ACTIVE PROFIT LTD v. NISSHO IWAI HONG KONG CORPORATION LTD AND OTHERS

cacv 320/2003 & CACV 332/2003

in the high court of the

hong kong special administrative region

court of appeal

civil appeal nos. 320 & 332 of 2003

(on appeal from HCCL NO. 47 of 1998)

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Before: Hon Rogers VP, Le Pichon and Cheung JJA in Court

Dates of Hearing: 2, 3 and 6 – 9 December 2004

Date of Handing Down Judgment: 23 February 2005

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J U D G M E N T

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Hon Rogers VP:

1.  This is an appeal from a judgment of Stone J given on 30 June 2003 following a trial which took some 15 days.  The action was for breach of trust against each of the defendants.  The judge found the defendants liable for breach of trust and ordered that the plaintiff should have remedies in respect thereof.  Although it is not entirely clear from the order, it was apparently intended, and has been so understood by the parties, that the various relief granted should be in the alternative.  The plaintiff has opted for an account of profits against each of the defendants.

Background

2.  The action arises out of an investment by the plaintiff in a joint venture for the development of land in the New Territories.  In order to understand the basis of the claim it is necessary to refer to the background facts with particular reference to the involved and evolving state of the various agreements which came into existence.  The judge referred to the case as being larded with detail.  That detail is important in many respects in this case because as, will be seen, the contractual provisions between some of the parties changed but in some respects remained consistent.  The changes came about as a result of negotiations over the development.  The need to consider the details of these arrangements is made necessary particularly because Mr Okuyama, who was probably the most important person involved, died in 1998.

3.  The 4^th defendant, Carlos Yuk Kei Cho (“Cho”), is an architect.  It would seem that from at least mid-1988 he had been putting together a proposal to purchase land in an area off Tung Lo Wan Hill Road, Shatin.  Although at that time this was agricultural land it was recognised that it would be ripe for development, provided consent was obtained.  There is a copy of a fax of 20 June 1988 in which the germ of the proposal which eventually emerged can be seen.  Together with the 3^rd defendant, Motoyuki Kodera (“Kodera”), he acquired the property, which has been referred to as Property A, which he had been considering.  Property A was purchased in three lots.  According to the plaintiff’s chronology the purchase took place in January 1989 for $7,953,100.  However the document suggested that the total cost may have been $11,353,100 and the area of land involved was some 124,539 square feet (11,570 square metres).  (In one of the documents it would appear that the area was 123,034 square feet (11,429 square metres) but nothing seems to turn on that small difference.)

4.  Kodera had originally held a senior position in a Japanese warehousing company.  It seems that by this stage he had branched out on his own and had substantial interests in warehouses in the New Territories.  One of his major companies was Ever Gain Limited (“Ever Gain”).  Cho apparently knew relevant persons at Sun Hung Kai Properties Limited.  For the purposes of this case there does not seem to be any relevant distinction between any of the companies which are assumed to be within the same group as Sun Hung Kai Properties Limited and they will be referred to interchangeably as Sun Hung Kai.  Whether it was on his introduction alone or together with Kodera does not materially affect the issue but it seems that discussions between Sun Hung Kai and Cho and Kodera soon took place with regard to a joint development. 

5.  The initial outline of the joint development proposals is contained in a letter 27 March 1990 written by Cho to Mr Thomas Chan of Sun Hung Kai which commences by referring to several meetings and discussions which the parties had had in the previous fortnight.  It is of interest that in that letter reference is made to the fact that although Government agreed in principle that the land should be redeveloped into a residential complex with a plot ratio of 0.4, the permitted development would give a gross floor area (“GFA”) of 4,628 square metres, if a planned District Distributor Road D10 were constructed the plot ratio could be considerably increased.  The suggestion in the letter was that because Sun Hung Kai was itself undertaking a large development in the area, the construction of the road would be advantageous for that development.  It was also said that there was an area of land of approximately 11,972 square metres which Sun Hung Kai might be able to obtain which would enable Sun Hung Kai to benefit not only from the development but also in respect of its existing development.  It might be noted that this was slightly more than the gross area of Property A which was said to be 11,570 square metres.  At the end of the letter there was the following sentence:

“If the proposal is agreeable then we shall retain the role of architect for the joint site whereas your company will act as the project coordinator.  Other details can be worked out after in-principle agreements have been reached.”

6.  The following month there was a favourable response, which referred to the fact that Government was likely to agree to a much higher development intensity, possibly in the region of a 1.5 to 3 plot ratio, provided the District Distributor Road D10 were constructed.  It appeared also that the construction of the road would have to be undertaken by the developer since the road was of low priority.  One of the matters mentioned in the letter of 6 April 1990 was Sun Hung Kai’s willingness to enter into a joint venture with Cho’s clients because it was influenced by the fact that it was considered that they were a reputable organisation in Japan.

7.  In July 1990, Sun Hung Kai acquired a substantial part of the property suggested.  That has been referred to as Property D.  However, in October 1991 it informed Kodera and Cho that it was not optimistic as to the prospects of acquiring further land at a reasonable price.  Later, in December 1991, a further property, Property B, was acquired.  This property was acquired in the name of Golden Essence Ltd which was a 50-50 joint venture between Sun Hung Kai and Beachshore Limited (“Beachshore”).  Beachshore was a company owned by Cho and Kodera.  It was used as a land holding company and was also used to hold Property A.  Even then, the land Sun Hung Kai owned only represented approximately 39% of the development. 

8.  In a letter of 7 July 1992 from Sun Hun Kai to Cho it expressed the wish to have 50% of any joint venture.  The request was made that it be given the option to increase its share in the development from 39% to 50%.  It should be mentioned that later in August 1992 another company, Bright Essence Ltd, again a joint venture between Beachshore and Sun Hung Kai, acquired Property C, bringing Sun Hung Kai’s interest to just over 41% but still substantially less than the 50% it wanted.  Sun Hung Kai’s interest was increased to the desired level, by dint of it acquiring the full interest in Properties B and C.  That was accomplished by buying the 50% interest in the 2 holding companies from Kodera, after it had been transferred to him from Beachshore.  There is no dispute that Kodera held part of that interest on behalf of Cho.  The transaction left Sun Hung Kai with excess land of 2,179.60 square feet which it was agreed would be transferred by Sun Hung Kai from the lots in Phase 2 to Nissho.

9.  It is of interest to note that slightly over two years later in November 1994, when Cho was complaining to the directors of Sun Hung Kai that he, Cho, had been squeezed out of being the architect in respect of the development he referred to this when he said:

“Through dedication, hard work, patience, friendship and ingenuity, I succeeded in getting your good self and the Nissho Iwai Group to enter into the deal, culminating in the signing of the Joint-Venture documents on 20^th August 1994….. This is no mean achievement because persuasion and perseverance had to be exercised to convince Mr Kodera, a founding partner in the project to part with some of his land holdings and my own 7.5% stake to your company.”

The letters to the Sun Hung Kai’s directors in which that was written were copied, amongst others, to Kodera and Mr Okuyama.

The involvement of Nissho Iwai Hong Kong Corporation Ltd

10.  The Japanese organization to which reference was made by Sun Hung Kai in their letter in 1990 was the 1^st defendant and its parent company.  For convenience they will be referred to as Nissho Hong Kong and Nissho Japan.  Although it would seem that Nissho Hong Kong only became a wholly-owned subsidiary of Nissho Japan in 1996, there is no dispute that at all material times it was controlled from Japan. 

11.  Perhaps one of the more revealing documents in the case is the proposal which was sent by Nissho Hong Kong to Nissho Japan in November 1992.  It is not entirely clear who drafted that proposal but it is very likely that Mr Okuyama either drafted the document or at least had a considerable hand in its drafting.  Mr Okuyama was the General Manager of Nissho Hong Kong until sometime in 1994 when he returned to Japan to become Deputy General Manager of Nissho Japan.  He played a key role in the events that have given rise to this action but, unfortunately as already stated, he died in 1998.

12.  The document sets out the proposal which Nissho Hong Kong was putting to Nissho Japan as to their respective involvements in a joint venture for the development of the land of which Property A formed a major part.  It was explained in the document that there would be a joint venture between Sun Hung Kai on the one part and a conglomerate of which Nissho Japan and Nissho Hong Kong would form 50%.  The other parties to the contract would be Ever Gain, that is the company owned and controlled by Kodera, and Penta-Ocean Construction.  As was explained in the document, Ever Gain was the partner of Nissho Hong Kong in warehouse developments and owned land in the Shatin area.  In contrast nothing was said about Penta-Ocean Construction presumably because it was a substantial Japanese construction company known to Nissho Japan.  It was explained that Ever Gain had wanted to develop the land jointly with Sun Hung Kai and that Sun Hung Kai had managed to purchase surrounding land through one of its subsidiaries.

13.  The site at Tung Lo Wan Hill Road was described as being a 12-minute walk west of the main Shatin KCR station.  It was said that Shatin was popular with “local salarymen”.  The proposed development was said to be of six towers of 12 to 18 storeys with eight units per storey.  Units were going to be between 60 square metres (approximately 646 square feet) and 95 square metres (approximately 1,023 square feet) each with an average size of 80 square metres (approximately 861 square feet).  The first reason given for pursuing the project was that Shatin was an area which was highly popular with working couples in the salaried office worker middle class.  Coupled with the estimate of the average selling price of a unit at $3.8 million, that gives some impression of the type of accommodation and market at which the development was proposed to be directed. 

14.  It may also be noted that the sale price of the units was worked out on the basis of $3,900 per square foot or approximately $42,000 per square metre.  Those prices can be compared with the prices which the document reveals Sun Hung Kai had sold other developments in the Shatin area between 1985 and 1991.  The highest prices achieved for each of those developments were in excess of $4,000 per square foot and the lowest price achieved according to the document was $3,400 per square foot but that was in 1990, possibly affected by the turmoil which had occurred in the second half of 1989 or possibly a slightly lower figure was obtained because the development, whilst having an open view, was not particularly convenient for public transport.  The table demonstrates a history of consistently substantially stable prices over the 6-year period.  The New Town Plaza, which was completed in 1991 and apparently sold out on the same day, sold at prices which ranged between $3,900 per square foot and $5,000 per square foot.  That, of course, is in the centre of Shatin.

15.  The document explains that there was to be a ceiling of $2,200 per square foot accommodation value in respect of the land.  It was said that this compared favourably with the then current market price of approximately $2,500 per square foot and that Nissho was able to achieve that because of its close relationship with Ever Gain.  It was said that the price paid for the land was calculated at approximately $1,000 per square foot and premium which Government would require at $1,200 per square foot and that if the premium went up the amount of the land fee would be adjusted accordingly.  Thus it might be deduced that, since there was a $300 per square foot discount because of the close relationship, the price for the land at open market value was considered to be approximately $1,300 per square foot excluding the premium.  It was estimated that Nissho’s profit would be approximately $112 million based on an exposure in respect of the project of $324 million i.e. just under 35% profit.

16.  Whilst there is no direct evidence as to the response from the head office in Tokyo, it is clear that the head office must have given its approval for Nissho Hong Kong to go ahead and, indeed, it must have done so on both Nissho Hong Kong and Nissho Japan’s behalf.  What is known is that Mr Okuyama wrote a letter on behalf of Nissho Hong Kong to Sun Hung Kai on 9 February 1993 setting out that both Nissho Hong Kong and the two Japanese interests: “… will participate in the project by acquiring majority shares of Beachshore Ltd.”  There were a number of conditions which were referred to in the letter in the following terms:

“In this connection we would like to confirm our basic understandings with you as follows.

