TIN LIK v. DEUTCHE BANK AG AND OTHERS

HCCL 17/2011

COMMERCIAL ACTION NO 17 OF 2011

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J U D G M E N T

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INDEX

1. INTRODUCTION

2. MY FINDINGS FROM THE UNCHALLENGED DOCUMENTARY EVIDENCE

2.1 The Legacy Transaction

2.2 The Bridging Loan

2.3 The Bank’s Participation in the Reit Listing

2.4 Sale and Purchase Agreement and other Transactional Agreements

2.5 The Listing and the Handover

2.6 The Suspension of Trading and Events thereafter

3. THE EVENTS OF 2006 TO 2007; THE “DUE DILIGENCE” EXERCISE; THE “DISCOVERY” OF THE RENTAL DISCREPANCY; AND THE MEETINGS OF AUGUST AND SEPTEMBER 2007

3.1 Tin’s Evidence

3.2 The Hearsay Evidence of Yuan, Chen and Zhang

3.3 The Evidence of Charles Wang, Li Lei, Su and Keogh

3.3.1 Charles Wang’s Evidence

3.3.2 Li Lei’s Evidence

3.3.3 Su’s Evidence

3.3.4 Keogh’s Evidence

3.4 My Findings

3.4.1 No Weight to be attached on the Statements of Yuan, Zhang and Chen

3.4.2 Tin gave Untruthful Evidence

3.4.3 The Evidence of Charles Wang, Li Lei, Su, Keogh and the Other Witnesses

3.4.4 The Due Diligence Exercise

3.4.5 Tin’s involvement in the False Documentation Scheme

4. DISMISSAL OF TIN’S CLAIMS

5. THE SET-OFFS

5.1 Whether Tin is entitled to the Repayment of HK$278,526,708 or Part Thereof

5.2 Whether Tin is entitled to the Repayment or Payment of the Sums of US$20 million (or HK$156 million),  HK$64,954,940, HK$50,000,000 and HK$16,541,458 or Any Part Thereof

5.2.1 Whether the Alleged Diminution in Value of the Property Amounted to Double Recovery and, if Not, whether it was Covered by a Certificate in Writing within the meaning of the 7 September 2007 Letter

5.2.2 Whether Tin is Liable for Legal Fees, Professional Costs and Investor Relations Costs incurred due to or arising out of Tin’s Breach of the Terms of the SPA and/or the Discrepancies or Potential Discrepancies of the Terms of the Tenancy Agreements stated in the SPA

5.2.3 Whether Tin is Liable for Loss of the Manager’s Fees resulting from the Discrepancies in Rental Payments

5.2.4 The Total Amount properly Set-off pursuant to the 7 September 2007 Letter or pursuant to Clause 9.1A of the SPA

5.2.5 The Alleged Set-offs that were Unrelated to the 7 September 2007 Letter or Breach of Warranty.

5.2.5.1 The Alleged Waiver of HK$50 million Dividend from Beijing Gateway

5.2.5.2 The Alleged Loss of Rental under the Advertising Right Agreement Guaranteed by Tin

5.2.5.3 The Alleged Loss of Rental Receivables collected by Tin and Amount due from a Related Party owned by Tin

5.2.5.4 The Alleged Expenses related to Defective Equipment

5.2.5.5 The Alleged Listing Expenses

5.2.5.6 The Alleged Loss of Rental Receivables, Unpaid Management Fees, Unpaid Double Holdover Rent and Reinstatement Costs due from Tin’s Affiliates

5.2.5.7 The Alleged Expenses of Stamp Duty, Urban Real Estate Tax and Related Penalty Interest

5.2.5.8 The Total amount of the Set-offs that were unrelated to the 7 September 2007 Letter or Breach of Warranty

5.3 The Amount due to Tin

6. INTEREST AND COSTS

1. Introduction

1.  This action concerns and arises from the listing in 2007 of a real estate investment trust (“Reit”), named RREEF China Commercial Trust (“RREEF CCT”), of a commercial property in Beijing known as called the Gateway Plaza (“the Property”).  The Property, completed in 2005 and situated in the Chaoyang District of Beijing, comprises two 25-storey tower blocks connected by a three-storey atrium and three underground floors.

2.  The Property was developed by the plaintiff, Mr Tin Lik (“Tin”), a mainland-based businessman and the chairman of Bestride Holding Ltd, through a company owned and controlled by him called Beijing Bestride Estate Development Co Ltd (“Beijing Bestride”).  After its construction, the Property was owned by a company called Hong Kong Gateway Plaza Co Ltd (“Hong Kong Gateway”), a wholly owned subsidiary of Beijing Gateway Plaza (BVI) Ltd (“Beijing Gateway”).  Tin owned the entire share capital of Beijing Gateway.

3.  RREEF CCT acquired the entire share capital of Beijing Gateway pursuant to a Sale and Purchase Agreement dated 4 June 2007 (“the SPA”) made by the 3^rd defendant, as trustee of RREEF CCT (“the Trustee”), the 2^nd defendant, as the manager of RREEF CCT (‘the Manager”), and Tin under which the rental payable by the tenants of the Property and the terms of the tenancies were provided and warranted to be true and accurate by Tin.  On 22 June 2007, RREEF CCT was listed on the Hong Kong Stock Exchange (“SEHK”).  The consideration for the purchase of the shares in Beijing Gateway had been based, amongst other things, on the valuation of the Property which was based, amongst other things, on its rental income.  However, it was later discovered that there were discrepancies between the warranted amounts and the actual amount of rental payments received.

4.  On 10 September 2007, the Manager issued an announcement that:

(1) it had discovered discrepancies between the amount of rental payments being made by tenants of the Property, and the amount of rental income expected to be paid under the tenancy agreements that had been disclosed at the time of listing;

(2) the financial value of the discrepancy over the terms of the affected leases was HK$278,526,708; and

(3) on 7 September 2007, Tin paid HK$278,526,708 into the account of the Trustee to make up for the shortfall,  and undertook immediately on demand of the Manager to make further payments if the shortfall payment was not sufficient.

5.  On 28 October 2007,  a further announcement stated that Manager’s investigation into the matter had by then been completed substantially and that:

“In summary, after taking into account (Tin's) payment of HK$278,526,708 on 7 September 2007 to (RREEF CCT) (which was used to adjust the consideration payable for the acquisition), the net assets attributable to unit holders of (RREEF CCT) (excluding deferred taxation) as at 30 September 2007 is HK$69,663,000 lower than it would have been if the rental values had been in fact as represented and warranted by the Vendor, and as reflected in the Offering Circular issued on 11 June 2007.”

The announcement also stated:

“In summary, it appears that:

(1) there was a complex fraud perpetrated by members of the Vendor's team, which had the effect of concealing the true lower value of rentals payable by tenants of the building;

(2) the fraud was of a degree of sophistication that meant that, despite what Clifford Chance consider to have been robust due diligence for the purposes of (RREEF CCT’s) IPO (or at least consistent with industry standards), it was not detected by any of the Manager, the Joint Global Co-ordinators of (RREEF CCT's) IPO, their respective legal advisers or the Reporting Accountants.”

There was a further description of the fraud in the announcement:

“The fraud

The fraud at its heart involved the surreptitious generation of false lease agreements which were introduced covertly into the due diligence process. It does not appear to have involved undisclosed side-letters or side-agreements with tenants. In particular, the Vendor's team surreptitiously intercepted tenant confirmations provided in response to due diligence questionnaires and altered the documents before they were returned to those conducting the due diligence. The discrepant lease agreements with high values (the ‘High Lease Agreements’) which were produced for the purposes of due diligence were the product of a fraud conducted in a clandestine manner without any apparent knowledge or involvement of the Manager, the JGCs or their respective professional advisers. Whilst both the High Lease Agreements and the lease agreements at lower values actually entered into by tenants (the ‘Low Lease Agreements’) all appear on their face to be legitimate original documents, a detailed inspection conducted from the standpoint of testing the authenticity of the documents revealed that Low Lease Agreements subsequently had pages swapped fraudulently so as to create the false High Lease Agreements. The Low Lease Agreements were provided by the Vendor to the Manager on 6 September 2007. The nature of these discrepancies is such that they are much more readily discernible when the two sets of original Lease Agreements can be directly compared, one against the other. These irregularities have now become clear, but only after a detailed, sceptical comparative review and with the benefit of having both sets of original Lease Agreements available. Approached in this manner, the discrepancies have been identified. But they are not immediately obvious.

The fraud also involved the falsifying of accounts, tenant invoices and original bank documents reviewed by KPMG as part of their work in the role of reporting accountants in the IPO.”

6.  There have been a number of proceedings arising from these events. In these proceedings, which were commenced on 5 July 2011,  Tin claims against Deutsche Bank AG, as the 1^st defendant (“the Bank”),  and the Manager and the Trustee, as the 2^nd and 3^rd defendants,  jointly and severally, for, amongst other things:

“(1) The balance of the Price due under the SPA, namely HK$270,955,000, pursuant to paragraph 62 above or damages in lieu.

(2) The balance of the sums refundable to the Plaintiff by the 3^rd Defendant and/or the 2^nd Defendant, namely, HK$289,426,166 plus all sums invalidly or unlawfully certified for payment and all sums payable to the 1^st or 2^nd Defendants herein, pursuant to paragraphs 81 and 82 above or damages in lieu.”

Tin also claims against the Bank and/or the Manager, jointly and severally, for, amongst other things, damages for wrongful intimidation and damages for fraudulent misrepresentation.

7.  The Bank and the Manager have filed a defence, and the Trustee has filed a separate defence, denying liability and claiming that, after various setoffs, a sum of just under HK$11,000,000 was payable to Tin, subject to any further losses caused by Tin in breach of his contractual obligations.

8.  It is Tin’s case that 3 key issues arise:-

(1) The Bank and the Manager had knowledge of the Dual Documentation Scheme when the SPA was executed[1];

(2) The Bank and the Manager breached their contractual/ statutory duties as financial advisers to Tin by failing honestly and/or fairly to advise Tin of the existence of the Dual Documentation Scheme and upon the consequences of his staff[2] submitting inaccurate documentation for use in an IPO.

(3) Neither the Bank and the Manager nor the Trustee made out their pleaded positive cases of alleged loss or damage which they were legally entitled to set off against either the Tin’s 7 September 2007 payment of HK$278,526,708 or against Tin’s contractual entitlements under the SPA.

9.  At trial, Tin was represented by Mr Barrie Barlow SC leading Mr Chan Pat Lun and Mr Lawrence Li, the Bank and the Manager were represented by Mr Wong Yan Lung SC leading Mr Mike Lui, and Mr Eugene Fung SC represented the Trustee.  Tin gave evidence in the course of a trial lasting 15 days.  He had also served witness statements from Mr Yuan Lijun, the former Finance Director of Beijing Bestride (“Yuan”), Mr Chen Jian (“Chen”), Yuan’s assistant, and Mr Zhang Kai (“Zhang”), the former manager at Beijing Jones Lang Lasalle Property Management Services Co. Ltd. (“Beijing JLL”), a subsidiary of Jones Lang Lasalle Ltd. (“JLL”).  I had refused Tin’s application to receive evidence from these 3 witnesses by video link on 19 July 2013.  On the morning of the commencement of trial, I was informed that they would not be called to give evidence and that Tin would rely on the statements they had made to the Securities and Futures Commission (“SFC”) as hearsay evidence.

10.  The following witnesses were called by the Bank and the Manager and in the following order:

(a) Mr Lawrence Chu[3] – Associate in HSBC’s Global Investment Banking Department during the period of time relevant to this action;

(b) Mr Charles Wang[4], the Bank’s former head of Global Banking China;

(c) Mr Ruoyu Jiang[5], Director in the Bank’s Structured Finance Group;

(d) Mr Eryck Su[6] (“Su”), the Vice-President in the Acquisitions Team of RREEF CCT and the former senior staff of the Bank’s subsidiary Deutsche Asset Management (HK) Limited;

(e) Mr Paul Keogh[7] (“Keogh”), the former Executive Director of the Manager;

(f) Mr Li Lei[8], the Bank’s former Vice President in the  China Banking Team;

(g) Mr Eric Lee[9], Head of Operations, Management Solution Greater China of JLL during the period of time relevant to this action; and

(h) Ms Gloria Chan[10], the Financial Controller of the Bank and Vice-President of RREEF CCT.

The Trustee called Mr Andrew Law[11].

11.  I also received into evidence a substantial amount of documentary evidence including:

- [C1] – The Legacy Transaction documents which relate to the period before Tin’s dealings with the Bank and the Manager (1 bundle);

- [C2] – The Transactional Agreements - including the Engagement Letter (2 bundles – A and B);

- [C3] – The Bank and the Manager’s internal emails plus various minutes of meetings and post-listing correspondence (5 bundles – A to E);

- [C4] – The defendants’ “set off” documents (6 bundles – A to F);

- [C5] – Sample Tenancy Agreements/payment notices and receipts/weekly reports (2 bundles – A and B); 

- [D1] and [D2] – the defendants’ September 2007 to 21 March 2011 Public Announcements, Public Circulars and published Results;

- [E1] and [E2] – containing email correspondence in relation to tenancy schedules from August to December 2005, email correspondence between the parties and/or internal emails in relation to the pre-listing due diligence exercise plus email correspondence between Beijing JLL and the Bank and the Manager, in relation to the post-listing rental collections;

- [F] – containing interlocutory affidavit/affirmation evidence filed in this action or in HCMP 242/2011;

- [G] – containing the relevant SEHK Listing Rules and SFC Codes of Conduct;

- [H] – containing statements provided to the SFC in relation to these matters; and

- Documents in electronic form (marked as Exhibit No. 1) and a number of other documents (marked as Exhibit Nos. 2 to 10).  Hard copies of documents in electronic form relied upon by the parties were placed in the [ED] bundle.

2. My findings from the Unchallenged Documentary Evidence

12.  I make the following findings based on the unchallenged documentary evidence that has been adduced at trial.

2.1 The Legacy Transaction

13.  Between 2005 and 2006, Tin and Beijing Bestride entered into a venture with the Hong Leong Group, which is Singapore based, and HSBC to list the Property as a Reit on the stock market of Hong Kong.  The Property was to be sold to the China Gateway Real Estate Investment Trust (“CG REIT”).  The proposed manager of the CG REIT was China Gateway Asset Management (“CGAM”), a subsidiary of the Hong Leong Group.  HSBC was appointed as the sole listing agent, global coordinator, and underwriter.  This proposed listing is described as the “Legacy Transaction” in these proceedings.

14.  The Legacy Transaction documents[12] show that, in 2005, for the purpose of the CG REIT listing project (including the preparation of the necessary valuation report of the Property by an independent valuer), Beijing Bestride had already provided CGAM and HSBC with the inflated rental information.  According to the tenancy agreements and rent rolls provided at that time, the average monthly rental exceeded US$35 per square metre (referred to as “High Rent” below), as can be seen from the following documents in [E1] :-

Date	Particulars	Tab
16.8.05	Email from Tony Ho of CGAM to Lawrence Chu of HSBC	1
27.9.05	Email from Raymond Wong of CGAM to various parties, forwarded to various recipients of HSBC	2
3.10.05	Email from Freddy Chua of CGAM to Professor Kim, forwarded to various recipients of HSBC	3
4.10.05	Email from Raymond Wong of CGAM to various parties, forwarded to various recipients of HSBC	4
6.10.05	Email from Raymond Wong of CGAM to Charles Chan of Saville Hong Kong, forwarded to various recipients of HSBC	5
16.10.05	Email from Liwei Zhang of HSBC to Yuan, forwarded to various recipients of HSBC	6
16.10.05	Email from Raymond Wong of CGAM to various parties, forwarded to various recipients of HSBC	7
8.11.05	Email from Raymond Wong of CGAM to Liwei Zhang of HSBC	8
10.11.05	Email from Raymond Wong of CGAM to Yuan, HY Wan, Tony Ho and Freddy Chua of CGAM, and Vivian Lam of Paul Hastings	9
12.11.05	Email from Tony Ho of CGAM to Freddy Chua, Raymond Wong and HY Wan of CGAM, and Stanley Chos of Allen & Overy	10
22.11.05	Email from Tony Ho of CGAM to Lawrence Chu of HSBC enclosing the updated rent roll	11
2.12.05	Email from Raymond Wong of Hong Leong to Xu Min and Ling Te Zhi of Commerce and Finance	12

15.  Based on such rental information provided by Beijing Bestride, DTZ Debenham Tie Leung Ltd (“DTZ”), the independent valuer engaged by the manager CGAM, valued the Property at US$410 million as at 31 December 2005[13].  Based on the rental information from Beijing Bestride, as recorded in DTZ’s draft valuation report, DTZ had worked out the average monthly rental as US$36.87 per square metre per month (“p.sq.m.p.m”).[14]

16.  By the end of 2005,  the proposed CG REIT listing had reached an advanced stage :-

(1) HSBC was mandated by Tin on behalf of Beijing Bestride to be the sole financial adviser, underwriter, listing agent, global coordinator and bookrunner of the proposed CG REIT[15];

(2) An application was made to the SFC in early August 2005 for licensing the responsible officers, the manager, and the authorisation of the proposed CG REIT listing, leading to the SFC’s setting up a case file to process the application[16];

(3) On 26 August 2005, the construction of the Property was completed[17] and on 13 September 2005 the Property’s first tenancy (with the Bank of China) commenced[18];

(4) By September 2005, Yuan had already given CGAM information relating to 32 (out of 36) tenancy agreements for “lease verification”[19];

(5) On 8 September 2005, HSBC submitted to the SFC a draft application for the authorisation of the CG REIT[20]. The expected date of trading in units of the CG REIT was early November 2005[21]; and dealings in units of the CG REIT was expected to start on 9 November 2005;

(6) On 3 October 2005,  HSBC again submitted to the SFC a revised draft application form for the authorisation of the CG REIT[22];

(7) On 3 October 2005, the CG REIT Manager’s Freddy Chua Ken Kim (“Freddy Chua”) sent an email to HSBC’s Lawrence Chu attaching the 3 October 2005 Rent Roll which showed average property rentals of US$35 p.sq.m.p.m[23] plus the draft Chesterton Petty Market Report (for the CG REIT IPO Offering Circular)[24] showing that the Property’s 2005 asking monthly rentals were US$25 p.sq.m.p.m[25].  In the email Freddy Chua stated:

“Please note that the developer has agreed to provide a guarantee that 90% of the space will be leased out at U.S.$35 p.m. for 5 years.”

(8) On 7 October 2005, HSBC submitted a compliance checklist for the Offering Document and the Draft Offering Circular for the CG REIT (version: 6 October 2005) to the SFC for consideration[26].

(9) By December 2005, close to 90% of the Property’s office space had been leased with terms varying from 2 to 10 years: see Draft Offering Circular dated 15 November 2005[27];

(10) According to the Draft Offering Circular, the projected date for the CG REIT listing was December 2005[28];

(11) In early December 2005, DTZ, the independent valuer, had already finished and circulated for comment its valuation of the Property at US$410 million (as at 31 December 2005), after taking into account the existing tenancies to the Property showing a rate of US$36.87 p.sq.m.p.m.[29];

(12) Very substantial costs including legal costs had been incurred for the listing.  The letter from HSBC to CGAM and Beijing Bestride (Tin) dated 24 April 2006 stated that HSBC’s Hong Kong counsel had incurred HK$6,507,010.31 and PRC counsel had incurred RMB500,000,  and out of pocket expenses of HK$435,992[30]. The Engagement Letter dated 25 May 2007 of the Bank and HSBC as joint global coordinators by Tin and Beijing Bestride recorded that prior legal costs payable to Allen & Overy in the Legacy Transaction was US$607,915.[31]

2.2 The Bridging Loan

17.  As a prerequisite of the CG REIT listing, the Property had to be transferred from Beijing Bestride (a PRC company) to a Hong Kong company[32].  For this purpose, a Hong Kong company, Hong Kong Gateway, and a BVI company, Beijing Gateway, were set up by Tin by the end of 2005.  Tin needed a bridging loan to enable Hong Kong Gateway to acquire the Property. 

18.  In his efforts to secure this bridging finance, Tin, through his then solicitors, Raymond Li of Paul Hastings,  approached the Bank in early January 2006 seeking a bridging loan of US$90 million for a 6-months’ duration.  The discussions fell through and Tin eventually obtained the loan from another lender.  However, the documents provided to the Bank by Tin and Beijing Bestride for the Bank to consider their request for a bridging loan showed that the rentals of the Property had already been inflated back in 2005, long before the Bank became involved.

19.  The documents sent to the Bank, clearly showing  tenancy agreements with the “High Rent”, included documents sent to the Bank’s Ruoyu Jiang by CGAM,  the proposed manager of the CG REIT, on 6 January 2006 and 10 January 2006[33] :-

(1) The rent rolls show unit rents of the Property ranging from US$32 to US$57 p.sq.m.p.m.[34];

(2) DTZ’s draft valuation report valued the Property at US$410 million.  In preparing the draft,  DTZ had been given copies of tenancy agreements and a summary of the rental payable[35];

(3) These documents showed total gross floor area of 83,265.07 square metres leased at a monthly rental of approximately RMB24,926,000 exclusive of management fees.  This suggested that the average rental of the Property was approximately RMB299 p.sq.m.p.m. or US$36.9 p.sq.m.p.m. (applying the exchange rate of US$1 = RMB8.11)[36];

(4) Draft profit forecast memorandum and draft working capital memorandum of the CG REIT showed an average gross rental rate of US$36.80 p.sq.m.p.m.[37]

2.3 The Bank’s Participation in the Reit Listing

20.  Apart from the bridging loan, which delayed the proposed CG REIT listing, certain requirements relating to a guarantee imposed by the SFC on the Hong Leong Group, the then 51% shareholder of CGAM, could not be met[38].  HSBC eventually withdrew the listing application on 16 May 2006.  By a letter dated 22 May 2006, HSBC informed Tin of the withdrawal and required Tin to come up with a new Reit Manager, failing which fees up to HK$7.5 million would have to be settled.[39]

21.  Apart from considering Tin’s request for a bridging loan in January 2006, the Bank was not involved in the proposed CG REIT listing.  Sometime later, the Bank took over the listing of the Reit of the Property.  My detailed findings of the circumstances under which it did so appear below. After it did so, the Bank was supplied with information about the Property (including the “High Rent” leases) and the work done on the CG REIT for the Bank to consider whether to take up the deal.  Essential information included the value of the Property, the occupancy rate, and the rental levels, some of which had already been provided to the Bank at the time of the request for the bridging loan. They consistently showed details of the “High Rent”.  Among the information provided to the Bank was the Draft Offering Circular of the CG REIT (version: 15 November 2005), which was provided by Paul Hastings to the Bank on about 4 May 2006[40].  Details of tenancy agreements, as set out in that Draft Offering Circular, showed that the average monthly rental was US$37.7 p.sq.m.p.m.[41], and was consistent with the “High Rent” information.

