PACIFIC ELECTRIC WIRE & CABLE CO LTD v. TEXAN MANAGEMENT LTD AND OTHERS

HCCL 16/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 16 OF 2009

(TRANSFERRED FROM HIGH COURT ACTION NO. 2203 OF 2004)

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BETWEEN

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J U D G M E N T

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I. INTRODUCTION

1.  These consolidated proceedings concern 3 actions by PEWC to recover 3 properties.  In HCCL 16 PEWC seeks to recover the PacMOS shares.  In HCCL 17 it seeks to recover the Shouson Hill Property.  In HCCL 18 it seeks to recover the South Horizons Properties.  In all 3 actions, the bases for recovery advanced by PEWC are the same.

2.  PEWC claims that, between 1988 and 1999, unbeknown to anyone else on PEWC’s board, 3 directors (Tung, Sun and Hu) established and operated a clandestine network of companies in Hong Kong. Tung, Sun and Hu were respectively PEWC’s Chairman, President and Chief Financial Officer.  Their senior positions enabled them (PEWC says) to commit a massive fraud on a systematic and audacious scale. 

3.  PEWC contends that, in setting up and running the secret network of companies, the 3 directors used PEWC’s funds, goodwill and credit to acquire various assets.  PEWC says that the 3 directors acted in breach of their fiduciary obligations or duties of loyalty to PEWC in so doing and are liable to account to PEWC personally for what they did.

4.  The companies at the heart of the alleged secret network were PCHL (a Hong Kong company), Blinco BVI (a BVI company) and Patagonia (a BVI company).  PEWC says that, through the secret network, the latter 3 companies used PEWC’s funds and credit to acquire the 3 properties.  The 3 companies thereby came to hold the PacMos shares through All Dragon, Texan and Super Wish and to hold the South Horizons and Shouson Hill Properties through Harmutty, Haddowe, Casparson, Afterville, Nee Soon and others.  In around 1999, Hu (PEWC contends) fraudulently transferred the 3 properties to himself beneficially by transferring control of the network to Bridle Path and thereafter to Top Selection.  Bridle Path and Top Selection are BVI companies which were incorporated on Hu’s instruction and the bearer shares of which Hu had custody.

5.  PEWC does not only claim to be the beneficial owner of what remains today of the network of companies which Tung, Sun and Hu once operated.  PEWC further maintains that the PacMos shares and the South Horizons and Shouson Hill Properties should be held on constructive trust for it by the relevant companies within the existing network.

6.  PEWC did not take out writs in these proceedings until September 2004 (HCCL 16) and December 2004 (HCCL 17 and 18).  That is because (according to PEWC) it needed time to discover and unravel the massive fraud perpetrated by Hu, Tung and Sun. 

7.  Hu, based in Taiwan, initially disputed jurisdiction.  Eventually, his attempt to set aside service abroad was dismissed by the Court of Appeal and Court of Final Appeal.  That was around March 2008.  Writs were then served on Hu in Taiwan in June 2008.

8.  Meanwhile, PEWC applied for summary judgment against Blinco BVI, Patagonia and certain companies within the alleged secret network.  Saunders J gave summary judgment in January 2008, following a hearing of about 10 days in August and October 2007.

9.  Pursuant to Saunders J’s judgment, the Court appointed interim receivers in respect of the PacMos shares and the South Horizons and Shouson Hill Properties.  Blinco BVI, Patagonia, and the Corporate Defendants (the expression used at trial to denote certain companies within the PCHL network which are being sued in these proceedings) were ordered to disclose the identities of their directors and shareholders.  It was only then, in August 2008, that the existence of Bridle Path and Top Selection became known to PEWC.

10.  Hu filed his Defence in November 2008.  The Corporate Defendants revised their Defences shortly thereafter to mirror what Hu pleaded in his Defence.  Hu’s Defence alleged for the first time that in early 1996 there had been a Takeover Arrangement between Tung, Sun and Hu on the one hand and a Robin Willi (a Swiss banker) on the other. 

11.  Hu’s Defence has since gone through various re-amendments.  In its final form, Hu’s Defence alleges that in 1996 Willi agreed to buy out PEWC’s interest in the PCHL, Blinco BVI and Patagonia.  The Takeover Arrangement (said to be evidenced by 3 letters passing between Hu and Willi) led to the beneficial interests in PCHL, Blinco BVI and Patagonia being initially transferred to Bridle Path and then Top Selection.  On 1 February 1999 Hu says that he handed over Top Selection’s bearer share to Willi to hold beneficially, Willi having performed that which he had agreed to do under the Takeover Arrangement.

12.  Consequently, although Hu and Willi do not dispute that PEWC previously held the ultimate beneficial interest in the network of companies, Hu says that PEWC no longer does so.  Instead, it is said that the companies and their underlying assets (including the PacMos shares and the South Horizons and Shouson Hill Properties) have been fully owned and controlled by Willi since February 1999.

13.  PEWC replies that the Takeover Arrangement is a recent fabrication by Hu.  PEWC observes that the story of the Takeover Arrangement only emerged late.  Hu and Sun were arrested in Taiwan and prosecuted for various criminal offences.  Their trial started in 2005.  But at no time until 2008 did Hu mention the Takeover Arrangement supposedly agreed between him and Willi. 

14.  It is PEWC’s case that the Takeover Arrangement never took place and the 3 letters said to evidence it were only created subsequently, probably in 2008, to conceal the fact that Hu owns (and remains in control of) Top Selection.  PEWC maintains that Willi is only Hu’s nominee.

15.  The Court of Appeal set aside Saunders J’s summary judgment in March 2009 and transferred the actions to the Commercial List.  The Court of Final Appeal refused leave to appeal against the Court of Appeal’s ruling in June 2009.

16.  Tung died in May 2008.  In July 2010 Hu, Sun and Tom Tung (Tung’s son) were convicted in Taiwan in relation to their fraudulent conduct of PEWC’s affairs.  Hu was fined NTD 1,000 million and sentenced to 18 years’ imprisonment for forgery and the misappropriation of business assets. Sun was sentenced to 4 years’ imprisonment for forgery.  Tom Tung was sentenced to 3 years and 2 months’ imprisonment for false accounting, forgery and misappropriation of business assets.  All have appealed against conviction and sentence.  Their appeals are pending.

17.  In addition to Hu, Tung’s estate, Sun, Blinco BVI, Patagonia, Top Selection and the Corporate Defendants, PEWC has sued Yip, Chung and Ma. 

18.  Yip and Chung are directors of certain Corporate Defendants.  Ma was a director of Trident Asia, Trident Bank and Town Sky. PEWC alleges that, at various time and in various ways, Yip, Chung and Ma dishonestly assisted Hu in concealing from PEWC the existence of the secret network of companies.  PEWC also alleges that in 1999, without authority from PEWC, Ma benefitted from the use of the South Horizons Property as security for a loan from Hamburgische Landesbank (HSH) to Ma’s company Town Sky.

19.  The main issues which I have to decide in these proceedings are thus as follows:-

(1) Whether Tung, Sun and Hu established a secret network of companies in Hong Kong?

(2) Whether the Takeover Arrangement is a fabrication?

(3) In light of the answer to (2), whether PEWC is entitled to any proprietary remedies?

(4) In light of the answer to (2), whether PEWC is entitled to any personal remedies?

(5) Whether any remedies to which PEWC might be entitled are time-barred?

II. BACKGROUND

A. General

20.  Many of the companies involved in these proceedings have undergone several changes of name over the years.  For ease of reference, I shall only refer to such companies by the name used to identify them during the trial.

21.  PEWC started as an electric wire and cable manufacturer in Taiwan during the 1950s. 

22.  The business was founded by 4 families.  The heads of the 4 families were Sun Fa-min, Lee Yu-tien, Cheng I-chou and Lee Hung‑wen.  The 4 families were later joined by other major investors.  One of those major investors was the Tung family.  The head of that family, Tung Yu‑jeh (Tung), eventually became PEWC’s Chairman.

23.  PEWC was incorporated in Taiwan in December 1957.  It became listed on the Taiwan Stock Exchange in 1963.  From the 1990s to early 2000s (the period which is the subject of these proceedings), PEWC’s Board had around 15 directors at any given time.

24.  Each founding family has held (and continues to hold) sufficient voting power to secure the appointment of one or more representatives of the family onto PEWC’s Board.  But at no time did the founding families and other major investors in PEWC together hold more than 13% of the company’s issued share capital.  The majority of PEWC’s approximately 300,000 shareholders are thus persons independent of the founding families.

25.  In the late 1980s PEWC decided to diversify its wire and cable business.  It began to invest in other businesses in Taiwan and overseas.  For instance, between 1988 and 2002, PEWC’s Board approved investments in Pacific Southwest Bank (USA), Conrad Hotel (Hong Kong), Pacific Plaza (Singapore), a joint venture manufacturing facility in Thailand, Pacific Electric Wire & Cable (Shenzhen) Co. Ltd., Ningbo Pacific CDC Cable Co. Ltd. and 4 factories in Shenzhen, Ningbo, Shanghai and Shandong.

26.  Hu joined PEWC as corporate secretary to the President’s office in 1978.  He became PEWC’s Financial Controller in May 1990. In April 1991 he became an ordinary Director of PEWC with the position of Executive Vice-President.  In 1994 he became a Standing Director of PEWC.  Hu then sat on PEWC’s board as a representative of Pao-hua, a company controlled by the Tung family.  He became PEWC’s Chief Financial Officer in January 1996. Noted for his intelligence and his facility with English, Hu was regarded throughout his career at PEWC as a star of the company’s management team.

27.  In June 1986 Tung was appointed as Chairman and Sun as President of PEWC.

28.  In August 1988 Blinco HK (a Hong Kong company) was incorporated as a subsidiary of PEWC.  It was set up to hold PEWC’s investment in the Conrad Hotel.  In 1989 Blinco HK obtained the Taiwan Investment Commission’s approval to invest in real estate and securities.

29.  In May 1990 Patagonia was incorporated as a wholly-owned subsidiary of PEWC. 

30.  The incorporation of Blinco BVI followed in December 1990.  Blinco BVI was also a wholly-owned subsidiary of PEWC.  Tung, Sun and Hu were its directors.

31.  PCHL was incorporated in August 1991.  It initially had a share capital of 20 million $1 shares of which Ma and Anthony Cheung each held 50%.  That was later enlarged to 80 million $1 shares. 

32.  Ma and Cheung were appointed as PCHL’s directors in September 1991.  In January 1992, Tung, Sun, Hu and Wellen Sham became additional directors.  Ma resigned in April 1992.  Philip Wong became a director in December 1993.  Cheung resigned on 31 January 1994, but came back as director in June 1996.  Sham resigned on 28 February 1995.  Wong resigned in December 1997.  He was replaced by Rafia Tam.

33.  On 31 December 1992 Blinco BVI issued one share each to Hu and Sun.  On the same day, Trident Asia was incorporated in Hong Kong with Bardstall (wholly-owned by PEWC) and Blinco BVI as shareholders.

34.  On 4 January 1993 the Blinco BVI shares held by Hu and Sun were transferred to PEWC.

35.  In March 1993 Bridle Path was incorporated.

36.  At a PEWC board meeting on 19 November 1993, the Vice-Chairman Lee Yu-tien asked Sun whether PCHL was related to PEWC.  The question was prompted by a Hong Kong newspaper article which had come to Lee’s notice. That article referred to notices issued by PCHL claiming a link with PEWC. 

37.  The minutes of the November 1993 board meeting record that Lee wished it to be “clarified whether [PCHL] is related to our company and our company should not give any endorsement or guarantee in favour of this company”.  According to the evidence of Andy Cheng (a PEWC director attending the meeting), Sun replied to Lee after consulting Hu (who was present), that PCHL was unrelated to PEWC and a letter had been issued to the Investment Commission in Taiwan making that clear.  Sun is reported by the minutes as having said that “our company has never given any kind of guarantee in favour of PCHL”.

38.  In January 1994 Super Wish was incorporated in the BVI.

39.  In March 1994 CPE was incorporated in Hong Kong as a wholly-owned subsidiary of PEWC with Hu, Tung and Sun as directors.  CPE essentially functioned as a central treasury for PCHL and its network of subsidiary and associated companies.  Funds from PEWC were typically routed at some stage through CPE before being remitted onwards to PCHL or other entities within the PCHL network of companies.

40.  In May 1994 one share of Trident Asia was transferred from Blinco BVI to CPE.

41.  On 22 June 1994 PEWC’s Board approved a US$12.5 million loan by Rabobank to CPE subject to a guarantee by PEWC.

42.  In November 1994 Central Pacific Bank (later known as Trident Bank) was incorporated in Vanuatu by Ma and Mengie Capistrano.  Shortly afterwards, in the same month, Mae Sai was incorporated in the BVI.

43.  On 28 February 1995 Hu, Tung and Sun as directors of Blinco BVI and Patagonia approved the transfer to Bridle Path of all shares in Blinco BVI and Patagonia.  The instruments of transfer were signed by Hu “for and on behalf of PEWC”.  Veritas International signed the instruments of transfer as sole director of Bridle Path.  The beneficial owners of Veritas International are unknown.  On the face of it, the transfer had the effect of removing Blinco BVI and Patagonia from PEWC’s apparent ownership.

44.  As previously noted, Sham resigned at this point. 

45.  Sham’s management of the PCHL group had brought about a “mess”.  Although rich in assets (including a paging service, the South Horizons Property, the Beijing Huizhou Hotel project and a residential development project in Fuzhou), PCHL faced potentially serious cashflow problems.  This was in part because PCHL had to service the substantial loans used to acquire its assets.  There was also the possibility of PCHL being called upon by its Mainland partners to honour its investment commitments in respect of the Beijing and Fuzhou projects.

46.  In March 1995 Texan was incorporated in the BVI.

47.  In June 1996 PEWC issued an Exchangeable Bond for US$120 million.  Willi (then employed by Bankers Trust) was instrumental in arranging the issue.

48.  In November 1996 All Dragon was incorporated in the BVI.  Its first directors were Hu, Cheung and Wong.

49.  In December 1996, Mosel Vitelic Incorporation (MVI) entered into a joint venture with the Siemens Group and formed a company known as ProMOS. 

50.  MVI was the result of a merger between Mosel Electronics Taiwan Inc. and Vitelic Corp. (a US company).  Hu became Chairman of MVI in 1992 and from April 1994 also acted as its President.

51.  Hu became Chairman of ProMOS upon its establishment.  ProMOS produced electronic components, in particular Dynamic Random Access Memory (DRAM) chips. 

52.  In December 1997 Wong resigned as director of All Dragon and various PCHL subsidiaries.

53.  In December 1998 POIM was incorporated in Hong Kong. 

54.  In September 1999 Hu retired from the position of Executive Vice-President of PEWC.  He retired as PEWC’s CFO in the following month.

55.  In November 1999 CPE entered into voluntary liquidation.  It was dissolved in November 2001.

56.  In March 2000 Hu resigned as director of Blinco HK.

57.  In November 2000 Cheung resigned from All Dragon and PCHL.

58.  Rafia Tam resigned from All Dragon and PCHL in September 2001.

59.  In May 2002 Trident Bank’s licence was revoked for non‑compliance with statutory filing requirements.

60.  On 4 April 2003 PEWC’s 2002 financial statement came before its board.  The statements showed a huge loss of NT$ 23,216 million.  The board resolved to form a Special Investment Review and Planning Task Force, headed by Tom Tung, to investigate the reasons behind the loss. 

61.  In May 2003 the Taiwan Securities and Futures Commission (TSFC) began to investigate the reasons for the loss.  KPMG was commissioned to prepare a report for the TSFC.

62.  In July 2003 the Taiwan Prosecution Authority began a series of investigations into the activities of PEWC, Tung, Sun and Hu.  The investigations (including interrogations of Tung, Sun, Hu and many others) ended in November 2004.

63.  On August 2003 Hu and his wife resigned as directors of All Dragon.

64.  In September 2003 the Taiwan Stock Exchange (TSE) suspended trading in PEWC, pending a satisfactory explanation for its huge loss.

65.  In the same month Kroll (commissioned by PEWC to investigate the loss) made its first report.  This led PEWC to apply for the resurrection of CPE.  A second and third Kroll report followed in October and November 2003 respectively.

66.  On 24 September 2003 PEWC’s offices were searched by the Taipei District Attorney (DA). 

67.  In November 2003 Kwan J declared CPE’s dissolution void.  Pricewaterhouse Coopers (PwC) was appointed as CPE’s liquidators.  PwC applied to the Court for an order that D P Lau (which had been CPE’s auditors) provide relevant documents (including audit working papers) relating to CPE’s affairs and its dissolution.

68.  On 25 February 2004 PwC and Allen & Overy reported their findings and conclusions to PEWC.  Three days later KPMG completed a Special Audit Report.  That report suggested that there was something “extremely suspicious” in the way that CPE had conducted its business.

69.  On 28 April 2004 PEWC was delisted from the TSE.

70.  On 3 September 2004 the DA seized papers from MVI’s Taiwan offices.  The papers seized included the swissfirst papers.  The latter were communications between Hu and Willi between May and August 2004. Copies are in Annex 1 to this Judgment. 

71.  Writs for the present 3 actions were issued in September and December 2004.

72.  On 18 October 2004 Hu and his wife resigned as directors of PCHL.

73.  Hu was arrested in Taiwan on 9 November 2004.

74.  On 30 March 2005 Goldkey and Dunsmore were incorporated in the Seychelles and became sole directors of Blinco BVI and Patagonia.

75.  On 19 April 2005 an Anton Piller Order led to 40 cartons of documents being seized from the offices of Trident Asia and Ma.

76.  On 31 May 2005 writs were served on Hu in Taiwan.

77.  In June 2005 Hu resigned as director of Top Selection.  Hu also resigned as director of Blinco BVI and Patagonia, to be replaced by Goldkey and Dunsmore.

78.  In July 2006 Willi filed affidavits in Hong Kong asserting that he was the sole beneficial owner of Blinco BVI and Patagonia.

79.  On 1 October 2007 Hu (as Chairman and President of MVI) was convicted by the Taiwan District Court of forgery and the misappropriation NT$ 480 million of MVI’s money.  He was sentenced to imprisonment of 4 years.

80.  In January 2008 Saunders J granted summary judgment in favour of PEWC against certain Corporate Defendants.  Interim receivers were appointed in respect of the latter.  The Court of Appeal allowed the appeal against Saunders J in March 2009.  The interim receiverships over the relevant Corporate Defendants were terminated in consequence.

81.  On 13 January 2010 the 3 letters said to evidence the Takeover Arrangement were produced for the first time by the solicitors then acting for Blinco BVI and Patagonia.  The 3 letters, consisting of correspondence between Hu and Willi, are in Annex 2 to this Judgment.

82.  On 30 July 2010 Hu, Sun, Tom Tung and Sharon Huang (Tom Tung’s personal secretary) were convicted in connection with their conduct of PEWC’s affairs.  The convictions and sentences are on appeal.

83.  On 30 September 2010 Ozris Investments as sole director cancelled Top Selection’s one bearer share and issued a registered share to Willi.

84.  On 10 March 2011 Hu and his wife were found guilty of income tax evasion by the Taiwan Court.

85.  A chart sketching out the Corporate Defendants’ present organisation is found in Annex 3 to this Judgment. 

B.      Acquisition of the South Horizons and Shouson Hill Properties

86.  In November 1992 PCHL (through a series of nominees) entered into Sale and Purchase Agreements for the East and West Blocks of the South Horizons Properties.  The total price was $1,173,746,750 ($362,336,100 for the East Block and $811,410,650 for the West Block).  Completion was to take place on 14 May 1993 for the West Block and 20 June 1994 for the East Block.

87.  The net result of a string of nominee transactions used to acquire the South Horizons Properties was that the Car Parking Spaces and External Wall of the East Block came to be held by Afterville. The Ground Floor, First Floor, Second Floor, Third Floor, Fourth Floor, Fifth Floor and Roof (including Flat Roofs and Terrace Area) of the East Block came to be held by Rakeplus and later (upon Rakeplus’ voluntary liquidation in March 1994) by Nee Soon.  The External Wall, Car Parking Spaces 1 to 102 on Level 1, Car Parking Spaces 1 to 108 on Level 2 and Service Parking Spaces S1 to S20 of the West Block came to be held by Casparson.  The Ground Floor, First Floor, Second Floor and Third Floor (including Terrace Area) of the West Block came to be held by Haddowe.

88.  The portions of the South Horizons Properties held by Rakeplus and Haddowe were referred to at trial as the East Block Shops and the West Block Shops respectively.

