FU HAP ENTERPRISES LTD AND ANOTHER v. LEUNG KIN BONG AND OTHERS

HCMP 2039/2020

[2026] HKCFI 5020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2039 OF 2020

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J U D G M E N T

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A.  INTRODUCTION

1.  In this action, the 1^st and 2^nd plaintiffs (“P1 and “P2” respectively, and “Ps” collectively) claim against 1^st and 2^nd defendants (“D1” and “D2” respectively, and “Ds” collectively), to seek redress for the 5^th defendant (the “Company” or “C”) under section 276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32) (“CWUMPO”).

2.  At the trial before me, Ps were represented by Mr Yang-Wahn Hew, Ms Sharon Yuen and Ms Clara Wong. Ds were represented by Mr Edward Tang and Mr Ryan Chan.

3.  The action was previously pursued also Lee Yat Kin Kevin (“KL”) as 3^rd defendant, and Tang Cheung Ming (“TCM”) as 4^th defendant, but by the time of trial had been discontinued as against those two defendants.

4.  Until C entered members’ voluntary liquidation (“MVL”) in February 2019, C’s business comprised manufacturing and trading high-end jewellery.

5.  There are four shareholders of C each holding 25% of its shares: P1 (corporate vehicle of Fu Sui (“FS”)); P2 (corporate vehicle of Wan Chi Leung (“WCL”); D1; and Cheung Ming Company Limited (“CMCL”) (corporate vehicle of TCM).

6.  In the broadest terms, the dispute is between two “camps” of shareholders and directors, which have been referred to as “Ps’ Camp” and “Ds’ Camp”. When I refer to Ps’ Camp I include Ps, FS and his daughter Fu Yuen Man Sylvia[1] (“SF”), WCL and his son Wan Bing Kin[2] (“CW”). When I refer to Ds’ Camp, I include D1 and his son D2.

7.  It is Ps’ case that D1 acted in breach of various duties owed to C as a director of C, and that D2 acted in breach of various duties owed to C as a senior employee and key officer of C, namely: the duty to act bona fide in C’s best interests (said to include a duty to act in accordance with board resolutions); the duty to act for proper purposes; the duty to deal with C’s assets in a manner analogous to a trustee; the no conflict/profit rule; the duty to supervise delegated functions; and the duty of skill, care and diligence.

8.  Ps’ complaints are further summarised in Section C below. Broadly speaking, they comprise: alleged failings in respect of fixing proper payment terms, monitoring the credit risk of, and collecting accounts receivable (“AR”) from certain customers of C; alleged breaches of duty in relation to the issuance of discount credit notes (“DCNs”) and return credit notes (“RCNs”) to certain customers of C; an allegation that Ds were motivated in their dealings in respect of C by improper purposes and/or under conflict of interests, given interests held in a company named Sung Art (Universal) Company Limited (“Sung Art”); allegations that Ds breached and/or failed to comply with a board resolution of C dated 23 October 2018 (the “October 2018 Resolution”) in relation to the collection of outstanding AR and consigned goods; and various other complaints further detailed below.

B.  BACKGROUND FACTS

9.  In this section, I set out some uncontroversial background facts, based mainly on the parties’ Agreed Statement of Facts (“ASF”) and Agreed Chronology.

B1.  The Company

10.  C was incorporated in Hong Kong (“HK”) on 13 October 1970.

11.  C entered into MVL pursuant to a members’ resolution dated 12 February 2019. Mr Yeo Boon Ann and Mr Chan Leung Lee of BDO Financial Services Limited were appointed to act as the liquidators of C (the “Liquidators”).

12.  The shareholding in C is as set out at §5 above.

13.  Since around 20 May 1993 to date, the directors of C are: (i) FS, with his daughter SF acting as alternate director since 29 August 2018; (ii) WCL, with his son CW acting as alternate director since 29 August 2018; (iii) D1; and (iv) TCM.

B2.  Key Individuals

14.  They key individuals and their roles prior to the MVL are referred to in ASF §7 as follows:

(1)  WCL: Jewellery designer of C who oversaw the operations of C’s jewellery workshop in Panyu in the Mainland, since about 1996.

(2)  CW: Son of WCL. A Chief Executive of the Exports Department (“Exports Dept”) of C since he joined C in September 2004.

(3)  FS: Father of SF.

(4)  SF: the Purchasing Manager of the Purchasing Department (“Purchasing Dept”) of C since around 1979.

(5)  D1: Father of D2. A jewellery designer of C.

(6)  D2: A Chief Executive of the Exports Dept since he joined C in around 2002, and one of C’s sales personnel (until 25 March 2019, or until the Liquidators took office on 25 February 2019 or until the MVL).

(7)  KL: the 3^rd defendant, against whom proceedings were discontinued. Nephew of TCM and son of a former director of C (Lee Kwok Chick). From around 1989/1990 until his resignation from all positions on 13 December 2018, KL was (i) General Manager of C; (ii) Head and Sales Manager of the Exports Dept; and (iii) one of C’s sales personnel/representatives.

(8)  TCM. The 4^th defendant, against whom proceedings were discontinued. He oversaw the operations of C’s jewellery workshop in HK.

(9)  Jason Tang (“JT”, also known as Tang Man Ho): Son of TCM. A Chief Executive of the Exports Dept since he joined C around 2002, and one of C’s sales personnel.

B3.  The Company, Panyu Global and Diamond Ray

15.  C’s principal place of business was 4/F and 5/F Lyndhurst Building in Central, HK (the “Lyndhurst Building Address”). C’s registered office prior to the MVL was 5/F of the Lyndhurst Building Address.

16.  C’s jewellery workshop in HK was located at 5/F of the Lyndhurst Building Address, which is owned by C. C’s offices spaces and vault storage were located at 4/F, which is not owned by C but by an associate company with the same directors and beneficial owners as C.

17.  Panyu Global (“Panyu”) is a company incorporated in the Mainland with beneficial ownership mirroring that of C. Panyu holds C’s jewellery workshop in Panyu, Guangzhou[3].

18.  Diamond Ray Jewellery Ltd (“Diamond Ray”) is a HK company held by various individuals within C. Diamond Ray has no employees of its own, its registered address is that of C, and it has all along been treated as an operating arm of C.

19.  Diamond Ray was incorporated: (i) to hold jewellery of lower value and for daily wear produced by the C at the Panyu factory (also called the “PY stock inventory”); (ii) for C to obtain additional booth space at jewellery exhibitions; and (iii) for C to participate in trade fairs where C’s major customers did not want C to set booth and supply jewellery to their competitors in the same regions in C’s name[4].

20.  Inventories which were more high-end than “PY stock inventory” were held under the C’s name (also called the “U stock inventory”), and were produced at both the Panyu Factory and 5/F of the Lyndhurst Building Address[5].

B4.  The October 2018 Resolution

21.  Prior to the MVL, on 23 October 2018 C held a board meeting attended by inter alia CW, SF, D1, TCM, JT and the parties’ legal representatives, at which C’s board unanimously resolved that:

(1)  C shall sell all its shares in listed companies by close of stock market on 24 October 2018, and D1 shall be responsible for conducting the sale;

(2)  All sale proceeds from the aforesaid share sale shall only be applied to repay the C’s outstanding bank loans and settle payments relating to staff layoffs;

(3)  C shall cease business in principle on 23 October 2018 (ie the day of the board meeting). No sale shall be made, no goods shall be delivered (including delivery of completed, existing orders) and no order shall be accepted unless there is written consent from all the directors of C;

(4)  All sales representatives shall use their best endeavours to collect all consigned goods and AR from customers within the next 2 months.

(ie the October 2018 Resolution)[6].

B5.  Sung Art (Universal) Company Limited[7]

22.  On around 7 November 2018, Sung Art was incorporated, and since then managed and controlled by D1 and D2 for them to continue to engage in the business of jewellery trading after the cessation of C’s business and/or its eventual winding-up:

(1)  At the time of its incorporation and up until at least 7 November 2019, its registered shareholders were D1 (holding 1 share) and D2 (holding 99 shares). As of 30 November 2020, its registered shareholders are D2 and Wong Hiu Fun.

(2)  From its incorporation until at least 28 November 2019, D2 was also its sole director. As of 23 March 2020, its directors are D2 and Wong Hiu Fun.

(3)  D2 successfully approached Wendy Ng (D2’s sales assistant), and also approached Ng Ka Man (also known as Jody Ng), the former assistant of KL, to join Sung Art.

(4)  Sung Art carries on the business of jewellery trading (as does C). Around November 2018, third-party jewellery factory staff in China sent email quotations with design draft, detailed quotation, production period, contact persons, and bank account details to D2.

B6.  C’s Financial Position

23.  The following is derived from ASF §§12 to 14.

24.  C’s audited accounts for the following financial years contain the information below:

Financial Year Ending	Amounts of Accounts Receivable	Operating profit/(Loss)[8]
31 March 2013	HK$135,332,413	HK$6,428,462
31 March 2014	HK$142,469,528	HK$775,112
31 March 2015	HK$135,725,460	HK$(3,460,073)
31 March 2016	HK$120,346,103	HK$(16,644,430)
31 March 2017	HK$111,556,698	HK$(6,386,583)
31 March 2018	HK$81,579,500	HK$(13,161,958)

 

	FYE 2018	FYE 2017	FYE 2016	FYE 2015	FYE 2014		FYE 2013
Cash generated from/(used in) operating activities	(5,979,555)	9,406,315	(29,343,182)	2,172,919	(13,422,563)		(5,423,950)
Cash generated from/(used in) investing activities	22,382,789	15,000,213	90,550,822	4,200,527	(20,901,803)		(14,806,111)
Cash flow generated from/(used in) financing ativities	(5,601,871)	(17,285,313)	(86,232,102)	(14,196,484)	34,871,771		3,733,501
Net increase/(decrease) in cash and cash equivalents	10,801,363	7,121,215	(25,024,462)	(7,823,038)	547,405		(16,496,560)
Cash and cash equivalents at the beginning of the year	(32,124,124)	(39,245,339)	(14,220,877)	(6,397,839)	(6,945,244)		9,551,316
Cash and cash equivalents at the end of the year	(21,322,761)	(32,124,124)	(39,245,339)	(14,220,877)	(6,397,839)		(6,945,244)

Cash and bank balances	9,515,239	2,218,253	3,384,483	3,964,920	1,426,736	7,566,148
Bank overdrafts, secured	(30,838,000)	(34,342,377)	(42,629,831)	(18,185,797)	(7,824,575)	(14,511,392)
	(21,322,761)	(32,124,124)	(39,245,348)	(14,220,877)	(6,397,839)	(6,945,244)
Extract from Statement of Cash Flow:
Payment for purchase of financial assets	(235,650,567)	(101,694,802)	(127,536,795)	(109,076,292)	(75,373,041)	(78,105,038)

25.  As of 31 August 2018, C had cash and cash balances of HK$493,065.73 and its current liabilities totalled HK$149,710,438.19.

26.  The ratio of trade and other receivables to the total current assets of C for the financial years ended 31 March 2013 to 31 March 2018 were as follows:

	FYE 31/3/2018	FYE 31/3/2017	FYE 31/3/2016	FYE 31/3/2015	FYE 31/3/2014	FYE 31/3/2013
Trade & other receivables	81,579,500	111,556,698	120,346,103	135,725,460	142,469,528	135,332,413
Total current assets	286,848,995	309,588,654	320,264,413	426,666,736	405,588,533	370,344,989
Ratio of Trade & other receivables to Total current assets	28.44%	36.03%	37.58%	31.81%	35.13%	36.54%

C.  SUMMARY OF THE PARTIES’ CASES

27.  As noted above, Ps’ pleaded case focusses on various alleged breaches of duties owed by D1 as director of C and D2 as senior employee/officer of C. In particular it is alleged that:

(1)  In respect of a category of C’s customers managed by Ds who still have outstanding AR owing to C (the “OAR Customers”), Ds had failed to fix proper payment terms, properly monitor C’s credit risk, and enforce payment terms/collect outstanding AR.

(2)  Ds wrongfully issued certain credit notes (DCNs and RCNs) to various customers managed by them, with the effect of writing off C’s AR without justification.

(3)  Ds had secretly established Sung Art in November 2018 with a view to enabling them to continue engaging in the business of jewellery trading after C ceased business. In respect of various of Ds’ alleged misconduct to C’s detriment from a certain point in time, Ds were motivated by improper purposes namely that they wished to cultivate relations with C’s customers so that these would be favourably disposed to trade with Sung Art. Further, Ds acted under a conflict of interests.

(4)  Following the October 2018 Resolution, Ds acted in breach of that resolution and their duties owed to C by failing to take proper steps to recover C’s outstanding AR and consigned goods, and causing further sales and deliveries to be made in breach of the October 2018 Resolution.

(5)  D1 acted in breach of duty in relation to 73 tailor-made items under an order placed in 2018 by the customer Manisha (the “Manisha Order”).

(6)  D1 further acted in breach of the October 2018 Resolution in that he failed to implement the sale of C’s shares in listed companies in compliance with that resolution.

(7)  D2 further acted in breach of duties in respect of a sum of approximately US$700,000 received from the customer Renee in July 2018.

(8)  In various respects regarding certain of the above complaints, D1 acted in breach of his duty to supervise his subordinates, D2 and KL.

28.  The loss and damages claimed by Ps include: the outstanding AR currently owed by the OAR Customers to C; the amount of C’s AR written off by the DCNs and RCNs; the losses said to have been suffered on the Manisha Order; the invoiced amounts or production costs of C’s consigned goods which allegedly should have been recovered; and the losses said to have been suffered as a result of D1’s mishandling of the sale of C’s shares in listed companies.

29.  Ds’ defences to each specific area of claim, are addressed further below. They include, in summary, the following:

(1)  Various of the practices of which Ps complain in relation to the OAR Customers and the issuance of DCNs and RCNs, were business decisions taken in good faith and bona fide in C’s interests. The court is very slow to interfere with directors’ business judgment.

(2)  Further, the said practices had been in place for many years, to the knowledge of Ps’ Camp. Ps’ Camp, who controlled 50% of C’s shareholding and board of directors, could have taken steps to object to the same but had not.

(3)  By a notice posted at C’s premises by P’s Camp on 31 August 2018, Ps’ Camp had effectively compelled C to cease operations and created a fait accompli forcing Ds’ Camp to agree to the MVL. It was in fact the sudden and abrupt cessation of C’s business and/or the MVL which caused the OAR Customers to stop trading with C and decline to settle their invoices, and further destroyed C’s reputation and goodwill.

(4)  Following the establishment of Sung Art, there was no change in the practices adopted in respect of C’s customers. Ds deny that any steps taken in relation to the OAR Customers, the issuance of DCNs or RCNs or otherwise, were for improper purposes.

(5)  Following the October 2018 Resolution Ds acted consistently with C’s interests in respect of sales/deliveries of goods, the issuance of DCNs and RCNs, and attempts to recover outstanding AR and consigned goods.

(6)  Ds deny any breach of duty in relation to the Manisha Order, D1’s sale of C’s shares in listed securities, and D2’s handling of US$700,000 received from Renee.

D.  PRELIMINARY RULING

30.  On the first day of trial, I was asked by Ps’ counsel to make a preliminary ruling, in relation to certain arguments raised in Ds’ written opening submissions (“Ds’ Opening”), which were said by Ps to relate to matters not pleaded by Ds.

31.  The first issue concerned the question of management, control and/or responsibility for the OAR Customers. Ps argued that in response to Ps’ pleaded assertions of the management, control and/or responsibility of D1 and D2 over the OAR Customers, Ds had pleaded only a non-admission. Accordingly, it was not open to Ds to at trial advance a new, unpleaded positive case that any person other than D1 and D2 had management, control and/or responsibility over such customers[9].

32.  Having considered this point and totality of the parties’ pleadings, I declined to make a formal ruling to the effect sought, at such juncture. First, I considered there was some arguable ambiguity over precisely what was meant by management, control and/or responsibility, so that cross-examination exploring this point and the degree of such should not be proscribed. Second, I considered that the issue might overlap with and not be entirely separable from other matters on which Ds did plead a positive case (eg the assertion that D1 was not responsible for following up on AR, and the denial that Ds had taken over key management roles in C).

33.  The second issue was whether it was open to Ds to argue (as prefaced in Ds’ Opening) that Ps had requested the Liquidators to stop recovery efforts pending the present proceedings or orchestrated a situation in which C could not continue recovery of its largest AR, relying inter alia on matters which were not in evidence[10].

34.  This matter was ultimately uncontroversial and I upheld Ps’ objection, on the basis that Ds should not be permitted to rely on an unpleaded contention.

35.  The third issue related to argument in Ds’ Opening[11] that C’s alleged losses in relation to AR are not losses at all, because the receivables are still assets of C which may be recovered in its liquidation. Ds arguing that there is no suggestion that the claims in question are time-barred or that the entities owing receivables to C have become insolvent. Ps asserted that this required to be pleaded by Ds, but was not.

36.  Have considered the parties’ argument on point, I upheld this ground of objection raised by Ps. I had regard to: (i) authorities on the importance of the parties’ pleaded cases in defining the issues at trial and providing notice of the case required to be met; and (ii) Order 18 rule (12)(c) RHC, providing that where a claim for damages is made against a party pleading, the pleading must contain particulars of any facts which the party relies upon in mitigation or otherwise in relation to the amount of damages.

37.  Ps have pleaded the claimed losses in some detail in the Re-Amended Statement of Claim (“SOC”), including the value of the receivables in question. If Ds were to take issue with this quantum on the basis that it fell to be reduced or extinguished since the receivables remained recoverable, that ought to have been pleaded; in which case Ps would have had a chance to plead in reply and adduce any relevant evidence.

38.  Since this was not done, I ruled that it was not open at trial for Ds to contend that the outstanding AR pleaded by Ps as losses may not be claimed, on the basis that they remain assets of C and/or are recoverable, along the lines contended in Ds’ Opening.

E.  LEGAL PRINCIPLES AND DUTIES OWED

E1.  Duties Owed: Pleadings

39.  In terms of general duties, Ps plead[12] that as a director D1 owed:

(1)  a fiduciary duty to act bona fide in C’s best interests, including to act in accordance with D’s constitution and board resolutions;

(2)  a fiduciary duty to act for proper purposes only and not to act for any collateral or improper purpose;

(3)  a fiduciary duty to use C’s assets in C’s best interests;

(4)  a fiduciary duty not to act in the affairs of C in circumstances where there exists any actual or potential conflict between his duties to C as a director and his other duties or interests;

(5)  a fiduciary duty not to profit or obtain for himself business opportunities acquired in the course of, or as a result of, his position as director;

(6)  a fiduciary duty to manage and deal with C’s assets and properties (insofar as within his possession or control) in a manner analogous to, and/or consistent with, the duties of a trustee;

(7)  a duty to comply with C’s articles of association and the laws and regulations concerning the management of a company including the Companies Ordinance;

(8)  a continuing duty to exercise the care, skill and diligence required of a director, including: (i) a duty to properly supervise the discharge of any functions delegated to his co-directors or subordinates; and (ii) a continuing duty to acquire and maintain sufficient knowledge and understanding of C’s business to enable him to discharge his duties as a director[13].

40.  Ps plead[14] that as senior employees/key officers of C and in their roles of management/control/responsibility in respect of C’s affairs, D1 (until 25 March 2019 or until the Liquidators took office) and KL (until 31 December 2018) owed duties analogous to those referred to above.

41.  In the Re-Amended Statement of Defence (“DEF”), Ds admit that D1 and D2 owed a fiduciary duty to act bona fide in the best interests of C, but otherwise respond mainly to the alleged duties by non-admission[15].

42.  In the course of submissions, I do not consider that Ds levelled serious resistance to P’s allegations as to the legal duties which were owed by D1 and D2 to C; though they highlighted in pleading and submissions that, insofar as those duties were owed, similar duties were also owed to C by other directors and individuals within Ps’ Camp.

E2.  Directors’ Duties

43.  The duties owed by directors to a company are well-settled: see eg Kwok Hiu Kwan v Convoy Global Holdings [2021] HKCFI 814 at §§49 to 53, citing China Metal Recycling (Holdings) Ltd v Chun Chi Wai [2021] HKCFI 378 at §§47-63.

44.  Below, I set out the key principles on the central duties which are alleged to by Ps to have been breached in this case.

Duty to act bona fide in the interests of the company (the “Best Interests Duty”)

45.  The law was summarised as follows in China Metal Recycling (supra) at §§62 and 63:

(1)  The question whether a director has breached the duty to act bona fide in the best interests of the company is ordinarily a subjective one, i.e. whether the director genuinely believed the transaction to be in the interests of creditors. In Regentcrest plc v Cohen [2001] 2 BCLC 80, DHCJ Jonathan Parker J said at [120]:

“The duty imposed on directors to act bona fide in the interests of the company is a subjective one … The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently. Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue is as to the director’s state of mind. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company’s interest; but that does not detract from the subjective nature of the test.”

(2)  Once such knowledge is established, it then becomes necessary to consider whether the director has acted appropriately in the circumstances. In this regard, where there is no evidence that the director gave actual consideration to the interests of the company, the proper test to be applied is an objective one, ie whether an intelligent and honest man in the position of a director of the company concerned could, in the whole of the existing circumstances, have reasonably believed that the transaction was for the benefit of the company”.