1. The project will be conducted by a development committee consisting of your company and us once the project start.

2. The development will be immediately proceeded once the land premium figure is given by the Government unless the premium is unreasonably high.

…

5. With regard to the sale of the falts (sic) please refer to our attached sheet.”  (emphasis added)

17.  The attached sheet made clear that the flats and car parking spaces would all be sold to the public and that although the sale price would be fixed by the committee members, the participants in the development would be free to sell their own flats at whatever price they saw fit. 

18.  From this one may conclude at least so far as Nissho Japan was concerned, and thereby Nissho Hong Kong as well, that the project was looked upon as being a development project and not an investment, speculative or otherwise, in land per se.  The only indication that the Nissho companies contemplated a gain in respect of the land itself, was as a consequence of the $300 per square foot discount.  There is no suggestion at all that the Nissho companies contemplated an increase in the capital value of the land, nor was there any suggestion that they would be receiving any part of the gain that Beachshore contemplated as a result of the conversion of the land to building land other than the $300 per square foot discount.  Indeed, there was obviously concern that the land premium might make the development project unattractive; hence the wish to abort the project if the land premium were too high.  Also it is clear that that Nissho wished to be able to dispose of the properties once the development had been completed, the inference being that it was willing, if it considered it necessary, to sell at a lower price than Sun Hung Kai.  This would give the impression that the Nissho companies did not want to take any risks in holding land once the development were completed.  All this seems to me to confirm what was said by Mr Takizawa, who became general manager of the property department of Nissho Hong Kong in January 1997.  See paragraph 17 of his witness statement.

The involvement of the plaintiff

19.  The plaintiff is an associated or subsidiary company of Playmates Properties Limited (“Playmates”).  The earliest document relating to its involvement in the project is a letter of 9 January 1993 from First Pacific Davies to Playmates referring to discussions which had taken place in relation to Playmates’ involvement in the project by becoming a silent shareholder taking what, in effect, would be 10% of the joint venture company.  The letter was headed “subject to contract” and it was stated that there would be a formal agreement although the letter itself was signed as accepted and confirmed both by Mr Thomas Chan who was a director of Playmates and Mr Okuyama who was, of course, a director of Nissho Hong Kong.  Little is known about the internal workings of the plaintiff.  It is known that there was a dispute leading to litigation between the members of the Chan family which was behind the plaintiff.  In about March 1994 Mr Albert Chan took over control of the plaintiff from Mr Thomas Chan.  Mr Albert Chan gave evidence but Mr Thomas Chan did not.  Mr Albert Chan had a meeting with Mr Okuyama and Mr Ishiwata of Nissho in April 1994.

The First Mainplaza Shareholders’ Agreement

20.  Matters soon came to a head as regards the formalisation of the documentation because on 5 March 1993 two important documents were executed.  The first was the joint venture agreement in respect of Mainplaza Investments Limited (“Mainplaza”) which for convenience will be referred to as the First Mainplaza Shareholders Agreement.  This was an agreement between Nissho Japan, Nissho Hong Kong, Milemore Investment Limited (“Milemore”) and Highs Development Limited (“Highs”).  Milemore was the investment vehicle of Kodera and Cho with Kodera owning 90% and Cho owning 10%.  It replaced Ever Gain as the participant in the joint venture.  Highs was a subsidiary company of Penta-Ocean Construction.  The agreement set out the way in which Mainplaza would operate.  The shareholders of the company would be the four signatories to the agreement with Nissho Japan having 20%, Nissho Hong Kong having 30%, Milemore having 20% and Highs having 30%.  The “Business” of the company was defined as being set out in Clause 2 of the agreement and such other business as the parties may agree from time to time in writing should be carried out.  The business was clearly defined in Clause 2 as relating to the redevelopment consequent upon the regrant of the site comprising Properties A to D.  Clause 5.1.1 restricted the business of the company exclusively to the “Business” as defined.  Although the definition of the primary object of the company set out in Clause 2.1 refers to the terms of the Joint Development Agreement, and that Joint Development Agreement had not yet been entered into, it is nonetheless clear that the agreement referred to the development of the relevant lots.

21.  In order for Mainplaza to be involved in the redevelopment it was necessary for it to acquire or control either part of the land or the shares in Beachshore which owned part of the land.  Hence, in Clause 6 .1 of the agreement, it was provided that the shareholders would inject the necessary funds to finance the Share Purchase Agreement in order to purchase the majority holding in Beachshore.  Provision was likewise made for injection of funds to finance the Joint Development Agreement.  Those funds would be provided by way of shareholders’ loans in the proportions of their interest in Mainplaza.  There was a provision preventing disposal of shares to entities other than associated companies of the shareholders and, furthermore, the shareholders were prevented from creating any pledge, lien or charge or granting any rights or interest over the shares to any other entities.  Although the Nissho companies had a 50% shareholding in Mainplaza, their control over that company was exemplified in Clause 14.1 which provided that Beachshore should appoint Nissho Hong Kong to be the authorised representative and agent for Beachshore in dealing with the other parties to the redevelopment, which included not only Penta-Ocean but also Sun Hung Kai.

22.  Under the agreement, Milemore was to benefit more than the other shareholders.  All the shareholders would share rateably in respect of the first portion of profit which would be equivalent to 20% of the total development cost.  If there were profits in excess of that Milemore would be entitled to a “Second Agreed Portion” i.e. a sum equivalent to $200 per square foot of approved GFA allocated to Beachshore under the Joint Development Agreement multiplied by 96.9%.  This was referred to as the Second Agreed Portion.  Any amount over and above that would be distributed rateably amongst the shareholders.  In addition, Milemore was to be entitled to what was referred to as the “Excess Car Parks”.  That meant car parks in excess of 1.2 per residential units allocated to Beachshore under the Joint Development Agreement.  Judging by the estimates given in paragraph 4 of the document sent by Nissho Hong Kong to the head office in Japan that would imply something like 103 car parks.  The estimate in that document had been that a total of 688 residential units and 1032 car parks would be built.

The Share Acquisition Agreement (“SAA”)

23.  Coupled with the signing of the First Mainplaza Shareholders’ Agreement there was also executed on the same day an agreement between Kodera and Cho on the one part and Mainplaza on the other.  This was an agreement for the sale of 969 shares of Beachshore.  That represented 96.9% of that company.  The remaining 3.1% of the company was to be owned by Kodera and was not to be transferred.  These percentages, naturally, were reflected in the way in which the Second Agreed Portion in the First Mainplaza Shareholders Agreement was calculated.  The agreement, which has been referred to as the SAA, provided for the down-payment of $55,056,000 as a deposit with the balance of the consideration for the sale being paid on completion.  Completion was to take place seven days after Kodera and Cho had notified Mainplaza in writing of the issue of the Architect’s Certificates in respect of

(a) the premium which would be payable to Government; and

(b) as to the gross floor area which would be permitted

together with a copy of what was referred to as the Initial Development Agreement duly signed by the owners of the various properties which would be included in the development.  That, of course, included Sun Hung Kai.

24.  Clause 7.2 of the SAA provided for termination of the agreement, the ultimate date being 31 August 1994.  If the offer letter from Government in respect of the premium and the gross floor area had not been received and the Initial Development Agreement not been entered into by then, the agreement was to be at an end and of no force or effect.

25.  There was, furthermore, good reason why completion could not take place under the SAA until the Architect’s certificates had been issued.  The total consideration under the agreement was to be worked out on the basis of the “Basic Price per square foot” of the land involved.  It was to be adjusted because only 96.9% of the shares were to be transferred and there was to be an adjustment in respect of the permitted GFA.  There was also to be a deduction of $15,241,143.56 because there was a loan owed by Beachshore to Bumper Harvest Limited.  The Basic Price per square foot was $930 per square foot being the agreed basic price per square foot of GFA.  However, not only was the consideration thus dependent upon the amount of GFA which would be allowed by Government, but the SAA also included provisions for adjusting the consideration depending upon the premium which would be demanded by Government.  The “Basic Rate of premium” adopted in the SAA was $1,200 per square foot.  If the premium which would eventually be demanded by Government varied from the Basic Rate, the Basic Price would be inversely varied by the corresponding amount so that the total cost of GFA payable by Mainplaza, i.e. the total of the consideration under the SAA and the premium, would remain the same.  The formula for calculating the consideration was as follows:

Basic Price (e.g. $930 per square foot) x 96.9% x assumed GFA (e.g. 305,470 square feet) – HK$15,241,143.56 (the Bumper Harvest Loan)

The consideration so calculated was $260,039,256.34.

26.  Although, therefore, it would appear on a casual reading of the SAA that Kodera and Cho were selling the land to the joint venture at $930 per square foot of approved building land, in reality, if matters went according to plan and as envisaged in the document sent to Nissho head office in November 1992, Kodera and Cho would also receive a further $200 per square foot under the provisions of the First Mainplaza Shareholders Agreement relating to the Second Agreed Portion and would also receive at least the proceeds of sale of some 100 car parks.  Whilst this may not bring the amount up to exactly $1,300 per square foot of approved building land, it would narrow the gap considerably.  On the figures in the SAA, the Second Agreed Portion alone was worth something in the region of more than $59 million.

The Participation Agreements

27.  The first participation agreement relied upon by the plaintiff in this case was executed on 1 June 1993.  It was made between Nissho Hong Kong and the Faser Limited.  Faser Limited subsequently assigned its rights to the plaintiff, but nothing turns on that.  It was an agreement made in the light of the SAA.  Although the Nissho Participation Agreement is short, the agreement appears to have been designed to carry out the intention expressed in the letter of 9 January 1993.  Clause 2 of the agreement read as follows:

“DECLARATION OF TRUST

In consideration of the agreement by the Participant hereinafter contained, and NICHK hereby declare that it will upon completion of the Shares Acquisition Agreement hold 1/3 of its interests and rights in its shares and investments (including shareholder’s loan to Mainplaza) in Mainplaza and in the Joint Venture in trust for the Participant and will deal with all dividends, rights and other interests which may accrue to the said 1/3 interests and rights in accordance with the direction of the Participant.”

That clause was then followed by a clause referring to the object of Mainplaza that read as follows:

“OBJECT OF MAINPLAZA

The primary object of Mainplaza shall be to carry out the Joint Venture, in particular but without limitation to proceed with the Exchange and the Development with other Joint Venture Partners.”

28.  There were provisions in the Nissho Participation Agreement providing for the obtaining of consent from the other participants in the First Mainplaza Shareholders’ Agreement for Faser Limited to enter the agreement.  There were also provisions requiring Nissho Hong Kong to supply all relevant information relating to the progress of the development of the property and the conduct of the affairs of Mainplaza.  There was a further clause which is of particular relevance in this case, namely Clause 9:

“CONTRIBUTION

The Participant shall be responsible for compliance with 1/3 of any funding obligations of NICHK as holder of 30% of the issued shares capital of Mainplaza under the Mainplaza Shareholders Agreement and NICHK shall hold all rights and benefits of such contribution by the Participant in trust for the Participant.”

29.  The consideration under this agreement was a down payment of $5,505,608 as deposit payable on the signing of the agreement and the balance of $27,528,040 would be payable on completion of the SAA.  Thus, in many respects, the provisions of this agreement accorded with the terms of the letter of 9 January 1993.  

