JOE ZHIXIONG ZHOU v. SAIF PARTNERS II L. P. AND ANOTHER

HCCL 16/2016

[2022] HKCFI 1095

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

(TRANSFERRED FROM HIGH COURT ACTION NO 1551 OF 2010)

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BETWEEN

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TAKING OF ACCOUNT

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INTRODUCTION

1.  This is a taking of account exercise.

BACKGROUND

2.  I set out some basic facts for the present purpose. Briefly, it is a hotly contested piece of litigation^[1] among parties in the venture capital business, commonly known as “VC”.

3.  At the material times, the plaintiff (“Zhou”) was a venture capitalist. He worked as a limited partner for the 1^st defendant (“SAIF”), in which the 2^nd defendant was a general partner. Zhou sued both defendants for over US$22 million sums due to him. The defendants on the other hand made a number of counterclaims against Zhou.

4.  The trial went before DHCJ Field in January 2018 for 11 days. The learned trial judge ruled^[2] for Zhou on his claim. SAIF promptly paid Zhou accordingly[3].

5.  However, SAIF also won one counterclaim so that Zhou had to account and disgorge profit he personally made by diverting the business and/or business opportunity conveniently known as “Xinrui investment”. This forms the beginning of the present taking of account.

6.  Zhou filed his first affirmation to comply with his duty to account. SAIF complained that it was inadequate. Upon application, the trial judge agreed with SAIF, directed Zhou to make discovery upon Zhou, including, those from KPCB-CF and its subsidiaries, affiliates and related entities (“KPCB”) and Keytone Ventures LP and its subsidiaries, affiliates and related entities (“KV”) as well as further gave his rulings^[4] on how the account of profit should be taken. In short,

(a) Upon undertaking by the defendants, Zhou had to provide an account verified by affidavit with all supporting documents.

(b) SAIF was at liberty to:

i. inspect the documents

ii. serve notice of objection, and

iii. file and serve affirmation in reply.

(c) Parties had to file and serve a Scott Schedule 14 days before PTR.

(d) Taking of account was to be held before a master for 2 days, with a PTR for half day at least 8 weeks beforehand.

(e) SAIF was also be at liberty to cross-examine on Zhou/deponent(s) on the affidavit(s) verifying the account.

7.  Zhou disagreed and took up the matters to appeal but lost them before both the Court of Appeal^[5] and the Court of Final Appeal^[6].

8.  In the meantime, Zhou further prepared his fourth affirmation to comply with the order of account. SAIF maintained that Zhou still failed to comply with the court orders.

9.  It further triggered contempt proceedings^[7] against Zhou. He lost his case before the Hon A Chan J^[8] and was finally sentenced for 2 months’ imprisonment. He appealed^[9] but failed again.

10.  Although Zhou did not come to Hong Kong to serve the punishment, he still engaged his legal team to defend for the taking of account.

(a) On 21 November 2019, the 5^th affirmation of Brandon Lin (“Lin”) was filed as a notice of objection.

(b) On 7 May 2020, the Scott Schedule of Parties’ Contention was lodged.

(c) Parties appeared before me for 3 PTRs and I made a number of directions and orders governing conduct of the taking of account, including:

(i) On 13 November 2020, I declined Zhou’s application to strike out part of the 5^th affirmation of Lin. I also declined his application to cross-examine Lin. However, I allowed his application for expert evidence although I preferred the directions proposed by SAIF.

(ii) On 21 December 2021, I dismissed Zhou’s application that his examination was to be done by VCF but allowed (with consensus from SAIF) that his expert could be done so.

11.  The taking of account came before me for 4 days in March 2022.

OVERVIEW OF PARTIES’ STANCE

12.  Parties made clear their position through counsel in their Openings.

13.  Mr Pow SC said that the trial judge found Zhou not a credible witness. He failed to comply with the disclosure order made against him. He did not disclose all income coming from KPCB and KV. He was found liable for contempt of court and sentenced to prison. He however did not come to serve it and became a fugitive from justice. Notwithstanding the suppressed information and lack of testing of his evidence under cross-examination, this court was not powerless and could adopt a flexible approach, taking every possible adverse inference against Zhou. With the available evidence before the court and the assistance of experts, SAIF sought a total sum of about US$6 million against Zhou under 7 heads.

14.  Mr Barlow SC disagreed and said that Zhou did not need to pay SAIF anything at all. Although the trial judge did order Zhou to account disgorge and disclose, it was only “profit made by KPCB under the Xinrui investment”. The present taking of account exercise was governed by the procedural framework in Order 43 of the Rules of High Court (Cap 4A). Burden fell on SAIF who chose to challenge the account rendered by Zhou. Although the court might approach the taking of account exercise in a flexible way, the question remained whether there was a profit made and proved to be payable within the judgment. The so-called profits claimed were only illogical conjecture or fantasy by SAIF. They were without basis in fact or in reality. There was nothing Zhou should pay to SAIF at all.

15.  I set out the differences between parties by the following table.

		SAIF’s case	Zhou’s case
Heads	Particulars	US$	US$
B1	Salaries from KPCB	267,857.14	0
B2	Management fees from KPCB	200,000	0
B3	Share Options in Keygate[10]	160,000	0
C	Capital Gain and Carry from KV	800,217.60[11]	0
D1	Salaries from KV	1,272,321.43	0
D2	Management fees from KV	3,392,857.14	0
D3	Share Option in Keygate	160,000	0
	Total	6,253,253.31	0

APPLICABLE LEGAL PRINCIPLES

16.  Both learned senior counsel drew my attention to different authorities governing how an account is to be taken. I endeavor to state them succinctly.

17.  Reyes, J in Kao, Lee & Yip v Donald Kao Hoi-Yan [2005] HKEC 2153 explained the basic scenario.

"64. When the Court orders an account of profit, the accounting party (Party A) typically prepares and verifies his version of what the final account should be…

65. The party to whom account is being made (Party B) may then challenge particular items in A's version or allege that A's version is incomplete…

66. A responds to B's case by accepting or rejecting B's contentions. A may amend his version of the final account to reflect any admitted errors.

