SHOWN WAI INVESTMENT COMPANY LTD v. HUI YIP WING DAVID

HCA 2959/2015

[2024] HKCFI 1477

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2959 OF 2015

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J U D G M E N T

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A.  INTRODUCTION

1.  In this case, the plaintiff (“SW”) is suing the defendant (“Hui”) for breach of fiduciary duties and breach of duty to exercise reasonable care, skill and diligence.  SW commenced and is pursuing this case against Hui at the direction of the joint and several administrators (“JAs”) of the estate (“the Estate”) of Madam Kung, Nina, also known as Nina Kung and Nina TH Wang (“Madam Nina Wang”).  SW’s case is that Hui procured SW to enter into a real estate development project in Foshan (“the Foshan Project” or “the Foshan Transaction”) in late 2009, and in doing so Hui had breached the aforesaid duties owed to SW and had caused substantial loss to SW.  SW is claiming declaratory reliefs and damages against Hui.  The amount of damages claimed is substantial, ie over HKD 310 million.

2.  In the trial, SW is represented by Ms Sara Tong SC, leading Ms Esther Mak and Mr Eugene Kwan.  Hui is represented by Mr Bernard Man SC, leading Mr Vincent Chen and Mr Ian Yu.

B.   BACKGROUND

3.  I would first set out the background facts which are either agreed[1] or shown in the documents.

B1.  The individuals and companies involved

4.  SW is a limited liability company incorporated under the laws of Hong Kong, a member of the Chinachem group of companies (“Group”), and a wholly owned subsidiary of Chime Corporation Limited (“Chime”).  Chime was and remains as the principal operating entity within the Group engaged in the business of providing, inter alia, property development services in Hong Kong.

5.  The Group forms a substantial part of the Estate.  The Group is now managed by the JAs from PricewaterhouseCoopers (“PwC”), who took office on various dates between March 2012 and June 2014:

(1)  Mr Jong Yat Kit (“Jong”) was appointed by an order dated 26 March 2012.

(2)  Mr Chan Wai Tong Christopher and Mr Wong Tai Wai Alvin were appointed by an order dated 26 June 2014.  Mr Chan Wai Tong Christopher was released from his office by an order dated 13 August 2021.

6.  Before the appointment of the JAs, the Estate was managed by the former administrators pendente lite from Deloitte Touche Tohmatsu (“Deloitte”, the Former JAs), who were in office between 10 December 2007 and 5 July 2012.

7.  The principal business carried on by the Group was and still is the development, sale and leasing of residential and commercial properties in Hong Kong.

8.  Regarding Hui:

(1)  He entered into an employment agreement with the Group dated 30 September 2008 (“the 2008 Employment Contract”), and another employment agreement with the Group dated 15 November 2011 (“the 2011 Employment Contract”).

(2)  He was the General Manager of the Group from 1 October 2008 to 24 November 2011.

(3)  He was a director of Chime from 20 October 2008 to 26 November 2012.

(4)  He was a director of SW from 28 December 2009 to 26 November 2012.

(5)  He was appointed as a member of the Group’s Executive Committee (“Exco”) on 27 January 2010 and held this role until the termination of his employment with the Group in or around November 2012. The Exco was created in January 2010 and has since been the Group’s key decision-making body.  It is a committee delegated with the power to exercise all of the powers of the respective boards of most of the companies within the Group so that their business and affairs can be managed by the Exco.

(6)  He was appointed as the Chief Executive Officer of the Group on 26 November 2011 and held this role until November 2012.

9.  Mr Wong Shing Loong Raymond (“RW”) was introduced to the Group by Hui in around November 2008.  RW was employed by the Group until his resignation on 22 October 2012.  He assisted on the Foshan Transaction on behalf of the Group.

10.  Before Hui and RW joined the Group:

(1)  Hui and RW worked in Tian An China Investments Company Limited (“Tian An”) where (a) Hui was its Managing Director and (b) RW was its financial controller and later appointed as an executive director.

(2)  Hui and RW were both appointed to the board of directors of Theme International Holdings Limited (“Theme”) on the same day on 27 July 2000.  Hui and RW resigned from their positions as directors of Theme on 1 August 2007 and 30 April 2007 respectively.

(3)  Hui and RW were both directors of the board of High Fashion International Limited (“High Fashion”).  Hui was an executive director of High Fashion Group from 1996 to 2007. By Hui’s introduction, RW worked in High Fashion from March 1997 to April 2007, first as financial controller and later as executive director.

11.  At the time when the Foshan Transaction was approved by Chime and SW, in December 2009:

(1)  The appointed directors of Chime were Hui, Ms Gong Zhong Xin, Ms Kung Yan Sum, Dr Kung Yan Sum (“Dr Kung”), Madam Liu Yuan Chun (“Madam Liu”, Dr Kung’s wife), Mr Leung Wing Kong Joseph (“JL”) and Mr Chan Kam Po (“KP Chan”) (collectively “Chime Directors”).

(2)  The appointed directors of SW were JL, KP Chan and Mr Li Kwok Kee (“KK Li”).

12.  Although Ms Gong Zhong Xin and Ms Kung Yan Sum (sisters of Madam Nina Wang) were appointed directors of Chime, they were not involved in any decision-making in respect of Chime.

B2.   Hui’s directorship in TAGZ, his relationship with Fong and his prior involvement in the Foshan Project

13.  Between 1997 and 2004, Hui was employed as a managing director of Tian An, which was in the business of property development in Mainland China.  Hui ceased to be an employee and/or director of Tian An in or around 20 May 2004.

14.  During the course of his employment with Tian An, Hui came to know Mr Fong Kai Shing (“Fong”), who had business dealings with Tian An in a project involving the construction and development of a golf club, villas and residential apartments in Zhaoqing (“Zhaoqing Project”).  Fong was a director of Asia Coast Investments Limited, a subsidiary of Tian An, which was involved in the Zhaoqing Project.

15.  On or around 3 December 2007, Fong entered into an agreement to purchase the Zhaoqing Project from Tian An.

16.  On or around 8 July 2008, Fong (through Tian An Hung Kai Group Company Limited) purchased a 100% shareholding in Tian An (Guangzhou) Investments Limited (“TAGZ”) from Tian An, and thus became the indirect owner of a residential development project called “Tian An Hung Kai Garden” (南海天安鴻基花園) (“Garden Project”) in Nan Hai District, Foshan City, of which TAGZ was the developer.

17.  Between 1997 and 2016, Hui held the following roles in TAGZ:

(1)  Hui was the legal representative and Chairman of TAGZ from March 1997 to 2 December 2009.

(2)  Hui was a director of TAGZ from 10 March 1997 to 4 November 2016.

(3)  On 2 December 2009, Hui (a) resigned from his position as the legal representative and Chairman of TAGZ, and (b) was appointed as the Vice Chairman of TAGZ.

(4)  Hui remained as the Vice Chairman of TAGZ until he resigned from the position on 4 November 2016.

18.  In his capacity as a director or the legal representative of TAGZ, Hui:

(1)  signed a board resolution of TAGZ dated 2 July 2007 and a notice declaring the amendment of TAGZ’s Articles of Association;

(2)  signed a board resolution of TAGZ dated 8 June 2011;

(3)  appointed Fong as his agent in respect of his powers at TAGZ by letter dated 9 July 2009; and

(4)  signed a board resolution of TAGZ dated 13 November 2009 concerning, among other things, the transfer of shares in TAGZ.

19.  Hui, together with RW, prepared financial projections for Fong in relation to the Foshan Project, including the land value of the relevant site in Foshan (“the Foshan Site”), and profits and costs forecasts, at the latest by March 2008 (“the March 2008 Calculations”).

20.  In both the 2008 Employment Contract and the 2011 Employment Contract, Hui disclosed, inter alia, his directorship in TAGZ.  The 2008 Employment Contract and the 2011 Employment Contract were signed by Dr Kung on behalf of the Group.

B3.  Related Party Policy

21.  By around mid to late 2009, the Group had implemented a related party and connected transactions policy (“Related Party Policy”).

22.  On 30 September 2009, Hui provided to the Group (a) a signed confirmation of his understanding of the Related Party Policy, and (b) a written declaration (“the 30 September 2009 Declaration”) of his potential outside interests.

B4.  Negotiation of the Foshan Transaction

23.  In or around April 2009, Hui, who was at the time a director of Chime and the General Manager of the Group, introduced to the Group the opportunity for a potential investment (ie the Foshan Transaction) in the development of a commercial property known as “International Finance Centre” (華南國際金融中心) (ie the Foshan Project) at the Foshan Site.

24.  The Foshan Site was held by a company called Guangdong Sun Tien Hung Real Estate Development Limited (“GDSTH”), which was owned by Sun Tien Hung Investment Company Limited (“STH”) and TAGZ as to 90% and 10% respectively. The shareholding in STH was owned by Toprich International Limited and Tremendous Profit Holdings Company Limited (“Tremendous”) as to 33.3% and 66.7% respectively.

25.  The negotiation between Hui (acting on behalf of the Group) and Fong (on behalf of Tremendous and STH),  proceeded on the basis that the Foshan Transaction would take the form of an acquisition by the Group of an equity interest in STH, which in turn held 90% of the shares in GDSTH.

26.  Hui also liaised with professional advisers to Chime, SW and/or the Group.

27.  Lau Kwong & Hung (“LKH”) was retained by the Group to give legal advice in relation to the Foshan Transaction and to draft the transaction documents.

28.  Kennedy YH Wong & Co (“KW & Co”) was retained by the Group to advise the Group on the Mainland Chinese law aspects of the Foshan Transaction.

29.  W.M. Sum & Co was retained to conduct a special audit of the financial records of STH and its subsidiary.

30.  On Hui’s introduction, Norton Appraisals Limited (“Norton”) was retained by the Group to conduct a valuation of the Foshan Site for the purposes of the Foshan Transaction.

31.  Between April 2009 and November 2009, Ms Cathy Fong (“CF”, an associate of Fong and niece of Fong) provided (inter alia) the following projections:

(1)  On 19 April 2009, CF provided RW with profit-cost projections for the Foshan Project. The land value of the Foshan Site was estimated at RMB 428 million and the profit after tax was estimated at RMB 1.016 billion.

(2)  On 10 July 2009, CF provided RW with revised profit-cost projections for the Foshan Project. The estimated land value of the Foshan Site was revised to RMB 856.6 million and the profit projection was revised to RMB 988.8 million.

(3)  On 23 July 2009, CF provided RW with revised profit-cost projections for the Foshan Project. The estimated land value of the Foshan Site remained at RMB 856.6 million and the profit projection was revised to RMB 972 million.

(4)  On 29 July 2009, CF provided RW with revised profit-cost projections for the Foshan Project. The estimated land value of the Foshan Site remained at RMB 856.6 million and the profit projection was revised to RMB 1.219 billion.

(5)  On 11 November 2009, CF provided RW with revised
profit-cost projections for the Foshan Project. The estimated land value of the Foshan Site was revised to RMB 1.142 billion and the profit projection was revised to RMB 1.701 billion.

32.  On 6 November 2009, there was a meeting attended by Hui, RW, JL and Fong (“the 6 November 2009 Meeting”), in which:

(1)  JL stated he had studied the materials provided by Fong and his views were that based on projections, the return on investment and loan translated into a very low return project (for less than 10%).

(2)  RW stated that the vendor had raised the price from RMB 3,000/m square to RMB 4,000/m square in view of the recent purchase price of a piece of land nearby (“the China Overseas Land”).

(3)  In response, JL stated that the China Oversea Land was a residential project and that the Foshan Project usage was different and value should be discounted.

(4)  JL further said that in view of the increase in price, Fong had to supplement the projection.

(5)  JL said that he had visited the site a few months ago and was of the view that the project should be viable and the region easily accessible from Guangzhou.  However, in view of his lack of experience in the Mainland property law and practice, he would hand back the project to Hui who should make a proposal to the board of directors.  If everything was in order, it would be JL’s intention to support the project.

B5.  Valuation of the Foshan Site

33.  GDSTH acquired the Foshan Site on 18 December 2008 at the price of RMB 110,010,000 for the purpose of the Foshan Project, with the formal contract for the grant of land use rights entered into between the Foshan Government and GDSTH on 18 March 2009.

34.  In a fax from JL to Fong dated 24 September 2009, JL requested for information to enable the Group to evaluate the feasibility of the investment in the Foshan Transaction, including a valuation report in respect of the Foshan Site.

35.  On 6 October 2009, RW sent an e-mail to Hui stating that the valuation report for the Foshan Site remained outstanding.

36.  On or before 27 October 2009, Norton sent a document entitled “Service Proposal for Valuation of Foshan IFC” to Hui, a copy of which Hui countersigned on 28 October 2009 on behalf of the Group.

37.  Between October 2009 and November 2009, Norton produced three valuation reports (“the Norton Reports”) in respect of the Foshan Site:

(1)  On 22 October 2009, Norton faxed a first draft of Norton’s valuation report (“1^st Norton Report”) to Ms Yannie Ng (“YN”), who was Hui’s secretary at all material times.  In the 1^st Norton Report, Norton valued the Foshan Site at RMB 885 million as at 30 September 2009.

(2)  On 5 November 2009, Norton faxed a second draft of its valuation report (“2^nd Norton Report”) to YN, in which Norton valued the Foshan Site at RMB 1.24 billion as at 31 October 2009.

(3)  On 12 November 2009, Norton issued a final valuation report (“Norton Final Report”), which valued the Foshan Site at RMB 1.24 billion.

38.  On 12 November 2009, RW sent an e-mail to LKH noting that “[l]and price had been agreed at RMB 1,142,160,000, so the consideration for the 30% interest will be RMB 342,648,000”.  That would be about RMB 4,000/m square.

39.  On 20 November 2009, RW circulated to the Chime Directors an email containing, inter alia, the Norton Final Report.

B6.  Removal of the Proposed Put Option

40.  On 11 August 2009, a draft term sheet setting out the proposed terms of the Foshan Transaction was prepared by RW. The draft term sheet provided, inter alia, that the Group would have a put option which, if exercised, would entitle it to exit the Foshan Project with a guaranteed return of RMB 513,973,000 upon the expiry of a 5-year term (“Put Option”).

41.  On 3 September 2009, LKH provided Hui with a draft term sheet and a chart illustrating the proposed deal structure. Clause 4(b) of LKH’s draft term sheet contained the Put Option.

42.  On 16 September 2009, LKH circulated to Hui and RW a revised draft term sheet which contained the Put Option.  In LKH’s cover letter dated 16 September 2009 addressed to Hui and RW, LKH said:

“Given the substantial investment involved, we suggest that you should ask for at least 16.7% shareholding in [STH] to be provided as collateral to secure against your interests under the put-option and/or the shareholder's loan. Such “equal footing” shareholding percentage in the enforcement scenario would also be a strong deterrent against any intending infringements of your interests. We have amended the Term Sheet as suggested above for your further negotiation.”

43.  On 21 September 2009, LKH sent an email to Hui and RW, reporting that they had sent a revised draft term sheet and a cover letter to TAGZ, copies of which were attached to the email. The revised draft term sheet contained the Put Option. In LKH’s cover letter dated 21 September 2009 addressed to TAGZ, LKH said:

“[O]ur client also requires [Fong] and other shareholder(s) (if any) to guarantee the Hong Kong holding company's [ie STH] performance of the put option (認沽權) and shareholder's loan (股東貸款) obligations.”

44.  In an e-mail to LKH dated 2 November 2009, RW wrote that “there might be some major changes in the terms of the proposed deal, eg no guaranteed return, no security for the guarantee and price”.

45.  In an email to LKH dated 3 November 2009, RW wrote that “there will not be any put option available, so sub-B in the co-operation terms of Clause 4 [ie the Proposed Put Option] has to be deleted”.

46.  In an e-mail to LKH dated 12 November 2009, RW stated that “[a]s per last draft, there will be no guarantee on return, nor put option of the entire share capital transferred”.

47.  The first draft of the Share Purchase Agreement (“SPA”) circulated by LKH to CF, Hui and RW on 17 November 2009 did not include the Put Option.