30.  On 30 September 1993 Milemore entered into an agreement with the plaintiff which was in similar form to the Nissho Participation Agreement entered.  On this occasion, however, the 10% interest in Mainplaza represented one half of Milemore’s share.  Whilst clause 2 of the Milemore Participation Agreement was in similar terms to that of the Nissho Participation Agreement there was an important variation to exclude from any benefit transferable to the plaintiff any part of the Second Agreed Portion to which Milemore was entitled under the First Mainplaza Shareholders Agreement.  There was also an exclusion of any benefit derived by Milemore in respect of the Excess Car Parks.  In addition, Kodera and Cho had stipulated that they should be entitled to an arrangement fee which would total some $13,275,000 of which $2,655,000 would be payable immediately.  Clause 10 of the Milemore Participation Agreement corresponded to Clause 9 of the Nissho Participation Agreement.  There is no dispute that there was no direct contact between Active Profit on the one hand and Milemore or Kowloon or Cho on the other.  All negotiations were done through Nissho.

The position of the parties upon the signing of the Participation Agreements

31.  If one considers the position as at the signing of the Nissho and the Milemore Participation Agreements the agreements that were in existence then were the SAA and the First Mainplaza Shareholders Agreement. 

32.  Clause 2 of the Participation Agreements could not have given rise to any immediate rights in Active Profit.  The circumstances which would trigger the coming into force of any rights under clause 2, namely the completion of the SAA, had not occurred. 

33.  The only trust that could arise is under Clause 9.  If it be assumed that the deposits paid under the Participation Agreements were used, notionally at least, to pay 1/3 of Nissho’s contribution and 1/2 of Milemore’s contribution towards the deposit payable by Mainplaza under the SAA, then Clause 9 might take effect.  Active Profit would be taken to have paid the relevant amounts in respect of the “funding obligations” of Nissho and Milemore respectively.

34.  On the basis that a trust under Clause 9 did arise irrespective of the fact that there was no direct contribution to the expenses of Mainplaza, the question then arises as to what the rights of Active Profit were under such a trust and what the duties and liabilities were of the trustees, namely Nissho Hong Kong and Milemore.  In my view, the circumstances were such that the trustees could only have been liable to conduct the affairs in relation to Mainplaza in an honest manner.  Active Profit had entered into the Participation Agreements on the basis that Nissho Hong Kong was itself the 30% shareholder of Mainplaza and was, together with Nissho Japan, the primary party controlling its affairs.  As such, Active Profit could expect no more than that Nissho Hong Kong would act in a proper and honest manner furthering the business of the company, namely the carrying out of the development with other joint venture partners, so as to enable all shareholders to obtain their legitimate benefits therefrom.  On the other hand, Active Profit was a silent partner; although the Participation Agreements did not expressly exclude Active Profit from any management role, clearly those agreements were on the basis that Active Profit would not be a shareholder in Mainplaza.  As such, it had no say and no claim to any say in the running of the affairs of Mainplaza.  It had no ground for demanding that Nissho Hong Kong would conduct the affairs of Mainplaza in any particular manner other than that expressed under the heading “Object of Mainplaza” and certainly it had no ground for expecting that Nissho Hong Kong should conduct the affairs of Mainplaza in what Nissho Hong Kong and its parent company thought was a risky manner.  It had no ground for expecting that Nissho Hong Kong would spend money of its own money, or make commitments, in respect of something which would not be part of the stipulated business of Mainplaza.

35.  Importantly, it is pertinent to observe that if, for any reason, completion of the purchase of the Beachshore shares under the SAA did not go ahead, Mainplaza would have had no claim to any interest in those shares or in Beachshore’s land.  The simple point is that unless and until completion of the SAA took place, Mainplaza would not hold any Beachshore shares.  Completion would only take place after Government had indicated the amount of the premium.  If Government did not indicate the amount of the premium prior to September 1994 the SAA would lapse.  This point is mentioned because one of the points mentioned by the plaintiff, although not put forward as a ground for complaint giving rise to relief, was that various changes to the agreements happened and decisions were taken without the plaintiff’s knowledge.  Since, however, the major ground of complaint and the claim for relief in this action is based upon the disposal by Mainplaza of the Beachshore shares, it can be seen that it is somewhat ironic that it is only because of the later changes in the contractual provisions, of which the plaintiff was unaware and to which it did not consent, that it can begin to found any ground of complaint in this action.

36.  Another significant point which should be mentioned in relation to the position of Active Profit was that the Participation Agreements gave it no share in the anticipated capital appreciation of the land held by Beachshore consequent upon the grant of any land exchange and conversion of the land into building land.  Indeed, as has been pointed out, the provisions of the SAA enabled Milemore to obtain an amount substantially closer to the $1,300 per square foot of GFA referred to in the document sent to Nissho Japan than the $930 per square foot.  Part of that was, of course, on the assumption that the development of the land would be profitable.  Nevertheless, the difference between the cost of acquisition of Property A and the sale price of Beachshore to Mainplaza was to be for the benefit of Kodera and Cho.

Subsequent Events

37.  As has already been mentioned Beachshore previously owned not only Property A but 50% of each of the companies which owned Properties B and C.  In December 1992 the shares of those two companies were transferred to Kodera.  This appears to have probably been one step in the arrangements which led to those companies becoming wholly owned by Sun Hung Kai.  Clearly the negotiations with Sun Hung Kai continued after the signing of the SAA.  Indeed, on 5 May 1994 Sun Hung Kai wrote to Nissho saying that they were pleased to note that they had come to an agreement with Cho and his clients in respect of the joint development in Tung Lo Wan Hill Road.  The letter then set out the major terms of that agreement.  The holding company in respect of Sun Hung Kai’s interest would be Tsuen Kwong, which was a wholly owned subsidiary of Sun Hung Kai, on the one hand and Beachshore, which was referred to as being a wholly-owned subsidiary of Nissho, on the other.

38.  It is clear on the calculations set out that Nissho’s side had 37,895.70 square feet more than Sun Hung Kai and that there was therefore to be a transfer of 18,947.85 of land (i.e. half the difference), notionally at any rate.  In respect of that Sun Hung Kai was to pay $1,000 multiplied by 2.59, being the estimated plot ratio, per square foot of land notionally transferred.  That was therefore the equivalent of $2,590 per square foot of GFA.  There is nothing in the letter, or anywhere else for that matter, to indicate that that was not the correct estimated price and indeed the figure of $49,074,931.50 was referred to in subsequent correspondence as being the correct price that Sun Hung Kai would pay for the 18,947.85 square feet.  As it worked out, in about August 1994, Kodera transferred the 50% interest in Bright Essence Ltd and Golden Essence Ltd which had previously been held by Beachshore Limited to Sun Hung Kai.  This has already been alluded to in paragraph 8 above.  That then left a balance which had to be transferred back to the Mainplaza side so that the ratio between the two partners namely Sun Hung Kai and Mainplaza was kept at 50:50. 

The events leading up to the Share Subscription Agreement (SSA)

39.  The SAA transpired to have been only the preliminary agreement leading up to a series of negotiations.  Sometime in about mid-1994, probably June 1994, an agreement was prepared between Kodera and Cho on the one part and Mainplaza on the other.  This has been referred to as the prototype of the Premium Agreement.  There were two different aspects to this agreement.  It provided for two things.  In the first place it provided that if the premium demanded by Government was more than $1,560 Kodera and Cho would have the right to cancel the SAA unless Mainplaza agreed to pay the difference between the premium and $1,560.  On the other hand if the premium were to be less than $840 then Mainplaza would have the right to cancel the SAA unless Kodera and Cho agreed to pay the difference between the premium and $840.  It would seem that the main purpose of those provisions was to protect Kodera and Cho should the premium far exceed that which had been anticipated.  It was not an unnatural nor an unjust agreement for the parties to have arrived at.  If the provisions of clause 4 of the SAA were strictly applied, the situation could have arisen whereby Kodera and Cho would have received nothing for their land.  It is justifiable to view matters on the basis that that could never have been the intention of the parties.  Furthermore, as has been pointed out, the scheme of the arrangements was that they would be the parties benefiting from the increase in value of the land consequent on its conversion to building land.  On this aspect the Nissho companies and Highs were given an exit if they considered that the total land cost was too high.  In this respect the prototype Premium Agreement echoes the letter of the 9 February 1993 referred to in paragraph 16 above.

40.  Possibly, the price that Sun Hung Kai was prepared to pay for the land as has been set out in paragraph 38 above alerted the parties to the fact that the price of land might well have been increasing with the consequent effect that it was possible that Government, which had not by then committed itself to the premium amount, would demand an inflated amount for the premium.  What in effect Kodera and Cho would be doing would be to lock the minimum price at which they would part with their land at something over 50% of the Basic Price in the SAA albeit they also would receive the Second Agreed Portion and the Excess Car Parks. 

41.  The other provision of the prototype Premium Agreement was that:

“If Regrant is not given by March 31, 1995 due to unforeseen reason after the completion of the purchase of the share in accordance with the Original Agreement, MIL has right to request to Seller to purchase back the share at purchase price of MIL together with interest from the payment date of purchase money until the purchase by Seller calculated at 6% per annum.

In order to avoid such happening, MIL may request Sun Hung Kai properties to release title deeds of the land owned by Tsuen Kwong.  If MIL find out any defect in such title deeds through Hastings & Company, MIL have right to cancell the Original Agreement unless Tsuen Kwong cure the defect upto satisfaction of Hastings & Company.”

42.  It is self evident from the wording of that agreement, and indeed there was no dispute about it, that this agreement was made without the help of legal advisers.  Nevertheless, the second part of this agreement reflects Nissho’s concern that it was interested in the development that was to take place as opposed to an investment in land.  Once it is appreciated that the SAA stipulated that completion had to take place by the latest 31 August 1994 upon the provision of the Architect’s certificates relating to the premium and the GFA, it is at once apparent that the purpose of the provision was that the development would be continued and not be allowed to stagnate. 

The September 1994 Agreements

43.  As noted above the final date for completion of the SAA was 31 August 1994.  By that date not only had Government not indicated the premium which would be demanded but the final contracts with Sun Hung Kai had not been completed.  There was indeed no contract between Mainplaza and Sun Hung Kai dated earlier than September 1994, although there is some indication in the correspondence that agreements with Sun Hung Kai might have been signed earlier than their dates.

44.  It is clear that negotiations had been continuing during 1994 with Sun Hung Kai.  These resulted not only in the transfer of the shares in Golden Essence Ltd and Bright Essence Ltd and the consequent adjustment but also, importantly, Sun Hung Kai was insisting that Mainplaza should have the shares in Beachshore before proceeding.  In those circumstances the arrangements between the shareholders of Mainplaza were revisited.  There were 2 sets of agreements which were entered into on 9 September 1994.  The first was a Shareholders Agreement in respect of Mainplaza.  This was entered into by the same parties who had entered into the First Mainplaza Shareholders Agreement.  The second agreement was a Cancellation Agreement entered into between Mainplaza on the one hand and Kodera and Cho on the other.  That agreement provided for the cancellation of the SAA and the return of the deposit which had been paid.  The deposits, however, were not in fact returned to the original payers because Mainplaza and Kodera and Cho entered into a Share Subscription Agreement on the same day.