22.  As from July 2006 onwards, Beijing Bestride started to provide the Bank with updated tenancy information.  All the rental information provided in [E1] and [E2] showed the “High Rent”:

Date	Particulars	Tab
13.7.06	Email from Li Lei to various recipients of the Bank in respect of the meeting at Gateway Plaza on 12.6.06 and enclosing rent roll received at the meeting.	14
28.9.06	Email from Yuan to Su enclosing rent roll	15
29.9.06	Email from Yuan to Su enclosing a rent roll and list of top 10 tenants	16
30.9.06	Email from Manshu Deng of Beijing Bestride to  Su enclosing rent roll	17
30.9.06	Email from Manshu Deng of Beijing Bestride to  Su enclosing rent roll	18
10.10.06	Email from Yuan to Su enclosing rent roll	19
4.11.06	Email from Yuan to Chen Xin enclosing rent roll	20

23.  The rental information contained in a number of the tenancy agreements submitted to the Bank during this period was identical to the information submitted to HSBC in the Legacy Transaction back in 2005 and showed the “High Rent”:

(1) Of the HSBC discovered agreements relating to 53 tenants, 26 (all in Tower A of the Property) remained in place at the time of the RREEF CCT Transaction. These 26 tenancy agreements all showed exactly the same “High Rent” as those agreements subsequently provided to the Bank in the course of the RREEF CCT Transaction[42];

(2) Lease confirmation letters submitted by various tenants to CGAM in September 2005 also showed the “High Rent”[43];

(3) The emails dated between 16 August 2005 and 2 December 2005[44],  generated in the course of the Legacy Transaction,  attached rent rolls showing rentals of the lease agreements consistent only with the “High Rent” and they corresponded to those provided to the Bank for the purpose of the RREEF CCT transaction.

24.  After obtaining the necessary internal approvals, the Bank agreed to go ahead with the proposed transaction.  An Exclusivity Agreement dated 15 September 2006 was signed by Tin, Beijing Bestride and the Bank (through its subsidiary, Deutsche Bank Asset Management (HK) Limited)[45] whereby Tin and Beijing Bestride agreed to deal with the Bank exclusively to pursue the Reit listing project during the cooperation period.[46]

25.  The Manager was incorporated in October 2006 to become the manager of the RREEF CCT. It was incorporated with the Bank as 80% shareholder[47] and Tin as 20% shareholder.[48] Tin also became one of the directors of the Manager until October 2007.

26.  The Manager commenced formal due diligence work, including tenants interviews, in November 2006, with the assistance of law firms including Simmons & Simmons, Paul Hastings, and Commerce & Finance.  Subsequently, between January and March 2007, written confirmations were also sent to selected tenants for verification.  The exercise was completed with the assistance of King & Wood.  My detailed findings in connection with the due diligence exercise appear below.

27.  On 25 May 2007,  an Engagement Letter was signed by Tin, the Bank, the Manager, HSBC and Beijing Gateway[49], whereby the Bank and HSBC were engaged as, inter alia, the joint global coordinators and joint lead underwriters for the proposed listing.

28.  An Offering Circular was prepared on or before 11 June 2007[50]. Since March 2007, Tin (as a director of the Manager) had been sent drafts of the Offering Circular and asked to review, comment, and approve them.  Tin confirmed the accuracy of the information described in the Offering Circular by signing the Responsibility Letter dated 1 June 2007 and the Verification Notes dated 11 June 2007[51].

29.  DTZ relied on the rental information provided by Beijing Bestride in preparing its valuation report dated 11 June 2007[52]. DTZ valued the Property at HK$3,978 million (equivalent to about US$510 million.) as at 31 March 2007[53]. The information provided to DTZ showed average monthly rentals at the “High Rent” level[54]. At p.VI-4 of DTZ’s Valuation Report[55], it was stated that DTZ relied to a “very considerable extent” on the information given to DTZ by Hong Kong Gateway (defined as the “Owner” at p.VI-2), including particulars of occupancy such as tenancy agreements in relation to the Property and the terms thereof.

2.4 Sale and Purchase Agreement and other Transactional Agreements

30.  The RREEF CCT listing was pursued on the basis of a number of transactional agreements including the SPA dated 4 June 2007[56]  whereby Tin sold his shareholding in the Property to the Trustee, as the trustee on behalf of the RREEF CCT.  The setting up of REEFF CCT and appointments of the Trustee and the Manager were more specifically pursuant to a Deed of Trust dated 28 May 2007 (“the Trust Deed”)[57].  Pursuant to the Trust Deed,  the Trustee was empowered to acquire and hold properties, and the Manager was empowered to manage the assets held by the Trustee.

31.  The underwriting aspect was further underpinned by a Public Offer Underwriting Agreement dated 11 June 2007[58], whereby the Bank and HSBC severally agreed, relying on the representations and warranties contained in the agreement, to underwrite offer of the IPO units: that is to say, in case of under-subscription, to procure subscribers for the unsold units or, failing that, to subscribe themselves for the unsold units as principals at the offer price[59]. Tin, as vendor, represented and warranted the accuracy of information provided[60].

32.  As the IPO included also an international offer, there was also an International Underwriting Agreement dated 15 June 2007 entered into by the same parties[61]. By two Closing Certificates dated 22 June 2007 duly signed by him, Tin certified and confirmed, inter alia, the accuracy of the representations and warranties given by him contained in the Public Offer Underwriting Agreement and the International Underwriting Agreement[62].

33.  There were several other relevant transactional agreements including a Consultancy Agreement dated 25 April 2007; a Subscription Agreement dated 31 May 2007; and also a Shareholders Agreement dated 10 June 2007[63].

34.  The IPO for the units of the RREEF CCT took place in June 2007.  The Trustee utilised the proceeds raised to acquire the Property.  Pursuant to the SPA, the Property was sold by Tin (as vendor) to the Trustee (as purchaser)[64] on the basis of the warranties specifically stipulated in the SPA.  Tin warranted to the Trustee and the Manager the accuracy of information disclosed including, in particular, the rentals set out in the tenancy agreements:

Under Clause 9 of the SPA[65] :-

“Warranties and Indemnities

9.1 Incorporation of Schedule 3

9.1.1 The Vendor warrants and represents to the Purchaser and the Manager in the terms set out in Schedule 3, subject only to:

(i) any matter which is fully, fairly and accurately disclosed in the Disclosure Letter and any matter expressly provided for under terms of this Agreement; and

(ii) any matter or thing hereafter done or omitted to be done pursuant to this Agreement or otherwise at the request in writing or with the approval in writing of the Purchaser.

9.1.2 The Vendor acknowledges that the Warranties are not qualified by the Manager’s due diligence on behalf of the Purchaser or anything discovered, or that could have been discovered, from the materials made available in the Vendor’s data room, save to the extent such matter is fully, fairly and accurately disclosed in the Disclosure Letter.” [My emphasis]

Under Clause 3 of Schedule 3 (headed “Warranties”) to the SPA[66]:-

“3. Accuracy and adequacy of Information disclosed to the Purchaser

All information contained in this Agreement and all other information which has been made available by the Vendor was when given and remains true, complete and accurate in all material respects and not misleading in any material respect and the vendor is not aware of any fact or matter or circumstances not fully fairly an accurately disclosed in the Disclosure Letter which renders any such information untrue, inaccurate and misleading in any material respect.”

Under also Clause 10 of Schedule 3 to the SPA[67]:-

“10.6 Tenancy Agreements

10.6.1 All rent … under the Tenancy Agreements have been duly paid as and when due…

10.6.2 Neither the HK Property Co nor the Predecessor Property Co has waived, altered or released or agreed to waive, alter or release any covenant, obligation or restriction to be observed or performed by the Tenants …

10.6.4 The rent set out in the Tenancy Agreements is the current rent payable by the Tenants …

10.6.9 The Vendor hereby warrants, undertakes and represents to the Purchaser that in respect of the Tenancy Agreements:

(i) the particulars of such Tenancy Agreements as set out in Schedule 5 are true and accurate in all respects …” [My emphasis]

35.  The consideration payable by the Trustee was computed according to the formulation in Clause 3.5.1 of the SPA.  The “Acquisition Value” of the Property was HK$3,822 million[68] and this was based, amongst other things, on the valuation of the Property made by independent property valuer, DTZ, engaged by the Manager.  Reliance was placed by DTZ on the rental information, the accuracy of which was warranted by Tin under the SPA.  DTZ issued its final report on 11 June 2007 stating that the market value of the Property, as at 31 March 2007, subject to existing tenancies, was HK$3,978 million (equivalent to about US$510 million)[69].  The valuation report was duly set out in Appendix VI of the Offering Circular published by the Bank on 11 June 2007[70].

2.5 The Listing and the Handover

36.  RREEF CCT was listed on the SEHK on 22 June 2007.  It was authorised as a unit trust and a collective investment scheme by the SFC pursuant to section 104 of the Securities and Futures Ordinance (Cap.571).  The listing was governed by the Code on Real Estate Investment Trusts published by the SFC (“the Reit Code”) and the operation and management of RREEF CCT was subject to the Reit Code. The Bank and the Manager were under stringent disclosure requirements and scrutiny of the regulating authorities.  Different law firms and professionals of other disciplines had been engaged in the exercise:

(1) Paul Hastings and Commerce & Finance were engaged as HK and PRC legal counsel respectively for the Manager;

(2) Simmons & Simmons and King & Wood respectively as legal advisers to the Underwriters (the Bank and HSBC); Simmons & Simmons were charged with the responsibility to conduct due diligence for the underwriters, including reviewing all tenancy agreements, and conducting interviews with major tenants;[71]

(3) KPMG as Independent Auditors and Reporting Accountants;

(4) DTZ as Independent Property Valuer; and

(5) Knight Frank Pty Ltd as Independent Property Consultant and Independent Market Consultant.

37.  Further, by a Property Management Agreement dated 31 May 2007[72], the Manager and Hong Kong Gateway appointed Beijing JLL as the Property Manager upon the acquisition of the Property by the Trustee, responsible for, inter alia, collection of rents from tenants.  Prior to 22 June 2007, Beijing JLL was appointed the manager of the Property in August 2005 by Beijing Bestride.  The extent of Beijing JLL’s responsibility prior to 22 June 2007 is the subject of my detailed findings below.

38.  On the staff of Beijing JLL, prior to 22 June 2007, was Zhang Kai[73] who was the Chief Property Manager of JLL’s office at the Property and head of the on-site team from October 2006 to August 2007.  Zhang had previously worked for the Bestride Group from at least 1998 to 2003 and he was the general manager for Bestride Holding Limited’s PRC projects from January 2002 to December 2003[74].

39.  After the listing of the RREEF CCT and the appointment of Beijing JLL as Property Manager on 22 June 2007, there was a transitional period before Beijing Bestride completely passed on its responsibility of collecting rent to Beijing JLL, the new Property Manager.  As part of the transitional arrangements, rentals for June and July 2007 were invoiced by Beijing Bestride and payments were directly collected by Beijing Bestride, and then remitted by Beijing Bestride to Beijing JLL. 

2.6 The Suspension of Trading and Events thereafter

40.  While the rental information provided by Beijing Bestride showed consistently the High Rent (i.e. average monthly rents at US$35 per sq.m. or more), the actual monthly rent paid by tenants was much lower, at around US$28 per sq.m. (“Low Rent”).  This scheme of providing false information of the rental income from the Property and covering up the falsehood by paying the difference between the false and the actual rental has been referred to euphemistically as “the Dual Documentation Scheme” by Tin.  I prefer to call a spade a spade and will refer to it as the False Documentation Scheme.  My detailed findings regarding the discovery of the rental discrepancies appear below.  There were meetings attended by Tin, Su and Keogh in connection with the rental discrepancies.  My detailed findings about these meetings are also set out below.

41.  On 3 September 2007, Keogh received by fax a letter from Tin dated 5 September 2007.  It bore the heading “Rental Fees Discrepancy” and it stated[75] :

“First, I would like to thank you for coming to Beijing on August 31, 2007 to meet with me regarding the matter. I appreciate your attention and quick action on this issue. Your team discovered some discrepancy between contracted rental fees and actual fees collected. You also requested that Bestride immediately look into this matter and conduct our own investigation.

This came as a total surprise for us here at Bestride. Upon our August 31 meeting, I immediately instructed my team to look into this matter. Our investigation indicated that there were some discrepancy between rental fees as indicated on the leases and actual fees collected. The main reason was that during the pre-leasing process, we agreed to subsidize some tenants the cost of refitting and remodeling. We promise to work closely with RREEF China REIT management to quickly resolve this issue. Furthermore, we guarantee that RREEF China Commercial Trust unitholders will not suffer any negative financial impact as a result of this matter.

Again, thank you for taking time out to meet me in Beijing in light of your busy schedule.”  [My emphasis]

42.  The Manager notified the SFC and also the SEHK on 5 September 2007.  Given the potential price-sensitivity of the information, trading in the Trust units was suspended from 6 September 2007 pending announcement.

43.  Tin travelled to Hong Kong and attended a meeting with officers of the Manager on 6 September 2007 which I deal with below.   Based on the information of the actual rental, the shortfall in rental revenue between the Low (actual) Rent agreements and the High (warranted) Rent agreements was calculated as HK$278,526,708,  and independently verified by the auditors, Ernst & Young, engaged by the Manager for this purpose on 7 September 2007.

44.  On 7 September 2007, Tin signed a letter dated 7 September 2007 (“the 7 September 2007 Letter”)[76] that was in the form of a deed and which stated:

“Re: Sale and Purchase Agreement dated 4 June 2007

I refer to the Sale and Purchase Agreement (‘SPA’) dated 4 June 2007 entered into between myself (as vendor), the Manager and the Purchaser and hereby:

(a) confirm and acknowledge that there are identified and potential discrepancies between the terms of the tenancy agreements (including rental payment amounts) signed with the tenants of Gateway Plaza, and the terms of the tenancy agreements disclosed to the Manager and the Purchaser under or pursuant to the SPA;

(b) acknowledge that on-going processes are taking place to ascertain the extent of such discrepancies and undertake to fully cooperate with and make available all relevant information to the Manager and the Purchaser in a timely manner to enable them to fully assess the situation;

(c) agree and undertake to credit in immediately available funds the sum of HK$278,526,708 (‘Sum’) to the following account as soon as possible but in any event, no later than 4 p.m. 10 September 2007 (Monday):

Account Number: 808-284855-292

Bank: The Hongkong and Shanghai Banking Corporation Limited

Name: HSBC Institutional Trust Services (Asia) Limited

- RREEF Account;

(d) irrevocably and unconditionally authorize the Manager and/or the Purchaser to apply all or part of the Sum, in its or their absolute discretion, in or towards payment or reimbursement of any losses, damages, costs and expenses which are or may be incurred or suffered by the Manager, the Purchaser, RREEF and/or their related companies arising from any actual or potential discrepancies in the terms of the tenancy agreements;

(e) confirm that, at any particular time, a certificate in writing signed by any of the duly authorized officer of the Manager and/or the Purchaser and/or the RREEF and its related companies stating the amount of any losses, damages, costs and expenses suffered by any of them due to or arising out of my breach of the terms of the SPA and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the SPA shall be conclusive and binding on me; and

(f) undertake that if the Sum is not sufficient to cover such losses, damages, costs and expenses, to immediately on demand of the Manager and/or the Purchaser make further payment(s) to the account specified in paragraph (c) above at the request of the Manager and/or the Purchaser.

I understand that all rights, powers and remedies under or pursuant to the SPA and any other rights, powers and remedies which the Manager and/or the Purchaser and/or RREEF may have at law or otherwise, in respect of any past, current or future breach are reserved by the parties and no failure or delay in the exercise of such rights, powers or remedies will operate as a waiver by the Manager, the Purchaser or any other person of those rights, powers or remedies or prejudice in any way the ability of any of them to exercise those rights, powers or remedies at any time.

I confirm that I have had the opportunity to seek independent legal advice prior to executing this letter.

The letter shall be governed by the laws of Hong Kong.”  [My emphasis]

45.  Tin paid the sum of HK$278,526,708 into RREEF CCT’s account. On 10 September 2007, the Manager published an announcement upon resumption of trading[77]. It was reported that the Manager had discovered rental discrepancies, that Tin had paid the lump sum unconditionally to meet the anticipated shortfall in rental payments, that the sum was separate from the retention sum of US$20 million already being held, and that the Manager considered the RREEF CCT would not suffer a shortfall of rental revenue due to the discrepancies identified. This 10 September 2007 announcement also recorded the written explanation that certain pre-leasing rental concessions had been granted to tenants of the Property, and these concessions were reflected in lower rental figures which were documented in separate tenancy agreements which had not been disclosed to the Manager[78]. The Manager also announced that it had formed a sub-committee of independent directors to investigate the matter.

46.  After investigation, the sub-committee’s findings were announced in the “Announcement Pursuant to Listing Agreement Para 4(3) and Rule 10.3 of the Code on Real Estate Investment Trusts” dated 28 October 2007 (“the October Announcement”)[79]. Relevant extracts from that announcement have been set out in §5 above.

47.  At the same time, on the ground that Tin had committed conduct bringing disrepute, the Manager resolved to remove Tin as its director.  Since December 2007, steps were taken to terminate the Consultancy Agreement and to compulsorily acquire for value Tin’s 20% shareholding in the Manager.

48.  On 6 November 2007, Tin was interviewed by SFC[80] and, at the conclusion of the interview, SFC requested that he provide a written statement to SFC.  On 30 November 2007, Tin provided his written statement to SFC[81], including written signed statements of Yuan, Zhang and Chen[82], and other documents including Yuan’s spreadsheet table of the rental discrepancies of 20 August 2007[83].  On 26 February 2008, Tin was again interviewed by SFC[84].

49.  In February 2010, the Trustee sold the Property to a 3^rd party buyer.  It was also publicly announced that the Reit would be terminated and liquidated with distribution of funds to investors, and would be delisted from SEHK.  The Reit was eventually delisted in May 2010.

50.  In addition to the retention money of US$20 million withheld by the Trustee pursuant to the SPA, the Manager and the Trustee purported to exercise a number of set offs from 2007 to 2010 against the moneys retained and against other moneys due to Tin.

51.  On 18 February 2011, the Trustee applied under Order 85 Rule 2 for an order that it could proceed with the distribution of the entirety of the net assets of the Trust without retention to meet any possible claim Tin may make against the Trust.  The Trustee’s application was heard in June 2011 and an Order 85 Rule 2 order was made on 30 June 2011.  Tin started this action on 5 July 2011 and, at the same time, appealed to the Court of Appeal against the Order 85 Rule 2 order.  On 21 December 2011, the Court of Appeal dismissed Tin’s appeal.

3. The Events of 2006 to 2007; the “Due Diligence” Exercise; the “Discovery”ofthe Rental Discrepancy; and the Meetings of August and September 2007

3.1 Tin’s Evidence[85]

52.  Tin gave evidence that he was the founder of the Bestride group of companies which he had started in 1992.  Its businesses included real estate, hotels and clubs, high-tech industries, eco-friendly energy and international trade.  The group employed nearly 10,000 employees[86]. During 2006 and 2007 he was interested in selling the Property but only if he was to be paid US$500 million that he believed to be its value.

53.  The idea of selling the Property through a Reit IPO was not his and had been suggested to him by the investment bankers.  He had met Charles Wang in January 2006 who told him that the Bank was experienced and interested in listing a Reit of the Property.  The Bank was not the first investment bank to persuade him to list, HSBC and CGAM had already done so but no substantial headway had been made. Charles Wang continued to show great interest and, in subsequent meetings, Charles Wang and Su offered US$500 million for the Property if he agreed to allow the Bank to list the Reit of the Property.  He appointed Yuan and vested him with full authority to handle all relevant matters.  He agreed to a delay in the proposed listing from March 2007 to June 2007. He did not participate actively in the listing process and he did not pay attention to other details, his primary concern being that he should receive US$500 million for the Property.  He did not even attend the listing ceremony.

54.  Although he was not responsible for the False Documentation Scheme and had not been aware of it, once it was bought to his attention on 20 August 2007 by Ms Tian Xiaoping (“Ms Tian”),  his elder sister and the Financial Manager of the Bestride Group,  he took responsibility and instructed Yuan to prepare his comparison table[87]. Ms Tian had told him that the Manager required them to make a one-off payment for the difference of rent.

55.  Soon thereafter, on 24 August 2007, he had a lunch meeting in Great Eagle Centre in Hong Kong with Su when they discussed the matter.  Su also explained that the rental difference between the recorded rent in the leases and the actual rent paid was a normal event to ensure that US$500 million was raised in the listing.  Su also told him that he could solve the problem by making a one-time payment of the difference.  Although he was unable to give an immediate response, he emphasized that investors’ interest must be secured.  Some time afterwards, Su informed him that he had arranged for his boss, Keogh, and himself to come to Beijing for a meeting to resolve the matter.