B7.  Approval of and Entry into the Foshan Transaction

48.  On 20 November 2009, RW, at Hui’s request, sent an email to the Chime Directors attaching the following documents in relation to the Foshan Transaction:

(1)  Project brief note prepared by the potential partner

(2)  Company chart

(3)  Projected profit and loss and cashflow of the Foshan Transaction

(4)  Calculation sheet for internal rate of return

(5)  Valuation report

(6)  Legal due diligence report

(7)  Land grant contract

(8)  Land certificate

(9)  Business licence of the project company (ie GDSTH)

(10)  Capital inspection report of the project company

(11)  2008 audit report of the project company

(12)  management accounts as of August 2009 of the project company

(13)  draft consolidated accounts of the project company

(14)   building plan of the project

49.  On 28 November 2009, RW circulated to the Chime Directors a draft of the SPA and called for a Chime Board Meeting to be held on 30 November 2009.

50.  The proposed meeting of the Chime Directors was eventually postponed to 4 December 2009 at the request of JL.

51.  In an e-mail dated 3 December 2009 from RW to Hui, RW said that he would be meeting JL at 3:00 pm on the same day to discuss two points which JL had raised in relation to the Foshan Transaction, namely that:

(1)  JL “felt uncomfortable with the asking price increase by RMB 85.7 million, which appears to be too much”; and

(2)  JL was concerned that “only one-third of the office space [was] freely saleable. 1/3 for own use and the other 1/3 for bringing in financial institutions”.

52.  On 4 December 2009, the Chime Directors convened a meeting to discuss the proposal that the Group would enter into the Foshan Transaction (“4 December 2009 Chime Board Meeting”).  RW, Mr Wilson Lau of LKH, Mr James Wong of KW & Co and Fong were also in attendance.  The 4 December 2009 Chime Board Meeting was eventually adjourned to be resumed on 9 December 2009.

53.  On 5 December 2009, a revised draft of the SPA was circulated by LKH to RW, Hui, JL and CF.

54.  On 6 December 2009, JL sent an email to LKH (copying RW, Hui, CF, and KP Chan), raising six comments in respect of the revised draft SPA.

55.  On 7 December 2009, LKH sent an email to JL (copying RW, Hui, CF, and KP Chan), responding to the six comments raised by JL in his 6 December 2009 email.

56.  On 8 December 2009, KP Chan sent an email to RW, attaching a rough calculation of project returns, and stating that “we need to research on the rates of “land gain tax” to justify the 3% assumption.  If the tax scheme fail, the impact on profit can be significant and we need to know the possible exposure beforehand”.

57.  On 9 December 2009, the Chime Directors convened another meeting to continue their discussions in relation to the Foshan Transaction (“9 December 2009 Chime Board Meeting”).  RW and Mr Wilson Lau of LKH were also in attendance.

58.  At the 9 December 2009 Chime Board Meeting:

(1)  The following resolution was put to a vote by the Chime Directors:

“To agree to the proposed investment in 29.97% of華南國際金融中心 - 佛山千登湖項目through a wholly-owned subsidiary (the “Subsidiary”) of the Company, the principal terms contained in the attached draft Sale and Purchase Agreement (the “S&P Agreement”) subject to such amendments as [Hui] deemed necessary; and to authorize [Hui] to sign the S&P Agreement and the relevant agreements for and on behalf of the Subsidiary.”

(2)  Dr Kung, Madam Liu and Hui voted for the resolution.  JL and KP Chan abstained from voting.

(3)  Accordingly, the proposed resolution was passed and became a resolution made by the Chime Board (“the 9 December 2009 Chime Resolution”).

59.  In an email to the Chime Directors dated 10 December 2009, KP Chan suggested that SW be used as the special purpose vehicle (“SPV”) through which the Group was to enter into the Foshan Transaction.

60.  On 10 December 2009, Hui circulated a memorandum to the Chime Directors (“10 December 2009 Memorandum”).  The 10 December 2009 Memorandum:

(1)  attached a news article reporting the auction of a piece of land near the Foshan Site which had been sold close to RMB 8,000/m square;

(2)  outlined various changes to the terms of the Foshan Transaction resulting from Hui’s discussions with Fong; and

(3)  stated that “[b]ased on this comparatively low land price we have achieved and we should move to lock up this investment as early as possible”.

61.  On 11 December 2009, Ms Fion Leung of Deloitte sent an email to Hui and RW (copying the other Chime Directors) raising a number of concerns in relation to the Foshan Transaction (“Deloitte Email”).

62.  On 12 December 2009, SW Directors (ie JL, KP Chan, and KK Li) passed the following resolution (“12 December 2009 SW Resolution”)[2]:

“In pursuance to the resolution of and as directed by Chime, it was resolved that the Company proceeds with the proposed investment in 29.97% of 華南國際金融中心 - 佛山千登湖項目 and to authorize [Hui] to sign the attached Sale and Purchase Agreement, incorporating amendments deemed necessary by [Hui], and the relevant agreements for and on behalf of the Company.”

63.  On 12 December 2009, SW and Tremendous signed the finalized SPA, pursuant to which SW agreed to purchase 33.3% of STH’s issued shares for a consideration of RMB 342,648,000.  According to Clause 2.2 of the SPA:

(1)  SW would be required to pay a 10% deposit in the sum of RMB 34,264,800 (“Deposit”) at the signing of the SPA; and

(2)  In the event that SW did not complete the transaction, Tremendous could forfeit the Deposit and re-sell (or otherwise use) the 33.3% STH shares, and thereafter neither SW nor Tremendous would be able to claim against the other for any legal liabilities and compensation, nor request the performance of the SPA (如买方违约，卖方除将上述买方所付之临时定金没收外，并有权将转让股份再行发售或作其它用途；之后任何一方均不得追究对方任何法律责任及赔偿，及不得要求强制履行本合约) (Clause 2.2(b) of the SPA, “Forfeiture Clause”).

(3)  The SPA is governed by Hong Kong law, and the parties to the SPA are subject to the non-exclusive jurisdiction of the Hong Kong Court (Clause 6.8 of the SPA). 

64.  On 16 December 2009, Mr David Parker (“Parker”, the then Director of Corporate Governance of the Group) sent an email to Hui (copying to YN and RW) attaching a draft memorandum addressed to Chime Board which was stated to be from Hui (“the Draft Conflict Memorandum”).  The Draft Conflict Memorandum disclosed Hui’s directorship in TAGZ.

65.  In this trial, it is not in dispute that the Draft Conflict Memorandum in fact has not been sent by Hui to the Chime Board.

66.  On 21 December 2009, RW sent an email to Ms Fion Leung, responding to the concerns raised by her in the Deloitte Email.

67.  On 8 January 2010, the Foshan Transaction was completed and the following documents were executed:

(1)  A loan agreement dated 8 January 2010 between SW and STH (“STH Loan Agreement”), whereby SW agreed to provide a five-year, non-interest bearing loan in the sum of RMB 60,000,000 to STH;

(2)  A loan agreement dated 8 January 2010 between SW and Tremendous (“Tremendous Loan Agreement”), whereby SW agreed to provide a five-year, interest bearing loan in the sum of RMB 90,000,000 at the interest rate of 6% per annum;

(3)  A Dividend Adjustment Agreement dated 8 January 2010 between Tremendous and SW, which concerned the distribution of the profits and tax liabilities of STH and GDSTH between SW and Tremendous;

(4)  A share charge dated 8 January 2010 between Tremendous and SW, whereby Tremendous charged 6% of its shares in STH to SW to guarantee Tremendous’ performance of its obligations under the Dividend Adjustment Agreement;

(5)  A share charge dated 8 January 2010 between Tremendous and SW, whereby Tremendous charged a further 9% of its shares in STH to SW to guarantee Tremendous’ performance of its obligations under the Tremendous Loan Agreement;

(6)  A Deed of Guarantee dated 8 January 2010 executed by Fong in favour of SW, whereby Fong guaranteed Tremendous’ performance of its obligations under the SPA, Dividend Adjustment Agreement, and the Tremendous Loan Agreement; and

(7)  A Shareholders’ Agreement dated 8 January 2010 between Tremendous, SW and STH.

68.  The following payments were made by SW in relation to the Foshan Transaction:

(1)  On or around 6 January 2010 and 8 January 2010 respectively, SW paid HKD 38,896,166.55 (equivalent to RMB 34,264,800 at the then applicable exchange rate) and HKD 350,435,454.55 (equivalent to RMB 308,383,200 at the then applicable exchange rate) to Tremendous as consideration for its acquisition of a 33.3% interest in STH under the SPA.

(2)  On or around 1 February 2010 and 18 March 2010 respectively, SW advanced the sums of HKD 35,000,000 and HKD 32,700,000 (totaling HKD 67,700,000, equivalent to RMB 60,000,000 at the then applicable exchange rate) by way of a loan to STH under the STH Loan Agreement.

(3)  On or around 1 February 2010 and 18 March 2010 respectively, SW advanced HKD 35,000,000 and HKD 65,400,000 (totaling HKD 100,400,000, equivalent to RMB 90,000,000 at the then applicable exchange rate) by way of a loan to Tremendous under the Tremendous Loan Agreement.

B8.  Subsequent Events 

69.  Following completion of the Foshan Transaction, Hui and Dr Kung were appointed as the directors of GDSTH.

70.  In or around the middle of 2010, the Group recruited Mr Philip Tse as the Chief Executive Officer of a newly formed China division within the Group.

71.  On 22 August 2011, SW received a request from Tremendous for SW, as a 33.3% shareholder of STH, to contribute additional capital in the amount of RMB 87,676,286 (“Further Capital Injection”).

72.  Thereafter, in a series of subsequent internal meetings within the Group (attended by Hui), it was decided that SW would not fulfil the capital call, for the following reasons:

(1)  Even if the capital call was met, GDSTH would still have continuous funding needs and would require further capital injections from shareholders;

(2)  It would be difficult for GDSTH to obtain funding through bank borrowings due to the tightening of domestic lending by the Mainland banks; and

(3)  Given the unfavourable macroeconomic conditions in the Mainland and the uncertainties in the Mainland real estate market, it would be difficult for GDSTH to rely on pre-sale proceeds to enhance its cash flow.

73.  At an Exco meeting held on 11 January 2012:

(1)  Hui reported that “due to current poor property market situation in China and the difficulty to obtain bank loans, we had not injected the required capital as agreed. The counterparty had now proposed to purchase our shares in this project so that they could issue CB to Agricultural Bank of China Limited for financing to complete this project”; and

(2)  Hui “wished to obtain an agreement in principle from members so that he could further negotiate the buy-back proposal and associated settlement arrangement with the counterparty” and would “bring a detailed proposal to Exco for consideration and approval when available”.

74.  On 10 February 2012, Hui on behalf of SW informed Tremendous that SW would not be injecting further capital into the Foshan Project.

75.  At the Exco meeting held on 5 September 2012, it was reported, inter alia, that “a draft valuation report from Jones Lang LaSalle had been distributed yesterday. However, it was too early to be discussed in detail today…As to the valuation, it showed that the land value was slightly higher than what we had paid for it”.

76.  At the Exco meeting held on 9 October 2012, it was reported, inter alia, that “[Parker] reported that the valuation report for the Foshan project had been distributed on 26 September 2012. The valuation revealed that our investment cost and the valuation of the project was more or less the same”.

77.  On 9 October 2012, the JAs formed a Chinachem Group audit committee (“AC”).

78.  Hui’s employment with the Group came to an end in November 2012.

79.  On 2 September 2015, the Exco authorized the AC:

“to take any action, on behalf of and/or in the name of [SW] and/or any other relevant company in [the Group] as the AC may consider necessary, desirable or appropriate in respect of the Foshan Transaction, including but not limited to the following actions:

causing legal proceedings to be commenced in the name of [SW] and/or any other relevant company in the Group;

……

authorising one or more members of the AC to execute agreements or other documents on behalf of [SW] and/or any other relevant companies in the Group.”

80.  On 11 December 2015, the JAs procured SW to issue the Writ of Summons herein against Hui.   The Statement of Claim (“SOC”) was filed on 21 April 2017.

81.  On 6 September 2016, a Deed of Settlement and Release (“Settlement Agreement”) was entered into among SW, Chime, Tremendous and Fong, under which the Group would receive a total of RMB 185 million by way of two instalments, comprising:

(1)  RMB 90 million as the outstanding principal due under the Tremendous Loan Agreement;

(2)  RMB 60 million as the outstanding principal due under the STH Loan Agreement; and

(3)  RMB 35 million which Tremendous agreed to pay in return for the transfer of SW’s 33.3% shareholding in STH.

The aforesaid would be the consideration for the Group exiting the Foshan Transaction.

82.  The first instalment of RMB 150 million due pursuant to the Settlement Agreement was paid in September 2016. The second instalment of the remaining RMB 35 million was paid in September 2017.

C.   THE PARTIES’ RESPECTIVE CASES

83.  In this section, I would first set out the parties’ respective cases put forward in their respective submissions, and then I would deal with the various pleadings objections raised by the parties in this trial.  I have told the parties that I would consider the submissions and the evidence adduced by the parties on de bene esse basis, subject to my ruling on the pleading issues.  After setting out my ruling on the pleading issues, I would then list out the issues (which are defined by the pleadings, not by the submissions nor by the evidence) to be resolved in this trial.

C1.  SW’s case in its submissions

84.  Ms Tong submitted that SW’s case is that although Hui was only formally appointed as a director of SW on 28 December 2009, Hui was a de facto director of SW at all material times prior to such date by reason of (inter alia) his dominant and leading role in the negotiation of the Foshan Transaction (which was to be entered into by SW as the SPV of the Group), his assumption of director’s duties and his exercise of powers as a director of SW.  Hui therefore owed fiduciary duties and/or a duty of care to SW at all material times.

85.  In the opening submissions, SW’s case is that Hui breached his fiduciary duties and/or duty of care owed to SW by procuring its entry into the Foshan Transaction:

(1)  Hui breached the no conflict rule in continuing to act as a director of TAGZ, and failing to disclose such directorship to SW.

(2)  Hui also failed to disclose to SW his previous involvement in the Foshan Transaction by virtue of his directorship in TAGZ as well as his prior relationship with Fong.

(3)  Hui breached his duty to act in the best interests of SW in that it was known, or should have been obvious, to Hui that entering into the Foshan Transaction at all or on the terms as agreed was not and/or would not have been in SW’s best interests.

(4)  On the basis of the above, Hui also failed to exercise reasonable care, skill and diligence, and Hui caused, induced and/or failed to prevent SW from entering into the Foshan Transaction.

86.  Ms Tong made the following points in her submissions:

(1)  Hui was a de facto director of SW at the time of the 12 December 2009 SW Resolution, for Hui had assumed directorial duties and responsibilities vis-a-vis SW. Hui played the dominant and leading role in the negotiation of the Foshan Transaction which was to be entered into by an SPV (which ended up being SW).  Hui individually drove 9 December 2009 Chime Resolution (required as part of the Group’s corporate governance structure) to approve the Foshan Transaction. Hui’s dominant and leading role in respect of the Foshan Transaction continued after SW was chosen as the SPV for the Foshan Transaction and his role and responsibilities at that stage were at least equivalent to (if not greater than) those of a director of SW, albeit that his appointment was not formally implemented until 28 December 2009.  Pausing here, it would be necessary to say that SW has abandoned its case that Hui was a shadow director of SW at the time of the 12 December 2009 SW Resolution.

(2)  Ms Tong submitted that in any event, there can be no dispute that Hui owed director’s duties to SW in relation to his continued acts and decision to complete the Foshan Transaction on behalf of SW after he was formally appointed as SW’s director on 28 December 2009, when it was in fact open to SW to exit the Foshan Transaction and confine its loss to a deposit of around RMB 34 million by relying upon the Forfeiture Clause.

(3)  Directors are under a fiduciary duty to avoid conflicts between their duties owed to the company and their duties owed to another principal (“the no conflict rule”).[3] The existence of a conflict is determined by an objective test, namely whether a reasonable person looking at the relevant facts would think there is a real sensible possibility of conflict.[4]  For the purpose of establishing a breach, it is irrelevant that the company would have entered into the same contract with the same terms absent any conflict.[5]  The rule is infringed by a director even if (a) his conduct has caused no loss to the company; (b) there is no unfairness; (c) the honesty of the director is not in question; and/or (d) the director does not directly or indirectly make a profit.[6]  A director breaches the no conflict rule even if he is unaware that what he is doing constitutes a breach of duties and/or even if he considers his conduct to be in the best interest of the company.[7]

(4)  Hui was in clear breach of the no conflict rule:

(a)  In acting as a director/de facto director of Chime/SW on the one hand, and as a director of TAGZ on the other hand, and in negotiating the Foshan Transaction on behalf of the Group, Hui placed himself in a position where his duties to Chime/SW conflicted with his duties to TAGZ.