89.  Hu, Tung and Sun were directors of Afterville, Rakeplus, Nee Soon, Casparson and Haddowe when the latter companies acquired their interests in respective portions of the South Horizons Properties. Afterville, Rakeplus, Casparson and Haddowe (all BVI companies) were each owned 100% by Harmutty (a BVI company), which in turn was 100% owned by Ever Dragon (a Hong Kong company).  Ever Dragon was 100% owned by PCHL.  Nee Soon (a BVI company) was 100% owned by Blinco BVI.

90.  The South Horizons Properties were paid for by a combination of loan monies from CEF and internal funding.

91.  A deposit amounting to 30% of the purchase price of the East and West Blocks had to be paid in 3 installments by 15 February 1993.

92.  The first deposit installment of $120,304,675 was due on 23 November 1992.  PCHL appears to have funded this installment out of a loan from Blinco HK.  The evidence for this is that PCHL’s financial statements for the year ended 31 December 1992 show an amount due from fellow subsidiaries of $258,592,000.  The latter amount is equal to the increase in the amount due from an affiliated company shown in Blinco HK’s 1992 financial statements.

93.  A second deposit installment of $60,152,338 was due on 3 December 1992. A bank advice shows that on 4 December 1992 Blinco HK remitted US$10 million to PCHL.  It is likely that this remittance was the source of funds for the second installment.

94.  A third deposit installment of $180,457,012 was due on 15 February 1993. A bank advice shows that on 16 February 1993 PEWC remitted US$24 million ($187.2 million) to Blinco HK.  It is likely that this remittance was the source of funds for the third installment.

95.  Stamp duty of US$5 million was payable for the sale of the South Horizons Properties on 29 April 1993.  That appears to have been paid out of US$5 million held in PEWC’s account with Societe Generale.

96.  To finance the balance of the purchase monies due, on 7 May 1993 PCHL entered into a Dual Currency Loan Facility (the 1^st CEF Loan) for $700 million with a syndicate of banks led by CEF. 

97.  The 1^st CEF Loan was supported by a Letter of Commitment from PEWC.  By that Letter, PEWC stated that PCHL, Haddowe, Casparson, Afterville and Rakeplus were its direct or indirect subsidiaries and that PEWC would not dispose of its interests in those subsidiaries during the life of the 1^st CEF Loan.  By the Letter, PEWC also confirmed that it fully backed PCHL’s obligations.

98.  PCHL paid the balance ($559,197,455) due on the West Block on 14 May 1993.  Of that payment, $500 million came from the 1^st tranche of the 1^st CEF Loan.  The remaining $59,197,455 appears from PCHL’s books to have financed by a loan from Blinco HK to PCHL.

99.  PCHL paid the balance ($253,635,270) due on the East Block on 30 July 1994.  Of that payment, $200 million came from the 2^nd tranche of the 1^st CEF Loan.  The remaining $53,635,270 was financed through a loan from Blinco HK according to PCHL’s books.

100.  The 1^st CEF Loan stipulated that all loans from Blinco HK to PCHL had to be subordinated to the 1^st CEF Loan. 

101.  As at 7 May 1993, $420,111,480 seems to have been owing from PCHL to Blinco HK as a subordinated loan.  The amount corresponds with the sum total of the 30% deposit and the $59,197,455 used to pay for the West Block.

102.  Nonetheless, Blinco HK’s balance sheets do not show a receivable of $473,746,750 ($420,111,480 plus the $53,635,270 paid for the East Block) as due from PCHL.  This may have been because (according to audit papers relating to Blinco HK) “the amount was actually due to other PEWC group companies, [and] Blinco [HK] was named to facilitate the arranging of finance”.

103.  A Blinco HK board minute of 26 January 1996 (signed by Hu and Sun) records that PCHL was indebted to Blinco HK for $678,359,820. 

104.  But a representation letter (also signed by Hu and Sun) in relation to the audit of Blinco HK’s financial statement for the year ended 31 December 1996 states that there is no amount due to Blinco HK from PCHL. Instead, according to the letter, Blinco HK “merely acted as trustee” of the amount mentioned in the 26 January 1996 board minute as having come from “the beneficiary”.  The representation letter declares that “the beneficiary has committed to reimburse all losses, if any, sustained by the company in the trust”.  The references to “beneficiary” must be to PEWC, Blinco HK’s parent.

105.  On the basis of the foregoing, I conclude that, despite having been booked by PCHL as loans from Blinco HK, in all likelihood the internal funding used for the South Horizons Properties ultimately came from PEWC.

106.  Between May 1994 and February 1998 the East Block Shops were sold through further BVI nominees (Showground, Berridale and Jutech) to third party purchasers for a total of $788,691,021.  The portions of the East Block held by Afterville were sold between October 1994 and February 1998 to third party purchasers for $75,140,000.

107.  The 1^st CEF Loan was partly repaid through proceeds from the sale of portions of the East Block.  As at November 1994, proceeds from the East Block came to $522,297,241.  Of this, $477,000,000 was used to reduce the 1^st CEF Loan.

108.  On 28 February 1995 the 1^st CEF Loan was replaced by a US$60 million (about $480 million) Transferable Loan Facility (the 2^nd CEF Loan) granted to Haddowe as Borrower by a syndicate of lenders with CEF as Agent and Arranger.  The purpose of the 2^nd CEF Loan was to refinance the $223,000,000 then remaining unpaid under the 1^st CEF Loan and to provide additional working capital for PCHL and its subsidiaries. 

109.  PCHL stood as Guarantor under the 2^nd CEF Loan. 

110.  The 2^nd CEF Loan was also secured on the unsold portions of the South Horizons Properties (including any proceeds from the sale of parts thereof).

111.  The 2^nd CEF Loan was further secured by a Sale Option Deed dated 20 March 1995.  By the Deed, PEWC granted an option entitling Haddowe to require PEWC to purchase the West Block at not less than US$75 million.  The option had a life of 5 years.  It was signed by Tung, Sun and Hu on behalf of PEWC.  Haddowe assigned the benefit of the option to CEF to hold for the lenders under the 2^nd CEF Loan.

112.  The 2^nd CEF Loan stipulated that, where the value of the South Horizons Properties held as security fell below 200% of the loan obligation, CEF could require Haddowe to make up the shortfall.

113.  The 2^nd CEF Loan provided that it would be an event of default if PEWC ceased to have a controlling interest in PCHL or if PCHL ceased to own Harmutty, Casparson, Haddowe and Afterville.

114.  From June 1996 onwards, Casparson began selling car parking spaces in the West Block. 

115.  For the period from December 1994 and December 1996, proceeds from the sale of car parking spaces in the East and West Blocks amounted to $266,882,781.  For the period from October 1994 to December 1996, proceeds from the sale of shops in the East Block and car parking spaces in the East and West Blocks amounted to $789,180,022.

116.  On 20 December 1996 the 2^nd CEF Loan was replaced by a Transferable Loan Facility of $475 million in favour of Haddowe.  The facility (the Rabobank Loan) was given by a syndicate of lenders led by Rabobank as Agent and Arranger. 

117.  Of the Rabobank Loan, about $300 million was to be used for re-financing the outstanding balance of the 2^nd CEF Loan; about $45 million was to be used as working capital for a construction company (Wing Shing); about $100 million was to be used for the investment purposes of the PEWC Group; and about $30 million was to serve as working capital for the PEWC Group.

118.  In support of the Rabobank Loan, Hu signed a Letter of Comfort on behalf PEWC.  By that Letter, PEWC stated that it would maintain its controlling interest in the mortgagor companies and the ultimate beneficial interest in such companies would remain vested in PEWC.  PEWC also undertook by the Letter not to demand repayment of any loans which it had extended to the mortgagor companies.

119.  It was a term of the Rabobank Loan that there would be no change in PEWC’s ultimate beneficial ownership of PCHL.  The Rabobank Loan provided that it would be an event of default if PEWC ceased to control the PCHL group.

120.  In August 1999, a balance of about $169,625,000 remained outstanding under the Rabobank Loan.  The latter was replaced by a loan (the HSH Loan) from HSH for $200 million. 

121.  By an Agreement dated September 1997 Harmutty agreed to sell and True Union to buy Harmutty’s shares in Haddowe and Casparson.  Tung Fong Hung (Holdings) Ltd. and Lo Siu Fai guranteed True Union’s performance of the Agreement.  The purchase price was $1.2 billion as adjusted by an amount equal to the difference between the current assets and liabilities of Haddowe and Casparson.

122.  The Agreement (had it been completed) would have resulted in the disposal of the West Block.

123.  True Union paid an initial deposit of $180 million, but defaulted on a 2^nd part payment of $120 million. Harmutty therefore treated the $180 million deposit as forfeited.  Harmutty then sued True Union, Tung Fong Hung and Lo in the High Court for damages.

124.  The litigation was settled by a Deed dated 14 June 2000.  By that Deed, Tung Fong Hung transferred the share capital of Gold Global to Harmutty.  In addition, Tung Fong Hung and Lo respectively agreed to pay $5 million and either $123 million or $169 million to Harmutty.  It is unclear what amounts were eventually paid.

125.  As a result of the transfer of Gold Global’s shares, Harmutty came to own 100% of Greateam.  Greateam held the Shouson Hill Property.  Harmutty therefore came to own (and continues to hold) the Shouson Hill Property through Greateam.

C.      ACQUISITION OF THE PACMOS Shares

126.  In early 1995 Ma informed Hu that he had found a public listed company which could serve as a takeover target for the PCHL group.  The listed company was Win Win International Holdings Ltd.

127.  The takeover was eventually executed through 2 special purpose vehicles, both BVI companies.  One was Prima Pacific (Holdings) Ltd. (PPH), the other Texan.

128.  Texan was incorporated in March 1995.  In May 1995 Texan increased its share capital from US$50,000 to US$5 million by creating 4,950,000 shares.  Of the latter shares, Texan allotted 2,449,000 (49%) to PPH and 2,550,000 (51%) to Pacific Capital (Investment) Ltd. (PCI) (a Hong Kong company incorporated in 1992, now known as Clipper Investment Ltd.). 

129.  PPH ostensibly belonged to Larry Horner.  But in June 1995 Horner executed a Declaration of Trust stating that PPH held the Texan shares for PEWC.

130.  In June 1995 Texan agreed to purchase 150,164,000 Win Win shares at $1.388 per share.  The shares were to be bought from Win Win’s then majority shareholders, Savio Lam Holdings Corp. and Daniel Lam (the Lam interests).  As part of the sale terms, the Lam interests charged a further 69,186,000 Win Win shares as security for the performance of the Lam interests’ undertaking to buy back Win Win’s existing trading business.

131.  Since the shares purchased (about 51% of Win Win’s issued share capital) exceeded the 30% trigger in the Hong Kong Code for Takeovers and Mergers, it was necessary for Texan to make a general offer to purchase Win Win’s shares.

132.  Texan made a general offer on 17 July 1995.  The Offer Document stated that PPH was beneficially owned by Horner, that PCI was a wholly-owned subsidiary of PCHL, and that PCHL was indirectly controlled by PEWC.  The Document further declared that Texan did “not have any plans regarding acquisitions or disposals of any material assets of the Group (save for [certain disclosed Agreements]) or any fund raising activities of the Company”.

133.  Completion of the share sale took place on 9 August 1995.  In addition to the 150,164,000 shares sold by the Lam interests, Texan acquired a further 5,446,000 shares under its general offer.  Texan therefore obtained a total of 155,610,000 shares for about $216 million or US$27.7 million.

134.  In due course, Win Win was renamed as “PCL Enterprises Holdings Ltd.” and then “PacMOS Technologies Holdings Ltd”.  For convenience, I shall refer to the company as PacMOS from this point onwards.

135.  On 13 November 1995 Texan transferred 1 PacMOS share each to PC Asia and PCI.

136.  Texan funded its purchase of the PacMOS shares in 2 ways.

137.  First, on 19 May 1995 PEWC remitted US$2.62 million to PCI.  US$2.550 million of that sum was used to fund PCI’s contribution to Texan’s share capital.  The amount was recorded in PCI’s books as being payable to CPE instead of PEWC.

138.  Second, a sum of US$26.55 million was raised for Texan’s purposes.

139.  On about 25 May 1995 PEWC (Treasury) issued a 1^st Floating Rate Note (the 1^st FRN) for US$100 million.  This was guaranteed by PEWC.

140.  On about 13 June 1995 PEWC (Treasury) issued a 2^nd FRN for US$30 million.  PEWC also guaranteed that issue.  On 16 June 1995 the net proceeds raised through the 2^nd FRN (US$29.76 million) were deposited into CPE’s call deposit account at Societe Generale. 

141.  Between mid-June and mid-July 1995, US$8.42 million was withdrawn from the latter account.  But at the end of July 1995 Blinco HK and PEWC respectively deposited US$2.44 million and US$4 million into the account.  This led to a US$27.778 million credit balance.

142.  On 31 July 1995 US$26.55 million was paid out of the Societe Generale account to Texan.  CPE treated this as a payment of US$14,259,000 on behalf of Texan (probably including US$2.45 million to cover PPH’s contribution to Texan’s share capital) and a payment of US$12.291 million on behalf of PCI.

143.  The 1^st and 2^nd FRNs were redeemed as to US$26 million on 30 May 1997 with monies from CPE.  CPE seems to have derived the latter monies from deposits by PEWC (made between 20 and 28 May 1997) amounting to US$34 million.

144.  The remaining $104 million due under the 1^st and 2^nd FRNs was redeemed on 29 May 1998 with funds from a 1998 FRN in the amount of US$110 million.  The funds from the 1998 FRN were deposited into a CPE account.

145.  In May 2001, following the winding up of CPE in November 1999 and the striking off of Mae Sai in May 2000, PEWC (Treasury) defaulted on the 1998 FRN.  But, as guarantor, PEWC had to pay the 1998 FRN in full. 

146.  To accomplish this, PEWC, through its wholly owned subsidiary Pacific Hong Kong Holdings, borrowed US$30 million.  PEWC repaid that loan in 2002.  PEWC, through PEWC (Treasury), borrowed a further US$88 million from another bank.  That was repaid in 2002.  The remainder of the 1998 FRN was paid from remittances of US$9,032,300 and US$4 million by PEWC.

147.  There is some evidence that it was all along intended by Hu that monies borrowed for the acquisition of PacMOS shares would be settled with PEWC funds.  In this connection, Horner’s evidence is that he was told by Ma and Hu that:-

“all money for the acquisition of the shares of Win Win came from PEWC. The funding could be direct from PEWC or through the subsidiary(ies) of PEWC or raised from financial institutions using PEWC’s credit. I cannot recall the exact name(s) of the subsidiaries involved but I had no reason to doubt that the money would come from any place other than PEWC. The funding was all from and/or procured by PEWC.”

148.  According to PacMOS’ Annual Report for the year ended 31 March 1996, the position by then was that Texan was held as to 51% by PCI and 49% by PPH; PCI was wholly owned by PCHL; PPH was owned by Horner (on trust for PEWC); and PCHL was PacMos’ ultimate holding company.

149.  Sometime in 1996, PacMOS’ board decided to acquire a controlling stake in Vitelic HK.  Vitelic HK manufactured wafer chips and traded in electronic components.  Vitelic HK was controlled by Vitelic Corp (holding 1,999,999 of 2 million shares in Vitelic HK). 

150.  Vitelic Corp was then wholly owned by Mosel Electronics Taiwan Inc. (a company listed on the Taiwan Stock Exchange).  The latter was engaged in the research, design, development, production and sale of high technology electronic components (such as integrated circuits).  In due course, Moisel Electronics Taiwan and Vitelic merged to become MVI.

151.  MV Holding (a Seychelles company) is a wholly owned subsidiary of MVI.  In March 1997 MV Holding changed its name to Vision 2000.

152.  From 1 October 1996 Hu was Chairman of MVI’s board.  At the time, he held 1.45% of the share capital of MVI.  At the same time, PEWC directly or indirectly held about an 18.8% in MVI.  The percentage of PEWC’s shareholding, however, changed over time.

153.  By an agreement dated 1 October 1996 PacMOS agreed to issue convertible redeemable fixed interest loan notes for $51.6 million to Vision 2000 as subscriber.  The loan notes carried an option for conversion into PacMOS shares.  Fully converted, the loan notes would become shares representing about 12% of PacMOS’ share capital.

154.  By another agreement dated 1 October 1996 Ryder (a PacMOS subsidiary) agreed to purchase 1,020,000 Vitelic HK shares (about 51% of Vitelic HK’s share capital) at $51,601,538. That would leave Mosel USA with about 49% of Vitelic HK’s share capital.

155.  PacMOS passed a board resolution approving the aforesaid transactions on 1 October 1996.  PacMOS’ shareholders approved the same on 25 October 1996.  At the time, in obtaining clearance for the arrangements, Richards Butler acting for PCHL informed the Hong Kong Stock Exchange that PCHL (the apparent ultimate beneficial holder of the PacMOS shares) was indirectly owned by PEWC.

156.  Further on 25 October 1996 PacMOS required the Lam interests to carry out their undertaking by 8 November 1996.  At the same time, Texan expressed a desire to purchase the PacMOS shares which the Lam interests had charged as security for the performance of their undertaking.

157.  The result was that by a Share Sale Agreement dated 8 November 1996 Texan agreed to purchase the relevant shares from the Lam interests for $96,030,168 ($1.388 per share).  Of that consideration, $65 million would be paid to PacMOS in satisfaction of the Lam interests’ undertaking. 

158.  Upon completion, the 69,186,000 PacMOS shares belonging to the Lam interests were transferred to Super Wish (which was held by PCHL until 1 January 1996 and thereafter by Texan).  It is unclear how the balance of the agreed consideration paid to the Lam interests was funded.

159.  On 15 December 1996 PCI (acting through Ma) agreed to sell PCI’s 51% stake in Texan to All Dragon.  The Agreement states a consideration of US$2,550,000 ($19.89 million).  But there is no evidence of an actual payment having been made.  No general offer was ever made, thereby indicating there was no change in the ultimate control of PacMOS arising from the Agreement.

160.  In its Annual Report for the year ended 31 December 1996, PacMOS declared that its ultimate holding company was All Dragon, not PEWC.

161.  On 13 June 1997 Texan sold 10 million PacMOS shares at $1.1 each for a net total of $10,954,270.  That sum was remitted to PCHL.  PacMOS being a listed company, the sale may have been executed to insure that, as connected persons, Texan, Super Wish and Vision 2000 would not hold more than 75% of PacMOS’ shares.

162.  In mid-1997, at Ma’s request, Horner executed documents transferring PPH’s 49% stake in Texan to All Dragon for no consideration.  Horner did so under the belief that All Dragon was a nominee of PEWC.

163.  At the same time, PCI transferred to CPE most of its accounts receivable from All Dragon (around $122 million (including the agreed consideration for the transfer of PCI’s Texan shares)).

164.  On 26 June 1997 PacMOS and Vision 2000 agreed to bring forward the date on which Vision 2000’s loan notes might be converted into PacMOS shares.  The date was changed from 30 November 1998 to 26 June 1997. Vision 2000 then exercised its conversion rights in respect of all the loan notes on the same day at a price of $1.40 per share.  Thus, 36,857,142 PacMOS shares were issued to Vision 2000 (10.95% of PacMos’ enlarged share capital).

165.  On 27 June 1997 Vision 2000 acquired Super Wish’s 69,180,000 shares for $83,023,200 ($1.20 per share).  That represented about 20.56% of PacMOS’ share capital.  The monies were deposited into PCHL’s HSBC account.

166.  On the same day, PacMOS issued a Substantial Shareholders’ Notification Report and a press announcement in relation to the exercise of Vision 2000’s convertible notes and the share transfer from Super Wish.

167.  The net result of the transfers described was that, as at August 1997, All Dragon held 100% of Texan.  Texan in turn held 100% of Super Wish. Texan held 145,609,998 PacMOS shares (43%), while Vision 2000 held 106,043,142 PacMOS shares (31.51%).

D.      Takeover Arrangement

168.  In this Sub-section, I summarise the main elements of the Takeover Arrangement as alleged by Hu and Willi.

169.  PCHL’s investments in Hong Kong and the Mainland had to be kept secret from the Taiwan Investment Commission because the investments were unauthorised.  If the Investment Commission were to discover that PEWC had been engaging in unauthorised investments in Hong Kong and the Mainland, PEWC and its directors could face criminal prosecution.

170.  As a result of Sham’s over-adventurous management, PCHL was facing a financial crisis in early 1995.  On the one hand, the group’s investments (notably the South Horizons Properties and the Beijing and Fuzhou developments) had dropped in value due to a generally adverse economic and political climate.  On the other hand, the PCHL group was haemorrhaging cash trying to service the loans used to fund its investments.

