  No document was signed at the meeting, but Leann Ho gave Zhang a letter enclosing a sample copy of the 3^rd CB and its terms and conditions (paragraph 11(2) of amended defence).

(11) On 9 August 2010, Zhang received a text message from Leann Ho stating that she was still waiting for Ying Zi’s documents and the Hong Kong Stock Exchange’s approval for the proposed transfer (paragraph 11(3) of amended defence).

(12) On 10 August 2010, Zhang was informed by Code Agriculture that the relevant transfer forms would be sent to him for signature and the official copy of the 3^rd CB would be ready for him to collect at the office of Code Agriculture on the next day.  On the same day, Zhang received a “Transferable Form” and a “Form of Transfer”, and later revised “Transferable Form” and “Form of Transfer”, by fax.  Zhang signed the revised forms and sent them back to Code Agriculture (paragraph 11(4) of amended defence).

(13) On 11 August 2010, Zhang went to the office of Code Agriculture and met with Patrick Wong and Leann Ho.  At that meeting, Leann Ho gave Zhang the following documents to sign:

(a) 2 identical Forms of Transfer stating that Cyberland transferred HK$50 million principal amount of the 1^st CB to Zhang;

(b)2 identical Transferable Forms, being letters addressed to Cyberland, stating that Zhang agreed to acquire HK$50 million principal amount of the 1^st CB and requested for the delivery of a certificate for the convertible bond.

At that time, all the aforesaid documents had already been signed by Ying Zi but had not yet been dated.  The documents also bore the company chop of Cyberland.  Leann Ho took the documents signed by Zhang and left the meeting room.  Later, she returned and gave the following to Zhang (i) one set of the signed Form of Transfer and Transferable Form, which had been dated 5 August 2010, (ii) the original 3^rd CB dated 11 August 2010, and (iii) a copy of Code Agriculture’s register of convertible bonds, which showed that Zhang’s name had been entered as the holder of the 3^rd CB (paragraph 11(5) of amended defence).

30.  Zhang said, in his witness statement (which he adopted as his evidence in chief), that in around June 2009 Shan approached and requested him to provide independent consultancy services to Shan and Cyberland in relation to the listing of the tobacco and agricultural sections of Shan’s group of companies, which later became the “backdoor listing” of Cyberland through the sale of Kang Yuan (and hence its wholly owned subsidiary, Jiangsu Kedi) to Code Agriculture.  In his oral evidence in court, Zhang said that Shan told him that he wanted to become the owner of a listed company in Hong Kong and have Jiangsu Kedi listed on the Stock Exchange of Hong Kong.  Zhang said that the services he had agreed to provide to Shan included:-

(1) acting as his adviser (軍師) and gatekeeper (把關);

(2) building up a network of business and government contacts for him;

(3) acting as Shan’s consultant in relation to his tobacco and agricultural businesses;

(4)helping Shan make decisions; and

(5) standing on a “higher level” to help Shan set general business directions.

31.  Zhang further said, in answer to a question from the court, that in July 2009 Shan agreed with him that the Service Fee would be 3% of the market capitalisation of the listed entity.

32.  Although Zhang’s pleaded case is that Shan asked him to provide consultancy services to Shan and Cyberland, it seems to me to be clear, on the totality of Zhang’s evidence, that he was engaged by Shan to act as Shan’s personal consultant or adviser, and he provided consultancy services to Shan and not to Cyberland.

33.  In passing, I may add that there was, at the trial, a dispute as to whether the parties intended the Transaction to be a “backdoor listing” of Cyberland.  I do not consider it matters very much whether the Transaction should be given the label of “backdoor listing”.  What seems to me to be clear is that the parties must have contemplated or intended that there would be a change in de facto control of Code Agriculture after completion of the Transaction, having regard to the following facts and matters:-

(1) In Code Agriculture’s public announcement relating to the acquisition of Kang Yuan dated 8 December 2009, it was stated that, for illustrative purposes only, immediately after the allotment and issue of conversion shares upon full conversion of the convertible bond with principal amount of HK$1,048 million at the conversion price of HK$0.43 per share, Cyberland would hold approximately 56.85% of the shareholdings in Code Agriculture.  It should be noted, nevertheless, that there were conversion restrictions under the Share Transfer Agreement and the terms of the convertible bonds.  In particular, Cyberland could not exercise any conversion rights which would result in Code Agriculture’s non-compliance with the minimum public shareholding requirement stipulated under Rule 11.23 of the GEM Listing Rules or other relevant requirements under the GEM Listing Rules, or would trigger a change in control under the Takeovers Code.  Taking into account the said conversion restrictions, immediately after the allotment and issue of the conversion shares upon conversion of the convertible bond, Cyberland would hold approximately 29.90% of the shareholdings in Code Agriculture.

(2) On 17 February 2010, Code Agriculture (then known as China Chief Cable TV Group Limited) announced that it proposed to change its name to “Code Agriculture (Holdings) Limited” and adopted the Chinese name “科地農業控股有限公司”.  It may be noted that the Chinese name of Cyberland is “科地(中國)有限公司”.  The change of the English name and adoption of the Chinese name were resolved at a special general meeting of the company held on 22 March 2010.