45.  The new Mainplaza Shareholders Agreement (“the 1994 Shareholders Agreement”) had some of the features of the First Mainplaza Shareholders Agreement to the extent that the business of the company was again limited to the joint venture with Tsuen Kwong to carry out the redevelopment upon the regrant of the site.  There were, however, some new features.  Gone, for example, was Milemore’s entitlement to the Second Agreed Portion and gone, too, was Milemore’s entitlement to the Excess Car Parks.  Interestingly, however, under clause 7.2 of the new agreement it was provided that the shareholders of the company undertook to procure that Beachshore would pay Milemore a management fee of $68 million.  This payment was not dependent upon any profit being made but was dependent solely upon the completion of what was termed Phase 1 of the project.  This, in itself, drew attention to another aspect, namely, that the new shareholders agreement referred to two phases in the development.  It is understood by the parties and was accepted by the judge that what was referred to as Phase 2, which related to what has in other places been referred to as Additional Properties which had been acquired by Sun Hung Kai, would be developed later and it would for the benefit of Milemore alone unless Nissho Hong Kong exercised an option.

46.  It would appear that the 1994 Shareholders Agreement had been the subject of a considerable negotiation along with the SSA.  It has the hallmarks of an incomplete revision: see, for example, clause 6.3 which refers to clause 6.2(a)(iv) which does not appear to exist.  Furthermore, although Milemore’s responsibility in respect of funding Phase 2 is spelt out in clause 5.3 of the 1994 Shareholders Agreement, its entitlement, which is acknowledged to have existed, does not appear to be so clearly spelt out.  It was not until later that an agreement was signed that seems to have made that position clear.

47.  The SSA had some of the hallmarks of the SAA to the extent that the amounts involved as consideration were the same.  It was, however, a different agreement.  It provided for the immediate allotment of 39,000 new shares to Mainplaza with 1000 shares remaining under the control of Kodera and Cho.  In contrast to the SAA, completion was to take place under the SSA within five days of signing.  In other words the new shares would be allotted to Mainplaza but the full consideration would not be paid until the two Architect’s Certificates in respect of the GFA and the Premium had been issued.  There was then a provision similar to the second provision in the prototype premium agreement, namely, a provision which enabled Mainplaza to rescind the SSA should the conditions including the issuance of the Architect’s Certificates not have been complied with by 31 August 1995.  There was a final termination date of the SSA of 31 March 1996.

48.  It is clear that when these agreements were signed on 9 September 1994 they were not in themselves complete.  The Option Agreement, which had been referred to in clause 5.2 of the 1994 Shareholders Agreement had not been executed.  It is also clear from the correspondence that a new premium agreement was to be drafted, albeit part of the prototype Premium Agreement had been included in the SSA.  In a letter dated 26 August 1994 from Clement Ng and Co., who were the solicitors for Nissho, reference is made to the fact that in addition to forwarding a copy of the Shareholder’s Agreement in respect of Mainplaza as well as a signed agreement relating to the consideration payable by Mainplaza to the existing shareholders of Beachshore, that is Kodera and Cho, there would also be a side agreement relating to the payment by Mainplaza in the event that the Premium exceeded $1,560 per square foot of the GFA.

49.  After the agreements of 9 September 1994, the arrangements as to the shareholding of Beachshore were communicated to Sun Hung Kai’s solicitors.  On 13 September 1994 Sun Hung Kai’s solicitors wrote back confirming the arrangements but making it clear that matters would proceed on the basis that the Nissho companies between them held 50% of the Beachshore shares and that Highs held a further 30%.  The letter also indicated that Sun Hung Kai would require guarantees from both Nissho Hong Kong and Penta-Ocean as well as from Ever Again.

50.  Matters did not stay still for long and it appears that 19 September 1994 was an extremely active day.  There were various transfers of the Beachshore shares to Mainplaza as well as the execution of the three guarantees required by Sun Hung Kai and the guarantee by Sun Hung Kai which corresponded.  It seems that all the Beachshore shares were transferred to Mainplaza, in contrast to the previous arrangement that Kodera and Cho would retain 1000 shares.  The guarantees were in respect of the due performance of the Development Agreement which was also executed on the same day by Beachshore on the one hand and Tsuen Kwong on the other. 

51.  The arrangements between Mainplaza and Sun Hung Kai were put into effect by two agreements.  The first was a deed of exchange entered into by Tsuen Kwong and Beachshore whereby, effectively, the various plots of land were pooled together and Beachshore and Tsuen Kwong were to hold 50% each of the joint holding in the land.  In the second place, the parties i.e. Tsuen Kwong, Beachshore and Sun Hung Kai entered into the Development Agreement.  That agreement followed along the lines of the agreement annexed to the 1994 Shareholders Agreement signed on 9 September 1994.  Under that agreement, Sun Hung Kai was irrevocably appointed the sole and exclusive Project Manager of the development.  The agreement provided for the development of the site and the commitment of both Tsuen Kwong on the one hand and Beachshore on the other as well as Sun Hung Kai to proceed.  Tsuen Kwong and Beachshore were required to finance the project.  It was provided in clause 4.06 that if either of those two parties did not accept the amount of premium offered by Government for the User Modification, either of them would be entitled to appeal against the premium.  There were provisions enabling the buyout by a nondefaulting party of a defaulting party’s share if a defaulting party did not make its required contribution.  The development was to take place in two phases.  As already noted, it was the understanding at the time of execution of the 1994 Mainplaza Shareholders that Milemore would be the beneficiary and financier of the Phase 2 development.  That was made clear in a further shareholders agreement signed by the parties on 7 April 1995 referred to in paragraph 56 below.  Interestingly, it may also be observed that there was a provision in clause 12 of the Development Agreement which enabled each of the two owners to select their own solicitors in respect of any conveyancing of the developed property.

The third meeting with Active Profit

52.  In November 1994 there was a meeting between representatives of Nissho Hong Kong and Active Profit.  At that meeting Mr Ishiwata handed the Active Profit representatives copies of the various documents which had been executed in September 1994.  Those included the Cancellation Agreement, the SSA, the 1994 Shareholders Agreement and the Development Agreement.  In addition he apparently also handed over a copy of a letter from the Nissho Hong Kong’s solicitors to Hastings and Co, who by then were acting for Kodera and Cho.  That letter indicated that there were amendments to at least some of the documents executed on 9 September 1994.  In view of the fact that a copy of the letter was passed to Active Profit it was probably indicative that amendments would be made albeit subsequent to the initial execution but treated as having been made originally.

53.  As will be appreciated, the documentation made in September 1994 was not complete in that apart from anything else the Option Agreement which had been referred to in the 1994 Shareholders Agreement had not by then been executed.  Likewise, the Premium Agreement which had been referred to in the solicitor’s letter in August had not been executed.

54.  It can be mentioned at this stage that there still had been no direct communication between Kodera and Cho on the one part and Active Profit on the other.  All negotiations had been conducted by Nissho on behalf of Kodera and Cho.  It may also be observed that although as regards Nissho the SSA simply carried on from the SAA at least to the extent that the purpose of the two agreements was that the Nissho companies would take part in and benefit from the development of the Properties A-D, the position of Milemore and Kodera and Cho on the other hand was slightly different.  Under the SAA they had been entitled to the $200 per square foot under the Second Agreed Portion as well as the Excess Car Parks.  That had been carefully reserved to themselves in the Milemore Participation Agreement.  Now, under the SSA, they were entitled to the fee of $68 million and they were also to be entitled to Phase 2 of the development.  As will be noted below, the Option Agreement would provide for a payment of $30 million should Nissho wish to exercise its option to benefit from Phase 2.  These were thus very important advantages for Kodera and Cho and it would not have been possible simply to read the original Participation Agreement on to the SSA as regards themselves.  As has already been noted, at about that time, Cho was writing to the directors of Sun Hung Kai complaining that he was no longer the architect for the development and also drawing attention to the fact that he had persuaded Kodera to part with the interests in Golden Essence and Bright Essence in respect of which there was clearly some unease.

55.  Following that meeting Active Profit wrote to Nissho Hong Kong seeking clarification of various matters arising from the meeting and concluded the letter by saying that they had instructed their solicitors to prepare a revised Participation Agreement to be in line with the 1994 Shareholders Agreement and that their understanding was that their participation in the development had not been affected by the contractual changes.  There was no reply to that letter and indeed that was followed up by correspondence in the following year in which Active Profit emphasised the fact that they would need adequate warning of any premium that was required in order to arrange the provision of the necessary funds.

The 1995 Shareholders Agreement

56.  It would appear that the defects in the 1994 Shareholders Agreement were rectified by a further agreement dated 7 April 1995 headed “Shareholders Agreement” (“the 1995 Shareholders Agreement”).  It was made between Mainplaza, Kodera, Cho and Beachshore.  This provided that Kodera would be entitled to the proceeds of Phase 2 and would be responsible for the Phase 2 expenses.  On the same day the Option Agreement between Kodera and Nissho Hong Kong was executed giving Nissho Hong Kong the right to the benefits in Phase 2 should it exercise the option to purchase those rights for $30 million.

57.  It is clear that about that time the solicitors acting for the Nissho companies on the one hand and Kodera and Cho on the other hand were in communication about the Premium Agreement.  That agreement was executed on 29 August 1995 about a month after the time under the SSA had been extended to 31 August 1996 by a supplemental agreement.  Apparently Mr Okuyama had travelled to Hong Kong to execute that agreement on behalf of Mainplaza.  Because of the closeness of timing, it is not unreasonable to suppose that there might have been a link between the extension of the term of SSA and the putting into place of the formal agreement repeating the effect of the first part of the prototype Premium Agreement in the manner averred in Clement Ng & Co’s letter a year earlier.

58.  Nothing of grave significance occurred in 1996 save that in April 1996 Bumper Harvest Ltd, which was of course one of Kodera’s companies, borrowed some $335 million from Nissho Hong Kong.  There was a first repayment instalment which was due to be paid on 30 April 1997.  There was in addition a Supplemental Agreement extending the period under the SSA to 31 August 1997.  Apart from that, matters continued, and apparently meetings in relation to the project continued to take place with Sun Hung Kai taking the leading role. 

The events of 1997

59.  Perhaps due to the fact that the respective parties became conscious of the fact that it was likely that Government would fix the premium in the not too distant future, matters became more active in 1997.  Mr Takizawa who had previously been the General Manager of the Machinery Department of Nissho Hong Kong took over from Mr Ishiwata as General Manager of the Property Department when the latter returned to Japan.  This must have been about the time when Nissho Hong Kong commissioned a valuation report from Chesterton Petty in respect of the proposed development.  The report that was dated 13 January referred to a development which consisted of six blocks of residential buildings with a total of 454 residential units and 717 car parks.  This was considerably less than had been estimated in the document which had been sent to the Nissho head office in Japan in 1992.  It would also be noted that the average gross floor area was said to be 1,400 square feet.  The report valued the completed site at $4,345,000,000.  It could be mentioned as an aside that ignoring the 717 car parks the average price per unit would work out at about $9.5 million.  This would be a far cry from the $3.8 million which was estimated in the document of December 1992.  The valuation given for the land on a cleared site basis with the premium having been paid was $1,698,000,000.  That assumed a cleared site with vacant possession and permission for proposed development free from any material encumbrance. 