171.  PCHL attempted to raise cash and cut costs through the sale of loss-making assets.  But those assets generated significantly less cash than anticipated.

172.  Without PEWC’s continuing financial support, PCHL could not expect to pay its debts as and when they fell due.  But PEWC was itself not in a healthy financial position to keep bailing out PCHL indefinitely.  Nor, since its own resources were themselves over-stretched, was PEWC inclined to lend further monies to the PCHL group of companies.

173.  Sham having resigned, Tung and Sun instructed Hu to get PEWC out of this desperate situation, which Ma characterised in a private letter as the “verge of bankruptcy”.  Hu then took over from Sham. Hu’s task was to clean up Sham’s mess as quickly and discretely as possible, so as not to attract unwelcome and embarrassing scrutiny from the Taiwan Investment Commission.

174.  An initial step towards the rehabilitation of PCHL was to transfer the shares of Blinco BVI and Patagonia to Bridle Path in February 1995.  This had the effect of distancing PCHL from PEWC in organisational terms.  Bridle Path was not within the PEWC group, so the transfer resulted in Blinco BVI, Patagonia and their subsidiaries (including PCHL and PCHL’s own subsidiaries) appearing to be held by Bridle Path rather than PEWC. 

175.  At the same time, Ma (on Tung’s instruction) had found a publicly listed company (PacMOS, then known as Win Win) which could be used for a backdoor listing.  The thinking was that PCHL’s assets could be injected into PacMOS in return for cash.  The cash thereby raised would allow PCHL to pay off some of its pressing debts, including the 2nd CEF Loan.

176.  Sometime in late 1995 Tung informed Hu that the backdoor listing plan was not viable due to “technical difficulties”.  The exact nature of the difficulties encountered is obscure.  Apparently the difficulties arose from the Listing Rules prohibiting the injection of real estate into PacMOS.  Parenthetically, I would add that precisely how it was envisaged in the first place by Hu or Ma that the purchase of a backdoor listing could generate quick funds for PCHL is equally obscure.

177.  In any event, it is said by Hu that the rejection of the backdoor listing option rendered PCHL’s financial situation even more dire.  Tung and Sun made it clear to Hu at this point that PEWC was not prepared to throw good money after bad.  Tung and Sun authorised Hu to dispose of PCHL as necessary.

178.  In about August or September 1995 Hu sought help from Willi.  This was because, Willi having previously assisted PEWC to raise funds, Hu believed him to be “very knowledgeable in financial matters and ... well‑connected in the banking world”.  Hu asked Willi to arrange an $80 million bridging loan.  The purpose of the loan was to tide PCHL over pending the resolution of its liquidity problems.  Due to the sensitivity of the matter, Hu’s approach to Willi was kept secret even from PCHL’s own staff.  Only Tung, Sun, Hu and Willi were aware of the approach.

179.  Willi offered to provide an $80 million bridging loan himself.  The loan was to be secured by Hu’s personal guarantee. Tung and Sun refused to provide similar guarantees to Willi.

180.  Willi recalls that the $80 million loan was advanced in 2 tranches “into a bank account specified by Mr. Hu”. But, because of the time that has elapsed since the $80 million loan, Willi no longer remembers precisely when and how the loan was paid to PCHL. Consequently, in the course of preparing his evidence for these proceedings, Willi asked Hu to remind him of the details.

181.  Hu claimed in cross-examination to have remembered the dates of the 2 tranches by resort to a mnemonic.  Hu recalled the dates as “9/20” and “9/11”, that is, the tranches were paid as to $25 million on 20 September 1995 and as to $55 million on 9 November 1995  Hu mentioned his recollection to Willi who then repeated the information in his Witness Statement.

182.  Willi says that the funds for the $80 million loan came from sponsors.  These sponsors were “clients of the bank”.  By “bank” is presumably meant Banker’s Trust, Willi’s then employer.  But this is unclear.

183.  The sponsors have never been identified because (according to Willi) Swiss banking law prohibits him from disclosing their identities or any details about them and the amounts they lent.  Willi stated that he was keeping information about his sponsors secret on advice from his own Swiss lawyers.  It is thus not even known whether the sponsors are natural persons or corporations.

184.  The $80 million bridging loan proved insufficient to help PCHL out of its troubles in any substantive way. According to Hu, as at early 1996, PEWC was not even in a position to pay back the $80 million loan which Willi had advanced.  Further, the 2^ndCEF Loan remained to be paid.  There was concern that, if any event of default (as defined by the 2^nd CEF Loan Agreement) were to occur, PEWC could be required by the lenders of the 2^nd CEF loan to honour the Sale Option Deed and purchase the South Horizons Properties from Haddowe for at least US$75 million.  Willi characterised that possibility in his evidence as a severe US$15 million penalty.

185.  Further negotiations ensued between Hu and Willi. 

186.  This culminated in the signing of a letter of 10 March 1996 (the first of the Takeover Arrangement documents in Annex 2).  Under the Takeover Arrangement evidenced by this letter, Willi undertook to inject a further US$14.5 million into PCHL.  This amount roughly corresponded to the next 2 installments of the 2^nd CEF Loan.  In return, PEWC would in due course transfer ownership of the PCHL group to Willi.  Willi would then assume PCHL’s liabilities (including the $80 million loan) and assets.  At a later stage, Hu and Willi would determine the true value of the PCHL group’s assets and liabilities and Willi would make a final payment to PEWC in full and final settlement of the same.

187.  Hu claims to have been authorised by Tung and Sun to enter into the Takeover Arrangement on behalf of PEWC.  He also says that Tung and Sun fully approved of the Takeover Arrangement, although they were not prepared to sign the 10 March 1996 letter themselves.

188.  Willi claims to have remitted US$14.5 million to PCHL in around April 1996.

189.  Willi says that he raised the requisite cash from another set of investors with a different risk profile from those who participated in the $80 million loan.  The new sponsors were apparently also clients of Bankers Trust.  Again, as a result of Swiss banking laws, Willi insists that he is obliged to keep the identities and details of this second set of sponsors secret.  Willi states that he had a written contract with this second set of investors, but those documents were destroyed “a long time ago”.

190.  Nonetheless, Willi says that he paid the US$14.5 million over to PCHL on his own behalf.  The monies were remitted from a Swiss bank account which did not belong to Willi.  He is therefore unable to reveal who the relevant account-holder was.  From that account, the funds “were ... onwarded to the account of another, smaller bank”.  That account is said to have been one “controlled by a person next to Mr. Sun”. 

191.  According to Hu, on 19 April 1996 the amount (in the form of a cashier order from Sin Hua Bank dated 18 April 1996) was deposited into Patagonia’s account at Banque Indosuez.  From there, Hu states that the amount was loaned by Patagonia to PCHL in tranches of $31 million and $91.6 million respectively.

192.  By late 1996 all PCHL’s assets (including Texan and its PacMOS shares) had been transferred to All Dragon.  Everything was in readiness for a final transfer of the PCHL group to Willi or his nominee, once Willi had performed the terms of the Takeover Arrangement.

193.  The 2^nd CEF Loan was replaced by the Rabobank Loan.  The latter is said to have been the outcome of Willi’s efforts, acting through his contacts in Rabobank.

194.  Through 1997, Willi complained on several occasions that PCHL’s assets and liabilities (including the amounts said to be payable by PCHL to Blinco HK) were over-stated.  He told Hu that under the Takeover Arrangement he was only obliged to pay a fraction of the value alleged in PCHL’s accounts.  Hu says that he in turn was prepared on behalf of PEWC to concede on the issue of PCHL’s debt to Blinco HK if only “so that the parties could rid themselves of the main obstacle to the final completion of the Takeover Arrangement”.

195.  On 3 October 1997 Super Wish acquired LET’s 50% interest in the Singapore development known as Pacific Plaza.  PEWC (which was in a joint venture with LET to develop Pacific Plaza) held the other 50% interest at the time.  Super Wish paid a consideration of about S$32 million (approximately $160 million) for the 50% interest using PCHL’s internal funds. As a result of the purchase, Super Wish obtained LET’s share in Myall (the company through which LET had held its 51% interest).

196.  On 1 February 1999 the shares of Blinco BVI and Patagonia were transferred by Bridle Path to Top Selection.  Top Selection’s one bearer share was then handed to Willi to signify completion of the Takeover Arrangement.

197.  On 28 June 1999 Super Wish transferred its Myall share to Blinco HK in full and final settlement of Willi’s remaining obligation to PEWC under the Takeover Arrangement (namely, the payment of a sum representing PCHL’s surplus of assets over liabilities).  PEWC thereby became the ultimate beneficial owner of 100% of Pacific Plaza. 

198.  PEWC sold Pacific Plaza in May 2005 for S$111 million.

III.    DISCUSSION

A.      Whether Tung, Sun and Hu established a secret network of companies in Hong Kong?

199.  PEWC alleges that Tung, Sun and Hu established a secret network of companies in Hong Kong.  The network is said by PEWC to have been “secret” in the sense that its establishment and operation were deliberately concealed from the other directors on PEWC’s board.

200.  I am unable so to conclude. 

201.  The evidence suggests that PEWC’s board expressly authorised Tung, Sun and Hu to handle PEWC’s overseas investments. The 3 directors carried out that mandate by establishing PCHL and its network of associated and subsidiary networks.

202.  There was no real attempt to keep that network and its connection with PEWC secret.  On the contrary, to borrow the expression which Willi used in cross-examination to describe the situation, it was an “open secret” in Taiwan, Hong Kong and the Mainland that PEWC was behind the PCHL group of companies. 

203.  Thus, for example, PCHL openly relied on its PEWC connection as a means of raising loan monies from banks or of obtaining necessary permissions from institutions such as the Hong Kong Stock Exchange. PCHL stressed its ties with PEWC when marketing PCHL’s Beijing and Fuzhou projects in the Mainland as a suitable vehicle for promoting economic relations with Taiwan.  The relationship between PCHL and PEWC was also extensively mentioned in the media (including Hong Kong and Taiwanese newspapers). 

204.  In the circumstances, it is hard to believe that, apart from Tung, Sun and Hu, no other person on PEWC’s board was aware of the connection.  The reality is that there were numerous contacts over the years between PCHL and PEWC staff.  On PEWC’s side, Fang Jang‑chung, Hu Ta-ping, Chan Chueh-pin, and David Sun met PCHL personnel.  On PCHL’s side, Anthony Cheung and Philip Wong visited PEWC’s offices in Taipei.

205.  This does not mean that PCHL flaunted its connection with PEWC.  The connection was an “open secret” in the sense that, while the relationship was well-known, the “official line” might well have been that PCHL had nothing to do with PEWC. 

206.  The reason for a distinction between official and unofficial lines would have been because in the late 1980s and early 1990s, as a matter of strict Taiwanese law, PCHL’s Mainland investments were unauthorised and unlikely to obtain official sanction.  This does not mean that the Taiwanese authorities were unaware of what PEWC (in keeping with many other Taiwanese companies) was doing in the Mainland.  On the contrary, the Taiwanese authorities must have been fully aware of what was going on among numerous Taiwanese companies (including PEWC) and their Mainland counterparts in terms of cross-straits business.

207.  But the authorities probably took a pragmatic stance for policy reasons.  Given the political climate of the day, it may not have been appropriate too openly to approve of investment in the Mainland, so the prohibitions remained on the statute books.  Nonetheless, provided PEWC did not flagrantly tout PCHL’s activities on the Mainland, the authorities were probably prepared to tolerate the situation in the interests of greater economic trade between Taiwan and the Mainland.  The growth of trade could only benefit the Taiwanese economy, even if not recognised officially.

208.  Nor does this mean that everyone on PEWC’s board was aware precisely what Tung, Sun and Hu were doing in Hong Kong in relation to PCHL.

209.  Board members might have readily learned about the existence and activities of the PCHL group of companies prior to 1996, if they had bothered to inquire.  But the evidence also suggests that, having authorised Tung, Sun and Hu to handle PEWC’s overseas affairs, other directors more or less left Tung, Sun and Hu to carry out their work with little monitoring from the board.  Overall corporate governance at PEWC appears to have been lax, at least insofar as far as the overseas activities of Tung, Sun and Hu were concerned.

210.  The evidence is that individual directors at PEWC were responsible for handling specific departments.  Each director appears to have concentrated on his departmental territory with little more than a cursory knowledge about what was going on in other departments.

211.  Andy Cheng, for instance, was in charge of the purchasing department.  He gave evidence that he was unaware of Tung, Sun and Hu’s activities in relation to PCHL.  That may well have been true as far as Cheng was concerned.  But that does not mean that Tung, Sun and Hu deliberately kept the PCHL network secret from Cheng and others in his position.

212.  Thus, for example, Cheng was a director of Blinco HK.  He could have asked, if he wished, to review Blinco HK’s minutes and papers from time to time.  He did not do so.  He instead seems to have regarded his position as purely reactive.  He was not particularly aware of what Blinco HK was doing from time to time.  He was content to leave it to his fellow directors (such as Hu) to carry on Blinco HK’s business as they saw fit. He relied on them to inform him of relevant meetings as and when something might be required of him.

213.  Despite Andy Cheng’s evidence that board meetings were forums for lively discussion of initiatives put forward by directors, PEWC’s board minutes tell a different story.  On the face of the board minutes, at a typical meeting, PEWC’s directors would unanimously and routinely approve agenda items with little discussion.

214.  The 19 November 1993 agenda item mentioned above is a rare exception.  For that reason, it must be approached with some caution.

215.  According to Andy Cheng, the exchange recorded in the November 1993 minutes is evidence that Sun and Hu deliberately misled PEWC’s board by answering that PCHL had no connection with PEWC.  But I am unable to attach much weight to the exchange recorded in the minutes.

216.  The minutes do not state that Sun consulted Hu before answering.  Even if Cheng’s recollection that Sun so consulted Hu is correct, Cheng did not actually hear what Sun and Hu said to each other.  Even if the minutes accurately recorded Sun’s denial of a link between PCHL and PEWC, it is possible that Hu advised Sun to say something else, perhaps admit the link, but Sun of his own decided to deny the link for whatever reason.

217.  I doubt that the minute recording Sun’s denial can be taken at face value.  As I have mentioned, as far as the Taiwan authorities were concerned, the official position appears to have been that PEWC had no connection with PCHL.  If so, one would expect the board minutes of a listed company such as PEWC to deny the existence of a link with PCHL in keeping with the official position, whatever the practical reality might be.

218.  Indeed, it is difficult to believe that Lee Yu-tien did not fully appreciate that there was a connection between PEWC, PCHL and other overseas companies with Mainland investments.  This is because Lee himself was (and had been since 1989) a non-executive director of Pudong Development Holdings Ltd., a Cayman Islands company within the Tomson Group.

219.  At the relevant time, the Tomson Group was engaged in property, hospitality and industrial businesses in Shanghai and Pudong.  In addition to Lee, the Tomson Group also had Tung, Sun and Hu as directors.  PEWC is in fact described in Pudong’s 1997 Annual Report as “a substantial shareholder of the Company”. 

220.  But the Tomson Group (like PCHL) did not feature in PEWC’s balance sheet at the time when Lee asked his question.  It briefly appeared in PEWC’s books in 1989, but disappeared from there between 1990 and 1997.

221.  Lee must have been aware then that, like the Tomson Goup, there were overseas investments which did not appear in PEWC’s records.  Lee could possibly have asked his question in order merely to prompt the response which Sun gave.  The response could then be used to fortify the official line that PEWC had no link with PCHL.

222.  Nonetheless, even if the PCHL network was an “open secret,” that would not have entitled Hu or any other director to transfer the network’s assets to himself without specific approval from PEWC’s Board.  Hu’s case is that he did not dispose of the network to himself.  He says that he bona fide transferred control of the PCHL group to Willi under the Takeover Arrangement for the good of PEWC. 

223.  It is therefore the validity of the Takeover Arrangement that is the crux of this case.  It is therefore to that consideration that I now turn.

B.      Whether the Takeover Arrangement took place?

224.  In this section, I examine the circumstances which according to PEWC give rise to an irresistible inference that the Takeover Arrangement is a concoction between Hu and Willi.  In particular, I will look at the following matters:-

(1)    The swissfirst papers.

(2)    The alleged transfer of funds from Willi to PCHL pursuant to the Takeover Arrangement.

(3)    The 3 letters said to evidence the Takeover Arrangement and the late assertion of the Takeover Arrangement.

(4)    PCHL’s financial condition at the time of the Takeover Arrangement.

(5)    The transfer of Blinco BVI and Patagonia to Top Selection and Hu’s continued directorships of companies in the PCHL group.

(6)    The use of the South Horizons Properties as security by Hu and Ma.

(7)     The knowledge and conduct of Tung, Sun and Tom Tung.

B.1    The swissfirst papers

225.  The swissfirst papers consist of 7 faxes.  Other communications between Hu and Willi were seized when the Taiwanese authorities raided Hu’s MVI offices.  Seven faxes, collectively identified as “the swissfirst papers” at trial, were relied on by PEWC as compelling evidence that there never was a Takeover Arrangement.  If PEWC is right, that would have the consequence that Hu (not Willi) is the beneficial owner of Top Selection, Blinco BVI, Patagonia, All Dragon, and (through the subsidiaries of the latter companies) the PacMOS shares and the South Horizons and Shouson Hill Properties.

226.  I shall first review each fax to examine what, on its face, it seems to be saying.  I shall follow by summarising the evidence of Hu and Willi on the swissfirst papers.  I shall then test the credibility of their evidence against the wording of the papers.  I shall finally assess what the swissfirst papers suggest about the Takeover Arrangement.

B.1.1    25 May 2004 fax

227.  The first swissfirst paper is a 3-page fax dated 25 May 2004 from Willi to Hu.

228.  By then, Willi had left Bankers Trust and, after working for a series of banks, had joined swissfirst Structured Bonds AG (SFSB).  Swissfirst is a niche asset manager handling funds dedicated to convertible bonds and Asian equity.  In 2004 it was managing the Cameleon Fund in which ProMOS was an investor.

229.  In the fax, Willi proposes to Hu alternative schemes by which an Investor X who is beneficially entitled to 40% of PacMOS’ shares can transfer those shares to a Fund and make it appear that the Fund is the beneficial owner of the shares. 

230.  The transfer is not straightforward because it is necessary to ensure that the process does not lead to the Fund having to make a take‑over offer under the Hong Kong Stock Exchange Listing Rules.  In other words, since X will be transferring more than 30% of the shares of a listed company to the Fund and the latter is to hold as apparent beneficial owner instead of X, there is the possibility that the Fund would have to make a general offer for PacMOS’ shares.  It would then be a “problem” as a general offer may mean having to spend a lot of money buying up other PacMOS shares.  I note that having to make a general offer would also attract publicity.

231.  On the other hand, if it were possible to transfer the PacMOS shares to the Fund, it appears from the fax that such result would be desirable “from the disclosure perspective”.  This would be because, on paper at least, the Fund “is the owner of 40% of the shares” and the identity of the owner of the Fund certificates (that is, X as the person who injected the shares into the Fund in the first place) would be “protected by the fund and by bank secrecy laws in Liechtenstein and Switzerland”.

232.  The first alternative which Willi proposes involves X’s shares “going into the fund via two ways, once directly, and one via my [Willi’s] company”.  It requires that X split the relevant shareholding into two portions, each representing (say) 20% of X’s PacMOS shareholding. 

233.  Willi accepts that the scheme is “more complicated” than the second alternative to be suggested.  But the complication is introduced in to avoid the 30% general offer trigger.  The first alternative is illustrated by a diagram on the second page of the fax. 

234.  Under this first alternative, a portion of X’s PacMOS shares is to be injected into a swissfirst (Lie) Opportunities Fund.  The Opportunities Fund will then allocate to X Fund units corresponding to the injected shares.  Note that the word “Lie” in the Fund name is an abbreviation for Liechtenstein, indicating that the Opportunities Fund is intended to be domiciled there.

235.  At the same time, X is to transfer the remaining portion of X’s PacMOS shares to SSBF (Willi’s company) in exchange for a Note evidencing the transfer.  SSBF would then inject the shares so transferred into the Opportunities Fund.  The latter then allocates Fund units corresponding to the injected shares to SSBF.

236.  The end result would be that the entire 40% PacMOS shareholding ends up in the Opportunities Fund, which to the outside world will appear as the holder of the shareholding.  But X would hold Fund units and an SSBF Note as evidence of X’s beneficial interest in the 40% PacMOS shareholding.

237.  The second alternative is described in the second paragraph of the fax.  It is illustrated by a diagram on the third page of the fax. 