(b)  Despite the lack of disclosure of his clear position of conflict, Hui took the leading role in negotiating the Foshan Transaction on behalf of the Group and voted in favour of approving the transaction as a director of Chime, in circumstances where he ought to have abstained.

(c)  Hui’s failure to disclose his conflict to Chime/SW could only have been deliberate, since Hui had signed a board resolution of TAGZ and been appointed as Vice Chairman of TAGZ Board just one month prior to SW’s approval of the Foshan Transaction.

(5)  Hui breached his duties to act in the best interest of SW and/or to act with reasonable care and skill when negotiating the Foshan Transaction.  Amongst other things:

(a)  Hui failed to properly disclose to Chime/SW the fact that he was at all material times a director of TAGZ when he was responsible for negotiating the Foshan Transaction on behalf of the Group.

(b)  Hui failed to disclose his connection with Fong to Chime/SW when he was negotiating the Foshan Transaction on behalf of the Group.

(c)  Hui made no inquiries regarding the fluctuating profit-cost forecasts, cashflow projections and land valuations provided by Fong.  Specifically, the estimated land value of the Foshan Site and the estimated profits of the Foshan Project underwent successive increases within a short span of time without any apparent justification.  Since the price SW was ultimately to pay for its interest in the Foshan Project was based on the estimated land value and profits, such fluctuations would have prompted any reasonable director to make further queries, but Hui failed to raise any issue with Fong.

(d)  The valuer engaged by Hui on behalf of the Group, ie Norton, provided successive valuations of the Foshan Site which underwent similarly unexplained significant increases, which were coincidentally aligned with the increases in Fong’s forecasts and projections. Despite these glaring red flags, Hui failed to inquire into the valuations and withheld from the Chime Board the lower draft valuation previously supplied by Norton. In asking the Chime Board to consider and approve the Foshan Transaction, only the final (higher) valuation was provided to it.

(e)  During his discussion with Fong, Hui saw fit to forego the Put Option, against the advice of the Group’s lawyers and without consulting the other directors of Chime or seeking their views. The removal of the Put Option substantially increased the Group’s risk exposure, essentially leaving the Group with no protection at all against any downside risk of its equity investment in the Foshan Project.

(f)  Whilst two other directors of Chime (ie JL and KP Chan) raised various concerns regarding the risks and uncertainties associated with the Foshan Transaction, Hui acted indifferently to these concerns and consistently pushed for the early approval of the Foshan Transaction. These concerns cover several critical issues, including (i) the anticipated low rate of return of the Foshan Project; (ii) the Group’s potential tax exposure, which would further diminish SW’s already low rate of anticipated return; and (iii) the foreseen potential difficulties in funding the development of the Foshan Site, which ultimately materialised and led to the Group’s exit from the Foshan Project.

(g)  In light of the matters aforesaid, Hui acted in breach of his duties by causing, inducing, permitting or failing to prevent SW’s entry into or completion of the Foshan Transaction.

(6)  SW would not have entered into the Foshan Transaction (or at least not on the agreed terms) but for Hui’s breaches of duty.  Hui is liable for, inter alia, the initial costs of entering into the Foshan Transaction less the sums received from Fong by way of settlement (being approximately RMB 307.6 million), or alternatively, such sum minus the Deposit which would have been forfeited for an early termination of the Foshan Transaction by SW by relying upon the Forfeiture Clause.

(7)  There is no basis for Hui to seek the statutory reliefs in s.358 of the former Companies Ordinance (Cap.32), s.903 of the Companies Ordinance (Cap.622) and/or s.60 of the Trustees Ordinance (Cap.29) (“the Statutory Reliefs), for Hui did not act honestly and reasonably.

87.  SW is seeking declaratory reliefs and damages against Hui.  The reliefs sought by SW are as follows:

(1)  a declaration that Hui is liable to SW for breach of his fiduciary duties and breach of his duty to exercise reasonable care, skill and diligence;

(2)  damages against Hui for his breach of fiduciary duties and his duty to exercise reasonable care, skill and diligence;

(a)  if the court finds that Hui owed director’s duties to SW at all material times, whether as de facto director (prior to 28 December 2009) or de jure director (from 28 December 2009), the quantum of SW’s loss for which Hui should be held liable would be SW’s initial costs of entering into and completing the Foshan Transaction, minus (i) the sums recovered by SW from Tremendous under the Tremendous Loan Agreement and (ii) the settlement sum of RMB 185 million, ie the capital loss in the sum of HKD 312,332,437.10;

(b)  alternatively, if the court finds that Hui only owed director’s duties to SW after his appointment as a de jure director on 28 December 2009, the quantum of SW’s loss for which Hui should be held liable would be the capital loss minus the Deposit, being the loss which P could have avoided had it aborted the Foshan Transaction after the SPA was entered into on 12 December 2009 but prior to completion on 8 January 2010, ie HKD 273,436,270.55; and

(3)  interest.

C2.  Hui’s case in submissions

88.  Mr Man on behalf of Hui submitted the following:

(1)  Hui was not, and did not purport to act, as a shadow and/or de facto director of SW prior to his appointment on 28 December 2009.  He did not owe any duties qua director of SW at the time of the 12 December 2009 SW Resolution.

(2)  SW Directors exercised their judgement and scrutinised, critically appraised and evaluated the proposals put forward to them and approved the Foshan Transaction independently.

(3)  Hui did not exert the undue and unwarranted pressure upon the Chime Directors, given the equal status and independence of each of the Chime Directors.

(4)  The authority of Hui in dealing with the Foshan Transaction was derived from, and limited by the authority delegated to him by the SW Directors.

(5)  Hui’s directorship in TAGZ was recorded in the appendix to the 2008 Employment Contract.  Proper disclosure of his directorship was made since the beginning of his employment with the Group.

(6)  Prior to the approval of the Foshan Transaction on 12 December 2009, Hui verbally disclosed his position as a director and legal representative of TAGZ to Parker, and legal advice was sought in respect of Hui’s positions of directorship and legal representative in TAGZ and his previous involvement in the Foshan Transaction.  In any event, such matters are irrelevant to the merits of the Foshan Transaction and would not have affected the decision of the SW Directors in approving the same. Hui did not receive any personal benefit or profit from the Foshan Transaction.

(7)  Hui delegated to, and reasonably relied on, the senior staff of the Group (in particular RW) and the professional advisers engaged by the Group in carrying out the due diligence, assessing the viability of the Foshan Transaction and addressing the concerns raised by the Former JAs, the JAs and the Chime Directors.

(8)  The queries raised by JL on the investment, and the concerns raised by the Chime Directors at the 4 and 9 December 2009 Chime Board Meetings, were fully discussed and addressed to the satisfaction of the Chime Directors and the SW Directors. The 9 December 2009 Chime Resolution was passed without any objection from JL or KP Chan.  They only abstained from voting.

(9)  The points raised in Deloitte Email had been considered and follow-up actions taken even before the email was sent. Those concerns were addressed or resolved to the satisfaction of the SW Directors. The Foshan Transaction was approved by the SW Directors and the representatives of the Former JAs did not object to the same.

(10)  In any event, no loss was suffered by SW from the investment in the Foshan Transaction, given that:

(a)  The Mainland tax authorities did not levy the relevant tax (ie land value-added tax, “LVAT”) beyond 3%;

(b)  The risk associated with the Self-Use Portion Issue (ie it might not be permissible to sell a portion of the Foshan Site to the public) was adequately protected by clause 2(a) of the Dividend Adjustment Agreement[8]; and

(c)  The Put Option Issue was the result of commercial negotiation. Hui and the SW Directors in the exercise of their commercial judgement considered that there was adequate protections built into the terms of the Foshan Transaction against any downside risk.

(11)  Hui honestly believed that it was in the best interests of SW to enter into the Foshan Transaction on the terms of the SPA and the other related agreements. Alternatively, it was not obvious to Hui that it was not.

(12)  The progress of the construction of the Foshan Transaction was stalled, and the value of the Foshan Site was suppressed as a result of the downturn of the Mainland real property market in 2012.

(13)  The loss and damage were not caused by the alleged breach of duties, but SW’s decision (not involving Hui) in settling the dispute on the terms of the Settlement Agreement, and/or failing to mitigate its loss.

(14)  In entering into the Settlement Agreement, SW, Chime, JAs did not take the necessary steps[9] to ensure that SW would not dispose of its rights and interest in the Foshan Transaction at a gross undervaluation of RMB 185 million.

(15)  Hui acted honestly and reasonably in the conduct of the affairs of SW.  Insofar as may be necessary, as a matter of fairness, Hui should be granted the Statutory Reliefs excusing and relieving him from any liability to SW.

C3.  The pleading issues

89.  There are various arguments concerning pleadings raised by the parties[10], and SW has made an application to amend its pleadings at the end of its opening submissions in the trial.  I would address these matters in turn in the paragraphs below.

C3.1  The principles

90.  It is well established that the issues in a trial are defined by pleadings, not by evidence.  One cannot slip in an unpleaded issue by saying that there is evidence on the issue.  As said by Ma CJ in Kwok Chin Wing v 21 Holdings Ltd^[11]:-

“21. It should by now really be quite unnecessary to issue yet another reminder on the rationale behind pleadings. The basic objective is fairly and precisely to inform the other party or parties in the litigation of the stance of the pleading party (in other words, that party’s case) so that proper preparation is made possible, and to ensure that time and effort are not expended unnecessarily on other issues:- Wing Hang Bank Limited v Crystal Jet International Limited [2005] 2 HKLRD 795, 799 [6(1)]. It is the pleadings that will define the issues in a trial and dictate the course of proceedings both before and at trial. Where witnesses are involved, it will be the pleaded issues that define the scope of the evidence, and not the other way round. In other words, it will not be acceptable for unpleaded issues to be raised out of the evidence which is to be or has been adduced. As the Court of Appeal remarked in Wing Hang Bank Limited v Crystal Jet International Limited:-

‘(2) In a trial, particularly where evidence is given by witnesses, it becomes extremely important that each side knows exactly what are the live issues. Where issues are sought to be introduced that have not been adequately or properly pleaded, amendments must be sought unless the consent of the other party or parties has been obtained. It will simply not do for unpleaded issues to be “slipped in” when evidence is being given in the hope that the other side is not sufficiently alert to object.’

22. …… one does not sift through the evidence adduced in a trial in the hope that something was said that can conceivably found a cause of action. Issues, I would reiterate, must be properly pleaded unless for some reason the pleadings have assumed a less significant role in the proceedings.” (Emphasis added)

91.  The purpose of pleadings is to define the real issues in dispute and to ensure that the litigation is conducted in a fair way.  It is pertinent to note what has been said by Yuen JA in Chan Kong v Chan Li Chai Medical Factory (Hong Kong) Ltd^[12]:

“15. …… It is well established that pleadings need to be clear - because pleadings are the foundations on which the rest of the action stand. The reason why parties to litigation must ensure that the real issues in dispute are defined in advance in the pleadings is so that there is an unambiguous framework for the many interlocutory steps that follow in an action, such as discovery of documents, interrogatories and witness statements, as well as for the conduct of the trial itself. A statement of claim should make it clear to the reader what the plaintiff's cause of action is, and it should set out the material facts which provide the basis for him to pursue that cause of action. It is not adequate for a plaintiff just to set out his story extensively and then to allege a number of breaches of rights for which he claims relief. Put another way, it should not be left to the reader to guess how the dots should be connected.

16. The more complex the facts and the more complicated the claim, the more important it is for the pleader to get it right. That is because the more obtuse the pleading, the more capacity there is for genuine misunderstanding or specious opportunism. And the more blind alleys are left in a pleading, the more expensive and time-consuming the litigation will be.” (Emphasis added)

92.  Further, in Sinoearn International Ltd v Hyundai-CCECC Joint Venture[13], Ribeiro PJ said:

“30. …… A party must raise all the issues he wishes to raise to be dealt with at the trial. Parties are not entitled to have issues recently thought up dealt with separately and piecemeal. The other party is entitled to know from a clear pleading what is the entire case he has to meet so that he can decide whether particulars should be sought; how he should plead in response; what discovery he is entitled to; what evidence he should adduce to meet it; and what points of law should be taken. ……

……

34. Pleadings are not mere formalities. They impose a necessary discipline and are fundamental to enabling every procedural facet of the adversarial system to operate fairly.” (Emphasis added)

93.  All the causes of action relied upon by a claimant must be pleaded in the statement of claim.  A new cause of action cannot be raised in the reply.  A claimant may only raise a new claim by amending his statement of claim.  As said by Lam J (as he then was) in Magic Score Limited v. The Hong Kong and Shanghai Banking Corporation Limited and Another^[14]:-

“20. Thus, it is not appropriate to raise in the reply a new cause of action (see Hong Kong Civil Procedure 2006 Paragraph 18/3/2).  A plaintiff who wishes to pursue an additional or alternative cause of action should do so by amending the statement of claim.

21. This is not simply a technical rule. A defendant to an action is entitled to know from the writ and statement of claim what are the precise limits of claims he is faced with.  He should focus on the same and then put forward his case in his defence and prepare for the evidence accordingly.  He should be able to conduct the litigation and arrange his affairs on the basis that all the relief and remedies claimed against him have been set out in the statement of claim, subject to any amendments that might be made to that document.  He could, for example, consider whether to make any payment into court or any offer for settlement based on this.  He could also decide what is the proportionate time and costs that he should spend on the litigation by reference to those claims. A reply (or any subsequent pleadings) is not the right place for new claims to be put forward as it does not contain any prayers and a defendant does not have any automatic right to file any pleadings subsequent to reply (see Order 18 rule 4).  It would also be confusing for new claims to be buried amongst other positive allegations made in genuine reply to a defence.” (Emphasis added)

94.  Ms Tong submitted that while a cause of action is pleaded in the statement of claim, the plaintiff may plead the material facts in the reply in support of the cause of action pleaded in the statement of claim.  With respect, I am unable to agree.  If a cause of action pleaded in the statement of claim is not supported, or is not sufficiently supported, by the material facts pleaded in the same pleading, then the statement of claim would disclose no reasonable cause of action.  That would be fatal to the plaintiff’s claim. The problem has to be rectified by adding the necessary material facts to the statement of claim by seeking leave to amend the same, not by introducing the necessary material facts in the reply.

95.  In my view, the analysis set out in the aforesaid paragraph is consistent with the rationale in Lam J (as he then was)’s judgment in Magic Score. A defendant should be entitled to know all the material facts in support of the cause of action relied upon by the plaintiff by reading the statement of claim.  After knowing all these, the defendant would then put forward his defence and prepare his evidence in answering to all the material facts alleged by the plaintiff.  Bearing in mind that the defendant does not have any automatic right to file any pleadings subsequent to reply, it would not be fair to the defendant if the plaintiff raises any material fact (which is essential to the establishment of the cause of action pleaded in the statement of claim) in the reply for the first time.

96.  The parties’ respective cases run at the trial must not contradict the aforesaid principles.

C3.2  SW’s Summons dated 6 October 2023 (“SW’s Summons”)

97.  In the trial, at the end of Ms Tong’s oral opening submissions, Ms Tong indicated that SW would seek leave to amend its pleadings.  On 6 October 2023, SW took out a summons (“SW’s Summons”) for leave to amend its pleadings (“the Amendment Application”) and for leave to file and serve the Jong’s 4^th supplemental witness statement (“the Witness Statement Application”).  On 10 October 2023, I heard the parties’ respective submissions concerning SW’s Summons.  The Witness Statement Application was not opposed by Hui, and I allowed that application.  The Amendment Application was opposed by Hui.  After hearing submissions from the parties, I dismissed the Amendment Application.  The dismissal of the Amendment Application would have an implication on the parties’ respective cases, for each party would not be allowed to travel beyond its or his own pleadings.  I would now give my reasons for the dismissal of the Amendment Application.

98.  By the Amendment Application, SW proposed to amend the following parts in its pleadings:

(1)  Proposed amendments to SOC:

“56. Only after his execution of the [SPA] on 12^th December 2009 on behalf of [SW], on 16^th December 2009, did Hui did not inform Chime’s Board that he was still a director of TAGZ, being the other 10% shareholder of GDSTH (in addition to STH as a 90% shareholder of GDSTH) and a company owned and controlled by Mr Fong. There was no explanation by Hui for his failure to disclose his continuing directorship in TAGZ, notwithstanding that he had, prior to joining [the Group] in October 2008, disclosed his interests in the Zhaoqing Project and the Garden Project.”