60.  There was a further report from Chesterton Petty in March 1997 which was entitled “Research Report and Feasibility Study on the Hong Kong and Shatin Residential market for Nissho Iwai H.K. Corporation Ltd.”  That was a much more detailed assessment of the project and the property market in Shatin.  Some of the tables in that report provide interesting reading.  For example, the inflation rate in Hong Kong is set out in a chart for the period 1991 to 1997.  It would seem that the inflation in Hong Kong was somewhere in the region of between 10% to begin with dropping to approximately 6% in 1997.  There were also tables which showed the supply of residential property in Shatin in terms of the size of the units.  By far the greatest supply over the years from 1986 to 1997 had been in units which were between 40 and 70 square metres in size.  The next biggest supply was in respect of units which were less than 40 square metres in size.  The average yearly supply for the 10 years preceding the report had been 1208 units in the 40 to 70 square metres range and 1072 in the under 40 square metres range.  In contrast, units of the size of between 100 and 160 square metres, which the report contemplated would be relevant in respect of the proposed development, the supply had been on average 175 units per year.

61.  What was, perhaps, of more concern was the table showing the average monthly price trend in 1996 and 1997.  In respect of Shatin properties as a whole it showed an increase over the one year period of 41%.  In Tai Po the increase had been 36%.  In respect of Ma On Shan the increase was less namely 27%.  Indications were given of some specific properties in Shatin and in respect of one the average price had risen 66% in the course of one year and 50% in relation to another development.

62.  As an aside one might say that these increases in the prices of already developed flats showed a trend which could perhaps be described as a bubble market.  Not only was the rise in property prices extreme, it was clearly unrelated to the underlying inflation rate.  Although the report was optimistic that the prices would remain stable at least until the development was completed, such a sanguine assessment would almost certainly not have been shared by the Japanese companies and the Nissho companies in particular.  They had already witnessed a bubble property market in Japan and its subsequent collapse.  They were well aware that property markets which rose dramatically could equally fall dramatically.

63.  It will also be noted that in the report the construction costs were estimated at approximately $1.3 billion which would work out on the figures given in the report as something in the region of just over $2,000 per square foot.

64.  At the end of January 1997 Active Profit recommenced the correspondence with Nissho Hong Kong.  The first letter repeated requests for complete copies of the various contractual documents and also asked that Active Profit be given six to eight weeks notice in advance for any funding arrangement.  This met with a reply from Nissho’s solicitors indicating that the Nissho companies were minded to refund the deposits which had been paid together with interest.  Milemore’s solicitors wrote a similar letter later in February 1997 also offering return of the deposit again on the basis that the SAA had come to an end.  These offers were rejected by the Active Profit’s solicitors.  There was further correspondence along the same lines and cheques for the deposit amount together with interest were sent to the plaintiff’s solicitors and returned. 

65.  By March 1997 Nissho’s solicitors wrote saying:

“Our clients have received indication from the Government that the amount of premium payable will be in the range of HK $3000 per square foot which is way out above (in fact more than double) the amount of the Basic Rate of Premium (as defined in the Shares Acquisition Agreement).

It is the intention of our clients and Sun Hung Kai Properties Limited (“SHK”) to construct a luxurious type of residential apartments instead of ordinary type of residential apartments as originally planned.

SHK and our clients have also recognised that they might not obtain bank financing against the security of the land and that the joint venture partners should finance the development of the project by way of shareholder’s loans.

It is likely that there will be some major changes in the shareholdings of Mainplaza and the percentage of participation which our clients might shell out to your client would have to be adjusted (and in all likelihood will be upwards) depending on the result of the restructuring of the shareholding of Mainplaza.

In view of the above-mentioned factors, the commercial basis of the underlying transaction have entirely changed and our respective clients should start fresh negotiations for a possible cooperation or participation.”

66.  These sentiments did not strike a note of concurrence with the Active Profit.  Whether it was this letter that the judge regarded as “less than full and frank and borders on the disingenuous” (see paragraph 144 of the judgment) is not known.  What is clear, however, is that the type of property apparently being contemplated at the time had changed: contrast the 1992 document sent to Nissho head office and the Chesterton Petty reports.  This letter also indicates that Nissho and, from the expression used in the letter, probably Highs as well, were becoming very wary of continuing with the project.  The other interesting thing about the letter is the suggestion that with some of the Mainplaza shareholders pulling out to a greater or lesser extent, Active Profit might have to shoulder a greater proportion of the joint venture if it wanted to continue.  In the reply, Active Profit showed no enthusiasm for that but merely insisted it was entitled to a share in the joint venture.  The correspondence continued with Active Profit’s solicitors insisting that the Participation Agreements covered the present situation and that there was no need for any renegotiation.

The premium required

67.  Government eventually stated the premium that it required in a letter of 5 May 1997.  It seems that that letter was transmitted by fax to Nissho Hong Kong on 12 May 1997.  It might be mentioned that the writ in this action seeking declarations was issued on 9 May 1997.  The premium required by Government was $2,607,020,000.  As set out in the covering fax from Sun Hung Kai, the premium figure worked out at a net A.V. of $4,404 per square foot.  The note went on “if you add back the cost of the building the road plus a credit for the value of the lots we are surrendering it brings the gross figure close to $5,000!”.

68.  It hardly takes very much imagination to appreciate that these figures were somewhat alarming.  The premium required by Government appears to have been $1 billion more than Chesterton Petty had 3 months earlier estimated was the value of the land after premium had been paid.  Kodera put a back of an envelope assessment of the situation in his second supplemental witness statement:

“On that premium, my assessment at the time was that the cost of the Redevelopment would be no less than HK$10,140 per square foot with reference to the following factors:-

(a) Premium  = HK$4,400 / sq. ft

(b) Land Costs = HK$840 / sq. ft

(c) Construction Costs = HK$2,000 / sq. ft

(d) Financing Costs = HK$2,500 / sq. ft

(e) Marketing Costs  = HK$400 / sq. ft

 Total = HK$10,140 / sq. ft

…

Accordingly, if the Redevelopment was to be proceeded with, a completed domestic unit would have to be sold at a price of no less than HK$13,000 per square foot in order to have a reasonable profit.  It was therefore totally ridiculous for a flat in such a remote area of Shatin to be sold at that high price and it was blatant to all the shareholders of Mainplaza at the time that the Redevelopment had to be called off.” 

69.  Similar sentiments were expressed on behalf of Nissho Hong Kong by Mr Takizawa and by Mr Kakimoto on behalf of Highs put the matter succinctly when he said:

“If the A.V. is HK$5,000 per square foot, no way would we be prepared to proceed even if all other shareholder is Mainplaza, namely, Nissho and SHK were all to say they were to go ahead.”

70.  The fax which had been sent by Sun Hung Kai indicated that they had already initiated action to submit an appeal to the Lands Department in respect of the premium required.  Matters, however, moved on fast from then.  Mr Takizawa, who was in charge of Nissho Hong Kong, spoke to Mr Okuyama, who, of course by then held a senior position in Nissho Japan.  There were extensions of the time limit under the Premium Agreement until 19 May 1997.  On 16 May 1997 there was a board meeting of directors and a shareholders meeting of Mainplaza in which it was decided not to proceed with the development in view of the very high level of premium which was required.  It was resolved that Mainplaza would not pay the adjusted consideration to Kodera and Cho under clause 3 of the Premium Agreement and that a letter would be written accordingly to Kodera and Cho.  It might be mentioned that Kodera attended the meeting and disclosed his interest.  Cho, on the other hand, did not attend that meeting and was not party to it.

71.  Following that Kodera spoke to Mr Okuyama on the telephone when Mr Okuyama was in Japan and Mr Okuyama suggested to Kodera that he might consider selling the Beachshore shares to Sun Hung Kai.  Mr Okuyama agreed to negotiate with the directors of Sun Hung Kai with whom he was well acquainted.  It does not seem that that was the only attempt by Kodera and Cho to sell the Beachshore shares.  There was a fax from Cho to a Mr Johnny Or dated 21 May 1997.  A fair reading of this fax would indicate that Cho had had a previous discussion with Mr Or and had followed that up by thereafter talking to Kodera.  The proposal in the fax was that the Beachshore shares should be valued at $350 million for 100% and that Mr Or should purchase 80% thereof.  There was to be a 1.5% finder’s fee.  Although in argument Mr Chang treated this fax with some degree of scepticism, when asked directly, he disavowed any suggestion that this fax might not have been indicative of genuine attempts to interest other parties in taking over the Beachshore shares.  In my view it demonstrates a continuation of the thinking of Kodera and Cho throughout.  They were looking for recompense in the form of the value generated by the change of permitted user to building land together with some degree, albeit minor, of participation in the future development.

72.  On 22 May Mr Okuyama came to Hong Kong for an Asian regional meeting of the Nissho Iwai Property Group in Hong Kong.  On that occasion he met Raymond Kwok, a director of Sun Hung Kai and told him that he had been asked by Kodera to assist in the sale of Kodera and Cho’s shares in Beachshore.  Mr Takizawa said that Mr Okuyama indicated that Kodera would be prepared to sell at $1,300 per square foot.  Mr Okuyama instructed Mr Takizawa to follow the matter up with the relevant people at Sun Hung Kai.  The sale appears to have been agreed in principle fairly quickly.  The price concluded with Sun Hung Kai worked out at almost exactly $1,300 per square foot.  The mechanics of how the transfer of the Beachshore shares to Sun Hung Kai took place are not important for the purposes of this case but they appear to have been somewhat complicated, perhaps for tax reasons.  In any event, Kodera was paid in two tranches, the final tranche being paid on 1 August 1997.  In total, he was paid $376,117,464 out of which he transferred $37,611,746.40 to Cho.  On the day prior to the payment of the final instalment, Tsuen Kwong released Nissho Hong Kong, Penta-Ocean and Ever Gain from the guarantees which they had made in respect of Beachshore’s obligations owed to Tsuen Kwong.  On 5 August 1997, shortly after receiving the final payment part of the Bumper Harvest loan, Nissho was repaid the sum of $110 million.  Two further matters may also be mentioned in relation to Nissho’s involvement in the sale.  The first is that a service agreement was entered into between Nissho Japan and Kodera under which Nissho Japan received $8 million for its services in securing the sale of the Beachshore shares to Sun Hung Kai.

73.  The other matter is that by letters dated 10 July 1997 Nissho Hong Kong gave a series of undertakings and guarantees to the company that was acquiring the Beachshore shares on behalf of Sun Hung Kai.  For the most part those assurances were either based upon the fact that there was clear title to the Beachshore shares which Roy King Ltd could acquire or were assurances which carried little or no risk, for example, there was a guarantee in respect of any reimbursement which the company named as the vendor of the Beachshore shares should have to reimburse should Government eventually reduce the permitted GFA when it issued a new Conditions of Grant.  That liability on the part of the vendor corresponded to a liability on the part of Roy King Ltd to pay an additional amount should the Government have permitted the GFA to be increased.

The judgment below

74.  The judge came to the conclusion that the trusts arose first of all under clause 2 of the Participation Agreements on the basis that although the SAA had not been completed, the SAA was reconstituted and survived in the SSA.  As such, he treated the two as one and held that there was a trust under clause 2.  He also held that there was a trust which arose under clause 9 of the Nissho Participation Agreement and clause 10 of the Milemore Participation Agreement because the payments which had been made by Active Profit were used in the “funding obligation”.  He also held that there was a resulting or constructive trust as regards the money which had been returned as a result of the cancellation of the SAA.