67. If A and B cannot agree on what the final account should be, the matter proceeds to a substantive hearing, where the Court decides between the rival contentions. The Court may agree with some, all or none of A's version of the final account. The account taken by the Court then becomes the final account."

18.  Usually, the beneficiary or principal may challenge the account by 2 ways, namely, to falsify and/or to surcharge.

(1) To falsify means to have the entry deleted or reduced in favor of the beneficiaries or principal.

(2) To surcharge is to add into it an entry that was previously absent from the account in favor of the beneficiaries/principal.

See Pit v Cholmondeley (1754) 2 Ves Sen 565 … at 566 and Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681.

19.  The Court's equitable jurisdiction to require a defaulting fiduciary to account for unauthorized or secret profits merely constitutes the enforcement of his principal's equitable entitlement to profits. They are profits actually received but not in abstract. The principal shall not be unjustly enriched. In a taking of accounting exercise, no punitive element is involved as against the fiduciary. (Warman International Ltd v Dwyer (1995) 182 CLR 544 [P#4] at 556-557 and 561; Vyse v Foster (1872) LR 8 Ch App 309 [P#5] at 333, Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 [P#6], Mason, J, Tripole Trading Ltd & Others v Prosperfield Ventures Ltd & Another (2006) 9 HKCFAR 1, Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681)

20.  However, when it is not possible to approach the matter with mathematical exactness, for example, the fiduciary has mixed the secret profit with those of his own, the court could adopt “a reasonable approximation” approach and be “flexible”. (See Kao Lee & Yip v Koo Hoi Yan Donald [2003] 3 HKLRD 296 at §§143-144 per Ma J (as he then was)).

21.  Last but not least, it sometimes happens that the fiduciary is not helpful or even obstructive to the taking of account exercise, Lord Millett NPJ said in the leading case of Libertarian Investments v Hall (2013) 16 HKCFAR 681 at §174 as to how the court may deal with the situation with three principles.

“Where the absence of evidence is the consequence of the fiduciary’s own breach of duty the court is not without resource, for it can have resort to three principles. First, it may be able to take the fiduciary at his own word and use his falsehoods to establish the facts as if they were true even though they are known to be untrue. Secondly, the court is entitled to make every assumption against the party whose conduct has deprived it of necessary evidence. And thirdly the court is entitled to be robust and do rough and ready justice without having to justify the amount of its award with any degree of precision.” (emphasis added)

22.  Both learned counsel had no great dispute over the above principles and authorities, save that Mr Barlow argued that burden rested upon SAIF to prove. In my view, there is no real conflict between the learned counsel on their legal submissions. As usual, the key lies on the application of them at appropriate circumstances. In the present case, the authorities relied upon by Mr Barlow does not assist Zhou much because of the followings.

(a) Zhou’s (repeated) understanding and interpretation of the judgment/order of account given by the trial judge is wrong.

(b) Zhou has not completed his primary burden to render a proper account in the first place. Irrespective of the burden, it is undisputed or indisputable that Zhou has failed to account for his income received.

(c) This is a taking of account, and not an assessment of damages. A defaulting fiduciary cannot hide away from his obligation to account simply by insisting on keeping everything in the dark. This court is not powerless and can resort to the 3 principles put by Lord Millett NPJ as aforesaid.

THE JUDGMENT/ORDER TO ACCOUNT

23.  There is no argument that the present exercise stems from the order made by the trial judge directing Zhou to account. Mr Barlow stressed the need to understand such order correctly. I have no quarrel with him on this.

24.  In the words of Mr Barlow as per paragraph 12 of his Opening Submissions, the trial judge only ordered Zhou to:

“(1) “... account … for any profit ...”;

(2) “... that the Plaintiff made…”;

(3) “... as a result of the investment made by KPCB ...”;

(4) “... under the Xinrui ... investment agreement dated 24 August 2007”.”

25.  Mr Pow said it was ironic that yet again he was accused of misunderstanding of the order and judgment of the trial judge. He took this court through various passages of related judgments of the cases to demonstrate that Mr Barlow was wrong.

26.  Upon consideration, I have no hesitation to reject the “narrow” interpretation of the judgment/order of account as proposed by Mr Barlow, and agree with the one suggested by Mr Pow.

27.  As a matter of fact, similar dispute happened before the trial judge. Zhou deposed that investment did not go well. No profit was made when KPCB sold it to KV for US$8 million. KV further sold it at a loss of over US$4.5 million. SAIF disagreed and went back before the trial judge to seek further directions on the taking of account. The trial judge apparently disagreed with the interpretation of his judgment and order suggested by Zhou and said in his Ruling on 26 June 2018 herein that:

“9. In my judgment, given P’s untruthful account of when he began to discuss a possible investment in Xinrui and the relative scarcity of the discovery he provided for the trial, D1 is entitled to an order that goes wider than might have been conventionally appropriate in setting the modalities for an account of secret profits to be given by a fiduciary. It is also the case that, since P did not himself provide the alleged US$ 8million invested in Xinrui, the absence of any profit for CPCB-CF on the US$ 8 million investment does not necessarily mean that P personally did not benefit financially in one way or another from the investment (emphasis added).”

28.  Zhou took up the matter further and tried to convince the Court of Appeal that the trial judge was wrong. However, all the attacks failed[12].

“129. Mr Barlow submitted that the judge had become functus officio …

130. This is a bad point. …

131. A number of objections were taken …

132. The plaintiff contended that the order complained of exceeded the permissible bounds for an order to account…

133. He also complained that the order impinged upon his rights, the rights of KPCB and the rights of subsidiaries, affiliates and related entities of KPCB and KV...