“81. Further, Hui failed to disclose to the board of [SW] at the earliest available opportunity and in any event prior to 16^th December 2009, his continued directorship in TAGZ, his previous involvement in the Foshan Transaction by virtue of said directorship and his prior relationship with Fong as pleaded in paragraph 13 above. [SW] avers that had such disclosure been made, the board of [SW] would have adopted a more prudent and cautious approach towards the Foshan Transaction, including but not limited to ensuring the steps pleaded at paragraph 80 above were properly taken prior to the approval of the Foshan Transaction.”

(2)  Proposed amendments to the Amended Reply:

“6(1) it is averred that no written disclosure of Hui’s continuing position legal representative of TAGZ or the fact that he remained as a director of TAGZ after joining [the Group] as General Manager on 1^st October 2008, was made to anyone at the Chinachem Group until his memorandum to the Chime Directors dated 16 December 2009”

99.  Ms Tong submitted that the only purpose of the proposed amendments is to correct a factual matter which Hui himself also accepted as being incorrect, ie that Hui made disclosure of his directorship in TAGZ to the Chime Board on 16 December 2009 by way of the Draft Conflict Memorandum.  It is now clear that the Draft Conflict Memorandum in fact has not been sent by Hui to the Chime Board.  The proposed amendments should be allowed for the following reasons:

(1)  The purpose of the proposed amendments is simply to put the pleadings in order, and to correct an error so as to reflect the correct factual position which both parties are not in dispute about.

(2)  SW should not be forced to run a case on an incorrect factual premise, particularly when there is no dispute between the parties on the correct factual position. The court’s role is to decide the matter based on an adjudication of the real factual matters. If the judgment of the court stands on a factual assumption which both parties regard as incorrect but which was not allowed to be corrected, such judgment must surely be defective.

(3)  The deletion of factually incorrect pleas cannot conceivably cause any prejudice to Hui, particularly when (a) Hui’s own case is that he never sent the Draft Conflict Memorandum to the Chime Board; (b) he denies having made disclosure of his TAGZ directorship to the Chime’s Board on 16 December 2009; and (c) he has all along proceeded on such premise both in his pleadings and witness statements.

(4)  Mere undue delay is not sufficient to bar an application to amend.[15] Since the purpose of the Amendment Application is to correct an undisputed incorrect factual premise, the lateness of the application would not cause any prejudice to Hui. 

(5)  The court should exercise its case management powers to secure the just resolution of disputes in accordance with the substantive rights of the parties.[16]  Viewed in context, with this primary aim in mind, the Amendment Application should be allowed.

100.  Mr Man submitted that the Amendment Application ought to be refused for the following reasons:

(1)  Hui does not accept that the Chime Directors had not been told about his directorship by 16 December 2009.  Hui’s case is that he verbally disclosed his position as director and legal representative of TAGZ to Parker before the 12 December 2009 SW Resolution was passed.[17]  Hui has not disputed that by 16 December 2009, Chime Directors had already acquired knowledge of his directorship in TAGZ. 

(2)  SOC §§56 and 81 simply plead that the Chime Directors had knowledge on 16 December 2009.  It does not say that they had knowledge by reason of having been sent the Draft Conflict Memorandum.  These pleas in the SOC in fact are consistent with Hui’s case as pleaded in the Amended Defence.

(3)  The Proposed Amendments would have a significant impact on the parties’ respective cases:

(a)  It impacts upon whether Hui’s alleged concealment of his directorship in TAGZ was “deliberate”.

(b)  It impacts upon the issue of causation. No one in the Chime Board had attempted to unravel the Foshan Transaction (or do anything about it) before the completion of the same on 8 January 2010 despite their knowledge of Hui’s directorship in TAGZ on 16 December 2009.

(c)  It also impacts upon whether Hui had been acting honestly and reasonably, which in turn would impact upon the Statutory Reliefs claimed by Hui.

(4)  The Proposed Amendments, if allowed, would cause irremediable prejudice to Hui.

(a)  If SW’s case had been that the Chime Board never had knowledge of Hui’s directorship in TAGZ, Hui could have made inquiries with other directors of Chime, eg Dr Kung or Madam Liu, to ascertain as to when the Chime Board was made aware of his directorship in TAGZ and give evidence for Hui.  Hui could also have sought discovery on communications between Parker and the Chime Board.

(b)  Even regarding the existing witnesses in this case, the passage of time would have inevitably led to fading of memory. This prejudices Hui’s ability (and entitlement) to adduce potentially critical evidence.[18]

(5)  The Amendment Application is an extremely late application, and there is no evidence explaining why the application has not been made at an earlier time.  In view of the extreme lateness of the application and the lack of explanation, the application must be refused.[19]

101.  I agree with Mr Man.  As submitted by Mr Man, the Proposed Amendments are not going to put a “common ground” in the pleadings.  It would introduce a controversial issue, ie whether D had ever disclosed his directorship in TAGZ to the Chime Directors.  The introduction of this controversial issue would have a significant impact on the parties’ respective cases, and would cause irremediable prejudice to Hui.  Further, it is undeniable that the Amendment Application is an extremely late application, and there is no evidence explaining the delay.  In the circumstances, for the purpose of securing a just resolution of disputes between the parties in accordance with their substantive rights, I am of the view that my discretion should be exercised against SW.

102.  For the reasons above, I dismissed the Amendment Application.

103.  In Xue Boran & Anor v Hui Chi Sum & Anor[20], the defendants took out an application for leave to amend the defence on the ground that the defence was not factually consistent with their witness statements, and the proposed amendments were technical in nature, and the purpose of the proposed amendments was to bring in line the pleadings with the witness statements.  DHCJ Winnie Tsui dismissed the application and said:

“31. The outcome of my decision is that the defendants would be bound by a factual case which is, according to them, not entirely accurate on the facts. But as I have said just now, this is a problem of their own making and they will have to live with the consequence and deal with the problem if they can. So that is my decision.”

104.  Similarly, as a result of the dismissal of the Amendment Application, SW must be bound by the case as pleaded in its current pleadings and is not allowed to run a case which contradicts the pleadings.

105.  As to the costs of the SW’s Summons, since the parties would only be able to know the reasons for dismissing the Amendment Application by reading this judgment, I make a costs order nisi that:

(1)  costs of the Witness Statement Application be in the cause, with a certificate for 3 counsel, to be taxed if not agreed; and

(2)  costs of the Amendment Application be to Hui in any event, with a certificate for 3 counsel, to be taxed if not agreed.

Any application for varying this costs order nisi must be made by a summons within 14 days after the handing down of this judgment.  Unless there is such an application within the prescribed time, the costs order nisi shall become absolute without a further order.

C3.3  Parties in this case – SW and Hui only

106.  In order to sort out what are the real issues to be resolved in the trial, one must bear in mind that the only plaintiff in this case is SW.  Chime or anyone else is not a plaintiff in this case.  In other words, the issues in this trial must be whether Hui has breached any duties owed to SW (not any duties owed to Chime or anyone else), and whether the breach of the said duties has caused loss to SW (not Chime or anyone else).

107.  One must also bear in mind that the only defendant in this case is Hui. SW has made no claim against anyone else, and there is no allegation that Hui has conspired with anyone to cause loss to SW.  Thus, the correctness of Norton’s valuation in their reports would not be an issue in this trial, for this is not a trial against Norton.  There is also no allegation that Hui has conspired with Norton to injure SW.

C3.4  De facto directorship

108.  In the SOC, it is pleaded:

“7. At the time of their approval of the Foshan Transaction … on 12 December 2009, each of [JL], KP Chan and KK Li was accustomed to act in accordance with Hui’s directions and instructions. This is to be inferred from, inter alia, the following facts and matters:

……

8. Accordingly, at the time of approval of the Foshan Transaction …, Hui was a shadow and/or de facto director of [SW].” (Emphasis added)

109.  It is an indisputable fact that when the SW Board passed the 12 December 2009 SW Resolution, Hui was not a de jure director of SW.  In SW’s opening submissions, Ms Tong has made clear that SW would not say that Hui was a shadow director of SW on 12 December 2009.  SW’s case is that Hui was a de facto director of SW at that time.  Bearing in mind that the only plaintiff in this case is SW, and SW’s claim is based upon breach of duties owed to SW by Hui, SW’s claim that Hui was a de facto director of SW on 12 December 2009 is an important basis of SW’s case. 

110.  Mr Man submitted that no claim based upon de facto directorship has been properly pleaded in the SOC.  Mr Man referred me to Cyberworks Audio Video Technology Ltd v Mei Ah (HK) Co Ltd[21], in which Coleman J, after reviewing the authorities, said:

“56. My own summary of the principles is as follows:

(1) The essence of deciding whether a person has acted as a de facto or shadow director is to consider whether that person has acted in such a way that he is to be taken to have assumed – and for the Court to impose on him – a director’s duties and responsibilities in relation to the subject company.

(2) Each case gives rise to a question of fact and degree, where all relevant factors must be taken into account and looked at in their context. It is the cumulative effect of all relevant factors that guides the Court. But those who assume to act as directors and who thereby exercise the powers and discharge the functions of a director must accept the responsibilities of the office, whether they are validly appointed or not, and whether they claim to be a director or claim not to be.

(3) In order to make a person liable for misfeasance as a de facto director, it must be shown that the person was part of the corporate governing structure, namely the system by which the subject company’s business is directed and controlled, and that he assumed a role sufficient to impose on him a fiduciary duty to the company. That may require the Court to consider the company’s business and whether the person’s acts were directorial in nature.

(4) Often, a de facto director is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. Though that is not a necessary feature, it may be weighty evidence in support of the conclusion that a person acted as a director in fact. So might the evidence that third parties considered that he was a director. The Court will not focus on what the person was called by the company or by himself, or (by extension) what others called him, but instead the Court will look to see what he actually did. The Court will consider if he was the sole person directing the affairs of the company, or acting on at least an equal footing with others in directing its affairs, whether those others were validly appointed or not.

(5) It is not sufficient to show that the person was concerned in the management of the company’s affairs, or undertook tasks in relation to its business, which can properly be performed by a manager below board level. Rather, it is necessary to plead and prove that the person undertook functions in relation to the company which could properly be discharged only by a director. That is because it is only the exercise of such functions which give rise to the corresponding duties and responsibilities. If it is unclear whether the acts of the person are referable to an assumed directorship or to some other capacity, and so long as the Court does not strain the facts on this question, the person is entitled to the benefit of the doubt.

(6) The definition of shadow director is to be construed to give effect to the legislative intention ascertainable from the words used, and the mischief aimed at, where the purpose of the legislation is to identify those (other than professional advisers) with real influence in the corporate affairs of the company. It is, however, not necessary that such influence should be exercised over the whole range of the company’s corporate activities which are decided by the board.

(7) To establish that a person is a shadow director of a company, it is necessary to allege and prove: (1) who are the directors of the company whether de jure or de facto; (2) that the person directed or instructed those directors how to act in relation to the particular sphere of activity of the company relevant to the enquiry, or that he was one of the persons who did so; (3) that those directors, or a majority of them, acted in accordance with such directions; and (4) that they were accustomed so to act, in a pattern of behaviour in which the board, or a majority of its members, did not exercise any discretion or judgment of its own but acted in accordance with the directions of others. A shadow director is a puppet master pulling the strings of the true directors who are his puppets or stooges.

(8) For a person to be taken as a shadow director, it is not necessary that all the true directors should act in accordance with the directions of the shadow director; it is enough that a majority do so. It is also sufficient to show that the properly appointed directors, or a majority of them, cast themselves in a subservient role or surrendered their respective discretions in the face of directions or instructions from the alleged shadow director.

(9) The concepts of de facto and shadow directorships are primarily separate and distinct, and in many (perhaps most) cases will be mutually exclusive. For example, in many cases the de facto director holds himself out as a director, even though not validly appointed, whilst the shadow director usually claims not to be a director at all and, as the very name suggests, lurks in the shadows. But recent authorities acknowledge that there may be some erosion in the distinction. Considering the extent of the erosion is unlikely to be helpful. Rather, the focus should always be on the relevant factors taken as a whole and on the question whether the individual has acted in such a way as triggers a director’s duties and responsibilities owed to the subject company.

(10) Acts outside the period when the person is said to have been a de facto or shadow director may throw light on whether he was a de facto or shadow director in the relevant period.” (Emphasis added)

111.  Further, in Re Hydrodam (Corby) Ltd[22], Millet J (as he then was) said:

“A de facto director is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company's affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level.” (Emphasis added)

112.  Mr Man submitted that SOC §7 is not a plea in support of a claim that at the time of the 12 December 2009 SW Resolution, Hui was a de facto director of SW.  SOC §7 only advances a plea of shadow directorship.  The particulars thereunder are to support a specific inference that “each of [the SW Directors] was accustomed to act in accordance with Hui’s directions and instructions”.  This cannot be a reference to, and is not a plea of, de facto directorship.  Further and in any event, the matters pleaded in SOC §7 are clearly not sufficient pleas for de facto directorship as a matter of substance.  None of them plead functions which could only be discharged by a SW director, given that Hui was also a Chime director, the General Manager of the Group, and the person authorised by the SW directors to sign documents.

113.  Ms Tong submitted that:

(1)  SW has pleaded that Hui undertook functions that were referrable to assumed directorship of SW. The operative plea is in the Amended Reply, which is the touchstone for de facto directorship, is that Hui “purported to act and held himself out as a director of [SW], and assumed the duties of a director of [SW]”[23], and he “exercised powers exercisable by a director of [SW], and had apparent authority to act for and on behalf of [SW]”[24].

(2)  The particulars relied upon to support such plea include the matters set out SOC §7 and Amended Reply §§3(2)(a)-(d):

(a)  It is pleaded that Hui played a dominant role in the Foshan Transaction by virtue of his dominant role in the Group.[25] He led the negotiations with Fong[26], instructed professional advisors[27], and was understood by LKH to be the person in charge of the Foshan Transaction[28].  These particulars are pleaded as acts which support, and thus must be referrable to, Hui’s assumption of directorial responsibilities of SW as the entity entering into the Foshan Transaction.

(b)  Hui played a dominant and leading role in the negotiation of the Foshan Transaction in the context where SW was an SPV[29]. In other words, Hui’s acts must be considered through the lens that SW would be interposed as the SPV for the investment.

(c)  Hui’s de facto directorship further finds support from the fact that he was appointed as a de jure director of SW on 28 December 2009, shortly after the SPA was executed.[30]

(3)  It is therefore incorrect for Hui to allege that SW’s pleas refer only to Hui’s role in discharging his duties as the General Manager of the Group and a director of Chime.

114.  I am in respectful agreement with Mr Man.  In my judgment, SW has not pleaded a cause of action based upon the alleged de facto directorship of Hui in SW on 12 December 2009.

(1)  As rightly pointed out by Mr Man, SW’s stance that the “operative plea” of de facto directorship is contained in the Amended Reply §§3(2) and 4 is fatal. It is trite that pleas forming a party’s cause of action cannot be raised in the reply and the proper course would be to amend the statement of claim.  As said by Lam J (as he then was) in Magic Score, this is not simply a technical rule. A defendant to an action is entitled to know from the writ and statement of claim the precise limits of the claims he is faced with. This enables the defendant to put forward his case in his defence and prepare his evidence accordingly.  While there is no operative plea concerning de facto directorship in the SOC, SW cannot put forward a claim based upon de facto directorship against Hui in the trial.

(2)  As said in the above, not only a cause of action must be pleaded in the statement of claim, but also the material facts in support of the cause of action must be present in the statement of claim.  While the material facts in support of a cause of action are missing in the statement of claim, the statement of claim is liable to be struck out for disclosing no reasonable cause of action.  It is not an answer to say that the necessary material facts are contained in the reply.

(3)  Further and in any event, looking at all the particulars pleaded in the SOC and in the Amended Reply carefully, none of the matters relied upon by SW is referable only to a de facto directorship in SW.  All those matters are explicable on the basis of Hui’s role as (a) the Group’s General Manager, (b) a Chime Director and/or (c) an authorized representative under the 12 December 2009 SW Resolution and/or 9 December 2009 Chime Resolution.  If there is any grey area, Hui is entitled to the benefit of the doubt.