46.  Further, in Poon Ka Man Jason v Cheng Wai Tao [2023] HKCA 676 the Court of Appeal reasoned as follows:

“59. … whilst reference is sometimes made to a director’s “duty to act in the (best) interests of the company”, this is a mere shorthand. In the classic words of Lord Greene MR in Re Smith & Fawcett Ltd [1942] Ch 304, 306 … directors are bound to exercise the powers conferred on them “bona fide in what they consider – not what a court may consider – is in the interests of the company” (see also Simon Fireman v Golden Rice Bowl Ltd [1987] HKLR 981). Consistently with its general approach, the court does not substitute itself for a company’s management and decide what is best for the company. That is a matter for the appropriate organ of the company. Directors owe a fiduciary duty, but the essence of that duty here is loyalty; it is not a warranty that a director’s act is necessarily the best possible course for the company, viewed objectively or even retrospectively. To find a breach of this duty requires the court to conclude that the director did not subjectively believe that his act was in the interests of the company, or, where the director did not give any actual consideration to the question, that a reasonable director in his position could not have reasonably believed that it was for the benefit of the company: see e.g. Wang Pengying v Ng Wing Fai [2021] 1 HKLRD 997, §§67-74”.

47.  A breach of the Best Interests Duty involves a question of honesty: Wang Pengying v Ng Wing Fai [2021] 1 HKLRD 997 at §28. An allegation that conduct is not bona fide is a very serious one which impugns motives, and the burden of establishing this is to be discharged by evidence as opposed to assertion and speculation: see Fountain II Ltd v Ping An Securities Group (Holdings) Ltd [2020] 1 HKLRD 429 at §§41, 44, 46.

Duty to act for proper purposes (the “Proper Purposes Duty”)

48.  The law was summarised in China Metal Recycling (supra) at §§52 to 54 by reference to various HK and overseas authorities as follows: 

(1)  A director owes a fiduciary duty to exercise his power solely for the purposes for which they are conferred. The rule is not concerned with excess of power by doing an act which is beyond the scope of the instrument creating it as a matter of construction or implication. It is concerned with abuse of power, by doing acts which are within its scope but done for an improper reason.

(2)  The test is an objective one.

(3)  A four-stage test should be applied in the following manner:

(a)  identify the power whose exercise is in question;

(b)  identify the proper purpose for which that power was delegated to the director;

(c)  identify the substantial purpose for which the power was in fact exercised – this is a question of fact and turns on the actual motives of the director at the time; and

(d)  decide whether that purpose was proper.

(4)  Since the test is an objective one, it matters not whether the director honestly believed that in exercising the power as he did he was acting in the interests of the company; the power having been used for an improper purpose, its exercise will be liable to be set aside.

49.  In respect of the four-stage test see also Extrasure Travel insurances v Scattergood [2003] 1 BCLC 598 at §§92 & 93. It is unnecessary for a plaintiff to prove that a director was dishonest, or that he knew that he was pursuing a collateral purpose; and the test is objective in that sense. The third stage of the test involves a question of fact, turning on the actual motives of the director at the time.

50.  In Poon Ka Man (supra), the Court of Appeal observed as follows:

“56.  Further, to find that a director breached his fiduciary duty by exercising a power for an improper purpose, one would expect the court to examine the scope of the proper objects of the power in question, and find the purpose for which the power was actually exercised. Where there may be more than one purpose, the cases traditionally suggest it is necessary to ascertain what has been variously described as the primary, substantial, principal, or dominant purpose: Passport Special Opportunities Master Fund LP v eSun Holdings Ltd [2011] 4 HKC 62, §57; Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 at 832F-G & 835G; Tsang Wai Lun Wayland v Chu King Fai [2009] 5 HKLRD 105, §73; Fountain II Ltd v Ping An Securities (Holdings) Ltd [2020] 1 HKLRD 429, §41(3). More recently, in Eclairs Group Ltd v JKX Oil & Gas plc [2016] BCC 79 at §§21-22, Lord Sumption said that acting for an improper purpose, be it a minor or major purpose, is impermissible, but the act may be valid unless the improper purpose was causative in the sense that but for its presence, the power would not have been exercised in that way.

57.  For the purposes of these appeals it is unnecessary for us to decide whether Lord Sumption’s approach in Eclairs Group (based in part on the statutory formulation of the duty in section 171(b) of the Companies Act 2006) should be adopted because it seems to us that the judge did not base his reasoning on a breach of duty by acting for an improper purpose…”

Duty to avoid conflicts of interests (the “Conflicts Duty”)

51.  The law was summarised as follows in China Metal Recycling at §§59 to 61:

(1)  Directors owe a fiduciary duty:

(a)  not to place themselves in a position where there would or may be a conflict between their personal or separate interests / duties and the interests of the company; and

(b)  not to make a profit from their position.

(2)  The no conflict and no profit rules are proscriptive duties (ie they forbid or restrict a director from acting in certain manner), which duties are strictly enforced, even in the absence of conscious wrongdoing. They are inflexible rules which must be applied inexorably by the court which is not entitled … to receive evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent.

(3)  The test for determining whether there has been a breach of that duty is an objective one. Hence, the no conflict rule operates where the reasonable man looking at the relevant facts and circumstances of the particular case thinks that there is a “real sensible possibility of conflict” or “a real or substantial possibility of conflict”.

52.  In Poon Ka Man Jason v Cheng Wai Tao (2016) 19 HKCFAR 144, Spigelman NPJ stated at §74 that the conflict rule is generally stated in the form that a fiduciary may not put himself or herself in a position where his or her interest and duty conflict. However, it is well established that there must be a “real sensible possibility of conflict”.

Duty to exercise reasonable skill, care and diligence (the “Duty of Care”)

53.  Section 465 of the Companies Ordinance provides that a director must exercise reasonable skill, care and diligence.

54.  The Duty of Care is distinct from the director’s fiduciary duties (the Best Interests Duty and the Proper Purposes Duty), since the latter are concerned with concepts of honesty and loyalty, as opposed to competence: Extrasure (supra) at §§87 & 89.

55.  As explained by Coleman J in Kwok Hiu Kwan (supra) at §53, the degree of care required is such care as would be exercised by a reasonably diligent person having both the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director, and the general knowledge, skill and care which the director has[16]. The scope of the duty, and whether it has been breached, requires detailed consideration of all the relevant facts in any case.

56.  In Wong Leung Hang v. Chan Yuk Lung, CACV 112/2012, 30 October 2013, the Court of Appeal explained at §25 that the degree of care required of a director is measured by the care an ordinary man might be expected to take in the circumstances on his own behalf; and that a director needs not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.

57.  Negligence is not the same as mere error of judgment. The approach is to allow for a margin of differing opinion and even error: Shown Wai Investment Co Ltd v Hiu Yip Wing David [2024] HKCFI 1477 at §233(4).

58.  In Bishopsgate Contracting Solutions Limited v David Thomas O’Sullivan [2021] EWHC 2103 (QB), Linden J approved the following passages from Palmer’s Company Law in the context of the Duty of Care at §§184 & 186:

“The approach adopts as the minimum standard that objectively expected of a person in the directors’ position; that standard may be raised by the subjective element of the test if the particular director has any special knowledge, skill and experience

…

On the other hand, directors managing companies are in the business of taking risks … A director is not automatically negligent because the company suffers a loss as a result of the directors’ activities. The director is not required to be right, just to display reasonable care … measured by the care an ordinary man might be expected to take in the same circumstances on his own behalf. He is clearly … not responsible for damages occasioned by errors of judgment… A director must be guilty of such negligence as would make him liable in an action. Mere imprudent is not negligence; want of judgment is not. It must be such negligence as would make a man liable in point of law…”

Business judgment and decisions

59.  As noted above, Ds relied authority to the effect that the law displays hesitance in second-guessing the business judgment of and business decisions made by company directors.

60.  See for example the following:

(1)  Wong Leung Hang (supra) per Chu JA at §26:

“It is to be recognized that in the performance of their office, directors will from time to time have to make business judgments and business decisions. The court should be slow to interfere with the business judgment and business decisions of directors. As explained in Harlowe’s Nominees Pty Ltd v. Woodside (Lakes Entrance Oil) Co NL (1968) 121 CLR 483, 493:

‘Directors in whom are vested the right and duty of deciding where the company’s interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment if exercised in good faith and not for irrelevant purposes is not open to review in the courts.’”

(2)  Chinaculture.com Limited v Lam Ting Ball Paul [2022] HKCFI 1114, where Harris J set out the principles in the following terms:

“B. Court’s reluctance to interfere with commercial decisions

17. The court will remedy acts or omissions, which constitute breaches of the duties, which I have discussed in the previous sections. The court does not, however, interfere with decisions and transactions over which differences have arisen, which are largely matters of commercial judgment. The reasons are explained by Street CJ in Re Mineral Securities Asia Ltd (in liq):

‘When the court is required to pronounce upon the commercial prudence of a transaction it enters upon a slippery and uncertain field. Apart from the lawyers’ disclaimer of expert qualifications in matters of business prudence, the very process of litigation and the necessary limitations upon the scope of admissible evidence, restrict the available material to far less than is necessary for the making of a commercial decision.’

18. In Wong Luen Hang v Chan Yuk Lung, Chu JA echoes this reasoning…

19.  Of course, not every case in which the principal complaint concerns a commercial decision is immune from action. If a breach of duty has occurred that resulted in a bad commercial decision, which caused loss, the breach of duty will be actionable. What is material is whether the substance of the complaint is a matter of commercial judgment or genuinely concerns non-compliance with a director’s duties. A complaint about a commercial judgment cannot circumvent the above principle by being dressed up in the pleadings as a breach of duty. What is in substance a matter of commercial judgment cannot be successfully attacked by identifying a series of breaches of duty in the process by which it was reached, if the breaches are unlikely to have made any difference to the decision that was eventually made. In practice the more criticism and evidence focuses on the commercial features of the impugned transaction or corporate affairs, the less likely it is that the court will conclude that it is a genuine complaint of breach of duty as opposed to a disagreement over management decisions.”

(3)  Fountain II (supra) per Recorder Manzoni SC at §§41(1) & 42. It is well established that the court will generally not second-guess the correctness of bona fide commercial decisions of the board; the court should not interfere with bona fide management decisions and substitute its own opinions for those of the management.

(4)  Fountain II was applied by Harris J in Zhu Bin v Thousand Vantage Investment Ltd [2024] HKCFI 70 at §§14 & 15, including the following:

“15.  The evidential burden on a shareholder seeking to interfere in the decision of a board is … considerable. It is not sufficient to demonstrate that an alternative decision may be commercially more attractive or that a board may not have had regard to all possible options or obtained all possible information. Business decisions will often involve commercial judgment and a board is likely to have regard to considerations such as the cost of obtaining professional input and the need for timely decision making in deciding how to determine whether to proceed with a transaction and how it is to be structured. It is well established that if, as will normally be the case, the articles vest the management of a company in the hands of the directors … they do not have to justify their management decisions to shareholders. The only way in which a shareholder can interfere with management decisions is as part of the general body of shareholders exercising rights conferred by the articles or the Companies Ordinance, Cap 622 to, for example, change the constitution of the board”.

(5)  Sanju Environmental Protection (Hong Kong) Ltd v Wang Lishan [2023] 2 HKLRD 242 per Recorder Jin Pao SC at §48. Matters of management are within the responsibility of the directors, and it would be wrong for the court to substitute its own opinion for that of management or indeed to question the correctness of a management decision where it is arrived at in good faith. The court is not a supervisory board over decisions within the powers of management honestly arrived at.

(6)  Shown Wai Investment (supra) per DHCJ MK Liu at §§231(3) & 232; including that it is vital to distinguish between: (a) a failure to act in the company’s best interests and/or negligence; and (b) a commercial decision on which independent directors could legitimately come to different conclusions.

E3.  Delegation and Supervision

61.  The relevant law was set out by Kwan J (as she then was) in Re Copyright Ltd [2004] 2 HKLRD 113 at §§34 & 35:

(1)  Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them to properly discharge their duties as directors.

(2)  Whilst directors are entitled (subject to the articles of association) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions.

(3)  No rule of universal application can be formulated as to the duty referred to at (2) above. The extent of the duty, and the question whether it has been discharged, must depend on the facts of each particular case, including the director’s role in the management of the company.

(4)  Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them. A proper degree of delegation and division of responsibility is permissible, and often necessary, but total abrogation of responsibility is not.

62.  See further:

(1)  Sanju Environmental (supra) at §47. Although the delegation of responsibility and functions by directors is permissible, the directors are subject to a residual duty to ensure that there is a system in place for checking upon the performance of the delegated functions.

(2)  Madoff Securities International Limited (in Liquidation) v Raven [2013] EWHC 3147, per Popplewell J at §191. It is legitimate, and often necessary, for there to be division and delegation of responsibility for particular aspects of the management of a company. Nevertheless, each individual director owes inescapable personal responsibilities. He owes duties to the company to inform himself of the company’s affairs and join with his fellow directors in supervising them. It is therefore a breach of duty for a director to allow himself to be dominated, bamboozled or manipulated by a dominant fellow director where such involves a total abrogation of this responsibility.

(3)  Shown Wai Investment (supra) at §233(3). Directors are entitled to delegate and rely on professional advice. They may rely on the advice of professionals who are appropriately qualified and independent, where the advice is within the expertise of the adviser and where the director has provided the adviser with correct information and context, and the director has assessed the advice so far as his or her expertise and knowledge permits.

E4.  Duties of Senior Officers/Employees

63.  As noted above, Ds admitted that D2 owed a fiduciary duty to act bona fide in the best interests of C.

64.  On the question of the duties owed to a company by a senior officer or employee, Ps cited Leader Screws Manufacturing Company Limited v Huang Shunkui [2021] HKCFI 141 at §§46 to 50. In short, the employment relationship does not, of itself, attach fiduciary duties. The concept of a fiduciary duty encaptures a situation where one person is in a relationship with another giving rise to a legitimate expectation, which equity will recognise, that the fiduciary will not utilise his or her personal position in such a way which is adverse to the interests of the principal. That expectation is assessed objectively.

65.  Much depends on the employee’s role and function. A senior employee/manager has been held to owe fiduciary duties to his employer in carrying out the specific duties to which he was assigned. An employee entrusted with the company’s money is likely to owe fiduciary duties in relation to the money, even if a junior employee.

66.  As noted above, I do not consider that Ds levelled serious opposition to Ps’ assertions that D2, as a senior officer/employee of C, owed general duties to C which are similar to those owed by D1 as a director. I am satisfied for the purposes of these proceedings that he did.

E5.  Section 276 of CWUMPO

67.  Section 276 of CWUMPO provides, inter alia, that if, in the course of winding up a company, it appears that certain specified persons have misapplied or retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance, breach of duty or breach of trust in relation to the company which is actionable at the suit of the company, the court may, on the application of … any contributory examine into the conduct of the person, and compel the person to repay or restore the money or property or any part thereof respectively with interest at such rate as the court thinks just, or to contribute such sum to the assets of the company by way of compensation as the court thinks just.

68.  The persons in respect of whom proceedings can be brought include an officer of the company, and a person who has been concerned or taken part in the promotion, formation or management of the company.

69.  The section is a procedural provision only, which does not create new rights, but only provides a summary method of enforcing existing duties arising before the winding-up: Butterworths Hong Kong Company Law (Winding Up and Miscellaneous Provisions) Handbook, 6^th Ed at §276.02.

70.  The parties did not make substantial submissions in relation to section 276 of CWUMPO, and no point was taken by Ds as to the suitability of the procedure under section 276 for resolving the disputes which are the subject of Ps’ claim.

F.  WITNESSES AND GENERAL COMMENTS ON CREDIBLITY

71.  There were five witnesses. Ps called CW and SF, whilst Ds called D1, D2 and KL.

F1.  Witness Credibility

72.  I heard lengthy oral evidence and cross-examination of the witnesses on the various issues that arise in these proceedings.

73.  In this section, I make some very general observations on the credibility and reliability of each of the witnesses in turn.

74.  I have considered the totality of the evidence, and all of the parties’ submission on witness credibility. I do not make express reference to all of those points, but confine myself to only a few examples.

CW and SF

75.  The time spent on cross-examining Ps’ witnesses, was considerably shorter than that spent on Ds’ witnesses.

76.  I note that on certain limited matters, CW and SF were unable to give evidence from within their own knowledge, an instead relied on what they had been told by others (eg events before they joined C, or the precise role and degree of knowledge/supervision exercised by WCL).

77.  Overall, I considered CW and SF to be straight-forward witnesses, whose credibility was not significantly damaged under cross-examination, and were not demonstrated to have given false evidence.

78.  They sometimes made fair concessions.

79.  For example, CW accepted when it was put to him that responsibility for collecting AR fell to individual sales representatives, though adding that they ultimately reported to and were supervised by D1 to whom KL reported.

80.  In the case of SF, she was frank in conceding that D1 was not part of the Exports Dept, though she said that he managed it under his leadership.

D1

81.  D1’s witness statement was, like those of Ds’ other witnesses, rather short/skeletal, given the detail and complexities of the allegations levelled at Ds. Some of those were not responded to in detail or at all in Ds’ witness statements.

82.  Overall, I did not consider D1 to be an entirely reliable witness, though nor did I think that he was clearly shown to be a dishonest witness. He had limited knowledge of, and professed difficulty in remembering, the detail of various of the transactions and documents put to him. This was said, in essence, to be attributable to his limited or lack of involvement in them, lapse of time, and the number of different transactions canvassed.

83.  Given the number of transactions canvassed in these proceedings, the length of time elapsed, and D1’s role in C, I tend to accept his evidence that he did not know and/or genuinely could not recall the details of particular transactions.

84.  D1 had at times a propensity to not answer questions directly, and there was some degree of inconsistency between his witness statement and his oral evidence, and in different aspects of his oral evidence.

85.  Examples of this include his evidence on his responsibility for U stock, the evidence in his statement that although he was important in C he never had key managerial/administrative responsibilities (which did not sit well with other aspects of his statement and the evidence in general), and his evidence as to the degree of WCL’s and the other directors’ involvement in C and the Exports Dept (discussed further below).

86.  D1 sometimes made frank concessions orally, such as KL reporting to him on matters relating to the Exports Dept, and that D1 asked KL to follow up on outstanding AR.

87.  There was some inconsistency in D1’s evidence on the extent of his responsibility for DCNs and RCNs: see below. He initially conceded that he was notified and approached in respect of DCNs, though he could not remember their detail; but his later evidence was less certain, to the effect that he was not involved in at least some of them.

88.  D1 professed only a very limited recollection of the Manisha Order and “Manisha Protocol”, and his evidence on point was somewhat confused/contradictory. On balance I accept that this was likely due to poor recollection.

89.  I considered that portions of his evidence may have been exaggerated, such as his assertion that whenever Ringo Li raised matters with D1, D1 would ask whether the other shareholders were aware of the situation and Ringo Li would respond in the affirmative; and his assertions that P’s Camp’s notice dated 31 August 2018 had been sent to banks, suppliers and customers.

D2

90.  In general, I considered D2 to be a careful and sharp witness, who listened to the questions asked, and answered them directly. D2 made a number of concessions, despite them being potentially against his interests.

91.  For example, he accepted that customers outside HK would have a high credit risk, and that how much was known about ability to repay would affect credit risk. He generally answered questions on credit risk carefully. He admitted that Ambrosi had a poor repayment history, and was not a good customer.

92.  D2 also appeared to give frank and honest evidence about the point in time was which he began to prepare the Sung Art business. He accepted that one of the reasons he wanted to maintain good relations with customers was so that they might trade with Sung Art; though he said that was not the only reason. I considered his evidence that he was not motivated in various steps taken in relation to C’s business, by Sung Art’s interests, to be credible and believable.

93.  I accept that aspects of D2’s oral evidence were not contained in his witness statement, but as noted above, Ds’ witness statements were prepared on a rather short/skeletal basis.

94.  Notable here was D2’s oral evidence to the effect that there was (or may have been) a separate system of handwritten invoices in addition to those generated by C’s computer system (see below), which Ps relied upon to attack D2’s credibility.

95.  Ps also criticised D2s’ evidence denying his attempts to recruit Jody Ng to Sung Art[17], though I am not persuaded that those were necessarily false, given that D2 admitted that he had successfully approached Wendy Ng to join Sung Art.

96.  Further, Ds’ evidence that WCL requested written reports following overseas business meetings, was not contained in his witness statement, and he backtracked on it to some extent: see below.

KL

97.  Ds argued that KL should be regarded as independent, since he was no longer a defendant to the proceedings, and had no incentive to lie.

98.  Overall, I considered KL’s evidence to be of mixed quality and reliability. He sometimes did not answer questions directly, and his answers sometimes strayed beyond what he was asked.

99.  KL’s evidence was at times inconsistent, for example on the question whether D1 was responsible for AR and business decisions on them. I did not think that his evidence on the involvement of the four directors in the business of C and supervising the Exports Dept, was entirely consistent, and his evidence on the degree of WCL’s involvement did not marry up precisely with D1’s.

100.  There was, further, some degree of inconsistency between KL’s witness statement and his oral evidence, for example on the question of the AR Policy. As another example, his evidence in relation to the Manisha and the Manisha Protocol did not seem entirely clear/consistent.

101.  However, there is some difficulty in assessing whether the above was due to KL giving consciously inaccurate evidence in any respects, or simply a degree of confusion or lack of precision in his quality as a witness.

F2.  Concluding General Observations on the Witnesses

102.  On the whole, whilst I consider that there were differences in the quality of the evidence given by and apparent reliability of the various witness as discussed above, I do not think that any of them was clearly demonstrated under cross-examination to be a generally dishonest witness.