134. I reject all the above contentions. Similar submissions had been made before the judge…

135. The plaintiff was not asked to account for profits in the abstract. He was ordered to account for any profit he made as a result of the investment made by KPCB under the Xinrui Investment Agreement. The Accounts Ruling made clear that given the plaintiff’s untruthful account of when he began to discuss a possible investment in Xinrui and the relative scarcity of the discovery he provided for the trial, it is appropriate to make “an order that goes wider than might have been conventionally appropriate in setting the modalities for an account of secret profits to be given by a fiduciary”… It is with such considerations in mind that the order was made, so that the court can properly ascertain whether and to what extent those monies could be regarded as falling within the scope of his duty to account and disgorge, instead of merely relying on the assertion made in his affirmation of 25 March 2018.

136. As for monies received including “salary, fees, dividends and other remuneration”, assuming that his salary was agreed with KPCB before they made the Xinrui investment, if his salary was enhanced as a result of the profits he brought in by such investment, this may well be a profit attributable to his breach of fiduciary duty for which he would come under a duty to account.”

29.  Last but not least, the argument also appeared before the Hon A Chan when he found against Zhou in contempt of the disclosure order made by the trial judge. The learned Judge commented[13] that:

“Ambit of the Account Order

63. …

64. In my view, the terms of the Order are abundantly clear. They were detailed because of the need to ensure that Zhou would not try to wriggle out of it in light of his disinclination to comply with his disclosure obligation.

65….

68. I agree with Mr Pow that the account may be provided by drawing up a table of all items of income which Zhou and his related entities had received from KPCB and Keystone (and their related entities), and attaching the supporting documents. The fact that such a simple exercise has not been carried out, despite the resources available to Zhou, speaks volumes.

69. The charge against Zhou here is that he had unilaterally read down the scope of the Account Order, namely, his obligation was limited to income from the investment of KPCB and/or Keystone (and their related entities) into Xinrui (see, as an example, para 28 above). Consequently, Zhou has failed to account for all his income as ordered by the court.

70….

71. Plainly, Zhou has not fulfilled his obligations. He has never tried to identify all the income which fit the prescriptions in the Account Order…

74. In the premises, I find it proved beyond all reasonable doubt that Zhou is in breach of the Account Order by failing to account for all his income.”

EVIDENCE

30.  Mr Barlow submitted that SAIF had absolutely no documentary evidence to support the “claim” as contained in Lin’s 5^th affirmation/notice of objection. The disclosure order only helped SAIF to trace into payment received by Zhou. There was no basis to suggest that Zhou had concealed or withheld or destroyed documents. There was no factual witness attending the taking of account exercise.

31.  Mr Pao disagreed and said that the trial judge specifically directed Zhou to make a wider discovery. The Court of Appeal illustrated with an example[14] how “salary” earned by Zhou could become “profit” accountable by him to SAIF. In light of the stance having been insisted upon by Zhou, Lin could not be said to be speculative. It was something asked and triggered by the conduct of Zhou. In any event, there was a lot of primary facts and evidence SAIF entitling it to raise the objection or case against Zhou. It started with findings by the trial judge. Lin then built up SAIF’s case from the non-disputed facts, limited disclosure and “admissions” by Zhou on affidavit evidence.

32.  Upon consideration, I take the view that the complaint raised by Mr Barlow does hold any water and I agree with the submissions by Mr Pao.

33.  First, the trial judge directed the preparation of affidavit by parties as well as the discovery. These matters form the backbone of the present taking of account. They stand as evidence before the court with or without cross examination.

34.  Second, I also allowed expert evidence to be filed. Expert reports were prepared. Both experts attended at the hearing to be cross-examined. They were evidence to be weighed and decided by the court.

35.  Third, at the contempt proceedings, it is true that the Hon A Chan did not rule against Zhou on the charge in respect of specific discovery, for a number of different reasons including that the required high standard of proof. However, more importantly, the learned judge did find beyond all reasonable doubt that Zhou was in breach of the account order by failing to accounting for all his income[15]. Hence, it is something that forms a binding fact of evidence before me.

THE EXPERTS

36.  Mr Walters and Mr Terry, the respective experts of SAIF and Zhou, helpfully agreed with a number of matters to put before the Court, including the following basic matters to help understanding of VC Industry.

37.  Five questions were put to the experts by this Court to resolve the disputes of parties. The experts also helpfully agreed their answers to Q3 and Q4. As to the remaining three, they party agreed on some of the answers but maintained some to be decided by me.

38.  Both of the experts attended the court for examination to assist the court further, Mr Walters appeared in person when Mr Terry, through VCF in England. They demonstrated to me to be a professional in their own expertise area.

39.  Upon consideration, regarding their differences, I prefer the opinion of Mr Walters than that of Mr Terry, whenever there are differences between them.

40.  First, Mr Walters is a better expert in the sense that he has been working in the “right” area for the present proceedings, namely, VC industry in Mainland China. He has worked in Hong Kong for more than 22 years and could help explaining the practices in the area of VC under the Greater China Region. However, in the cross examination by Mr Pao, Mr Terry:

“2. … admits that while he was involved in the set up of two technology funds, none of them ever invested into a Chinese tech portfolio company, and his experience

“has predominantly been in the UK” [Day 3/4/line 9].

3. He further admits that:-

a. He had never even set foot in Mainland China [Day 3/5/line 25].

b. He is “no expert” and has “no direct experience” in relation to the regulatory framework in China concerning foreign investments [Day 3/6/line 1-5]. His experience, he says, does not extend to the preparatory steps or regulatory gateways that would have to be passed before a deal can close in China [Day 3/7/line 3-9].

c. He is not conversant with the legal or regulatory constraints regarding the running of a VC fund in China [Day 3/6/line 3].”

(Closing Notes of SAIF)

41.  Second, in acceding to Zhou’s alternate application for expert evidence, I decided so because of, inter alia, his evidence and that of Lin might not be as neutral as possible. Hence, I opted to be assisted by professional experts. Nonetheless, Mr Terry might be too keen to help Zhou and therefore, is seen by the court as crossing the impartial boundary and stepping into the arena. During the cross-examination by Mr Pao upon paragraphs 37, 42 and 52 of his own report, he took the evidence of Lin on board and expressed disagreement with him. Expert must be clear about his duty towards the court, after CJR.

