KO MING FAN and Another v. KO KWOK KUE and Others

CL No. 126 of 1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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Introduction

1. Although this is an action in the commercial list, it is essentially a family dispute between the 1st Plaintiff (Mr. Ko) and his son, the 1st Defendant (K.K. Ko). It arises out of efforts to rescue the family company, the 6th Defendant (H.K. Clays), from its financial difficulties in 1990. These efforts were at the instigation of K.K. Ko and involved joining forces with New World Development Company Ltd. which through the 2nd - 4th Defendants took the lead in trying to obtain a change of use of H.K. Clays' land from mining to residential/ commercial. The land could then be redeveloped and the profits shared with H.K. Clays. It is the allegedly undisclosed variation of the Ko family's share of the net profits which gives rise to the dispute.

2. To enable K.K. Ko to conclude an agreement with New World, Mr. Ko gave him a power of attorney. Joint venture deeds were entered. H.K. Clays was restructured. It is Mr. Ko's case that he was led to agree to this course of action because K.K. Ko and another misrepresented, fraudulently or negligently, the true nature and effect of the agreement with New World and of the documents; further, that because of their relationship, K.K. Ko with the knowledge of the other Defendants exercised presumed or actual undue influence over him; and that the bargain is any event unconscionable. He seeks rescission of the documents, alternatively damages.

3. The 2nd Plaintiff (Miss Ko) is Mr. Ko's daughter. She has like complaints. Her claim has, however, no independent life of its own. It stands or falls with that of Mr. Ko. It is common ground Miss Ko simply followed her father's wishes.

4. The Defendants deny the allegations. By way of counterclaim, they assert that this action is an abuse of process, its only purpose being to frustrate negotiations with the Government in order that the Plaintiffs may obtain a better financial deal from the Defendants. They seek an indemnity for all losses caused to them by this improper action.

History of the Ko family & H.K. Clays

5. Mr. Ko who is now aged 91, was born in Guangdong. His native dialect is Hakka but he now readily speaks and understands Cantonese. He came to Hong Kong in 1946 and remained here until he emigrated to Canada on 2nd December 1990. Mr. Ko's first wife died before he came to Hong Kong. By his second wife, who died in 1981, he had 10 children.

6. The three eldest children live abroad. The fourth child is K.K. Ko who was educated in Australia and U.S.A. where he studied and worked as an engineer before returning to Hong Kong in 1973 to work for Mr. Ko in the then family company. He returned at the request of Mr. Ko when Mr. Ko's eldest son decided not to return from Germany where he had gone to study.

7. The next child is Miss Ko who is also known as Cynthia. In the mid 1960's, she went to England where she trained and worked as a secretary until 1981 when she returned to work in the office at H.K. Clays. She worked at H.K. Clays until 1988.

8. The sixth child was a son, Kwok Tung. He was a director of and worked at H.K. Clays from 1979 until 1983 when he was disabled in an industrial accident. Thereafter, he was a non-executive director. His brother Kwok Toi went to Thailand in 1982 but was also a non-executive director of H.K. Clays.

9. The three youngest children were all daughters. Mee-fan, Cindy lives in Vancouver. Lai-fan, Dorothy lives in England. Wa-fan, Rita lives in Vancouver.

10. In 1956, Mr. Ko acquired Flat Hill Quarry Co. Ltd. For the next 17 years, it operated a stone quarry at Ngau Tau Kok under an annual mining licence. In 1974, the Government refused to renew the licence, so that the company could no longer carry on blasting operations. For two years, it survived by obtaining stone elsewhere for crushing. It operated at a loss. After two years, Flat Hill was given notice to vacate the site. Having been advised by counsel that it had no case to obtain a new licence, Flat Hill vacated the site in 1976.

11. In the same year, Flat Hill acquired a kaolin mine near Tuen Mun. The acquisition was attractive because there was a significant quantity of machinery already in place and there were 21/2 years of a five year mining licence still to run. Unfortunately, the Government again refused to renew the licence. The company vacated the site without seeking legal advice.

12. In 1978, Mr. Ko acquired H.K. Clays from a Mr. Wu Won-hoi who in turn had acquired it from Jardine Matheson Ltd. Mr. Wu sold this company because kaolin extraction was uneconomic without blasting and he did not have the resources for blasting operations. Further, the mining lease was due to expire in 1980. In 1983, K.K. Ko who was by then running H.K. Clays persuaded the Government to renew the mining lease. H.K. Clays was given a ten year mining lease, back-dated to 1980 upon payment of a premium of $6.3m. At the same time, H.K. Clays agreed to build a tile factory on an adjacent site. The factory was completed at the end of 1986 and production on a trial basis began in 1987. The factory and its machinery was financed partly by bank borrowing and partly by shareholder loans from Mr. Ko.

13. H.K. Clays did not flourish during the 1980's. It never paid a dividend. Apart from 1988, when it made a small profit of some $485,000.00, it operated at a loss. By 31st December 1989, it had an accumulated deficit of $13.2m. In the following year, there was a net loss of $5.4m and the accumulated deficit rose to $18.7m. The company's total liabilities were $49.5m including a bank loan of $15.5m and shareholders loans of $20.7m which came principally from Mr. Ko.

14. Events had, however, conspired against H.K. Clays. Its main competitors in the tile industry were from Italy, Taiwan and Spain. In the late 1980's, there had been a sharp fall in the value of the Italian lire, so that Italian products had become much cheaper. The business environment for H.K. Clays' products was very bad.

15. The situation was made worse by other events occurring in 1989 and 1990. In June 1989, Tien An Men Square rocked Hong Kong and, apart from affecting the property market, caused many people to emigrate from Hong Kong. Mr. Ko was one of these. In 1990, there was a dispute about whether or not Hong Kong should have a new airport. In August that year, Iraq invaded Kuwait, thus initiating the Gulf War which further depressed the market. Finally, by July 1990, Government had indicated that it was prepared to renew H.K. Clays' lease for a period of three years only, but at an annual rent of $4.7m. The existing rent was just over $1m and H.K. Clays was having difficulty in paying even this. The proposed new rent was out of the question. In his letter dated 13th August 1990 to the District Lands Office, K.K. Ko described it as

"Manifestly excessive when compared with our previous annual payment, and it is not possible for us to proceed on doing business on the site at this rent."