115.  Further, the subject matter in SOC §7 is that “each of [JL], KP Chan and KK Li was accustomed to act in accordance with Hui’s directions and instructions”, and this is to be inferred from the particulars set out in SOC §7.  However, in this trial, SW is not saying that JL and KP Chan were accustomed to act in accordance with Hui’s directions and instructions, and in fact the evidence shows that JL and KP Chan would act independently according to their own judgments.  SW is also not pursuing a case that KK Li was accustomed to act in accordance with Hui’s directions and instructions, and in any event there is no evidence showing that.  In the circumstances, the subject matter in SOC §7 is not proved.  Given that SOC §7 is the basis of SOC §8, while SOC §7 is gone, SOC §8 simply does not have a leg to stand on.  For these reasons, the plea on de facto directorship must fail. 

116.  Ms Tong submitted that Hui was able to influence the majority of the Chime Board and thus had an influential role in the Group.  Hence, Hui was a de facto director of SW at the material time.  Ms Tong submitted that this has been pleaded in SOC §7.6(ii):

“[JL], KP Chan and KK Li and/or other individuals holding senior managerial and directorial positions within [the Group] did not act on their valid objections and concerns, and did not contradict decisions taken and/or recommendations or proposals put forward by Hui, and were accustomed to following his directions and instructions” (Emphasis by counsel)

117.  With respect, I am unable to agree.  SOC §7.6(ii) is a subparagraph under SOC §7.  The matters in that subparagraph are particulars of the subject matter pleaded in SOC §7 and cannot change the subject matter in SOC §7.  For the reasons set out in the above, while the subject matter in SOC §7 is not proved, all the particulars under SOC §7 (including SOC §7.6(ii)) in fact do not serve any meaningful purposes.

118.  In my judgment, there is no proper case based upon de facto directorship has been pleaded against Hui before Hui was appointed as a director of SW on 28 December 2009.  On this ground alone, any claim based upon the alleged de facto directorship cannot succeed.

C3.5  Alleged intentional wrongdoing and actual interests of Hui

119.  Mr Man submitted that SW has not pleaded that Hui had any (a) deliberate concealment, (b) actual preference, (c) actual interests in TAGZ and/or (d) actual interests in the Garden Project.  Having examined the pleadings, I agree with Mr Man.

120.  In her oral opening submissions, Ms Tong accepted that the allegation of Hui preferring Fong’s interests over that of SW’s is not in the pleadings and is an observation from the evidence.  However, as stated in the above, it is trite that issues in the trial are not defined by evidence but by the pleadings.

121.  It is also trite that fraud must be pleaded distinctly and with the utmost particularity.[31] SW cannot advance a case of deliberate concealment against Hui in the absence of a clear plea.

122.  Mr Man submitted that SW is not entitled to put forward a case concerning Hui’s subjective belief and/or his actual knowledge in the absence of a proper pleading. The only possible reference to Hui’s actual knowledge is SOC §80 , in which it is pleaded:

“80. By reason of the matters pleaded in paragraphs 37 to 52 above, at the time of [12 December 2009 SW Resolution] and at all material times subsequent to that, it was known, or alternatively should have been obvious to Hui, that entering into the Foshan Transaction …… was not and/or would not have been in the best interests of SW ……” (Emphasis added)

123.  Mr Man submitted that SOC §80 is clearly a “rolled-up plea”, which can only be treated as a single allegation of constructive knowledge.[32]

124.  Ms Tong submitted that whether a rolled-up plea is permissible depends on the context in which it is made and the state of mind required to sustain a particular cause of action.  Ms Tong referred me to China Medical Technologies Inc (in liq) v BEA[33], in which Peter Ng J said:

“19. [the second point in counsel’s submissions], the repeated references as to what an “honest and/or rational” banker would do are defective. Such rolled-up pleas would be treated as a plea of the lesser state of mind. Here, to allege that a “rational banker” would make inquiries would not be sufficient to allege dishonesty. An irrational banker is not necessarily dishonest.

20. The second point can be disposed of first for it is not exactly supported by the 2 authorities cited: Armitage v Nurse [1998] Ch 241, 257B-C (Millett LJ); Top Point Ltd v K&L Gates [2020] 1 HKLRD 814 at [19] (Lok J). What the 2 cases stand for, as explained by Lok J at [19], is this:

‘Second, a ‘rolled-up plea’, i.e. plea which, on its face, alleges actual or alternatively constructive knowledge, is not treated as making two alternative allegations. Instead, it is treated as a single allegation that a person ought to have known. Therefore, where a claim involves an allegation of dishonesty or fraud which requires a plea of actual knowledge, and yet the pleader only makes a rolled-up plea, the claim is liable to be struck out for disclosing no reasonable cause of action or defence or being embarrassing.’

21. This court does not accept the Defendant’s submission that rolled-up pleas are always defective - it all depends what the pleas are and the context in which they are made. If the context is that “actual knowledge” must be pleaded in order to sustain a cause of action and the plea is “actual or alternatively constructive knowledge”, then the plea is understandably embarrassing and defective. But it is at least arguable that the 2 cases cited do not support the proposition, and in principle this court does not support the proposition, that references as to what an “honest and/or rational” banker would do in a pleading will be treated only as a reference to what a rational banker would do. The plea of what an “honest and/or rational” banker would do is made in the alternative and should be treated as such. This court accepts, as submitted by the Defendant, an irrational banker may not necessarily be dishonest. But it is clear to this court that failure to do what an honest banker would do can only mean dishonesty.” (Emphasis added)

125.  One of the issues in this case is that if Hui has breached the duties owed to SW as alleged by SW, whether he should be granted the Statutory Reliefs.  In order to obtain the Statutory Reliefs, Hui must be acting honestly and reasonably at the material times.  SW is saying that Hui is not entitled to have the Statutory Reliefs.  In my view, it is clear that SW is trying to argue a case that in respect of the alleged breaches, Hui was not acting honestly and reasonably at the material times.  In other words, SW is trying to run a case against Hui involving dishonesty and unreasonableness.  In the circumstances, I am of the view that the rolled-up plea in SOC §80 is embarrassing and defective, and I agree with Mr Man that the plea in SOC§80 can only be treated as a single allegation of constructive knowledge.

C3.6  Conflict of interests

126.  Mr Man submitted that SW does not have a pleaded case on breach of the no conflict rule.  For there to be a proper plea, SW has to identify the duties and/or interests alleged to be in conflict[34] and plead a breach of the rule.  In the SOC, SW has not pleaded that (a) there was a breach of the no conflict rule, (b) the conflicting duties were duties owed by Hui as a director of TAGZ and his (alleged) de facto directorship in SW, or that (c) Hui’s de facto directorship conflicted with Hui’s interests in the Zhaoqing Project and the Garden Project. SW should not be allowed to introduce a case of breach without a proper plea.  Had SW properly pleaded a “duty-duty” conflict with reference to Hui’s TAGZ directorship:

(1)  SW would have to properly identify the alleged duty owed by Hui to TAGZ.  That would be a question of Mainland Chinese law, as TAGZ was a Mainland Chinese company.  Questions of foreign law have to be specifically pleaded.[35]

(2)  Even assuming that Hong Kong law applies, the duties owed by Hui to TAGZ are factual issues. Fiduciary duties could be modified by the agreement or the understanding between the parties.  The precise understanding and agreement between Hui and TAGZ would determine the extent of the duties owed by Hui to TAGZ.  If the agreement was that Hui was only to have a nominal role, then it would be at least arguable that he owed no duty to TAGZ as its director.

(3)  Whether there is any duty-duty conflict would also depend on whether TAGZ actually desired to have Chime as an investor. No evidential enquiry has been made on that question because of the lack of proper pleading.  TAGZ/Fong’s view must be relevant to the determination of this issue. Hui could also have made enquiries as to whether there were competing or potential buyers.

Mr Man submitted that there would be real and substantial prejudice to Hui if SW is allowed to run an unpleaded case of conflict against Hui.

127.  Ms Tong submitted that the issue of conflict of interests has been properly pleaded in the SOC.  SW has already pleaded that Hui breached the no conflict rule by reason of his undisclosed directorship in TAGZ, previous involvement in the Foshan Transaction and prior relationship with Fong.  Ms Tong is relying upon SOC §§11, 13, 16, 18, 81, 82.1 and 84.

128.  Having reviewed the pleadings, I am in agreement with Mr Man.  In my judgment, SW has not properly pleaded a case against Hui based upon the no conflict rule.

129.  Ms Tong argued that Hui did not plead that he was only a nominal director of TAGZ.  With respect, I agree with Mr Man that there is no merit in this argument.  As said in the above, SW did not plead the no conflict rule. SW also did not plead what duties were owed by Hui to TAGZ.  The only matter pleaded by SW is the mere office of directorship of Hui in TAGZ.  In the circumstances, it would be legitimate for Hui to deal with this pleaded case by arguing whether the mere office of directorship in TAGZ would give rise to any duty of disclosure that he has allegedly breached.

C3.7  Related Party Policy

130.  In the Voluntary Particulars of the SOC provided by SW on 15 March 2023, in relation to the Related Party Policy, it is pleaded:

“6(3) [The 30 September 2009 Declaration] did not mention Hui’s relationship with [Fong], Hui’s roles in TAGZ, or the possibility of the Foshan Transaction being a connected transaction by reason thereof.”

131.  Mr Man submitted that SW has only pleaded that Hui did not mention his relationship with TAGZ, his roles in TAGZ, or the possibility of this being a “connected transaction” by reason thereof.  It has not been pleaded that (a) there was an actual breach of the Related Party Policy or that (b) the Foshan Transaction is in fact a “connected transaction”.  Thus, SW is not entitled to pursue these allegations in the trial.

132.  I agree and accept Mr Man’s submissions.

133.  Ms Tong submitted that SW does not rely on the Related Party Policy to mount a case of breach against Hui.  Rather, it is only relevant to the causation analysis, ie whether Hui can discharge his burden to show that a resolution approving the Foshan Transaction would have nonetheless been passed at the Chime level if Hui had disclosed his conflict to the Chime Board and/or the SW Board.  SW contends that the Foshan Transaction is a relation or connected party transaction, which would have entailed Hui abstaining from deliberation and voting.

134.  With respect, I am unable to accept Ms Tong’s submissions.  A party must in any pleading subsequent to a statement of claim plead specifically any matter which he alleges makes any claim or defence of the opposite party not maintainable, or which, if not specifically pleaded, might take the opposite party by surprise, or which raises issues of facts not arising out of the preceding pleading.[36] In Ms Tong’s submissions, the Related Party Policy would have a bearing on the causation issue, and would have an impact on the outcome of this trial.  That being the case, SW must plead an actual breach of Related Party Policy in its pleadings, at least in the Reply.  Failing to do so, SW would not be able to put forward any argument based upon a breach of the Related Party Policy.

C3.8  Attribution of knowledge

135.  Ms Tong submitted that Hui did not plead that his verbal disclosure to Parker was sufficient because Parker’s knowledge should be attributed to Chime.  With respect, I am unable to agree with Ms Tong.  The relevant part of the Amended Defence is as follows:

“12. Further, in the last quarter of 2009, and prior to the approval of the Foshan Transaction by [the SW Directors] on 12 December 2009:

(1) [Hui] verbally disclosed his position as director and legal representative of TAGZ to [Parker], who held the position of director of corporate governance and oversaw [the Group]'s compliance and legal matters at the time.

(2) To the best of the recollection of [Hui], [Group] sought, obtained and/or settled payments for legal advice from Norton Rose (currently named Norton Rose Fullbright) in respect of [Hui’s] positions of directorship and legal representative in TAGZ and his involvement in the Foshan Transaction.

(3) In the premises, the board of directors of [SW] and/or [the Group] were fully informed and/or aware of [Hui]’s position as director and former position as legal representative of TAGZ prior to and at the time of the approval of the Foshan Transaction.

……” (Emphasis added)

136.  As to whether it is necessary to plead attribution of knowledge, Ms Tong relied upon Kwong Yi Ling v Lau Kwun Leung[37] and submitted that the answer is “Yes”.  On the other hand, Mr Man relied upon Chan Shun Chun & Anor v Dr Kung Yan Sum & Ors[38] and submitted that the answer is “No”.  For the purpose of this judgment, it would not be necessary for me to give an answer on this issue.  In my view, as set out in [135] above, it is clear that Hui has pleaded a case that the Group did acquire knowledge of his positions in TAGZ through Parker before approving the Foshan Transaction on 12 December 2009.

C3.9  Causation

137.  SW is seeking declaratory reliefs and damages against Hui.  In order to succeed in its claim for damages against Hui, SW must prove causation.  As pointed out by Litton NPJ in Man Ping Nam & Anor v Man Fong Hang[39]:

“62. A charge of breach of trust by persons in the role of trustees does not hang in the air. It is grounded upon loss. And it is for the party alleging loss to prove that the wrong caused the loss. As at common law with regard to an award of damages, the liability in equity to pay compensation for loss is fault-based: see Target Holdings Ltd v Redferns & Another [1996] 1 AC 421 at p.432G, per Lord Browne-Wilkinson. ……” (Emphasis added)

138.  SW’s case on causation as pleaded in the SOC is as follows:

“80. …… at the time of [the 12 December 2009 SW Resolution] and at all material times subsequent to that, it was known, or alternatively should have been obvious to Hui, that entering into the Foshan Transaction at all or on the terms of [the SPA] and of [the Agreements pleaded in SOC §55] was not and/or would not have been in the best interests of SW ……

81. Further, Hui failed to disclose to the board of [SW] at the earliest available opportunity and in any event prior to 16^th December 2009, his continued directorship in TAGZ, his previous involvement in the Foshan Transaction by virtue of said directorship and his prior relationship with Fong as pleaded in paragraph 13 above. [SW] avers that had such disclosure been made, the board of [SW] would have adopted a more prudent and cautious approach towards the Foshan Transaction, including but not limited to ensuring the steps pleaded at paragraph 80 above were properly taken prior to the approval of the Foshan Transaction.” (Emphasis added)

139.  No other case on causation has been pleaded.  There is no pleaded case that (a) Chime (and/or the Chime Directors) would have acted differently or that (b) Hui would have been required to abstain from voting at the 9 December 2009 Chime Board Meeting.

140.  SW would only be able to rely upon the causation issue as pleaded in the SOC, but not any other issue for the purpose of establishing causation.

C3.10  Withdrawal from the Foshan Transaction

141.  In the trial, SW is trying to argue that Hui owed a duty to SW to procure a withdrawal from the Foshan Transaction by relying upon the Forfeiture Clause in the SPA.  However, this is not a matter pleaded in the SOC.  In the SOC, the Forfeiture Clause is not mentioned at all.  Further, SW’s pleaded loss and damage is not premised upon Hui resorting to the Forfeiture Clause.

142.  In my view, it is impermissible for SW to rely upon the Forfeiture Clause to try to make a claim against Hui.  Such a case would only be permissible if (a) the Forfeiture Clause, (b) the allegation that Hui should have resorted to the same (with sufficient particulars as to why he should do that and at what time) and (c) the consequential loss are pleaded in the SOC. In the absence of all these pleas, to allow SW to put forward such a case would be grossly unfair to Hui, for Hui would not have the opportunity to adduce evidence to meet this unpleaded case at the trial.

143.  To state the obvious, whether the Forfeiture Clause should be invoked to terminate the Foshan Transaction is not a matter which could be solely decided by Hui.  Hui would need to put the matter to the SW Directors, and the SW Directors would need to seek directions from the Chime Directors.  The views of the SW Directors and the Chime Directors on this termination proposal would certainly have an impact on whether the alleged failure of relying upon the Forfeiture Clause by Hui had caused loss to SW.  By failing to plead the Forfeiture Clause in its pleadings, SW has deprived Hui of the opportunity to adduce evidence concerning the responses of the SW Directors and the Chime Directors to the termination proposal.  Such evidence (for example, the majority of the Chime Directors and the majority of the SW Directors were against this termination proposal) may constitute a complete answer to the SW’s arguments based upon the Forfeiture Clause.

144.  In the course of hearing oral final submissions from the parties, I invited counsel to make submissions on one point, ie in the event that SW has committed a breach of the SPA, whether Tremendous may elect to sue SW for specific performance of the SPA notwithstanding the Forfeiture Clause (“the SP Issue”).  Ms Tong submitted that the answer to the SP Issue is “No”, while Mr Man suggested that the answer should be “Yes”.  My view is as follows:

(1)  The Forfeiture Clause has been set out in §63(2) above.  The plain meaning of the Forfeiture Clause is that if SW is in breach of the SPA, Tremendous “除将上述买方所付之临时定金没收外，并有权将转让股份再行发售或作其它用途”.