56.  On 30 August 2007, he met Su at the clubhouse in the Property without Keogh, who had been unable to come to Beijing.  Yuan and Tin’s assistant, Mr James Wong, were also present.  Su again pressed for a one-off payment to be made by 3 September 2007 and that he should sign a document indicating that the rental difference was discovered by the Manager.  He, on the other hand, raised objections to Su’s requests.  He explained to Su that he had been unaware of the False Documentation Scheme until recently, and that such a scheme should not have been implemented.  Su countered by stating that he had discussed the False Documentation Scheme with Yuan, who should have told him about it. Su also told him that he was a law graduate and Su assured him that a one-time payment by him of the rental difference would ensure that investors’ interests were protected.  Tin, nevertheless, pressed for a meeting with Keogh.

57.  This meeting with Keogh and Su took place on 31 August 2007 at the clubhouse in the Property.  They did not wish Yuan to join the meeting but agreed that Tin’s assistant, James Wong, could attend as interpreter. 

58.  James Wong’s note[88] of that meeting with Keogh and Su recorded that:

“→Paul, Eryck, Tin, James – Gateway Club – 12pm mtg:

· Obj – discuss hi-lo contract issue

· PK: critical to keep discussion secret

· PK - draft letter “DB discovered discrepancy, brought to our attention.” Don’t mention Tin discovered first.

· Paul suggests fax draft to him – get blessing; then deliver signed original by next Wed.

· Tin – asks all this ok? Su (background in law): fine.

· Tin – hi-lo due to fit-out reimbursement / incentives / etc.”

Although James Wong’s note suggests that Tin tried to explain that the rental difference was to “fit-out reimbursement / incentives etc.”, Tin made no mention of that in his witness statement in which he stated:

“27. During the meeting, Paul Keogh repeated that the content of the meeting must be confidential and suggested that:

1) If the aforesaid one-off payment for difference of rent could be made this time, they would thoroughly settle the problems within the scope of the Manager, even if an announcement is required under the regulations, they would still settle the matter properly;

2) In order to settle the matter more effectively, it is hoped that I could sign a letter, the content of which was that it was the Manager who had discovered the difference of rent, and after the Manager told me about it, I was surprised and then I had an understanding of the situation through my subordinates, and that it was not me who had first discovered the problem;

3) I would sign the letter only after he had checked the draft letter[89] and agreed on it, and the original copy of the letter would be sent to the Manager’s office next Wednesday (5 September);

4) The comparison table regarding difference of the rent of the lease shall be delivered to the Manager’s office along with the letter next Wednesday. ”

…

30. On 6 September, I came to the Manager’s office in Hong Kong in Mr James Wong’s [company], and gave Paul Keogh the aforesaid letter[90], another letter concerning advertisement fees and a comparison table regarding the difference of rent.  (Please see our disclosed document No. 21 for the signed letter; and the disclosed document No. 10 for the letter concerning advertisement fees)

31. Paul Keogh told me to sign an agreement with the Manager as soon as possible, indicating that I agree to pay the difference of rent in full.  Then I called Mr Yuan Lijun and asked him to check the total sum with the Manager’s staff.  According to my knowledge, Mr Yuan Lijun checked the relevant data with Benson Lai and Mr Eryck Su all along that night.  

32. On 7 September, I came to the Manager’s office again with Mr James Wong and signed an agreement prepared by the Manager’s solicitor[91]. According to the agreement, I agreed to pay HK$278 million to the Manager in Hong Kong.  (Please see our disclosed document No. 10 for the agreement.)

The breakup and the lawsuit

33. After 7 September, the Manager had a total change of attitude and even gave a false account of the true facts,  claiming that we deceived them,  and even deposed me from being a director of the Manager, cancelled my equity and withheld the money payable and the part to be distributed to me, resulting in this action.

34. DB and the Manager now claim that they know nothing about the lease arrangement and the difference of rent, which is absolutely not the fact but only an excuse of shirking their liabilities.  The truth is: it was completely a trick plotted by DB investment bank and its staff for earning money.”

59.  In his evidence in chief, Tin said that, at the meeting on 7 September 2007,  he was unhappy and expressed his grievance that he had been deceived. He had requested that the Property must not sell for less than US$500 million but now they were demanding payment of HK$278 million.  However, Su and Keogh had told him that if the payment of HK$278 million was not resolved within the scope of the Manager, it would have to be made public and that is why he signed the 7 September 2007 letter in an unwilling manner.

60.  Tin also relied on his interview by SFC dated 6 November 2007[92] in which he had stated that at around 20 August 2007 Yuan had told him that the Manager had asked him for RMB300 million to solve the problem of the rental difference. Yuan had also explained to him that he had been told by Su and Li Lei that the rents had to reach US$35 p.sq.m.p.m. in order for the Property to be valued at US$500 million, but Yuan had told them that the actual rents had only reached US$25 to US$28.

3.2 The Hearsay Evidence of Yuan, Chen and Zhang

61.  Tin also relied on the hearsay evidence of Yuan, Chen and Zhang that was contained in their statements that he had provided to SFC[93].  The evidence is summarised in Mr Barlow’s Opening[94]. Yuan stated that the Bank initiated a meeting in Beijing in May 2006 about the listing of the Reit, where Tin had re-iterated that the basic premise of the co-operation was that the sale of the Property should be no less than US$500 million.  Charles Wang re-assured Yuan that, based on their own research of the Property and the Beijing property market situation, the US$500 million valuation could be achieved.  During the period from May 2006 to August 2006,  Li Lei and Su held dozens of meetings with Yuan and his colleagues and gave them detailed guidance and training on the procedures required to ensure the Reit’s listing.  Li Lei had restated that in order for the Property to be valued at US$500 million for the IPO, the rents receivable should be declared at an average of at least US$35 p.sq.m.p.m.  Yuan had explained to Su that the actual rents receivable fell short of that figure because the Property was a new building and the decoration subsidies, rent-free periods and multiple decoration periods had been incentivised to new tenants.  However, Li Lei and Su informed Yuan that, in the circumstances, Beijing Bestride should discuss the matter with the existing tenants and endeavour to achieve the required level of rents through other commercial arrangements.  This might be achieved by marking-up the existing tenancy agreements to ensure an average rent of US$35 p.sq.m.p.m. and then ensuring that the Bestride Group made up the shortfall between the marked-up price and the actual rents receivable.  The Bank pushed aggressively for the adoption of the False Documentation Scheme and the relevant pages listing the lease rentals were changed in accordance with their suggestions. Yuan made the details of the False Documentation Scheme clear to Zhang.  It was only later, in mid-August 2007, that the Manager’s Benson Lai called for a meeting with Yuan and demanded that the entire difference be calculated for the remaining term of each lease so that Beijing Bestride might pay a single lump sum to Beijing JLL to cover the entire shortfall.  He then reported the matter to Ms Tian, who reported the matter to Tin.

3.3 The Evidence of Charles Wang, Li Lei, Su and Keogh

3.3.1 Charles Wang’s Evidence

62.  Charles Wang gave evidence that he had joined the Bank in October 2005 as co-head of Global Banking China, and later became the head of Global Banking China.  He left that role in May 2009 but remained in the Bank until 31 August 2011, after which he moved to ICBC International as Deputy Chief Executive Officer. 

63.  Shortly after joining the Bank,  he started working with Raymond Li of Paul Hastings on a proposed bridging loan, by the Bank to Beijing Gateway, to support the sale of Tin’s property to a Reit to be listed on the SEHK.  The Bank did not provide the bridging loan after becoming aware, in January 2006, that Tin was trying to get the bridging loan from a Chinese bank.  To the best of his recollection, he had no further contact with Tin until on or about 23 March 2006, when he received a telephone call from Raymond Li asking whether the Bank would be willing to consider setting up a Reit management company and being mandated as the bookrunner on the Reit. 

64.  Following the call, he sent an email to Douglas Morton, Head of the Real Estate Banking Group, stating that the proposal should be seriously considered as the deal size was about US$400 million.  This amount was based on a valuation report from the Legacy Transaction which had been provided to the Bank by Bestride.  He had a general recollection that Tin wanted a higher price, as was typical for any vendor.  However, at no time did the Bank ever promise or commit to a particular price.

65.  He met Tin to discuss the proposal in Beijing on 25 March 2006, and a further meeting took place on 28 March 2006 at the Bank’s offices in Hong Kong.  That was attended by Tin and Raymond Li.

66.  Following emails exchanges, agreement was reached in principle on 3 May 2006  that the Bank would hold 80% of the proposed Reit management company and Tin would hold the remaining 20% ;  that Tin would receive an additional 10% net profit; that Tin would be a non-executive director of the Reit management company; that the Bank would be appointed as the joint global coordinator, joint lead manager, joint bookrunner and joint listing agent of the proposed Reit listing and would share equally with HSBC in 50% shares the underwriting share and economics; and that the IPO of the Reit would be completed within 12 months after establishment of the Reit management company.  

67.  He denied that the Bank had agreed, at any time, to assist Tin to raise US$500 million through the proposed Reit.  The price for the Property depended on valuation reports and the Bank had not, at that stage, conducted a valuation or carried out required due diligence. 

68.  A Draft Offering Circular had been prepared because of the Legacy Transaction and, on 4 May 2006, Li Lei forwarded to him a copy of the Draft Offering Circular.  It had been provided to the Bank by Paul Hastings in an email on 4 May 2006.  He was one of the team leaders responsible for high level supervision and execution of the transaction and Douglas Morton was the other team leader.  His involvement included liaising on occasion with Tin over the next few months until an exclusivity agreement was signed on 15 September 2006.  He was also responsible for supervising the due diligence for the transaction.

69.  On 25 May 2007 he signed, on behalf of the Bank, the Engagement Letter entered into between the Bank, Deutsche Management, HSBC and Beijing Gateway, whereby the Bank and HSBC agreed to act as exclusive joint listing agents, joint global coordinators, joint bookrunners, joint financial advisors, joint lead underwriters and joint placement managers for the proposed Reit. 

70.  He denied Yuan’s allegation that, as the receivable rents were in the order of US$25-$28 p.sq.m.p.m., Yuan was told that the details of the Property should be altered to state that the average receivable rent for the Property was US$35 p.sq.m.p.m.  The documents provided to the Bank from the Legacy Transaction clearly showed average rentals above US$30 p.sq.m.p.m. The rental values for the Property had been fraudulently altered well before any involvement by the Bank in the proposed Reit listing.

3.3.2 Li Lei’s Evidence

71.  Li Lei gave evidence that he joined the Bank in June 2005 as an associate in the China Banking Team.  In early 2007, he was promoted to the position of Vice President in that team, and he remained in that role until he left the Bank in May 2009.  At the material time, he worked under the supervision of Charles Wang. 

72.  He denied the allegations made against him that he and Su had already instructed Yuan on how the Property should be valued;  he denied that he and Su had informed Yuan that the monthly rentals receivable from the tenants must average at least US$35 p.sq.m.p.m. in order to ensure that the Property would be valued at around US$500 million;  and he denied that he and Su had instructed Yuan to alter the rentals/leases to show that the average receivable rent was US$35 p.sq.m.p.m. so as to artificially inflate the value of the Property for the Reit listing.  He denied that he and Su had devised the False Documentation Scheme and he denied that they had advised Yuan that such a scheme was an approved, normal business practice.

73.  He first met Tin in March 2006.  From then on he assisted with the project team in negotiating with Tin and Yuan in connection with the project.  Agreement in principle was reached in a meeting on 3 May 2006.  He did not give any assurance to Tin at any time that Tin would get US$500 million from the Reit listing.  Neither did Charles Wang, or anyone else from the Bank, gave any such assurance to Tin.  They had always been clear that the final valuation for the Reit listing was dependent on the amount of rental income.  He denied the allegation that he and Su had told Yuan that the monthly rentals receivable should be altered to state that the average receivable rental was US$35 p.sq.m.p.m. The Draft Offering Circular, which had been prepared as part of the Legacy Transaction and which had been sent to the Bank on 4 May 2006 by Paul Hastings, showed clearly that these allegations were untrue.  It was stated in that circular that the total monthly rental income was RMB21,452,851 and the total lettable area was 70,339 sq.m,  which gave an average rental income of around US$37.7 p.sq.m.p.m. (using the prevailing exchange rate of US$1 to RMB8.08). The Draft Offering Circular, amended on 15 November 2005, had been prepared for the Legacy Transaction.  The Bank had no involvement with the Legacy Transaction.  The average monthly rental income shown on the Draft Offering Circular was essentially consistent with the rental levels shown in the rent rolls and leases provided to the Bank after July 2006.  

3.3.3 Su’s Evidence

74.  Su gave evidence that he had joined Bankers Trust (which later became the Bank) in 1997.  At the time of these events, he was employed by the Bank’s subsidiary, Deutsche Asset Management (Hong Kong) Limited, and he was Vice President in the acquisitions team of RREEF, the Bank’s real estate investment management division.  As the lead transaction manager, he had the day to day responsibility for the management and execution of the listing of RREEF CCT.  He reported to Morgan Laughlin, who was then the Managing Director Asia for RREEF until July 2006, and then to Brian Chinappi,  Managing Director and Head of Acquisitions, East Asia.

75.  He denied the allegations made by Yuan in his statement dated 29 November 2007 that had been provided to SFC.  He denied that he and Li Lei had devised the False Documentation Scheme, and he denied advising Yuan that such a scheme was accepted practice.

76.  His first introduction to the transaction was when he received an email from Morgan Laughlin on 27 March 2006,  asking if he could join a meeting he and others were having with Tin.  That meeting took place on 28 March 2006 at the Bank’s office in Hong Kong.  It was the first time he had met with Tin.  At the meeting, Raymond Li of Paul Hastings and Tin put forward a proposal for the Bank to become involved in a Reit listing for the Property.  He denied that he had contacted Tin in around January or February 2006 to promote the Bank’s proposals for the Property.

77.  DTZ had done work on the Legacy Transaction with HSBC, and he noted that they had valued the Property at US$410 million.  On 11 April 2006, he sent an email to Morgan Laughlin summarising his initial analysis. He corresponded with Tin and met him at the end of April 2006.  Agreement in principle was reached at a meeting on 3 May 2006.  It was only on 9 May 2006 that he was made aware that Yuan was the Chief Finance Officer of Beijing Bestride.  He had not met or dealt with Yuan prior to this. 

78.  On 27 June 2006, following RREEF’s internal approval, Yuan was informed of the approval.  The formal due diligence work carried out by the Manager commenced around November 2006 and lasted until the issue of the Offering Circular on 11 June 2007.  The valuation of the Property,  that was carried out by DTZ for the listing, was conducted based on the same rent roll that was prepared and provided to the Bank by Tin.  These had been provided at a very early stage in the discussions with Tin about the listing, and they had previously been provided to HSBC in the Legacy Transaction.  It was absurd to suggest that he and Li Lei had orally instructed Yuan on how the Property would be valued; that he had informed Yuan that the rentals receivable must average at least US$35 p.sq.m.p.m. in order to ensure that the Property would be valued at around US$500 million; and that they had instructed Yuan to alter the rentals/leases in order to show that the average receivable rent for the Property was US$35 p.sq.m.p.m.

79.  As the lead transaction manager, he was responsible within RREEF for executing that transaction until RREEF CCT was listed.  He consulted Brian Chinappi about the due diligence exercise when appropriate or necessary.  He was assisted by others during the due diligence process.  Benson Lai, Danny Suen and Gloria Chan assisted as well after they joined the Manager.  A due diligence committee was set up by the Manager, comprising of Brian Chinappi and Keogh, when he had agreed to take on the role of fund manager.  The committee oversaw all aspects of the due diligence exercise and supervised the production of the Offering Circular.

80.  The due diligence work included financial due diligence and legal due diligence, carried out by the Manager’s professional advisors KPMG, Paul Hastings, Commerce & Finance and DTZ, respectively.  Apart from legal opinion, a market research report was obtained from Knight Frank, tax and audit reports were obtained from KPMG and a valuation report from DTZ. 

81.  The specific due diligence actions, in relation to tenancies included:

(a) Review of the tenancy agreements provided by Tin by professional advisors;

(b) Cross-checking the tenancy agreements against the agreements registered with the relevant Beijing authorities;

(c) Reviewing the trilateral novation agreements signed  by tenants;

(d) Interviews with major tenants to independently confirm the major terms of the leases;

(e) Direct rental confirmations with tenants to independently confirm the major terms of the leases;

(f) Physical inspection of the Property to confirm tenant occupancy;

(g) Financial due diligence conducted by KPMG, conducting random voucher tests to confirm historical payments; and

(h) Benchmarking the rental terms against an independent market survey conducted by Knight Frank.

82.  Concurrently, the Joint Listing Agents, the Bank and HSBC, carried out their own due diligence and some of the steps in their due diligence overlapped with the Manager’s due diligence.  The colleagues from the Bank involved in the due diligence process included Douglas Morton, Charles Wang, Li Lei and others. Legal advisers to the banks were Simmons & Simmons and King & Wood. 

83.  An important aspect of the due diligence process was the review of the tenancy agreements, which was conducted by both Commerce & Finance and Paul Hastings, for the Manager, who were instructed to review the originals.  The RREEF Team worked off a ‘rent roll’ that was provided by Beijing Bestride.  At an early stage in the due diligence process, the banks in their due diligence exercise also used the same rent roll.  On the Manager’s side, the contents of the rent roll were verified for due diligence purposes by Commerce & Finance.

84.  On 4 July 2006, he and Li Lei visited the Property and met with Yuan and his team to discuss the due diligence process.  On 23 August 2006, RREEF’s Product Development Committee’s approval was received and the parties started making arrangements for a kick-off meeting, which took place on or about 20 September 2006. From then until early November 2006, Beijing Bestride sent him and his team various emails enclosing updated versions of the rent roll and a list of the top ten tenants. The formal due diligence work by the Manager commenced at the beginning of November 2006.  Su worked on designing the due diligence process. 

85.  The Tenant interviews took place on 15 and 16 November 2006.  Top ten tenants were chosen to be interviewed, largely by reference to the size of leased premises.  Seven were ultimately selected from the list provided by Beijing Bestride, plus three others outside the list.  The questions for the interviews were drafted by Simmons & Simmons.

86.  Yuan assisted in getting in touch with the tenants and helped arrange the interviews.  He attended all the interviews that took place along with Joe Lai and Xin Chen from the Bank, Athena Ng from HSBC, Cherie Choi, Claudia Tam and Loretta Lau from Simmons & Simmons, and Mark Hwang and Celia Chau from Paul Hastings.  Yuan and Chen Jian, the Tenant relation manager of Beijing Bestride, also attended the interviews.  The interviews were led by Simmons & Simmons and he did not have an active role.  Simmons & Simmons prepared the Meeting Minutes of the interviews.  No concerns were raised about the quality of the interviews and the interviews process did not reveal any inconsistent or unusual factors relating to the tenancies in question.

87.  In addition to the Tenant interviews, written confirmations were sent to 18 tenants jointly selected by the Manager and the banks.  Top ten tenants were included plus a random sample of eight other tenants.  Initially, Yuan resisted the confirmation exercise.  As recorded in his email to Jie Wei on 12 January 2007, he received a call from Yuan on 27 February 2007 telling him that Tin was refusing to do the Tenant Confirmations.  He reported this by email to Joe Lai, Chris Wang and Jie Wei.  Joe Lai subsequently emailed the team, including himself, stating that he had just told Yuan that the Tenant Confirmations were a must.  On 7 March 2007, Joe Lai received an email from Yuan, also copied to him, Chris Wang and Tin, stating that they had communicated with the tenants and had received the tenants’ “assistance and support” for the Tenant Confirmation process. 

88.  On 8 March 2007, a further email was received by Joe Lai from Yuan resisting the Tenant Confirmation process and suggesting that the Bank should think of other solutions.  Joe Lai had forwarded the email to him, Chris Wang and Jie Wei.  On 9 March 2007, Chris Wang responded to Yuan, saying they could not proceed without rental confirmations.  It was Su’s evidence that he felt frustrated trying to get what should have been a straight-forward process agreed with Yuan and Tin.  The Tenant Confirmations had been prepared by Commerce & Finance. 

89.  On 12 March 2007,  Joe Lai received an email from Vivian Lam at Paul Hastings,  which was copied to him and to others, stating that Yuan would like “someone from Bestride to accompany the Bank or PRC counsel” to deliver the confirmations to the tenants.  Jie Wei responded stating that he had no objection so long as it was made clear to the tenants that they should confirm directly with the Manager, rather than sending any confirmation letter through Beijing Bestride.

90.  On 15 and 16 March 2007, a total of 30 Tenant Confirmations were hand delivered to 18 selected tenants’ offices by Xin Chen,  Benson Lai and Chen Jian.  There were 30 Tenant Confirmations for the 18 tenants because many of the tenants had shared their space with subsidiary companies.  The Tenant Confirmations were accompanied by a cover letter and an empty envelope marked with the Manager’s address. The letters set out clear instructions for the completed Confirmations to be mailed directly to the Manager.  29 Tenant Confirmations were returned to the Manager.  Some of them were not fully completed, and follow-up calls to the tenants concerned were made.   The Tenant Confirmation process did not disclose any inconsistent unusual factors relating to the Property’s tenancies.

91.  During the course of the transaction, the topic of the Property’s valuation had come up a number of times.  He recalled Tin mentioning a figure of US$500 million on a number of occasions.  Tin was informed on numerous occasions that it would be ultimately up to the market to decide what value was acceptable to the investors, as was the case with any IPO.  He denied Tin’s allegation about meeting him in Hong Kong on 24 August 2007.

92.  Brian Chinappi had informed him of the discovery of some rental discrepancies at the end of August 2007, and requested him to assist Keogh in the investigation of the discrepancies.  He was asked to assist in setting up a meeting between Tin and Keogh.  On 29 August 2007, he flew to Beijing for this purpose, and met Tin, Yuan and James Wong, Tin’s assistant. He informed them that the Manager had discovered some discrepancies in the rental of certain tenants and was investigating the issue.  Tin and Yuan looked very concerned and afraid about the discovery.  He informed Tin that Keogh was planning to fly up to Beijing to meet with Tin, and Tin agreed to meet with Keogh in the afternoon of 31 August 2007.  He did not meet Tin again until the scheduled meeting with Keogh on 31 August 2007.  After meeting Tin on 29 August 2007, he had sent an email to Keogh saying that he had confirmed the meeting for 31 August 2007, and he also asked if Keogh wanted Benson Lai to attend the meeting.  Keogh replied that he would not invite Benson Lai because he wanted to keep the content of the discussion contained to as few people as possible, and because he did not want Tin to feel defensive or embarrassed.  He denied Tin’s allegation that it was Tin who had demanded to see Keogh.