75.  As regards breach of trust the judge held that all the defendants were in breach of trust because Mainplaza should have, and should have been caused to have, paid Kodera and Cho the balance of the $153 million under the Premium Agreement and then to have itself sold the Beachshore shares to Sun Hung Kai for the same price as the Kodera had achieved.  He came to the conclusion that it was in the Nissho companies’ interests to have arranged matters so that Mainplaza did not so act.

This judgment

The trusts

76.  In my view it is difficult to support the conclusion that a trust arose under clause 2 of the Participation Agreements.  The document was a contractual document and it is clear that under the SAA completion was not to take place until the premium had been fixed.  Even on the basis that the SSA was a continuation of the SAA it appears to me to be illegitimate to read the terms of the Participation Agreements on the basis that they had been somehow amended.  For the reasons which appear below, I proceed upon the basis that the deposits which Active Profit had paid to Nissho Hong Kong and Milemore were used to fund, at least partially, the funding obligations of those companies under the SSA.  In so saying, however, I do not consider that the obligations of those companies was any greater than originally envisaged under the Participation Agreements.  The Participation Agreements were entered into on the basis that Nissho Hong Kong and Milemore were both commercially interested in the affairs of Mainplaza and had their own commercial interests to consider.

Was the Premium Agreement invalid or unconscionable?

77.  Whether logically correct or not, I propose to consider the validity of the Premium Agreement first.  It is the subject of Active Profit’s respondent’s notice.  It is claimed that the judge should have held that it was a breach of trust and fiduciary duty for the Nissho Hong Kong and Milemore to agree to the terms of the Premium Agreement and it was a breach of trust on the part of Kodera to have procured the agreement.  In my view there was no ground for criticism of the Premium Agreement.  The judge below proceeded upon the basis that it was a valid agreement.  In the course of argument Mr Chang was invited to make his position clear as to whether he alleged that the Premium Agreement was invalid.  Although it was clear that he was prepared to accept that it might be, he appeared to raise it as some sort of complaint.

78.  In my view, looked at from various aspects I cannot see that there are grounds for complaint about the making of the Premium Agreement.  It was clearly deliberately made.  Mr Okuyama, who was by then of course stationed in Japan, signed it.  He may well have been the person who authorised it.  From the point of view of Nissho Japan and Nissho Hong Kong the Premium Agreement was important.  As has already been noted, when Mr Okuyama wrote to Sun Hung Kai on 9 February 1993, shortly before the March 1993 agreements were signed, one of the main stipulations was that the development would proceed immediately once the premium demanded by Government were known unless it was “unreasonably high”.  Since Nissho spoke on behalf of the Mainplaza shareholders, at least as far as Sun Hung Kai was concerned, there was nothing to cause surprise as regards Mainplaza’s dealings with Sun Hung Kai if the Mainplaza shareholders refused to go ahead in circumstances where they considered that the premium was unrealistically high.

79.  As regards the other Mainplaza shareholders, the business of Mainplaza was the development of the Properties.  The Mainplaza Shareholders Agreements expressly stipulated that the business was to be confined to the development of the Properties, unless all parties agreed otherwise.  Highs was a construction company.  Its involvement in Mainplaza was ancillary to its business.  It anticipated being given construction contracts and obtaining work out of the development.  If the development were not to go ahead, the purpose of becoming a shareholder in Mainplaza would not be accomplished.  Highs was, thus, under no obligation to agree to any change in the business of Mainplaza if it considered that the premium demanded made the development of the Properties unviable.  Both Nissho and Highs, being Japanese companies, had shortly prior to these events seen a drastic downturn in the property market in Japan.  They were well aware that property prices could drop sharply.  Neither company was a property speculator. 

80.  The Premium Agreement was drafted on the basis that gave the shareholders of Mainplaza an exit should it be considered that the premium demanded by Government made the development of the Properties unviable.  It did not compel the shareholders to return the shares in Beachshore to Kodera and Cho but gave an option not to do so if they were prepared to pay a minimum amount in respect of the Beachshore shares.  The only difficulty in the Nissho companies and Highs exercising the option under the Premium Agreement was the existence of the guarantees given to Tsuen Kwong.  However any difficulty was probably more theoretical than real.  The guarantees would only be called upon if Tsuen Kwong itself went ahead with the development.  Realistically it would only do so if it was reasonably certain to make a profit.  As of May 1997, there was no prospect that Tsuen Kwong would be willing to pay the premium demanded by Government, let alone proceed with the development.

81.  As regards the dealings between Nissho and Highs on the one hand and Kodera and Cho on the other hand, clearly the Premium Agreement was just.  It cannot be supposed that either in March 1993 or September 1994 it was contemplated by the parties to the Mainplaza Shareholders Agreements that a situation would arise where because of the premium demanded by Government a situation would come about where Kodera and Cho would not receive anything in respect of their land.  It was they who had found the land.  It was they who had put together the consortium that consisted of themselves Nissho, and Sun Hung Kai.  Whilst they might derive benefit from being shareholders in Mainplaza it would be an unacceptable recompense if they were not to derive proper compensation for land which they had located and secured as being ripe for conversion to building land.  They would have thrown away their work in acquiring the land and putting together the consortium. 

82.  In this respect, one only has to consider the letters written by Cho at the end of 1994 to which reference has been made, to appreciate that Cho already considered he had been hard done by, if not deprived of the benefits which he legitimately expected.  He had anticipated being the architect in respect of the development of the Properties.  He had been squeezed out.  He had every reason to take steps to try to protect himself from any further erosion of his rights.  In this respect, the making of an agreement the effect of which was to ensure that if the object agreed, namely the development of the Properties, was not to be proceeded with, he would retain his land. 

83.  As regards the position of the plaintiff, I consider that any complaint that the Premium Agreement was unjust or invalid as against it, is totally misplaced.  As has already been pointed out, the plaintiff acquired its interest in Mainplaza under the SAA.  Under that agreement if the development of the Properties did not go ahead Mainplaza would not have had any interest in the Beachshore shares.  The prototype Premium Agreement came into existence when the SAA was in force.  The plaintiff had nothing to do with the formation of the SSA.  That was something which it knew nothing about until considerably later.  It happens to be the foundation of its action and in that respect that can only be considered fortuitous.  But at the time the SSA was made, the parties to it had previously signed the earlier prototype Premium Agreement which had been backdated to 5 March 1993.  The correspondence in August 1994 from Nissho Hong Kong’s solicitors makes clear that that was the basis upon which they were proceeding.  In any event, the fact that the Premium Agreement came after and not at the same time as the SSA could make no difference to the plaintiff’s position.  Furthermore, as already noted, the Premium Agreement was being finalised at the same time as the extension of the term of SSA.  There is no reason why Active Profit should try and take advantage of the extension of SSA without taking into account the Premium Agreement.  It was all very well for Mr Chan to say when giving evidence that if he had been told of the Premium Agreement earlier he would not have accepted it, but it is difficult to see how he could accept the SSA but refuse to accept the Premium Agreement.

Was there a breach of trust as found by the judge?

84.  The judgment below proceeded upon the basis that Mainplaza could pay the $153 million to Kodera and Cho under the Premium Agreement and then sell the Beachshore shares to Sun Hung Kai on the same terms as were obtained for Kodera and Cho.  There are two aspects to this.  The first is whether Mainplaza could pay the amount due to Kodera and Cho, in the sense that the shareholders would have been willing to do so.  The second is whether Mainplaza could have sold the Beachshore shares to Sun Hung Kai and if so on what terms.

85.  Looking at the first aspect, on the assumption that the Premium Agreement was valid, the point is whether Mainplaza was in a position to pay the necessary amounts to Kodera and Cho.  In this respect one has to bear in mind the situation which prevailed at the time.  As has already been explained, the proposed development as it was envisaged at its inception, and as the head office of Nissho Japan had agreed to it and authorised Nissho Hong Kong to enter into it on its behalf, was for the development of Properties A-D.  Specifically, that would entail the construction of flats which would appeal to salaried office workers.  No doubt the flats would be attractively designed and the development would have amenities such as swimming pools and gymnasiums but the flats were intended to be small, ranging upwards from 60 square metres (approximately 646 square feet) with an average of 80 square metres (approximately 861 square feet).  As originally envisaged, the flats would sell for an average of $3,800,000.  That was a figure which might be within the reach of salaried office workers, particularly if say both husband and wife were working.  Once the premium demanded by Government had increased, the evidence was that Sun Hung Kai estimated that the cost price would have to be approximately $10,000 per square foot.  This would make a 1000 square-foot flat cost something in the region of $10 million.  In this respect the figures quoted by Kodera in his witness statement appear to accord with the advice of Chesterton Petty.  He may even have underestimated the cost by leaving out the $600 per square foot adjustment referred to in Sun Hung Kai’s fax dated 10 May 1997.  Even given some increase in income of the average household between 1993 and 1997, it is quite understandable that those involved would consider the original project unviable.  Quite apart from the fact that on the face of it that would appear a high amount, the relative price can be assessed in various ways.  For example, a mortgage of something in the region of $9 million might be expected to require a joint income of a couple of somewhere in the region of $3 million per year.  There are not many households of “salaried office workers” that could command such an income. 

86.  The major shareholders of Mainplaza were development and construction companies.  They were not property speculators.  They had seen the Japanese property market crash.  Leaving Kodera and Cho aside for one moment, if the shareholders of Mainplaza were to honour the Premium Agreement and pay Kodera and Cho the balance of the $153 million they would each have to find a substantial amount.  Even given the fact of the payment of the initial amount to Kodera and Cho there would still be nearly $100 million which would have to be found.  Highs’ share of that would be some $30 million and the Nissho companies’ share of that would be some $40 million, even taking into account a contribution from Active Profit.  Those are not insignificant sums and indeed are very large in comparison to the amounts which those companies had already paid much earlier to enter the joint venture.  Authority would have to have been obtained from the head offices in Japan. 

87.  The evidence from the witnesses from the Japanese companies was that they would not recommend to their head offices that their companies should proceed with the development.  Mr Kakimoto of Highs said in evidence that he considered that the development had become unworkable because of the amount of premium demanded by Government.  His evidence shows that he, at least, was not particularly enamoured with the site because it required the construction of infrastructure such as roads which would make it costly to develop.  The evidence from Nissho’s witnesses was also to the effect that they considered that the premium demanded by Government made the development unworkable.  In those circumstances, the powers that be in Nissho and Highs would have had to be persuaded that they should invest far more than already had been invested in what was, in effect, a speculative investment in land, not directed to develop the land but in order to extricate the companies from a development which was considered unviable.  It might be supposed that the head offices would only be prepared to venture that if the ability to succeed in selling to Sun Hung Kai was an absolute certainty.

88.  In contrast, there was an alternative way in which the companies could extricate themselves from the development and recover their money together with interest immediately.  For those who have seen a substantial drop in property prices, not to speak of a crash, following unwarranted fast rising prices, which some might think had the appearance of a bubble, to get one’s money back with interest would seem very attractive.  The possibility, therefore, of the relevant parties being able to persuade their head offices in Japan to invest substantial sums in what would be an investment in land rather than an investment in the development at a time when the property market had become excessively expensive over a very short period of time was remote unless a deal for the onward sale of the Beachshore shares had been secured.  Coupled with this, the parties obviously had to take decisions quickly.