(2)  “有权” means having a right.  Thus, if SW is in breach of the SPA, Tremendous would have a right to resell the shares which are the subject matter of the SPA, or use the said shares for some other purposes.  Tremendous has a right to do all these, but Tremendous is not obliged to do all these.

(3)  “除将上述买方所付之临时定金没收外” and “有权将转让股份再行发售或作其它用途”are connected by the conjunctive “并”.   In my view, by looking at the sentence structure and the conjunctive “并”, it is reasonably arguable that the phrase “有权” is also referring to “将上述买方所付之临时定金没收”.

(4)  The following are reasonably arguable:

(a)  The true meaning of the Forfeiture Clause is that if SW is in breach of the SPA, Tremendous would have a right to forfeit the Deposit and a right to resell the shares, or to use the shares for some other purposes, without the necessity of proving any actual loss caused by SW’s breach.  In the event that SW is in breach of the SPA, Tremendous may elect to exercise these rights.  If Tremendous so elects, Tremendous shall have no other remedies, including damages and specific performance.

(b)  The Forfeiture Clause is only conferring the aforesaid rights on Tremendous, not restricting Tremendous to the remedies set out in the clause.  Whether Tremendous would exercise those rights is a matter within Tremendous’ own hands.  Tremendous may elect not to exercise those rights but to affirm the contract and require SW to continue to perform the same, and sue SW for specific performance and/or damages.

(5)  I have considered the other clauses in the SPA and the SPA as a whole.  In my view, there is nothing in the SPA rendering the aforesaid construction unarguable.  I am of the view that the SP Issue is at least an arguable issue. 

145.  That being the case, had the Forfeiture Clause been pleaded by SW in the SOC, the following would have had been explored in the trial:

(1)  As a matter of law, notwithstanding the Forfeiture Clause, whether Tremendous may elect to sue SW for specific performance;

(2)  As a matter of fact, had SW tried to terminate the SPA by relying upon the Forfeiture Clause, whether SW would have been successful in doing so, and what consideration that SW and the Group would have to pay in order to achieve that task.  One must not forget that in a falling market or while the market forecast is not optimistic, the buyer may want to leave the bargain, but the seller may elect to compel the buyer to perform and complete the transaction.  Further, while the stake is high, SW and Tremendous may have litigations concerning the true meaning of the Forfeiture Clause.  The time and costs of these litigations, and the impact of the litigations on the goodwill and the operation of the Group, would be consideration that SW and the Group have to bear.  Taking the consideration into account, whether it is really advisable for SW to try to withdraw from the Foshan Transaction by trying to rely upon the Forfeiture Clause. Whether the Chime Directors and the SW Directors would be willing to bear the aforesaid consideration.  All these matters would need to be addressed by evidence and submissions in this trial.

146.  Had the Forfeiture Clause been pleaded, the course of evidence and the conduct of the case would have had been very different.  In my judgment, SW should not be allowed to run a case based upon the Forfeiture Clause while the same has not been pleaded by SW at all.

147.  Ms Tong submitted that in the Endorsement of Claim contained in the Writ of Summons, it is stated in §1.4 that one of Hui’s breaches is “failing to procure the termination of the Agreements by [SW]”.  However, it is plain that the endorsement is not in the nature of a pleading and does not form part of the pleadings.[40] In any event, the Forfeiture Clause is not mentioned in the endorsement.

148.  Ms Tong relied upon Shine Grace Investment Ltd v Citibank & Anor[41], in which the Court of Appeal rejected the point that a party was not allowed to rely on particular terms of the contract which were not pleaded.  With respect, I am of the view that SW cannot derive any assistance from Shine Grace. In the circumstances of that case, the unpleaded point “would have no impact on the evidence if any party is allowed to rely on these clauses in the General Terms.”[42] However, in this case, for the reasons set out in the above, it cannot be said that whether the Forfeiture Clause is pleaded by SW or not, the evidence in this case would be the same.

149.  Ms Tong also relied upon Lucky Sky (Hong Kong) Ltd v Bodum AG[43] and submitted that SW’s reliance on the Forfeiture Clause is in support of an alternative case, in which SW’s claim is only about HKD 273 million, ie less than the HKD 312 million in the primary claim.  Since the greater includes the less, SW should be permitted to run this alternative case.  With respect, I am unable to accept these submissions.  As submitted by Mr Man, Hui’s complaint is that SW is trying to rely upon the Forfeiture Clause to advance a completely different case of breach of duty.  In Lucky Star, it was under the same breach that the court held that the principle that “the greater includes the less” was applicable in that case.[44]  It is plain that one cannot rely upon that principle to advance an unpleaded case based upon a completely different breach.

D.   THE REAL ISSUES

150.  The parties are unable to provide me a list of agreed issues.  Each party has submitted a list of issues to me.  Having considered the respective lists provided by the parties and as a result of my ruling on the pleading issues as set out in the above, I am of the view that the real issues to be resolved in this trial are the issues as set out in the list of issues submitted by Hui.  In my view, the issues formulated by Hui are more succinct and are in accordance with the pleadings.  Those issues are as follows:

(1)  At the time of the 12 December 2009 SW Resolution, whether, for the reasons as pleaded in SOC §7, Hui was a de facto director of SW;

(2)  If yes, whether, as a de facto director of SW, Hui owed the duties to SW as pleaded in SOC §11;

(3)  If yes, whether Hui, as a de facto director of SW and/or as a formally appointed director of SW from 28 December 2009 until 26 November 2012, acted in breach of his fiduciary duty and/or his duties of care respectively owed to SW in relation to the Foshan Transaction in the way as pleaded in SOC §§80 to 82;

(4)  Whether SW has suffered loss and damage in respect of the Foshan Transaction;

(5)  If yes, whether the loss and damage are caused by Hui or whether the effective cause of such loss was the failure on the part of SW, Chime, JAs and members of the AC in taking the necessary steps as pleaded in the Amended Defence §§62(2) and 68;

(6)  Whether the loss suffered by SW was too remote, was not reasonably foreseeable and/or fell outside of the scope of D’s alleged duties;

(7)  Whether SW has reasonably mitigated its loss and damage; and

(8)  Whether Hui should be granted the Statutory Reliefs.

E.  DISCUSSION

E1. The factual evidence

151.  The factual witnesses giving evidence in support of SW’s case in the trial are Jong and KP Chan.  On the other hand, the factual witnesses giving evidence in support of Hui’s case in the trial are Hui himself and RW.

152.  As to evaluation of factual evidence given by witnesses, the principles are trite.  See Hui Cheung Fai and another v Daiwa Development Limited^[45], in which DHCJ Eugene Fung SC said:

“77. Generally speaking, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility: Onassis v Vergottis [1968] 2 Lloyd’s Rep 403 at 431 (Lord Pearce) ……

78. In deciding whether to accept a witness’ account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events: e.g. Lam Rogerio Sou Fung v Tan Soon Gin George (unreported, HCA 2576/2005, 5 May 2011) §39 (Chu J).

79. In determining a witness’ credibility, I have also attached importance to the consistency of the witness’ evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence. The latter type of consistency is often tested by a comparison between the witness’ oral testimony and his or her witness statement.

80. I have cautioned myself against the dangers of too readily drawing conclusions about truthfulness and reliability solely or mainly from the appearance of witnesses (Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336 at §§36-37 (Bokhary PJ)), or from the assessment of the witnesses’ character (Esquire (Electronics) Ltd v HSBC [2007] 3 HKLRD 439 at §135 (Stock JA)).”

153.  Similarly, in Lee Fu Wing v Yau Po Ting Paul^[46], in which DHCJ Au (as he then was) said:

“53. In assessing the credibility of a party’s case on a particular issue, I accept the submissions of [counsel] that the Court should take into considerations the following: -

(1) Whether the party’s case is inherently plausible or implausible.

(2) Whether the party’s case is, in a material way, contradicted by other evidence (documentary or otherwise) which is undisputed or indisputable.

(3) Where it is shown that a witness has been discredited over one or more matters to which he has given evidence using the above tests. This is relevant to the assessment of his overall credibility.

(4)   The demeanour of the witnesses.”

154.  While there is a long passage of time between the material events and the trial, contemporaneous documentation is of particular importance.  In Esquire (Electronics) Ltd v Hong Kong and Shanghai Banking Corp Ltd ^[47], Stock JA (as he then was) said:

“…… Comparison with contemporaneous documentation is always an aid to reliability of oral testimony, unless there is reason to believe that the documentation is contrived or materially incomplete; but where the passage of time between events and trial is as long as it was in the present case, and where there is such a host of contemporaneous documentation, as there was in this case, the documentation must, I would have thought, assume a special importance. ……

I would venture to suggest that the truth, in so far as one is able to reach it or, as is sometimes the case, to reach a version of it that is more likely to be correct than not, can best be tested by reference to contemporaneous documentation where it exists, or to its absence where one would expect it to have been created, as well as to inherent probabilities (though bearing in mind that there may be occasions where the truth may run against that particular grain) having regard to all the facts that are known. This is particularly so in a case such as the present, where events have taken place so long before trial and where there exists a mountain of contemporaneous documentation that can be used to point the way. This is not to say that the documentation should have been treated as if it stood on its own, not to be explained, contradicted or supported by oral testimony. It is however to say that in this case the approach adopted to assessment of the facts placed far too much emphasis on character impression and too little upon what was suggested by the documentation and by the inherent probabilities in their historical context. That documentation, as well as conflicts within the evidence, inherent probabilities, and a study of how matters were originally pleaded and asserted in witness statements – these are the factors which in a trial such as this, so long removed from the time of the events in question, were likely to be of particular use in assessing the facts ……” (Emphasis added)

155.  As to drawing an adverse inference against a party on the basis of absence of a particular witness from that party, the principle has been set out by the Court of Appeal in Li Sau Keung v Maxcredit Engineering Ltd[48], which has been applied by DHCJ Lisa Wong (as she then was) in South China Securities Ltd v Lam Kwen Yuen[49]. In the latter case, the learned judge said:

“7. …… I take note, of the principle that where a person without explanation fails to call as a witness a person who he might reasonably be expected to call, it is open to the Court to infer that that person’s evidence would not have helped that party’s case. See, eg Li Sau Keung v Maxcredit Engineering Ltd [2004] 1 HKC 434, 443E–444C, per Le Pichon JA citing O'Donnell v Reichard [1975] VR 916, 929, per Newton and Norris JJ. The same principle would apply to a failure without proper explanation to produce a document or other real evidence that a party might reasonably be expected to disclose.” (Emphasis added)

156.  An allegation of willful misconduct by a director of a power for an improper purpose is a serious one.  The allegation can only be proved by cogent and compelling evidence.  As said by Harris J in Chinaculture.com Ltd v Lam Ting Ball Paul & Ors[50]:

“23. An allegation of wilful misconduct by a director of a power for an improper purpose is a serious one. As these passages make clear the necessary inference can only be drawn from proven facts, which make the inference compelling. It is not sufficient to identify a series of wrongs and mistakes committed over time and invite the court to conclude that by virtue of their number it is probable that something more than negligence or indifference was their cause. This is to invite speculation and conjecture. It is necessary for the court to find facts, which assessed in context are indicative, in the present case, of the Defendants’ attitude and motives. Context includes how a person or a company normally conducts its affairs. If it is normally casual and unsophisticated, it is difficult to infer anything about the motives for dealing with a particular transaction in a casual and unsophisticated manner. Similarly, if the facts can credibly be explained as mistakes or errors of judgment an inference of, in the present case, conscious non-compliance by the Directors with their duties, or recklessness indifference to doing so, cannot properly be made.”

157.  With these principles in mind, I now turn to the evidence.

E1.1  SW’s factual witnesses

E1.1.1 Jong

158.  As said in [5] above, Jong was appointed as one of the JAs on 26 March 2012.  Accordingly, in respect of the matters inside the Group occurred prior to his appointment, including the events leading to the Foshan Transaction, Jong does not have any personal knowledge.  In respect of all those matters, all Jong could say would be knowledge acquired by him by reading the documentary records or by hearing from others.  Jong is the person who has signed the statements of truth verifying the matters pleaded in the SOC and in the Amended Reply.

159.  Jong is a factual witness.  Some of his evidence may be regarded as opinion evidence and, strictly speaking, may not be admissible evidence. However, there is no objection from Hui regarding the admissibility of any part of Jong’s evidence.  Accordingly, I would proceed by treating all the evidence given by Jong as admissible evidence.

160.  Jong said that SW would never have initiated this action if the Foshan Transaction was merely a wrong commercial decision.  Jong said that the decision to pursue this action was a collective decision by the AC and the Exco, prompted by the significant “red flags” concerning Hui’s handling of the Foshan Transaction which the JAs had uncovered during their years of investigation of the Foshan Transaction.  According to Jong, the presence of these red flags shows that the Foshan Transaction is far from a typical arms-length commercial transaction, and that Hui has fallen far short of his director’s duties by putting himself in a position of conflict and driving the transaction forward despite its many highly alarming features.

161.  With respect, I am not impressed by Jong’s evidence.  Jong said that as a JA, he had two duties.  One duty would be to protect the interest of the Group.  The other duty would be to act fairly.  For some unknown reason, Jong was acting under the belief that his primary duty was to preserve the interest of the Group, and the duty to act fairly would be subordinate to this primary duty.

(1)  Under cross-examination, Jong was referred to SOC §7, in which it is pleaded that “[a]t the time of their approval of the Foshan Transaction … on 12^th December 2009, each of [JL], KP Chan and KK Li was accustomed to act in accordance with Hui’s directions and instruction.”[51]  Jong confirmed that before he signed the statement of truth verifying the matters pleaded in the SOC, he had already possessed the relevant materials and knew the fact that before 12 December 2009, JL did raise a number of questions concerning the Foshan Transaction, and both JL and KP Chan voted differently from Hui at the Chime Board Meeting on 9 December 2009.  Jong was then asked why he would verify SOC §7 as true and correct.  Jong replied that his primary duty would be to preserve the interests of the Group, and “we framed the case as wide as possible to cast a net”.

(2)  In re-examination, Jong said “I would treat both duties, I think the protect and preserve the interests of the group is my primary duty.  And in the course of it, I would, you know, act fairly to discharge the duties”, “I am very sure, you know, protect and preserve, I am holding up to it, 100 per cent.  Fairly?  There are, you know, you can question some of the – the actions and decisions of pleadings.  But I think overall we are – you know, we are taking actions against things that does look very peculiar, very extraordinary”.

162.  I must say that Jong was acting under an entirely incorrect belief.  As an officer of the court, one must act fairly at all times, and the duty to act fairly is the primary and the paramount duty.  The duty to preserve the interest of the Group must be performed without compromising the duty to act fairly.  To state the obvious, the JAs cannot put forward allegations which are known to them to be false, and the JAs cannot suppress any truth, to try to frame a case against someone to pursue the interest of the Group.

163.  Since Jong was under the aforesaid mistaken belief at all times, it would not be safe to proceed on the basis that Jong has presented the case against Hui in a fair and unbiased manner and has made all proper disclosures. A glaring example is Jong’s evidence revealed under

(1)  In the Defence filed on 1 September 2017, Hui pleaded:

“12. Further, in the last quarter of 2009, and prior to the approval of the Foshan Transaction by the [SW] Directors on 12 December 2009:

(1) [Hui] verbally disclosed his position as director and legal representative of TAGZ to [Parker], who held the position of director of corporate governance and oversaw [the Group]'s compliance and legal matters at the time.

(2) To the best of the recollection of [Hui], [the Group] sought, obtained and/or settled payments for legal advice from Norton Rose (currently named Norton Rose Fullbright) in respect of [Hui]’s position of directorship and legal representative in TAGZ and his involvement in the Foshan Transaction.

(3) In the premises, the board of directors of [SW] and/or [the Group] were fully informed and/or aware of [Hui]'s position as director and former position as legal representative of TAGZ prior to and at the time of the approval of the Foshan Transaction.

(4) [Hui] does not have copies of the aforesaid legal advice or records of the aforesaid communications in his possession, custody or power. He reserves the right to plead further to such matters after full discovery, enquiries and/or interrogatories.”

(2)  In the Reply filed on 5 January 2018 (verified by a statement of truth signed by Jong), it is pleaded:

“6. As to paragraph 12:

  paragraph 12(2) is denied.  [The Group] did not seek, obtain and/or settle payments for legal advice from Norton Rose (now Norton Rose Fullbright) in respect of Hui’s position of directorship and legal representative in TAGZ and his involvement in the Foshan Transaction.”