93.  At the meeting on 31 August 2007,  attended by him,  Keogh, Tin and James Wong, in the Korean Restaurant at Tin’s club at the Property, Keogh informed Tin that the Manager discovered some discrepancies with respect to some of the leases, which had lower rental rates than contained in the tenancy agreements and the Offering Circular, and Keogh asked Tin to urgently assist in the investigation.  Tin explained that the discrepancy was caused by fit-out incentives that had been provided to the tenants.  A further meeting in the following week was suggested to discuss the issue.  He was not actively involved in the investigation following the 31 August 2007 meeting, but he recalled seeing the fax from Tin of 3 September 2007 in which he explained that the rental discrepancies arose due to fit-out incentive provided to tenants.

94.  On 6 September 2007,  a further meeting took place with Tin in Hong Kong, attended by Keogh, Brian Chinappi and Dilip Ayyar,  the Bank’s in-house lawyer.  James Wong was also present.  Tin was informed that trading in the RREEF CCT had been suspended and Tin would be required to compensate the Reit for the losses suffered as a result of the rental discrepancies.  At the meeting, Tin provided them with a table listing out all the discrepancies and acknowledged Tin’s obligation to take responsibility for the losses caused by those discrepancies.

95.  A further meeting took place with Tin on 7 September 2007, but he did not attend that meeting.  On that day,  Brian Chiniappi had informed him that the rental discrepancies amounted to approximately RMB270 million.  He denied the allegation made against him and Keogh that the payment of HK$278 million was extracted from Tin, and that they had obtained Tin’s signature on a letter, expressing his agreement to make such payment, by unlawful means.  He denied threatening Tin or representing to Tin that the problems about the discrepancies had to be kept confidential, and that the Manager intended to resolve the problems internally.

3.3.4 Keogh’s Evidence

96.  Keogh gave evidence that, until September 2012, he was the Executive Director of the Manager.  He had joined RREEF, which was the Bank Group’s real estate investment management business, in September 2004.  RREEF acquired and managed investments in real estate, real estate securities and infrastructure projects on behalf of its institutional and private clients worldwide.

97.  In January 2007, he was told that he was to be the newly appointed Executive Director of the Manager, a newly formed company incorporated on 27 October 2006 for the purpose of being the management company of RREEF CCT.  From March 2007, he became increasingly engaged in the RREEF CCT project.  He became aware of the Legacy Transaction which ultimately did not proceed. 

98.  By the time he had joined, the due diligence process for the RREEF CCT acquisition and listing was well underway.  This was being conducted by representatives of the joint underwriters, the Bank and HSBC, and by representatives of RREEF as the proposed property manager, together with their various professional advisors. 

99.  The RREEF team responsible for the acquisition of the Property and the due diligence exercise comprised of Brian Chinappi, Su, Alan Tam and Boon Kwan.  The employees of the Manager, including himself, Benson Lai, Danny Suen and Gloria Chan, also became involved in the due diligence and listing preparation process.

100.  Paul Hastings and Commerce & Finance were engaged as Hong Kong and PRC legal counsel respectively for the Manager.  Simmons & Simmons and King & Wood were respectively engaged as legal advisors to the Underwriters.  Other parties involved in the listing process were KPMG as Auditors and Reporting Accountants,  DTZ as Independent Property Valuer,  and Knight Frank Pty Ltd as Independent Property Consultant and Independent Market Consultant.

101.  Although Beijing JLL had a limited pre-existing role as facilities manager for the common areas of the Property, its role expanded significantly with responsibilities including tenant management and rental collection, after it was appointed by the Manager on 22 June 2007 as property manager.

102.  He first recalled meeting Tin during a dinner in Beijing in the first half of 2007, and subsequently met Tin with Brian Chinappi and Su at the Property in June 2007.  James Wong, Tin’s assistant, also attended and helped to interpret.  There were subsequent meetings with Tin that he had attended, but he did not recall ever dealing with Yuan although Yuan might have been present at the coffee meeting in June 2007.

103.  The due diligence process formally commenced in about November 2006 and continued through to the issuance of the Offering Circular on 11 June 2007 and the listing on 22 June 2007.  He became involved midway through the process.  It was important for him as a director of the Manager to be satisfied with the due diligence process,  and he familiarised and satisfied himself closely with the steps that had been taken.  He and Brian Chinappi were members of the due diligence committee and reported to the Board of the Manager on the progress and adequacy of the exercise.  This was a detailed and lengthy process.  Steps were taken to verify the lease agreements and represented rentals, based on which the Property was valued and acquired.  The following steps had been taken prior to his involvement to verify the rentals and lease agreements disclosed during the acquisition and diligence processes:

(a) Review of the Lease Agreements confirmed that the rent rolls that had been provided were consistent with them;

(b) Cross-checking the Lease Agreements against the tenancy records required to be registered, on the national and municipal level, in the PRC, was conducted by Commerce & Finance, and was again consistent with the Lease Agreements;

(c) Ten major tenants were interviewed and written rental confirmations were obtained directly from a larger group of 18 tenants;

(d) Financial due diligence was conducted by KPMG, who vouched rental revenues against a sample of tenant transactions.

There had been initial resistance by Tin through Yuan to the Tenant Confirmation process, but the Manager and the Underwriters insisted that it must occur.

104.  RREEF CCT acquired the Property on 22 June 2007, and units in RREEF CCT commenced trading the same day.  From that day, the Manager became responsible for management of the Property including liaising with existing tenants and collecting rentals from them.  Beijing JLL was appointed Property Manager with effect from 22 June 2007.  Benson Lai, as Asset Manager, and himself, as Executive Director, were responsible for liaising with and supervising the work performed by Bejing JLL.  

105.  Transitional arrangements were put in place: for example,  tenant rental payment for 22 to 30 June 2007, and also for July 2007, were paid to Beijing Bestride’s account and then remitted to the Manager.  The payment received from Beijing Bestride as rent was the “High Rent” that had been disclosed from the outset.  Tenants were notified that rental payments from August 2007 were to be made directly to Beijing JLL.  

106.  The first signs of the leases signed by the tenants were different from those that had been disclosed arose during the course of August 2007.  In early August 2007, Beijing JLL raised an issue of one tenant claiming in rent renewal discussions that the rent payable by it was lower than the “High Rent”.  Two further cases had arisen by mid-August in which tenants claimed to have agreed to lower rentals.  He asked Benson Lai to notify Paul Hastings and Commerce & Finance, and also asked Beijing JLL,  discreetly but urgently, to investigate the position with other tenants.  This investigation commenced in the week of 20 August 2007.

107.  He denied that the Manager demanded lump sum compensation from Tin or Beijing Bestride at or around 20 August 2007.  At that time, they were aware only of three discrepant leases.  More discrepant leases come to light during the weeks commencing 20 and 27 August.  An explanation was sought from Beijing Bestride.  Benson Lai reported to him that he had met with Tin at his office who explained that incentives had been given to tenants and that he would compensate any losses that might result.  Keogh stated that he had not authorized Benson Lai to make any demand from Tin. At this time he asked Su to assist with the enquiries and investigations.

108.  By Friday 31 August 2007, it was apparent that there were a significant number of discrepant leases.  On that day, he travelled to Beijing to meet with Tin and seek a proper explanation.  To his recollection, the meeting was set up on his initiative.  Su also attended, as did James Wong, Tin’s assistant, who interpreted for Tin at the meeting.  He informed Tin of the discovery of the discrepant leases and asked for an explanation.  Tin explained that the discrepancies had arisen because of leasing concessions or incentives granted by Beijing Bestride.  He asked about the nature of the incentives, but Tin did not provide further details and said that he would look into the issue.  He was concerned whether James Wong had properly translated some of the terms he had used, such as ‘capital incentives’ and ‘rent-free periods’.  He was dissatisfied that no prior disclosure of the concessions had been made.  He asked Tin to urgently investigate the cause of the discrepancies and to provide an explanation in writing to the Manager.  He did not tell Tin what to say in his written explanation or make any threats to him.  He insisted on clear and detailed explanations for the lease discrepancies, and asked Tin to quantify the extent of the concessions.  He made it clear that RREEF CCT must be compensated for any loss arising from undisclosed rental arrangements.  However, he never suggested or stated such compensation would facilitate a secret or private settlement avoiding public announcement and reporting to relevant authorities.

109.  He was conscious at that the meeting that they were dealing with a potentially serious issue, and that, as a listed entity, the results of the investigation could be price sensitive and/or have regulatory ramifications.  He wanted, therefore, to contain the information to a small group of people until they understood more about the situation.  Accordingly, he asked Tin to keep the matter and his written explanation to him private and confidential.  He did not dictate or stipulate what the explanation should be.

110.  Tin provided his written explanation by fax sent the following Monday morning, on 3 September 2007[95]. Benson Lai had informed him that morning that Beijing JLL had substantially completed their investigation and had found approximately 30 discrepant “Low Lease” Agreements.  He informed the Manager’s Board of Directors at the same time.  Mindful that RREEF CCT was a publicly listed Reit, the Manager notified SFC and also the SEHK on 5 September 2007.  Trading in RREEF CCT’s units was suspended from 6 September 2007 pending an announcement.

111.  Tin travelled to Hong Kong for further meetings with them on 6 and 7 September 2007.  Tin and his assistant James Wong attended the meeting on 6 September 2007.  The Manager’s representatives were himself, Brian Chinappi, Su, and Dilip Ayyar, the Bank’s in-house lawyer.  He recalled that, at that time, a schedule of the Low Leases had been made available.  They informed Tin that trading in units had been suspended that morning pending an announcement, which they were required to issue imminently. They iterated that RREEF CCT must be compensated for the difference in aggregate rental revenue.  Tin agreed in principle to make a lump sum compensation payment, subject to calculation and confirmation of what that number would be.

112.  He engaged Ernst & Young urgently to calculate the aggregate rental shortfall.  The resulting figure was HK$278,526,708.  A further meeting was held with Tin and his assistant James Wong on 7 September 2007.  He and Dilip Ayyar attended on behalf of the Manager.  At that meeting, Tin agreed to make an immediate lump sum payment in that amount.  The agreed basis on which this sum was paid was recorded in the 7 September 2007 Letter signed by Tin[96].

113.  The Manager issued an announcement through SEHK on 10 September 2007 informing unitholders that rental discrepancies had been discovered, and that Tin had made an immediate payment to meet the anticipated shortfall; that Tin’s explanation was that the discrepancies were the results of pre-lease rental concessions; and that the Manager had formed a sub-committee of independent directors to fully and independently investigate.

114.  He categorically denied and rejected the assertions that Su and he had represented to Tin that the False Documentation Scheme was a common mechanism in raising capital operations that had been implemented to guarantee that the listing process would raise US$500 million; that the lump sum payment was required to cover the shortfall in rental payments; and to keep private the arrangements that had been made.  It was reprehensible to mislead investors through the creation of false documents.  He was completely unaware of the existence of the False Documentation Scheme until that came to his attention in late August and early September 2007.

115.  They did not inform Tin that the lump sum payment would allow the False Documentation Scheme to be kept private.  RREEF CCT was a publicly listed Trust and, as directors of the Manager, they had disclosure obligations to investors and to SEHK.  An announcement clearly had to be made.  They did inform Tin that investor reaction to that announcement would differ significantly, depending on whether he compensated RREEF CCT for its immediate rental shortfall loss.  They were also cognisant of the potential price sensitivity of the emerging information on rental discrepancies and, therefore, made it clear to Tin the importance of confidentiality pending the announcement.  His preparation and diary note for the meeting with Tin on 6 and 7 September 2007 stated:

“meet Tin, remember confidential – insider/price sensitive info and he cannot disclose info”.

He denied that he was proposing a confidential settlement as an alternative to a public announcement.

116.  The assertion that he persuaded Tin to sign a letter recording that the Manager discovered the rental shortfalls first, in circumstances where Tin claimed that he had discovered the problem in the first place, was completely incorrect. The contemporaneous correspondence made it quite clear that the Manager and Beijing JLL had discovered the issue and that the Manager then confronted Tin with it.

3.4 My Findings

3.4.1 No Weight to be attached on the Statements of Yuan, Zhang and Chen

117.  On Day 7,  Mr Barlow informed me that although Tin had pleaded, based on what Yuan had said, that he and his team were taught by the Bank’s staff how to implement the False Documentation Scheme, Tin was no longer pursuing that[97]. On Day 8, Mr Barlow confirmed that Tin was not suggesting that Yuan was taught how to promulgate the High Leases and the Low Leases.  Whatever Yuan may have said in his statement, that those leases came about as a result of tutoring by someone involved with the Bank and the Manager, Tin was not suggesting that in respect of the 2005 Leases.  90% of the Property had been leased by 2005 and those leases were in existence in 2005, as could be seen from the DTZ valuation[98].

118.  The Legacy Transaction documents, showing the High Rent Leases well before the Bank was involved in the listing, disapproved any suggestion made by Yuan that “Mr Li Lei and Mr Eryck Su directed us to obtain the Lease which reached the level of an average rental of US$35, i.e. the so-called Big Lease or Big Contract”[99].

119.  By letter dated 16 October 2013, Tin expressly abandoned specific paragraphs in the statement of claim, and he abandoned his case that it was the Bank’s staff, namely Li Lei and Su, who had taught Beijing Bestride’s staff to implement the False Documentation Scheme.  It was clear from the Legacy Transaction documents that the False Documentation Scheme was implemented long before the Bank became involved with the listing of the proposed Reit.  The Legacy Transaction documents demonstrated that Yuan’s statement contained a lie that Li Lei and Su directed them to implement the False Documentation Scheme.  That is sufficient reason for me not to place any weight on any other statement contained in Yuan’s statement that was provided to SFC.

120.  However, there are many other reasons why I decline to place any weight on the statements of Yuan, Zhang and Chen that were provided to SFC.  Their signatures on those statements have not been verified.  Those statements had been attached to the statement of Tin.  During his interview by SFC on 28 February 2008, Tin was asked whether any third party had been present to witness Yuan, Zhang and Chen sign the statements that he had submitted, and Tin answered that he was not clear about that[100].

121.  Furthermore, the statements had been submitted merely as appendices to Tin’s statement to SFC, and Yuan, Zhang and Chen had not been interviewed by SFC. In the course of the interview with Tin on 26 February 2008, the interviewing officer expressed to Tin his wish to interview Yuan about these serious matters and informed Tin that no matter whether he contacted Yuan by telephone or by email, Yuan had made no reply; and he asked Tin why Yuan always avoided his contact, if what Yuan said was true and correct[101].  In response, Tin suggested that this might be due to the fact that Yuan had left Beijing Gateway.  However, Tin failed to inform SFC that Yuan was still employed by Tin in the Bestride Group, albeit in a different company.  It was clear from the cross-examination of Tin that he had made untrue statements in his 2^nd affirmation regarding Yuan and Chen’s current employment[102]. In that 2^nd affirmation, Tin had stated that Yuan and Chen had left Beijing Gateway since September 2007 and December 2007 respectively.  He exhibited emails from Yuan and Chen stating that they were working, respectively, for Beijing Ferryboat International Public Relations Consultancy Limited (“Beijing Ferryboat”) and Beijing Green Energy Technology Limited, and that both were too busy to arrange time to come to Hong Kong to give evidence.

122.  Under cross-examination, Tin conceded that the email he had exhibited in his 2^nd affirmation as coming from Yuan, had stated erroneously that Yuan was employed Beijing Ferryboat.  At that time, Yuan has already started working for China Energy Bestride Environmental Protection Limited (“CEBE”)[103]. CEBE was 80% owned by Bestride Holdings and 20% owned by Beijing Bestride Gateway Leisure Club Company Limited[104]. The email purportedly coming from Yuan contained a number of untruths in that: 

(i) he was employed by CEBE, not by Beijing Ferryboat;

(ii) he was not the general manager of the financial department of Beijing Ferryboat, but he was the general manager of CEBE;

(iii) he was neither doing the business review, nor the valuation for the Beijing Ferryboat[105]. 

123.  The email that was exhibited in the 2^nd affirmation of Tin that purportedly came from Chen had stated that he was working with China Energy Environmental Protection Company, but had omitted to mention the Chinese characters for “Bestride” in the name of the company.

124.  I am satisfied that Tin presented misleading evidence to me, when he applied for leave to adduce the evidence of Yuan and Chen by videolink and that he withheld from me the fact that they were employees in the Bestride Group.  He also mentioned for the first time under cross-examination that they did not come to Hong Kong to testify because they were afraid of being arrested in Hong Kong[106]. No mention of fear of arrest was made in his 2^nd affirmation.

125.  The statements of Yuan,  Zhang and Chen contained serious allegations of gross impropriety.  No credible explanation has been offered to me why these important witnesses were not called to give evidence at trial.  I had concluded, from my review of the affidavit evidence placed before me at the application to adduce evidence by videolink, that Tin had a far closer relationship to the 3 individuals concerned, such that I was not persuaded that he was unable to arrange for their attendance in Hong Kong to give evidence.  These individuals were not third party witnesses, but were closely associated with Tin and had been for a fairly long time in the past, and which association was continuing up till the time of trial.  In these circumstances, I am unable to give any weight to the hearsay statements of these persons, who could have been called to give evidence to support the serious allegations they were making and who would have been subjected to vigorous cross-examination on those allegations.

126.  Not only did these statements contain multiple hearsay, they also contained assertions which are inherently incredible, given the abandonment of the assertion that Li Lei and Su had instructed Yuan and his team to implement the False Documentation Scheme.  In particular, Zhang’s statement is particularly difficult to accept at face value.  He stated that he was informed by Yuan, representing the vendor, in 2007 that a massive fraud had been devised and implemented so as to procure a successful listing of the Reit.  He then discussed the fraud with Benson Lai, representing the Manager, who did not do anything about it apart from acknowledging its existence.  However, Zhang never reported this to his seniors or to the management in Beijing JLL[107].  Zhang did not explain in his statement that had been provided to SFC why he did not do so.  As he had failed to report such a serious fraud to his seniors, both his integrity and his reliability as a truthful witness must be suspect.  Further, Tin claimed in §10 of his 2^nd affirmation that Zhang had never been under his employ; and he had omitted to inform the Court that Zhang had worked in the Bestride Group from June 1998 to December 2003[108].

127.  For these reasons,  I am unable to place any weight on the statements of Yuan, Zhang and Chen that had been submitted to SFC by Tin.

3.4.2 Tin gave Untruthful Evidence

128.  I do not believe Tin.  He presented false and misleading evidence in the 2^nd affirmation with the hope that the court would permit Yuan, Zhang and Chen to give evidence by videolink.  I have referred to some of that false and misleading evidence when I dealt with the weight to be placed on the hearsay statements of these individuals.

129.  Tin hid from the court the close association Yuan, Zhang and Chen had with the Bestride Group and his assertion, in his 2^nd affirmation, that each of them had told him that by reason of their “business and employment and family commitments they are not prepared to travel to Hong Kong for the 3 to 5 days required to give their evidence in person”[109], was false. His evidence, under cross-examination, that the email from Yuan which he had exhibited in his 2^nd affirmation, had been written by an unknown staff of the Bestride Group on Yuan’s behalf, and that this individual had made a mistake about Yuan’s true employer beggars belief.  It was a brazen lie uttered under cross-examination to cover up the lie contained in Yuan’s email that was exhibited to his 2^nd affirmation.

130.  Tin was evasive and argumentative.  His evidence was unreliable and inconsistent with contemporaneous documents.  His evidence was unreasonable and irresponsible.  I find that Yuan and his team implemented the False Documentation Scheme.  Tin never expressed shock and outrage at Yuan’s gross misconduct in doing so.  He denied knowledge of Yuan giving false rental information to HSBC and CGAM in 2005, but he was quick to attack the integrity of Freddy Chua, the CEO of CGAM[110].  On being confronted with the Legacy Transaction documents showing that Yuan had given the false rental information in 2005, long before the Bank and the Manager had any dealings with the Bestride Group[111], he claimed for the first time that Freddy Chua was “hidden behind” the fabrication of the High Rent, and that Freddy Chua was a very dishonest person[112].

131.  Tin was evasive and refused to give an account of what Yuan had told him in August 2007 about the rental discrepancies.  His evidence was unreliable.  He said he was never interested in and not concerned with the rental level of the Property[113]. That evidence was inconsistent with the record of his due diligence interview on 19 January 2007[114].  He went as far as disagreeing with what was recorded in that document[115].  His evidence was unreasonable. He would not accept any statement in any document until and unless his signature appearing on that document was shown to him.  He disagreed with that record of interview because it demonstrated that he had good knowledge of the rental situation.  In that record of interview, he confirmed that the information contained in the Offering Circular was accurate, and he added that the Offering Circular was well written.  He made no complaint of this record when he made his witness statement in which he had said he had participated in a personal due diligence that the Bank conducted on him, and faithfully replied to their inquires[116].

132.  He also disputed the record of his due diligence interview held on 29 January 2009[117], on the ground that it was unsigned, and he even denied ever attending that due diligence interview. He did so when his recorded answer was shown to him under cross examination[118], that when the current leases expired, there was a plan to repartition the rental area, with a view to increase rent per square metre, which demonstrated that he had a good knowledge of the rental income of the Property.

133.  Tin claimed that he had never read the Manager’s Announcement until they were shown to him in the witness box[119].  However, he confirmed in his SFC interview record of 6 November 2007 that he had read those Announcements as at the date of that interview[120], an interview at which Tin’s lawyers were present with him.