(3) In Code Agriculture’s public announcement dated 26 February 2010, it was stated that the proposed change of name was to align with the corporate strategy of the company in diversifying its existing business portfolio into the modern tobacco drying industry in the PRC.  In the 2010 annual report of Code Agriculture, it was stated that modern tobacco agriculture had became the group’s core business.

(4) On 22 November 2010, Ying Zi, Shan and Wu were appointed as executive directors of Code Agriculture.

(5) On 26 November 2010, Ying Zi was appointed as the chairman of Code Agriculture.

(v) Subsequent events

34.  By a letter dated 28 January 2011, Zhang informed Code Agriculture of his HSBC bank account number into which account interest payable under the 3^rd CB was to be paid.

35.  By a letter dated 31 March 2011, Cyberland informed Code Agriculture that it would waive payment of all interest accrued under the 1^st CB up to 31 March 2011.  It may be noted, however, that it is Cyberland’s case (and an agreed fact) that the 1^st CB had already been cancelled on 11 August 2010.

36.  Anyhow, there is no dispute that Code Agriculture did not make any payment of interest under the 3^rd CB to Zhang.

37.  According to Zhang, between February and June 2011, he discussed with Shan on several occasions regarding the failure of Code Agriculture to pay interest under the 3^rd CB.  Eventually, a proposed solution involving a cash payment of HK$15 million by Cyberland to replace the 3^rd CB was agreed.  Zhang was willing to accept the cash payment provided that it was paid by the end of June 2011.  As a matter of fact, Zhang did not receive any payment.

38.  In an email sent by Zhang to Shan on 18 July 2011, Zhang stated (inter alia) as follows:

“ Regarding the $50,000,000 CB, I have discussed a bit with Yingzi to see if the previous expenditures problem could be resolved by the cashing of $15,000,000.00 based on what we have discussed in Yixing… The issue of advance payment made by my company and my partners cannot be further delayed.”

I shall come back to this email later in this judgment.

39.  According to Zhang:-

(1) In or around October or November 2011, Ying Zi and Shan on behalf of Cyberland offered to find a third party to acquire the 3^rd CB from him for the sum of HK$15 million.  Shan’s secretary (Athena) and Zhang then exchanged email messages in relation to a letter of confirmation and a buy-back agreement.

(2) In the documents before the court, there are three versions of the letter of confirmation between Cyberland and Chinaland Management Limited (“Chinaland”), a company belonging to Zhang.  Two of them were signed by Shan for and on behalf of Stepwise as representative of Cyberland, but they were not signed by or on behalf of Chinaland.  The third version was signed by Shan for and on behalf of “Top Lucky International Development Limited” as representative of Cyberland, and by Zhang for and on behalf of Chinaland.

(3) In the letters of confirmation, it was stated that Cyberland had engaged Chinaland to be its independent agent in assisting Cyberland in the sale of Kang Yuan to Code Agriculture, and Cyberland had paid remuneration to the designated beneficiary of Chinaland, namely, Zhang, in August 2010 by way of a convertible bond with a principal amount of HK$50 million.

(4) The buy-back agreement, which was not signed by any party, named Zhang as the seller of the 3^rd CB in his capacity as the legal and beneficial owner of it.

(5) Eventually, the proposed buy-back of the 3^rd CB did not materialise.

40.  Ying Zi’s evidence is that she only saw the aforesaid letters of confirmation and buy-back agreement at the office of Cyberland’s solicitors in the course of the present litigation.

41.  On or about 30 March 2012, there was a meeting between Zhang and the representatives of Cyberland including Shan and Ying Zi at Shan’s private residence in Yixing (“the March 2012 Meeting”).

(1) According to Ying Zi, at that meeting, Zhang demanded Shan to repay him HK$10 million in respect of the expenses which he claimed to have incurred for the acquisition of a listed shell company for Shan and HK$2 million by way of interest.  Zhang further said that he would not return the 3^rd CB to Cyberland until Shan had made payment to him.  Although it was pointed out to Zhang that he should not mingle his personal dispute with Shan with Cyberland’s property (ie the 3^rd CB), Zhang refused to return the 3^rd CB to Cyberland.

(2) On the other hand, according to Zhang, the meeting was not arranged to discuss the 3^rd CB although Ying Zi did, during the dinner, tried to persuade him to accept a lower buy-back consideration of HK$10 million for the 3^rd CB.  He declined to discuss this offer further unless Shan and Ying Zi could demonstrate their ability to make payment.

42.  By an email dated 15 May 2012 sent by Zhang to Shan, Zhang stated that he was unable to contact Shan despite several attempts and felt that the matter relating to the CB could not be delayed any further.  Zhang also stated that “[i]f the payment is still not made as agreed, my side will immediately start legal proceedings, and will directly claim against the listed company”.

43.  By two letters dated 21 and 31 May 2012 respectively, Zhang (through his solicitors, Messrs Yung, Yu, Yuen) demanded Code Agriculture to make payment of the outstanding interest and/or principal under the 3^rd CB.