(3)  Under cross-examination, Jong was referred to these pleadings.  For the first time, Jong revealed that the denial in Reply under §6 was only denying the identity of the law firm, ie the Group did not obtain a legal advice from Norton Rose, but the Group in fact obtained a legal advice from Deacons (“the Deacons Advice”).  Jong said that there were a lot of internal discussions as to how to handle the Deacons Advice, and he himself was not opposed to disclosing it. Jong said that Parker obtained the Deacons Advice at a time around 16 December 2009.  Jong said that the time should not be as early as 12 December 2009 or any earlier time.

164.  Any reasonable reader with the background of this case in his mind would know that the focus of the Defence §12 is that Hui claimed that he had already disclosed his position of directorship and legal representative in TAGZ and his involvement in the Foshan Transaction to the Group before 12 December 2009. The impression conveyed in Reply §6 is that all these are untrue.  Under cross-examination, Jong revealed for the first time that the Group in fact obtained a legal advice in December 2009 as a result of Hui’s disclosure of his position in TAGZ and his involvement in the Foshan Transaction, but the legal advice was not from Norton Rose.  The legal advice was from Deacons.  Further, the legal advice was not obtained before 12 December 2009, but was obtained at around 16 December 2009.  With respect, I have to say that the JAs have chosen to present SW’s case in a very unsatisfactory way, which is misleading and unfair to Hui.  Had the real position of the JAs been made clear to Hui at a reasonable time before this trial, Hui would have had an opportunity to seek discovery concerning the timing of the Deacons Advice, to see whether there would be documentary evidence in support of the time suggested by Hui in his case, ie before 12 December 2009.  By presenting SW’s case in a misleading way as set out in the above, the JAs have deprived Hui of this opportunity.  This cannot be fair.

165.  Further, I agree with Mr Man that the conscious concealment of the Deacons Advice is not merely grossly unfair but in fact amounts to a substantive breach of duty.  In Lehman Brother Australia Ltd (In Liquidation) v MacNamara[52], David Richards LJ said:

“35. The principle established by the decision of the Court of Appeal in Ex parte James is that the court will not permit its officers to act in a way which, although lawful and in accordance with enforceable rights, does not accord with the standards which right-thinking people or, as it may be put, society would think should govern the conduct of the court or its officers. The principle applies to a failure to act, as much as to positive acts …… As a public authority and given its role in society, the court is expected to apply standards to its own conduct which may go beyond bare legal rights and duties.” (Emphasis added):

166.  In early 2019, Hui made an application for specific discovery concerning the legal advice from Norton Rose, and an order was made in March 2019 requiring SW to file an affirmation to address the issue.  As a result, Jong made an affirmation in April 2019, in which Jong confirmed that there was no written advice from Norton Rose.

167.  The existence of the Deacons Advice itself is not privileged and is relevant to when Hui disclosed his directorship and legal representative in TAGZ and his involvement in the Foshan Transaction to the Group, which is an issue which may affect the outcome of this case.  Any right-thinking person would appreciate that the significance of the existence of that legal advice lies in the fact that advice was sought, not the identity of the law firm from which it was sought.  Regrettably, in my judgment, the JAs have failed to observe the principle in Lehman as set out in the above by acting in accordance with the standards which society would think should govern the conduct of officers of the court.  This is particularly so when the JAs continued to try to conceal the existence of the Deacons Advice notwithstanding Hui’s specific discovery application and the court’s order made in 2019.

168.  As stated in Lehman §35, “[a]s a public authority and given its role in society, the court is expected to apply standards to its own conduct which may go beyond bare legal rights and duties”.  Thus, the JAs could not play games with words to try to conceal the truth.

169.  In my judgment, there is no reason why the JAs would try to conceal the existence of the Deacons Advice and the date of that advice (both of which are not privileged), unless these matters are not favourable to SW’s case.  In the circumstances, I accept Mr Man’s submission and draw an adverse inference against SW that the disclosure of the existence and date of the Deacons Advice would have supported Hui’s case that the disclosure to Parker was in fact made before the 4 December 2009 Chime Board Meeting.[53]  Further discussions on this matter are set out in [225] below.

170.  I do not regard Jong as a reliable witness.  Save and except the matters not disputed or accepted by Hui, I refuse to attach weight to Jong’s evidence.

E1.1.2  KP Chan

171.  KP Chan was and still is an office holder of the Group.   He is now a senior advisor of the Group.  He only agreed to give evidence for SW after the tolling agreement against him expired on 10 December 2021.

172.  According to KP Chan, while Madam Nina Wang was alive, Madam Nina Wang was the only de facto decision maker in the Group.  In the period between her passing and the appointment of the Exco, the Group was led by the Chime Board collectively.  This was so even after Hui had joined the Group.  During that period, KP Chan accepted that no one in the Group could be regarded as the de facto decision maker of the Group by himself or herself alone.

173.  KP Chan also said that among the Chime Directors, JL and himself were acting diligently and trying to act in Chime’s best interests.  He provided his comments on the Foshan Transaction to the best of his abilities for the other Chime Directors to consider.  He said that Madam Liu would invariably followed the decisions made by Dr Kung.

174.  Regarding the Foshan Transaction, KP Chan agreed that at the material times in 2009, the real property market in Foshan was a volatile one.  He accepted that the crux of the matter was really a matter of opinion as to when was the appropriate time to invest in this market. He also stated that it was fair to say that Hui genuinely believed that it was a rising market in 2009, and Hui pushed the matter forward because he did not want the opportunity to be missed.

175.  As for Hui’s position in TAGZ, in his witness statement, KP Chan said:

“32. At the time when [the Group] was searching for a person to lead [the Group] following Mrs Wang’s demise, I took part in an interview with Hui. I do not recall that Hui had informed [the Group] of any on-going role in TAGZ after joining [the Group]. Even if he had, I do not understand him to have ever indicated that he would continue to be employed by, or be interested in the affairs of, TAGZ after joining [the Group].”

176.  In cross-examination, KP Chan was referred to the 2008 Employment Contract and the 2011 Employment Contract.  KP Chan said that he was in possession of the 2008 Employment Contract and the 2011 Employment Contract. In these contracts, Hui’s directorship in TAGZ was expressly disclosed and mentioned.  KP Chan said that he did not pay attention to the contents of these documents, as it did not concern him.  After being referred to these contracts, KP Chan accepted that Hui had informed the Group of his on-going role in TAGZ in these employment contracts, and he only took issue with whether Hui did so properly.  However, as to what constitutes proper disclosure, KP Chan is unable to give a satisfactory answer.  KP Chan also said that after these disclosures in the two employment contracts were made, he did not demand Hui to resign from this position in TAGZ.  KP Chan also did not remember that anyone in the Group had requested Hui to do so.

177.  Although SW is a wholly-owned subsidiary of Chime, KP Chan said that he would to the best of his abilities make the best decision for SW. If there were issues arising after the 9 December 2009 Chime Resolution, KP Chan said that the most proper way would be to refer the matter back to Chime for reconsideration.  KP Chan was of the view that if there were some material changes in the matter, it would not be proper for SW Directors to remain silent and just blindly follow the 9 December 2009 Chime Resolution.

178.  KP Chan also said that the issues raised in the Deloitte Email had been satisfactorily resolved.  He said that the matters raised in that email in fact were the matters raised by him and JL, and those matters had already been discussed in the 9 December 2009 Chime Board Meeting.  According to KP Chan, had those issues remained unresolved, he would not have voted in favour of the 12 December 2009 SW Resolution.

179.  KP Chan said that the 12 December 2009 SW Resolution is a paper resolution.  However, Hui said that the resolution was passed in an actual physical meeting of the SW Board held on 12 December 2009.  Having examined the minutes of that meeting, in my view, it is more likely that the 12 December 2009 was passed in an actual meeting.

180.  KP Chan’s evidence is not seriously challenged.  Save and except the unsatisfactory aspect of his evidence concerning “proper disclosure” as set out in [176] above and the matter set out in [179] above, I am of the view that KP Chan’s evidence is reliable.

E1.2 Hui’s factual witnesses

E1.2.1  Hui

181.  At the beginning of the trial, Mr Man informed me that Hui’s wife was suffering from terminal illness.  On 16 October 2023 (2^nd day of Hui’s evidence), Mr Man informed me that Hui’s wife was unwell.  I adjourned the hearing so that Hui could leave the court to see his wife.  Hui’s wife passed away that night.  On 17 October 2023, Mr Man told me the demise of Hui’s wife.  After consulting the parties, I directed that the trial would be resumed on 2 November 2023, so that Hui could have a break to attend to his family matters.  Hui then continued to give evidence on 2 and 3 November 2023.

182.  Understandably, Hui attended the trial under difficult personal circumstances.  His wife was seriously ill at the beginning of the trial, and passed away while Hui was in the middle of his evidence.  All these are unfortunate and sad.  However, in assessing the credibility and reliability of Hui’s evidence, I only applied the principles as set out in the above to examine his evidence, and I have not taken the unfortunate personal circumstances of Hui into account.

183.  Hui impressed me as a straightforward and forthcoming witness.  He would not shy away from difficult questions.  His evidence is clear and cogent.

184.  Hui said the following in his evidence:

(1)  He did not have any personal interest in the Garden Project, the Zhaoqing Project, and TAGZ.

(2)  He made verbal disclosure in respect of his positions in TAGZ to Parker in or around November 2009.  He denied that he instructed Parker to prepare the Draft Conflict Memorandum or provided information to Parker for the preparation of the same.  He said that he had never seen the Draft Conflict Memorandum before the commencement of these proceedings.  He also denied that he had any intention to conceal his positions in TAGZ.

(3)  As to the legal advice obtained by the Group in 2009 as pleaded in the Defence §12(2), Hui said that after Parker considering such legal advice, Parker said to him that there was no problem.  Hui’s evidence on this point is consistent with the fact that Parker did not further follow up on this matter.  Had the Deacons Advice raised any issue, Parker, as the Director of Corporate Governance of the Group, would certainly follow up on the matter.

(4)  Hui disagreed that Dr Kung and Madam Liu just blindly followed him on matters related to investments in the Mainland real property market.

(5)  Hui also explained and detailed the steps of the negotiations in respect of the Foshan Transaction.  He explained why he adopted the value of the Foshan Site as at March 2008 as the “opening shot” of the negotiations with Fong.  He took a view that using the figures as at March 2008 was very reasonable in light of the sale prices achieved in that neighbourhood.  He also explained why the price at which Fong previously bought the Foshan Site was irrelevant to his consideration.

(6)  Given that it was a rising market in the Mainland at that time, Fong was very “rigid” about the price and there was no room for downward adjustment.  Hui did attempt to negotiate the price with Fong, but these attempts were not made by way of emails.  In my view, there is nothing inherently improbable in this answer.  It would not be a surprise that some negotiations between businessmen would take place informally and orally.

(7)  Hui mentioned that on 28 October 2009, another site near the Foshan Site was sold for more than RMB 6,000/m square. Hui said that he believed that Norton must have considered this sale in rendering the 2^nd Norton Report.  Since this sale, Fong demanded that a lot of the terms of the Foshan Transaction be changed, such as the sale price of the Foshan Site and the removal of the Put Option.

(8)  Hui also explained that the different concerns raised by SW in these proceedings were in fact properly considered and addressed by the Chime Board.

(9)  Hui was in attendance in the meeting of the SW Board held on 12 December 2009.  He was there to prepare to answer any question from SW Directors concerning the Foshan Transaction.  However, no one asked him any question in that meeting.

185.  Given the long lapse of time, it is understandable that Hui could not recall all the details of the events occurred at the material time.

186.  Hui said that the Draft Conflict Memorandum was not prepared on his instructions.  Ms Tong submitted that this is self-serving and incredible, for some of the contents in that memorandum would be matters within Hui’s personal knowledge and could only come from Hui.  With respect, I am unable to agree with Ms Tong.  As explained below, in my judgment, Hui did make a disclosure to Parker before 4 December 2009.  That being the case, it would not be a surprise that Parker would have the necessary information when Parker was preparing the Draft Conflict Memorandum.  After preparing the Draft Conflict Memorandum, Parker did not ask Hui to sign the memorandum and pass the same to the Chime Board.  The fact that Parker did not do all these would mean that Parker did not regard the contents of the Draft Conflict Memorandum as something important, and Parker did not regard that it would be necessary for him to bring Chime Board’s attention to these matters. 

187.  Ms Tong also submitted that Hui’s evidence concerning his disclosure to Parker should not be accepted.  In my view, it is understandable that Hui was unable to have a word-by-word recollection of the exchanges between him and Parker in 2009.  However, Hui was able to tell the gist of that conversation. The existence of that disclosure is supported by the fact that the Group through Parker obtained the Deacons Advice, and hence Parker must have paid attention to Hui’s directorship in TAGZ.

188.  Ms Tong further submitted that (a) Hui’s alleged telephone conversation with Fong in November 2009 when Hui agreed to the removal of the Put Option, (b) his alleged oral negotiations with Fong regarding the land value/price, and (c) his alleged oral instructions to Paul Wong of Norton to prepare the 2^nd Norton Report, all these have not been mentioned in his witness statements nor recorded in any documentary records available.  In my view, as said in the above, it would not be a surprise that some discussions between businessmen would take place informally and orally.  Further, the material events in this case occurred in 2009.  SW only issued the Writ of Summons in December 2015 and filed the SOC in April 2017.  Given the long lapse of time, the documentary records available in this trial may not be the complete set of records of events occurred at the material time.  Although some of the evidence mentioned by Hui in cross-examination is not contained in his witness statements, there is no documentary evidence contradicting those answers and I do not regard those answers as inherently improbable.

189.  Ms Tong submitted that there is cogent reason to doubt the reliability of Hui’s account of the visits to the Foshan Site.  Ms Tong submitted that in Hui’s witness statement, Hui claimed that Dr Kung, Madam Liu, JL and himself went to the Foshan Site before making the decision to invest.  However, in cross-examination, Hui corrected himself that he only went there with Dr Kung and Madam Liu, and JL went on a separate occasion.  In his witness statement, Hui said that “Dr Kung told me that he had personally visited the Foshan Site”.  However, in cross-examination, he retracted from this by saying that the expression in his witness statement (which is in English) was not clear and he was present at the same site visit that Dr Kung attended.   Ms Tong submitted that Hui’s evidence on the site visits is wholly unreliable, especially when there is no documentary record which refers to any such site visits.  Having carefully considered these submissions, I am unable to agree.

(1)  As said in the above, given the long lapse of time between the occurrence of the events at the material time and the commencement of these proceedings, the parties may not have preserved all the relevant documents, and the documentary records now available in this trial may not be the complete set of records of events occurred at the material time.

(2)  As recorded in the minutes of the 6 November 2009 Meeting, JL in that meeting said that “he had visited the site a few months ago”.  So it is clear that JL did visit the Foshan Site in 2009.  However, apart from the minutes of this meeting, no document concerning this site visit (for example, the documents recording the expenses in relation to this site visit) has been disclosed by SW.

(3)  Given that the Foshan Transaction is a very substantial investment of the Group, it is inherently probable that apart from JL, the other Chime Directors would also personally visit the Foshan Site before making a decision to enter into the transaction. 

190.  Ms Tong invited me to attach weight to Hui’s evidence under cross-examination that Dr Kung was not capable of making decisions on his own in the absence of advisors.  At the same time, Ms Tong submitted that Hui’s evidence that Dr Kung may have had his own advisors in relation to the Foshan Transaction should be rejected, for this part would be Hui’s own speculation. In my view, whether Dr Kung himself would be able to make a commercial decision in the absence of professional advice, and whether Dr Kung has his own advisors in relation to the Foshan Transaction, are matters not within Hui’s personal knowledge.  I would not attach weight to Hui’s opinion on these matters.

191.  In my view, Hui’s evidence remains intact and unshaken after cross-examination.  I regard Hui as an honest and reliable witness.  Save and except the matters mentioned in the paragraph above, I accept and attach weight to his evidence.

E1.2.2  RW

192.  RW is an independent witness having no personal interest in the outcome of these proceedings.

193.  In his witness statement, RW said:

“8. …… in about early 2008, Mr Hui contacted me saying that a business acquaintance of his namely Mr Fong had the vision and the idea to try to carry out an Initial Public Offering (“IPO”) in Hong Kong, using the real estate projects Mr Fong had in [the Mainland]. He asked me whether I could help out in running some projections for Mr Fong to see whether an IPO plan was feasible by calculating their net present value at different discount rates. ……”

194.  RW was personally involved in the March 2008 Calculations which were found in his computer.  In cross-examination, RW was referred to some emails sent by him to CF and Hui in March 2008.  RW said that those emails were related to a contemplated IPO listing by Fong. In my view, RW’s evidence is credible and supported by the documents.  The calculations in the emails are titled “IPO Presentation (3/2008)”.