“General duty to Court

2. As expert witness has an overriding duty to help the court impartially and independently on matters relevant to the expert’ area of expertise.

3. An expert witness’s paramount duty is to the Court and not to the person from whom the expert has received instructions or by whom he is paid.

4. An expert witness is not an advocate of a party.”

(Code of conduct for expert witness) O 38 rr 35, 37B and 37C, RHC (Cap 4A))

42.  A simple confirmation by a signature on the report is not sufficient and the court will look at the document and see if it is only lip service being paid. Further, although it is tempting to agree on suggested paragraphs made by the instructing solicitor or counsel to be inserted into the draft report, the expert must be refusing it if the same will make him derelict from his duty towards the court.

43.  Third, the evidence of Mr Walters remained unshaken under cross-examination. However, it is not the case for Mr Terry. In Q2, the experts differed in their opinion as to whether Zhou, in negotiating his new funds and determining his remuneration, benefited from the ready-made deal of Xinrui. Mr Walters answered positively but not Mr Terry. However, in the words of Mr Pao, it was not in accordance with common sensical analysis. It was only how relevant and how much weight would depend on the deal at hand and how attractive it was. Mr Terry started to avoid the question:

“Q. …

So I want to understand your opinion. Are you saying that the fact that an individual has a potential investment to bring into the new fund can never be a relevant factor to persuade an investment company to take him up as a partner?

Do you understand my question?

A In my experience, if that was the only thing, I believe so. I believe so. In my experience if that is the only thing somebody is offering, then that would not be sufficient. The venture capital industry that I have been exposed to is a world where may investments are looked at and very few are invested in. And subsequently those investments that make a great deal of money make the fund. So actually starting from a situation where somebody is bringing you an opportunity is a very, very long way away from what you really are looking for.” [Day 3/10/21]

When he was further pressed by Mr Pao, he provided an unhelpful answer.

“Q. Even if that particular deal which he can present good materials and analysis, figures to arouse your appreciation of his potentiality is a matter of extent, is it, and degree, would you agree? It depends on how good the deal is presented before you?

A. I think -- I'm not so sure. I think the -- hiring people at a senior level, you are expecting this as a basic, in my view, level of what they are able to do. You would expect them to do this week in and week out over an extended period. So what you are suggesting might be some evidence of this, but I don't think on its own it certainly wouldn't influence me to hire somebody.” [Day 3/12/2]

Mr Terry finally conceded that a ready at hand deal was a relevant consideration, albeit reluctantly:

“Q. But to be fair, Mr Terry, I note your reservation, but would you agree that the fact that this candidate can present to you an existing ready-in-hand deal with sufficient force or persuasion -- that would at least be a relevant matter, relevant factor in your consideration as to whether you want to cooperate with him? Someone may put high weight on it, someone may put little weight on it, like you, but it would be a relevant consideration. Would it not?

A. I think it’s on the list and perhaps what I’m saying is it would be below -- for me, it would be below the threshold of which it would be important.

Q. All right.

A. But it would be a consideration, but it wouldn’t be a consideration that I would make very strongly.” [Day 3/14/13]

OTHER ARGUMENTS OF ZHOU

44.  At the closing submissions, Mr Barlow advanced some other arguments for Zhou. He offered to testify through VCF. SAIF objected to it and this court did not allow him to do so. The application to strike out certain part of affirmation of Lin was rejected and Zhou maintained that they were inadmissible and irrelevant. Lin did not agree to be cross-examined and this court also did not require him to do so. Court would not and should not draw the “adverse evidential inferences” upon Zhou.

45.  For the present purpose, I do not propose to deal with each of these arguments again and would only recap what I had explained to parties orally when I made the rulings.

“Striking out?

P sought to strike out certain parts of the 5^th affirmation of Lin. Mr Barlow SC said that they purported to advance expert ‘evidence’ on the alleged nature and practices of the venture capital fund management industry, in support of wholly conjectural theoretical hypotheses. They were untrue, speculative, in substance opinion as well as new allegations and inadmissible evidence firstly advanced. P had no opportunity to reply.

Mr Pow SC disagreed. Lin had to put forward D1’s case because P failed to give a proper account at all. From the leading authority of Libertarian, facing such situation, court was not powerless. He would find a rough and ready sum without resorting to precision. Lin’s evidence was a matter for the court to be weighed and decided at the taking of account, but never a question of admissibility. There could not be argument that evidence of business usage and industrial practice was factual and not opinion/expert evidence. The case of Unlimited Productions clearly affirmed such proposition.

Upon thought, I prefer the submissions of C for D1, Mr Pow. Unlimited Productions is a direct authority to such argument before me. As said and accepted by the learned Judge Poon (as Poon CJHC then was) therein “… business usage as distinguished from a common law custom can be proved by the direct evidence of witness. Hence, it is ultimately a matter of merits and not question of admissibility. …”. In this respect, there is no other authority referred to me by P’s counsel or that somehow the application of such proposition should be distinguished herein.

Directions on expert evidence?

Having decided not to accede to the striking out application, how should the taking of account be proceeded with? Indeed, during the hearing, parties did indicate a number of different options for this court to choose, including the followings.

(a) Should P be allowed to make a reply?

(b) Should Lin attend the taking of account hearing to be cross-examined?

(c) Should expert directions be given to the relevant issues having been identified by Mr Barlow and/or Mr Pow?

After thought, I take the view that a set of directions on expert evidence would be helpful and conducive in the taking of account exercise. Notwithstanding that both P and Lin are experienced businessmen in the field of venture capital fund, they are parties or somehow interested in the outcome of the proceedings. The expert’s need to be impartial and objective might be lacking or at least doubtful in both of them.

Both paragraph 2 (3) to (6) of P’s summons and Appendix A of the Skeleton from Mr Pow contain 2 different sets of expert directions for me to choose. Upon further thought and a close examination of them, I prefer the one prepared by Mr Pow. I agree that those contained in P’s summons are too general. Further, it appears that they only aim at attacking the 5^th affirmation of Lin. On the other hand, those proposed by Mr Pow are more specific and contain particulars under 3 headings, namely, remuneration of partners, calculation of management fees and practice in attributing profits. They all touch on the major disputes between parties in the taking of account. I will therefore respectfully agree and adopt the proposed directions from D1….”