103.  In the circumstances, in areas where the witnesses gave contrary factual evidence on matters within their own knowledge, I will assess the evidence on an item-by-item basis in order to make factual findings, including in light of any documentary evidence and the inherent probabilities.

G.  MANAGEMENT, CONTROL AND/OR RESPONSIBILITY OVER THE OAR CUSTOMERS AND OTHER CUSTOMERS IDENTIFIED IN THE CLAIM

104.  This issue was identified as Issue 1 in the parties’ Agreed List of Issues, and it is sensible to consider it before I move to substance of Ps’ complaints.

105.  I also give some consideration in this section to the alleged issues whether Ds’ Camp had “seized control” of C’s operations (said by Ds to be Issue 4) and whether Ps were or could have been aware of Ds’ alleged acts and omissions (said by Ds to be Issue 18A).

G1.  Pleadings

106.  It is part of Ps’ pleaded case that:

(1)  D1 had, both acting alone and through subordinates D2 and KL, taken control of virtually all key aspects of C’s operations and management since the early 2000s, including exerting and assuming management control/responsibility over a significant number of accounts of C’s customers.

(2)  D2 and KL acted under the supervision/oversight of D1 and reported to D1.

(3)  The customers over which D1 (assuming both direct and supervisory authority) together with either D2 or KL exercised and assumed management/control/responsibility included the OAR Customers, Manisha and the customers identified in Ps’ pleaded case as to DCN, RCNs and consigned goods.

(4)  Since the early 2000s, D1 began to act as CEO and “boss” of C and encroached on the management and operational roles of Ps and their representatives (including FS, WCL, SF and CW) despite protests. This included seizing control over the Exports Dept of C, and delegating half its control to D2 and the other half to KL, both of whom D1 oversaw.

(5)  The OAR Customers were under the management/ control/responsibility of D1 together with D2 or KL, as set out in a table at SOC §271. Similar pleas are made in respect of the customers to whom DCNs and RCNs were issued.

107.  In their pleaded case Ds:

(1)  Deny Ps’ allegation that D1, D2 and KL took control over key aspects of C’s operations/management since early 2000s including assuming management/control over a significant number of accounts. Ds plead that this is implausible since Ps were 50% shareholders and controlled 50% of the board. It was in fact members of Ps’ Camp who failed to perform their duties resulting in Ds having to bear the burden of those duties; including that FS was rarely in C’s office for 2 years prior to the MVL.

(2)  Aver that D1’s role was at all material times chief jewellery designer of C. D1 was in charge of designing jewellery as well as liaising with existing and potential customers with respect to designing jewellery pieces. D1 had never been responsible for collecting AR for C; rather it was FS who had responsibility of collecting AR for C at all material times until deciding to reduce his involvement in C’s operations since the early 2000s.

(3)  Do not admit that: (i) D2 and KL acted under the supervision/oversight of D1 and reported to D1; (ii) the customers over which D1/D2/KL exercised management/control/ responsibility included the OAR Customers, Manisha and the customers in Ps’ pleading on DCN, RCNs and consigned goods; (iii) the persons having management control/responsibility of the OAR Customers are accurately stated in the table in Ps’ pleading.

(4)  Deny that since the early 2000s D1 began to act as CEO and boss of C, or encroached on management/operational roles of Ps’ Camp. Ps’ Camp never made any protest as to D1’s role in C prior to the MVL, and they had sufficient power controlling half of the board and general meeting to ensure their interests were protected or take proper action, but did not.

G2.  Evidence

108.  There was a substantial volume of evidence given on these issues, which I have considered. Below, I set out some key items of evidence from each of the witnesses.

CW’s evidence

109.  CW gave evidence on the history of the four bosses’ involvement in C, based on what he had been told by his father. In the early days, C was co-managed by WCL, FS, D1 and TCM, but in the late 1990s to early 2000s, WCL and FS started to be less active due to health issues. This gave D1, D2 and KL the opportunity to seize control of various accounts of C’s customers, with D1 overseeing their management.

110.  CW and SF were left managing only a handful of customers, with limited access to and knowledge of the details and financial records for those accounts. It was only after the MVL and the Liquidators providing discovery, that they uncovered issues such as the amount of outstanding AR, and the other matters of which Ps complained. However, SF, FS, CW and WCL did have some knowledge of long outstanding AR before then. In company meetings since at least 2015, they had repeatedly complained about long overdue AR and urged D1/D2/KL to collect them, require payment for tailor-made goods, and tighten credit periods, but such complaints were persistently ignored.

111.  After the seizure of control, D1/D2/KL dominated the organisation and management of important international exhibits, and CW was excluded from such organisation. Various key personal in C reported to D1. D1 persistently refused to convene board meetings, and only instructed SF to convene informal ad hoc meetings with short notice, at which D1 would inform FS, WCL, SF and CW of his plans for C, mostly ignoring complaints and requests. TCM effectively condoned D1’s conduct, due to their close relationship.

112.  Accordingly, Ps’ Camp lost the ability to meaningfully participate in C’s affairs, despite being shareholders and in theory controlling half the board. They did not resort to legal measures as the camps had worked together for so long, until instructing lawyers in August 2018 when disagreements became fundamental.

113.  D2 was supervised by and reported to D1, but also supervised by KL who was head of the Exports Dept. KL also acted under D1’s supervision and reported to him for C’s operations in HK, but reported to WCL on Panyu and Diamond Ray (for which WCL was responsible). The same applied to the other Chief Executives of the Exports Dept (other than D2), namely CW and JT. Ultimately, all the departments of C reported to D1.

114.  Under cross-examination, CW accepted that since he joined C in 2004, his knowledge of matters before then was based on what his father or SF had told him. WCL’s role was to manage the Panyu factory and matters relating to Diamond Ray, though he attended the HK office for part of the week and the Mainland for the other part. The diminishing role of FS over time was due to ill-health, whereas for WCL it was partly for such reason, and partly his focus on Panyu/Diamond Ray. TCM was responsible for the HK workshop.

115.  CW agreed that in the early 2000s the responsibility for collection of AR fell to individual sales representatives, but said they were all under D1’s supervision.

116.  CW was questioned about C’s 2018 audited financial statements (“AFS”), signed by TCM on behalf of the board when CW was an alternative director of C. These included an ageing analysis of trade receivables which were not impaired, and a note that these relate to customers with a good track-record and balances expected to be recoverable. CW said that although he had in theory approved the AFS, he had never in fact received them at the time. CW and WCL had not received any of the 2014 to 2018 AFS before they were approved. In reality, D1 controlled all matters in the HK office, and represented that the outstanding AR and consignment goods could be recovered.

117.  During C’s annual meeting, D1 would talk about C’s status briefly without showing data to the other directors/SF, who attended. D1 would briefly talk about revenue and AR, and his decisions on salary and bonus. WCL, SF and FS would complain about outstanding AR, and D1 would provide assurances that they would be followed up[18].

118.  CW said that Ps’ Camp faced obstruction if they tried to obtain financial information or documents, but the elder figures did not wish for conflict, and trusted D1. C had always been run informally, without written records of decisions, and on the basis of trust and confidence between the four elder figures.

SF’s evidence

119.  SF gave evidence largely similar to CW, on these issues.

120.  FS was responsible for managing C’s HK customers until the early 2000s when he became ill, since when he participated less in C’s affairs and relied on SF. D1 seized management control after FS and WCL’s participation declined, due to ill-health; after which D1 assumed the role of CEO or boss.

121.  After D1/D2/KL seized control of most accounts, SF managed only one (Mrs Yeung of Simplex Diamonds). SF was head of the Purchasing Dept and Diamond Dept, but was required to report to D1 and act under his direct supervision. SF said she was continuously sidelined and overridden by D1 in her role as head of the Purchasing Dept, and pointed to a number of invoices signed by D1/KL to suppliers directly, bypassing SF’s role as such, as well as a number of other incidents.

122.  Under cross-examination, SF said the Exports Dept (dealing with foreign markets) was established around 1988-1989, but not then on a large scale. D1 did not belong to that department, but managed it. There were 3 Chief Executives (D2, JT and CW) who reported first to KL, who in turn reported to D1.

123.  Every 3 months or so, Ringo Lee from the Accounts Department (“A/C Dept”) would prepare a document showing C’s outstanding AR (the “AR Document”[19]) and submit it to D1 and KL, who would pass it to sales representatives for following up if needed. The portion of the document relating to her own customer, would be provided to SF. D1 was constantly overseeing and following up on AR.

124.  As to ad hoc meetings convened by D1, SF exhibited WhatsApp messages illustrating that she had been asked to convene one at D1’s request. She agreed that due to the informal way C was operated, it had never been the practice to have an agenda prior to meetings.

125.  During annual meetings, SF and FS would learn of outstanding AR. D1 would hold up two sheets of paper – one with his decision on salary and bonus and one indicating how much business was transacted as well as money owed by major customers – and outline them. After this FS and SF would ask that these matters be followed up, and D1 would promise that this would occur. FS and SF had repeatedly complained and urged D1/D2/KL to collect long overdue AR.

126.  FS did not file any lawsuit to complain of exclusion, because the “four elders” had been brothers, and would not wish to pursue legal remedies. SF agreed that other than two instances mentioned in her statement regarding transactions in securities, FS had never raised any written complaint regarding D1 and his management of C.

127.  When asked about FS’s signature appearing on certain pages of C’s AFS, SF indicated that FS could not read English so could not have understood them. She further denied that she had approved the 2018 AFS (at which time she was an alternate director).

128.  SF was questioned about a letter from the Liquidators in October 2019, stating that each of C’s sales managers would handle their own customers for inventory sold, AR and consignment goods as they see appropriate. SF said that for each customer, matters would be reported to D1 via KL, and D1 would make the final call.

D1’s evidence

129.  In his witness statement, D1 explained that C was incorporated in the 1970s as a family-run business with no clear demarcation of duties, built on trust and confidence. As the youngest shareholder, D1 had always had a higher workload than the others and carried C on his back for over 50 years. D1 and WCL had primarily kept C afloat in the 1970s to 1980s, but in 1990s WCL was planning to emigrate to Canada and after 1997s returned to HK and turned his focus to Pan Yu and Diamond Ray; though he would be kept abreast of C’s affairs by Ringo Li, who gave WCL regular reports about C’s sales and finances.

130.  For the last two decades FS was only marginally involved, and rarely in the office. D1 referred to dereliction of duties by WCL and FS particularly towards late 2000s; but D1 did not complain and put in extra effort to make C a success. D1 denied the alleged seizure of control, saying that if so Ps and their associates could have taken steps as 50% shareholders and directors. He also denied that he made all major decisions regarding C’s business or was CEO or that different departments including the Exports Dept reported to him. D1’s position in C had always been chief jewellery designer, in charge of designing jewellery pieces and liaising with customers on this. He was important within C but never had key managerial or administrative responsibilities. He was never responsible for collecting AR, which responsibility fell on individual salespeople since FS had stopped performing this duty.

131.  Under cross-examination, D1 said WCL had never had a light workload, and had always been an important pillar of C. D1 and WCL were all along important pillars; TCM being responsible for the manufacturing section and not bothering himself with the business portion, and FS seldom attending the office. D1 said that he and WCL worked together every day talking about C, the business, customers, collection of payment, and securities, even though WCL travelled to the Mainland. He at one point agreed that he was in charge of U stock ie higher-end items, but later said that was for design of U stock.

132.  D1 said the Exports Dept was under the full authority of KL. If the second generation (SF, D2, CW and JT) approached D1 for guidance he would be happy to help, but for the Exports Dept he would refer them to KL. If issues related to Panyu or Diamond Ray he would refer them to WCL, and for manufacturing issues, to TCM. When asked if he had responsibilities other than design, D1 said staff would naturally approach the four bosses with queries, and for WCL and D1 they were responsible for design, manufacture and delivery.

133.  When questioned about the AR Document produced by the A/C Dept - which he indicated was every ½ month, 1 month or 2 months - D1 said he would read it and ask KL to follow up. All four bosses would receive this, and follow up on chasing receivables. D1 often saw WCL approach KL on the issue of receivables, but WCL never suggested that C should stop doing business with these customers. D1 accepted that he monitored and kept track of the outstanding AR, including by instructing KL to take appropriate follow up action; though he also said that he was not responsible for collecting AR[20]. D1 was not familiar with 80-90% of the customers, and did not speak good English; none of the customers were handled by him.

134.  D1 said he was not involved in striking business deals or handling the customers, and the Exports Dept was fully independent. D1 would only instruct KL to follow up after reviewing the AR Document. He disagreed that he oversaw and managed the Exports Dept and acted as ultimate decision-maker, but when the same point was put to him in relation to U stock he agreed at one point. When asked whether as boss he had a duty to supervise his subordinates in the Exports Dept including K1 and D2, he said “of course, as a boss that’s a responsibility of mine”. When it was put to him that there were different responsibilities in C with TCM looking after the HK workshop, WCL looking after Diamond Ray and Panyu, D1 looking after the affairs of the HK office and the Export Depts, and he answered that in general, one could say something like that.

135.  Every time Ringo Li raised matters with him, D1 would ask whether the other shareholders were aware of the situation, and would Ringo Li would say that all of them were clear. D1 accepted that he signed invoices showing a negative profit margin. If business deals involved some special issue or difficulty such as this, the salesperson would request one of the bosses to sign.

KL’s evidence

136.  KL was head and sales manager of the Exports Dept, and also one of the sales representatives. He supervised salespeople in that department.

137.  In his witness statement, KL said he primarily reported to D1 and WCL. He understood from his father that FS used to be responsible for collecting AR and managing customer relationships, and it was FS’s idea in the 1970s and 1980s to give individualised credit terms such as payment other than cash on delivery (“COD”) and payment by instalments. Around the 1990s FS played a lesser role in C. WCL was in charge of the Panyu Factory and Diamond Ray, and KL had frequent discussions with WCL about C’s business. D1 was the hardest worker in C, and ensured that C operated smoothly when the other directors began spending less time managing C.

138.  C periodically reviewed the monthly AR Document produced by A/C Dept, and the AFS were endorsed by the directors. It was the directors who ultimately abided by the business strategy to set higher profit margins to compensate for business drought or bad debts, and the directors were well aware how C dealt with its customers and of C’s financial status.

139.  Under cross-examination, KL accepted that as head of the Exports Dept, he was in charge of managing and supervising the collection of AR from customers, and also from his own customers.

140.  He at one point accepted that D1 was in charge of U stock, and that KL would seek D1’s opinion and report to D1 regarding U stock (which was most, but not all, of the goods sold by Exports Dept). KL did not report everything to D1, but would report problems or serious problems. KL would also seek D1’s opinion and consent in relation to consigned goods, though KL was responsible for this. He said that for invoices showing a negative profit margin, D1 needed to sign to be aware of the situation. At another point, however, KL disagreed that he only reported to D1 and that D1 was his supervisor in the Exports Dept.

141.  KL agreed that WCL was in charge of Panyu factory and Diamond Ray, and was not otherwise involved in C’s operations.

142.  KL said that all four bosses and SF received the regular AR Document produced every 1 or 2 months. KL did not report to D1 regarding outstanding AR, but D1 would look at the figures and tell KL to follow up. D1 and the other bosses did not know the details of the dealings with individual customers managed by the salespeople, including payment terms and periods granted. D1 did not access the documents and records of each customer. KL said that all four bosses were anxious about outstanding AR and oversaw the management of AR. FS, WCL and TCM would sometimes inquire about the Exports Dept, but KL did not report to them or D1 regularly.

143.  KL said that the overall risks of trading with customers (such as Schriener) were determined by the four bosses.

D2’s evidence

144.  In his witness statement, D2 explained that he joined C in 2002 as a Chief Executive of the Exports Dept, the other 2 Chief Executives being JT and CW. They acted independently, with D2 focusing on the USA, JT on Europe and CW on the Middle East.

145.  D2 strenuously denied the allegations of taking over C, and encroachment on the roles of Ps’ Camp. Panyu and the factory it held were managed by WCL, but D2 would see WCL at least 3 times per week unless D2 was on business trips. WCL actively inquired into sales conducted, the status of customers visited during a trip, and requested a detailed report regarding this and discussion on such report. D2 did not notice any health deterioration by WCL or FS, as alleged.

146.  Under cross-examination, D2 accepted that D1 was a senior figure in charge of C’s key management, saying that he was one of them.

147.  D2 agreed that the customers listed as his responsibility in the AR Document, were under his management, and he fixed the payment terms. KL was his direct supervisor, and he would report matters to KL when there were problems, but not for day-to-day operations. D2 would not report to D1 except at the initial stage for some old customers D1 was acquainted with; and he would not discuss Renee with D1. D1 was not involved with AR, and D2 would not discuss sales with him (D1 did not know about these), but rather with KL. D1 was chief jewellery designer at least for U stock, and D2 would often ask D1 about this aspect.

148.  As to the AR Document, it was usually KL who approached D2 on this, he did not recall D1 ever doing so. D1 would have been aware of general issues regarding AR, but did not manage the AR of D2’s customers, which were discussed with KL.

149.  Under questioning, D2 said WCL was one of the persons responsible for managing the Exports Dept. When asked if D1 was the ultimate decision-maker and supervisor of the Exports Dept, he said he was unsure since D2 reported to KL, and he did not know how KL reported. He later disagreed that he reported to D1, or that D1 was his supervisor regarding his customers in the Exports Dept.

150.  When questioned about his allegation that WCL would ask for written reports after business trips and why they were not in evidence, D1 said that the so-called reports were brief, comprising a pile of papers, invoices, and some drafts about products, sometimes with handwriting, gathered in folders, rather than formal reports. He said that he clearly called WCL speaking to him about collecting outstanding AR.

G3.  Factual Findings

151.  Below, I make factual findings on the central points relating to management and control of customer accounts, and related issues. Since the oral evidence of the various witnesses conflicted in certain respects, and there are not always documents shedding light directly on the issues in dispute, I make such findings on a balance of probabilities based on all the evidence and submissions received, and inherent likelihood.

152.  Ds submit that adverse inferences should be drawn from the absence of FS and WCL as witnesses[21]. I have considered these submissions, and do not consider it appropriate to draw adverse inferences, given the explanations proffered for the witnesses’ absence (essentially based on ill-health and age).

153.  However, I do take into account the absence of FS and WCL as witnesses, in assessing points of conflicting evidence on matters on which CW and SF did not have first-hand knowledge.

D2 and KL’s role and responsibility for accounts alleged by Ps

154.  In short, and having considered all the evidence, I accept Ps’ case as to the management, control and responsibility of customer accounts by D2 and KL, as set out in the SOC; including their responsibility to monitor outstanding AR for such customer accounts.

155.  I take into account that in their pleaded case, Ds only responded to Ps’ assertions of their control of such accounts by way of non-admission; and the further points based on Ds’ pleadings and ASF §32, referred to in Ps’ Written Closing Submissions (“Ps’ Closing”) Section D.

156.  Indeed, I consider that the resistance to Ps’ assertions of management/control/responsibility of customer accounts by D2 and KL, levelled by Ds’ team, was less strenuous than on the equivalent point for D1.

157.  As noted above, D2 and KL accepted responsibility for many of the accounts in question, and their responsibility for various of them also appeared in the AR Document, as well as their signatures on certain invoices and other documents.

158.  I also take into account that in their witness statements, D2 and KL did not dispute (or seriously dispute) their management/control/ responsibility of the accounts as alleged by Ps.

D1’s role and responsibility for accounts alleged by Ps

159.  Again, I take into account D1’s pleaded “non admission” of management, control and responsibility over the customer accounts listed in the SOC, and the other pleading points raised in Ps’ Closing Section D. I do note that the concept of management, control and responsibility is inherently imprecise, and accordingly make findings on the degree of control and responsibility exercised, in the case of D1[22].

160.  The witnesses were essentially ad idem that C had all along been operated informally, on the basis of mutual trust and confidence amongst the directors, and without written records of decisions made. Accordingly, I do not think that there was a formal division of responsibility as between the four directors[23].

161.  Having said this, I find that there was a de facto division of responsibilities and roles, whereby D1 had increasingly over time assumed a more active role in C generally compared to the other directors; and whereby WCL was primarily responsible for the Panyu Factory and Diamond Ray, TCM was primarily responsible for the HK factory/workshop, and FS’s role had become more peripheral. As the most active of the directors, D1 was regarded at least by some as the overall “boss” (his own statement accepted this to some extent, as did KL’s evidence). D1 was not merely a jewellery designer, nor was it the case that he never had any key managerial or administrative responsibilities.

162.  D1 was not part of the Exports Dept, which was headed by KL. However, D1 exercised supervision over that department, to a greater extent than the other directors. This is supported by: KL’s evidence that D1 was in charge of U stock and KL would report to D1 on U stock; also that KL reported to D1 on consigned goods and D1 was anxious regarding the same; D1’s acceptance that he was notified of/approved DCNs and was notified of returned goods; D1’s acceptance that he had a duty to supervise his subordinates in the Exports Dept including KL and D2; the evidence of D1’s monitoring and follow up in relation to outstanding AR[24]; the evidence in relation to the Manisha Protocol (considered below); the appearance of D1’s signature (and not that of the other directors) on invoices which showed a loss.