238.  It involves X injecting the entire 40% PacMOS shareholding directly into the Opportunities Fund and the latter allocating fund units to X in return.  Although simpler, Willi cautions that he “still need[s] to check from a take-over perspective” that this second scheme is viable.  By that, Willi evidently means that, at the time of writing, he was unsure whether the alternative might run afoul of the 30% trigger.

239.  The third paragraph of the fax raises the question which specific Fund managed by SFSB will receive the 40% shareholding.  Willi broaches 2 possibilities. 

240.  There is first the existing Cameleon Fund, in which the only investor at the time was ProMOS.  An injection of the PacMOS shares into that Fund carried the drawback that the shares “will be co-mingled with the ProMOS investments” in the Cameleon Fund.

241.  On the other hand, a new Fund (the second possibility) would take “2 weeks only” to set up.  That new Fund would be “a real fund” regulated by Liechtenstein law.  It would have its own accountants and auditors, but it would be managed by Willi.

242.  The reference to “2 weeks only” suggests that time was an important consideration.  Whichever transfer option was chosen, the whole transaction had to be done quickly. 

243.  Willi indicates that a new Fund might be preferable “so that not even the people at ProMOS know what is happening”.  In that way, only Willi would know the true beneficial ownership of the 40% shareholding.  The Fund having been set up and the shares having been transferred, the true beneficial ownership of the shares in the Fund would be protected by Willi as Fund manager and by Liechtenstein’s secrecy laws.

244.  Who is X?  There can be little doubt from the context.  X must be Hu.

245.  The schemes outlined would not make sense if X was anyone other than Hu.  The fax would not make sense if (say) Willi was writing as beneficial owner of the 40% PacMOS shares.

246.  That X is Hu is especially apparent from the last bracketed words in the third paragraph of the fax.  There Willi states that the new Fund will be “managed by me (and therefore, by you)”.  The bracketed words can only mean that, because Willi will serve as Fund manager, Hu would in reality be in the driving seat.  In other words, Hu could always instruct Willi as to how Hu’s 40% PacMOS shareholding injected into the Opportunities Fund is to be handled.

247.  The 40% PacMOS shareholding must be a reference to Texan’s 43% shareholding in PacMOS.  There was no other 40% shareholding in PacMOS in existence at the time.  Nor has Texan ever reported to the Stock Exchange any change in the beneficial ownership of its PacMOS shareholding.

248.  Accordingly, on its face, the 25 May 2004 fax is indeed compelling evidence that the Takeover Arrangement is a fiction. 

249.  The fax contradicts the case advanced on behalf of Hu and Willi (namely, that from 1999 to the present, Willi has throughout been the beneficial owner of the PacMOS shares through Top Selection’s control of All Dragon and Texan).  The fax instead suggests that Hu was the beneficial owner of Texan’s 40%+ shareholding in PacMOS in 2004. 

250.  That could only have been the situation if All Dragon as the 100% shareholder of Texan were controlled by Hu.  Given then that All Dragon was transferred to Top Selection in 1999, Hu’s beneficial ownership as indicated in the 25 May 2004 fax would suggest that Top Selection has been controlled all along from 1999 onwards by Hu and not Willi.  In that case, Top Selection would really belong to Hu.

B.1.2    27 May 2004 fax (1)

251.  The second swissfirst paper is a handwritten fax dated 27 May 2004 from Hu to Willi.  It is a response to the 25 May 2004 fax just examined.

252.  Hu begins by apologising for his “poor handwriting”.

253.  Hu then refers to the “structure of the subject project” which he depicts in a diagram.  The diagram shows the 40% shareholding being held by “A (BVI) Co.” which is in turn held by “B (BVI) Co”.  This very neatly corresponds with the then actuality that All Dragon (a BVI company) held Texan (a BVI company) and Texan held 40%+ of PacMOS’ shares.  That cannot be mere coincidence.  Consequently, on the face of the fax, by “B (BVI) Co,” Hu must be referring to All Dragon and, by “A (BVI) Co,” Hu must be referring to Texan.

254.  Hu proposes a third alternative to the 2 already suggested by Willi.  He asks whether the share ownership of B (BVI) Co (that is, All Dragon) might simply be transferred into a Fund.  Hu reasons that, as there is no actual trading of the PacMOS shares (as opposed to a transfer of control in All Dragon), “there should be no take-over issue”.  But (Hu suggests) after the re-structuring brought about by the transfer of All Dragon shares to the Fund, “the controlled fund then becomes the beneficial owner” of the PacMOS shares.

255.  Hu ends by stating that “[a]ll the study should do between you and me” and “then it will pass to Ben for execution”. “Ben” must be a reference to Chung (also known as Ben Chung) who was at the time (and continues to be) a director of Texan and All Dragon.  This is despite the fact that in cross-examination Chung did not accept that he was the person so mentioned.  On the other hand, Hu accepted in cross‑examination that by “Ben” he meant “Ben Chung”.

256.  If anything, on its face, the second fax confirms the reading of the 25 May 2004 set out above. 

257.  Hu is seeking advice from Willi on how to conceal the beneficial ownership of Texan’s 40%+ PacMOS shareholding.  Willi and Hu appear to be thinking about achieving that object through the injection of shares into a swissfirst Opportunities Fund.  But, whereas Willi focused on injecting the PacMOS shares directly into the Fund, Hu suggests transferring All Dragon’s shares to the Fund instead.

258.  There is a sense of urgency in the first and second faxes.  Time is short.  If something is to be done, it must be done quickly.  Thus, the simplest and most expeditious mechanism for achieving concealment of the beneficial ownership in the shares is being debated between Willi and Hu.

259.  The second fax only makes sense if Hu were the beneficial owner of the PacMOS shares.  Hu is firmly in the driving seat, not just seeking Willi’s advice, but also directing who (Chung) is to execute any transaction finally decided by Hu himself on Willi’s advice.  If there truly had been a Takeover Arrangement, it is odd that Hu (not Willi) should be giving such instructions.

B.1.3    27 May 2004 fax (2)

260.  The third swissfirst paper is another fax dated 27 May 2004.  It is Willi’s response to Hu’s handwritten fax of the same date.

261.  Willi believes that Hu’ suggestion of transferring share ownership in B (BVI) Co (All Dragon) to the Fund may just about work.  Willi says he will find out.

262.  Of interest is the fax’ third paragraph.  There Willi notes that “whoever is to receive shares in the fund” has to have a bank account.  Willi can open the account (presumably in Switzerland or Liecthenstein).  The result would be that the holder is “protected by bank secrecy”.  Otherwise, Hu can direct whose bank accounts are to be used for the purpose.

263.  The fourth paragraph raised the issues of Willi’s fees.  There is stress on the Fund being “a regulated, real fund”.

264.  There would seem to be little need to stress that aspect unless there was something “unreal” or artificial about the transaction being discussed.  This further suggests that the real object of the exercise is simply to disguise the beneficial ownership of Hu (Investor X) in the 40%+ PacMOS shareholding.  That goal is to be accomplished by injection into a Fund (possibly tailor-made for the purpose, but no less regulated or “real”) and by reliance on bank secrecy laws.

265.  The fees for running a real Fund are said by Willi to be “more expensive than a BVI company”.  That suggests that at present Hu (not Willi) is paying the bill for maintaining a BVI company such as All Dragon to hold the PacMOS shares through Texan.

266.  Willi again notes that Hu might use the Cameleon Fund in which ProMOS has currently invested.  But “you [that is, Hu] may wish not to use that fund, but a new one, so that this asset is protected from Taiwanese accountants and auditors”.  That suggests that there is something covert or illegal about the entire transaction.  If what was being envisaged were above board, why is there a need to hide the same from Taiwanese auditors?

267.  Finally, Willi asks Hu to decide so Willi can then “execute according to your wishes”.  That there is urgency in the matter is again apparent from the last sentence” “I believe we can proceed very soon, and I suggest that we have a quick talk tomorrow”.

268.  This third fax supports the reading of the first two faxes.  It once more points to the ultimate beneficial owner of the PacMOS shares as Hu rather than Willi, at a time (2004) when Willi is supposed to be the true owner of the PacMOS shares.

B.1.4    14 July 2004 fax

269.  There is a gap of 1 1/2 months between the third and fourth swissfirst papers.  The latter is a typewritten fax dated 14 July 2004 from Hu to Willi.

270.  The 14 July 2004 fax refers to PacMOS’ plan to issue a convertible bond of US$10 to 15 million.  The purpose of the issue is to raise money “to invest in an electronic plant in China”.

271.  Hu calculates that, on the assumption the bond is converted into PacMOS shares, there will be a dilution in the 43% shareholdings of “the target company” from 43% to somewhere between “30% to 23%”.  The expression “target company” must refer to Texan, given Texan’s then 43%+ holding in PacMOS.

272.  Hu comments that “as discussed over the phone,” Willi would hold “the bearer shares” and be “the beneficial owner if it is required to report”.

273.  That suggests that Hu (not Willi) is the beneficial owner of the PacMOS shares.  The bearer shares of the company holding the PacMOS shares (All Dragon) are only to be held by Willi or by Willi’s managed Fund so that Willi or the Fund can appear to be the beneficial owner to the outside world.  This once more indicates that the real purpose of the transaction being discussed between Willi and Hu is to conceal Hu’s beneficial ownership of the PacMOS shares.

274.  Hu then outlines the plan.  PacMOS will hold an EGM to approve the bond issue.  Willi (if interested) can handle the bond issue on PacMOS’ behalf.  Once bonds are issued to a subscriber, the latter is immediately to convert the same into PacMOS shares. 

275.  The result will be that Texan’s (and through Texan, All Dragon’s) shareholding in PacMOS falls below the 30% trigger.  All Dragon’s PacMOS shares can then be injected into a swissfirst Opportunities Fund without the need to make a general offer.  The Fund will appear to the world to be the beneficial owner of the now diluted shareholding as discussed in the previous swissfirst papers.

276.  The scheme as outlined is a refined version of what was broached in the second and third swissfirst papers.  The scheme is consonant with the goal in those papers of finding an expedient means of disguising the beneficial ownership in Texan’s PacMOS shares.  Evidently, Hu and Willi were discovering that it would not be an easy matter to get around the Listing Rules.

277.  Hu’s beneficial ownership of the relevant shares is evident from the fact that he calls the shots.  He directs Willi as to precisely what is to be done and when.  This is inconsistent with Willi being the actual beneficial owner of Texan’s 43%+ PacMOS shareholding at the time.

B.1.5    15 July 2004 fax

278.  The fifth swissfirst paper is Willi’s response to Hu’s 14 July 2004 fax.

279.  Willi confirms that he would be interested in working with Hu “on the issuance of convertible bonds and their immediate conversion as well as on the transfer of the stake currently held by Texan Management into a fund management company as discussed”.  Willi asks Hu to “advise as to the timing of the cb [convertible bond] and the suggested transfer of the stake of Texan Management and we will revert with a detailed execution strategy”.

280.  Hu redacted out the words “Texan Management” in his copy of the fax.  Presumably, that was done to keep the company name secret from others.  But Texan’s name is readily visible behind the redaction if one holds the original fax up to the light.  In cross-examination, Hu accepted that the word “Texan” had been blacked out by him from the fax.

281.  On its face, the fax again suggests that Hu (not Willi) is the ultimate beneficial owner of All Dragon and Texan and thereby Texan’s PacMOS shares.  Thus, it is Hu who is to advise Willi as to “the timing of ... the suggested transfer of the stake of Texan”.  One asks why Hu would be advising Willi about such transfer, if Willi were the beneficial owner of All Dragon and Texan.  One also wonders why Hu would be the one telling Willi about the dilution of Texan’s shares in PacMOS through issue of a convertible bond, if at the time Willi were the actual beneficial owner of the PacMOS shareholding?

B.1.6    16 July 2004 fax (1)

282.  The sixth swissfirst paper is Hu’s reply to Willi.

283.  Hu is glad to know that Willi is interested in handling the convertible bond issue.

284.  Hu says that “to make things much simpler,” he is considering “the possibility of the USD10M to 15M cb to be funded within our group”.  That suggests Hu is exploring the possibility of one or more companies within his group (it is not clear from the fax which group) subscribing to the convertible bond.

285.  That would presumably “make things much simpler” because there would be greater control over the group subsidiary company used. The latter could immediately convert its bonds into shares upon issue as required by the plan.  Texan’s PacMOS shares would then quickly be diluted and there would seem to be no further obstacle to transferring All Dragon’s shares into an agreed Opportunities Fund.

B.1.7    16 July 2004 fax (2)

286.  The seventh swissfirst paper is a fax dated 16 July 2004 from Antonio Meroni, a swissfirst director writing on Willi’s behalf.  Willi was travelling.

287.  At the outset, Meroni refers to having himself written to Hu “yesterday [15 July 2004]”.  We do not have that earlier fax referred to by Meroni.

288.  Willi’s reply (as conveyed by Meroni) is that it would be “by far the easiest” if the funding of the convertible bond is “to occur within the group”.  This must refer to the group which Hu indicated might fund the convertible bond issue.

289.  The PacMOS stake can be transferred to the “swissfirst (Lie) Opportunities Fund -- Segment Challenger”.  Alternatively, Willi says that it will be possible to create a “swissfirst (Lie) Opportunities Fund -- China Technology”.  But it will take 4 weeks to set up such new Fund. This observation by Willi stresses the need to proceed quickly.  Timing is an important consideration.

290.  Willi finally points out that the name “China Technology Fund” may be “useful for your group when international investors or auditors look at your group”.

B.1.8    Hu’s evidence on the swissfirst papers

291.  Hu claimed that reading the swissfirst papers in the manner advanced above (as PEWC invited the Court to do) was to take those documents “out of context”.

292.  In his Supplemental Witness Statement dated 13 January 2012, Hu claimed to be acting throughout in his role as Chairman and President of MVI (which owned PacMOS shares through Vision 2000).  Hu says that, at the relevant time, MVI was running PacMOS for PCHL because MVI alone had expertise in high-tech manufacturing.  It was also important to ensure that Vitelic HK (which had been injected into PacMOS) was running properly as MVI had undertaken to PacMOS that Vitelic HK would generate annual profit of at least $20 million for PacMOS.

293.  As a result, Hu states that he would communicate with swissfirst as one of PacMOS’ financial advisers from time to time to raise funds for PacMOS.

294.  Hu deposes that, prior to 25 May 2004, he had spoken to Willi over the telephone “about raising funds for a potential investment project (in respect of an electronic plant in China) of PacMOS”.  Hu claims that “Willi, as the beneficial owner of PCHL, agreed MVI’s proposal for PacMOS to participate in the potential investment project”.  Willi apparently asked Hu whether swissfirst could help to arrange the necessary financing.  Hu agreed.

295.  It was (according to Hu) in that context that Willi wrote to him between May and July 2004.  The first plan in the May 2004 swissfirst papers (Hu continued) “was aborted after seeking the advice of lawyers in Hong Kong -- swissfirst realised that there was no way to circumvent the general offer requirements”.

296.  The set of July 2004 swissfirst papers concerned a different plan (Hu stresses).  Given “there was no way to circumvent the general offer requirement when the shares of PacMOS were to be held by a fund,” the initial plan had to be modified.  PacMOS was to “issue a convertible bond to raise funds”.  When Hu wrote that “[Willi] was to hold the bearer shares and be the beneficial owner if it is required to report,” he meant that “swissfirst or its funds would serve as the beneficial owner if it was required to report”.

297.  In the course of cross-examination by Mr. Charles Hollander QC (acting for Willi), Hu accepted that at the time of the swissfirst papers Willi “wanted to dispose of his shareholding in PacMOS”.  He agreed that Willi wanted to dispose of the shareholding without triggering a general offer.

298.  Mr. Hollander suggested that Willi “wanted to dispose of his shares and he was looking with you [Hu] at a mechanism, a means, to do this, and the possibility of doing it through a fund, through finance being provided”.  Hu agreed.

299.  Mr. Hollander further suggested that Hu put forward alternative proposals, one which “involved diluting ... Willi’s shareholding so it fell below 30 per cent and then the issue of a convertible bond”.  Hu agreed.

300.  But, throughout Mr. Hollander’s examination, Hu was adamant that his discussions with Willi were “mainly to get funds for the investment in mainland China”.  Hu’s insistence on this last point was apparent in his cross-examination by Mr. Anthony Neoh SC (acting for PEWC). 

301.  Hu explained to Mr. Neoh that at the material time there was in Ninghai “an electronic plant of which the expenditure was not too much”.  It was thought that the plant “could be acquired by PacMOS, that could offer new developments for PacMOS”.  Thus, “the first thing was to consider the issue of funding, from where the funds would come, from where the funds would come”.  Willi was consulted because he was “an expert in funding”.

302.  Willi (Hu continued to Mr. Neoh) mentioned the 30% trigger point within the Listing Rules.  Therefore, Hu and Will “had been making considerations on the basis of PacMOS about how to get around or avoid that issue of general offer”.  If a general offer was unavoidable, then “an increase in capital should be done by means of acquisition of shares” and “the parent company Mosel and PCHL would be held responsible”.

303.  Hu disagreed with the suggestion that the swissfirst papers were expressly referring to Texan’s 40% shareholding in PacMOS and that “A (BVI) Co” and “B (BVI) Co” were respectively references to Texan and All Dragon.  The 40% was (Hu said) “picked up at random” and used by Willi and him as “a figure as an example for the sake of discussion”.

304.  Hu accepted that the reference to “target company” in his 14 July 2004 fax was to Texan.  He could not recall why he had blacked out the same.  But he thought that the redaction “doesn’t mean anything in particular”.

305.  As to that fax itself, Hu claimed the subject matter was “about selling shares to raise funds”.  But, because “the selling of the shares was not successful,” Hu explained that “the issue of the CB would be done first”.  Hu was therefore writing to Willi to tell him that as a result of the convertible bond, Willi’s shareholding “would be decreased to 20 to 23 per cent”. 

306.  Hu continued in relation to the 14 July 2004 fax:-

“What is being talked about here is about the dilution of the share capital after the issue of the convertible bond. After the acquisition of the convertible bond, no matter whether ... Willi was buy it with funds or with companies, he would be holding shares after the conversion from the CB. So in that case, it would changed to a situation where he would just be holding shares....”

307.  Mr. Neoh pointed out that the consequence of Hu’s evidence was that money for the acquisition of the convertible bond would have to come from Willi or his company.  Hu said that, if Willi were willing to buy the bond, Willi had to pay the requisite sum.

308.  Mr. Neoh asked whether Hu, in referring in the fax to “bearer shares” being transferred to Willi and to Willi appearing as beneficial owner “if it is required to report,” meant shares in PacMOS or “in some other structure”.  Mr. Neoh pointed out that, being a Hong Kong listed company, PacMOS did not have bearer shares.  Hu replied that he was “just presenting my thinking or my own idea”.  He claimed to have mentioned bearer shares “to avoid tax”.

309.  On Hu’s 16 July 2004 fax to Willi, it was put to Hu that, in suggesting that a group company would take up the convertible bond issue, Hu was not actually looking to Willi for money to buy the bond.

310.  Hu replied:-

“That’s right, in principle. But the process would involve a very complex procedure and would need a lot of time to accomplish. Because that situation was told by ... Willi to me, and that’s also why I wrote to him saying if you think that the time is too short for you to do so, causing you any difficulties, I can consider making use of the fund of Mosel group to take part in this US$10 million to 15 million CB issue.”

311.  Mr. Neoh concluded by putting to Hu that, contrary to his evidence, the swissfirst papers involved a serach by Hu for a structure which would keep secret Hu’s beneficial ownership of the PacMOS shares.  Hu disagreed.  He went so far as to suggest that Willi had “misunderstood” Hu in the swissfirst correspondence.

B.1.9    Willi’s evidence on the swissfirst papers

312.  Willi’s evidence on the matter is contained in his Supplemental Witness Statement dated 13 February 2012.

313.  Willi there stated that in 2004 he was looking to sell his interest in PacMOS.  He was exploring 2 solutions: either “find an investor who would buy the shell [PacMOS] and sell back the technology related business interests [PacMOS’ wafer technology business injected into PacMOS] to MVI” or “convince ... Hu to bring his China technology interests under PacMOS thereby making its stock attractive for investors”.

314.  It was an “overriding concern” to Willi that “the new owner ... not be forced to have to make a general offer for PacMOS”.

315.  By the swissfirst papers, he was consequently “exploring multiple possible options to re-package the share ownership of PacMOS”.  He was looking at “ways to shift the Texan stake in PacMOS ... into vehicles where ... Hu would be responsible to get new investors”.  He was in that context “considering using an investment fund that ProMOS was invested in” and “ProMOS would effectively become one of the new investors”.