44.  According to Ying Zi, round about that time, she spoke to Zhang over the phone.  During that telephone conversation, Zhang required Shan to sign an agreement to acknowledge his indebtedness of HK$10 million to Zhang and undertake to repay that debt before Zhang would return the 3^rd CB to Cyberland.  Ying Zi then instructed solicitors to prepare a draft agreement (“the Draft Letter of Undertaking”), which was sent to Shan and Zhang for their approval and signature. Subsequently, Zhang told Ying Zi on the phone that Shan would only pay him HK$300,000 and would not sign the Draft Letter of Undertaking. Eventually, the Draft Letter of Undertaking was not signed by either Shan or Zhang.  On the other hand, Zhang denied the alleged telephone conversations with Ying Zi, and said that he first saw the Draft Letter of Undertaking when it was produced after commencement of litigation.

45.  By a letter dated 5 June 2012 from Messrs S K Lam, Alfred Chan & Co (Code Agriculture’s solicitors) in reply to Messrs Yung, Yu, Yuen’s said letters dated 21 and 31 May 2012 respectively, Messrs S K Lam, Alfred Chan & Co stated that Shan was in the course of negotiating a settlement of the matter with Zhang and requested Zhang to withhold further proceedings for the time being.

46.  Ying Zi said that there was a meeting of the board of directors of Cyberland held on 31 July 2012, during which it was agreed that Cyberland would defer taking action against Zhang to recover the 3^rd CB in view of the fact that Cyberland was at that time undergoing a fund raising exercise which had reached a critical stage.  It was considered that taking action against Zhang at that time might jeopardize or adversely affect the fund raising exercise.  The board minutes of that meeting was signed by Ying Zi and Wu (“the 31 July 2012 Board Minutes”).  It was stated in those minutes that the 3^rd CB was transferred to Zhang so that he could use it to demonstrate Cyberland’s strength and sincerity when seeking to raise funds for the company, and that Zhang had promised that if the fund raising exercise was not successful within one month, he would immediately return the 3^rd CB to Cyberland.  On the other hand, Zhang’s evidence is that Shan told him that he (Shan) was not aware of this board meeting of Cyberland allegedly held on 31 July 2012.

47.  According to Zhang, in around October and November 2012, Ying Zi informed him that Shan had found a third party to acquire the 3^rd CB from him, but the proposed buy-back did not materialise in the end.  This allegation is denied by Cyberland.

48.  On 19 December 2012, Zhang (through Messrs Yung, Yu, Yuen) served a statutory demand on Code Agriculture demanding for payment of HK$51,250,000.00 under the 3^rd CB within 21 days.

49.  In an email apparently sent by Susan (Ying Zi’s assistant) to Shan on 2 January 2013, it was stated (inter alia) as follows:-

“ The claim for debt by Zhang Wei Bing has nothing to do with the operation and management of Code Agriculture: Zhang Wei Bing has said many times that the convertible bond is money for your acquisition of the shell (inclusive of interest), and has also asked me to act as the middleman to help resolve it. Zhang Wei Bing agrees that you can settle the debt by instalments (aggregated amount not exceeding $10,000,000), but you have failed to repay him directly or sign the agreement even after stalling for a long time.”

50.  In Shan’s reply email dated 4 January 2013 to Ying Zi (and a few others), Shan in substance denied any liability or responsibility on his part.

51.  Both Susan’s email dated 2 January 2013 and Shan’s email dated 4 January 2013 were forwarded by Ying Zi to Zhang on 6 January 2013.  Although Zhang does not dispute that he did receive those emails, his case, as I understand it, is that they were created for the purpose of lending credence to Cyberland’s case.

52.  On or about 23 January 2013, Zhang sent a “WeChat” message to Ying Zi stating that unless he received HK$20 million by Friday (ie 25 January 2013), he would proceed with the threatened court action.

53.  On 25 January 2013, Zhang presented a winding up petition against Code Agriculture in HCCW 31/2013 claiming default in payment of principal and interest under the 3^rd CB.

54.  On or about 4 February 2013, Ying Zi sent a “WeChat” message to Zhang stating as follows:-

“ Please be cautious. Shan wrote to the company saying that he does not know you, and also does not admit you have paid for him for the shell, just introduced you to me, he does not know about the transfer of the 5000 cb.”

55.  It was put to Ying Zi in cross examination that this “WeChat” message amounted to a veiled threat and its contents were made up by her, which Ying Zi denied.  I accept Ying Zi’s evidence that she was simply repeating to Zhang what Shan had alleged, even though it must have been obvious to everyone concerned that what Shan alleged could not be true.  In my view, this is an example of Shan being prepared to make untrue statements to temporarily get himself out of trouble.

56.  In a further “WeChat” message sent by Ying Zi to Zhang on 4 February 2013, the following was stated:-

“ So, Wei Bing [Zhang], it is most unfair to me, how many times you made me come out to mediate the question of debt between you and Shan, including making me the middleman, let Shan only repay the principal of HK$10,000,000, can be paid by a few instalments, once Shan pays, you return the 5000 cb, I am dealing with it seriously. Thinking of ways to help you resolve.”

57.  According to Ying Zi and Wu, there was a meeting of all the shareholders of Cyberland which took place in Yixing on 25 February 2013, at the end of which a statement was signed by Shan, Ying Zi, Wu and Deng (“the February 2013 Shareholders’ Statement”).  In that statement, it was said that the 3^rd CB was transferred to Zhang so that he could use it to demonstrate Cyberland’s strength and sincerity when seeking to raise funds for the company, and Zhang had promised that he would return the 3^rd CB to Cyberland after the fund raising exercise (whether successful or not).  The authenticity of this document is not accepted by Zhang.