16. K.K. Ko and his brother Kwok Toi had already come to the rescue of H.K. Clays in 1989. In that year, a second production line had been established. Facilities from the Bangkok Bank amounting to $19m were required in return for which the Bank required security. This was provided by the two brothers who agreed to a legal charge over the family home at 5 Cambridge Road which had been given to them by their mother in 1971. The following year, to further assist H.K. Clays, the eldest son Kwok Dai gave a legal charge over factory premises at Tsui Fung Street which had earlier been given to him by Mr. Ko.

17. I think it fair to observe that, given the position in 1990, it is difficult to understand why anyone should have wished to try and keep H.K. Clays going. The prospects of the company turning the corner and becoming profitable were remote in the extreme. In any event, further loans to the company would undoubtedly have been required, to come principally from Mr. Ko. In evidence, Mr. Ko acknowledged that if the company had been wound up at that stage then, taking into account the outstanding bank loan, his own loan which he would have had to write off, and expenses associated with winding up, his losses would have amounted to almost $50m. Mr. Ko, however, seemed to have no qualms about continuing in business.

18. The answer to this apparent riddle lies at the heart of this case. Mr. Ko and K.K. Ko were not unaware of the problems facing H.K. Clays. They had taken two steps to try and solve the problems. First, they had consulted a number of solicitors, perhaps as many as five, about the prospects of establishing that H.K. Clays had a right under the Mining Ordinance to the renewal of its lease. Opinions were obtained from several counsel in Hong Kong. These opinions were uniformly unoptimistic about the prospect. Secondly and crucially, there had been discussions with large Hong Kong developers about the possibility of redeveloping the site. In 1987, K.K. Ko had spoken to representatives of Paliburg, while in 1990 Mr. Ko had spoken to representatives of Sino Land. Nothing came of either of these approaches.

19. Then, in November 1990, K.K. Ko was introduced to and began discussions with representatives of New World. K.K. Ko negotiated with New World on his own, although he informed and consulted Mr. Ko about the proposals that emerged. Oral agreement was reached with New World before Mr. Ko emigrated to Canada on 2nd December 1990. It is at this point that contentious issues arise.

20. The essence of the agreement reached between K.K. Ko and New World and embodied in written agreements between H.K. Clays and New World is very simple. Initially, New World would finance negotiation and, if necessary, litigation with Government in order to secure more favourable leases and conditions for H.K. Clays. If that proved to be successful, New World would go on to finance negotiation with Government for a change of use of the land so that it could be used for commercial, residential or industrial building. Assuming the negotiations to have been successful, New World would pay any necessary premium and redevelop the land at its own expense. After deduction of all the various costs and expenses which had been incurred, the net profits from the redevelopment would be shared between New World and H.K. Clays on an 80/20 basis. It was further agreed that upon Government consenting to change of use, New World would pay H.K. Clays $25m in return for half of its share, i.e. 10% of the net profit, thus providing H.K. Clays with ready cash.

21. The only expenses to be incurred by the Ko family were two-fold. First, should New World be unable to negotiate a change of use, H.K. Clays would pay New World up to 50% of any reduction in the rent which had been obtained. Second, upon Government consenting to change of use, the Ko's would have to wind up the business of H.K. Clays so that New World would have a vacant site and effectively a shell company for the redevelopment. For this purpose, the ready cash of $25m would be available.

22. One of Mr. Ko's complaints is that he has been advised that H.K. Clays will have to finance the redevelopment. Whilst this is true, the company has been so restructured that it is no longer owned by the Ko family. It is accepted and acknowledged that New World will be responsible for all costs and expenses.

23. The real issue which has emerged is whether Mr. Ko was informed about the exchange of 10% of the net profit for $25m before he signed a power of attorney in favour of K.K. Ko and his wife. This power of attorney enabled the attorneys to sign the original joint venture documents, documents which Mr. Ko asserts he would not have countenanced had he been aware that the Ko's would not get 20% of the net profits.

The Plaintiff's case

24. Until 1990, H.K. Clays was a family company. Mr. Ko owned 365,000 shares; Miss Ko 150,000; K.K. Ko 750,001; two other sons of Mr. Ko each held 105,000; and Flat Hill Quarry Co. Ltd., itself owned by the family, held 19,999.

25. H.K. Clays had been mining clay and kaolin at land in Cha Kwo Ling since about 1933. It was purchased by Mr. Ko in 1979. The following year, the capital of the company was increased and Mr. Ko distributed shares to members of the family. Thereafter, while Mr. Ko provided cash flow from his own resources for the company and guaranteed bank loans, management was left to K.K. Ko and Mr. Ko's other two sons. For various reasons, the other two sons ceased to be involved in management which then rested with K.K. Ko.

26. At the time when Mr. Ko acquired H.K. Clays, he also obtained a renewal of the lease of the site for a period of ten years expiring 31st July 1990 at a premium of $6.337m. When that lease expired, the Government eventually offered to renew the lease for a term of three years at an annual rent of $3.3m. This substantial increase in rent coupled with the company's exposure to Bangkok Bank Ltd. of about $20m. put the company in serious financial difficulties.

27. H.K. Clays had obtained legal advice to the effect that it would be difficult if not impossible to obtain a longer lease than that being offered or a reduction in the rent. In November 1990, Mr. Ko learned that K.K. Ko had been in touch with New World which was prepared to support a legal challenge to the rent increase in return for the right to redevelop the site. There were negotiations for the formation of a joint venture which would first secure a reduction in the proposed rent and then seek the right to redevelop the site by a change of user. Mr. Ko understood from K.K. Ko that K.K. Ko would make files relating to the rent increases available to New World in order to obtain advice from counsel in U.K. If counsel advised there was more than a 50% chance of success, New World would pay the cost of mounting a challenge to the rent increases. In return, New World would be entitled to seek to redevelop the site and if successful, H.K. Clays' existing shareholders would receive a 20% share of the net profit of redevelopment. To facilitate redevelopment, all the shares in H.K. Clays would be transferred to a new company which would receive the 20% of net profit.