46.  In dismissing Zhou’s application for his proposed giving of testimony through VCF, I said that:

“…C explained to me with reference to local and foreign cases, PD 29 and speech of CJ, on the applicable legal principles on giving of evidence by VCF. To recap them briefly,

(a) As a starting point, proceedings should be conducted in open court and giving of evidence by VCF is an exception. Departure from general rule requires good justification.

(b) There is no hard and fast rule and each case depends on its own facts.

(c) Ultimately, it is a matter of case management and judgment of the Court to be exercised judicially in light of all the circumstances of the case. Relevant factors include:

(1) fair and efficient disposal of the proceedings,

(2) ability of the witness to attend,

(3) prejudice,

(4) costs,

(5) delay,

(6) convenience or inconvenience,

(7) practical consideration,

(8) timing of the application,

(9) Covid-19 is not per se an exception.

(10) When credibility of the witness is seriously contested, it is important for him to be examined under the solemn atmosphere of the Court.

Both SC spent quite some time arguing on the legal implication when the applicant is a fugitive. In my view, I prefer the submissions of Mr Pow. It is a factor against affording the applicant the use of VCF. As a matter of public policy, it can never be a factor in favor of the applicant. In any event, for present purpose, I will consider it only as a relevant factor to be taken into account. This is the highest case proposed by Mr Barlow that I will accept for the benefit of P.

Applying the above to the present case, P has not been able to make out a case of exception.

He has not adduced any evidence, medical or otherwise, to satisfy he cannot come to HK. It remains a matter of his own convenience and reasons best known to him.

Mr Pow said that by P’s latest affirmation filed herein, he was in Beijing in September this year. On the other hand, by the latest skeleton, Mr Barlow submitted that P was a non-HK ID card holder. He had no fixed plans as to his whereabouts in March 2022. He could either be in the States or in the Mainland. However, our 4-day hearing was fixed at the 2^nd PTR herein in May this year. Irrespective of where P is or will be situated in March next year, ample and sufficient time has been given to parties to prepare. It also remains a matter of choice in P’s own hands of planning travelling and quarantine. In my view, the latest development of Omicron does not help P much in this respect.

There is no dispute that P is the key witness in the coming of taking of account exercise. It is the trial judge who directed him to provide the account and then to be cross-examined. His credibility is the core issue and seriously disputed. It is particularly important in light of the development of the case, namely, he was sentenced by A Chan J at committal proceedings wherein he was found failure to account for his income as ordered by the Court. The learned Judge also commented that P was deliberate and did it on purpose of evading his obligations under the Court order. P appealed against such ruling but has been dismissed by CA.

As it stands, as ordered by A Chan J, P is a fugitive because he has to serve the 2-month sentence if he would come to HK. When Mr Barlow tried to persuade the Judge not to impose custodial sentence, he submitted that such sentence would mean that P would unlikely come to HK for the Account proceedings. At the skeleton, submissions were made to the effect that P would be arrested and the court would not receive his evidence anyway. I did not hear such argument further probably because parties agreed that a body order could be issued to bring detainee to court. By oral submissions, Mr Barlow tried his best effort to persuade me to allow P’s application because: what then if the application is not granted, P would be deprived of the chance to give his evidence to the Court and to be cross-examined, as ordered by the trial judge and prayed by D1. To this, I will borrow the wisdom of A Chan J, namely, P cannot profit from his position as a fugitive of this Court, nor can the Court be held to ransom. Perhaps, I might further add that it is indeed not uncommon for this Court to only hear the available evidence before the Court and make rulings within the limited perimeters to the best of his ability….”

47.  Mr Barlow has not been able to persuade me to take different views.

48.  With the above, I now move to each of the seven heads put forwarded by SAIF and see if this court should or should not order Zhou to pay.

(1) B1 - Salaries from KPCB

49.  SAIF proposed the sum of US$ 267,857.14 (US$1.5m x 1.25/7).

50.  On oath^[16], Zhou believed that his salary was around $1.2m to $1.5m per year. SAIF picked the higher figure from the range, ie US$1.5 million. Zhou worked for one year and he was entitled to a 3 months’ bonus^[17]. It therefore became 1.25 years. Further, Zhou was managing 7 funds^[18] at the material times and so 1/7 of the salary and bonus would be attributed to Xinrui investment.

51.  Zhou disagreed. His salary had nothing to do with Xinrui investment. He only joined KPCB on 24 April 2007 when the latter signed the Xinrui investment 4 months later. He would have received the same salary regardless of such investment. Mr Terry also supported his case.

52.  Upon thought, on balance, I agree to accept the case of SAIF. The duty to produce an accurate account rested squarely on Zhou. If, for whatever reasons, he could not be precise and could only produce a range, there was no reason why one could not pick one to its disadvantage. Assumption could be taken against him.

53.  With the concession by Mr Terry under cross-examination and/or my preference of opinion of Mr Walters, I am satisfied that the causation link between the salary earned by Zhou and Xinrui investment have been established. The argument that the Xinrui investment was only entered into 4 months after the employment of Zhou by KPCB must fail because of, as pointed out by Mr Pow, the ruling of the trial judge^[19] that he was discussing the matter a week or so before 6 February 2007.

54.  Hence, there is no question that the salary earned by Zhou include the element of Xinrui investment, i.e. a mixing of accountable income with his other income. With the assistance from Kao Lee & Yip v Koo Hoi Yan Donald, such situation is not uncommon in taking of account exercise, a reasonable approximation approach is the way that the court should adopt. SAIF’s suggestion of 1/7, in my view, is a fair one in the circumstances.