134.  Tin was evasive in answering straightforward questions.  He would either respond with a long account of irrelevant matters or avoid responding by stating that his answers had already been clearly set out in his witness statement and suggesting that leading counsel was wasting time by asking him useless questions.  When asked to identify the whereabouts of such an answer in his witness statement, he was unable to do so.  Notwithstanding Mr Barlow’s suggestion that the answer was in his SFC statement, no such answer could be found[121].

135.  Despite alleging that he was very angry with Yuan for being part of the forgery scheme, not only was Yuan not reported to the authorities in Beijing, he continued working in the Bestride Group, a fact that was concealed from the court until the truth was discovered by the investigative work done by the Bank and the Manager[122]. His suggestion that Yuan’s transfer to CEBE was a punishment because he was not getting any bonus there, and the salary he earned there was not so high, was preposterous and I reject it outright[123]. Tin’s evidence that he was not in a senior position in CEBE is contradicted by the website of the Bestride Group, which listed Yuan as a member of the senior management team[124].

136.  I do not accept Mr Barlow’s submission that the contemporaneous documents were consistent with his testimony but not with the version of events later provided in December 2012 by Su and Keogh.  Tin’s witness statement was not consistent with his SFC statement: it was a reproduction of his SFC statement which was a self serving statement lacking in particulars of the sophisticated fraud carried out by the senior management of the Bestride Group.  He made no mention of the Legacy transaction in his SFC statement.  Instead of answering questions put to him, he stubbornly pointed to his SFC statement as containing all the answers to the questions put, which was most definitely not the case.

137.  Tin’s complete inaction between 2007 and 2011 impacts adversely on his credit.  He signed the 7 September 2007 Letter, which was a clear admission of liability, but took no steps to complain that it was procured by threats and misrepresentation.  The Announcement[125] published by the Manager on 10 September 2007 upon the resumption of trading was a breach of Keogh’s alleged promise not to make the matter public.  The Announcement also referred to Tin explaining the rental discrepancies by reference to “pre-leasing rental concessions”[126].  Despite these statements in the Announcement[127], Tin took no action against the Manager andmade no complaint to the Manager that Keogh had broken his promise.  The Announcement of 28 October 2007[128]  stated that “a complex fraud was perpetrated by the Vendor’s team” but Tin did not take any step to refute the allegation although he was already represented by Ford Kwan & Co (“FK”) at the time.  Prior to the publication of the Announcement of 28 October 2007, the Manager and its solicitors, Clifford Chance (“CC”), asked Tin to present his side of his story, but Tin declined[129].  Thereafter, the Manager took various steps, including removal of Tin as a director of the Manager, cancellation of the Consultancy Agreement and exercise of a call-option to purchase Tin’s shares in the Manager.  Apart from two letters of general denial[130],  Tin never confronted the Manager with any claim that the Bank/Manager had devised the Scheme, or raised any specific allegation that the 7 September 2007 Letter had been signed, or that the sum of HK$278 million had been paid, as a result of any threat or misrepresentation.  He only started the present action in July 2011 to prevent the Trustee from distributing the remaining trust assets to the unit holders.

3.4.3 The Evidence of Charles Wang, Li Lei, Su, Keogh and the Other Witnesses

138.  I accept the evidence Charles Wang, Li Lei, Su and Keogh in their entirety.  All of them gave evidence in a clear and straightforward manner.  They impressed me as witnesses of truth.

139.  Mr Barlow submitted that, apart from the provision of the necessary background, the Bank’s and the Manager’s other witnesses[131] did not give any evidence that had any real bearing on the three Key Issues.  I do not accept this submission as Charles Wang’s evidence and Li Lei’s evidence, which I have already accepted, directly contradicts Tin’s evidence and case.  I also accept in their entirely the evidence of Mr Ruoyu Jiang, Mr Lawrence Chu, Ms Gloria Chan, and Mr Li Ping Kee.  It was not suggested that their evidence was not credible. Mr Barlow also submitted that Mr Andrew Law, the Trustee’s only witness, had little or no personal involvement in the matter[132] and that he merely recited the documentary evidence.  I also accept his evidence in its entirety.

140.  I find that in late March 2006, 2 months after the bridging loan application fell through, the Bank was approached by Tin again, through Paul Hastings, to consider taking up the role of the Reit manager, jointly with Tin, and to become a joint global coordinator, bookrunner and underwriter with HSBC[133].

141.  I find that, prior to their appointment by the Manager as property manager on 22 June 2007, Beijing JLL’s responsibility as property manager appointed by Beijing Bestride was only to manage the common area and common facilities of the development.[134] Negotiation and signing of tenancy agreements, as well as collection of rents, were the responsibilities of Beijing Bestride.  It was not known to Beijing JLL that “top-up payments” had been included.[135]  I find that, in the course of August 2007 and over a period of time, the Manager discovered the actual rent paid in respect of some tenancy agreements was different from that as provided and warranted as accurate by Tin.  Beijing JLL only began reporting to the Manager on the rental information since early July 2007.  Beijing Bestride had delayed providing Beijing JLL with the full set of tenancy agreements and files.  It was only in the latter part of August 2007 that the reports revealed increased number of tenants paying rent in two tranches.  Separately, Beijing JLL also reported, in early August 2007, one case where the tenancy agreement of the tenant was lower than what Beijing JLL had understood it to be based on information provided by Beijing Bestride, which triggered an investigation that was insisted upon by the Manager.  On 27 August 2007, the Manager sought an explanation from Tin.  Benson Lai, an employee of the Manager, met Tin upon the instruction of Keogh.  After the meeting, Keogh instructed Su to help with the investigation.  Su met with Tin on 29 August 2007 in which he informed Tin and Yuan that Keogh was coming to Beijing to follow up.

142.  I do not accept Tin’s assertion in his interview on 6 November 2007[136] that Yuan had informed him on 20 August 2007 that the Manager had asked for RMB300 million.  On 18 August 2007 Beijing JLL was proposing to conduct only a low-key investigation as the nature of the error was still unclear[137]. The number of cases was relatively small.  On 20 August 2007,  Keogh was still instructing Benson Lai to notify lawyers of the matter and to ask JLL to discreetly and urgently investigate the situation and on 22 August 2007,  Keogh was still corresponding with James Wong, Tin’s assistant, on matters relating to tax, with no mention being made of discrepant rents or demand for payments[138].

143.  I accept the evidence of Su and find that the alleged meeting between Tin and Su on 24 August 2007[139] never took place. The contemporaneous emails showed that it was only on about 28 August 2007 that Keogh asked Su to assist in investigating the rental discrepancies[140].  I accept Su’s evidence that after the listing he had moved on to other matters and it was not until two to three days before the meeting on 31 August 2007 that Keogh and Brian Chinappi asked him to assist in the resolution of the matter.[141]

144.  I find that the alleged meeting on 30 August 2007[142] never took place, but that there was a meeting between Tin and Su on 29 August 2007[143].  Tin’s allegation, that Su had explained at that alleged meeting about the rental inflation and that he had already discussed it with Yuan, cannot be believed because the inflated rental information had already been provided by the Bestride Group in the Legacy Transaction.

145.  I reject Tin’s evidence[144] and accept the evidence of Keogh[145] and Su[146] in relation to what was discussed and decided at the meeting on 31 August 2007.  I am not persuaded by James Wong’s note[147] to find that Tin’s version of events was truthful.  The reference in the note to “hi-lo due to fit-out reimbursement / incentives etc.” is consistent with Su and Keogh’s evidence that this was the explanation offered by Tin and repeated in the fax of 3 September 2007 that was dated 5 September 2007.  Because of the price sensitive nature of the newly discovered discrepant leases, the discussions had to be kept confidential.  Insofar as the note conflicts with the evidence of Su and Keogh, I accept the latter’s evidence.  James Wong, the alleged maker of the note was not called as a witness.

146.  I reject the evidence of Tin[148] and accept the evidence of Keogh[149] on what was discussed at the meeting on 6 September 2007 in Hong Kong.  I reject Tin’s case that he was “intimidated” by Keogh’s threats at this meeting to make the matter of rental discrepancies public should he refuse to sign an agreement to pay the difference of rentals in full.  The matter had already been made public in that it had been reported to the SFC and SEHK on 5 September 2007 leading to a suspension in trading in the Reit on 6 September 2007.[150]  I find, despite his denial, that Tin was aware of the suspension in trading[151].  Tin confirmed repeatedly in cross-examination that the meeting on 6 September 2007 was “friendly”[152] and in re-examination, there was no “expressed disagreement” between the parties at that meeting.[153]

147.  Tin’s evidence was that at the meeting on 7 September 2007, he signed the 7 September 2007 Letter and agreed to pay the lump sum.[154]  I do not accept the allegations that Keogh made or repeated unlawful threats and demands.  Given that the matter had been reported to the SFC and SEHK leading to a suspension in trading on 6 September 2007,  the alleged threats by Keogh could not have had any intimidating effect on Tin.  I find that Tin signed the 7 September 2007 Letter because he knew he was responsible for the losses caused by the False Documentation Scheme.

148.  Mr Barlow submitted that Keogh’s evidence in relation to the post 24 August 2007 events was evasive and unsatisfactory and, in particular:-

(a) Keogh could not offer any explanation for why Benson Lai wrote in an email on 27 August 2007 “as you told me last time, he intends to make an agreement with us to solve these problems before it exploses to public”[155] despite giving evidence that he had not communicated with Tin about this matter prior to their 31 August 2007 meeting in Beijing[156];

(b) A day after receiving Benson Lai’s email, on 28 August 2007 Keogh instructed Benson Lai to “… assess how many of the 35 leases that we due diligenced are subject to another lease or side agreement. Also, for those leases, what is the amount of discrepancy for each lease?”[157]The implication was clear that Keogh was very concerned to find out how the due diligence exercise had failed and the irresistible inference is because Keogh was concerned of any SFC implications arising from the obvious failings of the Bank’s and the Manager’s curtailed due diligence exercise. However, Keogh curtly refused to accept that his major concern was the propriety of the due diligence exercise[158];

(c) It was clear from James Wong’s note of the 31 August 2007 meeting that despite the nature of the problem being clear,  Keogh’s had developed or was developing an intention was to keep the matter ‘confidential’ until a ‘solution’ (i.e. the lump sum payment) was achieved from Tin – the irresistible inference is that Keogh was keen from an early stage to ensure that the Bank’s and the Manager’s failings in relation to its curtailed due diligence exercise was hidden and/or downplayed;

(d) Keogh’s explanation that he had kept such price sensitive information from the public (or the SFC)[159] because he wanted further enquiries to be made is not credible and/or cannot be the whole truth of the matter. It was clear as early as 27 August 2007, that there was a potential danger that the rental income stated for the Reit did not match the actual rental incomes for the Property.  The potential consequences and nature of the identified discrepancy warranted an immediate suspension of trading and any investigations could continue whilst trading was suspended. The reasonable and prudent course should have been to ask for a suspension of trading of the units by the latest 27 August 2007 in order to protect the integrity of the market and the investing public. However, Keogh’s patent desire to ensure Tin enter into the lump sum solution prior to making the full announcement of the Bank’s and the Manager’s  investigation must have been to ensure that the Bank’s and the Manager’s interests were placed in front of the investing public.

149.  I do not accept these submissions.  I accept the evidence of Keogh that he had not communicated with Tin before 31 August 2007.  Benson Lai did not give evidence and his email of 27 August 2007, stating that “Mr Tin talked to me this morning regarding the Advertising and the discrepancies found in the T/A, as you told me last time, he intends to make an agreement with us to solve these problems before it exploses [sic] to public”, was not well phrased.  “As you told me last time” might have been a reference to a previous conversation Keogh had had with him about discrepant leases.

150.  Keogh did not use the reference to the due diligence exercise defensively when he instructed Benson Lai by his email of 28 August 2007 to “assess how many of the 35 leases that we due diligenced are subject to another lease or side agreement”.  I cannot draw any inference from this email that he was concerned about the propriety of the due diligence exercise.

151.  I accept the evidence of Keogh that they were cognisant of the potential price sensitivity of the emerging information on rental discrepancies and, therefore, made it clear to Tin the importance of confidentiality pending the announcement.  The matter was not kept confidential until a lump sum payment was received from Tin or to conceal the Bank’s and the Manager’s alleged failings.  There were only 3 discrepant leases that had emerged before 20 August 2007.  Between 20 August to 31 August 2007, more discrepant leases emerged, and between 31 August 2007 and 5 September 2007, when SFC was notified, there was an email from James Clarke of Beijing JLL on 4 September 2007 with an update of the discrepancies, and also from Gloria Chan on the same date reporting on what she had found in Beijing[160]. With that information, it is understandable that he reported the matter to SFC on 5 September 2007. I accept Keogh’s evidence that, before 4 September 2007,  the nature of the discrepancy was not known and that it would have been irresponsible to make an announcement to SFC when there could have been a logical explanation for the discrepancy; and that, although he recognised the potential danger to the public, he did not consider that he had sufficient information to enable him to report the matter to SFC and that was why they were conducting a thorough investigation[161].

3.4.4 The Due Diligence Exercise

152.  Mr Barlow submitted that in the light of Su’s knowledge and experience in commercial property, it was inconceivable that he would not have worked out for himself that the Property’s 2006 rent rolls overstated the Property’s actual rentals, in the light of the known facts in mid-2006, including:

(a) the Property had attracted a number of impressive high profile tenants in a very short space of time;

(b) there was no other obvious features of the Property (other than discounted rentals) which would have attracted such impressive tenants in such a short period of time;

(c) the Property had only just been completed and there would have been a need to incentivise new major tenants to move into the Property;

(d) the rent roll rents were inconsistent with such incentivised discounted rentals;

(e) the achievable rents from comparable properties with established tenant bases in the same area were markedly less than the rent roll rentals; and

(f) the rent roll rentals were far too high compared to the known average asking rentals in late 2005 as could be seen from the Colliers International’s Quarterly Research Report readily accessible by Su that the average asking rental rate in the Lufthansa District where the Property was located was US$26.10 – US$25.57[162].

153.  Mr Barlow submitted, further, that by October / November 2006, when the CG REIT Data Review[163] was completed, which Su confirmed had been done[164], Su was well aware of:

(a) the 31 December 2005 DTZ Valuation of the Property at US$410 million only;

(b) the CG REIT rent rolls showing 81% occupancy only;

(c) the Chesterton Petty Market Report[165] within the CG REIT’s draft IPO Prospectus recording that the Lufthansa area 4Q: 2005 asking rentals were at a US$25 unit rate only;

(d) the 15 discrepant tenancy agreements in the CG REIT due diligence exercise[166];

(e) Freddy Chua’s email[167] stating that the developer had agreed to provide a guarantee that 90% will be leased out at US$35 p.sq.m.p.m.

It was inconceivable that an “expert” like Su could have missed all the obvious indicators of the False Documentation Scheme, unless his conduct was undertaken in the pursuit of the target deal of US$500 million.

154.  Mr Barlow directed my attention to the following exchange[168] to support his submission that Su’s inability to accept obvious criticism was revealing:

“His Lordship:	I just have one matter I want to clarify in my mind. Mr Su, I think it’s common ground that there were two sets of rental figures, the high rental figures and the actual rental figures, which were lower.
Su:	Yes.
His Lordship:	It’s also common ground that your due diligence process did not discover the two sets.
Su:	Yes.
His Lordship:	Do you accept that there was some failing in the due diligence process that was conducted by your team?
Su:	No, I do not.
His Lordship:	Because in the course of the questioning, I think some of the specific matters were pointed out, such as the fact that the tenant confirmations were not given to the responsible persons, that was one example. In the light of those matters that were pointed out to you, do you still maintain your evidence that the due diligence process was satisfactory?
Su:	In my opinion, yes.”

155.  Mr Barlow also submitted that this case did not involve a ‘sophisticated fraud’ at all, as Beijing’s JLL’s early detection of the False Documentation Scheme amply showed.  If the scheme was in place, since its detection was so obviously identifiable (because the dual rental payments could not be disguised or camouflaged in any way),  the only rational explanation was that the Bank and the Manager were also aware of the False Documentation Scheme. This explained why the due diligence exercise was conducted in such a shoddy and inept manner.  Su  (who by all outward appearances was a sophisticated and educated man and well-versed in high level real estate matters) was unlikely to have conducted or been instrumental in such an inept exercise unless it was deliberate.  The only plausible explanation for the poorly designed exercise was because Su and his and the Banks’ team knew of,  consented to and/or turned a blind eye to the existence of the False Documentation Scheme.

156.  I accept the evidence of Su, Keogh and the other witnesses in connection with the due diligence exercise.  They remained unshaken under forceful cross examination.  I do not accept Mr Barlow’s criticisms of Su’s evidence and the due diligence exercise.

157.  I am satisfied from the clear documentary evidence emanating from 2005, well before the Bank became involved in discussions with Beijing Bestride on the provision of bridging loan and in the RREEF CCT listing, that Beijing Bestride had already been providing false inflated rental information to CGAM and HSBC in order to justify the price of US$500 million that Tin wished to obtain from the CG REIT listing.

158.  Tin denied knowing that Yuan acting on behalf of the Bestride Group had provided CGAM and HSBC with the false inflated rental information in the course of the Legacy Transaction[169]. I find on the evidence before me that the clandestine fraud perpetrated by the False Documentation Schemewas sophisticated and well thought out, complex and extensive, and involved:

(a) surreptitious generation of false lease agreements[170] by Yuan’s team which were introduced covertly into the due diligence process;

(b) Yuan's team’s surreptitious interception of the tenant confirmations;

(c) alteration of tenant confirmations by Yuan’s team before they were returned to those conducting the due diligence;

(d) fraudulent swapping by Yuan’s team of certain pages of Low Lease Agreements to create the High Lease Agreements;

(e) falsification by Yuan’s team of accounts, tenant invoices and original bank documents reviewed by KPMG as the reporting accountants.

I also find that the False Documentation Scheme was perpetrated by Yuan and his team in Beijing Bestride by giving CGAM and HSBC inflated rental information in 2005 in the course of the Legacy Transaction, and that the False Documentation Scheme had been repeated by Yuan and his team providing the same inflated rental information to the Bank and covering up the actual rental information during the due diligence exercise by means of the sophisticated fraud outlined above, which included false leases being registered with the Beijing municipal authorities. Tin eventually agreed to it upon the insistence of the Manager[171]. However, the suggestion, that someone from Beijing Bestride should also participate in the delivery of confirmations to the tenants[172],  was made to enable the alterations of the tenant confirmations to be made by Yuan’s team before they were returned to those conducting the due diligence.

159.  The suggestion that the Bank and the Manager knew or should have known about the inflation of rental by reason of the amount of the rental income in the year 2006, as verified by the independent auditor and reported in the IPO Prospectus has no merit since it ignores the low occupancy rate at the Property (shown in the Prospectus) and that the rental figures in DTZ’s valuation report were only projected, not actual, figures.  Mr Barlow’s submission overlooked the clear conceptual difference between the forward-looking assessment made by a valuer and the historic audit conducted by an accountant.

160.  As regards the submission about the knowledge to be gleaned from the CG REIT documents and, specifically, the Chesterton Petty report in August 2005[173] and Collier’s market research (regarding Q4:2005[174]),  there was no evidence that the attention of anyone in the Bank or the Manager had been drawn to the Chesterton Petty report at any time in 2006 or 2007.  The clear evidence from Su and Li Lei was that they had never seen the document[175], which they consistently maintained was outdated.[176]  The Chesterton Petty report,  a draft dated August 2005 prepared for HSBC for the proposed CG REIT,  was indeed badly outdated for the purpose of the RREEF CCT listing in 2007.  The Bank had engaged Knight Frank to conduct the market research.  There was nothing in the Knight Frank report[177] which caused or could have caused any concern on the part of the Bank or the Manager as to the veracity of rental information given by the Bestride Group.  The Bank and the Manager had engaged DTZ to carry out a valuation, which exercise directly involved seeking and reviewing the rental information provided by the Bestride Group.  DTZ found nothing strange or suspicious about the information obtained.  The Bank and the Manager relied and were entitled to rely on the work done by DTZ and the integrity of their exercise.  Neither Li nor Su recalled that they had seen or read the Collier market research paper before.[178]  Similarly, the figures set out in the report were only average figures and the report was badly outdated for the purpose of the RREEF CCT listing in 2007.

161.  It has never been pleaded that the due diligence exercise was a sham or was not properly designed or conducted;  nor was this allegation made in Tin’s Opening.  The first time that the due diligence was described a “joke” was in the oral opening submission by Mr Barlow[179].  Tin’s case at trial was that the Bank and the Manager ought to have detected a fraud that was prevalent in the People’s Republic of China.  However, no evidence was led to prove the alleged prevalence of such conduct.  I accept Su’s evidence in cross-examination that the due diligence process was an investigation with a healthy scepticism and not a forensic exercise,  and that, at the time of the due diligence in question, there was no reason for the Bank or the Manager to suspect that any fraud or wrongdoing had been committed[180].

162.  I find that the due diligence exercise was properly designed and conducted and not a sham.  When Tin and Yuan resisted the tenant confirmation exercise in about December 2006 to March 2007,  it was Su and others in the Bank who insisted on carrying out the exercise as part of the proper due diligence[181]. Multiple parties and many teams of independent professionals were involved in the due diligence exercise.  When irregularities were first suspected in August 2007, the inflated rentals were subsequently confirmed upon the Manager’s insisting on a thorough investigation by Beijing JLL.[182]  I cannot accept that this detailed and contemporaneously evidenced account of events was contrived.

163.  I accept Su’s answer to my question quoted above.  I find that he honestly held the opinion that the due diligence exercise was properly conducted and executed.  Notwithstanding the many criticisms made by Mr Barlow about it,  I find that the due diligence exercise was properly conducted and executed.  It is always easy to be wise after the event and think of specific ways to uncover the sophisticated and extensive fraud that had been perpetrated on the Bank, HSBC and the Manager.  I also find that the due diligence exercise failed to uncover the False Documentation Scheme only by reason of the sophisticated and well executed fraud perpetrated by Yuan and his team.