58.  On 15 April 2013, Harris J made an order in HCCW 31/2013 that Code Agriculture was to pay into court the amount of HK$51,230,137.00 by 8 May 2013, failing which Code Agriculture would be wound up at the adjourned hearing of the winding up petition on 13 May 2013.

59.  On 6 May 2013, Cyberland commenced the present action against Zhang (as the 1^st defendant) and Code Agriculture (as the 2^nd defendant).

60.  On 8 May 2012, Code Agriculture paid the sum of HK$51,230,137.00 into court.

61.  On 13 May 2013, Harris J dismissed the aforesaid winding up petition on (inter alia) the following term, namely, that the said sum of HK$51,230,137.00 paid into court by Code Agriculture be paid out to Zhang on or after 24 May 2013 unless Cyberland obtained an order restraining the payment out or as otherwise ordered.

62.  On 23 September 2013, Cyberland filed a notice of discontinuance in this action against Code Agriculture.

63.  On 11 October 2013, Deputy High Court Judge Mayo ordered that the said sum of HK$51,230,137.00 was to remain in court pending final judgment in the present action.

Proper approach in assessing the oral evidence of a witness

64.  The court’s approach in assessing the oral evidence of a witness is well settled.  In Esquire (Electronics) Ltd v Hong Kong and Shanghai Banking Corp Ltd [2007] 3 HKLRD 439 at 481, Stock JA (as he then was) stated as follows:-

“ …… I do not say that an assessment of the character of a witness plays no part in the fact-finding process, but it is a task that may sometimes be elusive even to the best trained eye and ear, and I would venture to suggest that the truth, in so for as one is able to reach it or, as is sometimes the case, to reach a version of it that is more likely to be correct than not, can best be tested by reference to contemporaneous documentation where it exists, or to its absence where one could expect it to have been created, as well as to inherent improbabilities (though bearing in mind that there may be occasions where the truth may run against that particular grain) having regard to all the facts that are known … This is not to say that the documentation should have been treated as if it stood on its own, not to be explained, contradicted or supported by oral testimony. It is however to say that in this case the approach adopted to assessment of the facts placed far too much emphasis on character impression and too little upon what was suggested by the documentation and by the inherent improbabilities in their historical context. That documentation, as well as conflicts within the evidence, inherent probabilities, and a study of how matters were originally pleaded and asserted in witness statements – these are the factors which in a trial such as this, so long removed from the time of the events in question, were likely to be of particular use in assessing the facts …”

65.  In what follows, when assessing the oral evidence of any witness, I shall pay particular attention to:-

(1) the inherent probabilities, or improbabilities, of the events put forward by the witness;

(2) the consistency, or inconsistency, of his or her evidence with undisputed background facts or contemporaneous documents; and

(3) the consistency, or inconsistency, with his or her previous statements and the pleadings of the relevant party.

Cyberland’s case of the Alleged Bond Borrowing Agreement is not accepted

66.  When considering the inherently probabilities of Cyberland’s case in respect of the Alleged Bond Borrowing Agreement, it is relevant to take into account the background and experience of Ying Zi and Wu.  In the 2011 annual report of Code Agriculture, it was stated that Ying Zi joined the company as an executive director and was appointed as the chairman of the company in 2010, that she had been engaged in corporate operation for years and had extensive experience in corporate management and corporate finance in the PRC.  In her oral evidence, Ying Zi stated that her background was principally in the field of tobacco advertising, and her experience in corporate finance related to bank financing only.

67.  In so far as Wu is concerned, in the 2011 annual report of Code Agriculture, it was stated that he joined the company as an executive director in 2010, had been engaged in research and promotional activities in the tobacco industry in the PRC for years and had extensive experience in practical and operational management in private entities.

68.  Both Ying Zi and Wu appear to me to be reasonably sophisticated and successful business persons.  I have no reason to doubt that, in 2010, they would not be prepared to transfer away any substantial asset of Cyberland to any third party without fully understanding the purpose for the transfer and without being satisfied that there was/were good or sufficient reason(s) to do so.

69.  I do not accept Cyberland’s case in respect of the Alleged Bond Borrowing Agreement, for the following reasons.

70.  First, Cyberland’s pleaded case that Zhang requested for the transfer of a portion of the 1^st CB to him so that he could demonstrate his financial standing to potential financial institutions when seeking to raise funds for Cyberland seems to me to make no commercial sense and is, for that reason, inherently improbable.  If (according to Cyberland) Zhang was an intermediary or middleman tasked with raising funds for Cyberland, I do not see how his own financial standing would be relevant to potential financial institutions when considering whether to lend money to, or invest in, Cyberland.  On the other hand, by transferring a portion of the 1^st CB to Zhang, Cyberland’s assets would be reduced, which might make it more difficult for Zhang to raise funds for Cyberland.