316.  Willi continues:-

“15. Since the proposal was made on [SFSB] letter head, and since I was sitting on the opposite table from ... Hu, with me the seller, and ... Hu the potential buyer, the discussions were more formal than otherwise, and the papers reflect the situation of a future owner of PacMOS. [Hu] was aware that I also had employees who knew nothing of my ownership of PCHL and communicated appropriately. As the fund was to be set up and operated by the swissfirst group, swissfirst would also appear as the beneficial owner of the PacMOS shares controlled by the fund.

16. [Hu] was receptive of the fund idea but focused on the preservation of the existing holding structure... This would have meant hiving off the other assets controlled through All Dragon. I referred to Hong Kong counsel to review the idea... As new investors were to come in, I alerted ... Hu’s attention to the necessity to open up a bank account for the fund. [Hu] had indicated to me that some of the investors may be Taiwanese. As the investment would be in a fund, the auditors and accountants of those investors would not be concerned about the (indirect) investment in high-tech companies in China and the pertaining restrictions.

17. In the following weeks,... Hu considered that it would be preferable for PacMOS to issue a convertible bond and to have the shares proceeding from the conversion together with the PacMOS shares held by Texan put into the fund...  As such fund would be owned by the swissfirst group holding the shares in such fund company, swissfirst rather than the individual investors would reported to the regulator, if necessary, as beneficial owner of the PacMOS shares.  The fax letter dated July 16, 2004 ... confirms my understanding with both legs of the transaction.”

317.  Under cross-examination by Mr. Neoh, Willi stated that when he talked about being able to set up a “real fund” in Liechtenstein within only 2 weeks, the proposition was for the “43 per cent package [held by Texan] to go into a fund, for Hu to provide funding, and to purchase” and “[t]hereupon he [Hu] can do with PacMOS whatever he wants”.

318.  Willi rejected Mr. Neoh’s suggestion that the whole point of the correspondence was to help Hu hide Texan’s 43% interest in PacMOS in a fund covered by Swiss or Liechtenstein secrecy laws.  Willi explained:-

“That’s wrong. I have known for years that ... Hu had an interest to acquire technology in China. As a Taiwanese national, he allowed to take his technology to mainland China, provided that technology was outdated, such as the 4-inch DRAM. Until today, it is prohibited to export modern state-of-the-art technology from Taiwan to mainland China.

I know that he and his investors would like to operate modern technology in China.  So we know that these investors cannot operate directly, so what I’m essentially doing is making from a direct investment an indirect investment; exactly, a portfolio investment.  This helped ... Hu, creates value for him, and thus he must have an interest in my shares.”

319.  Mr. Neoh put to Willi that the correspondence did not involve fund-raising, especially if monies for the proposed convertible bond were to come from Hu’s group.  Willi said that, by Hu’s group, Will had understood the MVI group.

320.  Willi stressed that the swissfirst papers show that he had no interest in being (and did not want to be) diluted.  He elaborated:-

“In all conversations I had with ... Hu, [he] came always up with the idea to issue new shares. However, he did not mention how he wanted to buy me out. I wanted to be bought out, and at the same time ProMOS had $5 million with me. One should take into consideration that in the year 2003, PacMOS, for the first time, made a decent amount of money, which however was not sustainable.

From 1995/1996 until today, PacMOS, in more than half of the year, made losses.  This is not an interesting business for me.”

B.1.10    Assessment of the evidence of Hu and Will on swissfirst papers

321.  The explanations of the swissfirst papers proffered by Hu and Willi are unconvincing.  The explanations do not only contradict what the faxes say on their face, the explanations also contradict each other. 

322.  Hu says that he or his group was seeking to raise money for the acquisition of an electronic plant.  Willi, on the other hand, says that he was seeking to interest Hu or Hu’s group in buying the PacMOS shares from Willi.  Hu was seeking to raise funds from Willi, while Willi was seeking to obtain funds from Hu.  Both objectives could not be achieved simultaneously.

323.  The May 2004 swissfirst papers put forward 3 schemes for injecting PacMOS shares into a swissfirst Opportunities Fund.  If Willi were really trying to selling his shares, why would he be referring to himself as Investor X in his 25 May 2004 fax to Hu?  Plainly, X is Hu.

324.  Willi’s evidence implictly recognised this difficulty.  He therefore deposed that he was writing about the future, anticipating a situation where Hu or possibly some entity associated with Hu had already become the owner of the shares.

325.  But such evidence is problematic.  If the situation envisaged were truly one where ownership of the shares had been passed by Willi to Hu, the 30% general offer rule would have already been triggered.  Hu subsequently injecting the PacMOS shares into a Fund would not get around the problem that, having already acquired Willi’s alleged 43%, Hu or his associated entity would have to make a general offer.  There would be no point in the discussion between Willi and Hi about getting around having to make a general offer.

326.  Hu denied that the 40% reference in the papers was to Texan’s shareholding in PacMOS.  The “40%” figure was alleged to be something plucked “at random” solely for illustrative purposes.  On the other hand, Willi agreed that it was such a reference.  It would be hard to believe that the 40% was a reference to anything else, if Willi (as he claims) were actually seeking to sell the entire of his alleged shareholding in PacMOS to Hu.

327.  The 40% reference must plainly be to Texan’s PacMOS holding.  It is curious that Hu (the person to whom Willi is supposed to be selling the shares) does not even acknowledge that the correspondence is specifically about Hu buying Willi’s PacMOS shareholding.

328.  Contrary to what Hu is saying, the correspondence does not appear on its face to have anything to do with fundraising.  If Hu’s group were (as Hu now claims) genuinely seeking to raise money to enable it to purchase the Mainland electronic plant, how could the group raise money through itself subscribing for the convertible bond which was supposed to raise money for the group?  The group would merely be borrowing its own monies by the convertible bond.

329.  Nor can the July 2004 correspondence have been about Willi selling his stake in PacMOS.  Assume the convertible bond was exercised as discussed by Hu and Willi.  Texan’s PacMOS shares are diluted. Texan’s holding company (All Dragon) or the diluted shares themselves are then injected into a swissfirst Opportunities Fund.  How does that lead to Willi obtaining money and from whom?

330.  In any event, Willi denies that he was interested in dilution.  If that were the case, why is it that after Hu in his July 2004 fax suggests a scheme which would have the immediate and avowed result of diluting Texan’s shareholding, Willi immediately writes to confirm that he is interested in working on the issuance of the relevant bonds and their immediate conversion?  Willi then asks Hu to advise on the timing of the bond and the transfer of Texan’s stake, so he can “revert with a detailed execution strategy”.

331.  Willi says that he all along wanted to inject the shares into a China Technology Fund to make the same attractive to Hu or other Taiwanese investors.  The injection into a China Technology Fund would enable the latter parties (it is said) to invest directly in cutting edge technology business in the Mainland.

332.  But the “name of China Technology Fund” only appears in Willi’s 16 July 2004 fax in connection with the aftermath of the exercise of the convertible bond and dilution of Texan’s 43% PacMOS shareholding.  Even then the China Technology Fund is only an alternative suggestion by Willi.

333.  Under the China Technology Fund alternative proposed, it is difficult to see how Willi is supposed to make money from any sale of his alleged PacMOS shares.  It is unclear how exactly Willi is supposed to be paid (and by whom) for a transfer of the bearer shares of a company controlling the underlying diluted PacMOS shares into the Fund.  The China Technology Fund scheme as discussed has no apparent bearing with any sale of Willi’s alleged PacMOS shares.

334.  Willi says that he was thinking of ProMOS becoming interested in the shares.  But if so, why does Willi refer in his 25 May 2004 fax to the possibility of setting up “a separate fund so that not even the people at ProMOS know what is happening”?  This is not the language one uses if one is doing something in which ProMOS is supposed to be actively engaged.

335.  The explanations of Hu and Willi sit awkwardly with the plain text of the swissfirst papers.  The explanations, on the contrary, appear to be retrospective attempts to explain away the obvious meaning of the faxes.  Read against the faxes, the explanations just do not make sense.  They simply do not fit the texts.

336.  The swissfirst papers mean what they say.  They evidence a scheme to hive off Texan or its stake in PacMOS into some structure (such  as a Liechtenstein Fund).  That would achieve the objective of concealing the actual beneficial ownership of the 43% PacMOS shareholding behind a veil of bank secrecy laws.  At the time of the correspondence in 2004, Hu was being investigated by the DA’s office.  There would have been an urgency in covering up his beneficial ownership of All Dragon, Texan and the PacMOS shares.  Against the backdrop of the DA’s continuing investigations into Hu’s affairs, the plain meaning of the swissifrst papers makes sense.  The problem which Hu and Willi faced was to get arround the 30% trigger rule and avoid any consequent publicity.

337.  The swissfirst papers inexorably lead to a conclusion that in 2004 Hu (not Willi) was the beneficial owner of the PacMOS. That could not be if the Takeover Arrangement had truly happened.  It follows that the Takeover Arrangement must itself be a concoction designed to conceal Hu’s beneficial interest.  Willi’s supposed ownership is merely a front for Hu.

338.  The strategies discussed in the swissfirst papers were ultimately not pursued.  Instead it seems to have been decided to put up the story of the Takeover Arrangement as a more straightforward means to disguise Hu’s beneficial ownership of the 43% PacMOS shareholding.

339.  The unfortunate corollary of the foregoing conclusions is that Willi and Hu have been lying to the Court.

B.2    Transfer of funds

340.  A second way of testing the veracity of the Takeover Arrangement is to examine the fund flows into PCHL at the relevant time.  More specifically, is there evidence that Willi loaned first $80 million and then injected US$14.5 million to PCHL?  Is there evidence that Willi made a full and final payment to PEWC in respect of PCHL’s liabilities to PEWC?  It is PEWC’s contention that, in all likelihood, alleged inflows into PCHL came from PEWC, not Willi.

341.  Note that any investigation into the fund flows in and out of the PCHL group has to contend with a major difficulty.  The difficulty is that not all of the records of CPE or Trident Bank are now available.

342.  CPE was used as a central treasury for the PCHL.  Funds remitted by PEWC to companies within the PCHL network were usually (but not invariably) routed through CPE.

343.  But CPE went into voluntary liquidation in 1999 and was dissolved in 2001.  It was revived by Lazarus Order of this Court in 2003.  As a result, some records (especially D P Lau’s working papers) covering the period for 1995 were retrieved.

344.  Unfortunately, many other records were destroyed or lost upon CPE’s dissolution.  Thus, it is not possible to have a complete picture of the fund flows between PEWC or PEWC-related companies and PCHL.

345.  PEWC has suggested that Hu engineered the voluntary liquidation and dissolution of CPE to cover traces of his wrongdoing.  Such cover-up (PEWC says) was largely achieved through the destruction of CPE’s records upon dissolution.

346.  It is unnecessary for the resolution of the issues in this trial to consider whether Hu caused CPE to be dissolved for ulterior motives.  As I told counsel during the trial, I shall merely treat the lack of a complete set of CPE records as a fact of life.  I shall not draw adverse inferences against one party or another merely because this or that CPE financial record is missing.

347.  Ma operated Trident Bank prior to its becoming defunct.  Although Ma is a party to these proceedings, the discovery which he has made in relation to the dealings of Trident Bank has been scanty.  Ma also opted not to give evidence at trial.

348.  Some Trident Bank documents were obtained as a result of an Anton Piller Order against Ma.  But those documents are themselves far from complete.  Consequently, as payments to and from companies within the PCHL group were frequently routed through Trident Bank, it is not always possible to have a complete picture as to what happened to monies after they were received by Trident Bank.

349.  As far as Ma is concerned, the Court is entitled to draw adverse inferences against him in relation to any specific failure to make discovery or in relation to any matter upon which he might have been cross-examined.  But I do not think that I would be entitled without more to draw adverse inferences against other parties merely because Ma has failed to make discovery of some particular document.

350.  There is a further caveat.

351.  Despite its name, Trident Bank was never a real bank.  It was, for instance, not licensed to receive deposits from the public. Trident Bank instead seems to have been used as an “internal bank” to assist senior officers within PEWC to clear outward remittances from PEWC’s Temporary Account #1502.  For the purposes of this trial, it is not necessary to delve into precisely who the senior officers were.

352.  Funds transferred by PEWC to overseas companies (including subsidiary or associated companies within the PCHL network) were initially booked as advance payments in Account #1502.  It was the practice at PEWC to clear Account #1502 quarterly. Consequently, at a given quarter end, journal entries would be created whereby the overseas remittances booked as “advance payments” in Account #1502 would be treated as having been transferred into a Fixed Deposit Account with Trident Bank.  Thereafter, from time to time, there would be further journal entries to indicate that the relevant Fixed Deposit amount had matured and then had been rolled over.

353.  It follows from this system that, although PEWC certainly remitted funds to overseas entities, it is not always clear from PEWC’s accounts which company was the ultimate destination of the monies. Further, although there are records showing funds as having been deposited with Trident Bank, the “deposits” are unlikely to have been true deposits.

354.  If monies actually passed through Trident Bank, they would most likely have been immediately transferred to some other company.  Despite entries in its records showing a “deposit,” Trident Bank would merely be a brief transit point in a complicated (possibly roundabout) routing of particular funds.

355.  One might ask why such a byzantine system was adopted.

356.  It was PEWC’s case at the summary judgment hearing and in its pleadings in this action that the “round-robin” system used in Account #1502 was Hu’s means of siphoring off PEWC’s funds to maintain the secret network of companies in the PCHL network without PEWC’s knowledge.  Monies remitted abroad for the purposes of the PCHL group would appear from PEWC’s books (especially Account #1502) merely to be held for Fixed Deposit Terms with obscure overseas banks (such as Trident Bank) offering seemingly favourable rates of interest.  That (PEWC contended) would disguise the real uses to which PEWC’s monies were being put.

357.  For the purposes these proceedings, it is unnecessary for me to determine whether the system used to clear Account #1502 was or was not part of a scheme to defraud PEWC.  Counsel sensibly did not waste time exploring that aspect of the pleadings in great depth at trial.  It is sufficient for the determination of the present actions to understand in a general way how Account #1502 operated without looking into the motives behind such operation.

358.  In summary, such incomplete accounts as are available to the Court often disclose a dizzying maze of fund flows, debt assignments and set-offs among PEWC and companies within the PCHL network. Even where an internal record exists, the record may not by itself necessarily reflect how funds were used.

B.2.1    $80 million bridging loan

359.  It is common ground that PCHL received a payment of $25 million on 20 September 1995 and $55 million on 9 November 1995.  It is these payments which Hu and Willi say together constituted the $80 million bridging loan. 

360.  Willi recalls having made the payment in 2 tranches.  But he is now uncertain when and how the loans were actually advanced.  He relies on Hu for those details.  Hu, on the other hand, says that he recalls when the payments were made by reference to a mnemonic.

361.  The available documents show that remittances were made from Trident Bank’s Bank of Hawaii Hong Kong Branch account to PCHL’s China & South Seas Bank account on 20 September 1995 ($25 million) and 9 September 1995 ($55 million).  But the China & South Seas Bank Activity List evidencing the remittances describes the payments as the 2^nd and 4^th disbursements of a $123 million loan.

362.  This characterisation of the 2 tranches is supported by a Trident Bank Interest Income Schedule which shows a $123 million loan being disbursed to PCHL in 4 tranches.  The dates shown on the Schedule for the 2^nd and 4^th tranches of the $123 million loan correspond with the remittance dates for the $25 million and $55 million shown on the China & South Seas Bank documents.

363.  Other Trident Bank documents suggest that the monies loaned to PCHL came from funds deposited by PEWC with Trident Bank on 19 September 1995 (US$3.3 million (about $25,509,000)), 22 September 1995 (US$3.9 million (about $30,147,000)) and 8 November 1995 (US$7.2 million (about $55,656,000)).

364.  Trident Bank’s draft balance sheet shows that, as at 31 December 1996, it had taken in funds to a value of US$68,371,699.  A handwritten note on the draft balance sheet indicates that, of the latter amount, US$66,061,699 came from PEWC and US$2.31 million came from CPE.

365.  An Analysis by Trident Bank for the year ended 31 December 1996 shows US$46.07 million as having been loaned to PCHL from PEWC as “Depositor/Lender”.

366.  That the tranches of $25 million and $55 million came from this US$46.07 is supported by a fax dated 9 December 1996 from Trident Bank to PCHL.  That refers to 3 loans amounting to US$46,074,970.71 in total.  The third of the loans is the $123 million facility already mentioned above.

367.  Mr. Neoh invited the Court to focus more closely on the $55 million tranche.

368.  Mr. Neoh noted that, from the documents, Hu and Ma acting on behalf of PCHL applied to PEWC for US$7.2 million (approximately $55.656 million) to be remitted to CPE via its Societe Generale New York branch account.  PEWC acted on the request by making 2 remittances on or about 3 and 6 November 1995 to that account.  The remittances were for US$2.2 million and US$5 million respectively.

369.  On 8 November 1995 CPE acknowledged receipt of a US$7.2 million deposit from PEWC.  CPE’s confirmation states that the deposit is for 16 days at 5.75% interest.

370.  On the same day CPE transferred the US$7.2 million out of its Societe Generale account.  There are no documents which evidence to whom CPE paid the amount. 

371.  But Trident Bank’s Interest Income Schedule for the year ended 31 December 1995 show that on 8 November 1995 it received a deposit of US$7.2 million from PEWC.  That deposit (the Schedule records) was for 16 days at 5.75% interest.  This same deposit has already been mentioned above as one of the sources (according to Trident Bank’s documents) for Trident Bank’s $123 million loan to PCHL.

372.  Consequently, Mr. Neoh submitted that the Court should infer that CPE transferred the US$7.2 million to PCHL on 8 November 1995.  Mr. Neoh also invited the Court to infer that the $25 million tranche paid in September 1995 was probably routed to CPE and PCHL in similar fashion, although the available documentation for that tranche is incomplete.

373.  Mr. Robert Whitehead SC (acting for Hu) and Mr. Hollander criticised Mr. Neoh’s analysis on a number of bases.

374.  Let me start with the US$7.2 million ($55 million) tranche just examined.

375.  First, it was suggested that the application form to PEWC stated (in handwriting) that the sum was to go to Blinco HK (not PCHL).

376.  But I do not think that there is much in the first point.  Mr. Neoh observed that PCHL’s modus operandi when applying to PEWC for funds was to state that the monies were destined for Blinco HK, even if that were not the case.  The mention of Blinco HK in a requisition therefore cannot be taken to mean that monies went to Blinco HK and not elsewhere.

377.  Second, the point was made that, where foreign exchange is concerned, conversion from a currency to another means that one rarely arrives at a neat round figure.  Here, on the other hand, if Mr. Neoh is right, one has US$7.2 million being converted into a neat figure of $55 million.  In fact, at a conversion rate of US$1 = $7.73, US$7.2 million equates to $55,656,000.

378.  I do not think the point takes us very far.  It is perfectly possible for Trident Bank to have remitted US$7.2 million to its bank and then to have instructed the latter to on-send a rounded down sum of $55 million to PCHL.  I am unable to deduce anything from the appearance of neat round figures.

379.  Third, my attention was drawn to CPE’s draft extended trial balance as at 31 December 1995.  That document does not indicate a flow of funds from CPE to Trident Bank of any amount even close to US$7.2 million.

380.  Moreover, one of the documents in the case is a Schedule dated October 1998 summarising “Cash flow between PEWC and HK from 11.6.1992 to 9.10.1998”.  It was prepared by Amy Huang of PEWC’s Finance Department on the instruction of Tom Tung and sent to Anthony Hung and Wilson Lee of PCHL.  At the time, Tom Tung was supposed to be investigating precisely what happened to the PCHL group of companies.  I will refer to this document as the “Tom Tung Schedule”.

381.  The Tom Tung Schedule does contain an entry stating that US$7.2 million was remitted to CPE on 3 November 1995.  But it also shows a remittance to CPE of US$2.31 million on 5 November 1995.  That last entry has alongside it the typewritten comment “Funding for PCHL Loan SG [Societe Generale] call D”.

382.  Counsel noted that the figure of US$7.2 million appears frequently in the Tom Tung Schedule.

383.  But the more interesting point is that, although the US$2.31 million figure appears in CPE’s draft trial balance as a fund flow involving Trident Bank, the US$7.2 million figure does not.

384.  I am unable to deduce anything from the frequent appearance of the figure of US$7.2 million in the Tom Tung Schedule.  Of greater significance is the 3 November 1995 date of the US$7.2 million entry in the Tom Tung Schedule upon which Mr. Neoh relies.  That date fits in with the dates in other documents, including the documents from CPE’s bank.

385.  I would accept that the draft CPE trial balance constitutes some evidence against Mr. Neoh’s submission that the US$7.2 million moved from CPE to Trident Bank.  But I do not think that means the money did not transit through Trident Bank from CPE on the way to PCHL.