163.  The level of supervision in practice exercised by D1 was relatively “high level”. He did not access detailed documents in relation to customers, nor was involved with day-to-day dealings, transactions, invoices and payment terms, which were dealt with by individual salespeople/Chief Executives[25]. However, D1 did monitor outstanding AR after his receipt of the regular AR Document from the A/C Dept, and would press KL to follow up on this[26]. From time-to-time a salesperson or Chief Executive might approach D1 for guidance or where difficult issues arose, in which case he would give input.

164.  On balance, I take the view that D2 did not deal with or report directly to D1 in respect of customers under this control and guidance, but would report to KL[27]. However, he might sometimes consult D1 on difficult issues which arose.

Alleged seizure of control

165.  I do not think that it is necessary for me to make findings on the allegation of seizure of control raised by Ps, given in particular my other findings made below[28].

166.  Having said this, I consider it more likely that what occurred was in the nature of a gradual assumption of more responsibility by D1, as a result of the other directors taking a more limited role over or focussing on specific areas of C’s operations.

167.  In this regard, I rely inter alia on the relative paucity of documents supporting the “taking over” allegation; the absence of written complaint made in this regard by Ps’ Camp; and the fact that it was P’s own case that over time at least WCL and FS were less actively involved due to health issues.

168.  I have considered the various specific complaints made regarding D1’s conduct in CW’s and SF’s statements. While there may well have been matters in respect of which they were dissatisfied over the years, I do not think there is sufficient evidence to make good the allegation going as far as seizure of control of the Exports Dept and customer accounts, or true exclusion from management, given the above factors. I am further persuaded by Ds’ arguments that if so there would have been legal remedies open to Ps which were not pursued or threatened (and they could as directors eg have summoned board meetings).

Knowledge of Ps’ Camp

169.  Ps do not dispute that they their camp had some general knowledge that substantial AR and consignments remained outstanding for long periods from various customers including Renee and Manisha; but say that they did not have detailed knowledge until after the MVL when documents were disclosed by the Liquidators[29]. Ps argue that this issue is something of a red-herring, since their evidence is that P’s Camp repeatedly voiced objection to the long outstanding AR, and did not have access to detailed accounts or knowledge of other egregious practices (such as DCNs and RCNs) until after the MVL.

170.  There was conflicting evidence as to whether the AR Document which was regularly issued by the A/C Dept, was given only to D1/KL, or also to WCL, or to all four directors. There is some difficulty resolving this issue since there was only oral evidence on point. On balance, in the absence of evidence from WCL, I am minded to accept that he at least received this document from time-to-time, and that would complain/follow up on outstanding AR[30]. However, I do not think that WCL or the other directors exercised the same degree of supervision of the Exports Dept as D1.

171.  I accept that D1 would convene informal meetings by asking SF to do so (supported by WhatsApp messages exhibited by SF). Further, annual meetings were conducted informally, by D1 talking through certain documents and figures. It was CW’s own evidence that at such meetings, D1 would provide an update on the amount and size of AR from major customers, so it is clear that the other directors would have some knowledge of this issue from such meetings. I also accept that Ps’ Camp expressed concerns to D1 at such meetings as to outstanding AR and requested him to follow up; and the other directors would sometimes ask KL about outstanding AR.

172.  On balance, I do not think that the other directors had detailed knowledge of the way that the customers in question were handled by KL, D2 and the relevant salespeople, for example the detailed payment patterns.

H.  Ps’ HEADS OF CLAIM: PRE-OCTOBER 2018

173.  In the sections below I set out my analysis and conclusions on each head of claim made by Ps in turn, starting with the period before the October 2018 Resolution[31].

174.  I do so broadly in the order in which they appear in Ps’ Closing.

175.  Both parties made very lengthy and detailed written submissions[32]. I do not think it feasible to deal with every point there made or item of evidence relied on. Rather, I deal with the main points which I consider pertinent and which inform my judgment.

I.  FAILURE TO FIX PROPER PAYMENT TERMS/PROPERLY MONITOR C’s CREDIT RISK[33]

I1.  The Complaint

176.  In respect of the OAR Customers, Ps allege that Ds were in breach of the Best Interests Duty and the Duty of Care by failing to fix any or proper payment terms and failing to properly monitor C’s credit risk[34]. Details of the invoices complained of are set out in Annex A to the SOC (“Annex A”).

177.  In particular it is said, inter alia, that:

(1)  Ds fixed no payment terms at all for most orders placed by the OAR Customers, since payment terms on invoices were often left blank, or marked as COD which was simply inserted by default, was meaningless and not enforced. Accordingly, say Ps, OAR Customers were allowed to pay as and when they wished, or not at all[35].

(2)  No payment terms were fixed for most invoices issued to Renee, even though they concerned orders involving gold, metalling and labour work, for which COD terms should have been imposed[36].

(3)  Ds did not require the OAR Customers to pay any deposit before taking the orders, even in relation to orders for tailor-made jewellery items or goods re-designed to customers specifications, which should have been done[37].

(4)  The AR Policy adopted by C and reflected in its AFS (for which see below), including that trade receivables were due within 90 days of billing, was not applied at all[38]

178.  These complaints were elaborated in detail in Ps’ witness statements, which I have considered[39].

179.  Ds’ pleaded position includes that:

(1)  D1 and D2 did in fact monitor the creditworthiness and repayment/credit history of their relevant customers when determining the credit to be extended to each customer. Ps were well aware of, or were at least in a position to ascertain, the repayment/credit history of each of the customers and the credit extended, but had never complained prior to the MVL.

(2)  Many customers of C including the OAR Customers would make payment in a cyclical manner.

(3)  Notwithstanding payment terms on invoices, D1 and D2 took carefully considered business decisions not to enforce the payment terms strictly on the OAR Customers, but rather allowed a degree of flexibility for them to settle, after careful consideration of factors such as the customer’s creditworthiness, the profitability of the order, the pre-existing relationship with the customer, and the perceived risks of default. Such business practices allowed relationships with the customers to develop and reaped benefits for C.

(4)  P’s Camp was well aware that the C did not enforce payment terms strictly against all of its customers, and allowed a certain degree of flexibility; yet never raised any issues or concerns prior to the MVL.

(5)  The irregular payments of which Ps complain were in fact cyclical payments by the OAR Customer to settle invoices.

(6)  It was only the sudden and abrupt MVL that caused the OAR Customers to stop trading with C and settling their invoices; but for which they would have continued making cyclical payments as they had throughout the years.

I2.  The AR Policy

180.  It is common ground[40] that the AFS of C the for the year ended 31 March 2018 set out the following policy in relation to credit and AR:

“Trade receivables are due within 90 days from the date of billing. The Company has policies in place for the control on and monitoring of its credit risk, like credit limits are granted to customers with an appropriate credit history. These evaluations focus on the customer's past history of making payments when due and financial ability to pay, and taking into account information specific to the customer as well as pertaining to the economic environment in which the customer operates.”

181.  Further, it is agreed that a policy in relation to credit and AR to similar effect was adopted by C for the financial years ended from 31 March 2014 to 31 March 2017.

182.  This is collectively referred to as the “AR Policy”. At SOC §25, Ps plead a number of specific duties owed by Ds and said to flow from the AR Policy, including monitoring and controlling the credit risk of C’s customers by fixing proper payment terms in accordance with that policy; requiring COD terms for gold, metaling and labour work; keeping themselves apprised of the history of repayment of AR and creditworthiness of customers; and taking other reasonable steps to minimise C’s exposure to credit risk.

183.  Ps’ case and evidence is that in dealing with the OAR Customers, Ds repeatedly flouted the AR Policy and the duties referred to above[41].

184.  Ds plead that the AR Policy was intended to be applied in a discretionary manner, on a case-by-case basis in relation to each customer, in line with industry or trade practices, in the best interests of C, and flexibly in accordance with such factors[42].

185.  Ds argue that the wording of the AR Policy itself allows for flexibility in terms of credit granted, based on an evaluation of various factors including the customer’s past history of payments and the economic environment[43]. Ds further argue that Ps’ Camp would have been aware of long outstanding AR despite the AR Policy, from various features of the AFS including ageing analysis contained therein. In addition, SF had herself granted payment terms longer than 90 days to her customer, Simplex Diamonds.

186.  Under cross-examination D1 said the policy was applied flexibly. If C’s policies were strictly adhered to, he said, C would have folded in 3 years. D1 said he told staff members about this rule or “so called” rule, but there was never a strict policy per se [44].

187.  When questioned, D2 seemed to have limited familiarity with the AR Policy, though his responses included some references to flexibility. He also said that terms were not able to be fixed unilaterally, because the customer may have its own strict payment policy which needed to be accommodated if C wanted to conduct business with them.

188.  When questioned about the AR Policy, KL said that he was unaware of it and had not been told about it.

189.  In cross-examination, CW accepted that it was always C’s policy to give some flexibility to the sales representatives on the AR policy. However, an objective and reasonable bottom line had to be in place so that the flexibility would not be abused[45].

I3.  The Payment Terms that were Imposed

190.  The payments terms for the invoices complained of were set out in Annex A, the accuracy of which did not seem to be disputed. In short, few of the payment terms are 90 days, many of them are COD, and some of the invoices have no payment term written on them at all.

191.  Further, the AR Document for 31 October 2018 shows that a large amount of receivables from the OAR Customers had been outstanding for periods longer than 90 days, including large amounts longer than 210 days.

192.  This was further apparent from the Statements of Account which were produced in respect of each OAR Customer, showing the history of payments, receipts and balance of outstanding AR in the years leading up to the MVL.

I4.  The COD Term

193.  Under questioning, KL’s evidence was that the COD term was simply printed on invoices by default, by C’s computer system. This was confirmed by D1. KL said this was better than leaving the term empty, and the customer would be chased for payment later.

194.  When cross-examined, D2 accepted that there should be payment terms imposed on all sales, and that it would not be in accordance with industry practice to impose no payment term. He said that terms would be mentioned to customers at the outset, or discussed later. It was not the case that there were no terms, but they were not written out, and customers would pay regularly[46].

195.  D2 also said that COD was only a default term on invoices generated by C’s computer. I consider that there was some lack of clarity in his evidence as to whether he was saying that there was a separate handwritten invoice issued to customers which may have terms different to printed invoices, though he appeared to say so at least at times.

196.  In short, on this point, I find that the COD terms on the relevant invoices were simply generated by C’s computer system by default, and they were routinely not enforced[47].

I5.  Ds’ General Evidence on Dealings with the OAR Customers

197.  In his witness statement, D1 said credit periods such as those granted to large customers of C were commonplace in the jewellery business. C’s customers were accustomed to paying in a cyclical fashion, settling payments sometimes between half a year and two years later.

198.  Ps’ complaints should be understood against the norms and customs of the jewellery industry, which in HK operated on trust and reputation. It was commonplace for payment to be effected 6 months or longer after delivery, and AR to be accrued on a rolling basis for long-term clients. C had operated in this way for decades, which played a part in its growth. D1 could hardly imagine a jewellery manufacturer insisting on strict COD payment terms, especially from repeat customers; and if so, it would have no repeat customers.

199.  When questioned, D1 said the “so called” COD term had never been executed/enforced by C. It was always the case that they would gradually chase after payments following delivery of goods, and he had heard this from FS.

200.  D2’s witness statement included similar evidence that the credit periods granted to large customers were in line with industry practice in the jewellery business. It had always been C’s practice, at least since he joined in 2002, not to insist on COD even if physical invoices provided for that. If credit periods were substantially tightened, this would damage relations with long-term customers who would most likely be lost. It had always been a common understanding between C and its regular customers not to insist on payment on delivery, but rather after a reasonable period of time.

201.  When asked why, in general terms, D2 continued to trade with the OAR Customers he dealt with and considered that in C’s best interests, D2 said they were long-term customers, and it was necessary to take into account the market. The customers may not accept different payment terms such as COD or 90 days. He considered it in C’s best interests to build a long-term relationship with the customers to maintain growth. If one insisted on COD terms but lost customers as a result, C would be harmed[48].

202.  When a customer’s repayment history was bad, they would do many things like fly over to have discussions, look at the customer’s trading in shops, and their assets. They would press customers quite frequently for payment. A judgment would then be made whether to continue to transact with such customers[49].

203.  KL said he understood from his father that it was FS’s idea in the 1970s and 1980s to give individualised credit terms to different customers, such as payment terms other than COD, and allowing payment by instalments[50]. This allowed C to attract more business compared to its competitors. KL also gave evidence similar to Ds that: credit periods granted were in line with industry practice; it had always been C’s practice at least since he joined in 1988, to vary/tailor payment terms depending the customer, and not insist on COD even if an invoice so stated[51].

204.  Under questioning, KL said he would monitor the creditworthiness of his clients, considering numerous factors including their repayment capacity and profits made. For new customers, they would be more cautious. When cross-examined in relation to Schreiner’s payment pattern, KL explained why he continued to carry out business with Schreiner. He said this type of customer gave business consistently, and profit was accumulated. It was in this trade necessary to carry out business with this kind of customer in such a fashion, placing trust in them. C would collect payment as soon as possible to keep profits rolling, and secure business deals as soon as possible. When they dealt with a customer they would visit them, try to know the customer better and have references from people in the trade[52].

205.  Ds also relied on certain statements in C’s AFS to the effect that trade receivables were from customers who have a “good track record”, and that based on past experience management believed no impairment was necessary and the balances were expected to be fully recoverable[53]. Accordingly, said Ds, the management of C in general had taken the view that the balances of AR were expected to be fully recoverable, and the customers had a good track record.

206.  As set out in Sections G2 and G3 above, there was some degree of disagreement between the parties as to the extent of awareness of the other directors (ie WCL, FS and TCM) of the AR from the OAR Customers and the detail of how business was conducted with them.

I6.  Analysis and Conclusion

207.  It is perhaps easy to become lost in the detail of the evidence and complaints made by Ps. I consider, however, that certain of that detail can be cut through.

208.  I take the view that this head of Ps’ complaints  - and various others dealt with below - engage the high threshold for intervention where the court is faced with commercial decisions. I am not persuaded that given that threshold, Ps are able to demonstrate that there was a breach of duty by D1 (to the extent that he was responsible) or D2, in respect of the payment terms or granting of credit to the OAR Customers.

209.  The focus of Ps’ complaints is very much on the commercial soundness of the payment terms granted, the monitoring of C’s credit risk, and effectively, the decision to continue to trade with the OAR Customers and grant credit notwithstanding their payment patterns and large amounts of outstanding AR. Accordingly, the principles referred to at §§59 and 60 above come into play.

210.  As there set out, the court is ill-positioned and very slow to second guess the business or commercial judgment of directors (and the same must apply to senior officers). This informs my assessment whether there was any breach of duty, including of the Duty of Care.

211.  In my opinion, and having considered all the relevant evidence, the decisions to grant payment terms to the OAR Customers, the manner in which those terms were enforced or not enforced, and the credit assessment whereby trade was continued notwithstanding substantial outstanding AR, were business or commercial decisions taken by the persons in charge of the accounts in question. The basis for taking those decisions was as set out in Ds’ evidence, taking into account multifarious factors, and would further have involved assuming a calculated risk: see Section I5 above[54].

212.  I refer in this context to the Statements of Account for the OAR Customers, which as noted above show the historic pattern of transactions, payments, and outstanding AR. Since it is impractical to here deal specifically with each OAR Customer, I will focus on those for which Ps claim the most quantum, by way of example and illustration.

213.  Schreiner. This customer accounts for by far the largest quantum of outstanding AR claimed by Ps, namely HK$23,348,494.67[55]. The invoices complained of in Annexe A start in October 2017. If one examines Schreiner’s Statement of Account starting April 2015, it is apparent that Schriener did have a long history of making large lump sum payments periodically up to the period complained of, and at times substantially reduced large outstanding AR by making such payments. For example, on 31 July 2015 the amount of AR outstanding was nearly HK$27 million, but several large payments were made reducing the outstanding amount to over HK$9 million by end October 2015. Other examples include large payments made in April and September 2018, which substantially reduced the outstanding AR.

214.  Renee. The amount claimed for this customer is HK$3,879.000.21. The invoices complained of in Annex A start in March 2018. If one examines Renee’s Statement of Account starting April 2013, one again sees that notwithstanding substantial amounts of outstanding AR, large payments were made from time-to-time bringing down the outstanding AR and making good on portions of the customer’s debts. For example, for the period from February 2017 to say March 2018, the amounts of outstanding AR were reduced from approximately HK$10 million to the region of HK$6 to 7 million, and by 8 October 2018 this balance had been reduced to the region of HK$4 million.

215.  Al Majed. The amount claimed by Ps is HK$2,508,5998.76, and the invoices complained of in Annex A start from February 2018. By way of example, from 1 April 2012 to 18 February 2014, the amount of outstanding AR was kept reasonably stable (around the region of HK$7 to 8 million) by the receipt of periodic large lump sum payments. The level of outstanding AR reached approximately HK$24 million around March/April 2015, but large lump sum payments were made bringing this to around HK$12 million in November 2015. The balance rose again to over HK$23 million in February 2016, but large payments were made over time bringing this under HK$ 8 million by August 2017.

216.  Albert K Ltd. The amount claimed by Ps is HK$2,097,382, and the invoices complained of in Annex A start from November 2017. The Statement of Account starts from Aril 2012, with outstanding AR gradually building up (despite periodic payments) to around HK$3.7 million by early November 2017. A series of payments was then made reducing the balance below HK$3 million, with a further series of payments in November 2018 to January 2019, reducing the balance to around HK$2 million.

217.  In broad terms, notwithstanding the often very long periods of time taken to pay, the customers frequently did make good on their debts by large periodic payments, and frequently made good on large amounts of debt[56].

218.  In these circumstances, I am not persuaded to accept that the business judgment which was exercised in trading with and extending credit to these customers in the manner complained of, was something which no reasonable director or senior officer would make, given the numerous factors which fell to be and were taken into account.

219.  As to the Best Interests Duty, I consider that D2 (and to the extent that he was responsible D1) did consider C’s interests, and honestly believed that transacting in the way they did was in C’s best interests. It follows that there was no breach of the Best Interests Duty in this part of Ps’ complaint.

220.  As to the Duty of Care, I do not consider that the way in which trading was conducted with the OAR Customers fell outside the generous ambit which is afforded to directors and senior officers to make business judgments on such matters. It is to be emphasised that directors are in the business of taking risks, and the mere fact that a particular transaction may have resulted in loss (even if that is the case) does not, of course, mean that there was a breach of duty.

COD term and AR Policy

221.  Ps argue that given the evidence on COD terms (see above), in fact no payment terms were actually fixed at all for most of the orders placed by the OAR Customers[57]. That is because most of the payment terms as set out in Annexe A are either COD – which Ds’ witnesses said were default terms generated by C’s computer – or in some cases blank.

222.  I can certainly see that this is less than ideal. However, I am not persuaded that this amounted to a breach of legal duty by Ds.

223.  First, I do not see that the fact that the COD term on the invoices was issued by default and not enforced, means that there is no payment term at all. Rather it suggests that the payment term is COD and payment might legally be sought from the customer if it came to enforcement, immediately or at any later stage.

224.  Second, in cases of no payment term at all, the customer would presumably still be under a legal obligation to pay eventually (likely within a reasonable time).

225.  Third, I consider that the way in which payment terms were handled was simply part of the business decision or approach taken when dealing with the customers in question; namely pressing for payment periodically and permitting that to be made in lump sums from time-to-time - for which see my reasoning above.

226.  Ps also argue that it is one thing to apply the AR Policy flexibly, but another to completely ignore it, which is what occurred[58]. I agree that in respect of the OAR Customers, any policy for a 90-day payment period was largely not applied.

227.  I take the view that there was room for flexibility and judgment on the face of the AR Policy, as Ps’ witnesses accepted. In addition, in light of the evidence discussed above, I find that the other directors, CW and SF were essentially aware that a 90 day payment policy was not being applied at C. This is evident from, for example, Ps’ own evidence that they were made aware of various details of the outstanding AR at regular meetings chaired by D1, and they frequently complained and pressed for payment to be made[59].

228.  Further, I do not think that the imposition of a 90-day payment period in all cases – leaving aside the question whether the transactions would have occurred at all on such terms – would necessarily have resulted in earlier recoveries. There is, after all, a difference between the date upon which the price is payable, and that on which it is paid, and there can be little question that under the sales in question payment would have legally to be made eventually. To put the matter another way, the stated COD terms which appeared on many of the invoices actually provided for payment to be due earlier than 90 days from billing[60].

COD for gold, metalling and labour

229.  Ps complain specifically that COD terms should have been imposed for orders concerning gold, metalling and labour work, in particular Renee, whereas in fact no payment term at all was generally stated on invoices for Renee[61].

230.  In his witness statement, CW said that as a matter of business commonsense and industry practice, as well as C’s established practice, it was customary for such works to be charged on a COD basis, as sellers such as C are generally required to pay their labour, gold and metal suppliers COD. Therefore, unless COD terms are imposed, sellers such as C are effectively required to extent credit and pay sums to their suppliers in advance to produce goods for customers, which strains cash flow and enhances credit risk[62].

231.  Under cross-examination, D1 agreed that it was industry practice to require payment for gold, metalling and labour on COD terms. When asked about Renee specifically, he initially agreed that the terms should be COD. However, he went on to say that in practice, C had never executed this term, but rather would always gradually chase payment after delivery of the goods; that was what he had heard from FS. The term was there on paper, but it was never executed.