Whether it was open to the shareholders of Mainplaza to object to Mainplaza raising sufficient funds to discharge the balance of the $153 million payable to Kodera and Cho so that a sale by Mainplaza of the Beachshore shares could be made directly to Sun Hung Kai

89.  One of the questions which arises as a result of the holding of the nature of the breach of trust is whether it was open to the shareholders of Mainplaza or any of them to object to Mainplaza raising sufficient funds to discharge the balance of the $153 million payable to Kodera and Cho so that a sale by Mainplaza of the Beachshore shares could be made directly to Sun Hung Kai.  In my view it clearly was.  As already indicated, from the beginning to the end, the purpose of Mainplaza was to develop the Beachshore properties together with Sun Hung Kai.

90.  The First Mainplaza Shareholders Agreement provided that the objects of the company would be as follows:

“2. OBJECTS OF THE COMPANY

2.1 The primary object of the Company shall be to participate through Beachshore in the joint venture with the Owners to carry out the Redevelopment upon the Regrant of the Site in exchange for the Surrender of the Properties in accordance with the terms of the Joint Development Agreement.

2.2 After the Redevelopment, all the Units of the Buildings including those allocated to Beachshore shall be offered for sale to the public at the Sale Prices and the Company shall procure Beachshore to hold any Units (if not sold) allocated to Beachshore for investment purpose or for sale upon such terms and conditions as may be approved by the Board pursuant to the Joint Development Agreement.

2.3 The Business shall be conducted in the best interests of the Company on sound commercial profit making principles so as to generate the maximum achievable maintainable profits available for distribution.

…

5. Conduct of the company's affairs

5.1 The Shareholders shall exercise all voting rights and other powers of control available to them in relation to the Company so as to procure (in so far as they are able by the exercise of such rights and powers) that at all times during the term of this Agreement: --

5.1.1 the business of the Company consists exclusively of the Business;”

91.  It was on that basis that Active Profit entered the Participation Agreements.  Although the wording of the 1994 Shareholders Agreement varied slightly from the First Mainplaza Shareholders Agreement, the effect of the agreement was the same.  Indeed there was a provision that Mainplaza would only conduct any other business as the board might from time to time unanimously decide. 

92.  The 1995 Shareholders Agreement was equally specific.  The Business of Mainplaza was to carry out the Development.

93.  In my view, therefore, quite apart from the provisions of the Premium Agreement, each of the shareholders of Mainplaza was entitled to say that it would not commit Mainplaza and thereby also itself to further investment of substantial amounts directed towards something other than Mainplaza carrying out the Development.  As has been pointed out, very shortly prior to Government setting out the required premium, professional advice had been received that the value of the land as building land with vacant possession was $1 billion less than the premium demanded by Government.

94.  In considering the matter from the point of view of the shareholders, Mainplaza’s interests have not been overlooked.  Its interests, in so far as they can be distinguished from the interests of all shareholders other than Kodera and Cho, would also legitimately lie in recovering its investment and interest rather than speculating in an overheated property market. 

Kodera and Cho’s position

95.  When Kodera and Cho’s position is considered that is even more extreme.  In reviewing the documents in this case it became clear, as has been said above, that Kodera and Cho had contracted throughout on the basis that they would not only receive the value of the land converted into building land less, of course, the cost of the premium but would also receive some extra benefit.  In the first place they would benefit as shareholders of Mainplaza, albeit to a limited extent.  In the second place they were entitled initially to the Second Agreed Portion and the Excess Car Parks.  Naturally the Second Agreed Portion was subject to there being sufficient funds so that all the shareholders would receive the first 20% profit.  But it can hardly be supposed that any property developer would engage in a substantial development of properties if they contemplated over a period of a number of years that their profit would not be 20% overall.  To put the point in another way, a 20% profit taken after a three-year period of investment would only work out at less than 7% per year.  As demonstrated by the Chesterton Petty report, that would hardly be in keeping with inflation at the time that the SAA and Participation Agreements were entered.  Thus, realistically, it must have been in all parties’ contemplation at the time the SAA was made that a profit substantially in excess of 20% overall would be made and that, therefore, Kodera and Cho would be entitled to the Second Agreed Portion.  The additional benefits receivable were later changed to a fixed amount of $68 million, which was not in any way dependent upon a profit being made, and also the entitlement to Phase 2.  It is evident that the negotiations between the Mainplaza shareholders and indeed with Sun Hung Kai as well were detailed and, apparently, protracted.  One of the matters which is evident is that when the SAA was replaced by the SSA there was a new shareholders agreement.  When the Option Agreement was entered there was again a new shareholders agreement.  The differences might have been minimal but clearly Kodera and Cho sought to retain such advantage as they could.  In this respect I am comforted in the conclusion to which I have arrived that Kodera expressed the same sentiments in his witness statement.

96.  This point was brushed aside in paragraph 125 of the judgment below on the basis of the argument put forward by counsel for Active Profit as follows:

“125. In response, Mr Chang submitted that none of the items relied on over and above the consideration for the share sale can be found in the terms of the SSA, and that clearly there was here a confusion between Kodera qua vendor of the Beachshore shares and Milemore’s interest in Mainplaza. He argued that if the share sale had proceeded under the SSA, once Mainplaza had paid the consideration under clause 4 and advanced the HK$15 million loan, that Kodera and Cho no longer would be in the picture, and that thereafter if Mainplaza decided not to proceed with the redevelopment, and instead had chosen to sell the Beachshore shares (whether to Sun Hung Kai or anyone else) Kodera and Cho could have had no complaint. Moreover, he argued, on the final version of the SSA the 1,000 shares, that is 2.5% of the Beachshore share capital which was retained by Kodera and Cho, never constituted part of the subject matter of the SSA, and thus was immaterial to the question of what constituted the Consideration under that Agreement. In my view this analysis is correct, and I reject the ‘package’ argument also.”

97.  In my view this argument put forward by counsel ignores the fact that the shareholders agreement specifically provided that there could be no deviation from the business of the company; the business was confined to the development of the property and nothing else unless the shareholders of Mainplaza agreed to it.

98.  When considered in the round, Kodera and Cho received no more for the interest in the Property A than they had originally contracted for under the agreements made in 1993.  I see in no reason, whether legally, commercially or morally, why Kodera and Cho should not have insisted that if the development with Sun Hung Kai did not proceed they should not have the benefit of the land returned to them.  Had they agreed to Mainplaza itself selling the Beachshore shares to Sun Hung Kai or anybody else at a profit they would not only have been deprived of their interest in what might be termed the conversion factor in the land but would have lost out on the opportunity to engage in the redevelopment and also, in particular, they would have lost their right to the $68 million to which they were entitled under the 1994 Shareholders Agreement.  It seems to me that it was open to them to use their position as shareholders of Mainplaza via Milemore as well as their rights under the Premium Agreement to secure that. 

99.  The conclusion in the judgment on this aspect was that it was open to the shareholders of Mainplaza to vary the agreement to enable Mainplaza to sell the shares directly to Sun Hung Kai.  The fact that it might have been open to the shareholders to vary the agreement is one thing.  The fact is that it was not their agreement initially that that should be done and I see no reason why they should be compelled to have entered on that course which would have required payment of substantial sums in a speculative venture.

100.  Mainplaza was a closely held company, with a minimal number of shareholders, formed for a one-off project and conducted more in the nature of a partnership as opposed to an amorphous entity.  Whether in other cases it is possible to divorce the interests of all the shareholders from the interests of a company is questionable in itself but in my view it is not possible to divorce the interests of the shareholders of Mainplaza from the interests of all the shareholders.  If the shareholders unanimously considered that their interest as shareholders of Mainplaza lay in a particular course, then it seems to me that as shareholders and directors they were perfectly entitled to take that course.

101.  If the position were looked at from the other aspect, namely Active Profit’s position, as already explained, Active Profit’s position can scarcely be regarded as meritorious.  This action is founded upon the change from the SAA to the SSA.  At best it can be regarded as fortuitous.  Active Profit is in this case claiming a benefit, and seeking relief based on such benefit, for which it would not have been entitled when it entered the Participation Agreements.  It took its interest such as it was in Mainplaza on the basis that those who held its interests had their own commercial interests as shareholders of Mainplaza.

Could Mainplaza have sold the Beachshore shares to Sun Hung Kai on the same terms as Kodera and Cho?

102.  The plaintiff’s case is predicated on the proposition that the sale of the Beachshore shares to Sun Hung Kai which was accomplished by Kodera and Cho could have been effected by Mainplaza directly.  It is an argument which is sought to be supported by the proposition that because Mr Okuyama, was well acquainted with the relevant persons at Sun Hung Kai, the same deal could have been achieved on behalf of Mainplaza.  That argument appears to me to lose sight of the realities of the situation at the time.  Mainplaza’s bargaining position was not the same as that of Kodera and Cho.

103.  Mainplaza had entered a joint venture agreement with Sun Hung Kai.  The development of the Properties as originally envisaged had clearly become unviable.  The fact that Sun Hung Kai must have appreciated that is exemplified by the fact that it was proposing that the development should now be of larger sized flats.  These were clearly to be directed at a different market to the small flats.  The price at which the flats would have to be sold put them in quite a different category to the flats originally envisaged.  Although Sun Hung Kai was appealing the assessment of the premium there is no indication of how long that process would take and as to how successful it was likely to be.  Sun Hung Kai might well, as argued by Mr Chang, be happy to acquire a land bank but it would obviously want do so at minimum cost.

104.  It is true that under clause 6 of the Development Agreement, if Mainplaza refused to pay its share of the premium, Sun Hung Kai had the option of paying the premium itself and buying out Mainplaza’s interest.  But it did not have to do so.  Clearly at the time Sun Hung Kai was probably not in a hurry to develop the land.  The land had its difficulties because of the necessity of constructing the road.  The costs involved increased the development costs.  Indeed history has shown that the land still to this day remains undeveloped.  Sun Hung Kai could have simply left the matter as it was and continued the appeal process against the amount of the premium as long as it could.  Mainplaza and its shareholders were in no bargaining position to demand that Sun Hung Kai should buy them out, still less at any particular amount.  It has not been suggested that Mainplaza might have been able to sell the Beachshore shares to any other party, indeed particularly given the time involved, the amount of the premium, the apparent abandonment of the original development plans and question mark hanging over how and when the development might take place that would no doubt have been very difficult.  Coupled with that, if the Beachshore shares had been sold to a third party with a view to that party continuing the joint venture with Sun Hung Kai there would have been continuing concern about the guarantees that had been given. 

105.  In contrast, once the Beachshore shares had been transferred to Kodera and Cho, they were presumably not in a position to finance 50% of the development under the Development Agreement themselves.  They might have been able to sell the Beachshore shares to another party.  But that, for similar reasons, was highly problematic.  Although Mr Chang attempted to pour scorn on the suggestion that there was any serious negotiation with Mr Johnny Or, the cross-examination of Kodera was on the basis that it was a serious negotiation. 

106.  If Sun Hung Kai had wished to retain the other half interest in the properties so that it could form part of a later development, it made commercial sense to come to some arrangement with Kodera and Cho.  The arrangement to which it came was that the land was valued at approximate to $1,300 per square foot.  Whether that represented the full value of the land at the time is difficult to assess.  The market for flats was a rising market, which had clearly risen considerably to such an extent that it could legitimately be referred to as inflated.  Within less than six months the price at which developed property was sold started to drop.  Experience has shown that the New Territories, in particular, suffered a considerable fall in the price of property starting in October 1997 to the extent that many of the flat owners in the New Territories have long been labouring under what has been termed negative equity.  The premium demanded by Government clearly made the assessment of land value by Chesterton Petty give the impression that the basic value of the land was nil or worse.  As it was the price of $1,300 was approximately the same as that estimated in 1992, some 4½ years earlier and it was half the price which was used in calculating the Bright Essence and Golden Essence sales in 1994. 