28. By this time, Mr. Ko had decided to emigrate to Canada. He left Hong Kong on 2nd December 1990, leaving K.K. Ko to handle matters. Once in Vancouver, Mr. Ko had a number of phone conversations with K.K. Ko which did not change his understanding of the proposal. Then at the end of December 1990, he received from K.K. Ko a letter dated 25th December 1990 (the Christmas letter) and a number of documents. In the letter, K.K. Ko informed Mr. Ko that

"We stopped the new production line yesterday, reduced the number of workers by six, and hope to reduce the number of sales representatives by two by the end of the month (probably will get rid of Chan Chai and the one surnamed Lee).

The week before last, with no alternative, (we) paid to the Government another $475,000.00 as rent for the first half year. The lawyer said that if we do not pay the rent, the Government can say that we are occupying Crown property by trespassing, and in this event they will have the right to close the factory. Now the rent for the first year is $3,300,000 p.a. on a temporary basis. That is, the total rent we have paid ($1,175,000 + $475,000 = $1,650,000) covers the period up to the end of January 1991. (I) believe that another $1,650,000 has to be paid on 1st February. (I) really don't know how to deal with that.

Now New World intends to send our factory's information to a UK Barrister for his perusal. If the UK Barrister after perusal considers there is a chance (e.g. the chance of winning is 50% or more), then New World will pay the expenses and strive for us. Of course the purpose of New World is to get the rights and interests of development in future. The Barristers we found by ourselves in Hong Kong all said that we have no right to force the Government to renew the lease!! Now we can only place our hope on this UK Barrister. But New World will only assist us after we have signed the letter of consent in order to protect their interest. The terms we agreed orally are the same as what I told you last time, that is, if the right to develop is obtained in future, then the existing shareholders of our company will enjoy a 20% share of the net profit derived at that time from the development.

New World's plan is that if the right to develop is successfully obtained (in two or three years' time), all shares in Hong Kong clays will be transferred to a new company, and this new company will be entitled to 20% of the net profit of the intended development.

Since this plan requires the transfer of the existing shares to a new company in future (after obtaining the right to develop), consent to this plan must be obtained from all the shareholders. However, many of the shareholders are not in Hong Kong as present

- for example, Flat Hill Quarry owns 19,999 shares, with you and the eldest brother as directors.

- and Ah Toi is in Thailand

- and you are in Canada

this will make it very difficult to obtain all the shareholders' Power of Attorney or their legal signature. Accordingly, after discussion with the lawyer, it was unanimously thought that the best thing to do is to have the following shares transferred back to your name.

(1) Flat Hill Quarry's 19,999 shares

(2) Ah Toi's 105,000 shares

(3) Ah Tung's 105,000 shares

(share transfer procedure is simple which requires only the signature of the buyer and the seller), and then you in turn authorise me or Dan Ching to handle on your behalf your shares in Hong Kong Clays. In this way, So Fan and I can represent 100% of the shareholders of Hong Kong Clays and sign the Letter of consent with New World. In the circumstances, this is the quickest method because before the letter of consent is signed, New World is unwilling to spend money to engage the UK Barrister to start working for us. As regards how you would handle the shares under your name, you can discuss the same with lawyer when you come back to Hong Kong."

K.K. Ko went on to ask Mr. Ko the sign the documents necessary to transfer the shares and the power of attorney. He concluded :

"Please call me as soon as you receive this letter. There is not much time left! And don't know if we can pull through this difficult year!."

29. Mr. Ko signed the documents immediately and returned them to K.K. Ko by speedpost. He signed because K.K. Ko told him it was necessary to enable him to negotiate with New World. Mr. Ko did not date the power of attorney having been told not to by K.K. Ko.

30. In about August 1991, K.K. Ko phoned Mr. Ko saying that U.K. counsel had advised H.K. Clays had a case against Government, and New World were to instruct him in the litigation. He said there was an important document to be signed, so H.K. Clays could cooperate with New World and deal with the litigation. On 29th August, Mr. Ko met K.K. Ko's wife when she arrived at Vancouver Airport. They went straight to a notary public where Mr. Ko signed the supplementary restructuring deed dated 1st October 1991. Mr. Ko was given no translation or explanation. When someone in the notary public office asked if Mr. Ko understood, Mr. Ko looked at his daughter who had accompanied him and at K.K. Ko's wife who said "Mr. Ko would understand it". Proceedings against government, which would not renew the lease, were commenced.

31. In May 1993, Mr. Ko was in Hong Kong for the hearing of H.K. Clays' case against Government. The case was settled without a hearing. While Government made no concessions as to its position in law, it agreed to renew the leases for six years from 1st August 1990 at a rent of 3% of the annual rateable value. Money already paid by H.K. Clays in excess of that sum would be repaid. Unfortunately, this happy state of affairs was short-lived. The Government decided not further to renew the mining lease because it was of the view that H.K. Clays had not been carrying on mining operations. H.K. Clays challenged the Government's decision by way of judicial review. A decision on that review was handed down during the course of the trial of this action. The review was successful on a narrow procedural ground but failed in its challenge to the Government's substantive findings of fact about H.K. Clays mining operations or lack of them.

32. Mr. Ko was still in Hong Kong when he received a phone call from K.K. Ko on 19th August, asking him to be a guest of the boss of New World at lunch at the Dynasty Restaurant in the Victoria Hotel. K.K. Ko explained that an agreement was to be signed so that a consultant could be engaged to seek change of use. He also said that H.K. Clays' factory site and equipment had been valued at $50m which would be taken into account in a new company in which H.K. Clays would have a 50% holding. Mr. Ko asked about the value of the lease. K.K. Ko said it was not worth anything at all. Mr. Ko queried this saying even unused cultivated land in the New Territories was worth a few hundred dollars per square foot. K.K. Ko said they should wait for approval of change of use and then take it up with New World. Mr. Ko was not happy that this had not been taken up with New World.