232.  When questioned, D2 denied that there was an industry practice requiring payment for gold, metalling and labour work to be on COD terms. That was the practice in the jewellery industry a long time ago, and there were no COD terms these days for gold, metalling and labour. D2 accepted that his evidence differed to D1’s, and said his father would be talking about older practices.

233.  In short, even proceeding on the assumption of an industry practice as alleged by Ps, I am not persuaded that it was outside the ambit of reasonable business judgment or discretion to contract with Renee (or other similar customers) on other terms. Rather, this would have been a calculated business risk within the ambit of reasonable disagreement amongst commercial people. As noted above, for example, Renee did in fact make payment of its debts from time-to-time by way of lump sum. It is also unclear whether, had COD terms been insisted upon, the transactions with Renee would have occurred at all.

Absence of deposits

234.  Ps complain that Ds did not require the OAR Customers to pay deposits before taking orders, including for orders of tailor-made jewellery or items designed to specifications. This was so even for customers based outside the jurisdiction or a sole proprietor such as Schreiner, and/or with poor repayment history[63].

235.  Ds plead inter alia, that these were business decisions taken after careful consideration of several factors. Ps’ Camp were well aware that C did not require deposits to be paid for all tailor-made orders, but never raised any concerns prior to the MVL[64].

236.  When asked about this, KL said that deposits were not taken because these were long term customers, from whom money had been earned, referring to Schreiner’s sales volume of $230 million odd, and to profits made. Business decisions were taken after consideration of different factors. KL accepted that tailor made goods involved higher risk, and that C needed to incur up-front production costs, so that if C proceeded to produce such goods without requiring a deposit and the customer defaulted, C might have incurred production costs for nothing.

237.  D2 said under questioning that security deposits were not the practice of the industry. If business with a customer started without taking a deposit, then a deposit was suddenly asked for, this would hurt the customer relationship.

238.  Once again, in short, this is in my opinion a business judgment reached on a bona fide consideration of various factors and risks, and not outside the ambit of judgment afforded to a director or senior employee, whatever was the general industry practice. It may well be that the approach entailed risk, but as noted above, directors and persons of commerce are in the business of taking calculated risks.

239.  I also note that Ps’ Camp were aware that deposits were not being placed for tailor made items, though they say that they had complained of this[65]. Further, it is again unclear whether the transactions would have occurred at all, had different terms been sought.

J.  FAIULRE TO ENFORCE PAYMENT TERMS/COLLECT ACCOUNTS RECEIVABLE FROM THE OAR CUSTOMERS[66]

J1.  The Complaint

240.  There is considerable overlap between the complaint considered in this section, and that in the previous section.

241.  Ps here complain that: (i) for most of the invoices in question, no payment term was fixed such that none could be enforced; (ii) even where payment terms were fixed they were not enforced by Ds; (iii) Ds did not take proper steps to collect outstanding AR from the OAR Customers and effectively condoned them paying as and when they wished, in whatever amount they wished, or not at all; and (vi) the AR Policy was simply ignored[67].

J2.  Evidence as to Steps Taken to Collect AR

242.  As noted above, it was CW’s and SF’s evidence that the outstanding AR would be discussed at meetings chaired by D1, and that Ps’ Camp would complain about long overdue AR and urge their collection.

243.  KL’s witness statement gave evidence of various steps he took from time-to-time to try to collect outstanding AR for C[68]; which he elaborated orally. When the A/C Dept encouraged him to recover payment from customers, he would aggressively chase them. In addition, as soon as he saw the AR Document he would look at what was outstanding and take steps to follow up on payment.

244.  As noted above, D2 gave evidence when asked about Renee that they would fly over to locate customers, have discussions with them, and press them quite frequently on payment. When asked about Albert K, D2 said when they flew to the US periodically for shows, they would go to check the accounts with clients and collect payments from them.

245.  D1 made various references in his oral evidence to reminding KL to chase customers with outstanding receivables. In practice COD terms were not enforced but they would gradually chase for payment after delivery.

246.  I accept Ds’ evidence to the effect that steps were taken from time-to-time to follow up on payments with the OAR Customers, along the lines described above. Ps complain that no documentary evidence was produced of attempts to chase payment, but it does not follow that attempts to chase payment were not made by other means as described by Ds’ witnesses.

247.  I further find it inherently likely that at least some attempts to chase payment were made. D1 was, after all, a shareholder of C and it would be in his interests (and indirectly in D2’s) that C should prosper.

J3.  Analysis and Conclusion

248.  This area of complaint can be dealt with on a similar basis to the previous one.

249.  I have found as a fact that at least some steps were taken to chase for payment from the OAR Customers: see above. I do not accept the assertion in Ps’ Closing that the OAR Customers were effectively permitted to not pay at all.

250.  Even assuming that the method of chasing payments was not particularly aggressive, I do not see that this falls outside the ambit of a reasonable business judgment afforded to directors and senior officers. Rather, this was simply part of the approach which Ds’ witnesses described for dealing with the Outstanding AR Customers[69]. This approach was a calculated business risk or approach which was within the permissible scope of judgment given to the decision-makers[70].

K.  “PROFIT ONLY” APPROACH AND DISREGARD OF C’s TRUE FINANCIAL POSITION[71]

251.  This area of complaint appears in Ps’ Closing, but is not specifically pleaded. I will attempt to deal with it concisely.

252.  First, Ps complain that it emerged at trial that Ds focussed solely on “profit” when they decided to contract with the OAR Customers. Ps refer in closing to parts of the evidence where Ds’ witnesses indicated a focus on profit when dealing with those customers.

253.  However, looking at the totality of the evidence, I do not think that in deciding whether to transact with the OAR Customers, Ds’ witnesses considered only the profit to be made from the transactions. For example, as set out above D2 referred to factors such as the long-term relationship with the customers, the market, whether the customer was regarded as trustworthy and the different payment terms they may accept, as well as assessment by reference to their shops and assets. KL said he would monitor the creditworthiness of customers including their repayment capacity and profits.

254.  Second, Ps argue that the despite Ds’ witnesses referring to profits from the OAR Customers, C had been trading at an operating loss with severely negative cash flow for years: see figures at Section B6 above. CW also gave evidence of C’s serious cash flow issues over the years, which he said were jeopardised by Ds’ failure to fix proper payment terms and collect AR[72].

255.  Ps say that it is one thing to talk about profits, but another to talk about cash flow ie liquidity. C’s cash flow had been negative, ranging from HK$6.4 million to HK$39.2 million from 2013 to 2018 (using year-end figures). Accordingly, Ds’ decisions to trade with the OAR Customers in the way that they did, in the face of C’s negative cash flow, further demonstrates a breach of duty.

256.  During oral closing submissions, Mr Tang for Ds made detailed reference to C’s AFS from 2014 to 2018, to argue that C’s general financial position, profitability and cash position, was in fact more favourable than the impression given by the figures in the ASF; though Mr Hew pointed out that CW’s evidence on cash flow was not challenged in cross-examination. Ds also argued that even the figures in the ASF showed that the total amount of C’s AR was reduced over the years leading to 2018.

257.  I have carefully considered this line of argument, but I do not accept it, for reasons similar to those previously given. As to the Best Interests Duty, I think that the decisions to transact with the OAR Customers were made in the bona fide belief that they were in C’s best interests. As to the Duty of Care, I do not think that I can conclude on the basis of the evidence set out above, even taking into account C’s financial position and cash flow, that the manner of trading with the OAR Customers was outside the ambit of discretion afforded to commercial decision-makers.

258.  Third, Ps point to the evidence of Ds’ witnesses under questioning as to their state of knowledge of C’s financial position. I accept that this evidence was not entirely clear and consistent.

259.  KL said that he was alerted to C’s cash position; but also that as a sales person he did not pay attention to the financial position, and whether to take on business with eg Schreiner was up to the “four bosses”. He did not really look at C’s management accounts or cash position, but the A/C Dept would sometimes alert him to low cashflow in which case he would chase customers for payment. When asked if he knew about C’s operating loss for 2015 to 2018, his evidence was to the effect that he broadly knew C was “in the red”, but he later said this was only speculation.

260.  D1 initially said that he did not look into cash flow deeply, and only listened to what Ringo Lee of the A/C Dept told him. His evidence was somewhat contradictory/unclear as to whether he read the AFS, but he said he looked at monthly statements and the AR Document, which would have shown C’s current cash position and cash flow. He initially accepted that he would accordingly have been aware of C’s negative cashflow, but then said that the cashflow was never negative. D1 said he was aware of C’s operating losses from 2015 onwards, and that the other shareholders were also aware of this.

261.  D2’s evidence was that he did not know whether C was operating at a loss as a whole, and he suggested that the financial statements shown to him in cross-examination might only have been prepared for tax purposes[73]. D2 questioned where money came from to pay staff, if C were really operating at a loss, and had negative cash flow. He said that he did not have professional knowledge of such matters, but he never heard from the A/C Dept or his colleagues that the financial position was not healthy or C had run out of money. He said that he did not look at the AFS, though he may have in 2018. WCL would every now and then alert him to C’s cash flow, but as a salesperson he would not generally be interested.

262.  Ps argue that accordingly, there was a failure to monitor C’s credit risk with a rigour commensurate with its true financial position. To the extent that Ds were unaware of financial difficulties facing C, they were negligent in transacting with the OAR Customers without apprising themselves of C’s true financial position.

263.  On this point, I consider on balance that D1 was likely to have had an ongoing awareness of C’s broad cash-flow position, on the basis of the evidence set out above; and that any inconsistencies in his evidence were likely due to poor recollection. I so find. D1 was also aware of the outstanding AR from the regular AR Document, and instructed others to chase for payment when this was received.

264.  Given my finding above – that D1 exercised de facto supervision over the Exports Dept including D2 and KL - I do not think that the decisions to continue to trade with the OAR Customers were made without any reference to C’s cash flow or financial position.

265.  Accordingly, and for reasons similar to those elaborated above, I am not persuaded that continuing to transact with the OAR Customers in the manner complained of was in breach of duty, even in light of Ps’ arguments on C’s financial and cash flow position.

L.  CAUSATION, LOSS AND DAMAGE: CLAIMS REGARDING THE OAR CUSTOMERS

266.  Ps claimed the AR which are outstanding from the OAR Customers, in the amount of HK$34,774,799.87, on the basis that but for Ds’ breaches of duty, C would not have lost, but rather would have collected, those AR[74].

267.  As noted above, I made a preliminary ruling that Ds are not entitled to argue that the outstanding AR remain recoverable, since that was not pleaded.

268.  Given my findings on breach of duty, it is unnecessary for me to resolve the questions of causation and quantification which would otherwise arise.

269.  However, I would comment that it is unclear whether Ps’ case on loss could be established, though this may depend on the type of breach of made good[75].

270.  If, for example, there was a breach of duty by failure to fix proper payment terms, there is a potential difficulty in establishing that it would have been possible to trade with the OAR Customers at all on different terms, and if so that such terms would have led to the outstanding AR being recovered. If there was a breach of duty by trading with the OAR Customers at all, the correct measure of loss may not be the outstanding AR (as opposed to eg the cost of the transactions to C).

271.  If there was a breach of duty by failing to take sufficient steps to recover AR, Ps would seem to be required to establish on a balance of probabilities that if proper steps had been taken, more receivables would have been recovered. Since the outstanding AR have not been recovered to date, I am not persuaded that has been made good (see further Section Q below).

272.  In addition, it was part of Ds’ case that: (i) by the notice posted on 31 August 2018, Ps’ Camp effectively compelled C to cease operations and created a fait accompli forcing Ds’ Camp to agree to the MVL; and (ii) it was the sudden and abrupt cessation of C’s business and/or the MVL which caused the OAR Customers to stop trading with C and decline to settle their invoices[76]. Given my findings above and below, I do not consider it necessary to address or resolve these issues.

M.  DISCOUNT CREDIT NOTES AND RETURN CREDIT NOTES: PRE-OCTOBER 2018[77]

M1.  Overview

273.  Ps allege that Ds breached the Best Interests Duty, the Trustee Duty and the Duty of Care[78] by issuing DCNs (discount credit notes) and RCNs (return credit notes).

274.  The DCNs are said to be credit notes by which a discount/credit was given by C to a customer retrospectively in relation to a previously invoiced item or customer’s balance of receivables[79]. The RCNs are said to be credit notes whereby a discount/credit was given by C to a customer in relation to goods that had been previously delivered and invoiced for, but which were returned to C at or around the date of the RCN[80].

275.  The DCNs and RCNs complained of are set out in Annexes B and C to the SOC respectively (“Annex B” and “Annex C”), in relation to various customers said to be managed by D1, D2 and/or KL. For the DCNs, the tables provided set out the customer name, invoice amount and date, credit note date, discounted amount and percentage, and number of days a discount was issued after invoice. For the RCNs the table provided sets out similar details, save that there is no percentage discount (since the credit note is issued in respect of returned goods).

276.  Ps’ complaint is that the DCNs and RCNs were issued without justification and not in C’s interests. Accordingly, Ps claim loss and damages in the amount of the receivables – said to be C’s assets – which were written off by Ds in alleged breach of duty.

277.  During the course of the trial, Ps referred to extensive details of the DCNs and RCNs issued - such as instances on which a large number of credit notes were issued on a single day, and long periods of time after corresponding invoices (sometimes several hundred or even thousands of days) - in furtherance of their case that the DCNs/RCNs were issued without justification.

278.  Ps’ complaints were further detailed in their witness statements, which I have considered[81].

279.  Ds plead as follows on the DCNs[82]:

(1)  The giving of discounts or credits to customers via DCNs was the result of a properly considered business decision;

(2)  It is a widespread practice in the jewellery industry in HK for a manufacturer to offer a substantial discount or credit when a customer makes a justified complaint that the goods delivered are sub-par and/or not of merchantable quality;

(3)  Such practice by C directly resulted in C’s good reputation in the industry over the years, and in turn reaped substantial benefits for C;

(4)  The practice of issuing such DCNs was known to Ps’ Camp and no issues were raised prior to the MVL;

(5)  In respect of DCNs issued after the October 2018 Resolution, Ds also plead that the discounts formed part of the Ds’ efforts to collect outstanding AR from customers. Rather than simply repeatedly reminding customers of the outstanding sums or resorting to litigation outside the jurisdiction, D1 and D2 took the business decision to offer discounts to some customers in an effort to make those customers settle outstanding amounts.

280.  Similarly, Ds plead as follows on the RCNs[83]:

(1)  It is standard practice in the industry for a manufacturer to offer a substantial discount, or accept returns, when a customer makes a justified complaint that the goods delivered are sub-par or not of merchantable quality;

(2)  It has been C’s practice at all material times to offer such discounts or to accept returns in such circumstances;

(3)  Such business practices contributed to C’s good reputation within the industry, and good relationships with its customers;

(4)  The practice of issuing RCNs under such circumstances was known to Ps’ Camp, and no issues were raised prior to the MVL;

(5)  Each RCN was the result of a business decision taken by D1 or D2 or KL (as the case may be) after careful consideration of several factors, including inter alia the profitability of the order, the pre-existing relationship between the customer and C, and the justifications for the customer’s complaint about the product.

(6)  In respect of RCNs issued after the October 2018 Resolution, Ds also plead that the RCNs formed part of D1 and D2’s endeavours to collect the outstanding receivables from customers. Rather than simply repeatedly reminding customers of the outstanding sums or resorting to litigation outside the jurisdiction, D1 and D2 took the business decision to offer discounts to some customers in an effort to make those customers settle outstanding amounts.

M2.  Ds’ Key Evidence on Justifications for the DCNs and RCNs

281.  KL’s oral evidence included that a justified complaint about quality was one of the reasons for issuing a substantial discount. When it was put to him that none of the DCNs and RCNs were due to quality disputes, he said for some of them yes, for others no, there must be a reason behind the notes.

282.  When asked why many DCNs were sometimes issued in one day, he said that customers would come to shows in HK periodically, and if there were problems with the invoices they would ask for a discount in one go. For the problematic invoices, customers would not settle the payment, so a discount note would be issued. He was not able to recall the reasons for each individual credit note on which he was questioned.

283.  When asked about an RCN issued to Al Mahaba, he said that the customer had monetary problems due to an embargo imposed on Russia, and it was agreed to take back the goods rather than receive nothing. When asked about a DCN issued to Manisha 899 days after the invoice, he agreed that it was probably not due to quality issues, but the customer may have asked for a discount. He said that if the customer was a good one, and asked for a discount before payment was made, he would have to accept it; if the credit note was refused, they may not pay at all[84].

284.  D2’s witness statement essentially mirrored Ds’ pleaded case on DCNs and RCNs[85].

285.  Under questioning, D2 said some credit notes were issued due to quality issues, and some to induce repayment[86].

286.  When it was put to him that there was no reason to issue a DCN or RCN due to alleged quality complaints made hundreds of days or even years after the invoice, he did not accept this, saying a customer may raise complaints within a short time which were refused initially.

287.  Some credit notes were in response to justified complaints about quality, but some related to a customer’s unreasonable complaints. D2 said a series of credit notes might be issued on one day, because the customer may come to discuss face-to-face how much discount could be given. After offering a discount, more goods might be ordered.

288.  When asked whether issuing DCNs was in C’s best interests, D2 said that it was for building up a long-term relationship with the customer. These were common practices in the industry. For some RCNs, the approach was if the customer refused to pay up, they should return the goods.

289.  D2 was able to give evidence on the reasons for some of the specific DCNs and RCNs which were put to him, but not all[87].

290.  When cross-examined, D1 had difficulty remembering the justification for specific DCNs and RCNs, frequently saying the events occurred more than 10 years ago and he could not recall.

291.  There was some inconsistency in his evidence as to whether he knew of and approved credit notes. He at one point said that the Exports Dept operated independently of him, and the specific salesperson responsible for the client would made a decision to issue a credit note[88]. He was only one of the bosses and could not answer for the reasons for each discount. At another point he accepted that if a special discount was to be offered or if a business deal would incur a loss, then the person in charge of C must be approached for signature and he must be notified; and accepted that he would be notified of and approved all DCNs.

292.  D1 said they would sometimes give discounts in relation to justified complaints about quality. He at one point agreed that such a complaint should not be accepted hundreds of days after delivering the goods, but later he said it could. When conducting business, a company had to allow some flexibility. After a customer collected goods and did not pay, they may make a complaint after one hundred days or more due to reluctance to pay[89]. C may say that as they were not satisfied with the goods they could be returned, since this was better than simple non-payment.

M3.  Factual Findings

293.  I have considered the totality of the evidence on point, the parties’ written submissions, and the details of the DCNs and RCNs as set out in Annex B and Annex C to the SOC, and Annex 1 to Ps’ Closing. I note that for the pre-October 2018 period[90], the majority of credit notes complained of are DCNs, whereas for the post-October 2018 period, more of the credit notes complained of are RCNs rather than DCNs.

294.  In my view – dealing at present with the pre-October 2018 period – the DCNs and RCNs were issued pursuant to business decisions which were taken for bona fide reasons considered to be in C’s best interests.

295.  Indeed, I cannot see any other reason why decisions would have been taken to issue the disputed DCNs and RCNs during the period prior to that for which improper motives are alleged in relation to Sung Art. Ds had financial interests in C, and there was no reason for them to act deliberately other than in what they considered to be C’s best financial interests.

I find that the reasons for the said business decisions were principally the following (which might often overlap):

(1)  complaints made by customers in relation to quality;

(2)  general negotiations engaged in by or with customers in relation to payment (which did/might include reference by the customer to quality complaints, justified or unjustified);

(3)  discounts given in order to encourage continuation of the relationship with the customer and/or the payment of outstanding AR (which did/might overlap with the above); and/or

(4)  in the case of RCNs, at least sometimes, a desire to get back something for C in cases where the customer was unwilling to make payment and/or made complaints.

296.  I have considered Ps’ arguments that there was sometimes a long lapse of time between the invoice date and the discount given, and that multiple discounts were given on a single day; but I accept that Ds’ witnesses gave plausible explanations for these features as set out above.

297.  I have also weighed in the balance the absence of documentary evidence of customer’s quality complaints. I take the view that complaints may have been made orally and/or Ds may not have access to any documentary evidence which exists. In respect of the DCNs, I note also that many of the percentage discounts granted were not particularly large.

298.  Subject to the pleading point considered below, I accordingly conclude that the said decisions were taken bona fide, and within the ambit of a reasonable discretion afforded to commercial people taking business decisions in C’s interests, such that there was no breach of the Best Interests Duty, the Duty of Care, or the Trustee Duty.

M4.  The Pleading Point

299.  Ps take a pleading point based on DEF §§36, 37, 43 and 44, namely that Ds confined their pleaded justifications for the DCNs and RCNs to “justified” complaints as to the quality of goods delivered. Accordingly, say Ps, it is not open to Ds to rely on any justification for the DCNs and RCNs at trial by reference to “unjustified” complaints about quality, or any other reason. Further, Ps argued that for the post-October 2018 period, Ds’ pleaded justification is offering discounts in an attempt to recover outstanding AR from customers[91].

300.  I have carefully considered this point, and am of the view that any disparity between the Ds’ pleaded case and the evidence relied upon above on the justification for credit notes, is rather minor/technical and further would not likely have caused prejudice to Ps in the preparation of their case.

301.  Notably, Ds’ evidence was that certain of the quality complaints leading to DCNs/RCNs were justified, and certain were unjustified; but I consider the line between complaints considered to be justified, and those considered to be unjustified but nonetheless resulting in a discount or return, to be rather fine. To the extent that some DCNs/RCNs were issued without any quality complaint having been made at all, I note that Ds did plead at DEF §§37.3 and 45 (though apparently in relation to the later time-period) that some discounts or returns were simply part of endeavours to recover outstanding receivables.