107.  In those circumstances, the suggestion that Mainplaza was in a position to negotiate a favourable sale of Property A to Sun Hung Kai was no more than an argument.  Nor was it supported by the evidence of Mr Kakimoto in the passage in cross-examination on Day 8, page 89 referred to by the judge and heavily relied upon by Mr Chang:

“Q. If Highs, in May 1997, knew that Nissho Hong Kong could have, on behalf of Mainplaza, secured a sale of the Beachshore shares to Sun Hung Kai for $378 million, would Highs have voted to cancel the share subscription agreement?

 A. I did not even think about such thing.

 Q. No, I am asking you, had Highs known about that, would you have just gone ahead and cancelled the deal?

 A. I think it did not happen, because if the deal did not complete, then Mr Kodera could cancel.

 Q. Just to follow up on that one, if Mainplaza could sell the Beachshore shares at $378 million, even if you had to pay the $153 million pursuant to the premium agreement, there would still be a benefit of $225 million; would you agree with that?

 A. I wish it was like that.”

108.  The crucial question which the witness was not asked, and in respect of which there was no evidence, was whether Mainplaza could have achieved such a sale.  In my view it could not.  Any property developer with a business sense who had a joint venture partner that came to it, with cap in hand on the basis that it did wish to proceed with the contractual joint development, would drive as hard a bargain as it could.  It would put its opposite number in an unenviable position.  There is no evidence from Sun Hung Kai or anybody else that it would have come to the same arrangement with Mainplaza as it did with Kodera and Cho.  Neither was Mr Kakimoto asked whether Highs would have been permitted by its parent company to put up a further $30 million in the hope of securing a sale to Sun Hung Kai.

109.  There is a conclusion in the judgment that there had been negotiations for sale of the Beachshore shares to Sun Hung Kai early in 1997.  There was no evidence to that effect.  Unfortunately it was surmise based, no doubt, on conjecture in argument.  Although Mr Takizawa did give evidence that Nissho Hong Kong was strenuously re-evaluating the project including the possibility of persuading Sun Hung Kai to take a larger share, that does not mean that that had been discussed.  Still less does it mean that any arrangements had been come to with Sun Hung Kai.

110.  It would seem that Mr Okuyama was the contact with Sun Hung Kai.  In March 1997 he was said by Nissho’s solicitors to have recently undergone a major lung operation and to be convalescing.  It is unlikely therefore that he had been in contact with Sun Hung Kai until he was in Hong Kong at the end of May that year.  There is no suggestion in the papers or the evidence that anybody else approached Sun Hung Kai with a view to effecting a sale.

111.  Indeed, it would be remembered that on 13 March 1997 Nissho Hong Kong’s solicitors had written suggesting that Nissho Hong Kong might “shell out” a higher percentage of share in Mainplaza.  Whilst that met with an initial rebuff, there does seem to have been a without prejudice meeting in early April, although if it did take place it was quickly followed by an enquiry as to whether Clement Ng & Co was instructed to accept service of proceedings.  By the time the premium demanded by Government was known to Nissho Hong Kong, the writ in this Action had already been served on them.

Would the Nissho companies have benefited more if Mainplaza had sold the Beachshore shares to Sun Hung Kai?

112.  One of the matters which needs to be addressed in coming to the conclusion that Nissho Hong Kong acted in breach of trust in the manner that has been held is as to whether that allegation could be sustained on the basis that Nissho Hong Kong may have had a financial motive for so doing.  At paragraph 166 of the judgment the conclusion was reached that despite the Mainplaza shareholders not wishing to assume the financial risk of proceeding with the redevelopment, a matter which seemingly was accepted as true, Nissho Hong Kong “was enabled to achieve that which appears to have been significant financial advantage from the course of dealing as in fact was adopted, and it is perhaps not unfair to observe that the full extent of such advantage may yet not be entirely clear.”

113.  An initial consideration of the matter confirms that it is by no means clear as to what financial advantage Nissho Hong Kong or Nissho Japan achieved on the basis that Mainplaza returned the Beachshore shares to Kodera and Cho in exchange for their money back with interest as opposed to arranging for Mainplaza to sell the Beachshore shares to Sun Hung Kai.  Mr Shieh SC, who appeared on behalf of Nissho Hong Kong, cogently drew this court’s attention to the various factors which demonstrated that had Mainplaza itself been able to sell the Beachshore shares to Sun Hung Kai, the Nissho companies would have been very considerably better off.  As it was there was little if anything that they gained from returning the Beachshore shares to Kodera and Cho apart from their money back and the interest.  Indeed, they had to share expenses which possibly they might not have had to do.

114.  Had Mainplaza been able to sell the Beachshore shares directly to Sun Hung Kai at the same price that Kodera was able to, it would have meant that in round terms approximately $400 million would be paid by Sun Hung Kai and Mainplaza would have had to have paid Kodera and Cho a further $100 million dollars in addition to the $53 million which had already been paid under the Premium Agreement.  There would have been a profit to Mainplaza as a whole on the transaction of something in the order of $250 million.  Of that Nissho Japan would have been entitled to 20% and Nissho Hong Kong would have been entitled also to 20% after taking into account the 10% due to Active Profit.  Thus Nissho Hong Kong and Nissho Japan together would have benefited directly to the tune of approximately $100 million. 

115.  One of the major points made in the judgment as regards the supposed benefit to the Nissho companies was that in September 1997 a payment of $110 million was made to Nissho Hong Kong by Bumper Harvest pursuant to a Supplemental Agreement dated 6 May 1997.  That repayment was made in respect of the loan referred to in paragraph 58 above which had been taken out in 1996.  The first point that might be made in respect of this was that if the course had been adopted which was held should have been adopted, namely that Mainplaza should have paid the balance of the $153 million to Kodera and Cho they would have been in receipt of $100 million to start with.  In addition there would have been their share of the Mainplaza profits on the supposed sale to Sun Hung Kai.  That would have been approximately a further $25 million even taking into account Active Profit’s share.  In those circumstances Kodera himself would have been left with approximately $110 million in any event.  Moreover, as was pointed out by Mr Shieh, the loan had been taken out to finance the purchase of Ever Gain Centre.  That was a property worth around $430 million and thus the loan taken out by Bumper Harvest was adequately secured.  Furthermore, Kodera himself had guaranteed the loan.  Kodera also owned what had been referred to as “a couple of numbers of buildings in Japan”.  The supplemental agreement dated 6 May 1997 providing for a revised repayment schedule had been negotiated for one or two months prior to that.  As was submitted by Mr Shieh there was nothing to suggest that without the sale of the Beachshore shares by Kodera and Cho, this loan would not have been repaid by Kodera to Nissho Hong Kong.

116.  At paragraph 152 the judgment it is suggested that Nissho Hong Kong benefited to the tune of $9.88 million by reason of a loan owed to it being paid off.  What was said was:

“Additionally, Nissho Hong Kong’s interests were furthered by sharing in the consideration paid for the shares by Sun Hung Kai by means of an assignment to Sun Hung Kai (in the person of Kose Top Limited) on 31 July 1997 of a HK9.88 million loan owing to Nissho Hong Kong from Beachshore.”

117.  Mr Shieh demonstrated that the reference to the $9.88 million loan was in respect of development costs being professional fees for consultants, investigations, design work and architects as well as funding costs and registration fees for the development.  Initially, Nissho Hong Kong had paid that amount on behalf of Beachshore and therefore it was a debt owed by Beachshore to Nissho Hong Kong.  When Kodera received the payment in respect of the Beachshore shares this amount was taken into consideration and Sun Hung Kai paid the $9.88 million to Nissho Hong Kong.  There was thus a debt owing in respect of this amount from one Sun Hung Kai company to another and it was thus presumably cancelled out.  On the other hand, because of the arrangement, in effect, it was Kodera who had paid the $9.88 million in various costs on behalf of Beachshore.  As a result, on 1 August 1997, there was an apportionment of those costs amongst the shareholders of Mainplaza.  This was referred to in an agreement signed on that day.  Apart from anything else Nissho Hong Kong and Nissho Japan together reimbursed Kodera more than $5 million in respect of this. 

118.  The important point must, however, be that prior to Kodera arranging for Nissho Hong Kong to be reimbursed the $9.88 million out of the proceeds of sale to Sun Hung Kai, this was a debt owed by Beachshore to Nissho Hong Kong.  If the sale of the Beachshore shares had taken place in the manner that the judge said that it should have done, then that debt from Beachshore to Nissho would either have remained or would have been taken into account on the sale.  Either way, Nissho could have expected to be repaid the loan treated as having been made to Beachshore and hence Nissho Hong Kong in reality gained nothing in respect of the loan from what did in fact take place.  On the contrary, the Nissho companies had to pay their share of the expenses to the tune of some $5 million.

119.  In paragraph 152 of the judgment reference is made to the fact that the payment obligations incurred by Nissho Hong Kong and Nissho Japan under the 1993 Joint Venture Agreement and the 1994 Shareholders Agreement were discharged as were the performance guarantees given by Nissho Hong Kong and others pursuant to the Development Agreement with Tsuen Kwong.  That is as it may be but it was not an advantage which would not equally have been secured had the Beachshore shares been sold directly to Sun Hung Kai as the judge held that they should have been.

120.  The only remaining matter is the question of the $8 million payment in respect of the Service Agreement.  This was paid to Nissho Japan, not Nissho Hong Kong, but, in any event, it could hardly be described as excessive in terms of fees paid to estate agents and others.  In my view it is the only advantage secured by Nissho Japan as a result of the events which took place and has to be compared with the amounts which the Nissho companies would have stood to gain on the hypothesis upon which the breach of trust was held.  It thus cannot be said that Nissho engineered Mainplaza to take the course adopted in order to benefit itself at the expense of Highs and Active Profit.  It would have been to their considerable financial advantage if the course that has been held should have been followed, had been possible and had been accomplished to such an extent that it is difficult to discern the “significant financial advantage” referred to in paragraph 166.

Conclusion

121.  In conclusion I would allow this appeal, set aside the judgment below and simply make an order that the plaintiff was entitled to the return of the deposits paid under the Participation Agreements together with interests.  Since that has already been done there would seem to be no need for any further order other than that there should be an order nisi that costs here and below should be to the defendants.  The parties should be at liberty to apply for any further or other order that would arise under this judgment.

Hon Le Pichon JA:

122.  I agree.

Hon Cheung JA:

123.  I agree.

Mr Denis Chang SC, Mr Jeremy S K Chan and Ms Phoebe Man, instructed by Messrs Kao, Lee & Yip, for the Plaintiff/Respondent

Mr Paul Shieh SC and Mr Bernard Man, instructed by Messrs Clement Ng & Co., for the 1^st Defendant/Appellant in CACV 332/2003

Mr David Oliver QC, Mr Jat Sew-Tong SC and Ms Winnie Chan, instructed by Messrs Hastings & Co., for the 2^nd to 4^th Defendants/Appellants in CACV 320/2003