33. Next evening, K.K. Ko phoned again and asked if Mr. Ko was going to the lunch. Mr. Ko said he was not going. K.K. Ko responded that that was alright as he could sign for Mr. Ko using the power of attorney. The following morning, Mr. Ko discovered Miss Ko, with whom he was staying, was going to the lunch so he decided that as he had never met Mr. Cheng, the boss of New World, there was no harm in going to lunch to meet him.

34. At the restaurant, Mr. Ko met not Mr. Cheng but his son, Cheng Ka Shing, and the son's wife. At or soon after 2.00 p.m. two other men arrived. One was a solicitor, Ko Shing Tak (otherwise known as Aggarwal) while the other he came to know was a Mr. Law of New World. Mr. Aggarwal opened and explained some documents to Mr. Ko. He said there was going to be a joint venture and that there was an agreement to be signed. A consultant would be instructed for the change of use. H.K. Clays' factory and equipment would be priced at $50m and become part of a new company of which H.K. Clays would hold 50%. If the application for change of use succeeded then, on completion of redevelopment, Mr. Ko's company would take 10% of the net profit. All costs of redevelopment would be taken care of by New World and Mr. Ko would not have to pay a single cent. New World would also give H.K. Clays HK$25m and H.K. Clays and the Ko's would take care of the severance and removal of the factory.

35. Mr. Ko said he was not happy as they had gone too far. He had understood the Ko's would take 20% but now it was only 10%. Mr. Aggarwal explained that these terms were already in the 1991 agreement and only being repeated. Mr. Cheng said the terms would not be changed. K.K. Ko then confirmed that this was correct. He said the change of use would cost $30m and H.K. Clays did not have such funds. He was therefore willing to come down to 10% so the Ko's would not have to bear these fees. Mr. Ko thought that as he trusted his son there was not much he could do and signed. He said, however, that it was ridiculous and unreasonable.

36. Later in 1993, Mr. Ko learned from the newspaper of a redevelopment at Lai Chi Kok Amusement Park. The value of the land was quoted at $1,310 per square foot. Mr. Ko's reaction was that the Ko's had been cheated by New World because the agreement with New World made no reference to the value of the land. He made a calculation that the H.K. Clays' site of 850,000 square feet was worth over $1 billion. He returned to Hong Kong and in January 1994 obtained copies of the various deeds.

37. Mr. Ko apparently obtained advice from counsel upon these deeds. He was told, erroneously as it is now clear, that the Ko's would have to fund the redevelopment and would be lucky to get their 10% net profit. (In fact H.K. Clays would pay for the redevelopment but the funds would come from New World because of the restructuring of H.K. Clays. Other than the winding up of H.K. Clays if the redevelopment was approved, the Ko's would have no financial commitments apart from the guarantees and indemnities.)

38. In May 1994, Mr. Ko sent two letters to K.K. Ko. The first was dated 8th May and read:

"A few days ago, two translated documents were delivered. One of them was sent by Kwok Dai, the other was translated by solicitors' firm. Father (I) have read them and found that the contents are more or less the same. You must read and study them carefully. If there is anything unclear, it is important that you consult Mr. Wu Won Hoi.

Overall speaking, all of the assets and land ownership of the entire clay company are completely taken over by the other side (if the change of usage and development to construct buildings were approved). According to the explanation given by the barrister to father (me), even if we are given 10% of the net profit, it would be extremely difficult for us to obtain them, believe it or not. Father (I) would not live to see that happens!

Father (I) have now decided to take legal actions to nullify the five agreements. Succeed or not, it is hard to predict. However, according to what the barrister said to father (me), there is a 60% to 70% chance of winning the lawsuit. This is because those agreements are one-sided and highly prejudicial to us and would cause (us) a big loss. Firstly, if the other side applies for change of usage and successfully obtains approval to develop the site into buildings, they will make profits of several billions, whereas we would not even be able to recoup our costs. Don't you think this is heart-breaking?

Four days ago when I met you in the office, I would have wanted to discuss this with you in detail. However, (I) was unable to do as I wished because Mr. Mui of Sun Ka Lee came at that time. (I) seemed to have heard you said that the barrister was unable to understand the contents of the agreements. Father (I) was perplexed but it was not convenient for me to say more. I hope you can stay calm and study and think about the circumstances before and after the signing of the agreements with them thoroughly: whether it is likely that what they have said to you is different from what they have put down in writing and that you are not aware of it, not knowing that they kept you in the dark.

There are three important matters that you must bear in mind:

1. When you deal with the other side, stay calm.

2. What is the progress of the plan of the other side's consultant? You must make enquiries frequently on it and the expenses involved and make notes on them.

3. For the time being you must not disclose that we are instructing lawyers to study the matter. If they ask, just say "don't know", that is all.

Father
8-5-1994

N.B. The power of attorney executed on 0 date 0 month 91 was undated, do check and let me know. If you cannot find it, it must be with the lawyers. (You) must ask (them) to give it back to (us). Do remember this."

39. Kwok Dai is Mr. Ko's eldest son. Mr. Wu is the man from whom Mr. Ko acquired H.K. Clays and who stayed on as Mr. Ko's book-keeper or accountant.

40. It is worth noting that Mr. Ko's complaint is not so much about getting only 10% but rather about obtaining both that and recouping costs.

41. The second letter was on 18th May. Mr. Ko referred to the Lai Chi Kok redevelopment and to land at Tai Wo Ping which had been bought by Sino Land at a price of $8,325 per square foot with a selling price of $5,414 per square foot (I take that to be the cost of a unit when sold). He continued:

"The land at our clay factory has an area of 850,000 square feet, New World offers me $25 million. The price is only $21 per foot. Although our factory land is not held under ownership, if there is resumption by the Government for development, according to the law there would be compensation. The amount of compensation will be determined by Government professional valuation. Even though (we) do not know what (the valuation figure will be), it is estimated that a minimum of $500 to $600 per (square) foot compensation will be given to us (meaning that when the application for change of usage is successful and the land is allowed to have buildings constructed on it). By this comparison, don't you think it is heart-breaking!