71.  Second, in her oral evidence, Ying Zi said that another reason given by Zhang for seeking a transfer of a portion of the 1^st CB was that it would help him demonstrate that he had a close connection with Cyberland.  Quite apart from the fact that this reason was neither pleaded in Cyberland’s statement of claim nor mentioned in Ying Zi’s statement, it is difficult to see how the fact that Zhang held a convertible bond issued by Code Agriculture would show that he had a close connection with Cyberland, granted that Cyberland was itself the holder of a substantial convertible bond issued by Code Agriculture which constituted Cyberland’s major asset at that time.  Also, it is not apparent to me why an intermediary or middleman seeking to raise funds for a company would necessarily find it easier to do so by showing a close connection between him and the company in question. Such connection would immediately raise issues of conflict of interest.  In this regard, it is relevant that Zhang was, apparently, dealing with professional investors (such as Olympus Capital, said to be an independent private equity firm which had invested over US$1.8 billion of equity capital in Asia for 18 years).

72.  Third, Cyberland’s case as to the reason allegedly given by Zhang for seeking a transfer of a portion of the 1^st CB to him has not been consistent over time. The following different reasons appear:-

(1) in the Draft Letter of Undertaking allegedly prepared in June 2012 – to secure an indebtedness of HK$10 million owed by Shan to Zhang;

(2) in the 31 July 2012 Board Minutes, the February 2013 Shareholders’ Statement, and Patrick Wong’s statement to the police on 28 March 2013 – to assist Cyberland to raise funds by showing Cyberland’s strength and sincerity;

(3) in Ying Zi’s statements to the police on 22 March 2013 and 25 June 2013 respectively and her witness statement, and Wu’s statement to the police on 22 March 2013  – to enable Zhang to show his strength, sincerity and/or financial standing when raising funds for Cyberland;

(4) in the oral evidence of Ying Zi and Wu – to enable Zhang to show (i) his financial standing, and (ii) his close relationship with Cyberland when raising funds for the latter.

73.  The underlying reason for the transfer of the 3^rd CB to Zhang is a crucial issue in the present case.  The above discrepancies cannot be overlooked or brushed aside as being of no significance.

74.  Fourth, in their oral evidence, both Ying Zi and Wu said that they were actually not clear about, or did not understand, the reasons given by Zhang for requesting for a transfer of a portion of the 1^st CB to him.  They further said that they were not concerned about such reasons during the July 2010 Meeting, they trusted Shan, and their focus was on how much Zhang could raise and what Cyberland had to pay him for his services.  I am unable to accept these explanations having regard to Ying Zi and Wu’s background and experience and the fact that the 3^rd CB was clearly an asset of substantial value.

75.  Fifth, the arrangement between Cyberland and Zhang under the Alleged Bond Borrowing Agreement was, on any view of the matter, a special one carrying obvious risk to Cyberland. It seems to me unlikely that Ying Zi and Wu, with their background and experience, would not have asked Zhang to sign something in writing to acknowledge that the transfer of a portion of the 1^st CB to him was for a special purpose and that it was to be returned to Cyberland in any event.

76.  Sixth, Ying Zi was adamant that Zhang was engaged to raise funds for Cyberland (instead of Code Agriculture) and the funds were intended to be used in new business venture(s).  However, such contemporaneous documents as have been adduced in evidence suggest that Zhang was in fact seeking to raise funds for Code Agriculture.  For example, in a series of emails exchanged between Ying Zi and Zhang dated between August and October 2010 which it is common ground related to the proposed fund raising exercise, the subject was Code Agriculture and the discussion was about Code Agriculture’s major operating subsidiary (ie Jiangsu Kedi). There was no discussion about Cyberland, or its business plans or prospects in those emails.  In another email sent by Zhang to Shan and Ying Zi dated 20 October 2010, the discussion was about “8153 secured loan”.  I pause to mention that this email was discovered late by Zhang (shortly before the commencement of the trial) and Ying Zi gave evidence that she could not find any record of having ever received it.  Nevertheless, I accept Zhang’s evidence regarding the authenticity of this document.

77.  Seventh, according to Ying Zi, Cyberland had, in July 2010, no substantial asset or business other than the 1^st CB, and further had not identified any specific opportunities or assets which it intended to acquire.  It is clear on the evidence that Cyberland did not have any concrete business plans or proposals at that time.  Such being the position, it is not easy to see how a private company like Cyberland could attract professional investors to lend money to, or invest in, it.

78.  Eighth, the Disclosure of Interests (Form 2 – Corporate Substantial Shareholder Notice) in respect of shareholdings in Code Agriculture filed by or on behalf of Cyberland dated 12 November 2010 was inconsistent with Cyberland’s case that Zhang held the 3^rd CB for a special purpose only with a promise to return the same to Cyberland in any event (in other words, upon trust for Cyberland). Ying Zi gave evidence that she did not know who submitted that notice.  However, even after she became aware of the existence of the notice at a time when it was plain, according to her, that Zhang was wrongfully holding onto to the 3^rd CB, she did nothing to rectify the contents of the notice.