164.  I do not accept the submission that the False Documentation Scheme was easily detectible before Beijing JLL was given the responsibility of collecting rental directly from the tenants.  Beijing JLL also did not discover the discrepancies during the period from the appointment of Beijing JLL on 22 June 2007 until the end of July 2007, because Beijing Bestride had received the actual rent from the tenants during this period and topped up the rent before paying over the “High Rent” to Beijing JLL.  Yuan and his team did so in order to cover up the fraud.

165.  It was obvious from the reports[183] submitted by Beijing JLL to the Manager in July and August 2007 that, prior to the gradual discovery of the rental discrepancies in August 2007, the information contained in them was only consistent with the High Rent.  As explained by Gloria Chan, it was only from “Rental Schedule 3” circulated under Beijing JLL’s email on 25 July 2007 that she discovered 7 tenants had deposited their July rental payments in 2 tranches and 2 tenants had deposited their August rental payments in 2 tranches.  However, Beijing JLL told the Manager that the 2-tranch payments were thought to be attributable to sub-lease arrangements.[184]  Furthermore, Rental Schedule 3 stated that both tranches of rental payments were made by the tenants themselves.  There was nothing to indicate there had been top-up payments by Beijing Bestride.[185]  The situation did not change much afterwards.  It was only when “Rental Schedule 10” circulated under Beijing JLL’s email dated 20 August 2007 revealed an increased number of tenants paying rent in 2 tranches (namely, 25 for July and 51 for August)  that Gloria Chan started to suspect that sub-leases might not be the real reason for the split payment.  However, by this time,  Beijing JLL had already discovered some cases where tenants claimed to have agreed to lower rents than what was specified in the leases, and Keogh had already asked Beijing JLL to investigate the position of other tenants.[186]  Gloria Chan’s evidence in this regard was not challenged.

166.  I find that, before the discrepant leases were discovered by Beijing JLL in August 2007, Su and his team did not know of, nor suspect, nor turn a blind eye to the False Documentation Scheme.

3.4.5 Tin’s involvement in the False Documentation Scheme

167.  Mr Barlow also submitted that there was no evidence that Tin “must have known” about the False Documentation Schemeand that Tin’s conduct suggested the contrary.  The Manager’s hugely expensive internal investigations uncovered no evidence and none of the defendants had pleaded that Tin had any part in or knowledge of the False Documentation Scheme.  Tin was not a ‘fly by night operator’ but a very successful property developer who had built 10-15 commercial buildings and hotels in or around China and he was the head of his own conglomerate with 5 different business lines and employing around 10,000 people. These were not the characteristics or achievements of someone who would conduct such a ham-fisted fraudulent scheme such as this one. Tin had real businesses to run.  He could not and did not spend much time on daily management details.  The documentary evidence, including the minutes of the meetings, well reflected this.  Tin was only at a couple “all parties” big meetings.  The Bank/the Manager’s witnesses also confirmed that they had dealt mostly with Tin’s subordinates, namely Yuan and his team.  Tin did not even have the time to attend the official SEHK ceremony of the Reit’s IPO launch ceremony.

168.  Mr Barlow also submitted that there was a distinct lack of an escape mechanism for Tin.  If he was truly involved or had any knowledge of the scheme it was unlikely that he would not have had some mechanism to extricate himself. Tin remained the largest independent unitholder of the Reit and he held 20% shareholding in the Manager.  Further he had agreed to and knew that the Trustee was holding onto a huge sum of unpaid consideration, which was bound to be confiscated or retained if he was truly involved in the False Documentation Scheme.  He was unlikely to have independently been involved in such an inept scheme (which was bound to be detected) and even if staff members of Bestride did know of the Scheme (which has never been established by the defendants[187]) they were unlikely to have agreed to such participation unless the Bank and the Manager also knew, consented and/or turned a blind eye to such matters.

169.  Tin acknowledged, under cross examination, that he signed the mandate letter dated 2 June 2005[188] but he claimed that no substantial work had been done in the CG REIT and the mandate letter showed only an intent[189]. He also claimed that:-

(1) he did not know about (a) the application made to the SFC in early August 2005 for licensing of responsible officers etc; (b) the inflated rental information provided by Yuan to CGAM as the proposed manager in the CG REIT; (c) the Draft Offering Circular prepared for the CG REIT; or (d) the draft valuation report prepared by DTZ in relation to the Property[190];

(2) he had no personal involvement in any discussion relation to the pre-listing restructuring in the proposed CG REIT listing[191];

(3) he had never had any discussion with CGAM as the proposed manager in the CG REIT listing[192];

(4) he had attended only one meeting with HSBC to discuss the CG REIT at the HSBC headquarters and the meeting lasted for not more than 3 minutes[193].

170.  I do not accept Tin’s denial of any personal involvement, or knowledge of progress, in the proposed CG REIT listing which was a lengthy, formal and expensive public offering conducted to sell a major asset owned by Tin through his corporate interests.  The email on 22 September 2005 from Freddy Chua (of CGAM) to David Chong (of HSBC)[194] recorded a telephone call from Tin to Freddy Chua in which Tin asked about the investment structure of the CG REIT, and whether the Property should be held by the BVI or HK entity.  This email showed that Tin participated in the CG REIT preparation and discussed the investment structure of the CG REIT.  After being shown this email in cross-examination[195], Tin said that the “Mr Tin” in the email might not refer to him, but to a Mr Tin Tai Chun who was a general manager of another property management company in the Bestride Group[196].  I reject this feeble attempt by Tin to distance himself from the CG REIT transaction in which he was actively and personally involved. Tin admitted that Mr Tin Tai Chun had no connection with the CG REIT listing exercise.

171.  Tin’s active participation and direction in the CG REIT listing is shown by the email on 8 October 2005 from Freddy Chua to Raymond Li (of Paul Hastings)[197] recording that HSBC was arranging for a meeting with Tin to discuss, amongst other matters, the transfer of title in the Property which was an issue “chief on Mr Tin’s mind”;  that Tin had been “talking to the authorities to have the title issued directly to HK PropCo”; that Tin desired that the property holding company and joint venture company would have similar Chinese names; and that Tin had said in his talks with CGAM that he was not in favour of having rentals remitted to the property holding company before the listing.  Under cross-examination, Tin said the meeting referred to in that email from Freddy Chua to Raymond Li was not formal but one of those “opinion meetings” which he was asked to attend; and he had no impression of having talked to the authorities, or expressed a view on the property holding company’s name or rental remittance to it[198].  I do not accept Tin’s evidence regarding this meeting.  By that email, Freddy Chua was simply reporting to Raymond Li about his discussions with Tin about the CG REIT and there was no reason for Freddy Chua to make a false report to Raymond Li.

172.  A kick-off meeting about “Project Gateway”took place on 20 September 2006[199] that was attended by Tin, his staff in the Bestride Group (including Yuan and Chen) and a number of the professionals involved in the RREEF CCT Transaction.  It was recorded in the minutes of that meeting, under the section “Old transaction issues”, that Tin kicked off the meeting by introducing to all parties 3 key issues that had delayed the Legacy Transaction back in 2005 and early 2006:-

“1. Bridging loan – Gateway was not able to obtain an offshore bridge loan to repay the onshore loan and to release the charge on Property. As a result, the Property can’t be transferred to Hong Kong Gateway.

2. SFC requires Hong Leong Group, the then 51% shareholder of the asset management company (“AMC”), to provide guarantee on the AMC/the (illegible) shareholder of the AMC and Hong Leong Group could not agree to such request;

3. Gateway was in the process of transforming the composition of its tenant base from local tenants to international tenants for the purpose of enhancing the REIT’s marketability to international investors.

The above problems are now resolved by 1) obtaining a bridging loan to repay the onshore bank loan and the Property has been successfully transferred to Hong Kong Gateway; 2) bringing in RREEF as the new AMC partner; and 3) replacing most of the local tenants with international tenants.”

Tin confirmed that he had attended and chaired the kick-off meeting.  I do not accept his denial of knowledge of the matters in the minutes under the section “Old transaction issues”, and I do not accept his assertion that he did not understand what those issues meant since those specific technical issues were handled by Yuan and the professionals[200]. I find, from this contemporaneous record of the kick-off meeting, that Tin was keenly aware of the major issues concerning the CG REIT listing.  I do not accept Tin’s challenge of the authenticity of the minutes of the kick-off meeting on the ground that it was not signed by him or any person from the Bestride Group[201].

173.  Tin had set up BVI Gateway and HK Gateway or caused the same to be set up in October and November 2005 respectively as part of the restructuring for the purpose of the listing exercise[202]. Tin was the sole shareholder and director of BVI Gateway; as to HK Gateway, he was the sole director and its only shareholder was BVI Gateway which he solely owned.  Tin was evasive but ultimately acknowledged under cross-examination that he knew about the formation of these two companies in October and November 2005[203]. This acknowledgement supports my finding that he was actively involved in the CG REIT transaction.

174.  A meeting between Tin and HSBC to discuss the bridging loan for acquisition of the Property was recorded in the letter dated 13 January 2006 from HSBC to CGAM copied to Tin[204] at which Tin had “presented a possible solution with the bridge loan from Bank of China International”.  This was cogent evidence showing that Tin was actively involved in the discussion regarding the bridging finance which was needed to enable the transfer of title in the Property to the Hong Kong company for the purpose of the listing.  Tin eventually admitted that he had been personally involved in procuring the bridging loan by taking part in meetings with ICBC and possibly also other lenders[205].

175.  The exchanges between CGAM and the professional parties involved in the proposed CG REIT listing have been set out in §14 above.  I find that the rental information circulated amongst those parties had come from Beijing Bestride; indeed, Tin has not suggested otherwise.  I also find that that Yuan acting as representative of the Bestride Group was directly involved in the dealings with CGAM and HSBC as regards provision of rental information of the Property.  As shown by the email from Raymond Wong (of CGAM) to Yuan on 1 September 2005 and copied to others in CGAM[206], Yuan by then had already given CGAM rental information in relation to 32 of the 36 tenancy agreements then existing for the purpose of lease verification. Further, as shown by the email sent by Raymond Wong to Liwei Zhang (of HSBC) on 26 October 2005 and copied to professional parties[207], King & Wood (as lawyers for HSBC) had to get in touch with Yuan so as to gain access to the original tenancy agreements for the purpose of certifying as true the copies of those tenancy agreements obtained from Beijing Bestride.  Lawrence Chu also confirmed that both the original and copy of each lease agreement were obtained from Beijing Bestride which disseminated them to CGAM and the lawyers[208].  The email from Raymond Wong of 8 November 2005 to other professional parties involved in the CG REIT also recorded that he had received copies of the tenancy agreements identified in the email from Yuan on that day[209].

176.  I have already found that that Beijing Bestride had previously provided false inflated rental information to CGAM and HSBC in order to justify the price of US$500m that Tin wished to obtain from the CG REIT listing.  I have also found that the False Documentation Scheme was sophisticated and extensive which the properly conducted due diligence exercise could not uncover.

177.  I remind myself that an inference of wrong doing cannot be drawn unless the inference is plainly or clearly established from proven facts and is compelling[210].

178.  Tin was the founder and head of the Bestride group of companies.  I have already found that he was actively involved in both the CG REIT and RREEF CCT listing, which was a very substantial project.  Thefraud perpetrated by the False Documentation Schemewas sophisticated and extensive and hugely beneficial to Tin.  It was perpetrated by Yuan, who held a senior management position in the Beijing Bestride, and his team, with the knowledge of Ms Tian, the Chief Financial Officer of the Bestride group of companies who was Tin’s sister.  It enabled Tin to sell the Property at an inflated price and enabled him, notwithstanding that the SPA provided for retentions moneys[211], to pocket the proceeds of sale[212] long before the False Documentation Scheme might be discovered.  Under the SPA, the consideration directly and indirectly paid by the Trustee to Tin on about 22 June 2007 was about HK$3,489,594,000[213]. Only US$20 million (or HK$156 million) was withheld by the Trustee as Retention Money.  I am satisfied on the evidence before me that I can properly draw the inference, which I do, that Tin, as head of the Bestride group who was actively involved in the listing exercise and who had signed the 7 September 2007 Letter and paid HK$278 million, was well aware of and had approved the False Documentation Scheme that had been perpetrated by Yuan and his team by giving CGAM and HSBC inflated rental information in 2005 in the course of the Legacy Transaction and that had been repeated by Yuan and his team providing the same inflated rental information to the Bank and covering up the actual rental information during the due diligence exercise.  I reject Tin’s testimony that he only became aware of the False Documentation Scheme on 20 August 2007 and that the False Documentation Scheme was “completely a trick plotted by [the Bank] and its staff for earning money”.

4. Dismissal of Tin’s Claims

179.  Given my findings of fact, Tin’s claims, based on first 2 key issues[214], must fail.  I find that the 7 September 2007 Letter is a valid agreement that is legally binding on Tin.  The claims for intimidation, deceit and misrepresentation have not been made out.  No other vitiating factor has been pleaded or established to invalidate the 7 September 2007 Letter signed by Tin[215]. The claims for breach of warranty, contractual and statutory duties have not been made out.  The claim for unlawful confiscation of Tin’s 20% shareholding in the Manager has not been made out.  It is a mockery to suggest the Bank and the Manager owed a duty to Tin to uncover, by a properly designed and conducted due diligence exercise, the very same fraud that had been perpetrated, with Tin’s knowledge and approval, by Yuan and his team on the Bank and the Manager. Even if such a duty could somehow exist,  it was not breached: I have already found that the due diligence exercise was properly designed and executed but that it failed to uncover the fraud only by reason of the sophisticated and well executed fraud perpetrated by the Yuan and his team.

180.  After the abandonment of the pleaded case that Su and Li Lei caused Yuan to set up the False Documentation Scheme, a substantial part of the remaining case being made against the Bank and the Manager was based on matters that had not been pleaded.  I would also dismiss Tin’s claims on the grounds that the matters he relied upon were not properly pleaded.

181.  I now turn to deal with the issue of whether or not the Bank, the Manager and the Trustee were legally entitled to exercise the set offs against Tin that they have pleaded in order to reduce the amounts owing to Tin.

5. The Set-offs

182.  After the 7 September 2007 Letter,  RREEF CCT purported to exercise a number of set-offs against Tin.  From October 2007,  Tin was provided with notification of the anticipated and actual exercise of set-offs by letters from the Manager’s solicitors, CC, to Tin’s solicitors, FK :

- CC to FK dated 27.6.08 [C4F/1582+]

- CC to FK dated 18.8.08 [C4F/1587+]

- CC to FK dated 9.9.08 [C4F/1590+]

- CC to FK dated 6.11.08 [C4F/1601+]

- CC to FK dated 25.11.08 [C4F/1605+]

- CC to FK dated 19.5.09 [C4F/1609+]

- CC to FK dated 15.6.09 [C4F/1615+]

- CC to FK dated 10.8.09 [C4F/1617+]

The set-offs had been publicly announced in the annual and interim results as well as Annual Reports as follows:

Announcements

- 2.4.08 (for the year ended 31.12.07) [D1/78+]

- 13.8.08 (for the half-year ended 30.6.08) [D1/105+]

- 19.3.09 (for the year ended 31.12.08) [D1/128+]

- 14.8.09 (for the half-year ended 30.6.09) [D1/156+]

- 25.2.10 (for the year ended 31.12.09) [D1/179+]

- 20.8.10 (for the half-year ended 30.6.10) [D1/208+]

- 21.3.11 (for the year ended 31.12.10) [D1/235+]

- 12.8.11 (for the half-year ended 30.6.11) [D329]

- 25.3.12 (for the year ended 31.12.11) [D330]

Annual Reports

- RREEF Annual Report 2007 dated 2.4.08 [D2/268+]

- RREEF Annual Report 2008 dated 19.3.09 [D2/412+]

- RREEF Annual Report 2009 dated 15.4.10 [D2/476+]

- RREEF Annual Report 2010 dated 21.3.11 [D2/576+]

183.  Tin never raised any substantive reply or objection to the set-offs.  There were only two short letters from his solicitors FK to CC dated 12 June 2009[216] in which it was asserted that Tin “disputes all set-offs your clients purport to make and will seek [payment of moneys properly due to Tin], legal actions if necessary at an appropriate time”, and 20 May 2010[217] in which Tin made formal demand to be paid the sum of HK$287,497,000 and threatened to “take such action as my be advised … for recovery or for wrongful distribution of assets”.  As action was not forthcoming, on 18 February 2011, the Trustee applied under Order 85 Rule 2 for an order that it could proceed with the distribution of the entirety of the net assets of the Trust without retention to meet any possible claim Tin may make against the Trust.  The Trustee’s application was heard in June 2011 and an Order 85 Rule 2 order was duly made on 30 June 2011.  Tin only started this action, almost 4 years later on 5 July 2011, apparently to justify his appeal to the Court of Appeal against the Order 85 Rule 2 order, which he had launched at the same time.  It was only in the Statement of Claim that Tin for the first time openly raised the various allegations against the Bank and the Manager, including the serious claims that their staff devised the Scheme, and that Tin had been deceived and intimidated into paying HK$278,526,708 and signing the 7 September 2007 Letter.  The Court of Appeal dismissed Tin’s appeal on 21 December 2011.

184.  By these proceedings, Tin sought to claim the following 5 sums from the defendants totalling HK$566,022,708[218]:

(1) HK$278,526,708 paid pursuant to the 7 September 2007 Letter;

(2) US$20 million (or about HK$156 million) retained under clause 6.3.2 of the SPA;

(3) HK$64,954,940[219] as balance of the Adjustment Payment under clause 7 of the SPA;

(4) HK$50 million as dividends declared by Gateway BVI for 31 December 2006 attributable to Tin as a former shareholder of Beijing Gateway;

(5) HK$16,541,458 as retention of the Plaintiff’s dividends from the Trust.

185.  There is no dispute between the parties as to the description and correctness of these figures.  The only dispute between the parties in respect of these claims is whether any or any part of these sums is now payable or repayable by any of the defendants to Tin.

186.  In summary, the defendants’ case is as follows:

(1) (a) The Bank was not a party to the SPA and these claims cannot be made against the Bank.  Although these claims are made against all 3 defendants in the Statement of Claim[220], in Mr Barlow’s Final Submissions, the claims are only advanced against the Manager and the Trustee[221].  This is no longer an issue;

     (b) Although the Manager was a party to the SPA, the Manager was not under any obligation under the SPA to pay the purchase price or the retention moneys[222] and no other breach of contractual obligation under the SPA has been pleaded against the Manager.  Tin’s disputed this assertion on the following grounds[223]:

(i) The Manager has accepted responsibility for the management and operation of the RREEF CCT (Clause 10.2.1 of the Trust Deed);

(ii) The Manager managed the Trust, inter alia, by managing the Property (through agents such as Beijing JLL) and by providing instructions to the Trustee, such as the Payment Instructions, to set-off sums allegedly incurred by or for and/or on behalf of the RREEF CCT against retained sums held for later payment to Tin;

(iii) The Manager instructed the Trustee to withhold from Tin and to retain the Unpaid Consideration due under the SPA;

(iv) The balance of the Unpaid Consideration is prima facie payable to the Tin unless the Manager and/or the Trustee can prove their asserted set-offs of debts due from Tin to the RREEF CCT which would extinguish or reduce the sums payable to Tin;

(v) All the Manager’s/the Trustee’s asserted set-offs arose upon the Manager’s Payment Instructions;

(vi) The Trustee’s refusal to pay the balance of the sums due to Tin, due to the Manager’s wrongful Payment Instructions to Trustee, constitute breaches of the SPA for which each of the Manager and the Trustee (as a contracting parties to the SPA) is liable;

  Mr Wong did not respond to these submissions on behalf of the Manager, either in the Manager’s Reply Submissions or in his oral submissions, except to submit that there was no pleading in the Statement of Claim as to how or why the Manager was in breach of the SPA[224];

(2) Tin is not entitled to the repayment of the HK$278,526,708 which was properly paid by Tin pursuant to the 7 September 2007 Letter;

(3) Tin is not entitled to the repayment or payment of the sums of US$20 million (or HK$156 million),  HK$64,954,940 and HK$16,541,458 from the Trust.  These sums have all been completely set off against Tin’s liabilities to the Trust and the Tin’s entitlement to their repayment or payment has been extinguished. The burden is on Tin to prove that he is entitled to the repayment/payment of these three sums and that the set-offs were improper.  However, he has failed to discharge such a burden.  All that the Manager and the Trustee need to prove in this trial is that the various set-offs have already been made and the extent of them.  This has been done by the reference to the Manager’s public announcements and annual reports.  As a result of certain provisions in the Trust Deed, the Manager and the Trustee are entitled to conclusively rely on such evidence without liability;

(4) Tin is not entitled to the payment of HK$50 million because it has been irrevocably waived by the Manager under clause 9B of the SPA;

(5) As at 31 December 2010, there was a balance of HK$10,899,727 payable by the Trust to Tin.  However, this sum has not been paid because it is being retained by the Trust to set off ongoing liabilities of the Trust as a result of this litigation;

(6) There was no double recovery for the Manager and the Trustee to have sought to recover the sum of HK$278,526,708 and the other sums from Tin;

(7) If the Court does not accept the Manager and the Trustee’s submissions in sub-paragraphs (3) above concerning the sufficiency of the Manager’s public announcements and annual reports, their fall-back position is that they are entitled to rely on the binding nature of the conclusive evidence clause in the 7 September 2007 Letter to establish the existence of Tin’s total liability;

(8) If the Court does not accept the Manger and the Trustee’s submissions in sub-paragraphs (3) and (7) above concerning the sufficiency of the Manager’s public announcements and annual reports and the effect of the conclusive evidence clause in the 7 September 2007 Letter, their further fall-back position is that each of the items of set-offs can be sufficiently proved by the underlying documents in the hearing bundles and by Keogh’s testimony.