Calculated by Father."

42. Mr. Ko apparently overlooked the unlikelihood of Government paying compensation to H.K. Clays if the land was redeveloped by H.K. Clays. He also took no account, because he had been misled by counsel's advice, of the fact that New World would have to pay an enormous premium in order to secure change of use apart from paying construction costs.

43. That essentially was the evidence of Mr. Ko. Once it had been clarified that the Ko's were not expected or required to pay any of the litigation or redevelopment costs (plainly they could not), Mr. Ko's two outstanding complaints were that the Ko's would only get 10% and that the value of the land had not been taken into account. He had signed the documents he did because he relied on and trusted K.K. Ko who had not informed him about the correct division of the net profits. Had he known that the Ko's would only get 10%, he would not have signed.

The documents

44. It will be helpful to consider the documents around which this case revolves. The documents fall into 3 groups:

1. The power of attorney

45. This was executed by Mr. Ko on 31st December 1990 in favour of K.K. Ko and his wife. After reciting that Mr. Ko had requested his attorneys "to act for me in all matters connected with my shares in (HK Clays)" the power went on to confer wide powers on the attorneys.

46. On the same day, as set out in the Christmas letter, the shares belonging to Flat Hill and Mr. Ko's two sons were transferred to Mr. Ko.

2. The 1991 deeds

47. Three deeds were executed in 1991

a) Deed for formation of joint venture dated 4th February 1991 (JVA). The parties were the 2nd Defendant (Rhyl Hill) and HK Clays. There were two objects. First, to renew HK Clays' two leases of the land on terms no less favourable than those already on offer by Government. Second, to obtain a change in the permitted user to include commercial, residential or industrial use with a view to redevelopment. For these purposes, HK Clays appointed Rhyl Hill its attorney for any negotiations with or proceedings against Government.

48. JVA called for three steps. Step 1 provided for HK Clays to pay Rhyl Hill's costs of obtaining no less favourable lease terms, capped at 50% of any reduction in the rent obtained. HK Clays itself would pay the rent and any other Government charges.

49. Step 2 provided that on securing change of user, Rhyl Hill would pay the premium required and have complete discretion as to how to develop manage and finance the project. HK Clays, however, would pay Rhyl Hill's costs of redevelopment and allow the site to be used as security for finance (here can be seen the source of Mr. Ko's misunderstanding about the costs of redevelopment. He, of course, always identified HK Clays with the Ko's).

50. Step 3 required HK Clays effectively to wind up its business, discharge all obligations and deliver a vacant site to Rhyl Hill.

51. Then, any benefits arising were to be shared 80/20 in favour of Rhyl Hill.

52. Clause 8 provided for termination. Rhyl Hill had a general right to terminate. Otherwise JVA could only be terminated if Rhyl Hill failed to obtain change of user within 5 year a period which Rhyl Hill had a right to extend by one year.

b) Deed for restructure of HK Clays dated 4th February 1991 (restructuring deed)

53. The parties were Rhyl Hill and "the owners" identified as Mr. Ko, Miss Ko and K.K. Ko, the remaining owners of shares in HK Clays. K.K. Ko signed on behalf of Mr. Ko. The owners acknowledged they were aware of and consented to the terms of JVA and agreed to procure HK Clays to comply with the obligations under JVA.

54. Restructuring was to take place on "initial completion" which was defined in JVA as fulfilment of step 3 and the issue of a grant effecting change of user. Rhyl Hill was to pay the owners consideration of $25m and subject to a declaration of a dividend of that amount by HK Clays, the owners would authorise Rhyl Hill to pay that $25m to HK Clays. This sum was to represent payment of 50% of the value of HK Clays' business and equipment and of its 20% share of the benefits under JVA which were to be transferred to a new company.

55. That new company was to be formed and shares held 50/50 by Rhyl Hill and the owners. HK Clays existing shares would be converted to deferred non voting shares while new shares would be issued to Rhyl Hill which would then hold the entire share capital of HK Clays apart from the deferred shares. Rhyl Hill was also to have the right to appoint directors and other officers. Any profit or loss of HK Clays' current business was to be for the owners.

56. Under Clause 5.23, the owners became jointly and severally liable as primary obligors of HK Clays' obligations and liabilities under JVA; and indemnified Rhyl Hill in the event of default by HK Clays or themselves under the restructuring deed.

57. Finally, the owners appointed K.K. Ko as their representative in any dealings with Rhyl Hill and appointed Rhyl Hill as their attorney for doing anything required under this deed.

58. On 9th May 1991, the 7th Defendant (Intcen) was formed. 150,000 issued shares were all held by the three Ko's.

c) Supplementary restructuring deed dated 1st October 1991 (the supplementary deed)

59. The parties were Rhyl Hill, the three Ko's and Intcen. The object was for the Ko's to transfer HK Clays' shares to Intcen and increase HK Clays capital for a fresh issue as required under the restructuring deed.

60. Intcen undertook to comply with the terms and conditions of the deed. The Ko's and Intcen were authorised to increase HK Clays' capital. The Ko's warranted Intcen's obligations and became jointly and severally liable for their own and HK Clays' obligations under the restructuring and supplementary deeds. They indemnified Rhyl Hill for any default.

3. The 1993 Deeds

a) Restructuring agreement for HK Clays dated 21st August 1993 (the revised agreement)

61. The parties were the 4th Defendant (Ewing), the 3rd Defendant (Muswell), Intcen, the Ko's and Rhyl Hill. The intention was "without materially altering the spirit of" the 1991 deeds to reorganise HK Clays. For this purpose, Muswell and Intcen would form a joint venture and hold the shares 60/40. Muswell would appoint two directors, Intcen one.

62. Then Intcen would sell 750,000, i.e. 50% of HK Clays' shares each to Ewing and the joint venture for $100.00.

63. Again the Ko's because jointly and severally liable.

64. As a result, the Ko's through Intcen would hold a 40% interest in the joint venture which in turn would hold 50% of HK Clays.