79.  Ninth, the same comment applies to the disclosure of substantial shareholders’ interests in the 2011 and 2012 annual reports of Code Agriculture, which were prepared after Zhang had allegedly reneged on his promise to return the 3^rd CB to Cyberland.  Ying Zi signed those annual reports as chairman of Code Agriculture.  Ying Zi initially, in cross examination, gave some explanations as to why it was not disclosed in the annual reports that Cyberland was interested in the 3^rd CB held by Zhang.  In her re-examination, she said, however, that she had simply failed to check the contents of the annual reports before signing them.  I am unable to accept this explanation.  The annual reports were obviously important documents from the point of view of the chairman and an executive director of a listed company.  While I can accept that Ying Zi probably did not read through the whole annual reports before signing them, the section relating to disclosure of substantial shareholders’ interests was something which particularly concerned her.  In view of her knowledge at that time that Zhang had reneged on his promise to return the 3^rd CB to Cyberland (if that indeed was the case), it seems to me improbable that Ying Zi would not have checked to ensure that Cyberland’s claimed interest in the 3^rd CB was clearly set out in the annual, published, reports of Code Agriculture.  It was only in the 2013 annual report of Code Agriculture that it was mentioned that a report had been made to the Commercial Crime Bureau against Zhang in relation to the 3^rd CB.

80.  I should mention that there are a few documents which, on their face, may be said to lend some support to Cyberland’s case in respect of the Alleged Bond Borrowing Agreement, eg the 31 July 2012 Board Minutes and the February 2013 Shareholders’ Statement.  However, these documents are largely self serving, and I am not prepared to give them any weight.

Neither can the court accept Zhang’s case of the Alleged Bond Payment Agreement which, in any event, would not be binding on Cyberland

81.  When considering the inherently probabilities of Zhang’s case in respect of the Alleged Bond Payment Agreement, it is again relevant to take into account his education, background and experience.  On his own account, by 2009, Zhang was a very successful financial consultant with extensive experience, network and connections in the securities and financial industry in the Mainland.  He would no doubt have appreciated the importance of keeping proper and accurate records and documentation in significant transactions, particularly where they affected his personal rights or interests.

82.  I am unable to accept Zhang’s case in respect of the Alleged Bond Payment Agreement, for the following reasons.

83.  First, Zhang has not produced any contemporaneous document signed by either Ying Zi or Wu to show their acknowledgement or acceptance of the Alleged Bond Payment Agreement.  Zhang explained why there was no written agreement with Shan recording or evidencing the Alleged Bond Payment Agreement, essentially because (according to Zhang) it was very common in the Mainland for there not to be any written consultancy agreement, Shan was a wealthy and successful businessman, he and Shan were good friends, and they trusted each other.  As earlier mentioned, I consider it to be clear that Zhang was engaged by Shan to act as Shan’s personal consultant or adviser, and he provided consultancy services to Shan and not to Cyberland.  If Shan was using his own assets to pay Zhang, I can just about accept Zhang’s explanations regarding the absence of any written agreement with Shan.  However, according to Zhang, Shan was proposing to use an asset belonging to Cyberland to pay him.  Zhang was plainly aware of the existence of other shareholders of Cyberland, including Ying Zi, at the material time.  In these circumstances, I consider it unlikely that Zhang, given his background and experience, would not have asked the other shareholders of Cyberland to sign any document to signify their acknowledgement or acceptance of the Alleged Bond Payment Agreement.  I shall deal with the Transfer Form signed by Ying Zi below.

84.  Second, it seems clear, from Zhang’s description of the consultancy services allegedly rendered by him, that they were mostly or primarily intended for the personal benefit of Shan.  If (i) Zhang and Shan did make the Alleged Bond Payment Agreement, and (ii) the nature or background of this agreement was fully or properly explained to Ying Zi and Wu (there being no suggestion that there was any misrepresentation made to them about the Alleged Bond Payment Agreement), I can see no reason, on the evidence and materials before me, why Ying Zi and Wu would agree to Shan using Cyberland’s asset to pay for consultancy services which were rendered by Zhang to Shan personally.

85.  In this regard, I accept Ying Zi’s evidence that she never agreed to use Cyberland’s asset (ie a portion of the 1^st CB) to pay for any consultancy services rendered by Zhang, whether to Shan or indeed to Cyberland.  Although I am unable to find, on the evidence, what was the true deal which led to Cyberland transferring a portion of the 1^st CB to Zhang, I do not consider that Ying Zi’s signing of the Transfer Form can properly be treated as her acknowledgement or acceptance of the Alleged Bond Payment Agreement.

86.  Third, Zhang’s evidence regarding the scope or nature of the consultancy services that he agreed to, and did, provide to Shan is different from his pleaded case and what he said in his previous affirmations and witness statements.  For example, there was no mention in his pleadings, affirmations and witness statements that one important service that he had agreed to provide to Shan was to help him build up a network of business and government contacts.  Also, as earlier mentioned, it seems clear from Zhang’s description of the consultancy services allegedly rendered by him that they were mostly or primarily intended for the personal benefit of Shan, whereas in his amended defence it is said that Shan requested him to provide independent consultancy services to Shan and Cyberland.  The consultancy services that Zhang had allegedly agreed to provide, as mentioned by him in his oral evidence (see paragraph 30 above), were not referred to in paragraph 11(1)(c) of the amended defence (even though the services there mentioned were, apparently, not intended to be exhaustive).  The scope or nature of the consultancy services which justify the transfer of 3^rd CB to him is an important issue in the present case.  The aforesaid discrepancies or omissions cannot be overlooked or brushed aside as being insignificant.