(2) B2 - Management fees from KPCB

55.  SAIF said that Zhou should also pay it US$200,000 (US$8m x 2.5%) because he owned KPCB China Management Limited which was entitled to receive management fees^[20] from KPCB. KPCB’s investment in Keygate amounted to US$8m^[21]. Although Zhou failed to disclose such fee, the experts agreed that the percentage was usually 2% per annum and it might be even up to 2.5% for more established and prestigious funds. In the present case, SAIF proposed 2.5% because KV took over a significate number of portfolio investments from KPCB. KV was in similar nature to KPCB and charged management fees at the rate of 2.5% per annum. Hence, there was no reason to suspect that KPCB China Management Limited was charging less.

56.  Zhou disagreed and argued that SAIF failed to adduce any evidence that he had any proprietary entitlement to any part of KPCB management fees. Further, what about the expenditures to be paid by KPCB China Management Limited? Notwithstanding the denial by Zhou, Lin kept on making his conjecture. In any event, the suggestion of 2.5% was against the agreed evidence of the experts that it would usually be 2% only.

57.  Upon consideration, I accept SAIF’s case and declined that of Zhou. As aforesaid, Zhou did not duly comply with the duty to account. Nonetheless, with the limited discovery from him, SAIF could legitimately take Zhuo at his own word and use such information to build up its case.

58.  Lin proposed in paragraph 24 of his 5^th affirmation/ notice of objection that:

“24. … it is evident from the documents disclosed by the Plaintiff that he was entitled to a least a part of the management fees payable by KPCB to KPCB China Management, Ltd :-

(a) the Plaintiff was a shareholder of KPCB China Management, Ltd…However, he has failed to disclose his percentage shareholding in that company;

(b) KPCB had to pay KPCB China Management, Ltd. a percentage of the Management Fee as determined in the (undisclosed) limited partnership agreement of KPCB and the Investment Management Agreement dated 20 April 2007…

(c) KPCB, through its legal representatives, confirmed to the Plaintiff that “[the Plaintiff’s] sole rights to payments were by reason of owning the management company…” ... It would thus appear that the Plaintiff actually owned 100% of the shareholding in KPCB China Management Ltd.”

Facing such objection (or confrontation), Zhou chose maintaining his bare denial and adduced nothing further. With all these before me, I agree to accept the proposition suggested by Lin on balance, namely, Zhou was the “owner” of KPCB China Management Limited.

59.  As to the choice of 2% or 2.5%, I prefer the latter one in the present case.

(a) The experts did agree it was usually at 2% per annum, but 2.5% is still possible. Mr Barlow referred in his skeleton^[22] to the 1^st half of paragraph 29 of their joint expert report. However, the latter half continued with “… it may be up to 2.5% per annum for a more established or prestigious fund…”

(b) If KV did levy its management fees at 2.5% per annum, I take the view that it is more likely than not that the same would apply to the case of KPCB China Management Limited.

60.  Zhou also complained through Mr Barlow in his skeleton^[23] that:

“126. … Also, the 1^st Defendant has failed to adduce any evidence to rebut the likelihood that all those management fees were disbursed in paying all the KPCB management expenditures (including all the salaries, rent and other KPCB expenses). There is no evidence of any actual surplus, let alone of any actual payment to the Plaintiff. There is no evidence of any Plaintiff Receipt. There is only Lin Conjecture.”

I reject such argument. Although it is not difficult to understand the incurring of expenses to earn fees, Zhou chose not to disclose the information. There is no evidence at all before me as to the actual expenses incurred. The expert also did not make any particular comment on the same or suggested a certain percentage to be considered. This court can only rule according to the available evidence put before him. He cannot go beyond it arbitrarily and without any evidential basis to suggest any figure of expenses or by way of percentage. If someone is to be blamed, I am afraid that it must be Zhou himself. It also falls within the flexible way in which a taking of account exercise can be done, when the accounting fiduciary has not been co-operative at all.

(3) B3 - Share Options in Keygate

61.  SAIF said that Zhou was entitled to share options in Keygate. Lin premised his suggestion on 3 facts. Mr Pao said in his skeleton^[24]:

“(1) Clause 7.19 of the Xinrui Investment Agreement provides that Zhou shall be appointed to Keygate’s board ….

(2) Clause 9.2 of the Xinrui Investment Agreement further states that Keygate shall establish an employee stock option plan, including reserving a certain number of shares for its directors ...

(3) By virtue of his position on Keygate’s Board, Zhou is therefore entitled to a certain number of shares in Keygate. Such shares constitute a valuable benefit received by Zhou attributable to the Xinrui Investment.”

62.  Mr Pao also said that Zhou did not disclose any information and had not specifically denied having obtained any share options from Keygate. With the complaints raised by in in Lin’s 5^th affirmation and the principles in Libertarian Investments, Mr Pao proposed that it was just to assume at least 2% of Keygate’s value as the value share option benefits Zhou had obtained.

63.  Mr Barlow objected to the suggestion. It was as usual a conjecture only. He argued, inter alia, that there was no evidence that the share option entitlement had been adopted or approved by Keygate’s board. Further, even had such shares been granted (which was denied), Keygate’s business and Xinrui was deregistered on 24 December 2009 and any such share options in Keygate would have been worthless.

64.  With the evidence before me, I am afraid that I have to decline the claim of SAIF for the share option of Keygate.

(a) Lin said in paragraph 29 of his 5^th affirmation that “… it is simply impossible, at present, for the 1^st Defendant to attribute or calculate the value of such share options…” and put down “indeterminate” in the amount claimed.

(b) There was no further notice of objection suggesting any figure to be considered by the court.

(c) Although the experts agreed that stock options were possible, questions were not posed to them to seek for suggestion on the usual percentage payable.

(d) The suggestion of 2% only came from the bar table by the opening skeleton. While accepting that the court was entitled to be robust and do rough and ready justice, I believe that an imposition of a figure of 2% (one might argue why not 1%, 3% or 5%?) is stretching the flexibility rule too far.

(4) C - Distribution of Capital Gains and Carry from KV

65.  Zhou deposed that the Xinrui investment at US$8m was sold at a loss for only US$3.5m and as such, there was no capital gain or carried interest from KV at all.