65. The joint venture became the 5th Defendant (Sun To)

b) Shareholders Deed dated 21st August 1993

66. The parties were Ewing, Muswell, Intcen, Sun To, the Ko's, Rhyl Hill and HK Clays. The deed stated

"The parties are desirous of entering into this Deed for the purpose of assuring an orderly and harmonious relationship between them and to consolidate and re-affirm the spirit of the joint venture covered by the Main JV Agreements and the 1991 Restructuring Deeds."

67. To this end, the 1991 Deeds became superseded and of no further effect save as to any accrued rights and obligations.

68. HK Clays' board was to have 7 directors, 4 nominated by Ewing and 3 by Sun To. HK Clays itself was inhibited from increasing its financial exposure without the consent of Ewing and Muswell. It appointed Rhyl Hill as its attorney for dealing with matters under the deed.

69. HK Clays and the Ko's were made liable for payment of the new rent and charges and for preserving the lease agreed with Government earlier in the year in court proceedings. HK Clays acknowledged it had obtained a benefit and would pay Rhyl Hill 50% of that benefit.

70. Clause 9 provided for Rhyl Hill to pay the premium and decide how to redevelop the site if change of user was secured. HK Clays was to pay Rhyl Hill's costs including financing costs. (I observe that it should be clear by now that, although HK Clays would be responsible for financing redevelopment of the site, HK Clays was no longer to be identified with the Ko's. The finance would come from another source, namely New World, which lay behind the Rhyl Hill and the other companies.)

71. Clause 10 again provided for HK Clays through Intcen to wind up its business on change of user and to hold itself and the site free of liabilities.

72. Clause 11 provided for further reorganisation upon the Government approving change of use. Sufficient of Sun To's shares in HK Clays would be converted into deferred shares so that Ewing would hold 63% of HK Clays' ordinary shares. Sufficient of Intcen's shares in Sun To would be converted to deferred shares so Muswell would have 73% of Sun To's ordinary shares. In consideration for these conversions, Rhyl Hill would pay $25m to Intcen.

73. Once this had been done, Clause 12 provided that any shareholder of HK Clays could require it to declare as dividends the balance of its net profits.

74. Again, the Ko's became jointly and severally liable for liabilities and obligations under this deed.

75. This deed could be terminated at any time by Ewing or Rhyl Hill. Otherwise it could be terminated if no change of user was obtained after 5 years, a period which could be extended by two years by Ewing or Rhyl Hill.

76. I accept, as counsel complained, that the Ko's incurred various obligations and liabilities under these deeds. I also acknowledge that the Ko's were locked into the various arrangements for an extended period of time whereas the New World side could terminate the arrangements at any time. The fact is, however, that Mr. Ko, the principal complainant, once the question of financing had been resolved, had only one complaint, namely the reduction of the 20% share of the net profits to 10% plus $25m.

No case to answer

77. The Defendants submitted that, because of deficiencies in the pleadings and because of the quality of the evidence of Mr. Ko, they had no case to answer. I gave a ruling on the nature of such a submission after which I heard supplementary submissions.

78. Mr. Ko was subjected to a long and detailed cross-examination. Having regard to that and to the evidence of Miss Ko, I have come to the conclusion that Mr. Ko was not a witness on whom I could rely.

79. First, Mr. Ko said he left K.K. Ko to run the business of H.K. Clays from 1980 onwards and relied upon him. He was kept informed. Mr. Ko, however, was not only kept informed, he kept himself informed. He visited the site, obtained information about the business and checked the accounts. He was fully aware of how the business was doing, of the poor cash flow and of the need for him to continue to make loans to H.K. Clays. He signed the annual directors' report although, according to Mr. Ko, it was because K.K. Ko explained that it was the directors' report and he, Mr. Ko, assumed that the auditors had done their job properly.

80. Not only was Mr. Ko very well informed about H.K. Clays' business, he remained involved in the business even after 1990. As late as 8th March 1992, he was writing to Bangkok Bank about an interest payment and complaining about the bank's unreasonable method of calculation of foreign currency savings.

81. It is therefore difficult to believe that Mr. Ko kept himself any less well informed about the progress of arrangements with New World. Mr. Ko accepted that, by the end of 1990, if H.K. Clays could not renew its lease on moderate terms, it faced winding up. H.K. Clays, in which he had sunk so much money and effort, therefore depended on a successful resolution of the negotiation and litigation for a new lease. It seems unlikely that Mr. Ko did not take pains to find out exactly what was going on.

82. It is curious that Mr. Ko several times referred to "me" and "my company". The strong impression was that H.K. Clays was his company and the object of his deep concern. In cross-examination, however, Mr. Ko somewhat diluted this impression. He said that K.K. Ko and his two brothers, Toi and Tung, decided to acquire H.K. Clays because he was already retired. He himself simply funded the purchase. He later gave each of them shares in the company to reflect their participation. He said K.K. Ko, who was effectively managing director, got the major share holding of 755,000 shares. The two brothers each got 105,000 shares. Miss Ko received 150,000 shares when she began working for H.K. Clays in a clerical capacity. Flat Hill, the existing family company, kept 19,999 shares. Apart from K.K. Ko, Mr. Ko expected his children to deal with their shares as he wished.

83. Toi, however, soon left the business to set up on his own in Thailand. He kept his shares.

84. Earlier, Mr. Ko had purchased two properties, namely the family home at 5 Cambridge Road and the factory premises at Tsui Fung Street. He gave 5 Cambridge Road to his wife who later gave it to K.K. Ko and Toi. Tsui Fung Street, he gave to his eldest son, Dai, who lived in Germany. Both premises were later charged to the Bangkok Bank as security for facilities. In 1992, the bank called its outstanding loan of about $20m. K.K. Ko and Toi agreed to the sale of Cambridge Road without hesitation and cleared of the loan. They also made $1.5m available to Mr. Ko which he gave to Miss Ko to buy a flat. Mr. Ko signed a document acknowledging receipt of $1.4m and pledging to surrender her shares in Intcen to Mr. Ko when he requested.