302.  As to Ds’ explanation in relation to some RCNs - that they were issued because recovering goods was better than receiving no payment at all – I take the view that this falls sufficiently/broadly within the ambit of Ds’ pleading regarding attempts to recover receivables.

303.  I accept, of course, the importance of pleadings in fairly delineating and giving notice of each party’s case in advance of trial[92], but I also consider that the ultimate aim is to achieve justice. In this case, I think on balance that Ds’ evidence as to the justifications for the DCNs and RCNs referred to above falls sufficiently within the ambit of Ds’ pleaded case, and I am not prepared to find Ds liable notwithstanding such evidence on the basis of Ps’ pleading point.

M5.  Loss and Damage on DCNs and RCNs

304.  During oral closing submissions, I raised the question whether it is open to Ps to claim the loss and damage said to have been suffered on the DCNs and RCNs (ie treating written-off AR as a loss) as well as the outstanding AR themselves under other of Ps’ heads of claim (ie treating outstanding AR as a loss); and whether there was any inconsistency between these two heads of claim.

305.  This was addressed by the parties in supplemental written closing submissions.

306.  Given my findings above and below, it is unnecessary for me to resolve this issue.

M6.  Conclusion

307.  For the above reasons, I dismiss Ps’ claims regarding the pre-October 2018 DCNs and RCNs.

N.  THE OCTOBER 2018 RESOLUTION AND EVENTS LEADING TO IT

308.  The following facts are taken principally from the Agreed Chronology and ASF.

309.  Since August 2018, Ps’ Camp and Ds’ Camp had growing disagreements and started negotiating ways to part ways and voluntarily wind-up C.

310.  On 20 August 2018, D1 called an ad hoc meeting without an agenda, and informed Ps of his intention to (i) purchase a new factory in Hung Hom by bank loan and mortgage; and (ii) sell the properties at Lyndhurst Terrace.

311.  On 21 August 2018, SF, CW, WCL, D1 and TCM called a meeting at Tsui Hang Village at which SF, CW and WCL proposed placing C into voluntary liquidation[93].

312.  On 24 August 2018, special resolutions were signed by Ps and served on D1 and TCM by letter, for the voluntary winding up of C.

313.  On 28 August 2018, Ps’ solicitors issued a letter to D1 and CMCL referring to ongoing negotiations over winding-up of C, and requesting them not to undertake the following transactions unless with the written consent of all directors: (i) enter into any consignment contracts with any party; (ii) sale of any goods/products on credit; (iii) sale of goods/products at under cost value; (iv) purchase of any raw materials (including but not limited to diamonds & gems); and sale and purchase of any stocks/securities (the “Proposed Measures”).

314.  On 29 August 2018, SF and CW started acting as alternative directors to FS and WCL respectively.

315.  By a WhatsApp message dated 31 August 2018, SF asked Ds to confirm agreement to the Proposed Measures by 3 September 2018.

316.  On 3 September 2018, solicitors for D1 and CMCL issued a letter stating that it was never their intention to wind-up C, but they were open to considering an action plan in view of the deadlock between C’s shareholders. The said letter also indicated that the Proposed Measures were not in C’s best interests.

317.  On 4 September 2018, Ps issued a notice to C’s staff directing them to comply with the Proposed Measures to maintain C’s financial position given ongoing negotiations between the shareholders.

318.  On 28 September 2018, D1 and CMCL indicated by letter from their solicitors that in light of the current deadlock, they were agreeable to winding-up C.

319.  As set out above, on 23 October 2018, C held a board meeting attended by inter alia CW, SF, D1, TCM, JT and the parties’ legal representatives, at which the October 2018 Resolution was unanimously passed. That resolution provided that:

(1)  C shall sell all its shares in listed companies by close of stock market on 24 October 2018, and D1 shall be responsible for conducting the sale;

(2)  All sale proceeds from the aforesaid share sale shall only be applied to repay C’s outstanding bank loans and settle payments relating to staff layoffs;

(3)  C shall cease business in principle on 23 October 2018 (ie the day of the board meeting). No sale shall be made, no goods shall be delivered (including delivery of completed, existing orders) and no order shall be accepted unless there is written consent from all the directors of C;

(4)  All sales representatives shall use their best endeavours to collect all consigned goods and AR from customers within the next 2 months.

320.  At the same meeting, all of the directors of C also agreed that all existing orders should be completed[94].

321.  On 9 November 2018, a sales representative meeting was held and attended by inter alia Ds and KL, during which the requirement that C’s sales representatives shall use their best endeavours to collect all consigned goods and AR from their customers within the next 2 months was reiterated.

O.  Ps’ HEADS OF CLAIM: FROM OCTOBER 2018

322.  In the sections below I deal with Ps’ heads of claim for period around and following the October 2018 Resolution.

P.  SUNG ART (UNIVERSAL) COMPANY LIMITED

P1.  Overview

323.  The agreed facts in relation to Sung Art are set out in Section B5 above.

324.  Ps’ case is that in respect of various of the misconduct alleged against Ds to C’s detriment, from a certain point in time, Ds were motivated by improper purposes (and/or acting under a conflict of interest) in that, essentially, they wished to maintain and cultivate an existing relationship with customers so they would be favourably disposed to carry on the relationship with Ds’ new company, Sung Art.

325.  In particular Ps plead that:

(1)  Ds’ failure to fix any or proper payment terms and/or take reasonable steps to collect AR from some of the OAR Customers, including Diacolor India, Ambrosi, Mi Lina and (in the case of D1) Manisha were affected by such motives. Ds accordingly, exercised powers for improper purposes[95].

(2)  Certain of the DCNs - marked with an asterisk in Annex B - were issued so that such customers would be favourably disposed to do further business with Sung Art rather than C; referring specifically to DCNs issued to Renee, Elong/Moneta, and Al Mahaba. Accordingly, D1 breached his duty to act for proper purposes and both Ds breached their duties not to act in the affairs of C in circumstances of an actual/potential conflict of interests. At all material times prior to the appointment of the Liquidators, Ds did not disclose to Ps or their representatives each of their interests and roles in Sung Art[96].

(3)  The same plea is made in respect of certain of the RCNs, marked with an asterisk in Annex C; referring in particular to RCNs issued to Elong/Moneta, Al Mahaba, Edcora, De Ambrosi and Exclusive Jewellery[97].

(4)  In respect of P’s complaint of failure to take proper steps to seek the return of consigned goods, alternatively payment for the same if return was refused, Ps again plead that Ds were motivated by Sung Art in so failing[98].

326.  In response, Ds plead, inter alia, that: (i) the practice of applying different payment terms to orders from different clients had been carried on within C long before the establishment of Sung Art; (ii) there was no change in the manner that Ds handled the OAR Customers when Sung Art commenced business; (iii) it is denied that any of the DCNs or RCNs were issued for the reasons alleged by Ps; (iv) it is denied that Ds attempted to divert business from C to Sung Art, as Sung Art carried on the business of jewellery trading, as opposed to C’s business of jewellery manufacturing[99].

327.  It is apparently common ground that Ps’ Camp were not told of the existence of Sung Art, prior to the MVL.

P2.  Evidence

328.  Ps’ said complaints were further detailed in Ps’ witness statements, which I have considered[100]. They were not dealt with in Ds’ witness statements.

329.  Under questioning, D1’s evidence was to the effect that he knew very little or nothing about Sung Art, as it was his son’s business, and D1 did not take any role in it since incorporation[101]. When C made a decision to enter liquidation, he said, D1 planned to retire, but his son D2 still wished to make a living. D1’s explanation for holding one share in Sung Art was that it was easier to open bank accounts if his name was involved in the operation. He agreed that he himself had not told Ps’ Camp about Sung Art before the MVL[102]. D1 also agreed that C’s business included jewellery trading, and that Sung Art’s also likely did.

330.  Under cross-examination, D2 agreed that preparing to start to incorporate a new company would have begun in September or October 2018. He accepted that when he decided to continue jewellery trading through Sung Art, he wanted to maintain a good relationship with C’s customers so that they might continue doing business with Sung Art; though he later said it was also for C’s interests[103]. In essence, his evidence was that he wished to maintain a good relationship with all customers generally with or without Sung Art, but Sung Art was one of the reasons. He agreed that he never told Ps’ Camp about Sung Art or his plans for it prior to the MVL.

331.  D2 appeared to accept that Sung Art had been manufacturing goods for Diacolour from around 2020 to 2022 onwards, but not from 2018. He said that Sung Art started producing goods for Renee around March or April 2019, though he was not entirely clear.

332.  It was suggested to him that DCNs/RCNs from September 2018 onwards were given to C’s customers for the main purpose of making them naturally disposed to trade with Sung Art which was his priority; and but for Sung Art they would not have been issued. D2 disagreed, saying the purpose of discounts was to incentivise customers to make repayment. Customers such as Renee and Diacolour still owned money to C, and at the time discounts and credits were offered so that they would pay as soon as possible. C kept pressing them for repayment and Sung Art was never mentioned.

333.  When it was put to D2 that an email dated 8 November 2018 from a third-party jewellery factory in the Mainland sending him email quotations and jewellery designs related to Sung Art, he denied this saying it related to C’s business.

334.  As to the agreed facts on approaching employees of the Company, D2 agreed that he had approached Wendy Ng to join Sung Art, but strongly disagreed that he had approached Jody Ng, despite the agreed facts saying otherwise (and certain WhatsApp messages from Jody Ng suggesting otherwise).

P3.  Reasoning and Conclusion on Sung Art and Improper Purposes

335.  I have considered the evidence, the parties’ arguments on improper purposes, and the principles summarised at §48 to 50 above.

336.  The purposes for which Ds were tasked to act were for C’s bests interests in the conduct of its business.

337.  In general terms, I am not persuaded that Ds in fact acted, in the period from September/October 2018 onwards or at all, in fixing any payment terms, issuing DCNs or RCNs or in respect of consigned goods, substantially or causatively for the purposes alleged by Ps, namely in essence, for the benefit of predisposing customers to trade with Sung Art.

338.  First, I consider that in this particular case, the allegation is a serious one since its effect is that acts were carried out to C’s detriment for the purpose of benefitting D2’s own venture, ie Sung Art. On well-known principle, the evidence required to make this good should be commensurate with the seriousness of the allegation, and an inference to such effect is not lightly drawn.

339.  Second, since D1 was a 25% shareholder in C and D2 was his son, they both held a financial stake in C, rendering it less likely that they would act to C’s direct financial detriment merely for the chance that this might encourage future trading with Sung Art. In other words, they were each financially interested in maximising C’s recovery of its asserts.

340.  Third, for the manner of trading with its customers and the DCNs in particular, as submitted by Ds in closing, it is difficult to see a real change in pattern as between the pre- and post-Sung Art period. In other words, in respect of the DCNs in particular set out in Annex B, whilst Ps complain of certain DCNs issued after Sung Art was incorporated, it is apparent that there was a history of issuing DCNs to customers (including sometimes for long outstanding invoices and with numerous invoices on a single day), long before Sung Art was incorporated.

341.  Fourth, having heard Ds’ giving evidence, I accept their evidence that they were not substantially motivated by the interests of Sung Art in the manner and extent alleged by Ps. I further find that any consideration of Sung Art’s interests which did occur was not causative of the transactions complained of[104].

342.  I refer also the further specific analyses below in respect of failure to collect AR, DCNs/RCNs and consigned goods.

P4.  Conflict of Interests

343.  I have considered the principles summarised at §§51 & 52 above.

344.  In my view, in respect of transactions around/after the establishment of Sung Art, Ds were acting under an actual or potential conflict of interests, such that they were in breach of the Conflicts Duty.

345.  However, since I have concluded that the actions and transactions of which Ps complain would have occurred in any event (see above), I take the view that losses claimed by Ps were not caused by the said breach(es) of duty[105].

Q.  FAILURE TO RECOVER OUTSTANDING ACCOUNTS RECEIVABLE AFTER THE OCTOBER 2018 RESOLUTION

346.  As noted above, the October 2018 Resolution required all sales representatives to use their best endeavours to collect all AR from their customers within the next 2 months.

347.  In Section J1 of Ps’ Closing[106], Ps invite me to conclude that Ds failed to take reasonable steps to collect outstanding AR from their customers following that resolution, in breach of the Best Interests Duty and their duty to comply with C’s resolution, leading to loss and damage in the amount of the outstanding AR namely HK$34,774,799.87.

348.  In this regard, Ps:

(1)  Rely on the absence of evidence, including documentary evidence, showing steps taken to collect outstanding AR from the OAR Customers following the October 2018 Resolution;

(2)  Argue that various of the OAR Customers hardly made any repayments during this period;

(3)  Seek to rebut Ds’ case that it was the sudden and abrupt MVL that caused the recovery of AR to become more difficult during this period, pointing out that Ps’ Camp (in contrast to Ds) had no difficulty in recovering payments from customers they managed despite the passage of the October 2018 Resolution and the MVL.

(4)  Refer to portions of the cross-examination where D1 suggested that in October 2018 or when the decision was made to liquidate C, he had already given up and stopped work in C because he considered it pointless to carry on. At one point in his evidence D2 also accepted that he had given up on C around a similar time. However, D2 later said that he was starting to prepare his own company (Sung Art) but did not give up on C completely; and at various points denied that he had given up on C to prioritise Sung Art.

349.  Ds, conversely, argue that Ps rely on a non sequitur: the mere fact that the outstanding AR were not recovered within the 2-month period did not mean that efforts were not made. Ds point to portions of D2’s and KL’s witness statements which refer to taking steps to recover outstanding AR from the OAR Customers[107], though I note that for D2 this does not refer specifically to the period following the October 2018 Resolution. KL’s witness statement includes evidence of steps taken following the October 2018 Resolution to chase by WhatsApp and telephone, and requesting individual salespeople to follow up. Under questioning, D2 also gave brief evidence that during this period they kept pressing customers for payment, and Sung Art was never mentioned[108].

350.  Following the passage of the October 2018 Resolution, it was in my view incumbent on at least D2 (as a salesperson) to take active steps to pursue the recovery of AR from customers with expedition. I have some sympathy for Ps’ submission that the evidence supporting the taking of such steps was somewhat thin, and there is no documentary evidence submitted by Ds. However, I accept Ds’ evidence to the effect that at least some efforts were made.

351.  Further, and importantly, I am again not persuaded that any shortcoming here caused loss to C. Given that the AR in question are, to my understanding, still outstanding[109], I do not think on a balance of probabilities that any further efforts by Ds to recover them during the 2-month period following the October 2018 Resolution or subsequently, would have yielded more recoveries.

352.  Accordingly, I do not allow this head of claim.

R.  POST-OCTOBER 2018 SALES/DELIVERIES[110]

R1.  Overview

353.  As noted above, the October 2018 Resolution provided that from 23 October 2018, no sale shall be made, no goods shall be delivered (including delivery of completed, existing orders), and no order shall be accepted unless there is written consent from all of the directors of C.

354.  It is an agreed fact that at the meeting in question, all of the directors of C agreed that all existing orders should be completed[111].

355.  Ps plead that after 23 October 2018, Ds caused (or in the case of D1 condoned) C to sell and/or ship certain goods to the OAR Customers (“Post-October 2018 Sales/Deliveries”), which are marked in the fourth column of Annex A. This is said to be in breach of the Best Interests Duty, including to act in accordance with C’s constitution and the October 2018 Resolution, given that these were effected without the knowledge and written consent of all of C’s directors; and further in breach of the Duty of Care. In addition, the Post-October 2018 Sales/Deliveries made other than on COD terms wrongfully caused an extension of credit by C[112].

356.  In response, Ds plead that:

(1)  The October 2018 Resolution was subject to a caveat that the relevant directors/officers shall not cause C to breach any existing contract and/or thereby incur civil liability;

(2)  D1 and D2 made the business decision to cause C to continue fulfilling existing contractual obligations towards the OAR Customers for two reasons: (i) to avoid C incurring civil liability for breaching existing contracts; and (ii) with the intention that the delivery of completed orders to the OAR Customers would cause them to settle their outstanding payment obligations in whole or part[113].

357.  By way of Reply, Ps plead that:

(1)  The alleged caveat to the October 2018 Resolution is denied. All of C’s directors expressly agreed orally at the meeting that the production of existing orders was to be completed but that all completed goods were not to be delivered absent consent from all the directors.

(2)  Ds were not precluded by the October 2018 Resolution from procuring C to complete and fulfil its pre-existing obligations owed to C’s customers.

(3)  To the extent that Ds had any valid reason for making the Post-October 2018 Sales/Deliveries, they should have but failed to seek consent from all directors to enter into new contracts and ship goods, in accordance with the October 2018 Resolution.

(4)  To the extent that Ds procured C to sell and ship goods to customers without written consent of the directors in breach of the October 2018 Resolution, and these customers later refused or failed to pay for such orders, any loss and damage occasioned to C was caused by breaches of the resolution[114].

R2.  Evidence

358.  CW’s evidence was that during the meeting at which the October 2018 Resolution was passed, all directors unanimously agreed that: (a) all existing orders placed by existing customers should be completed (although these completed orders were not to be delivered without written consent of all of C’s directors); and (b) new orders could still be accepted by C (again with the written consent of all of the directors). The focus was, at that time, to stop Ds from incurring further AR and preserve C’s existing assets[115].

359.  Ds’ witness statements did not deal with this area of complaint.

360.  When it was put to D2 that the Post-October 2018 Sales/Deliveries were in breach of the October 2018 Resolution, his evidence included that at the time, he had asked his colleague Wendy to seek approval from all of the directors before goods were shipped, and that she had indicated that this would be done. There was also occasion when he had asked SF whether they should be shipped, and she had approved. D2 accepted that he did not have documents to show that the four directors had consented to the transactions and had not checked with them himself; but he did ask Wendy clearly, who said that all of the bosses had been asked and had confirmed.

361.  D2 said that the orders complained of were not new orders. No new orders were received after mid-August 2018. All these orders were from before mid-August, and they were only trying to complete them. His evidence also included that he had left C by the end of January 2019.

362.  When KL was cross-examined on this topic in relation to Al-Majed, his evidence was that he had no idea about the transactions in question because by this stage, he was already leaving, such that CW in charge as to how to deal with this customer. He said he had no idea who directed his secretary to ship the goods.

363.  During re-examination, KL indicated that D1 was not aware of the shipping of goods to Al-Majed after the October 2018 Resolution. KL was referred to certain WhatsApp messages between him and CW during January 2019, where KL referred to a repayment plan from Al-Majed, and CW later mentioned that he had replied to Al Majed. KL indicated that these were exchanged because CW was following up regarding Al-Majed. He was also referred to an email from C to Al-Majed in January 2019 indicating that goods would be sent out in return for payment, and he indicated that the email was not sent by him but likely CW.

364.  The issuance of invoices without approval of all four directors in breach of the October 2018 Resolution, was put to D1 rather briefly during cross-examination. He accepted that there was no instance where he asked Ps’ Camp for their consent to deliver C’s completed orders to its customers. He said that after the passage of the October 2018 Resolution and the decision to wind-up C, he essentially stopped all his involvement and everything was taken over by CW and SF; his signature would not likely appear on documents during that period. He disagreed that he allowed and condoned KL and D2 to issue invoices during the period in question.

R3.  Analysis and Conclusion

365.  I am satisfied that under the terms of the October 2018 Resolution, written consent of all four directors was required for both new sales, and deliveries under existing contracts. That is sufficiently apparent from the wording of the resolution, and is also consistent with CW’s evidence as to the nature of the directors’ additional agreement at the meeting in question: see above. Further, this is consistent with D2’s own evidence that he did in fact seek the directors’ consent, through Wendy.

366.  I am also conscious of Ds’ pleaded case, which does not include that written consent of the other directors was obtained (as per D2’s oral evidence). In these circumstances, I conclude that it was not.

367.  I do not accept Ds’ argument that the October 2018 Resolution was subject to a caveat as alleged. This seems inconsistent with its express wording, and such a caveat was unnecessary given that transactions could still be effected/completed with the all the directors’ written consent.

368.  I further accept Ps’ argument to the effect that based on the authorities, there was a duty owed to comply with the October 2018 Resolution[116].

369.  For these reasons, I accept Ps’ argument that D2 was in breach of duty (the Best Interests Duty, to comply with the October 2018 Resolution, and/or the Duty of Care) by effecting the Post-2018 Sales/Deliveries set out in Annex A for which D2 was alleged to be responsible.

370.  Notably, it was not D2’s evidence that he was not responsible for the said transactions, save for those which occurred after he left at the end of January 2019. Further, I accept that the said breach of duty caused C to extend credit and/or incur additional AR.

371.  As to D1, I accept his evidence that he was not substantially involved following the October 2018 Resolution. In the premises, I do not hold him liable in respect of the said transactions complained of.

372.  I have considered whether there was a breach of supervisory duty by D1 in light of the principles summarised in Section E3 above, but I do not find that there was given the whole of the circumstances including that C was by then heading towards winding-up, and the evidence as to some involvement/oversight at this stage by CW and/or SF, which I find plausible.

373.  For the above reasons, I hold that D2 is liable to C in respect of the invoice amounts under the Post-October 2018 Sales/Deliveries, as set out in Annex A, in respect of the customers for which he is said to have been responsible.