87.  Fourth, in his email dated 18 July 2011 (referred to in paragraph 38 above), Zhang seemed to accept that the 3^rd CB was linked to the previous expenditures or advance payment that his company and his partners had provided or made to Shan.  In paragraph 3 of his supplemental witness statement dated 31 October 2014, Zhang said that the reference to “previous expenditures” was intended to be a reference to the expenses that he had actually incurred in providing the consultancy services.  I am unable to accept this explanation because, on Zhang’s own evidence, the consultancy services were provided by him personally. Neither his company nor his partners were involved in the provision of the consultancy services.

88.  In paragraph 4 of his supplemental witness statement, Zhang said that he deliberately mentioned in the email that the previous expenditures had to be resolved with his company and a new partner which Shan knew he had brought in to Chinaland since May 2011.  Zhang further said that “he deliberately mentioned them and tried to use the pressure from them as a pretext to urge Shan to proceed with the Cash Settlement”.  I do not accept this explanation either, which seems to me to be a contrived one.  It is Zhang’s case that the consultancy services were provided from about July to December 2009 (see paragraph 10(1)(c) of the amended defence).  On Zhang’s evidence, Shan knew full well that the consultancy services were provided by Zhang personally during a period of time when he had not yet brought in any partner to Chinaland.   I do not see how Zhang could think that the mentioning of his company and/or his partner would or could bring any pressure on Shan to make payment.

89.  Fifth, as mentioned in paragraph 31 above, Zhang said in answer to a question from the court that in July 2009 Shan had agreed with him that the Service Fee would be 3% of the market capitalisation of the listed entity.  It was only later in his evidence that he said that if the relevant transaction took the form of a sale and purchase, the Service Fee would be 3% of the transaction amount.  Zhang never mentioned in his previous affirmations or witness statements that he had reached any agreement with Shan that the Service Fee could be 3% of the market capitalisation of the listed entity (depending on the form that the transaction ultimately took).

90.  Sixth, in paragraph 31 of Zhang’s witness statement, he stated that between February and June 2011 he and Shan came to a proposed solution regarding the 3^rd CB which involved a cash payment of HK$15 million to replace the 3^rd CB.  However, in his oral evidence, Zhang said that in March 2011, he was told by Shan that Ying Zi was trying to sell part of the convertible bond held by Cyberland, and he asked Shan to ask Ying Zi to sell the 3^rd CB for him as well for the sum of HK$15 million.  On the other hand, Zhang’s evidence in court would not fit comfortably with the contents of his aforesaid email dated 18 July 2011 (referred to in paragraph 38 above), which suggested that there was some proposed agreement or understanding involving a payment by Shan or Cyberland of HK$15 million (instead of Ying Zi helping him to sell the 3^rd CB for HK$15 million).

91.  Seventh, in paragraph 29 of his affirmation filed on 11 June 2013, Zhang said that on 5 August 2010, he and Ying Zi had a meeting at the office of Code Agriculture in the presence of a number of its staff, namely, Rachel Hung, Leann Ho and Patrick Wong.  At that meeting, Ying Zi gave him 2 identical transfer forms (ie the Transfer Forms) and 2 identical letters (ie the Transferable Forms) which they both signed.  Zhang said that he kept one set and gave the other set to Ying Zi.  The purpose of this part of his affirmation was apparently to refute Ying Zi’s allegation that the transfer form was presented by Zhang to Ying Zi on or about 5 August 2010 for her signature.

92.  This version of event by Zhang is inconsistent with his pleading, in particular paragraph 11(4) and (5) of his amended defence.  In paragraph 22 of Zhang’s witness statement dated 22 May 2014, he said that, having checked his passport and relevant records and certain documents which had managed to locate in relation to the signing of the transfer forms, he wished to supplement and correct paragraphs 28 to 32 of his said affirmation.  The version appearing in his witness statement is broadly consistent with his pleaded case.  I may add that the documents now produced by Zhang provide a measure of support for his pleaded case regarding the execution of the documents.

93.  While it is entirely understandable that Zhang might not be able to recollect the precise dates on which various events occurred, I find it more difficult to accept that Zhang could genuinely have been mistaken and thought, when he made the said affirmation, that it was Ying Zi who presented the transfer forms and the letters to him to sign.  On his current evidence, Ying Zi was not even present when he signed the original transfer forms and letters at the office of Code Agriculture on 11 August 2010.  It is not for the court to speculate on why he put forward a different version in his said affirmation.  However, the discrepancy is a significant one on an important issue in the case and, in my view, adversely affects the credibility of Zhang’s evidence.

94.  At this juncture, I should also briefly deal with the letters of confirmation between Cyberland and Chinaland and the buy-back agreement allegedly prepared in around October and November 2010.  The letters of confirmation are, on their face, inconsistent with the Alleged Bond Payment Agreement.  They suggest that Cyberland engaged Chinaland to be its independent agent in assisting Cyberland in the sale of Kang Yuan to Code Agriculture, and Zhang was the designated beneficiary of Chinaland to receive the 3^rd CB as remuneration for services rendered by Chinaland.  Neither statement is correct even on Zhang’s case.  Zhang said that it was his practice to use Chinaland, of which he was the sole beneficial shareholder and director, to sign written consultancy agreements, even though the consultancy services were to be provided by him (see paragraph 36 of Zhang’s witness statement dated 22 May 2014).   I have reservation on this explanation offered by Zhang.  According to Zhang, by October / November 2010, Code Agriculture had been in default of payment of interest under the 3^rd CB, which Zhang considered to be a serious matter.  The letters of confirmation and buy-back agreement were intended to give effect to a solution proposed by Ying Zi and Shan which involved finding a third party to acquire the 3^rd CB from Zhang for the sum of HK$15 million.  Zhang has not suggested that there was any purpose to serve by making incorrect statements, or any downside in stating the facts correctly, in the draft documents.  Normally, people do not make untrue statements in formal documents without good reason.  The alleged practice of using Chinaland to sign written consultancy agreements does not seem to me to be any good reason to make untrue statements in the letters of confirmation.  In any event, I am not prepared to give weight to the letters of confirmation which, on their face, contain serious misstatements.  Neither am I prepared to give weight to the buy-back agreement which was not signed by any party.