85. Mr. Ko said he knew nothing of this document, which was witnessed by K.K. Ko, and had given no instructions for its preparation nor for the pledge. The money, however, was either part of H.K. Clays' finances or the property of K.K. Ko and Toi. There was no apparent need to involve Mr. Ko unless it was recognized and acknowledged that Mr. Ko was still very much in charge of what was going on and required this loan or advance to be neatly tied up.

86. In my view, this all tends to cast doubt on Mr. Ko's assertion that he had taken a back seat and wholly relied on and trusted K.K. Ko.

87. Second, there is the Christmas letter. Initially, Mr. Ko replied "I would say yes" to a suggestion that he had asked K.K. Ko to set out the proposals. He then changed his mind and said this letter was written on K.K. Ko's own initiative. He said the terms in the letter, that is 20% of the net profit for H.K. Clays, were what he had been told by K.K. Ko. He then went on to say, however, that until he received the letter, he was not aware that there was any agreement. Before going to Canada, he said, he knew H.K. Clays had offered a 60/40 split. After arriving in Canada, he was told on the telephone that at most H.K. Clays would get 25%. When he saw the terms contained in the letter, he had no objection.

88. The term in the letter that H.K. Clays would get 20% was not what Mr. Ko said he had been told. I find it hard to accept that, if Mr. Ko only knew about 25%, he would have agreed to 20% without making some enquiry as to whether it was really the best deal that could be achieved.

89. Further, although expenditure is no longer an issue, Mr. Ko endeavoured to support his contention that the Ko's should not have to pay anything from use of the words "net profit" in the letter. These, he said, made it clear that all costs were to be taken care of by New World. I am afraid the logic escapes me. The words make clear that expenses will be recouped. They do not make clear who will have expended them.

90. Third, Mr. Ko's attitude to H.K. Clays' position at the end of 1990 was wholly unrealistic. He acknowledged that, if there was no solution quickly, H.K. Clays would collapse and accepted K.K. Ko's view in the Christmas letter that, in effect, the Ko's had to accept the New World proposals or collapse. He claimed, however, that if New World only offered 10% to H.K. Clays, he would not accept it but carry on business. This he maintained in spite of the parlous state of H.K.'s finances, the new rent which Government was seeking, and the legal advice that H.K. Clays had no case against Government for a longer lease and better terms. Mr. Ko asserted that the adverse opinion obtained did not mean much as there were hundreds of lawyers in Hong Kong. He also acknowledged that, if H.K. Clays closed, he would already be facing a loss of about $50m.

91. I have to say that it is difficult to attach any weight to such evidence. In my view, Mr. Ko was simply trying to defend an impossible position.

92. Fourth, Mr. Ko was clear that the Dynasty lunch was the first time he knew that the Ko's were not getting 20% and the first time he complained. Until then, he said, he did not have copies of any deeds and did not know the true arrangement.

93. I fear Mr. Ko has been less than straightforward. He began by saying in chief that when K.K. Ko phoned him on 19th August, K.K. Ko told him that the litigation against the Government was over and the Ko's had won. Mr. Ko understood that litigation about the renewal of the lease and a reduction of the rent had been successful. Later, when giving evidence about his investigations when he returned to Canada after the Dynasty meeting, he said he was not clear about the result of the litigation, that he had no information and it was not clear to him. Again, when his attention was drawn to the fact that a copy of the consent order dated 28th May 1993 was annexed to the joint venture deed signed at the Dynasty Restaurant, Mr. Ko said he did not know at the time but became aware when K.K. Ko told him about it. Unfortunately, according to Miss Ko, whose evidence on this point was entirely unprompted and which I see no reason to doubt, Mr. Ko was in Hong Kong for the hearing on 28th May. He attended the litigation. He told her the outcome. Indeed, he stayed with her until August. There can be no doubt that he well knew the outcome immediately. But it gets worse.

94. Miss Ko's evidence in chief, which was wholly spontaneous and wholly convincing, of the events leading up to the Dynasty meeting was that she overheard bits of one telephone conversation Mr. Ko had with K.K. Ko. Of that, she said that "there was dissatisfaction as we were not getting 20%". Later, she said Mr. Ko was against going to lunch because he was not happy that the Ko's were to get less than 20%.

95. It is clear that Mr. Ko knew before the Dynasty lunch that the Ko's were not getting 20%. Mr. Ko's explanation of why he eventually decided to go to the lunch - because Miss Ko was going to meet Mr. Cheng and because K.K. Ko was going to use the power of attorney anyway - is specious. He plainly went to protect and to try and improve his position.

96. The reduction of 20% to 10% plus $25m was not some last minute alternation in manuscript in the 1991 deeds. It was fully integrated in the somewhat complex restructuring deed. It was in existence at the beginning of December 1990.

97. A memorandum dated 5th December 1990 was discovered. It was from Tony Sze, who had been negotiating on behalf of New World with K.K. Ko, reporting back that preliminary agreement had been reached. After giving details of the steps and negotiations that would be involved and stating that New World would be responsible for funding, Mr. Sze continued

"Profits derived from the sales of the development will be distributed 80% to New World and 20% to the Hong Kong Clays.

Upon successful negotiation in the change of use of the Site, JV Co will pay $25 million to acquire 50% interest in Hong Kong Clays. The owners undertake that on completion of the share transfer the company will consist solely of plant and machinery free from any lien or charges. This follows that JV Co will also be entitled to 50% of the share of the development profit entitled by Hong Kong Clays thus effectively increasing the profit sharing on the sales of the development to 90%. All business operations of Hong Kong Clays will remain vested with its present owners until its cessation of business at the Site."

98. It must be remembered that H.K. Clays was in a bad financial position. Later, it would have to wind up its operations if change of use was obtained. Mr. Ko accepted that New World could not be expected to pay for this. K.K. Ko therefore had bargained half of the Ko's share of anticipated net profits for $25m to put H.K. Clays and the Ko's in a position to fulfill its part of the bargain. I can see no reason why K.K. Ko should have concealed this. All he had to do was explain the financial facts to Mr. Ko who anyway was well aware of them. It is unfortunate that he did not set out the exact terms in his Christmas letter which, at least on its face, was misleading.