374.  The amounts for which I hold D2 liable are as follows:

(1)  Renee, total of HK$682,188.03;

(2)  Albert K, total of HK$332,893.50;

(3)  Emperor, total of HK$305,609[117];

(4)  Diacolour India, total of HK$493,985; 

(5)  Assael Int, total of HK$60,016;

(6)  Simpsons Landmark, total of HK$240,017.50.

Grand total: HK$2,114,709.03.

S.  DISCOUNT CREDIT NOTES AND RETURN CREDIT NOTES: POST-OCTOBER 2018[118]

375.  This section should be read together with Section M above.

376.  Ps argue that in the period after the October 2018 Resolution, Ds became even bolder in their practice of issuing large batches of DCNs/RCNs, and make claims in this period for DCNs totalling HK$253,544.63 and RCNs totalling HK$7,805,594.75[119].

377.  Ps argue that the writing off of receivables by DCNs/RCNs was even more egregious in light of the directive in the October 2018 Resolution to collect receivables. Further, Ps refer to the timing of the DCNs and RCNs close to the incorporation of Sung Art, coupled with the fact that many of them wrote off long-overdue receivables, arguing that this is suggestive that Ds’ true motivation was to benefit Sung Art.

378.  As to Ds’ plea that part of the purpose of DCNs and RCNs during this period was to incentivise customers to make repayments, Ps argue that there was no evidence of any agreement with customers that, in exchange of the issuance of RCNs and DCNs, receivables would be settled. Ps further rely on the absence of any correlation between DCNs and RCNs issued to customers during this period, and payments received from customers.

379.  Ps also argue that by this stage – when C was to be wound-up – there was no reason to issue DCNs/RCNs for the purpose of encouraging continued trading; further reinforcing that the true purpose was to groom customer relationships for the purposes of Sung Art.

380.  I have carefully considered the evidence and arguments on point, but I am not persuaded that Ds acted in breach of duty owed to C by the Post-October 2018 DCNs and RCNs.

381.  First, for the reasons already given above, I am not persuaded that Ds were substantially or causatively motivated to act other than in C’s financial interests, by considerations related to Sung Art.

382.  In respect of RCNs, it is apparently common ground that goods covered by an RCN were actually returned to C[120]. In my view, this makes it further less likely that the purpose of RCNs was to grant a favour to customers; given that those customers would in any event have to return the goods in question.

383.  Further, as argued by Ds, there was a history of granting DCNs and RCNs to C’s customers prior to the period in which Sung Art could have been a consideration[121].

384.  As one example, Ps emphasise RCNs to Al Mahaba as particularly egregious, but I note that it was KL rather than D2 who was responsible for these, making it less likely that considerations relating to Sung Art came into play.

385.  Second, as noted above, I consider that it was in Ds’ own financial interests for C to make recovery of as much of its outstanding AR as possible – or of goods where this was not possible.

386.  Third and accordingly, I accept Ds’ evidence as to the general purposes for which DCNs and RCNs were issued to C’s customers in the post-October 2018 period, on the same basis as for the pre-October 2018 period: see Section M above.

387.  I can see some force in the argument that following the October 2018 Resolution and in light of C’s intended winding-up, the focus ought to have been on the collection of AR. However, on balance and in light of the above factors, I am not persuaded that the RCNs and DCNs issued during this period were other than in a genuine belief that they were in C’s best interests.

388.  Accordingly, I do not accept that Ds were in breach of either the Best Interests Duty or the Proper Purposes Duty, in respect of the DCNs/RCNs during this period. Similarly, though I find the point arguable, I am not persuaded that the issue of the DCNs/RCNs issue fell below the standard of conduct required by a reasonable director or senior officer, and that there was accordingly a breach of the Duty of Care.

T.  CONSIGNED GOODS[122]

T1.  Overview

389.  This head of complaint bears some relation to that considered under Section Q above.

390.  The October 2018 Resolution provided that all sales representatives shall use their best endeavours to collect all consigned goods from customers within the next 2 months.

391.  Ps plead that[123]:

(1)  Over the course of its operations C had consigned various goods to its customers as set out in Annex E to the SOC (the “Consigned Goods”), with a total consignment price of HK$4,744,574 and a total cost of HK$3,913.082.22. At the time of the October 2018 Resolution all of those consigned goods were returnable to C on demand.

(2)  To date, the Consigned Goods have not been returned to C nor has C received payment for them[124].

(3)  After the October 2018 Resolution, Ds failed to take any or any active, prompt, proper or reasonable steps to seek the return of the Consigned Goods (such as issuing oral or written demands) or alternatively, payment for the Consigned Goods if return was refused from the customers at Annex E[125].

(4)  This was in breach of the Best Interests Duty, the Trustee Duty with respect to the Consigned Goods, the Duty of Care, and was for an improper purpose (ie for the benefit of Sung Art) and under conflict of interest.

(5)  Accordingly, Ps claim damages in the quantum of the invoiced amount of the Consigned Goods or their production costs.

392.  Ds plead that[126]:

(1)  D1 and D2 did take active steps to seek the return of the Consigned Goods from the relevant customers, including corresponding with them on multiple occasions.

(2)  Most of the relevant customers, when contacted to chase for the return of those items, cited C’s inability to fulfil current orders of jewellery as a ground to refuse to return the Consigned Goods and to refuse to make further payments to C.

T2.  Evidence

393.  Further factual details of Ps’ complaint are contained in CW’s witness statement[127], including his belief that lack of efforts to recover consigned goods was motivated by Sung Art’s interests, and that the use best of endeavours would have resulted in C recovering either the goods or their price, by the time of the MVL.

394.  Ds’ witness statements did not deal specifically with the issue of steps taken to recover the Consigned Goods.

395.  When questioned, D2 accepted that after the October 2018 Resolution and the meeting on 9 November 2018, he knew that all sales representatives including himself had to use best endeavours to collect C’s consigned goods within 2 months. When it was suggested that he did not take such steps in relation to customers for whom he was responsible (Moneta, De Ambrosi, Chatila, Renee, Mi Lina and Gem Trends), he disagreed. He said that he flew to the US to pursue this himself, in the case of Gem Trends and Mi Lina, but they refused to pay. He further said that he had assisted the Liquidators to meet these customers, including Renee in March 2019.

396.  When asked about Ds’ pleaded case that the customers when contacted cited Ps’ inability to fulfil existing orders, he said that applied to Moneta and Renee, but not the others. D2 disagreed that he did not pursue the return of consigned goods due to Sung Art. He said he did not inform or consult D1 in relation to consigned goods.

397.  Under questioning, KL also accepted that following the October 2018 Resolution, sales representatives were to use best endeavours to collect consigned goods within 2 months. When questioned about Al-Mahaba, he accepted that the failure to obtain a return of the consigned goods was not related to C’s inability to fulfil orders. His evidence was to the effect that he had pursued them for the goods/repayment, but their business was not good, and if they refused to pay or return the goods then it would be up to the Liquidators to sue them. He said that if customers knew C was going into liquidation, they would try to take advantage of the situation[128].

398.  D1 was cross-examined quite briefly on the topic of consigned goods. He said that he did not deal with Al-Mahaba, which was KL’s sole responsibility. He said he was not responsible for Renee, which was D2’s responsibility[129]. When it was put to him that he did not take any active steps to seek return of the Consigned Goods and failed to take proper steps to supervise his subordinates to do so, he simply disagreed.

T3.  Analysis and Conclusion

399.  In closing submissions, Ps again pointed to various portions of the evidence to the effect that by the time of the October 2018 Resolution, D1, D2 and/or KL had “given up” on C, and also to the absence of documentary evidence showing active steps to follow up on the consigned goods. They further referred to Sung Art as a reason why Ds would have been lax in following up on the Consigned Goods.

400.  I have considered the evidence and submissions, but I do not allow this head of claim.

401.  First, I accept D2 and KL’s evidence that at least some steps were taken to try to recover the Consigned Goods: see above. Whilst there were portions of the evidence where various of Ds’ witnesses indicated that they had “given up” on C around this time, these should be read together also with their evidence that they did take various steps to follow up on AR and consigned goods, and eg D2’s evidence that he had not entirely given up on C.

402.  Second, I again consider that it was in Ds’ interests for C to collect what it could in respect of the Consigned Goods; and I am not persuaded that Ds were motivated by Sung Art’s interests. I therefore consider it likely, on a balance of probabilities, that some steps were taken as stated by D2 and KL during their oral evidence, and consistently with their pleaded case.

403.  I accept it would have been preferable if Ds had adduced evidence of written requests regarding the Consigned Goods. On balance however, I am not persuaded that the standard of conduct fell below that of a reasonable director and/or senior officer.

404.  Third, and importantly, even if there was here a breach of duty, I am not persuaded that it caused the losses claimed. Once again, Ps would need to satisfy me that a greater level of effort to obtain the return of the Consigned Goods or payment, would on a balance of probabilities have resulted in these outcomes. Given that these outcomes have not been achieved to date, and that Ps’ claim for loss necessarily proceeds on the basis that they cannot presently be, I am not so persuaded.

405.  When I put this point to Mr Hew during oral closing submissions, his response was that the position after the MVL in terms of recoverability of the Consigned Goods or payment, would be different to the position prior to the MVL[130]. But I do not see any good reason why that should be so, and that point does not seem sufficiently persuasive to warrant me finding for Ps on causation.

406.  Accordingly, I dismiss this head of claim.

U.  73 ITEMS UNDER THE MANISHA ORDER[131]

U1.  Overview

407.  Ps’ pleaded complaint regarding the Manisha Order forms part of its pleaded complaint under the general heading of failure to fix payment terms, monitor and control credit risks, and collect outstanding AR. It overlaps, to a certain degree, with issues already considered above.

408.  Ps plead that[132]:

(1)  In around 2018, D1 caused/procured/allowed, and KL caused, C to produce 79 items tailor-made and/or re-designed to the specifications of Manisha Jewellers, Fujaivah, UAE (“Manisha”), a customer under their management, control and/or responsibility.

(2)  The 79 items were part of two orders placed by Manisha for 83 items on COD terms (ie the Manisha Order).

(3)  C completed the production or redesign of most of the items by August 2018. All 79 items were in C’s vault and ready to be shipped and delivered to Manisha by 9 October 2018.

(4)  D1 and KL wrongly failed to require Manisha to pay any deposit or security to take steps to ensure Manisha would pay for the 79 items before causing C to incur time and costs to produce the items to Manisha’s specifications. Given in particular that such items would not be readily resaleable, C was exposed to significant credit risk in the absence of deposit/security, and Manisha was not in the jurisdiction and had a poor repayment history.

(5)  To date, Manisha only paid for 6 items out of the 79, and the remaining 73 items have remained in C’s vault since they were ready.

(6)  Further, D1 and KL failed to take active, prompt or proper steps to demand and collect payment from Manisha on a COD basis or at all, including: (i) invoicing Manisha for the items in accordance with purchase orders/draft invoices; and (ii) demanding payment from Manisha, including demand letters.

(7)  Accordingly, D1 was in breach of the Best Interests Duty and/or Duty of Care (including duty to take proper steps to monitor credit risk, take appropriate steps to recover outstanding AR, and properly supervise subordinates), and exercised powers for improper purposes due to his motivation to assist Sung Art.

(8)  As a result, D1 is liable to C for HK$13,356,117.5 (ie the outstanding purchase price which C would have received under the Manisha Order) or HK$10,788,129.5 (ie the wasted production costs of the Manisha Order)[133].

409.  Ds plead that[134]:

(1)  C started dealing with Manisha in 2015. Manisha was at all material times constantly paying off AR in a cyclical manner after taking delivery of ordered items, except for a period in 2015 when Manisha was undergoing corporate restricting.

(2)  After Manisha resolved such internal issues in 2017, it resumed trading with C and paying off its AR.

(3)  As a result of C allowing Manisha a certain degree of flexibility in making repayment after taking delivery, C’s relationship with Manisha blossomed over the years, reaping substantial profits for C.

(4)  It is denied that C’s production of the 79 items was wrongfully caused/procured/allowed by D1.

(5)  There was nothing extraordinary about Manisha’s order of 79 tailor-made/re-designed items, which was a routine order made by Manisha in the ordinary course of C’s business.

(6)  Ps’ pleaded details of the order are admitted, including that C completed the production/redesign of most of the items by August 2018, and all 79 items were in C’s vault and ready to be shipped and delivered to Manisha by 9 October 2018.

(7)  It is denied that it was wrongful not to require any deposit or security, or that D1 failed to take necessary/proper steps to ensure that Manisha would make payment.

(8)  It is denied that the items were not readily resaleable to other customers.

(9)  It is admitted that Manisha carried on business outside HK, but denied that it had a poor repayment history.

(10)  It is averred that it was the sudden and abrupt MVL that caused Manisha to stop trading with C including paying for and taking delivery of the 73 items.

(11)  It is denied that Ds failed to take active/prompt/proper/reasonable steps to pursue Manisha for payment.

U2.  Evidence

410.  CW’s witness statement detailed Ps’ complaints on the Manisha order[135], including that it was customary to ask for deposits for tailor-made or customised items. Further, CW and SF had protested in around May/April 2018 that an order like this should require deposits, before incurring tsubstantial costs of producing the items. According to CW, KL at that time made a joke about the amount of time it would take Manisha to make repayment, indicating a cavalier and reckless attitude towards the collection of AR.

411.  CW explained that the goods in question were already completed and in C’s value by 9 October 2018 ie before the October 2018 Resolution, and they could have been shipped to Manisha at that time. However, D1 and KL continued to adopt a cavalier and indifferent attitude and failed to take any steps to demand payment from Manisha, and did not even invoice Manisha for these items to make efforts to demand that Manisha accept delivery or pay. Further, D1 and KL had not required any form of security or advance payment; and to date Manisha has not paid for the 73 items.

412.  CW also gave evidence that it would be exceedingly difficult to re-sell the 73 items as they were tailored to Manisha’ specifications.

413.  According to her statement, SF managed the account of Manisha for its first few transactions with C around the mid-2000s, and that as they were a new customer at the time, she required them to make payment on COD terms; though Manisha was later handed over to D1 and KL. Around March/April 2018, she was asked by KL to purchase raw materials to fulfil orders from Manisha. As she had heard that Manisha owed substantial amounts at that time, she refused to do so. CW and SF also protested that D1 and KL should have taken deposits before proceeding to work on Manisha’s substantial order, but KL ignored these, bypassed SF and went ahead to buy the raw materials himself. As things transpired, Manisha refused to take delivery of the goods for no good reason.

414.  D1’s witness statement did not deal specifically with the complaint regarding Manisha[136].

415.  KL’s witness statement included general evidence that the credit periods granted to customers were in line with industry practice, and it has always been C’s policy to vary/tailor payment terms and not to insist on COD even where invoices provided for this. Long periods of credit were given to established customers based on trust.

416.  KL was the person in charge of Manisha’s accounts. According to KL, Manisha was one of C’s major and valuable customers over the past 15 years which had contributed to accumulated revenue over HK$50 million and overall profit over HK$20 million. C’s profit margin for Manisha was around 35%. Manisha had close links to the royal family of the UAE. KL said that Manisha paid off its AR in a cyclical manner after taking delivery of ordered items, the only period of exception being 2015 when Manisha experienced a corporate crisis, after which it resumed business and paying in 2017. In essence, C had a blossoming business relationship with Manisha, but it was C’s sudden cessation of business which destroyed the relationship[137].

417.  As to the collection of AR from Manisha, KL said that prior to the implementation of a new credit sales policy which effectively put an end to credit sales - pushed by CW and SF after they took over the role of acting directors and all administrative duties around 30 August 2018 - the protocol established by D1 was to address outstanding accounts before conducting any new transactions (the “Manisha Protocol”). This change in policy backed by CW and SF led to items being put on hold and an end to credit sales. This adversely impacted negotiations between C and Manisha and C’s ability retrieve AR. Against this backdrop, it was only by around September 2020 that Manisha had paid off all its debts.

418.  Under questioning, KL accepted that the Manisha Order was placed around March/April 2018. He accepted, by reference to Manisha’s Statement of Account, that Manisha made periodic payments at times it saw fit.

419.  As to the reasons for entering the transaction, KL said he had worked with Manisha for years and made over/around HK$50 million of business deals and over HK$21 million of profit. The payment was slow, but the profit margin was over 20% to offset this. Manisha invoices were issued on COD terms by default. KL thought it was better to accept the order than not; referring to trust, profit risk and the long relationship with Manisha.

420.  When it was suggested that a deposit should have been sought, he said that all along it was not their practice to collect one. Profits had been made from the customer for years, and if a deposit was charged it would be as if there was no trust. Manisha had been paying, all along in the year 2018. Of course there would be risk, but profits were made, and the bosses would bear the risk.

421.  When asked whether the tailor-made/redesigned goods were harder to resell, he said that for Manisha’s goods they were really common or popular, for the Middle East market.

422.  KL appeared to accept the CW and SF made protests about the Manisha Order. He said that he did seek D1’s approval and who said “just have a go”. He also said he was the one who convinced D1 regarding this order.

423.  When asked about the protocol established by D1 to address outstanding accounts before conducting new transactions with Manisha, he referred to it sometimes as a suggestion or opinion, and not exactly a “protocol”. When it was put to him, however, that it was a rule he agreed; though he did not accept that the transaction was in breach of the protocol.

424.  When it was put to KL that he/D1 did not issue any invoice for the 73 items, he agreed, though he at one point said he had emailed Manisha. When asked about a demand letter, he indicated that in the absence of an invoice Manisha could not be asked to pay[138]. KL said that after production he asked Manisha how they would like to proceed, but the payment terms had changed after CW and SF become involved, so that COD was required; at which point Manisha said to keep the order on hold. Because the goods were not delivered, Manisha of course would not pay.

425.  Under questioning, D1 was unable to give much/helpful evidence on the Manisha Order, essentially saying he did not remember the transaction other than very vaguely.

426.  D1 accepted that for tailor-made goods C would need to incur upfront production costs, but he said they would not necessarily be difficult to resell.

427.  D1 said maybe KL had spoken to him about the Manisha Order, he could not quite recall. After he was taken to invoices for the purchase of stones to fulfil the order, various of which bore his signature and KL’s, he eventually accepted that he signed invoices to help KL fulfil the order. He could not remember whether the reason he did this was because SF refused to fulfil the order. D1 said he was completely unaware of an objection by CW and SF; from his recollection he had never heard such objection, and he did not know why he was involved in buying the stones. He accepted at one point that he would have known of Manisha’s outstanding receivables at the time, and C’s negative cash flow position. When asked whether he should have told KL to ask for a deposit or security for the Manisha Order, he at one point said he absolutely agreed, and this applied to every customer under normal circumstances; though at another point he said the suggestion was absurd.

428.  When asked about Manisha’s payment history and AR at the time, D1 said it was slow, but Manisha did make payments. It was necessary to take into account the revenue from the customer. It had not stopped paying, there was continuous payment and turnover.

429.  When questioned on the “Manisha Protocol”, D1 said he had some limited recollection, though his evidence was somewhat unclear/confused. He did not manage Manisha, and had difficulty recalling whether he discussed such a protocol with KL.

430.  He at one point said that he all along requested staff under the Export Dept to deal with customers this way, but he said this was very flexible and varied amongst customers. It could not be strictly followed or C would go out of business[139].

U3.  Manisha’s Payment History

431.  This history of Manisha’s outstanding AR and payments made, from 2012 to 2018, are set out in its Statement of Account. This shows, broadly, that Manisha did make payment of lump sums amounts from time-to-time. An outstanding balance over HK$12 million in 2012 was gradually brought down to the region of HK$3 million by August 2014. This then rose again to the region of HK$11 million by the start of 2016. A series of large payments were then made gradually bringing the balance down to the region of HK$5 million by the start of 2018, which further decreased to a little above HK$2 million by June 2018.

432.  I consider this pertinent, and it tallies with KL’s evidence to the effect that at the time of the Manisha Orders, Manisha had been making a series of payments over time and had been bringing down its credit balance.

U4.  Key Factual Findings

433.  The evidence as to precisely what happened with the Manisha Order was not entirely clear and consistent in all respects, but I set out some key factual findings reached on a balance of probabilities, below.

434.  First, I accept CW and SF’s evidence that they had made protest about the potential order from Manisha, and SF’s evidence that she indicated that deposits should be taken and refused to purchase stones for the order.

435.  Second, I accept KL’s evidence that he was in charge of Manisha and it had been a profitable client up to the relevant point in time. The way in which the transactions were conducted was consistent with previous orders which had been placed by Manisha; including that no deposit had been required from Manisha for a long period. The way in which Manisha was handled as a customer was similar to the OAR Customers as discussed above: payment terms were not strictly enforced, credit periods were allowed, and cyclical payments were made.

436.  Third, I accept KL’s evidence as to the reason for which he considered the transaction should be entered into - despite the various points put to him – including that sales had previously been profitable which offset the slow payment history, and Manisha had been paying its debts off at the time of the order. As to a deposit, this had not previously been asked for doing so would not likely be acceptable, or would be regarded as a destruction of trust.

437.  Next, I find that KL did ask for D1’s approval of the transaction, and that D1 was involved in the decision-making for this transaction and in purchasing the raw materials. KL convinced D1 to go ahead with the transaction. That was the effect of KL’s evidence, and D1 was not in a position to disagree since he largely could not recall.