95.  In all, I am not prepared to accept Zhang’s case in respect of the Alleged Bond Payment Agreement.  In any event, even if I were to accept that Zhang did reach agreement with Shan on the terms of the Alleged Bond Payment Agreement, it was an agreement between Shan and Zhang. Such agreement would not be binding on Cyberland because (i) it was not an agreement to which Cyberland was a party, and (ii) in any event, Shan did not have any actual or ostensible authority of Cyberland to make the agreement with Zhang.  The fact that Shan was an indirect substantial shareholder and/or a representative of a corporate director of Cyberland is not, in my view, sufficient to confer on him any actual or ostensible authority of Cyberland to make the agreement with Zhang.  Also, I find as a fact that neither Ying Zi nor Wu (the representatives of the remaining corporate directors of Cyberland) ever agreed or consented to Cyberland making the Alleged Bond Payment Agreement with Zhang.

The presumption of resulting trust has no application in this case

96.  I am left in a position where I am unable to accept the principal case advanced by either Cyberland or Zhang.  Mr Kenny Lin (for Cyberland) has reminded me of the undesirability of the court deciding a case solely on the basis of burden of proof.  I accept that as a general statement.  However, it cannot be the duty of the court to find an unbelievable version of events advanced by one party proved merely because it is less unbelievable than the version advanced by the other party. In my view, if the respective cases presented by the plaintiff and the defendant are not proved to the requisite standard, the court has no alternative but to reject both cases.  The parties’ rights and obligations would then be governed by such default legal rules as may be applicable to the facts of the case and the court would have to rule accordingly.  In such circumstances, it is neither helpful nor accurate to describe the case as being decided on the basis of burden of proof.

97.  As a matter of principle, the presumption of resulting trust can apply in favour of a party even if that party’s primary case regarding the underlying reason for the transfer of the relevant property to the other party is rejected by the court.  This proposition follows, in my view, from the majority decision of the House of Lords in Tinsley v Milligan [1993] 3 All ER 65.  In that case, it was held that the provider of part of the funds for the acquisition of a property can recover an appropriate share of the property in reliance upon the presumption of resulting trust without having to rely upon the underlying illegality which explained why the property was originally purchased in the sole name of the other party.  If the court can disregard the underlying illegality and applies the presumption of resulting trust in such a situation, I see no reason why the court cannot apply the presumption in favour of a party merely because it has rejected his or her underlying case for the transfer of the property to, or acquisition of the property in the name of, another party.

98.  However, the party in whose favour it is sought to invoke the presumption of resulting trust must prove the necessary facts for the presumption to arise: see Lee Tso Fong v Kwok Wai Sun [2008] 4 HKLRD 270, at paragraph 26 per Deputy High Court Judge Anthony To (as he then was).

99.  In the context of the present case, before Cyberland can rely on the presumption of resulting trust, it must prove that the transfer of the 3^rd CB to Zhang was voluntary or gratuitous: see Big Island Construction (HK) Limited v Wu Yi Development Company Limited, FACV 1/2015, at paragraph 44 per Tang PJ.  Although his Lordship was in the minority on the question of whether the decision of the English Court of Appeal in Seldon v Davidson [1968] 1 WLR 1083 ought to be followed in Hong Kong, the correctness of that decision does not affect the well established principle that the presumption of resulting would only arise in the case of a voluntary or gratuitous transfer or payment.

100.  In Big Island, the Court of Final Appeal held that one cannot presume, or infer, an implied obligation to repay from the mere fact of payment to a stranger.  This is because the making of a bare payment to another may in the nature of things be explicable by reference to a wide variety of possibilities: see paragraph 106 per Sir Anthony Mason NPJ (with whom Ribeiro and Fok PJJ and Chan NPJ agreed).

101.  In my view, neither can the presumption of resulting trust arise from the mere fact that a property is transferred by one person to another.

102.  In the present case, there was a “transfer” of the 3^rd CB by Cyberland to Zhang, but it has not been established on the evidence that the transfer was voluntary or gratuitous.  The presumption of resulting trust has no application in the present case, with the consequence that Zhang is entitled to the 3^rd CB as its legal owner.

Disposition

103.  For the above reasons, I dismiss the plaintiff’s action against the 1^st defendant.  I also make an order nisi that the plaintiff shall pay the 1^st defendant’s costs of this action, to be taxed if not agreed.

104.  Lastly, it remains for me to thank counsel for the helpful assistance that they have rendered to the court.