386.  I should be wary of regarding the CPE trial balance as more than just indicative.  The document is plainly a draft and it is unclear at what stage it was created in the course of (say) D P Lau’s audit of CPE.  It may, for example, have only been an initial draft with corrections and revisions to be entered later.  The draft nature of the document militates against my treatment of the trial balance as conclusive evidence.

387.  Mr. Whitehead sought to bolster confidence in the integrity of the CPE trial balance by reference to Trident Bank’s Interest Income Schedule.  That shows two loans from Trident Bank to CPE of US$33.8 million and US$6 million.  Those together (Mr. Whitehead observes) correspond with a figure of US$39.8 million shown in CPE’s trial balance as due to Trident Bank.

388.  But I do not think that Mr. Whitehead’s submission affects what I have said.  One would expect there to be some concordance among entries in CPE’s trial balance and Trident Bank’s records. The pertinent question is whether one can infer with any confidence from an absence of mention in what are obviously draft (and so possibly incomplete or incorrect) records that monies were not dealt with in a particular way between CPE and Trident Bank?  I do not think so.

389.  We know that US$7.2 million was received by CPE on about 6 November 1995 and transferred out on about 8 November 1995.  CPE then issued a deposit receipt to PEWC in relation to this.  How was this US$7.2 million reflected (if at all) in CPE’s trial balances?  If it was not reflected, then why was it not?  The answers to the latter are unclear.  It is not really possible to draw a meaningful deduction from the draft trial balances without better information.

390.  Against the evidence of the trial balance is the remarkable concordance between the date (8 November 1995) when CPE transferred the US$7.2 million out of its bank account and the date (8 November 1995) when Trident Bank apparently received a deposit of US$7.2 million from PEWC.

391.  The transfer out is vouched by independent third party records from CPE’s bank.  Those records can be treated as reliable.

392.  As for transfer of the US$7.2 million to Trident Bank which Mr. Neoh invites me to infer, it is to be noted that on 8 November 1995 CPE acknowledged receipt of the US$7.2 million as a deposit from PEWC for a period of 16 days at an interest rate of 5.75%, with the principal to be automatically rolled-over upon maturity.  The deposit terms coincide with the entry in Trident Bank’s records showing a deposit from PEWC for the same initial duration of 16 days and at the same rate of 5.75%.  I do not think that the coincidences of date and detail can be readily shrugged aside and ignored.

393.  In short, despite what may be indicated by CPE’s draft trial balance, it would still seem in all likelihood that Mr. Neoh’s analysis is the correct one.

394.  Let me move on to Mr. Neoh’s analysis of the first tranche of $25 million. 

395.  Mr. Neoh could not document the flow of that tranche from PEWC to PCHL to the same degree that he was able to do with the $55 million tranche.  The available records were far too incomplete for that.  The best that Mr. Neoh could do was to rely on the documents referred to above indicating that the $25 million was part of a $123 loan to PCHL.

396.  Nevertheless, Mr. Neoh submitted that, if (as I have concluded) the $55 million tranche probably came from PEWC, then it is unlikely that the alleged $80 bridging million (or any part of it) was paid in the manner that Hu and Willi now suggest.

397.  Further, given the manner in which the $55 million tranche was probably routed to PCHL, Mr. Neoh suggested that the $25 million was in all likelihood transferred in the same way.

398.  In my view, Mr. Neoh is right.  There is no other positive case being advanced by Hu or Willi as to how the $80 million loan was paid.  If $55 million came from PEWC in a particular manner, then it is likely that the $25 million came in similar fashion.  Even if the $25 million had been dealt with in a different way, there is nothing (apart from assertion) which evidences the loan of the whole amount of $80 million by Willi.

399.  For completeness, I note my acceptance of Mr. Neoh’s submission that the amounts loaned by PEWC to PCHL were most likely “paid” in early 1997 out of the proceeds from the sale by Blinco HK of the Conrad Hotel.

400.  Part of the Conrad Hotel sale proceeds in the amount of US$61.5 million) went from Blinco HK’s bank account to CPE’s Societe Generale account.  From there the monies went to Trident Bank’s Bank of Hawaii account and thence to PEWC’s bank account with First Commercial Bank Taipei. Trident Bank characterised the sale proceeds so paid to PEWC as the return of 6 time deposits in the total amount of US$61.5 million.

B.2.2    US$14.5 million injection

401.  Documents produced by the Corporate Defendants indicate that on 19 April 1996 a sum of $111,422,824.71 (roughly equivalent to US$14.5 million) was paid into Patagonia’s Banque Indosuez account by way of a Sin Hua Bank cashier order.  Then, also according to documents disclosed by the Corporate Defendants, on 22 and 23 April 1996, Patagonia respectively advanced $31 million and $91.6 million to PCHL. 

402.  Neither Patagonia nor the Corporate Defendants (specifically, PCHL) have disclosed any documents to show how the $111,422,824.71 was characterised in their books.  No document has been produced by the Corporate Defendants to show what happened to the monies received by PCHL from Patagonia.

403.  There is no evidence as to whose money was used to purchase the cashier order.  In his Witness Statement, Willi deposed to providing “around US$14.5 million to PCHL by way of a cashier’s order to Patagonia’s account at Banque Indosuez”.  In cross-examination, he clarified that the money was remitted from a Swiss bank account (which did not belong to him) to an account (which was “seemingly controlled by a person next to ... Sun”) pursuant to Hu’s instructions.  Willi did not himself purchase the cashier order.

404.  In those circumstances, it is impossible to say who was the source of the $111,422,824.71.

405.  Mr. Hollander and Mr. Whitehead nonetheless sought to persuade me that in all likelihood Willi was the source of the funds.

406.  Mr. Hollander observed that Mr. Neoh’s case on the $14.5 million loan was essentially a negative one: namely, that there was no evidence establishing the source.  But Mr. Hollander asked rhetorically: If Willi did not pay the sum, then who did? There being no alternative suggestion, he invited me to accept the truth of Willi’s assertion.

407.  Mr. Whitehead referred me to the Tom Tung Schedule.  He noted that there was no amount in that document matching US$14.5 million.  Neither did the Tom Tung Schedule show any direct payment from PEWC to Patagonia.

408.  That left the possibility of an indirect payment from PEWC to Patagonia routed through some subsidiary.  Since CPE was normally used as a treasury, funds if remitted by PEWC would (Mr. Whitehead submitted) have been routed to Patagonia through CPE.  But CPE’s balance sheet evidences no loan to Patagonia of a magnitude of US$14.5 million.  The closest amount is in relation to a loan from Mae Sai to Patagonia for US$13,495,089.63.  That loan, however, was already in existence by 1993.

409.  I am not persuaded by the submissions of Mr. Hollander and Mr. Whitehead on this matter.

410.  There must at least be an evidential (as opposed to probative) burden on Hu and Willi to establish that the money for the cashier order came from Willi.  I do not think that burden is met simply by Hu or Willi asserting that the monies came from Willi.  That must especially be the case where, as I have already found, Hu and Willi have not been telling the truth in relation to the swissfirst papers.  I must treat their assertions with circumspection.

411.  The Tom Tung Schedule may be some evidence that the monies did not come directly from PEWC to Patagonia.  That is hardly surprising.  PEWC habitually funded its overseas subsidiaries by highly indirect means.

412.  The accuracy of CPE’s balance sheet relied on by Mr. Whitehead is uncertain.  It does not look like a finished document as opposed to something being worked on by CPE’s auditors, that is, a work in progress.

413.  Let me assume, however, that I can take the document at face value.

414.  Mr. Whitehead’s negative reliance on the balance sheet assumes that any indirect remittance by PEWC would have been booked through CPE.  That appears to have been the case most of the time.  But that was not invariably the position.  It is still entirely possible that PEWC routed the funds in some other way or ways over some period of time or times.

415.  The evidential difficulty arises because Patagonia and the Corporate Defendants have only provided scant discovery.  One would have expected much fuller discovery as to how Patagonia and PCHL dealt with the cashier order amounts in their books.

416.  If Hu and Willi are right, Patagonia and the Corporate Defendants are under Willi’s control through Top Selection.  If PEWC is right, Hu remains in control of Patagonia and the Corporate Defendants. On either hypothesis, it is difficult to see why Hu and Willi should then be allowed to take advantage of the paucity of documents disclosed by companies which one or other of them ultimately controls.

417.  In the circumstances, I am unable to conclude on the available evidence that Willi was the source of the US$14.5 million loan.

B.2.3    Transfer of Myall share

418.  The transfer of Myall to PEWC is alleged by Hu and Willi to have been effected as part of the Takeover Arrangement in full and final settlement of PCHL’s indebtedness to PEWC.

419.  The allegation is suspect.

420.  Myall appears to have been acquired by Super Wish from LET in 1997 using internal resources of the PCHL group, possibly monies from the Rabobank loan secured on the South Horizons Properties and PEWC’s letter of comfort.  Therefore, as Mr. Neoh submits, it would not have made commercial sense for Myall later to be treated as part of the consideration for Willi’s acquisition of the PCHL group in 1999.

421.  There is a Blinco HK board minute dated 4 October 1999 signed by Hu which states that Blinco HK acquired Super Wish for $455,722,341 “through its ultimate holding company” (presumably, PEWC).  On the face of the minute, Blinco HK acquired Super Wish (and thereby Super Wish’s 50% interest in Pacific Place held through Myall) from PEWC.  The consideration was booked as part of an inter‑company debt due to PEWC from Blinco HK of $1,455,384,867.

422.  There is a prior Blinco HK board minute dated 28 June 1999 resolving that Blinco HK would acquire Myall from Super Wish “at a consideration that any one Director may think fit”.  There is a corresponding board minute of Super Wish (also dated 28 June 1999) resolving that Myall be sold to Blinco HK “at a consideration that any one Director may think fit”.

423.  There are also bought and sold notes signed by Hu recording the transaction at $455,772,341.  The notes are dated 28 June 1999.  But, as Mr. Neoh submits, there is clear evidence that the notes have been backdated.

424.  There is, for instance, a Trident Asia internal memo dated 29 November 1999 referring to a need “to date back the transaction on or before 30/6/99”.  There is also evidence from Yip that the transfer of Myall to Super Wish was still under discussion in March 2000.

425.  Hu says that, when he signed the bought and sold notes just mentioned, the consideration had been left blank.  The consideration must therefore have been inserted later.

426.  In any event, the Blinco HK and Super Wish minutes of 28 June 1999 (both stipulating “a consideration that any one Director may think fit”) suggest that the consideration subsequently inserted was purely notional.  That is, in all likelihood, no monies ever passed hands.  Instead accounting entries were simply made in the books of all relevant companies.  The consideration would then have been determined by reference to such accounting entries as it was desired to make.

427.  The point is that, on the face of the documents, Blinco HK acquired Super Wish and its Myall share from PEWC at a notional consideration.  Hu and Willi, in contrast, are asserting that Blinco HK acquired Super Wish and its Myall share for PEWC as a result of arm’s length bargaining between Hu and Willi.  The documentary evidence (much of which has been signed by Hu himself) does not back that case.

428.  Nor does timing make sense.

429.  If Hu and Willi are right, Myall was acquired by Blinco HK as part of the consideration agreed in the Takeover Arrangement. But, if so, why were Blinco BVI and Patagonia transferred to Top Selection (alleged to be Willi’s nominee) in February 1999, long before Myall was transferred to Blinco HK?

430.  The obvious conclusion is that the dealings in relation to Myall have been belatedly dressed up as a step in the completion of the Takeover Arrangement.  But the dress just does not fit the available  evidence.

431.  I note that it is not even clear why Myall’s market value (whatever that may have been) was regarded as anywhere near equivalent to the value of PCHL’s group’s assets and liabilities.  No expert valuation either of PCHL’s assets and liabilities or Myall’s value appears to have been conducted for the purpose of the alleged full and final settlement. This is suspicious.  That is not the way commercial enterprises normally conduct bona fide business.

432.  An analysis of the Myall transaction therefore suggests that the Takeover Arrangement did not take place as alleged.

B.2.4    Evidence of Hu and Willi

433.  The evidence of Hu and Willi on fund flow was highly unsatisfactory.  Their evidence was evasive.

434.  For example, Hu was asked in cross-examination why he did not simply ask Willi to write a cheque to PCHL for $80 million.  He claimed that “it didn’t dawn on us to do so then”.  This is hard to believe, given that Hu was then considered a highly effective and brilliant manager and Willi is an experienced banker.

435.  It was suggested to Hu that, if Willi had transferred the $80 million at all, Willi must have done so through Trident Bank.  Hu agreed.  When it was then pointed out that Trident Bank’s records do not disclose any account payable to Willi, Hu merely replied that he did not know about the operation of the bank.  This is despite the fact that, on the evidence, Hu worked closely throughout the relevant years with Ma and Trident Bank.

436.  Willi’s evidence was similarly difficult to believe.

437.  For example, Willi claimed that he could not disclose the names or details of his financial backers because of Swiss banking laws.  This is odd, since Willi entered into the Takeover Arrangement in a purely private capacity.  Why would banking secrecy protect the identities of private individuals entering into a commercial contract with a company?  Banking does not on the face of matters enter into the picture.

438.  Willi then claimed that his sponsors were bank clients.  But, as Mr. Neoh notes, it is incredible that clients of Bankers Trust would enter into a vague deal with a member of staff, especially when there were other deals available where they could receive protection from the bank’s routine credit and regulatory compliance procedures.

439.  Willi claimed that his sponsors knew that the $80 million bridging loan was a risky proposition.  They accepted that, if PCHL reneged on the loan, they would have no recourse against Willi.  Nonetheless, under the deal with the sponsors, the latter would apparently only receive 8%, while Willi would get 12%.  It is difficult to believe that such magnanimous sponsors exist in real life. 

440.  Willi said that he repaid his sponsors in due course, albeit with a haircut.  But Willi did not provide any further details as to how he did so.  It may be that, with the passage of time, one forgets specifics.  But it is hard to believe that Willi, who came across in the witness box as a fastidious person with a capacity to recall in some detail his dealings with PEWC and other parties over a long period of time, should be unable to say with greater precision when his backers were repaid.

441.  In relation to the US$14.5 million loan, Willi said that he provided PCHL’s 1995 audited financial statement to his financial backers.  That appears to have been for the purpose of persuading them to lend money.  But the auditors (PwC) did not sign off the audited financial statement until May 1996, about a month after the cashier order said to represent the US$14.5 million had been paid to Patagonia.

442.  Willi said that his sponsors for the US$14.5 million loan knew that he would be taking an equity position in PCHL.  But the sponsors seemingly did not insist on taking up an equity position themselves at least for their protection.  They instead lent monies to Willi, on a mere understanding that there might be a bonus, but without any formula for determining the bonus.  The bonus was apparently left to Willi’s discretion.  Again, it is incredible that there could be such generous financial backers.

B.2.5    Conclusion on fund flow

443.  Neither the $80 million nor the US$14.5 million appear on the evidence to have originated from Willi.  That again means that, in all likelihood, the Takeover Arrangement did not take place, contrary to what Hu and Willi allege.

444.  The documents support the conclusion that at least $55 million of Willi’s alleged $80 million ultimately came from PEWC. 

445.  The available evidence for the first $25 million tranche of the $80 million and the $111 million+ cashier order is less clear-cut.  Looking at everything as a whole (including the unsatisfactory nature of the evidence from Hu, Willi, Patagonia and the Corporate Defendants), PEWC is the more probable source of the $25 million. 

446.  In relation to the $111 million+ cashier order, the most that can be said is that Hu and Willi have not established their contention that Willi is the source of the same.

C.      Takeover Arrangement and its late assertion

447.  The 3 letters in Annex 2 are the only documents said to evidence the Takeover Arrangement.  The key letter is that dated 10 March 1996.  The other documents are dated 12 January and 29 November 1999.

448.  The letters now only exist as copy documents. The originals are said to have been destroyed or discarded long time ago.

449.  The circumstances surrounding the 3 letters are suspicious.

450.  First, there is the question of provenance.

451.  Hu says that he received the original March 1996 letter from Willi in Hong Kong.  He says that he returned the letter to Will in March or April 1999 after recording the approval of Tung and Sun on the same. Hu kept a copy for himself.  But he claims to have discarded the copy in 1999.

452.  In his Witness Statement, Willi stated that he had been able “to locate from my records” a copy of the March 1996 letter.  But under cross-examination, Willi clarified that, in accordance with his normal practice, he had destroyed the original March 1996 letter after completion of the Takeover Arrangement.  He said that, for these proceedings, he obtained a copy of the March 1996 letter from the Corporate Defendants.

453.  The copy of the March 1996 letter now before the Court was disclosed by Willi’s former solicitors (Orrick) on 13 January 2010.

454.  Hu says he discarded his copies of the November 1996 and January 1999 letters.  Willi says that he has not kept the originals of those letters.

455.  Hu has stressed that, because of the sensitivity and confidentiality of the Takeover Arrangement, he did not let PCHL’s staff know that they were being taken over by an outsider.  If so, it is curious that the March 1996 should have been obtained by Willi from the Corporate Defendants.  If the object was to conceal the Takeover Arrangement from PCHL’s staff, how is that a copy of that letter should now be found among PCHL’s files as Willi suggests?  For that matter, why did the Corporate Defendants themselves not disclose in their List of Documents the existence of the March 1996 letter?

456.  Chung and Yip, the directors of the Corporate Defendants, claim not to have known of the Takeover Arrangement (nor of Willi’s existence) until the commencement of the present actions.  Chung says that he did not know of the Takeover Arrangement until provided with copies of the 3 letters by Willi’s lawyers.  That further contradicts Willi’s evidence.

457.  If Willi and Hu destroyed or discarded their original copies of the March 1996 letter in 1999 and if the Corporate Defendants seemingly never had that letter until it was provided to them by Willi, from where did the alleged copy March 1996 letter produced to the Court come?

458.  Second, there is the late assertion of the Takeover Arrangement.

459.  Over the whole of his interrogation by the DA in 2004, Hu never mentioned the Takeover Arrangement.

460.  He told the DA that Patagonia and Blinco BVI should be the companies holding PCHL but he “needed to check the information to find out who owns these two companies”.  He was asked about the relationship between All Dragon and PEWC.  He replied that he did not know.

461.  Hu was asked who had the right and interest in the South Horizons Properties.  He said that he needed to check.  He said that he did not know anything about the South Horizons Properties.  He then said that the South Horizons Properties were related to PCHL, that PCHL was PEWC’s company, but he needed to check “so far as the rights are concerned”.

462.  Asked if PCHL acquired PacMOS, Hu remembered that PCHL acquired shares in PacMOS, “roughly a few hundred thousand shares registered under the name of PCHL”.  Asked who was in charge of PCHL at the time of the interrogation, Hu replied that he did not know.

463.  But on 11 November 2004 Hu told the DA that whatever belongs to PCHL should belong to PEWC.  Asked about this apparent admission in cross-examination, Hu said that he meant by his answer that in the past PCHL belonged to PEWC.  He said that, because the Chinese language does not make a distinction of tense, his answer had been misunderstood.

464.  But it is difficult to accept the gloss given by Hu at trial of his 2004 statement about PEWC’s ownership of PCHL’s assets.  It would have been clear to Hu from the context of the DA’s interrogation that he was being asked about PEWC’s ownership of PCHL’s investments in 2004.

465.  The interrogation was then focusing on whether Mrs. Hu and Hu’s children had taken up directorships or held equity in companies directly or indirectly related to PEWC.  Hu answered that Mrs. Hu had resigned as a PCHL director.  That is correct as Mrs. Hu had actually just resigned on 18 October 2004.

466.  Hu further mentioned that Mrs. Hu still seemed to be a director of the Beijing Huizhong Hotel and PCHL had a 50% equity in the Hotel.  The DA asked whether Mrs. Hu had made any investment payment on the Hotel.  Hu replied that she had not.  Hu was then asked whether the equity belonged to PEWC.  Hu replied that “[e]verything that are owned by Pacific Capital Ltd. [PCHL] belongs to PEWC”.

467.  If the PCHL network had been truly transferred to Willi beneficially (as Hu now asserts), it would have been the easiest thing in the world to have told the DA so in 2004.  But Hu did not say anything about PCHL having long been taken over by Willi.  On the contrary, he seems to accept in his interrogation that PEWC still owned PCHL and PCHL’s investments.

468.  Third, there is the entire context of the Takeover Arrangement.

469.  It is hard to believe that commercial business people would enter into a substantial agreement (involving the sale of an entire network of companies including substantial underlying assets) with such scant documentation or due diligence investigation.