66.  SAIF sought to falsify such account. Zhou should pay US$800,217.60 (US$8m x 20.8% x 48.09%).

(a) US$8m should be adopted because Zhou was not a credible witness, he failed to comply with the discovery order, so and so forth. The so-called sale at US$3.5 had to be rejected.

(b) It was more likely than not that KV operated the its investments on a particular mode called “fund-level carry” (as opposed to “deal-by-deal”). With the agreement by both experts, 20.8% would have been paid.

(c) From the evidence of Zhou himself, he would receive a 48.09% through his interest in 2 limited partners (Zhou/Ji Living Trust – 45.41% and Zhou/Ji Investment Partners – 2.68%)

67.  Zhou objected to it. It was entirely Lin’s conjecture. He had deposed and specially confirmed that he did not derive any income, salary or any other remuneration (whether by “Capital Distribution” and/or “Carried Interest” or similar) from Keytone’s Keygate/Xinrui Investment and neither did any of the other limited partners in Keytone. The calculation put forward by Lin was based on incorrect legal advice.

68.  Mr Pao proposed to deal with this argument by 2 questions.

(a) Whether Zhou should be believed? (And, if so)

(b) How the court should come up with a rough and ready estimate to cater for the benefit gained by Zhou?

69.  As to the question (a), I agree to accept the observations made by Mr Pao as per paragraph 56 in SAIF’s Opening Submissions.

“(1) Zhou had proven himself not to be a credible witness as observed by the Court a number of times, both at the trial, the account proceedings, and in the contempt proceedings.

(2) Zhou never provided any particulars explaining why KV was willing to purchase the Xinrui Investment at a significant amount of US$8 million in July 2008, only to have it “fail” in December 2009…

(3) In fact, there is no evidence as to how the Xinrui Investment “failed”, and what the description “failed” is supposed to mean when, even on Zhou’s own case, Xinrui at least still possessed valuable assets to the value of US$3.5 million….

(4) The purported sale of the “remnant assets” to MicroMedia is even more suspicious. Zhou only produced a copy of the purported Asset Purchase Agreement comprising of merely 4 pages … It is clear that the document produced is not a full document. Clause 2.2 refers to Exhibit A which is another agreement that should provide more information about the underlying sale. Zhou did not produce Exhibit A. Neither did he provide any evidence as to the identity of MicroMedia which could have been another vehicle of Zhou. In any event, MicroMedia did not even sign this purported agreement.

(5) Despite the transaction being for US$3.5 million (which is not a small sum), not even a list of assets had been produced. In fact, Zhou claims that “no list of assets was drawn up” … Such a purported sale makes no commercial sense at all – how could a sale of assets take place if such assets are not even listed?”

70.  To these comments, I have not heard any or any convincing argument from Mr Barlow to the contrary. It is particular true on point (4) above. The document showing and proving the sale was so important that Zhou only produced an “incomplete” one without signature from the purchaser. He took no further step whatsoever to improve or rectify the situation after objection from Lin.

71.  I move to question (b).

72.  In VC business, funds were invested in different investments. They would be sold for profits or at a loss. The experts agreed that there were two (2) usual ways to apportion the profit, fund-level carry model or deal-by-deal.

73.  Mr Barlow explained at Annex A to his Opening Submissions:

(1) The carried interest (usually 20% of the VC Fund's profits) will be paid by the VC Fund to its General Partner (who will pay a share of the sum received to the key investment professionals who run the VC Fund) using one of two models, namely:

(a) the "fund level" carried interest model, whereunder it only becomes payable following the repayment of all the Investors' Capital Commitment; and

(b) the "deal-by-deal" carried interest model, whereunder it becomes payable upon the realisation of each of the VC Fund's portfolio company investments.

(2) Under the "deal-by-deal" model, carried interest can be paid after a VC Fund's investment "... is exited, if the proceeds of disposal sufficiently exceed the cost of that investment and the preferred return promised to investors (ie usually 8% annualised return on the cost of that investment)".

74.  However, as the matter further developed, after examination of both experts, the difference between the 2 types of model became less important. As elaborated by Mr Pao in his Closing Notes:

“28. Now, as originally framed, there was this debate over whether or not Keytone works on the deal-by-deal carry model, or the fund level carry model. This is what the experts spent some time dealing with.

29. However, given the elucidation given by both experts over the last two days, it had become quite clear that this is a bit of a red herring, given the unique way in which Keytone was established.

30. Based on a reading of Keytone’s limited partnership agreement, Keytone actually runs on a ‘hybrid’ model. As Mr Walter explains…

“Q. My question is quite simple. Do these clauses indicate which of the two models is adopted by this particular partnership?

A. It's actually a hybrid. This is neither European or US. I've never actually seen these terms in a document. I'm used to either one or the other. But what this is doing, it's a hybrid because it's periodic, it's done on a fiscal year rather than on a deal exit. So it's not like a US deal where every time there's a deal you have to calculate carry, and it's not like a European where you have to look at the whole term. This is actually looking to take each fiscal year as a block. So, for example, if you had say five transactions in a particular year, you couldn't pay on the first one which made a lot of money, you would have to wait until the end of the year and then look at anything cumulative to that point. So I would say this is a hybrid and it's not clearly a fund-level or deal-by-deal carry. It's quite unusual.”

31. Mr Terry also accepted this analysis. At [Day 3/27/line 19]:-

Q. So it's not strictly a deal-by-deal arrangement but a deal-by-deal within a year arrangement. Would it be fair to say so?

A. I believe that is the right way of framing the Keytone agreement, yes.”

32. More importantly, rather than dwelling on meaningless labels, the experts agree as to how Keytone’s distribution structure works.

33. Basically, what happens is this – things are taken year by year. All transactions within a particular year are aggregated together, and if the net result is that there had been gains, a distribution can result. The fact that the experts agree is apparent from the cross-examination. This is clearest from the cross-examination of Mr Terry…

“Q: …So is it not aggregating the capital transaction gain that happened during a fiscal year and distribution would be made in that aggregate period of time?