5.1 Whether Tin is entitled to the Repayment of HK$278,526,708 or Part Thereof

187.  I have already found that the 7 September 2007 Letter was valid and legally binding on Tin.  The False Documentation Scheme was an egregious breach of the warranties contained in Clause 10 of Schedule 3 to the SPA[225] and Tin was liable to the Trustee and the Manager for losses caused by the breaches. These losses were quantified on a provisional basis by the the 7 September 2007 Letter[226] whereby Tin agreed as follows:

“(c) agree and undertake to credit in immediately available funds the sum of HK$278,526,708 (‘Sum’) to the following account ….

(d) irrevocably and unconditionally authorize the Manager and/or the Purchaser to apply all or part of the Sum, in its or their absolute discretion, in or towards payment or reimbursement of any losses, damages, costs and expenses which are or may be incurred or suffered by the Manager, the Purchaser, RREEF and/or their related companies arising from any actual or potential discrepancies in the terms of the tenancy agreements;

(e) confirm that, at any particular time, a certificate in writing signed by any of the duly authorized officer of the Manager and/or the Purchaser and/or the RREEF and its related companies stating the amount of any losses, damages, costs and expenses suffered by any of them due to or arising out of my breach of the terms of the SPA and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the SPA shall be conclusive and binding on me; and

(f) undertake that if the Sum is not sufficient to cover such losses, damages, costs and expenses, to immediately on demand of the Manager and/or the Purchaser make further payment(s) to the account specified in paragraph (c) above at the request of the Manager and/or the Purchaser…” [My Emphasis]

188.  Tin submitted that, by the express terms of the 7 September 2007 Letter,  he was contractually entitled to the refund of the amount of HK$278,526,708 which was not expended by authorised, certified set offs to make up the rental discrepancies arising in relation to the tenancy agreements that were annexed to the SPA.  By §(2) of the prayer to his Statement of Claim,  Tin sought:

“(2) The balance of the sums refundable to the Plaintiff by the 3^rd Defendant and/or the 2^nd Defendant, namely HK$289,426,166, plus all sums invalidly or unlawfully certified for payment and all sums payable to the 1^st or 2^nd Defendants herein, pursuant to paragraphs 81 and 82 above or damages in lieu.”

Under §§80 and 82 of the Statement of Claim, Tin pleaded that the alleged liabilities as declared in the Final and Interim Announcements up to 30 June 2010 only amounted to about HK$276,597,000, leaving a balance due to Tin of HK$289,426,166,  being the difference between the sum of $566,023,166[227] and HK$276,597,000.

189.  The 10 September 2007 Announcement issued by the Chairman of the Manager clearly stated that HK$278,526,708 was the actual aggregate rental shortfall calculated by working out the difference in rental revenue between the Low (actual) Rent tenancies and the High (warranted) Rent tenancies:

“The Board … has discovered discrepancies between the amount of rental payments being made … and the amount of rental payments expected to be made… Tin has paid the sum of HK$278,526,708 on an unconditional basis … to meet the anticipated shortfall in rental payments. … Because of the payment, the Manager considers that RREEF CCT would not suffer a shortfall of rental revenue by reason of the discrepancies identified.” [228]

In the 28 October 2007 Announcement issued by the Chairman of the Manager, it was stated[229]:

“the extent of the discrepancies in rental is in fact an aggregate value of substantially the same order as the Manager had provisionally ascertained at the time of announcement dated 10 September 2007. Accordingly, as the Manager indicated in the 10 September 2007 announcement, as a result of the Vendor’s payment of HK$278,526,708 on 7 September 2007, the Manager considers that RREEF CCT will not suffer any shortfall of distribution by reason of the discrepancies identified.”

190.  Unlike building contracts, the 7 September 2007 Letter did not impose any specific requirement to be met before “the certificate could be issued”, other than that the certificate should be in writing and signed by an authorized officer.  Citibank NA v Dayaram Nanik et al[230] is directly on point. In that case, Deputy High Court Judge Le Pichon held that an affirmation from the relevant officer of the bank stating the amount due could satisfy the conclusive evidence clause stipulating that a certificate in writing signed by a duly authorised officer stating the amount due shall be conclusive evidence. In Costain International and Anor v AG[231], the Court of Appeal, after considering all terms of the contract and the General Conditions and the prescribed forms, decided that an engineer’s order was not a certificate.  However, Sir Alan Huggins VP accepted[232] that “a document may sometimes be a certificate even though it is not described as such.  As I understand it,  a certificate is basically a document which speaks to the truth of some existing facts.”  I do not accept Mr Barlow’s submissions[233] that Citibank NA v Dayaram Nanik et al was wrongly decided and that the learned judge ought to have followed Costain International and Anor v AG.  The arbitration clause construed in Costain International and Anor v AG and the conclusiveevidence clause construed in Citibank NA v Dayaram Nanik et al are fundamentally different.

191.  The ordinary meaning of the word “certificate” is “a formal document attesting a fact”.  The Privy Council in Fairfield Sentry Limited (in Liquidation) (Appellant) v Migani and others (Respondents) [2014] UKPC 9 made the following observations on the meaning of a “certificate”:

“Certification

25. The Board has been referred to a number of authorities dealing with certification clauses, none of them analogous to Article 11(1)[c]. Their effect, broadly summarised, is that the word “certificate” has no standard meaning and that the question what constitutes a certificate is dependent on the commercial or legal context in which the certification clause appears.

…

27. As a matter of language, a “certificate” ordinarily means (i) a statement in writing, (ii) issued by an authoritative source, which (iii) is communicated by whatever method to a recipient or class of recipients intended to rely on it, and (iv) conveys information, (v) in a form or context which shows that it is intended to be definitive. There is no reason to think that a document must satisfy any further formal requirements, unless its purpose or legal context plainly requires them. …”

192.  On my construction of clause (e) of the 7 September 2007 Letter, there is no requirement that the “the amount of any losses, damages, costs and expenses” needs to be set out in a physical document entitled “certificate”.  All that is required is for such an amount to be set out in a formal document “signed by any of the duly authorized officers of the Manager and/or the [Trustee] and/or the Trust and its related companies”.  The person signing the document did not have to indicate that he did so as duly authorised officer.  I conclude that the 10 September 2007 and the 28 October 2007 Announcements signed by the Chairman of the Manager were certificates setting out “the amount of any losses, damages, costs and expenses due to or arising out of Tin’s breach of the terms of the SPA and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the SPA” and were conclusive and binding on Tin.  If necessary, I would also hold that the Affirmation of Chai Geok Lim made on behalf of the Trustee and signed by him on 31 March 2011 in support of the Order 85 Rule 2 application that referred to the statement of the Manager made in the 10 September 2007 Announcement[234] was also a certificate “setting out the amount of any losses, damages, costs and expenses due to or arising out of Tin’s breach of the terms of the SPA and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the SPA” and conclusive and binding on Tin.

193.  For these reasons, I conclude that Tin is not entitled to the repayment of HK$278,526,708.  I also conclude that there is no remaining balance of this sum of HK$278,526,708 that ought either to be repaid to Tin or to be utilised towards any other losses, damages, costs and expenses incurred or suffered by the Manager, the Trustee RREEF CCT and/or their related companies due to or arising out of Tin’s breach of the terms of the SPA and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the SPA.

194.  In the event that I am wrong in the above conclusion, I would go on to find that I am satisfied on the evidence adduced before me that was identified in Mr Wong’s Final Submissions[235] and for the reasons set out therein that HK$278,526,708 was the loss of rental of the Property suffered as a result of Tin’s breach of the terms of the SPA and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the SPA.  I find that Tin not entitled to the repayment of HK$278,526,708 as that amount was properly paid pursuant to the 7 September 2007 Letter or pursuant to clause 9 of the SPA and specifically clause 9.1A which provided[236]:

“Clause 9: “Warranties and Indemnities”

…

9.1A The Vendor undertakes to indemnify fully and keep the Purchaser indemnified (without limiting any other rights of the Purchaser in any way, including but not limited to its rights to damages in respect of a claim for breach of any Warranties or on any other basis) from and against any losses or damages directly suffered and any interest, cost or expenses whatsoever directly and reasonably incurred by the Purchaser or any of the Companies as a result of the failure of any of the Warranties to be true and correct in all material respects as of the date of this Agreement and as of the date of Completion, or any material breach of any of the agreements, undertakings and covenants made by the Vendor in this Agreement.” [My emphasis]

5.2 Whether Tin is entitled to the Repayment or Payment of the Sums of US$20 million (or HK$156 million), HK$64,954,940, HK$50,000,000 and HK$16,541,458 or Any Part Thereof

195.  As at 31 December 2000, these sums were potentially payable to Tin:

(1) HK$156,000,000 as the retention sum (US$20 million) held as security for breach of warranty under clause 6.3.2 of the SPA which provided[237]:

“The Retention Sum shall be withheld by the Purchaser on Completion and released to the Vendor on the 30^th day after completion of the audit of the accounts of the Companies for the 2007 financial year … Or on 31^st May 2008 whichever the earlier, subject to there being no material breach of the Warranties which, in the sole opinion of the Purchaser acting on the recommendation of the Manager, will have a material adverse effect on the financial condition, prospects, earnings, business, undertaking or assets of RREEF or on the Property, in each case, taken as a whole.”

(2) HK$64,954,940 as post-completion adjustment payment under clause 7 of the SPA;

(3) HK$50,000,000 as dividends declared by Gateway BVI for 31 December 2006; and

(4) HK$16,541,458 as the retention of Tin’s distribution as a unitholder under the Trust Deed.

The total of the alleged set-offs made in 2007, 2008 and 2009 is shown in the following table:

196.  Figures for items 1 to 8 can be found in the Final Results Announcement for the Period from 22 June 2007 to 31 December 2007[238] and the Annual Report 2007[239]. Figures for items 9 to 12 can be found in the Final Results Announcement for the Year from 1 January 2008 to 31 December 2008[240] and the Annual Report 2008[241]. Figures for items 13 to 17 can be found in the Final Results Announcement for the Year from 1 January 2009 to 31 December 2009[242] and the Annual Report 2009[243].

197.  In 2010, the Manager made two reversals totalling HK$37,097,456 as a result of the sale of the Property which reduced the loss in the Manager’s fees.  The Manager also declared as irrevocably waived under clause 9B of the SPA HK$50,000,000 attributable to Tin being unpaid dividend of Beijing Gateway for the year ended 31 December 1996.  As a result of the reversals and waiver, Tin’s alleged liability in 2010 became HK$12,902,544 (HK$50,000,000 – HK$37,097,456).  This figure can be seen from the difference between the “Amounts set-off” for 2010 (HK$276,597,000[244]) and those for 2009 (HK$263,694,000) in the Interim Results Announcement for the Period from 1 January 2010 to 30 June 2010[245],  the Final Results Announcement for the Year from 1 January 2010 to 31 December 2010[246] and the Annual Report 2010[247].  Accordingly, the total of all sums allegedly set off in 2007 to 2010 was HK$276,596,671[248].

198.  Although there are 17 items in the above table showing Tin’s alleged liability to the Trust, they may be grouped into the following 9 categories:

(1) Diminution in the net asset value of the Property (Item 1);

(2) Loss rental under the advertising right agreement guaranteed by Tin (Item 2);

(3) Irrecoverable rental receivables collected by Tin and amount due from a related party owned by Tin (Item 3);

(4) Expenses related to defective equipment (Items 4, 11, 14 and 17);

(5) Listing expenses (Item 5);

(6) Legal fees, professional costs and investor relations costs (Item 6);

(7) Loss in the Manager’s fees (Item 7);

(8) Rental receivables, unpaid management fees, unpaid double holdover rent and reinstatement costs due from Tin’s affiliates (Items 8, 9, 10, 13, 15 and 16);

(9) Stamp duty, urban real estate tax and related penalty interest (Item 12).

199.  Only the alleged losses under sub-paragraphs (1), (6) and (7) above are referable to the 7 September 2007 Letter as losses, damages, costs and expenses incurred or suffered by the Manager, the Trustee RREEF CCT and/or their related companies due to or arising out of Tin’s breach of the terms of the SPA and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the SPA.  By a letter dated 25 October 2007[249], Tin’s solicitors were informed by the Manager’s solicitors of the losses to the RREEF CCT resulting from Tin’s breach of the warranties.  There were 4 heads of such losses described in §§8, 9 and 11 of the letter[250]:

(1) Rental Income Loss – This referred to the difference between the rentals payable in the Low Rent Agreements and the rentals payable in the High Rent Agreements over the lifetime of the lease agreements,  which has already been dealt with above;

(2) Net Asset Value Loss – The fact that the Property was only able to generate the rentals payable in the Low Rent Agreements, but not the rentals payable in the High Rent Agreements, meant that the Property was worth less.  Therefore, the rental discrepancies would also lead to a diminution of the value of the Property;

(3) Expenses Loss – Fees, costs and expenses had been incurred by the Manager and the Trustee as a result of Tin’s breach of the warranties;

(4) Management Fee Loss – The Manager’s fees were calculated based on the value of the assets of the Trust and the Net Property Income and the Manager had accordingly suffered loss in management fees as a result of the low rental income.

5.2.1 Whether the Alleged Diminution in Value of the Property Amounted to Double Recovery and, if Not, whether it was Covered by a Certificate in Writing within the meaning of the 7 September 2007 Letter

200.  As stated in §13 of the letter, the sum of HK$278,526,708 paid by Tin to the Trustee on 7 September 2007 was intended to cover only the rental income loss.  In the Announcement made on 28 October 2007 signed by the Chairman of the Manager,  it was clearly stated that the HK$69,663,000 was the diminution of the net asset value of the Property in addition to the rental income loss:

“The key findings in the reports of the independent sub-committee, Clifford Chance and Ernst & Young are as follows. In summary, it appears that:

…

however, in addition, the rental discrepancies mean that the actual value of the Property would have been lower, and hence the net assets attributable to unit holders of RREEF CCT (excluding deferred taxation) is HK$69,663,000 lower (as at 30 September 2007) than it would have been if the rental values had in fact been at the level represented and warranted by the [Plaintiff], and as reflected in the Offering Circular issued on 11 June 2007.” [251]

“In summary, after taking into account [Tin’s] payment of HK$278,526,708 on 7 September 2007 to RREEF CCT (which was used to adjust the consideration payable for the acquisition), the net assets attributable to unit holders of RREEF CCT (excluding deferred taxation) as at 30 September 2007 is HK$69,663,000 lower than it would have been if the rental values had been in fact as represented and warranted by the [Tin], and as reflected in the Offering Circular issued on 11 June 2007.” [252]

201.  Accordingly, Tin was told, and knew, as early as 25 October 2007 that the diminution of net asset value was a loss suffered by the Trust in addition to the HK$278,526,708 he had paid, which represented only the rental income loss. The amount can be seen from the difference of the two final figures in the consolidated balance sheet of the Trust as at 30 September 2007 prepared by KPMG (HK$2,727,366,000 – HK$2,657,703,000)[253].  I find that the diminution in the value of the Property was a loss in addition to the loss of rental income and did not amount to double recovery.  In any event, I conclude that the 28 October 2007 Announcement was a certificate, within the meaning of the 7 September 2007 Letter, setting out the amount of this loss that was due to or arising out of Tin’s breach of the terms of the SPA and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the SPA and was conclusive and binding on Tin.  The Final Results Announcement up to the period 31 December 2007[254] signed by the Chairman of the Manager and the Annual Report 2007[255] signed by the Chairman of the Manager[256] to the same effect were also certificates within the meaning of the 7 September 2007 Letter and  conclusive and binding on Tin.

202.  In the event that I am wrong in the above conclusion, I would go on to find that I am satisfied on the evidence adduced before me that was identified in Mr Wong’s Final Submissions[257], and for the reasons set out therein, that HK$69,663,000 was the diminution of the net asset value of the Property suffered as a result of Tin’s breach of the terms of the SPA and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the SPA.

203.  I find that the amount of HK$69,663,000 has been properly set off against the amounts due to Tin pursuant to the 7 September 2007 Letter or pursuant to clause 9.1A[258] of the SPA.

5.2.2 Whether Tin is Liable for Legal Fees, Professional Costs and Investor Relations Costs incurred due to or arising out of Tin’s Breach of the Terms of the SPA and/or the Discrepancies or Potential Discrepancies of the Terms of the Tenancy Agreements stated in the SPA

204.  Of course I accept the submission of Mr Barlow that legal costs cannot be recovered as damages[259]. They must be claimed as costs of the action between the parties.  However, the present claim is not for legal costs of an action but for legal fees, professional costs and investor relations costs incurred due to or arising out of Tin’s breach of the terms of the SPA and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the SPA and which are claimed pursuant to the 7 September 2007 Letter.  Such a claim is valid in law.  Insofar as legal costs were incurred in investigating the facts surrounding the False Documentation Scheme, they were not incurred for the purposes of these proceedings but were incurred due to or arising out of Tin’s breach of the terms of the SPA and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the SPA.

205.  Tin was informed by CC’s letter to FK dated 25 October 2007[260] that further fees, costs and expenses had been incurred as a result of the fraud, estimated at this stage as HK$22,200,000 and will continue to be incurred.  The Announcement dated 28 October 2007 made mention of these costs being expended but did not specify any amount.  However, the Final Results Announcement up to the period 31 December 2007[261] signed by the Chairman of the Manager stated that the Manager has exercised rights of set-off against the amount due to Tin to compensate to compensate for the following amounts, including “legal fees, professional costs and investor relation costs totalling HK$63,640,636 in connection with the investigation and related work.”  I find that this was a certificate within the meaning of the 7 September 2007 Letter and conclusive and binding on Tin.  Upon the sale of the Property, in 2010, there was a reversal of this amount by the amount of HK$34,257,254 “in order to align provisioned investigation costs with actual investigation costs” as explained by Keogh in the amended Appendix 1 to his first witness statement[262].  The balance amount of HK$29,283,112, which is within the amount set out in the Final Results Announcement up to the period 31 December 2007, is recoverable from Tin pursuant to the 7 September 2007 Letter and properly set off against the amount due to him.

206.  In the event that I am wrong in the above conclusion,  I would go on to find that I am satisfied on the evidence adduced before me,  that was summarised in Annex 7 of Mr Wong’s Final Submissions,  that HK$29,283,112[263] was expended as legal fees, professional costs and investor relation costs in connection with the investigation and related work.  However, I have insufficient evidence to determine whether or not they were properly incurred so as to be recoverable under the 7 September 2007 Letter or whether they were directly and reasonably incurred so as to be recoverable pursuant to clause 9.1A of the SPA.

5.2.3 Whether Tin is Liable for Loss of the Manager’s Fees resulting from the Discrepancies in Rental Payments

207.  Tin was informed by CC’s letter to FK dated 25 October 2007[264] that the Manager also suffered loss in management fees in the sum of HK$8,311,614 as a direct result of the low rental income.  The Final Results Announcement up to the period 31 December 2007[265] signed by the Chairman of the Manager stated that the Manager has exercised rights of set-off against the amount due to Tin to compensate for the following amounts, including “loss in Manager’s fees of HK$8,311,614 as a result of the discrepancies in rental payments.”  I find that this was a certificate within the meaning of the 7 September 2007 Letter and conclusive and binding on Tin.  The Annual Report 2007[266] signed by the Chairman of the Manager[267] to the same effect was also a certificate within the meaning of the 7 September 2007 Letter and conclusive and binding on Tin.  Upon the sale of the Property, in 2010, there was a reversal of this amount by the amount of HK$2,839,932 thereby reducing the loss of the Manager’s fees to HK$5,471,682 as explained by Keogh in the amended Appendix 1 to his first witness statement[268].  The reduced amount of HK$5,471,682, which is within the amount set out in the Final Results Announcement up to the period 31 December 2007 and the Annual Report 2007, is recoverable from Tin pursuant to the 7 September 2007 Letter and properly set off against the amount due to him.

208.  In the event that I am wrong in the above conclusion, I would go on to find that I am satisfied on the evidence adduced before me, that was identified in Mr Wong’s Final Submissions[269], and for the reasons set out therein, that HK$5,471,682 was the loss of the manager’s fees suffered as a result of Tin’s breach of the terms of the SPA and/or the discrepancies or potential discrepancies of the terms of the tenancy agreements stated in the SPA.  I find that the amount of HK$5,471,682 has been properly set off against the amounts due to Tin pursuant to the 7 September 2007 Letter or pursuant to clause 9.1A[270] of the SPA.

5.2.4 The Total Amount properly Set-off pursuant to the 7 September 2007 Letter or pursuant to Clause 9.1A of the SPA

209.  I conclude from the above that the total amount of HK$104,417,794[271] was properly set off, against the amounts due to Tin, pursuant to the 7 September 2007 Letter or pursuant to clause 9.1A of the SPA.

5.2.5 The Alleged Set-offs that were Unrelated to the 7 September 2007 Letter or Breach of Warranty

210.  The following alleged set-offs were unrelated to the 7 September 2007 Letter or breach of warranty:

(1) Loss rental under the advertising right agreement guaranteed by Tin (Item 2 of the table under §195 above);

(2) Irrecoverable rental receivables collected by Tin and amount due from a related party owned by Tin (Item 3);

(3) Expenses related to defective equipment (Items 4, 11, 14 and 17);

(4) Listing expenses (Item 5);

(5) Rental receivables, unpaid management fees, unpaid double holdover rent and reinstatement costs due from Tin’s affiliates (Items 8, 9, 10, 13, 15 and 16);

(6) Stamp duty, urban real estate tax and related penalty interest (Item 12).

In addition, the Manager relied on the purported waiver Tin’s entitlement to HK$50 million of dividend from Beijing Gateway.

5.2.5.1 The Alleged Waiver of HK$50 million Dividend from Beijing Gateway

211.  It was stated in footnote 2 in the amended Appendix 1 to Keogh’s witness statement[272] that:

“Initially, the additional sum of HKD$50 million, being an unpaid dividend declared by Beijing Gateway Plaza (BVI) Limited for the year ended 31 December 2006, was treated as a sum potentially payable to the Plaintiffs against which set-offs could be exercised. However, any entitlement to this amount became irrevocably waived by the Plaintiff pursuant to clause 9B of the SPA and therefore ceased to be an amount to which the Plaintiff was potentially entitled.”