470.  No lawyers were actually engaged to advise on the details of the Takeover Arrangement, even on a confidential basis.  No accountants were actually engaged to value the assets and liabilities being transferred, even on a confidential basis.  No reference was made to the entire of PEWC’s board.  Everything was left to Hu and Willi or (if Hu is to be believed) to Tung, Sun, Hu and Willi.

471.  That is not how business is normally conducted. That is certainly not how Willi (acting for Bankers Trust) dealt with PEWC in relation to other transactions.  Those other transactions are remarkable for the amount of documentation, due diligence and compliance work involved.

472.  The whole account of the Takeover Arrangement therefore lacks the ring of truth.

473.  The production of copies of the 3 letters out of the blue at a late stage supports the above analyses of the swissfirst papers and the transfer of funds into PCHL.  The belated revelation by Hu of the Takeover Arrangement points to the transaction being a recent fabrication to cover up Hu’s continued beneficial ownership of PCHL and its underlying assets.

D.      PCHL’s financial condition in 1995

474.  Much time was spent at trial on the financial condition of PCHL in 1995.  That was because PCHL’s poor financial health (allegedly “on the verge of bankruptcy”) was supposed to provide the motivation for the Takeover Arrangement.

475.  In my view, the most reliable piece of evidence on PCHL’s health in 1995 are its audited accounts for that year prepared by PwC.  Those accounts were signed off on 17 May 1996.  They include the following opinion:-

“(3) Going concern of the group

At 31^st December 1995, the group’s shareholder’s funds were HK$109,178,000 and the loss of the group for the year then ended was HK$280,450,000.  The group has significant borrowings to finance its investment activities and the group’s current liabilities exceeded its current assets by HK$632,487,000.  Further contributions from the ultimate holding company are required so as to meet the group’s financial covenant as stated in paragraph (2) above.  In addition, additional funds are also required for the group’s capital commitments, including those investments in the PRC as stated in paragraph (1) above and (4) below.  The ultimate holding company of the group has confirmed its intention to provide continuing financial support to the group to enable it to meet its liabilities as and when they fall due so as to enable the group to continue trading for the foreseeable future.  Consequently, the accounts have been prepared on a going concern basis.  The accounts do not include any adjustments to the assets and liabilities that would result from a failure to obtain such financial support....”

476.  PCHL had substantial assets (in respect of the South Horizons Properties alone, worth at least about $1 billion) supported by a low capitalisation (only $80 million).  It obviously therefore could not service its liabilities without loans from PEWC.

477.  The evidence suggests that PEWC would continue supporting PCHL financially for the foreseeable future.  It is true that, when he took over from Sham in around February 1995, Hu informed PCHL’s staff by memo that they could not expect PEWC to continue supporting PCHL financially. But that does not mean that PEWC would immediately cease to support PCHL.  On the contrary, the Tom Tung Schedule shows that in fact between 1992 and 1998 PEWC made substantial remittances abroad (over US$2 billion).  Indeed, funds seem to have been readily remitted overseas despite then existing Taiwanese exchange control restrictions.

478.  It has been suggested by counsel for Hu and Willi that PEWC was itself not in a financial position to assist PCHL in 1995 and 1996.  But on the evidence PEWC’s credit remained good throughout that period and PEWC could tap capital markets for substantial amounts of cash if and when required to support PCHL.

479.  Thus, for example, PEWC had extensive under-utilised banking facilities (an average of $3.7 billion in 1995 and $4.4 billion in 1996).  Here I rely on the evidence of Frank Yuen (PEWC’s accounting expert).  That evidence was based on data extracted from the Taiwan Joint Credit Information Centre established by the Bankers Association of Taipei.

480.  Further, as noted, PEWC seemed to have no real difficulty making substantial remittances overseas as and when required between 1992 and 1998.

481.  Hu’s management in 1995 resulted in PCHL selling off loss‑making assets.  That exercise may not have fetched as much cash as PCHL might have hoped.  But there are indications in the Management Reports of the PCHL Group for 1996 that, as a result, PCHL was slowly recovering profitability.  Thus, the PCHL Group made a loss of around $280,450,000 in 1995 according to the audited accounts.  But for 1996 the PCHL Group made a net loss of only about $6.1 million according to the Management Report for December 1996.

482.  Consequently, the PCHL Group’s financial condition in 1995 could not have justified a selling off of the Group’s assets on the terms of the Takeover Arrangement.

483.  In any event, the Group’s financial condition (whatever that might have been) would in no circumstances have justified Hu in causing the beneficial ownership of underlying assets to be transferred to himself.

E.      Transfer of Blinco BVI and Patagonia to Top Selection and Hu’s

continued involvement in Corporate Defendants

484.  In the course of cross-examination, Hu said that he asked Willi for authority to sign the instrument whereby Bridle Path transferred Blinco BVI to Patagonia on 1 February 1999.  That could not have been right.  Until the transfer of Blinco BVI and Patagonia to Willi, the Takeover Arrangement would not have been completed.  Bridle Path would have held Blinco BVI and Patagonia on behalf of PEWC.  There would have been no reason to seek Willi’s authority to transfer Blinco BVI or Patagonia to Willi.

485.  In re-examination, Willi corrected himself.  He said that he himself had authorised the transfer to Willi and Tung and Sun did not participate at all.  If that is correct, Hu would not have had the requisite authority to transfer the PCHL group to Willi.

486.  Later, on further prompting from Mr. Whitehead, Hu said that Tung and Sun (acting on behalf of PEWC) authorised him to sign the instrument of transfer whereby Blinco BVI and Patagonia were given to Top Selection.

487.  The transfer of Blinco BVI and Patagonia to Top Selection was the crucial step in the Takeover Arrangement.  One would have thought that Hu would clearly recall who had authorised the same.  Instead, Hu by his response covered every possible source of authority (Hu himself, Willi, PEWC acting through Tung and Sun).  Hu’s lack of clarity in this important matter strengthens the conclusion that the Takeover Arrangement did not happen.

488.  Of equal significance is the fact that, even after the Takeover Arrangement was completed on 1 February 1999, Hu continued as a director of companies within the PCHL Group (for example, All Dragon (until 2003), Greateam (until 2009), Gold Global (until 2009), Haddowe (until 2009), Casparson (until 2009), Patagonia (until 2005), Blinco BVI (until 2005), PCHL (until 2004), Texan (until 2003)).  Hu thus remained in charge of the very assets and companies which he claims were bringing PCHL to the verge of bankruptcy and which had to be disposed of urgently and secretly.

489.  Hu was also himself a director of Top Selection until 30 June 2005.  According to Rafia Tam’s evidence, even Top Selection was set up on Hu’s instruction.

490.  Hu and Willi allege that Hu remained as a director because Hu alone had the necessary managerial expertise.  Willi, as a banker, was not interested (and had no experience) in the day-to-day running of the companies and the management of their underlying assets.  Willi was more concerned (according to his evidence) to profit from “a quick flip” of the assets acquired under the Takeover Arrangement.  Hu and Willi also rely on the fact that MVI acting through Hu had guaranteed the HSH loan facility and had guaranteed the profitability of PacMOS’ investment in Vitelic HK.

491.  But, if that is correct, why is it that Mrs. Hu (a university academic and housewife with no experience running companies) was appointed a PCHL director between September 2001 and October 2004?  Mrs. Hu was also appointed as a director of All Dragon in 2001.  She stepped down in 2003.

492.  Hu told the Taiwan Court that Mrs. Hu was appointed at Willi’s suggestion when Tung and Sun resigned from PCHL.  But Tung and Sun did not resign as PCHL directors.  They were removed by a shareholders’ resolution dated 26 April 1999 signed by Hu himself.  Mrs. Hu could not have been appointed to replace Tung and Sun as she was only made director in 2001.

493.  At trial, Hu gave a different account.  He claimed Mrs. Hu was appointed of PCHL and All Dragon at Yip’s suggestion.

494.  Hu’s prolonged involvement in the companies as director is another pointer to the Takeover Arrangement with Willi being a fiction.  That Hu and Mrs. Hu acted as directors is more consistent with PEWC’s case that Hu himself (not Willi) took over complete control of the PCHL Group in 1999.  Hu then treated the relevant companies as his own, even to the point of causing his wife to become director.

F.      Use of South Horizons Properties as security by Hu and Ma

495.  In 1999 Hu acting on behalf of Haddowe and MVI authorised the South Horizons Properties to be used to secure facilities of $73.4 for Town Sky (Ma’s company).  The facilities were increased to $170 million in 2001.  In 2003 Hu used the West Block to secure facilities of $150 million for 2 companies within the MVI Group.

496.  If the South Horizons Properties had truly been transferred to Willi as part of the Takeover Arrangement, why would Hu be using the same as security for his companies and those of Ma?  Such use points to Hu (not Willi) being the beneficial owner of the South Horizons properties.

G.      Knowledge and conduct of Tung, Sun and Tom Tung

497.  Tung and Sun were obviously involved in the acquisition and establishment of the subsidiary and associated companies within the PCHL group.

498.  What is less clear is the extent (if at all) that they were involved in the disposal of the PCHL group of companies by Hu.  In other words, it is unclear whether Tung and Sun were aware of the alleged Takeover Arrangement.

499.  There is some evidence that they were not aware.

500.  For instance, they did not mention anything about the Takeover Arrangement to the DA when questioned.

501.  Further, as already mentioned, Tung and Sun were removed from PCHL’s board by shareholders’ resolution signed by Hu alone.  Tung and Sun do not seem to have known of their removal and seem to have inquired around June 2000 as to why their PCHL directors’ fees were not being paid.

502.  Hu claims that he consulted Tung and Sun about the Takeover Arrangement and invited them to sign the March 1996 letter said to evidence the takeover.  Hu asserts that they refused to do so and refused to provide their own personal guarantee of the arrangements signified in the letter.  But there is no independent corroboration of this.

503.  The second page of the March 1996 letter records in Hu’s handwriting that: “I [Hu] discussed this letter with Mr. Tung and Mr. Sun.  They all agreed to it and authorized me to sign.”  But that could be self‑serving.  One only has the word of the agent [Hu] that the principal [PEWC acting through Tung and Sun] authorised Hu as agent to enter into the Takeover Arrangement.  In light of the other evidence canvassed above, one has to treat Hu’s annotation to the March 1996 letter with scepticism.

504.  Willi gave evidence that in 2002 he met Tung and Tom Tung in relation to some other matter.  According to Willi, at that time Tung and Tom Tung “also discussed the Takeover Agreement, and they expressed that they were pleased with the outcome”.  Willi also referred vaguely to a meeting with Hu and Sun where Sun confirmed Hu’s authorisation to enter into the Takeover Arrangement.  But, in light of the inconsistencies between Willi’s evidence and the available documents as discussed above, I am unable to place any weight on Willi’s hearsay evidence as to what Tung and Tom Tung said.

505.  Tom Tung came to Hong Kong in around 1998 to investigate what had happened to the companies and assets within the PCHL group.  This appears to have been done on Tung’s instruction.  If so, that would again suggest that Hu had kept Tung in the dark about the actual disposition of PCHL. 

506.  If Tung was in the dark, Sun was likely also kept in the dark by Hu as by all accounts Sun was more interested in strategic planning and not a person to focus on day-to-day management activities. 

507.  The idea seems to have been for Tom Tung to arrange for the transfer of PCHL’s assets to POIM.

508.  There is a note of a POIM meeting dated 23 December 1998 which records Tom Tung as having:-

“indicated that the South Horizon mall and PCHL are no longer part of PEWC, although attention should be paid to make sure there are no further liabilities on the part of PEWC in relation to that transaction”.

509.  The note is relied on by Willi and Hu as evidence that Tom Tung (and therefore Tung and (through Tom Tung and Tung) PEWC) were fully aware that PCHL had been transferred to Willi under the Takeover Arrangement.  I am unable to read the note, however, as indicating knowledge of the Takeover Arrangement by Tom Tung. 

510.  In February 1995 Blinco BVI and Patagonia (which then held PCHL) were transferred to Bridle Path.  This had the consequence that PCHL was literally no longer a subsidiary of PEWC, (whatever beneficial interest PEWC might have in Bridle Path).  As at 1995 PCHL had become a subsidiary of Bridle Path.

511.  By the same token, Harmutty, Haddowe and Casparson had been transferred to All Dragon in around 1996.  The South Horizons Properties held by those companies would then literally no longer be within the PEWC group (whatever beneficial interest PEWC might have in them). The companies would on the face of an organisation chart all fall under Bridle Path’s ownership.

512.  It is possible and likely that Tom Tung meant no more than that by his remark.  The laconic remark cannot itself be an acknowledgment of Willi’s ownership in any event, because Blinco BVI and Patagonia were allegedly not transferred to Top Selection until 1 February 1999 at the earliest.

513.  There is a letter to Moniker on PEWC letterhead signed by Tom Tung and dated 1 December 2000.  Moniker (a BVI company) held 100% of Bleau, which in turn owned the Pacific Plaza in Singapore.  Bleau was a 50-50 joint venture between PEWC and LET formed for the construction and development of Pacific Plaza.  LET held its 50% interest in Pacific Plaza through Myall and we have already seen how Blinco HK obtained Myall.

514.  The letter to Moniker refers to a meeting between PEWC and “Pacific Central Limited and Superwish Limited” (represented by Rafia Tam).  The letter records that at the meeting Tam “confirmed and agreed that all the related company balance is offset to zero balance by transferring all the balances to the inter-company account between PEWC and Central Pacific Limited”.  The letter continues that “[d]uring the year of 2000, all the related companies’ balances were eliminated through assignment to the account of PEWC”.

515.  The letter is so cryptically worded that I am unable to infer anything from it about anyone’s state of knowledge regarding the Takeover Arrangement.

516.  For instance, it is unclear what company is being referred to as “Central Pacific Limited”.  As Mr. Neoh notes, it cannot be CPE because that had gone into liquidation by the date of the letter.  It is also unclear who was at the meeting, if an actual meeting ever took place. Rafia Tam did not recall the meeting.  Hu says he was not there as he had retired from PEWC by then.  Tom Tung does not seem to have been there, because Rafia Tam says that she did not know Tom Tung.  The meeting may therefore only have been a “paper meeting” and the letter have merely been prepared for some accounting purpose.

517.  It has been suggested by the Defendants that PEWC should have called Tom Tung to give evidence on the matter.  The Court should (the Defendants submit) draw adverse inferences against PEWC in relation to the Moniker letter and the POIM note by reason of the failure to call Tom Tung.

518.  But I do not see how I can do that.

519.  Tom Tung was convicted in Taiwan of defrauding PEWC.  PEWC can hardly be expected to call Tom Tung as its witness when PEWC may well have to accuse Tom Tung of lying.  It is in any event unlikely that Tom Tung would be prepared to give evidence on behalf of PEWC.  Even if PEWC wished to compel Tom Tung to give evidence, there is no system of international subpoena to compel Tom Tung to give evidence from Taiwan on behalf of PEWC.

520.  It is likewise suggested that the Court should draw adverse inferences against PEWC in relation to the Takeover Agreement because PEWC has not called Sun to give evidence.  Sun (the Defendants point out) remains on PEWC’s board and, at least for a time, sat in on meetings to discuss the conduct of litigation here.

521.  I am equally unable to draw adverse inferences against PEWC because of a failure to call Sun.

522.  Sun is accused in these proceedings of defrauding PEWC.  Sun is a defendant here.  It would be odd for PEWC to call him to give evidence when there is every likelihood that PEWC would have to call Sun a liar in the course of his testimony.

523.  Sun’s continuance as a member of PEWC’s board despite the suit against him by PEWC is explicable.  According to Andy Cheng, the Sun family may still control enough PEWC shares to ensure Sun’s appointment on PEWC’s board as the family’s representative.  Andy Cheng’s evidence is that, in any case, Sun was eventually asked to absent himself from board meetings in which the present litigation was being discussed.

524.  There is accordingly nothing in the conduct of Tung, Sun or Tom Tung that supports the validity of Takeover Arrangement.

525.  The most that can be said is that Tung and Sun would have been aware that something had gone wrong because they ceased to receive emoluments from PCHL.  Consistently with their obligations under Taiwanese and Hong Kong law of safeguarding a company’s assets, they ought to have reported the existence of a problem to PEWC’s board.  It may have been for this reason that Tung sent Tom Tung to investigate through POIM.

H.      Conclusion on Takeover Arrangement

526.  There never was a Takeover Arrangement between Hu and Willi.  The alleged Takeover Arrangement was belatedly fabricated to cover Hu’s ownership and control through Top Selection of the companies and assets held through Blinco BVI and Patagonia.

527.  A Court does not lightly make findings of fraud.  It can only make such findings where it is satisfied to a high degree of conviction that there has been wrongdoing.  Here the evidence that Hu and Willi have not been honest with the Court is overwhelming.

528.  The swissfirst papers are especially revealing of an intention on the part of Willi and Hu urgently to conceal Hu’s benficial ownership in the PacMOS shares.  But there is more than just the swissfirst papers.

529.  There is the absence of documentation in relation to the alleged funding of PCHL by Willi.  The available documents suggest that there was no $80 million injection by Willi.

530.  There is the suspicious paucity of documentation in relation to the Takeover Arrangement.  There is the questionable provenance of the 3 copy letters which have been produced as evidence of the transaction.  There are the incredible explanations as to why the Takeover Arrangement was entered into in the manner that it was and how it was carried out.

531.  There is Hu’s vagueness as to who precisely authorised the transfer of Blinco BVI and Patagonia to Top Selection.

532.  There is Hu’s continued involvement with the companies in the PCHL group following the alleged takeover.  There is Mrs. Hu’s involvement.  There is the use by Hu and Ma of the South Horizons Properties for their benefit following the alleged takeover.

533.  The evidence irresistibly points to Willi, Top Selection, Blinco BVI, Patagonia and the Corporate Defendants being nominees of Hu.  Through the web of the latter companies, Hu to this day controls the South Horizons and Shouson Hill Properties and Texan’s 43% PacMOS shareholding. 

534.  There was no Takeover Arrangement.  Instead, in breach of his duties as director of PEWC, Hu in effect handed the assets of the PCHL network of companies to himself.

C.      Proprietary remedies

535.  The wrong (the misappropriation by Hu of PEWC’s interest in the PCHL network of companies) substantially took place in Hong Kong (where PCHL is domiciled).  Prima facie, Hong Kong law as the lex loci delicti is the proper law of the wrong.

536.  Insofar as any breach of Hu’s obligations as director is concerned, Mr. Whitehead is content for the Hong Kong law relating to fiduciaries to be applied by this Court.  Mr. Hollander did not strongly dispute that such law would be applicable as far as the breach by Hu of his duties as director is concerned.

537.  I now enumerate the proprietary consequences which flow from the conclusion in the previous section.

538.  First, Top Selection must be a nominee for Hu. It therefore holds it shares in Blinco BVI and Patagonia on trust for PEWC from whom Hu (in breach of his fiduiciary obligations owed to PEWC) diverted such shares.

539.  Second, Willi is not a bona fide purchaser for value without notice.  He did not provide valuable consideration in the manner alleged.  He had knowledge of Hu’s beneficial ownership of the relevant companies and their underlying assets. 

540.  Willi is himself merely a nominee for Hu. The fact that he is now registered as Top Selection’s sole shareholder would not affect the position that Top Selection holds Blinco BVI and Patagonia for PEWC.  Hu having acted fraudulently, the Court is entitled to pierce the corporate veil and treat Top Selection as Hu’s alter ego.

541.  Third, the shares of the subsidiary companies under Patagonia and Blinco BVI (namely, the Corporate Defendants) must also be held on constructive trust for PEWC.  The layers and layers of Corporate Defendants are in effect all merely nominees of Hu.  The Court is entitled to pierce the corporate veil and treat them as mere alter egos (albeit a chain of alter egos) for Hu.

542.  Fourth, there was a debate at trial over whether the underlying assets held through the Corporate Defendants (in particular, the South Horizons and Shouson Hill Properties and the PacMOS shares) should be treated as held on constructive trust for PEWC, if the Takeover Agreement were found to be  invalid. 

543.  Mr. Charles Manzoni QC (appearing for the Corporate Defendants) argued that underlying assets (as opposed to the shares of Blinco BVI and Patagonia) could not be held on constructive trust.  Among other reasons, he observed that assets had been purchased at least in part through loan monies to particular Corporate Defendants (such as PCHL), not necessarily through direct use of funds injected by PEWC.

544.  In my view, the Court is entitled to impose a constructive trust on underlying assets (including the South Horizons and Shouson Hill Properties and the PacMOS shares) in the hands of the Corporate Defendants. 