99. It must also be remembered that, when a deal was struck in 1990, the property market was much depressed. By 1993, when the case against Government was settled, the market had recovered. Mr. Ko became aware, because he said K.K. Ko told him, although whether in 1993 or as early as 1991 Mr. Ko was vague, that the profits were likely to be $3-4 billion.

100. Whenever he was told, Mr. Ko said expressly that in 1993 he would have liked the Ko's to get a bigger share.

101. It seems to me therefore more probable than not that Mr. Ko realized, when the litigation against Government was successful, that he and the family were sitting on a gold mine with greater reserves than were anticipated in 1990. Mr. Ko was not content with 10% of those reserves and hoped to get more. And that would explain why, at the Dynasty lunch, instead of complaining that he had been cheated or misled, he had to accept the bargain already agreed and reduced to writing in 1991. And I observe that if the redevelopment took place and the Ko's were to get, say, $100m for doing and contributing precisely nothing, they could hardly grumble.

102. I come to the conclusion that Mr. Ko's evidence is wholly unreliable. Having seen and heard Mr. Ko in the witness-box over several days, I found him to be a redoubtable and shrewd, if not very moral, man even at the age of 91. The idea that he was until August 1993 unaware of the terms of the 1991 deeds and that he was unduly influenced by K.K. Ko simply does not bear scrutiny.

103. The liability of the corporate Defendants was sought to be established through the agency of K.K. Ko and the knowledge of New World and its officers. As I understood it, the agency derived from the proximity or association between K.K. Ko and New World and/or the 2nd Defendant, while New World (which was not itself a party) infected the corporate Defendants. That was a rather shaky basis for establishing liability. Its shakiness is compounded by reliance placed on a document discovered by the Defendants shortly before trial. This was a note made by Mr. Aggarwal in or about November or December 1990 in which Mr. Aggarwal referred to K.K. Ko "convincing" Mr. Ko and "procuring" others to sign. It was the foundation of a late amendment by the Plaintiffs to plead K.K. Ko's agency.

104. In passing, I mention that this document was the object of considerable objection by Mr. Barlow for the Defendants. Without going into the rights and wrongs, I simply say that it is a document to which I attach no weight whatsoever. It is a note but whether it is a note of Mr. Aggarwal's thoughts, a note of instructions or a note of a meeting is far from clear and, in any event, the document is wholly ambiguous. If the Plaintiffs really wished to make something of this document, they should certainly have called the maker to explain it and not have relied on their anticipation that Mr. Aggarwal, who had made a witness statement, would be called by the defence.

105. In the circumstances, I have no hesitation in dismissing Mr. Ko's claim. With it, Miss Ko's claim must also fail. It is, therefore, not necessary for me to burden this already lengthy judgment with an examination of the alleged defects in the Plaintiffs' re-re-amended statement of claim.

The counterclaim

106. The counterclaim is pleaded as follows

"55. To the knowledge of the 1st and/or 2nd Plaintiffs herein the issue of the Writ herein seeking the rescission of each of the 1991 Deeds and each of the 1993 Deeds was calculated to cause immediate loss and damage to the Defendants by reason of the inevitable delays to the redevelopment of the site as a result of the inevitable suspension of negotiations with the Hong Kong Government in respect of the redevelopment of the site.

56. This Action was commenced by the 1st and 2nd Plaintiffs in abuse of the procedures of this Honourable Court in order to cause the Defendant to incur those losses during the period between the institution of this Action and its dismissal so as unlawfully to try to persuade the Defendants to confer benefits upon the Plaintiffs to which they have no legal entitlement."

107. It is accepted that there is a tort of abuse of process which arises where the predominant purpose of a plaintiff is collateral to obtaining the relief prayed for in his claim. It is not in dispute that the Plaintiffs sent copies of the writ to Government and the Land Registry. According to the Defendants, this wholly unnecessary action demonstrates the true motivation of the Plaintiffs, namely to try and hamstring negotiations with Government in order to obtain a better deal from the Defendants.

108. A number of difficulties lie in the way of the Defendants. First, the action was commenced only after taking advice from leading counsel that the Plaintiffs had a good claim. That suggests that proper and serious consideration was given to the proceedings. Second, although I have found Mr. Ko's evidence to be unreliable, it is more probable than not that the suggestion that copies of the writ should be served on Government and the Land Registry emanated from Mr. Ko's solicitors. Mr. Ko can hardly be blamed, in my view, for embracing a suggestion made by his legal advisors. Third, and crucially, these proceedings appear to have had no effect whatsoever upon the negotiations with Government and there is no indication that they will have any future effect.

109. Consultants were retained by New World to negotiate with Government. In December 1994, the Town Planning Board refused an application for rezoning as being premature because there was to be a Central and East Kowloon development statement study and because the Urban Council had expressed interest in the site. A further request for rezoning appears to have been made in late 1995 but the consultants themselves asked for consideration of the request to be deferred pending completion of the study. In April 1996, new consultants requested an amendment to the rezoning application. Government indicated, however, it was not prepared to consider the application until the study had been completed.

110. Then, in 1996, Government declined to renew HK Clays' lease. Whether or not the lease will now be renewed as a result of the judicial review proceedings remains to be seen. In the meantime, HK Clays has no lease and there is therefore no basis for negotiations with Government.

111. It is quite clear, therefore, that considerations wholly unconnected with these proceedings have either hampered or halted negotiations with Government. If negotiations do not resume, the cause will be either the failure to obtain a renewal of the lease, or the fact that Government develops its own requirements for the site, or (and perhaps this is speculation) the current economic uncertainty and in particular the state of the property market will lead New World to lose interest in the project.

112. Therefore, even if the Defendants established, which they have not, that there was an abuse of process they have signally failed to establish any damage. The counterclaim is accordingly dismissed.

113. As I have dismissed the Plaintiffs' claim, I make an order nisi that the Defendants should have the costs of the claim.

114. On the counterclaim, I make an order nisi that the Plaintiffs have the costs of the counterclaim.