438.  On balance, I do not accept the evidence in KL’s witness statement that after he informed Manisha of the C’s resolution to cease business, they expressed concerns over C’s capacity to delivery and follow up on the orders. That seems an unlikely reason for the transaction to fail, given that the items were ready for shipment. In addition, the tenor of KL’s oral evidence was more to the effect that by the time for delivery, protocols or practices had been put in place whereby COD terms were likely to be enforced, which Manisha would not accept.

439.  There is no evidence that Manisha was invoiced for the goods, and I accept that KL and D1 did not do so. I accept KL’s evidence that he indicated to Manisha that the goods were ready and could be delivered on COD terms, but did not invoice them because Manisha would not accept this.

440.  Finally here, the witnesses gave inconsistent evidence as to the degree of difficulty in re-selling tailor-made goods after production: see above. I accept that there was likely to be a degree of difficulty in this regard, although also some chance of re-selling the goods for at least some value[140].

U5.  Analysis and Conclusion

441.  I can see some arguable force in the criticisms made by Ps as to the commercial prudence of the transaction, and I bear in mind also that Ps’ Camp made specific protest about it.

442.  However, in my view, KL did enter into the transaction, with D1’s approval, in a genuine and honest belief that it was in C’s best interests, essentially for the reasons set out above. Indeed, I cannot see any other reason why the transaction would have been entered into at least by KL, who would not have been motivated by Sung Art’s interests. In essence, that disposes of Ps’ case on the Best Interests Duty.

443.  As to the Duty of Care, I am once again persuaded by Ds’ submission that this was ultimately a matter of commercial judgment, with which the court is very slow to interfere. Despite the risks of the transaction, it was within the scope of discretion afforded to those making business judgments and assessing risks. I also bear in mind that the transaction dealt with Manisha in a similar way to previous dealings, and that at the time Manisha had in fact been paying its debts: see above.

444.  Whilst the transaction may well have been a risky one, and one upon which others may have taken a different view (including CW and SF), I consider that it was a calculated risk which persons of business are entitled to take[141]. Further, the fact that this particular transaction turned out badly and the risk taken materialised, does not of course necessarily entail a conclusion of negligence. The degree of risk would also have been mitigated by the possibility of reselling the goods produced to a third party.

445.  As to the failure to take a deposit or security, I have also dealt with this point in more general terms above.

446.  The second area of Ps’ complaint is that D1 failed to take any active/prompt/proper steps to demand and collect payment from Manisha on a COD basis or at all, including invoicing Manisha in accordance with purchase orders/draft invoices and issuing demand letters.

447.  The complaint about COD terms has been dealt with in general terms, above. In addition, I once again do not see that any shortcomings in demanding payment from Manisha would be causative of loss[142].

448.  For the above reasons, I dismiss this head of claim.

V.  SHARE SALE BY D1[143]

V1.  Overview

449.  As noted above, the October 2018 Resolution provided that: (i) C shall sell all its shares in listed companies by close of stock market on 24 October 2018, D1 shall be responsible for conducting the sale; and (ii) all sale proceeds from the aforesaid share sale shall only be applied to repay C’s outstanding bank loans and settle payments relating to staff layoffs.

450.  Ps plead that[144]:

(1)  D1 was the de facto sole controller and operator of C’ securities accounts since the 1990s.

(2)  D1 failed to implement the said sale (the “Intended Share Sale”) as he only sold some of the shares owned by C in publicly listed companies[145] on 24 October 2018. The remaining shares were only sold on various dates from 25 October to 8 November 2018, with details contained in Annex D to the SOC.

(3)  The purpose of the Intended Share Sale was to realise cash as soon as possible so that C could discharge all of its outstanding current liabilities (including bank loans) and other liabilities (such as long-service payments and staff salaries) in pursuit of its orderly winding-up.

(4)  D1 knew, turned a blind eye to, was recklessly indifferent to or ought to have known each of the aforesaid.

(5)  In failing to implement the Intended Share Sale, D1 breached the Duty of Care, the Trustee Duty, and the Best Interests Duty including to act in accordance with the October 2018 Resolution.

(6)  Ps claim as a pleaded loss, a series of possible figures representing the difference between the sum which should have been realised had C’s shares all been sold on 24 October 2018, and the sum which was eventually realised

451.  Ds plead that[146]:

(1)  Immediately after the board meeting on 23 October 2018, D1 contacted C’s accounts executives at the various brokerages where C held its shares to instruct them to execute the Intended Share Sale.

(2)  In response, D1 was advised that for some of the securities, it was not possible to sell them by close of the stock market on 24 October 2018 as the trading volume on the open market was too low.

(3)  D1 was also advised that in relation to some of the remaining securities, the market was rising and as such, it would cause C substantial loss for them to be sold on the market at present. It was likely for them to be sold for more money if the sale was postponed for a matter of weeks.

(4)  The decision to delay the Intended Share Sale, particularly in circumstances where C was solvent and had no cash flow difficulties, was taken by D1 bona fide in C’s best interests. It was only upon receiving a letter from Ps’ solicitors that D1 had no choice but to immediately sell the securities without regard to their market price.

(5)  The alleged breaches of duty are denied[147].

V2.  Evidence

452.  This complaint was dealt with in CW’s witness statement[148]. CW reiterated Ps’ pleaded case, and elaborated that at the meeting on 23 October 2018, Ringo Li had explained C’s cash position, and that C was in immediate need of cash for orderly winding-up. There were two primary ways to raise cash, namely sell the listed securities and collect AR, of which the first was quickest. This explained the reason for the relevant portions of the October 2018 Resolution, such that proceeds of sale could be applied to repay outstanding bank loans and payments relating to staff layoffs; which resolution was passed by all directors.

453.  However, D1 did not sell all the securities by close of the stock market on 24 October 2018. He only did so following a letter dated 25 October 2018, which pointed out that D1 had not sold all the securities in accordance with the October 2018 Resolution, and demanded that he do so immediately.

454.  D1’s evidence in his witness statement[149] also followed his pleading.

455.  D1 immediately took steps to sell the shares by contacting accounts executives at various brokerages, and instructing them to sell. He was advised that for some securities it was not possible to do so by close of market on 24 October as the trading volume was too low. In relation to others, the market was rising, and C could receive a bigger return if the trade was delayed for a short time such as a matter of weeks. Relying on this advice from the account executives, he discharged his duties to exercise independent judgment to act in C’s best interests by delaying the Intended Share Sale. He took into account that C was solvent and had no cash-flow difficulties.

456.  D1 also stated that it turned out the account executives were right, as the Hang Seng Index rose within the week following 24 October 2018. However, upon receiving the letter from Ps’ solicitors he felt that he had no choice but to sell the securities at the prevailing market price so as to avoid personal liability. There was no motive for him to do this other than to try to do better for C.

457.  During cross-examination, it was put to D1 that in an affirmation filed in 2021, he had only referred to being informed by account executives that the market was rising and C could receive a larger return by delaying the trade; and not to the alleged low trading volume. His response included that there was one stock which had been mentioned later that was very hard to sell because there were no transactions.

458.  In oral evidence, D1 emphasised that he had had in mind achieving maximum profits for C. When it was suggested to him that even if he had received the alleged advice, he should have discussed with the four shareholders, he accepted this; but reiterated the advice he had received. He was aware of the deadline in the October 2018 Resolution and accepted he broke it, but said he did so in C’s best interests.

V3.  Findings, Analysis and Conclusion

459.  I am not minded to accept D1’s evidence that there was an impossibility of selling some of the stocks due to low trading volumes. First, and as noted by Ps, that assertion was not made in D1’s affirmation filed in 2021. Second, under cross-examination D1 did not emphasise this explanation, and suggested that it only applied to one stock. Third, D1 has not particularised which of the securities this explanation applies to, and I consider that this gives rise to a difficulty or unfairness in assessing the allegation or quantifying losses even if it made good.

460.  Rather, I consider that the most likely scenario is that D1 made a decision to delay selling the securities based on discussions which he had with brokers and advice received, leading to a view being taken on the direction of the market. That was the tenor of most of D1’s oral explanation for delaying the share sale. I so find.

461.  I do not think it necessary to here analyse all of the legal authorities cited by both parties on this point.

462.  In my opinion, given what had been resolved by the board of directors in the October 2018 Resolution, it was not open to D1 to take a unilateral decision to postpone the share sale. D1 was therefore in breach of the Best Interests Duty (which included a duty to comply with the October 2018 Resolution) and/or the Duty of Care in failing to comply with the board’s mandatory provision for the sale of shares on 24 October 2018.

463.  Ds’ legal team cited authority that directors are entitled to rely on professional advice in the performance of their duties. However, I do not think this assists D1 in circumstances where a board decision had already been made to sell the securities immediately, yet he made a unilateral decision to depart from that approach without consulting the other directors.

464.  Further, any opinion as to the direction of the stock market would of course be highly subjective. The board must already have been aware of the possibility of stock market fluctuations one way or another, yet decided to sell on a particular date.

465.  I also consider that losses to C of the nature claimed were a foreseeable result of D1’s breach of duty.

466.  I accordingly find D1 liable under this head of loss.

467.  Of the four alternative measures of loss set out at SOC§63(3) and in CW’s witness statement, I think the fairest to be that based on the shares’ Volume-Weighted Average Prices on 24 October 2018. In my opinion, that provides the closest approximation to the prices at which the shares would likely have been sold, had D1 complied with the October 2018 Resolution.

468.  There was no dispute from Ds as to the accuracy of the quantum claimed under the four options presented by Ps. I therefore find that D1 is liable to C for loss and damage in the sum of HK$1,706,983.52.

W.  ALLEGED MISAPPLICATION OF CORPORATE ASSETS BY D2[150]

W1.  Overview

469.  Ps plead that[151]:

(1)  On 19 July 2018, C received a sum of around US$700,000 from Renee through Al Mufta Doha (“AMD”), to settle Renee’s AR due to C (which amounted to US$928,677,63 as at 17 July 2018).

(2)  On the same day, D2 prevented sums totalling US$562,388 from being properly applied to discharge Renee’s AR as he instructed/caused C to: (i) transfer US$433,500 out of the US$700,000 to Renee; and (ii) transfer US$128,838 out of the said US$700,000 to a company named SWD Import Export Co Ltd, Bangkok (“SWD”).

(3)  In September 2018, D1 instructed C’s accounting staff to transfer to SWD another US$97,130 out of the remainder of the US$700,000.

(4)  On or around 18 September 2018, C received a sum of US$347,514 from Renee through AMD as partial payment of AR due to C.

(5)  Shortly thereafter, D1 and D2 instructed C’s accounting staff to transfer to Renee US$306,000 out of the said sum of US$347,514.

(6)  There was no justification for Ds’ said instructions. C had no prior dealings and/or any relationship with SWD. Any sums received from Renee should have been applied to settle Renee’s AR.

(7)  In September 2018, SF and CW learned of the attempted transfer of US$306,000 to Renee and repeatedly demanded an explanation from D1 and D2, but none was forthcoming. The full sum of US$347,517 was retained only after Ps’ solicitors warned D1’s solicitors by letter dated 26 September 2018 to refrain from dissipating funds further; and that sum was eventually used to settle Renee’s AR.

(8)  The attempted transfer of US$97,130 by D2 was only abandoned after SF and CW learned in September 2018 of the previous transfers to Renee and SWD in July and issued the aforesaid solicitor’s letter. This was also eventually used to settle part of Renee’s AR.

(9)  Ds accordingly breached the Best Interests Duty, the Trustee Duty and the Duty of Care, causing loss of US$562,338 to C, being C’s funds which were wrongly transferred and dissipated to Renee and SWD on 19 July 2018.

470.  Ds plead that[152]:

(1)  The US$700,000 which was received from Renee through AMD was not for the purpose of settling Renee’s AR due to C, but was an advance payment to C for the purchase of raw materials to be used in the production of a new order of jewellery from Renee.

(2)  As to the transfers instructed by D2 on 19 July 2018 - which were admitted - for the above reason these did not amount to D2 preventing those sums being applied towards Renee’s AR.

(3)  At the time, Renee had placed orders with several suppliers including SWD for raw materials to be shipped to C, to be used by C for producing jewellery for Renee.

(4)  On the same day, Renee informed D2 that some suppliers did not issue the invoice against C but to Renee as the named recipient instead. As such, D2 arranged for C to transfer back US$433,500 to Renee for settlement of those invoices from their account instead of C’s account.

(5)  The transfer to SWD on 19 July 2018 out of the US$700,000 was for the purchase of gemstones which were used for producing jewellery for Renee. SWD’s invoice for US$128,838 was issued against C and therefore C settled the invoice out of the US$700,000 received from Renee.

(6)  As to the US$97,130 - which it was admitted D2 instructed the AC Dept to transfer - this was to be transferred to SWD for the purchase of gemstones used for producing jewellery for Renee. SWD’s invoice for US$97,130 was issued to C and therefore C settled the invoice out of the US$700,000 received from Renee.

(7)  As to the US$347,514 received from Renee, in July 2018, D2 was informed by Renee that it would be making payment that was due to C via AMD, but the parties did not discuss the exact figure at that time.

(8)  After C received the US$347,514 from AMD around 18 September 2018, D2 was informed by Renee that the transfer was effected by mistake, due to some confusion with previous remittance instructions based on the previous transfer of US$700,000 to C.

(9)  Since the said sum was transferred mistakenly and not for settlement of AR, after discussion with Renee, D2 on behalf of C reached a preliminary agreement to only offset US$41,514 from the US$347,514 for settlement of AR and return the balance of US$306,000 to Renee pending approval from other directors.

(10)  With the long-standing relationship between Renee and C and Renee’s consistent payment history in mind, D2 was of the considered view that no impropriety would arise from returning a sum transferred by accident and considered that applying that sum to the AR despite Renee’s explanation would have significantly damaged C’s relationship with Renee.

(11)  Ds deny that D1 and D2 requested C’s accounting staff to transfer back to Renee US$306,000; they only instructed Chan Chong Kit of the Accounts Dept department to discuss with CW and SF their intention to return this sum. To the best of Ds’ understanding, the sum was not eventually transferred back to Renee.

(12)  Ds denied the alleged breaches of duty.

W2.  Evidence

471.  This area of complaint was dealt with in CW’s witness statement[153], where he explained the background, the manner in which he and SF came to discover this issue, and referred to a number of relevant documents.

472.  Under questioning, D2 said he had been informed by Renee that AMD would make payment on Renee’s behalf of US$700,000, as it was indebted to Renee. This was with an intention to advance money to C to buy raw materials on Renee’s behalf. Renee had placed orders with several suppliers including SWD where the shipping of raw materials was destined to C for producing jewellery for Renee. D2 was later informed by Renee that some suppliers did not issue invoices to C but to Renee, and it was for this reason that they had to transfer back US$433,500 to Renee for their settlement of those invoices instead of by C.

473.  The transfers of US$128,838 to SWD on 19 July 2018 and US$97,130 in September 2018, represented C’s purchase of gemstones used for producing jewellery for Renee. SWD’s invoices were issued to C and therefore C settled those invoices from its account with funds previously provide by Renee. Similarly, on the intended transfer of US$306,000 to Renee, D2’s evidence essentially tracked Ds’ pleaded case.

474.  D2 was questioned on a remittance advice for US$700,000 to C, bearing details of payment referring to “part payment exhib 2018 sales”, as well as the payments made to Renee and SWD on 19 July 2018. D2 broadly stood by his evidence that he been told by the customer that the US$700,000 was advance payment to C for the purchase of raw materials to be used in production of a new order from Renee. He indicated that he had relayed that to the AC Dept and it was up to them whether to make the remittances, since D2 had limited authority.

475.  When it was put to him that there was no documentary evidence of the indications allegedly given by Renee leading to the return of US$433,500, he said that the client had told him so, and one would not expect documentary evidence. He disagreed that there was no basis to transfer funds back to Renee.

476.  When questioned about the US$306,000 instructed to be transferred to Renee, he again said that he had only relayed the customer’s requests, and C could have declined the payment. It was the AC Dept that had the authority to decide whether to make the remittance, not D2[154].

W3.  Analysis, Findings and Conclusion

477.  It appears from Ps’ Closing that this claim is now only pursued against D2. In short point, the question is whether there were valid justifications for the transfers of US$433,500 to Renee and of US$128,838 to SWD on 19 July 2018, or whether those sums should have been applied to reduce Renee’s AR with C.

478.  Ps argue that as a fiduciary vis a vis C, the onus lies on D2 to justify his dealings with the C’s assets, and it is not for C to prove that the dealing was unjustified: Trinity Concept Ltd (in liquidation) v Wong Kung Sang and Anor [2022] HKCA 1180.

479.  Ps further point to the dearth of documentary evidence supporting D2’s explanations for the transfers in question, arguing that D2’s position is bare assertion. Further, that position is inconsistent with the reference in the remittance advice to C under details of payment to “payment exhib 2018 sales”. Ps also refer to an email dated 26 September 2018 from Renee to D2 forwarding emails which also refer to remittance information for the US$347,514 as “Final Settlement of Exhib 2018”.

480.  In addition, Ps argue that even if D2’s stated explanations were accepted, C was still entitled to apply the sums to Renee’s large outstanding AR and this should have been done; as eventually happened with the remaining balance of the funds which had been transferred by Renee to C.

481.  Conversely, Ds argue that D2’s evidence as to the arrangement made between Renee, C and SWD, and the reasons for the disputed transfers, should be accepted. Had C applied these funds instead to discharge Renee’s AR against Renee’s instructions, this would likely have damaged the relationship with Renee.

482.  Ds further argue that D2 had nothing to gain from returning funds to Renee and remitting them to SWD, which suggests that his explanations for the transfers were genuine; it being difficult to envisage any other reason why they transfers would have been made.

483.  On the state of the evidence, I do not find it easy to decide whether D2’s explanations for the transfers made to Renee and SWD on 19 July 2018, should be accepted. On the one hand, the remittance advices from AMD to C do make reference to settlement or payment exhib 2018 sales (and a similar reference appears in the email referred to above). Further, there is no documentary evidence to directly support D2’s explanations as to the transfers back to Renee and SWD 19 July 2018.

484.  On the other hand, the bundles do contain an invoice from Renee dated 18 September 2018 for US$306,000 and an invoice from SWD dated 18 September 2018 for US$97,130 and which refers to cut ruby. These at least provide some measure of support for portions of D2’s explanations in relation to this later series of transfers/intended transfers.

485.  Further, I am somewhat persuaded by Ds’ argument that there is no reason to believe that D2 gained anything from making these transfers to Renee or SWD, which tends to support D2’s assertions that there were reasons for the transfers to be made as alleged. The transfers in July 2018 were made before any motives in relation to Sung Art are alleged to have come into play, and indeed before August 2018 when it is agreed that there were growing disagreements between the two camps leading to negotiations to part way[155].

486.  On balance therefore, and having listed to the oral evidence, I am minded to accept D2’s explanations as to the reasons for the transfers to Renee and SWD on 19 July 2018.

487.  As to Ps’ reliance on one portion of D2’s cross-examination where he accepted that there was no basis for the transfers to SWD, I consider that this has to be read in the context of his whole evidence which essentially stuck by the explanations given in the pleadings and witness statement for the transfers.

488.  As to Ps’ argument that even if D2’s explanations were correct, the funds should have been applied to discharge outstanding ARs, I accept Ds’ argument that this could potentially have damaged the relationship with Renee such that there was a good reason in C’s interests for not doing so. Accordingly, I am not persuaded that D2 acted in breach of the Best Interests Duty, the Trustee Duty or the Duty of Care.

489.  For the above reasons, I dismiss this head of claim against D2.

X.  DISPOSITION

490.  For the reasons set out above, I allow two heads of Ps’ claim against Ds namely: (i) Ps’ claim against D1 based on the sale of C’s shares in listed companies in the sum of HK$1,706,983.52; and (ii) Ps’ claim against D2 in respect of Post-October 2018 Sales/Deliveries in the sum of HK$2,114,709.03.

491.  All the other heads of Ps’ claim are dismissed.

492.  Judgment will according be entered ordering:

(1)  D1 to pay damages to C in the sum of HK$1,706,983.52; and

(2)  D2 to pay damages to C in the sum of HK$2,114,709.03.

493.  I was not addressed on interest, and will make orders nisi that:

(1)  D1 pay to C simple interest on the above sum of damages payable by D1, at the commercial rate[156] from 24 October 2018 to the date of judgment, and thereafter at the judgement rate.

(2)  D2 pay to C simple interest on the above sum of damages payable by D2, at the commercial rate from 1 December 2018[157] to the date of judgment, and thereafter at the judgment rate.

494.  As to costs, I have considered the well-known principles on the exercise of the court’s discretion on costs, particularly where a claim is partially successful. I have taken into account what I consider to be the overall fairness of the matter.

495.  In terms of the amount of time spent and costs likely incurred, as well as the quantum sought, Ps have succeeded in only a rather small portion of their claims against each of D1 and D2.

496.  In my opinion, the fairest orders are that Ps pay to D1 75% of his costs of the proceedings, and Ps pay to D2 75% of his costs of the proceedings, to be taxed if not agreed. I will make orders nisi to that effect.

497.  The orders nisi as to interest and costs will become absolute 14 days after the date of judgment, unless an application is made to vary them. Any application to vary the said orders shall be made on paper; any submissions in opposition shall be made within 14 days after such application; and any submissions in reply shall be made within 10 days after the submissions in opposition. Each of the said sets of submissions shall be limited to 5 pages in length.

498.  Last, I thank both teams of counsel for their able assistance with this matter.