545.  Since the Corporate Defendants are mere nominees for Hu and since the Court can pierce the veil of incorporation where there is fraud, the present situation is analogous to Hu himself holding the relevant assets.  If the underlying assets were in his own name, Hu would undoubtedly hold the same on constructive trust for PEWC.  It should make no difference that Hu now holds the same assets through a string of nominee companies.

546.  Moreover, if the Court did not impose a constructive trust on the underlying assets, there would be a danger that something adverse to PEWC’s interests might be done to the same during the period when (say) shares of Blinco BVI and Patagonia are being transferred to PEWC.

547.  It therefore is appropriate to impose a constructive trust on the underlying assets.

D.      Personal remedies

548.  PEWC seeks a number of personal remedies consequent upon a finding that the Takeover Arrangement was invalid.  I shall run through PEWC’s claimed personal remedies in this Sub-section.

549.  First, PEWC seeks an Order that Texan, Super Wish and PC Asia account for all monies, payments and profits resulting from its holding of the PacMOS shares.  In my view, PEWC must be entitled to such an account.

550.  Second, PEWC seeks an Order that Harmutty, Nee Son, Showground, Afterville, Berridale, Jutech, Haddowe, Casparson and Greateam account for monies (including loan monies), payments, rents, income and profits received as a result of holding or having held all or part of the Sout Horizons and Shouson Hill Properties.  Again PEWC must be entitled to such an account.

551.  Third, PEWC seeks an Order that Tung’s estate account for any loss in respect of PEWC’s funds used in the acquisition of the PacMOS shares and for any loss to sale proceeds, rentals and other income derived from the South Horizons Properties.

552.  It is unclear from the evidence that Tung was personally involved in the disposal (as opposed to the acquisition) of the relevant properties by Hu.  Insofar as the acquisition of the properties is concerned, PEWC would have known (or could readily have found out about) the same at the relevant times.  I am not able to say that Tung deliberately concealed the acquisitions from PEWC.

553.  The most that can be said on the available evidence is that Tung indirectly assisted Hu’s breach of fiduciary obligation by not promptly alerting PEWC’s board to the apparent disappearance of PCHL as a PEWC subsidiary.  It is also unclear how strongly (if at all) Tung pressed Tom Tung to investigate what had happened to the PCHL group.

554.  Nonetheless, precisely what Tung did or did not know about Hu’s diversion of the PCHL group from PEWC is obscure.  I am not satisfied that PEWC has adduced sufficient evidence for me to hold that Tung dishonestly assisted in Hu’s breach of fiduciary obligation.

555.  I accordingly refuse to order a personal remedy against Tung’s estate.

556.  Fourth, PEWC asks for a similar remedy against Sun.  For the reasons already discussed with Tung, I am also unable to conclude that Sun dishonestly assisted Hu in the disposal of the PCHL group.  I therefore refuse a personal remedy against Sun.

557.  Fifth, PEWC seeks various personal remedies against Chung and Yip.

558.  But it is far from clear to me that Chung and Yip knew all relevant facts at the material times which would have enabled them to conclude that Hu had acted wrongly.  Insofar as they may have assisted Hu’s designs by acting in their capacity as directors of Corporate Defendants in accordance with his instructions, it is possible that they might have thought that he was genuinely entitled to give them instructions on behalf of the ultimate owner (whoever that might have been).  I am not able to conclude on the evidence that they dishonestly assisted Hu to commit a breach of trust.

559.  I therefore refuse personal remedies against Chung and Yip.

560.  Sixth, PEWC seeks an account by Ma of all borrowings made by Town Sky or Ma himself on the security of the South Horizons Properties.  Town Sky appears to be an alter ego for Ma.

561.  Ma could have appeared in Court to explain how it came to be that Town Sky (or Ma himself) was able to use the South Horizons Properties as security for bank borrowings.  He failed to do so.  In those circumstances, the Court is entitled to draw adverse inferences against Ma.

562.  Here Town Sky clearly obtained a benefit from the use of property which had been diverted by Hu from PEWC.  Ma presumably knew that neither he nor Hu would in the normal course of events be entitled to such a benefit.  There is no satisfactory explanation of what Ma knew or did not know, only because Ma opted not to give evidence.

563.  It would therefore be unconscionable in all the circumstances to allow Ma to retain the economic value of the benefit which he obtained.  Accordingly, a duty should be imposed on Ma to account as a constructive trustee for such benefit as he might have received.

564.  PEWC also ask that Ma account for losses to PEWC arising from the diversion of PCHL’s assets to Hu.  But on the evidence adduced by PEWC it is not clear to what extent (if at all) Ma assisted Hu.  I therefore do not think that I can go further than an account by Ma of Town Sky’s benefit from the loan facility.  In the absence of more concrete evidence of Ma’s involvement in Hu’s diversion of PCHL, I do not think that I can simply plug gaps by drawing adverse inferences against Ma.

E.      Limitation

565.  The Limitation Ordinance (Cap.347) (LO) provides as follows:-

“20. (1) No period of limitation prescribed by this Ordinance shall apply to an action by a beneficiary under a trust, being an action:--

(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy;

(b) to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.

(2) Subject as aforesaid, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Ordinance, shall not be brought after the expiration of 6 years from the date on which the right of action accrued:....

....

26. (1) Subject to subsection (4), where in the case of any action for which a period of limitation is prescribed by this Ordinance, either:--

(a) the action is based on the fraud of the defendant;

(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or,

(c) the action is for relief from the consequences of a mistake,

            the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.”

566.  The expression “trustee” in LO s.20 also covers a fiduciary holding assets on behalf of a principal.  For example, for the purposes of LO s.20, a company director may be regarded as “a trustee in relation to its assets”.  See Peconic Industrial Development Ltd. v. Lau Kwok Fai (2009) 12 HKCFAR 139 (Lord Hoffman NPJ at paras. 18 and 19).

567.  Various Defendants have contended that, by reason of LO s.20(2), PEWC’s claims against them have been time-barred.

568.  I do not think that is the case.

569.  PEWC claims against Hu for fraudulent breach of trust commited by Hu in his capacity as PEWC director or fiduciary.  PEWC says (and I have essentially found) that Hu fraudulently diverted PEWC’s assets (such as the shares of Blinco BVI, Patagonia, the Corporate Defendants, the South Horizons and Shouson Hill Properties, and the PacMOS shares) to himself. PEWC further says (and I have held) that the diverted assets continue to be held by Hu beneficially through a string of nominees (including Willi, Top Selection, Blinco BVI, Patagonia and the Corporate Defendants).

570.  Consequently, PEWC’s actions fall squarely within LO ss.20(1)(a) and (b).  Hu cannot hide from PEWC’s claims by transferring the assets to alter ego companies or third party agents acting for him.

571.  There is thus no time bar against Hu.  The 6 year limitation in LO s.20(2) does not apply where an action falls within LO ss.20(1)(a) or (b).

572.  By the same token, as mere nominees or alter egos of Hu, none of Top Selection, Blinco BVI, Patagonia or the Corporate Defendants can assert a separate immunity under LO s.20(2).  The Court may pierce the veil of incorporation and treat the foregoing companies as the equivalent of Hu.  Given that the 6 year limitation does not apply to Hu, the limitation cannot apply to his nominees.

573.  I have rejected PEWC’s case for the imposition of personal liability on the part of Tung’s estate, Sun, Chung and Yip. Limitation is not an issue in relation to them.

574.  That leaves Ma.  The only relief being granted against him is a personal liability to account for the benefit which he or Town Sky obtained from the use of the South Horizons Properties as security for a loan facility.  The facility was first granted by letter from HSH to Town Sky dated 27 May 1999. 

575.  The facility was originally for $73.4 million. It was increased to $170 million in 2001 and reduced to $150 million in 2003. Note that by the time that the facility was increased in 2001 Town Sky had been re‑named Trident (Asia) Investment Ltd.

576.  PEWC sued Ma for an account by writ filed in December 2004, that is, less than 6 years from the date when the facility was first granted.  It follows that PEWC’s claim in relation to the account is within the 6 year limitation in LO s.20(2).

577.  Consequently, on the facts found by the Court, time bar is not an issue.

578.  Even if time bar had been an issue, I doubt that PEWC could reasonably be expected to have discovered the fraud involved in Hu’s disposal of the PCHL group until some time between 2000 and 2003, at least as far as Hu, Blinco BVI, Patagonia and the Corporate Defendants were involved.  In this context, I note that POIM was investigating the affairs of the PCHL group in around 2000 to 2003.  In any event, PEWC could not have learned about Top Selection until 2008 when that company’s involvement emerged as a result of inquiries ordered by Saunders J.  PEWC employed investigators (such as Kroll) to look into matters.  But even Kroll did not manage to find out about Top Selection.

F.      Miscellaneous matters

579.  In this Sub-section, I shall briefly comment on miscellaneous arguments raised in the course of these proceedings.

580.  It was suggested that the Sale Option Deed (the benefit of which Haddowe assigned to CEF as security for the 2^nd CEF Loan) is evidence that CEF had a low credit rating in 1995. 

581.  The Deed gave Haddowe the option to require PEWC to purchase the West Block of the South Horizons Properties for at least US$75 million.  It was suggested by Willi in cross-examination that, the loan being for only about US$60 million, the exercise of the Deed in effect imposed a US$15 million penalty on PEWC.  It was argued that PEWC’s financial position much therefore have been dire, if it were prepared to accept the possibility of a US$15 million penalty in return for credit facilities.

582.  I am unable to deduce anything about PEWC’s creditworthiness from the Sale Option Deed.

583.  At common law, where monies are loaned on the security of property (a mortgage), lenders have the right to require immediate repayment of the monies due under the loan “as soon as the ink on the mortgage deed is dry”.  The fact that the Sale Option Deed could be exercised at any time merely reflected this feature of mortgage loans.

584.  The buy-back price (US$75 million) was apparently calculated to reflect the loan plus all of the interest payable over the full loan period.  If so, that would make perfect sense as the Deed was intended to be security for the loan.  But that does not mean that, if the option were exercised, the lenders would be able to receive more than they were entitled to receive as at the time of exercise of the option under the actual terms of the loan.

585.  PEWC could not be required to pay the banks US$75 million, if less than that was due under the mortgage loan.  Otherwise, there would be a “clog on the equity of redemption”.  The Court in its equitable jurisdiction will not enforce a “penalty”.  It will not allow lenders to recover more from the exercise of an option than the lenders would have been entitled to receive in the normal course of events under the terms of the loan.

586.  Mr. Whitehead suggested that it was “unconscionable” for PEWC to have sued Hu.  He essentially submitted that Hu was being victimised by PEWC and PEWC’s motive for doing so was to turn Hu into a scapegoat for PEWC’s financial losses.

587.  The evidence simply does not support Mr. Whitehead’s contention.  There is nothing unconscionable in PEWC having sought to unravel Hu’s fraud, notwithstanding the difficulties involved (including the destruction of key documents in the course of CPE’s liquidation).

588.  Mr. Whitehead submitted that, to the extent that Hu is found liable, he should be entitled to a contribution from Tung’s estate and from Sun.  Given my conclusions on the liability of Tung’s estate and of Sun to PEWC, I am unable to order a contribution by the estate or Sun towards Hu’s liability.

589.  Some time was spent at trial on the issue of apparent authority under Taiwanese law.  In the event, it has not been necessary for me to deal with that matter.  Nonetheless, I believe that Mr. Hollander accurately summarised the main difference between Taiwanese and Hong Kong law on the question of apparent authority.

590.  The position under Taiwanese law is roughly this: Assume a representation by a principal P to a third party T that a person X has authority to act on P’s behalf on a transaction.  T may not rely on the representation if T “knows or might have known” that X is not actually entitled to act as P’s agent in relation to the transaction.

591.  Hong Kong law, in contrast, will not allow T to rely on P’s representation where, having regard to all relevant circumstances, T would be acting “dishonestly or irrationally” in so relying.

592.  Mr. Hollander argued that Willi should be entitled to counter‑restitution in view of the loans which he provided to the PCHL group and his efforts since February 1999 to enhance the group’s assets and marketability.  In light of my conclusion that Willi is a nominee for Hu, the issue of counter-restitution does not arise.

593.  Mr. Whitehead and Mr. Hollander initially ran the argument that PEWC’s claims were unenforceable because its overseas investments in respect of the PCHL group had not been authorised by the Taiwan Investment Commission.  Both counsel later abandoned the argument as untenable. Only Mr. Manzoni maintained the argument.

594.  In my view, the illegality argument was rightly dropped as unsustainable.

595.  The evidence is that, although PEWC’s investments may have been illegal because they were not properly authorised, contracts entered into by PEWC in connection with such investments would still be enforced by the Taiwan Courts.  PEWC and its board, however, may have to contend with administrative fines or other penalties imposed by reason of any illegality.

IV.     CONCLUSION

596.  There will be a Declaration that Top Selection holds all its shares in Blinco BVI and Patagonia on constructive trust for PEWC.  Top Selection is to transfer such shares to PEWC or its nominee within 28 days.  Failing that, the Registrar of the High Court may execute the requisite transfers.

597.  There will be a Declaration that Blinco BVI and Patagonia hold all their shares in PCHL and All Dragon on constructive trust for PEWC.  Blinco BVI and Patagonia are to transfer such shares to PEWC or its nominee within 28 days.  Failing that, the Registrar may execute the requisite transfers.

598.  There will be a Declaration that All Dragon holds all its shares in Texan and Harmutty on constructive trust for PEWC.  All Dragon is to transfer such shares to PEWC or its nominee within 28 days. Failing that, the Registrar may execute the requisite transfers.

599.  There will be a Declaration that Harmutty holds all its shares in Haddowe, Casparson, Rakeplus, Gold Global and Greateam on constructive trust for PEWC.  Harmutty is to transfer such shares to PEWC or its nominee within 28 days.  Failing that, the Registrar may execute the requisite transfers.

600.  There will be a Declaration that Harmutty holds $180 million and any other sums received from True Union and Tung Fong Hung in relation to the aborted Sale and Purchase Agreement on constructive trust for PEWC.  Harmutty is to account to PEWC for such sums as well as for any monies received from Nee Soon or any other party in respect of the transfer of Rakeplus’ assets within 28 days.  Any amounts found to be due upon the taking of such account are to be paid to PEWC.

601.  There will be a Declaration that Nee Soon and Showground have held such parts of the South Horizons Properties as have been conveyed to them on constructive trust for PEWC.  Nee Soon and Showground are to account to PEWC for all sale proceeds received by them in respect of such parts within 28 days.  Any amounts found to be due upon the taking of such account are to be paid to PEWC.

602.  There will be a Declaration that Texan holds its PacMOS shares on constructive trust for PEWC.  Texan is to transfer all its PacMOS shares to PEWC or its nominee within 28 days.  Failing that, the Registrar may execute the requisite transfers.

603.  Texan is to account to PEWC for all monies (including sale proceeds, profits and dividends) received in connection with its PacMOS shares within 28 days.  Any amounts found to be due upon the taking of such account are to be paid to PEWC.

604.  There will be a Declaration that Super Wish held its PacMOS shares on constructive trust for PEWC.  Super Wish is to account to PEWC for all monies (including sale proceeds, profits and dividends) received in connection with those PacMOS shares previously held by it.  Any amounts found to be due upon the taking of such account are to be paid to PEWC.

605.  There will be a Declaration that Afterville, Berridale and Jutech have held such parts of the South Horizons Properties as have been conveyed to them on constructive trust for PEWC.  Afterville, Berridale and Jutech shall account for all sale proceeds received by them in respect of such parts within 28 days.  Any amounts found to be due upon the taking of such account are to be paid to PEWC.

606.  There will be a Declaration that Haddowe holds such parts of the South Horizons Properties as have been conveyed to it on constructive trust for PEWC.  Haddowe shall convey such parts to PEWC or its nominee within 28 days. Failing that, the Registrar may execute the requisite transfers.

607.  Haddowe shall account to PEWC for all amounts (including loan monies, sale proceeds, rents, income and profits) received by it in respect of such parts of the South Horizons Properties within 28 days.  Any amounts found to be due upon the taking of such account are to be paid to PEWC.

608.  There will be a Declaration that Casparson holds such parts of the South Horizons Properties as have been conveyed to it on constructive trust for PEWC.  Casparson shall convey such parts to PEWC or its nominee within 28 days. Failing that, the Registrar may execute the requisite transfers.

609.  Casparson shall account to PEWC for all amounts (including loan monies, sale proceeds, rents, income and profits) received by it in respect of the South Horizons Properties within 28 days.  Any amounts found to be due upon the taking of such account are to be paid to PEWC.

610.  There will be a Declaration that Gold Global holds Greateam on constructive trust for PEWC.  Gold Global shall transfer Greateam to PEWC or its nominee within 28 days.  Failing that, the Registrar may execute the requisite transfers.

611.  There will be a Declaration that Greateam holds such parts of the Shouson Hill Property as have been conveyed to it on constructive trust for PEWC.  Greateam shall convey such parts to PEWC or its nominee within 28 days.  Failing that, the Registrar may execute the requisite transfers.

612.  Greateam shall account to PEWC for all amounts (including loan monies, rents, income and profits) received by it in respect of the Shouson Hill Property within 28 days.  Any amounts found to be due upon the taking of such account are to be paid to PEWC.

613.  There will be a Declaration that PC Asia holds such all its PacMOS shares on constructive trust for PEWC.  PC Asia shall transfer all such shares to PEWC or its nominee within 28 days.  Failing that, the Registrar may execute the requisite transfers.

614.  PC Asia is to account to PEWC for all monies (including sale proceeds, profits and dividends) received in connection with its PacMOS shares within 28 days.  Any amounts found to be due upon the taking of such account are to be paid to PEWC.

615.  There will be a Declaration that Hu holds his beneficial interests in the South Horizons and Shouson Hill Properties and PacMOS shares on constructive trust for PEWC.  Hu is to account to PEWC for all benefits (including loan monies, rents, income, sale proceeds, and proceeds) received by him in connection with those properties within 28 days.  Any amounts found to be due upon the taking of such account are to be paid to PEWC.

616.  Ma is to account for all benefits (including monies and preferential borrowing rates) received by him or Town Sky through the use of any part of the South Horizons Properties as loan security from 27 May 1999 onwards.

617.  There will be an Inquiry as to the directorships and shareholdings of Texan, PC Asia, All Dragon, Super Wish, Gold Global, PCL Nominees, Greateam, Harmutty, Haddowe, Casparson, Blinco BVI and Patagonia from their dates of incorporation to the date of this Judgment.

618.  Interest is to run on any amount found to be payable as a result of the accounts ordered at the judgment rate from the date of this Judgment until payment.

619.  PEWC’s actions against Tung’s estate, Sun, Chung and Yip are dismissed.

620.  There will be an Order Nisi in relation to costs as follows:-

(1)  PEWC is to pay the costs of Tung’s estate, Sun, Chung and Yip in relation to these proceedings.

(2)  Ma is to bear 70% of PEWC’s costs of proceeding against him.

(3)  Hu and Top Selection are to bear 70% of PEWC’s costs of these proceedings.  PEWC’s costs are to be taxed on an indemnity basis.  The costs awarded by this sub-paragraph are to include 70% of the costs payable under sub-paragraph (1) and 70% of PEWC’s costs of proceeding against Ma.

(4)  Hu and Top Selection are to bear the Corporate Defendants’ costs of these proceedings, such costs are to be taxed on an indemnity basis.

(5)  There will be certificate for 4 counsel.

621.  The rationale behind the Costs Order in sub-paragraph (2) above is that PEWC has not been wholly succcessful in its claims against Ma.

622.  The rationale behind the Costs Order in sub-paragraph (3) above is that much time was spent on the question whether Tung, Sun and Hu established the PCHL network of companies surreptitiously without PEWC’s knowledge.  PEWC did not prevail on that issue.  However, since fraud is involved, PEWC’s costs are to be taxed on an indemnity basis in determining the 70% to be payable.  Further, given uncertainty as to precisely who were complicit in Hu’s diversion of PCHL, it was reasonable for PEWC to have joined Tung, Sun and Ma as parties.  Thus, some of the costs of suing the latter should be recoverable from Hu and Top Selection.

623.  The rationale behind the Costs Order in sub-paragraph (4) above is that, given the Corporate Defendants are to be transferred to PEWC or its nominee, it would be wrong to make those companies liable for PEWC’s and their own costs.  If the companies were made liable for PEWC’s as well as their own costs, PEWC would not only end up paying its own costs, but it would also be footing the bill for the companies’ costs of defending themselves against PEWC.  On the other hand, since Hu and Top Selection would have been behind the Corporate Defendants conduct of the litigation, the Corporate Defendants should be indemnified for their costs by Hu and Top Selection.

624.  There will be liberty to apply.

Annex