Clause 9B of the SPA[273] provided that:

“Irrevocable waiver of dividend

The Vendor hereby irrevocably and unconditionally waives any dividend or distribution declared by the BVI Property Company prior to Completion to the extent of any part of the profits of the HK Property Company for the financial year ended 31 December 2006 that cannot be repatriated in full to the HK Property Company’s bank accounts in Hong Kong by or before 30 days after completion of the audit of the accounts of the Companies for the 2007 financial year, and hereby confirms that any amount of the HK Property Company’s profits for the financial year ended 31 December 2006 which is not actually repatriated to the HK Property’s bank account in Hong Kong by or before the said 30 days after completion of the audit of the accounts of the Companies for the 2007 financial year as conclusively determined and certified by the Auditors shall reduce the amount of any dividend or distribution declared by the BVI Property Company and unpaid prior to Completion accordingly.”

212.  The Manager’s case is that, pursuant to the wording of Clause 9B of the SPA, the HK$50 million dividend was irrevocably waived because the profits of HK Gateway for the financial year ended 31 December 2006 could not be repatriated in full to the HK Gateway’s bank accounts in Hong Kong.  Keogh explained in examination-in-chief[274] how Tin’s entitlement was determined to be irrevocably waived by the Manager:

(1) The HK$50 million dividend was a sum of money in the bank account in Mainland China.  It represented the rentals received by the company in 2006;

(2) The normal process would have been for the rental to be declared and tax to be paid so that a tax clearance certificate would be issued in order for the money to be eligible to be repatriated to Hong Kong and subsequently distributed;

(3) However, the Manager was unable to get the tax clearance and therefore unable to confirm the source of the funds.  Accordingly, the money could not be repatriated to Hong Kong, and subsequently distributed to investors;

(4)As a result, clause 9B was invoked by the Manager to waive Tin’s entitlement to the dividend.

213.  There was contemporaneous documentary evidence showing that, despite requests being made, the Manager was never provided by Tin with the documents required to repatriate the money in the Mainland to Hong Kong[275].  The documents requested included:

“5. Receipts from the tax authorities in Beijing evidencing tax payments in relation to (a) rental income for the period from 26 April 2006 to 22 June 2007 and (b) rental income collected by Beijing Bestride on behalf of HK Gateway after 22 June 2007 (see attached email from Paul Keogh to James Wong dated 5 October 2007).

6. Copies of all the leases registered with the tax authorities in Mainland China for the repatriation of rent to Hong Kong (see attached e-mail from Paul Keogh to James Wong dated 5 October 2007.”[276]

It was explained in the email to James Wong that:

“We need the above documents in order to remit the rentals from Beijing to Hong Kong.

…

We need the above documents to pay tax, so that we can remit the rentals from Beijing to Hong Kong.

…

We need the above documents to pay tax, so that we could remit the rentals from Beijing to Hong Kong.”[277]

As can be seen from the subsequent correspondence[278] and confirmed by Keogh in court,[279] Tin never sent the documents required for repatriation to the Manager.

214.  In cross-examination, Mr Keogh was shown the Interim Report 2013[280] and it was suggested to him that there were no longer any funds remaining in the Mainland[281].   This suggestion was incorrect:

(1) The balance sheets as at 21 December 2012 and 30 June 2013 (shown in the Interim Report 2013) showed the position after the sale of the assets of the RREEF CCTto Mapletree India China Fund Limited.  What had been sold was not confined to the Property but included other assets including “cash and cash deposits”.

(2) The Consolidated Balance Sheet of the RREEF CCT as at 31 December 2010 included, at page 56 of the Annual Report 2010[282], “cash and cash equivalent”:

(a) as at the end of 2009 of HK$480,507,000; and

(b) as at the end of 2010 of  HK$215,558,000.

As well as “trade and other receivables”:

(a) as at the end of 2009 of $17,620,000; and

(b) as at the end of 2010 of $24,000.

(3) The entry “cash and cash equivalent” was explained in Note 14 at page 82 of the Annual Report 2010[283]:

“At 31 December 2009, the balance of cash and cash equivalents included deposits and cash at bank and in hand of approximately $229,226,000 which were maintained in a PRC bank account and denominated in Renminbi. The remittance of these funds out of the PRC was subject to the prevailing exchange control and tax regulations. These funds were held by subsidiaries, which were disposed of on 12 April 2010 (see note 11[284]).”

215.  I find that any cash in bank was part of the sale of the assets (through disposing the holding company) to Mapletree India China Fund Limited.  This is consistent with Keogh’s evidence that the funds representing the profit of 2006 could not be repatriated from the PRC to Hong Kong, and, for that reason,  the $50 million dividend was irrevocably waived pursuant to Clause 9B of the SPA.

216.  Tin has adduced no evidence to contradict Keogh’s evidence about the impossibility to repatriate the money without the tax clearance certificates.  I do not accept Mr Barlow’s submission that the fact that the tenancy agreements were registered with the Beijing Municipal Council is prima facie evidence that Beijing Bestride has paid tax on the rental earned under those tenancy agreements.  I find on the evidence that the Manager was entitled to and rightly asserted[285] that Tin’s entitlement to the HK$50 million dividend had been irrevocably waived pursuant to clause 9B of the SPA.  Mr Barlow has rightly submitted that in every year (including 2013) the audited accounts have recorded that the Trustee is still holding these dividends as part of the amount due to Tin[286].  However, the accounts also stated that the amount due to Tin may be subject to future revisions by the Manager based on legal advice[287].

217.  Mr Barlow has also rightly submitted that the Manager and the Trustee have not been adduced into evidence any auditors’ certificate, as required under clause 9B.  However, I construe clause 9B as consisting of 2 separate obligations, the waiver obligation which the Manager and the Trustee have rightly relied upon, and the separate obligation, flowing from an auditor’s certificate, which they do not rely upon.

5.2.5.2 The Alleged Loss of Rental under the Advertising Right Agreement Guaranteed by Tin

218.  Clause 9A of the SPA provided[288]:

“By an advertising right agreement dated 18 July 2006, Beijing Bestride Estate Development Company Limited granted to Beijing Shenmingda ad. Co., Limited (“Grantee”) the right to erect and use the advertising spaces of the Property for a term of 3 years from 18 July 2006 to 17 July 2009 at annual rentals of RMB35,000,000, RMB38,000,000 and RMB40,000,000 for the first, second and third years respectively. By an advertising right transfer agreement entered into by Beijing Bestride Estate Development Company Limited, the Grantee and the HK Property Company on 15 May 2007, the rights and interests of Beijing Bestride Estate Development Company Limited under the said advertising right agreement have been transferred to the HK Property Company. The Vendor hereby guarantees the payment of the relevant rentals under the said advertising right agreement to the HK Property Company by the Grantee and further covenants to indemnify the HK Property Company for any losses, damages, costs and expenses suffered by it in the event that the Grantee fails to pay the relevant annual rentals to the HK Property Company or otherwise perform its obligations in accordance with the terms of the said advertising right agreement.” [My emphasis]

219.  In §§19-20 of CC’s letter dated 25 October 2007 to FK[289], CC asserted that Beijing Shenmingda had failed to pay the rent due under the advertising right agreement[290] in the sum of HK$82,171,392 which the Manager and the Trustee claimed from Tin in accordance with clause 9A.

220.  The actual amount of set-off claimed was HK$41,171,392.  This was explained by Keogh in his examination-in-chief[291]:

(1) DTZ determined that the difference in the value of the advertising spaces in the two valuations was about HK$41 million.  This was subsumed within the calculation for loss of the net asset value of the Property;

(2) Accordingly, the Manager only claimed the balance of the loss in respect of the advertising agreement by way of set-off (HK$82,171,392 – HK$41,000,000).

221.  It was stated in the Notes to the Consolidated Financial Statements of the Annual Report[292] that:

“As the lessee has failed to pay the rentals due under the advertising right agreement and such agreement was terminated in February 2008, the Manager has claimed the loss in rentals under the advertising right agreement, to the extent not recovered through the updated property valuation (note (i)(b) above), of $42,171,392 by setting off against the amount due to the Vendor (note 15(iii)).”

Mr Barlow relied on the DTZ’s 23 October 2007 valuation report[293], which stated:

“As advised by the PRC legal counsel of the Manager, the configuration of advertising spaces stated in the Advertising Right Agreement should violate the Article 9 of the Norms Concerning the Configuration of Outdoor Advertisements in Beijing (the “Advertising Norms”) issued by Beijing Municipal Administration Commission, which required the minimum interval distance between two advertising facilities shall be no less than: (i) 200 meters if the area of advertising facility larger than 5 sq.m and smaller than 30 sq.m.; … the PRC legal counsel also advised that pursuant to the provisions of the Advertising Norms, the Advertising Right Agreement is partially unenforceable.”

222.  These changes were made in anticipation of the forthcoming Olympic Games and Mr Barlow raised the possibility of a “force majeure” clause in the advertising lease agreement and the possibility of the advertising tenant having brought up this matter[294] during his cross examination of Keogh. However, there was no evidence adduced before me that Beijing Shenmingda had invoked any “force majeure” clause in the advertising lease agreement.  Further, I do not construe the guarantee under clause 9A as liable to be invalidated upon the exercise of a “force majeure” clause in the advertising lease agreement.  The advertising tenant formed a significant part of the Property’s revenue at the time of acquisition, and materially influenced the valuation of the Property and of the consideration received by Tin and, for that reason, the guarantee under clause 9A was given in respect of the warranted revenue from the advertising tenant.

223.  I am satisfied from the Consolidated Accounts[295] that Beijing Shenmingda had failed to pay the rent due under the advertising right agreement in the sum of HK$82,171,392 and I am further satisfied that the reduced amount of HK$41,171,392, was properly set off against the amounts due to Tin pursuant to clause 9A of the SPA, so as to avoid a double recovery.

5.2.5.3 The Alleged Loss of Rental Receivables collected by Tin and Amount due from a Related Party owned by Tin

224.  The amount of HK$20,039,341, sought to be set off under this head, is set out as Item 3, under the year 2007, in the amended Appendix 1 to the Defence of the Bank and the Manager.  Keogh explained this set-off in evidence in chief:-[296]

“After we bought the asset and after the listing, there was a transition period where Beijing Bestride continued to collect rent on behalf of the trust, and that rent was then to be transferred to the trust. It was a transition, a very standard transition period, to allow tenants to get used to paying their rental to a different account or a different owner. That rental that was meant to be transferred -- that was collected by Beijing Bestride and was meant to be transferred to the trust was never transferred to the trust. And so that's the amount that we set off in lieu of the rent that was not transferred.”

225.  I am satisfied from the Consolidated Accounts of 2007 and 2008 that the sums of HK$7,007,808 and HK$13,031,533 totalling HK$20,039,341 were the amounts due respectively at the time of acquisition and subsequent to acquisition as rental receivables due from Tin and from a related company owned by Tin[297].  I am also satisfied that the amount of HK$20,039,341 has been properly set off against the amounts due to Tin.

5.2.5.4 The Alleged Expenses related to Defective Equipment

226.  Under clause 8.5 in Schedule 3 to the SPA, Tin warranted the “Equipment” owned or used in connection with the business was in good repair and condition and reasonable working order, and had been regularly and properly maintained[298].  Under clause 10.4 in Schedule 3, Tin further warranted that nothing done or omitted on the Property or any part thereof would contravene any law or regulations, and all conditions applicable to any licences had been complied with, and the present use of the Property was not in contravention of any law or regulations[299]. There is no dispute about these warranties and the only point being raised is whether their alleged breach has been sufficiently proved.

227.  Keogh explained the nature of this set-off for defective equipment in the total sum of HK$19,874,750 as follows:-

“When we buy a building, there is obviously equipment in the building that -- or a whole range of equipment. This relates to generators that were to generate power throughout the building. The building was a large building. It had several generators. Those generators then had to be licensed with the local authority, connected to the main grid in order for them to be effective in generating, in taking power from the grid and generating that power through the building. What we discovered after we took over the management of the building was that some of those generators were not connected, they were not licensed, they were therefore not generating power that we needed in the building. And so that was the amount that we set off in order to get that licensing from the authorities and make those generators effective.”[300]

“It was all related. What we found what we were trying to commission the equipment was that it was not necessarily fit for purpose. And that there was -- the equipment was either insufficient for what we needed it to do, or it was not properly fitted out for what we needed it to do. There are technical elements that I'm not -- I can't explain, but it was predominantly from an engineering perspective, these generators were not fit for purpose and they had to be adjusted in order for them to be used for us in generating the power in the building. That was discovered over a period of time.”[301]

228.  It can be seen from the proposal headed “Permanent Power Supply and Additional Power Capacity to Gateway Plaza, Beijing” from Beijing JLL[302] that there was a problem of inadequate power capacity since the Property opened in 2005, namely, the original design should have 8 power transformers but only 4 existed.  Of the 4, only 2 were installed pursuant to the power supply bureau’s permission document while 2 were not.  Hence, there was a need to remedy the situation and the proposed costs for the work was RMB14 million.  The document also referred to Beijing Bestride informing that the power supply was shared with another building, that the equipment owner was one Hang Yang Wah Lung Property Ltd (“HYWL”);  but that HYWL could not provide the ownership document and could not even be contacted afterwards.  The power supply bureau also advised that the original application no longer existed. 

229.  There were also email exchanges between Keogh and Beijing JLL’s Senior Technical Manager, confirming that the problem was attributable to the breach or fault on the part of the previous owner[303] and that the inadequate power supply capacity was due to the incomplete permanent power supply system ever since the building opened in 2005.

230.  Tin was notified of the set-offs relating to the defective equipment by CC’s letter dated 10 August 2009[304]. I am satisfied from the above documentation and from Keogh’s evidence that Tin was in breach of the warranties under clauses 8.5 and 10.4 of the SPA.  I am also satisfied from the documentation identified in Annex 8 to Mr Wong’s Final Submissions that RMB17,278,780 (equivalent to HK$19,874,750) was expended by the Manager to render the equipment in good repair and condition,  reasonable working order, properly maintained, and compliant with licensing and other laws and regulations.  I am satisfied that the amount of RMB17,278,780 (equivalent to HK$19,874,750) has been properly set off against the amounts due to Tin. Although the payment instructions appearing in Annex 8 were issued on dates that were different from the set-off dates appearing in Items 4, 11, 14 and 17 of the amended Appendix to the Defence of the Bank and the Manager, the total amount set off under those items amounted to RMB17,278,780 (equivalent to HK$19,874,750, which was the Hong Kong Dollar value of the payment instructions in RMB that were identified in Annex 8).

231.  In the event that I am wrong in the above conclusion on the Hong Kong Dollar value of the set-offs that were exercised, I would go on to find that the Manager and the Trustee have established to my satisfaction at trial a right of set-off in the sum of RMB17,278,780 against the amounts due to Tin.  Therefore, I would reduce the amounts due to Tin by the Hong Kong Dollar value of RMB17,278,780 as at the date of this judgment

5.2.5.5 The Alleged Listing Expenses

232.  This set-off appearing in Item 5 of the amended Appendix to the Defence of the Bank and the Manager in the sum of HK$1,102,177 is a small amount, relatively speaking.  Tin undertook, pursuant to clause 3.4.2 of the Supplemental Deed dated 8 June 2007[305],  to pay the Issue Costs in the event that it should exceed HK$79 million.

233.  I find that the total listing expenses that was incurred amounted to HK$84,994,747, as shown in the schedule titled “Project Gateway, listing fees and expenses status” attached to the payment instruction dated 26 February 2008,  which was headed “Payment Instructions for listing expenses”[306].  The total listing expenses exceeded the sum of HK$79 million.  However, only listing fees totalling HK$1,102,177 have been claimed by way of set-offs comprising:

(a) HK$102,660 to Baker & McKenzie (payment instruction of 26 February 2008[307]);

(b) HK$500,000 paid to Knight Frank (payment instruction of 26 February 2008[308]);

(c) USD17,886.82 (or HK$137,517) paid to Allen & Overy (payment instruction of 26 February 2008[309]); and

(d) HK$360,000 paid to KPMG (payment instruction of 9 January 2008[310]).

All these 4 sums were recorded in the schedule “Project Gateway, listing fees and expenses status” attached to payment instruction dated 26 February 2008.

234.  I am satisfied from the above documents and from the Annual Reports 2007 and 2008[311] that the total listing expenses exceeded the sum of HK$79 million by at least the sum of HK$1,102,177.  I am also satisfied that this amount has been properly set off against the amounts due to Tin.

5.2.5.6 The Alleged Loss of Rental Receivables, Unpaid Management Fees, Unpaid Double Holdover Rent and Reinstatement Costs due from Tin’s Affiliates

235.  This alleged set off, in the total sum of HK$32,857,825, relates to rental receivables, unpaid management fees and other related sums due from Bestride Gateway Leisure Club Co Ltd and Beijing Bestride[312].  Keogh gave evidence that these two affiliates of Tin occupied the clubhouse and office at the Property respectively but never paid any rent or utility costs.  The Manager eventually started proceedings in the PRC to evict them.  Tin defended the proceedings on the basis that, although he agreed to pay these sums on their behalf, the sums claimed had been the subject of set-off exercised by the Manager.  These two entities continued to occupy the office and the clubhouse despite the termination of the lease.  When the Manager, having obtained a court order for eviction, retook possession he found that the clubhouse had been “completely thrashed” and substantial reinstatement costs had to be incurred[313]. 

236.  I am satisfied from the Consolidated Accounts of 2007 to 2009 that these amounts were due and owing[314].  The reinstatement costs have also been proved to my satisfaction by the documents adduced into evidence that have been summarised in Annex 9 to Mr Wong’s Final Submissions.  I am also satisfied that the amount of HK$32,857,825 has been properly set off against the amounts due to Tin.

5.2.5.7 The Alleged Expenses of Stamp Duty, Urban Real Estate Tax and Related Penalty Interest

237.  The total amount of this alleged set-off under item 12 of the amended Appendix to the Defence of the Bank and the Manager is HK$7,033,392.

238.  The cumulative effect of clause 10.9,  and clauses 7.1.1 & 7.1.4 of Schedule 3 of the SPA[315], and clauses 2.1, 2.3 and 5 of Deed of Tax Covenant[316],  was that Tin agreed to indemnify the Manager and the Trustee in respect of any underpayment of Urban Real Estate Tax (“URET) and any penalty tax imposed.

239.  Keogh explained[317]that these claims arose from underpayment of URET prior to the listing and a related penalty.  The amounts of the outstanding URET as well as late payment fees can be seen from the payment instruction from the Manager to the Trustee dated 17 November 2008.  These payments match the calculations set out in the calculation sheet and the explanations given to the Beijing tax authorities[318]. Essentially, the cost of acquisition of the Property (i.e. RMB1.8 billion) should have been used as the basis for calculating URET, but Beijing Bestride used a lower sum (RMB803,879,414.17) as the basis,  and paid only RMB7,683,765.75 in URET.  This meant that they had underpaid a significant amount of URET amounting to RMB9,251,275.35, as notified under CC’s letter dated 6 November 2008[319] to FK.  I am satisfied from the above payment instruction that a total of RMB12,893,868 was paid to the tax authorities. It comprised the tax underpayment of RMB9,251,275.35 and penalty interest of RMB3,372,593 (at 0.05% per day).

240.  I am also satisfied from Keogh’s evidence[320] and from the Consolidated Accounts of 2008[321] that, after deducting an amount already provisioned when the Property was bought, the balance of HK$7,033,392 was due and was properly set-off against Tin, including a sum of RMB565,778 which was additional penalty for failure to provide original invoices and sale confirmations, as notified under CC’s letter dated 27 June 2008 to FK[322],  and including the sum of RMB125,501.24 being unpaid stamp duty as notified under CC’s letter dated 27 June 2008 to FK[323].

5.2.5.8 The Total amount of the Set-offs that were unrelated to the 7 September 2007 Letter or Breach of Warranty

241.  I have found that the HK$50 million dividend had been waived pursuant to clause 9B of the SPA.  I have also found that the total amount of HK$122,078,877[324] was properly set off against the amounts due to Tin.

5.3 The Amount due to Tin

242.  Following the waiver of the dividend of HK$50 million, the amount of Tin’s entitlement has been reduced to HK$237,496,398 [325].  As I have found that the sums of HK$104,417,794[326] and HK$122,078,877, totalling HK$226,596,671, have been properly set off against the amounts due to Tin, the balance amount now due to Tin is HK$10,899,727.  There has been no tender of this sum to Tin.  As this amount is properly due to Tin under the SPA, I conclude that the Manager has been in breach of his obligations under the SPA and, for the reasons set out in §186(1)(b) above,  I conclude that Tin is entitled to judgment in the amount of HK$10,899,727 against the Manager.  I also conclude that Tin is entitled to judgment in the amount of HK$10,899,727 against the Trustee[327].  I am unable to accept Mr Fung’s submission on behalf of the Trustee that clause 20.6.4(iv) of the Trust Deed[328] relieves the Trustee from liability to pay this amount of HK$10,899,727.  That clause can only relieve the Trustee from liability for payment of amounts which are properly set off against the amounts due to Tin.

243.  I grant leave to the parties to apply under within 28 days the slip rule to correct any errors of calculation that I may have made in this judgment.

6. Interest and Costs

244.  I direct the parties to exchange within 28 days written submissions[329] on the award of interest I ought to make and specifying the rate or rates of interest and the period or periods over which I ought to award interest.  The parties are also directed to exchange with 14 days thereafter written submissions[330] in reply.

245.  I make a costs order nisi that Tin pay to the defendants the costs of the action that were incurred on his claims which I have dismissed, on an indemnity basis, to be taxed if not agreed.  Those costs are exclusive of the costs incurred and the time expended on the defence of set-offs.  I direct the parties to exchange within 28 days written submissions[331] on the proper apportionment of the costs incurred on Tin’s claims and the costs incurred on the set-offs and on the costs order that I should make in respect of the set-offs.  The parties are also directed to exchange with 14 days thereafter written submissions[332] in reply.

246.  I cannot conclude this judgment without thanking counsel for the assistance that they have rendered to me.