A: Yes, I think that is correct.

Q. So if within that fiscal year -- the example I gave you earlier on, if I was able to sell investments 1 and 2 within that fiscal year, then the two transactions will be aggregated in order to calculate whether carry would be distributable; is that right?

A. I think that's right.

Q. And to take an extreme example, if the fund is able to sell all five investments within that fiscal year, then all five transactions would be aggregated together in order to do the calculation; is that right?

A. I believe so.”

34. In similar vein, Mr Walters explained as follows…

“Q. I think you have agreed with me within the fiscal year, if there are available capital transaction gains, they can be distributed at the end of the fiscal year?

A. Yes.”

35. Once this is clear, and using the same example I have put to Mr Terry yesterday, it is quite clear that there is basis to find that Zhou did benefit from Keytone’s sale of Xinrui, whether it was sold at US$8M or US$3.5M.

a. Now, we have not been provided any evidence by Zhou as to whether and how Keytone managed or sold its other deals in the year that Keytone was sold. In fact, even the allegation of Keytone selling the Xinrui Investment to MicroMedia is shrouded with suspicions as we noted in Our Opening §56.

b. In lieu of evidence from Zhou and the lack of opportunity to test such evidence through cross-examination, we say, again, following Libertarian, that every assumption can be made against Zhou.

c. In this regard, what we ask this Court to assume is that, in the same fiscal year as the alleged sale of Xinrui, there had been sales of other investments which generated sufficient profits which exceeded the total costs of the investments being sold (including the Xinrui project, at US$8M).

d. As a result, we say, the whole proceeds generated by the sale of Xinrui (whether it be US$8M or US$3.5M) is available for distribution as carried interest.

e. On such basis, based on the formulas set out in para.68 of our Opening, Zhou is entitled to carried interest (or if this Court takes the view that US$3.5M is the amount at which Keytone was sold, the calculation is at para.69 of our Opening).

f. Of course, we will ask the Court not to accept Zhou’s assertion of selling Xinrui at US$3.5M for the reasons we set out in §§56 & 57 of Our Opening.”

75.  With the picking of US$8m and “hybrid” model agreed by experts at the examination, I agree with Mr Pao and that Zhou should pay SAIF US$800,217.60 for his share of contribution or carry.

(5) D1 - Salaries from KV

76.  SAIF repeated his similar proposition of salaries earned by Zhou after he left KPCB for KV. The latter took at least the 7 investments from the former. Zhou earned US$1.5 million per year with an annual 3 months’ bonus. Hence, Zhou should pay SAIF US$1,272,321.43 (US$1.5m x1.25 x 4.75 years/7).

77.  Zhou also repeated his argument on the claim of salary by SAIF on that he earned from KPCB.

78.  I repeat my earlier explanation and agree with the sum suggested by SAIF.

(6) D2 – Management fees from KV

79.  Mr Pao said that Zhou had admitted to be the owner and controller of Keytone Management. KV had US$200m assets under management. Zhou also said that the management fee was 2.5% per annum (0.625% per quarter). Hence, with the same formula, he should pay SAIF US$3,392,857.14 (US$200m x 2.5% x 4.75 years/7).

80.  Mr Barlow reiterated his argument in management fees from KPCB.

81.  As in the management fees regarding KPCB, I accept the case of SAIF and reject the arguments of Zhou. Hence, he should pay SAIF as proposed.

(7) D3 – Share Options in Keygate

82.  SAIF asked for the second time share options in Keygate benefited by Zhou. I have declined it earlier. For the same reasons, I also decline the same again.

SUMMARY

83.  To sum up the above, Zhou should pay SAIF a total of US$5,933,253.31.

		US$
B1	Salaries from KPCB	267,857.14
B2	Management fees from KPCB	200,000
B3	Share Options in Keygate	0
C	Capital Gain and Carry from KV	800,217.60
D1	Salaries from KV	1,272,321.43
D2	Management fees from KV	3,392,857.14
D3	Share Option in Keygate	0
	Total	5,933,253.31

INTERESTS

84.  As to interest, Mr Pao suggested prime + 1%, the usual commercial rate to be payable from the respective due dates of sums under different heads.

Heads	Particulars	Justification	Interest Starting Date
B1	Salaries from KPCB	When Zhou left SAIF	April 2008
B2	Management fees from KPCB	When Zhou left SAIF	April 2008
B3	Share Options in Keygate	When Zhou left SAIF	April 2018[25]
C	Capital Gain and Carry from KV	Distribution should take place shortly after end of the year	February 2012
D1	Salaries from KV	Salaries should be paid annually after Zhou started to work in April 2008	(a) April 2009: US$267,857,14 (b) April 2010: US$267,857,14 (c) April 2011: US$267,857,14 (d) April 2012: US$267,857,14 (e) December 2012: US$267,857,14 x 0.75
D2	Management fees from KV	Management fees should also be paid annually after Zhou started to work in April 2008	(a) April 2009: US$714,285.71 (b) April 2010: US$714,285.71 (c) April 2011: US$714,285.71 (d) April 2012: US$714,285.71 (e) December 2012: US$714,285.71 x 0.75
D3	Share Option in Keygate	When KV purportedly disposed of Xinrui	July 2011[26]

85.  Zhou’s case was that he did not need to pay SAIF anything, let alone interest.

86.  The interest rate falls within the usual range allowed by the court in commercial dispute. The respective starting dates are reasonable. I would grant them accordingly until the date of this decision and thereafter at judgment rate until payment.

COSTS

87.  Costs follow event. I see no reason to depart from it. SAIF is the winner or substantive winner in the taking of account exercise. As to those costs reserved by me in the PTRs and summons heard by me throughout the relevant period, I also see fit to award costs to SAIF. There will be a costs order nisi that costs of the present taking of account, all PTRs and summons(es) with costs reserved, be borne by Zhou to SAIF, with certificate for 2 counsel for all hearings before me, to be taxed if not agreed.

88.  Last but not least, it remains for me to express my sincere gratitude towards all counsel for their assistance in the matter.