195.  RW could not remember certain events which took place in 2009.  Given the long lapse of time, this is understandable.

196.  In my view, RW’s evidence remains unshaken after

E2.  SW’s case not proved in any event

197.  Without prejudice to my ruling on the pleading issues as set out in subsection C3 above, for the reasons set out below, I am of the view that based upon the evidence accepted by the court, SW’s claim against Hui is not proved.

E2.1  De facto directorship

198.  In Revenue and Customs Comrs v Holland[54], the dispute was whether Mr Holland was a de facto director to some 42 composite companies, when he was a de jure director of the sole corporate director of these 42 companies. The UK Supreme Court (by a majority comprising Lord Collins, Lord Hope and Lord Saville) held that he was not. Lord Hope said:

“42. …… I think that the guiding principle can be expressed in this way, unless and until Parliament provides otherwise. So long as the relevant acts are done by the individual entirely within the ambit of the discharge of his duties and responsibilities as a director of the corporate director, it is to that capacity that his acts must be attributed.” (Emphasis added)

199.  The evidence clearly shows that before he was formally made a director of SW on 28 December 2009, everything done by Hui was his act in discharging his duties as the de jure director of Chime, the General Manager of the Group and/or the authorized representative under the 9 December 2009 Chime Resolution and the 12 December 2009 SW Resolution.  There was nothing which Hui could have done only as a de facto director of SW.

200.  Chime had a properly-functioning board of directors at the material times.  The Chime Directors (save and except Ms Gong Zhong Xin and Ms Kung Yan Sum) had in fact actively participated in the matters relating to the Foshan Transaction.

(1)  Dr Kung, Madam Liu and JL all visited the Foshan Site before the Chime Board deciding to enter into the Foshan Transaction.  Hui did so together with Dr Kung and Madam Liu, while JL went there on a separate occasion.

(2)  The Chime Directors had all personally met Fong.

(a)  In the 6 November 2009 Meeting, JL met Fong.  In this meeting, JL said that he had studied the materials concerning the Foshan Transaction provided by Fong and expressed his view on the project.  There were some discussions.  At the end of the meeting, JL said that in view of his lack of experience in the Mainland real property law and practice, he suggested to hand back the project to Hui who should make a proposal to the Chime Board.

(b)  In the 4 December 2009 Chime Board Meeting, Hui introduced Fong to the Chime Board.  JL, Dr Kung, Madam Liu and KP Chan were in that meeting.  The Foshan Transaction was discussed in this meeting.  JL and KP Chan raised some queries, and there were some discussions concerning the Foshan Transaction in the meeting.  Prior to this meeting, the Chime Directors were sent documents concerning the Foshan Transaction for their consideration.

(3)  Hui had casual discussions concerning the Foshan Transaction with the other directors of Chime from time to time, including Dr Kung and JL, as their offices were not far apart and were in fact in the same building.  Further, during their visit to the Foshan Site, Dr Kung had expressed his favourable view to the site to Hui.

(4)  JL had his own view and own judgment on the Foshan Transaction.  On 24 September 2009, he asked Fong for documents to evaluate the Foshan Transaction.  In both the 6 November 2009 Meeting and the 4 December 2009 Chime Board Meeting, he raised queries concerning the project.  After that meeting, he engaged in discussions with RW and Mr Wilson Lau.  In the 9 December 2009 Chime Board Meeting, he did not vote in favour of the Foshan Transaction and chose to abstain.

(5)  KP Chan also had his own view and own judgment on the Foshan Transaction.  In the 4 December 2009 Chime Board Meeting, he raised issues concerning financing conditions and rate of investment return.  In the 9 December 2009 Chime Board Meeting, he commented on some tax issues and queried the projected rate of return of the whole project.  At the end, KP Chan did not vote in favour of the Foshan Transaction and chose to abstain.

(6)  Dr Kung and Madam Liu also had their own views.  According to KP Chan, they had their own views in the Exco.  Dr Kung and Madam Liu also interviewed Hui and decided to employ Hui in 2008.  Dr Kung was the one who introduced KW & Co to the Group to advise on Mainland Chinese law issues for the Foshan Transaction.  Both Dr Kung and Madam Liu went to the Foshan Site to see the actual situation there before the 9 December 2009 Chime Board Meeting.  In that board meeting, after considering the different views concerning the Foshan Transaction, they chose to vote in favour of the 9 December 2009 Chime Resolution.  In my view, there is no factual basis to say that Dr Kung and Madam Liu did not have their personal views and they just blindly followed whatever suggested by Hui.

201.  In relation to the Foshan Transaction, each of the Chime Directors participated in the 9 December 2009 Chime Board Meeting has made a decision based upon his or her own judgment on what would be in the best interest of Chime.

202.  Based upon the evidence accepted by this court, the Chime Directors acted collectively and no individual could decide matters for the Group and dictate others’ views.  According to KP Chan, after the demise of Madam Nina Wang, decisions of the Group were made by the Chime Board collectively. Although JL was well-respected in the Group, who was Madam Nina Wang’s right-hand man and the most senior member of the Chime Directors, he could not dictate the Group’s decisions.  Decisions were made by the leaders of the Group collectively.

203.  Even if the other Chime Directors had no substantial experience in the Mainland real property market and relied on Hui on matters relating to investment in that market, that does not mean that the other Chime Directors would not exercise their independent judgment and would just blindly follow Hui and accept whatever suggestion put forward by Hui.  An analogy is that very often, a judge may not have personal knowledge or experience on a matter and have to consider some expert evidence.  However, that does not mean that the judge would blindly accept everything said by the expert and would not have an independent judgment on the matter.  As a matter of fact, after discussion, JL and KP Chan eventually chose not to vote in favour of the Foshan Transaction in the 9 December 2009 Chime Board Meeting.

204.  In my view, Chime had a properly-functioning board, which had duly considered the Foshan Transaction.  Further, the 9 December 2009 Chime Resolution was a decision made by the board collectively.

205.  According to KP Chan, although SW was a wholly-owned subsidiary of Chime, SW Directors would not just blindly follow the 9 December 2009 Chime Resolution if there were some material changes in the matter.  If necessary, SW Directors would refer the matter back to the Chime Board for reconsideration.  Thus, SW also had a properly-functioning board.

206.  There is no allegation, let alone evidence, saying that when the SW Directors (ie JL, KP Chan and KK Li) considered the 12 December 2009 SW Resolution, Hui exerted any pressure or undue influence on the SW Directors, causing them to pass the resolution.

207.  Since both Chime and SW had their own properly-functioning boards, Hui did not individually and personally assumed any responsibility to SW.  Hui was only one member of Chime Board and he had not taken on a role as regards SW before 28 December 2009.  As a matter of evidence, there is no sufficient basis to say that Hui was a de factor director of SW before 28 December 2009 and impose director’s fiduciary duties on him.

208.  Ms Tong relied upon Aston Risk Management Ltd v Jones[55] and ACL Netherlands NV v Lynch[56] in support of SW’s contention.  With respect, I am of the view that SW cannot derive assistance from these cases.

(1)  In Aston Risk, the holding company had no properly functioning board and that the alleged de facto director’s role in the subsidiary was so fundamental that it cannot be confined to particular clearly identifiable decisions.  Here, both Chime and SW had properly functioning boards at the material time.  Further, Hui did not have control of either the Chime Board or the SW Board.  Each member of these boards would make decision in accordance with his or her own independent judgment. In my view, the circumstances in this case are substantially different, and SW cannot rely upon Aston Risk to advance its case.

(2)  In ACL, the subsidiaries had no functioning board of directors and the alleged de facto director had the ultimate decision-making power.  However, in this case, SW had a properly functioning board at the material time, and Hui did not have the ultimate decision-making power in the SW Board.  SW simply cannot derive assistance from the ACL case.

209.  Ms Tong further submitted that since Chime’s loss is reflective of SW’s loss, Hui should be made liable as a de facto director of SW because otherwise SW would be left without a remedy.  With respect, I am unable to accept these submissions.

(1)  First, the proposition advanced by Ms Tong is not supported by any authority.

(2)  Second, the proposition is not supported by the evidence.  As shown in the evidence, the 9 December 2009 Chime Resolution is a collective decision made by the Chime Board.  Dr Kung, Madam Liu and Hui voted in favour of the resolution, while JL and KP Chan chose to abstain from voting.  No one voted against the resolution.  In these circumstances, there would not be any sufficient basis to target Hui and to affix liability on Hui because of the Foshan Transaction.

(3)  Third, in any event, if SW has no cause of action against Hui, Chime can choose to sue Hui for breach of duties owed by Hui to Chime (Hui was a director of Chime at the time of the 9 December 2009 Chime Resolution).  Chime may sue Hui for the loss in a diminution in the value of the shareholding of Chime.  However, the JAs has decided not to bring in Chime as a plaintiff in these proceedings.

(4)  The decisions made by the JAs in these proceedings are decisions made by them with legal advice.  Not bringing in Chime in these proceedings is an informed choice made by the JAs.  In the circumstances, the JAs must accept the consequences of that informed choice.

E2.2 De jure directorship

210.  Ms Tong on behalf of SW has tried to argue that after Hui becoming a de jure director of SW, Hui had breached duties owed to SW by failing to procure SW to withdraw from the Foshan Transaction by relying upon the Forfeiture Clause (“the Withdrawal”), thereby causing loss to SW.

211.  Without prejudice to the pleading problems as set out in the above, in my view, this argument put forward by SW cannot succeed in any event.

(1)  As a matter of common and commercial sense, withdrawal from the Foshan Transaction by breaching the SPA and relying upon the Forfeiture Clause to limit SW’s liabilities would have an adverse impact on the goodwill of the Group.  This may in turn affect the reputation of the Group in the commercial world.  Such a drastic move may not be agreed by the SW Directors and the Chime Directors. 

(2)  At the level of SW Directors, there is no evidence showing that the other SW Directors would agree to the Withdrawal.  In fact, KP Chan’s evidence is that he never thought of giving up the Deposit and abandoning the Foshan Transaction.  In the absence of exceptional circumstances, he did not see why this course should be adopted.

(3)  At the level of Chime Directors, there is no evidence showing that the other Chime Directors would agree to this course.

(4)  Thus, SW’s argument as set out in the above does not have an evidential basis.  There is no evidence showing that had the Withdrawal proposal been raised by Hui, the other SW Directors and the other Chime Directors would have agreed to the same.

E2.3  The no conflict rule

212.  In my view, based upon the evidence accepted by the court, SW’s claim against Hui by relying upon the no conflict rule cannot succeed.

213.  In Poon Ka Man Jason v Cheng Wai Tao[57], Spigelman NPJ said:

“104. In the light of this considerable body of criticism, Mashonaland and its adoption in Bell v Lever Bros Ltd, should be regarded as standing for no wider a proposition than the trite statement that the law will not interfere in the absence of evidence of a real possibility of breach of fiduciary duty, including of the conflict rule.

105. As Upjohn LJ said, the conflict rule:

‘…must be applied with common sense … and applied realistically to a state of affairs which discloses a real conflict of duty and interest and not to some theoretical or rhetorical conflict.’

[Boulting v Association of Cinematograph Television and Allied Technicians [1963] 2 QB 606 at 637-638]” (Emphasis added)

214.  Ms Tong submitted that:

(1)  In around early 2008, TAGZ and STH commissioned a feasibility study on the Foshan Project and agreed to form a joint venture company, GDSTH, with a view to developing the Foshan Site.  Thereafter, a feasibility report dated 20 January 2008 (“the Feasibility Report”) with a positive result was produced.

(2)  As evidenced in the March 2008 Calculations and the related materials, including the emails and the presentation slides, 7 months before Hui joined the Group, Hui (with the assistance of RW) and Fong were already working together on financial analyses and presentation materials for the Foshan Project.

(3)  Hui admitted that after he left Tian An and before he joined the Group, he was aware of Fong’s interest in developing the Foshan Site and was even invited to visit the site.

(4)  GDSTH acquired the Foshan Site in January 2008 for the purpose of the Foshan Project, with the formal contract for the grant of land use rights being entered into between the Foshan authorities and GDSTH on 18 March 2009 (“GDSTH Contract”).

(5)  After Hui became employed with the Group and involved in the negotiation of the Foshan Project on behalf of the Group, Hui did not disclose to Chime/SW his dealings and connections with Fong (who became the counterparty) or his prior involvement with Fong in the Foshan Project or his conflicting directorship in TAGZ.

(6)  Hui’s recommendation to the Group to invest in the Foshan Project followed discussions with someone with whom he had been and was, unbeknown to the Group, closely connected with, and who was the very person who became the counterparty of the Group.  It was not until 4 November 2016 (ie 4 years after Hui’s employment with the Group terminated) that Hui resigned as a director and Vice Chairman of TAGZ.

(7)  Hui’s close connections with Fong and his position in TAGZ serve to explain his conduct throughout the Foshan Transaction negotiations purportedly on behalf of the Group which, objectively viewed, was clearly not in the interests of the Group/SW, but rather served Fong/TAGZ’s interests and wishes.

215.  With respect and notwithstanding the eloquent submissions of Ms Tong, based upon the evidence accepted by the court, I am of the view that no real possibility of breach of the no conflict rule has been shown.

216.  First, Hui’s directorship in TAGZ was nominal.

(1)  As shown Tian An’s Public Announcement dated 16 July 2008 concerning the disposal of TAGZ, Tian An did not treat TAGZ as one of its subsidiaries since the commencement of the

“Co-operation Agreement” between Tian An and the company controlled by Fong in August 2000. Under the Co-operation Agreement, TAGZ was not to have any operation other than the Garden Project. TAGZ’s assets and liabilities were not consolidated into Tian An’s own accounts. Tian An in fact treated TAGZ as Fong’s company. On page 7 of that public announcement, it is stated:

“[TAGZ] is a wholly-owned subsidiary of [Tian An] solely by virtue of its 100% equity interests in [TAGZ]. However, [TAGZ] is not a subsidiary of [Tian An] from an accounting point of view since the commencement of the Co-operation Agreement in August, 2000 as the financial statements of [TAGZ] have not been consolidated into the financial statements of [Tian An] since August, 2000.”

(2)  Since TAGZ was only nominally owned by Tian An before July 2008, it would not be a surprise that while Hui was working in Tian An, Hui’s directorship and his role as legal representative of TAGZ was also nominal.  According to Hui:

(a)  A Mr Patrick Li appointed Hui to TAGZ due to Li’s friendly relationship with Fong and wanted Hui to help Fong out.  Hui was asked to stay in TAGZ to avoid suspicions by the Nanhai Government on land speculation activities.

(b)  Hui had no involvement in the Garden Project, for he was only a nominal director and legal representative.

(c)  As TAGZ was Fong’s company, Hui had not been informed of the GDSTH Contract.  Further, at the material time, Hui did not have knowledge of the Feasibility Report.

(d)  Hui had no participation in TAGZ’s affairs save as to signing resolutions that were administrative in nature and which requires filing with the工商局 in the Mainland.

(3)  In my view, Hui’s evidence is supported by:

(a)  A “授权委托书” dated 9 July 2009 sent out by Hui, whereby Fong was appointed as lawful agent to handle all the affairs of TAGZ and to exercise all lawful powers on Hui’s behalf.  Hui candidly admitted that he could not recall whether he had actually signed this power of attorney.  However, Hui said that Fong had the authorities to decide all the matters in TAGZ.

(b)  That Hui conferred upon Fong all powers at TAGZ by the aforesaid power of attorney is a fact admitted by SW.  See Statement of Agreed Facts §17(3).

(c)  Hui only remained in TAGZ but not any other subsidiary of Tian An after he left Tian An in 2004, due to the fact that TAGZ was in substance Fong’s company.

(d)  Further, there is no documentary evidence showing that Hui was involved in making substantive decisions in TAGZ.

217.  Ms Tong submitted that in cross-examination, Hui admitted that Fong appointed him as the Vice Chairman of TAGZ because Fong thought that Hui could provide advice and opinions.  Ms Tong submitted that this is a clear piece of evidence suggesting that Hui’s role in TAGZ was not nominal.  Having reviewed the transcript, Hui’s evidence is that due to Hui’s management experience, Fong wanted to consult Hui.  Hui did not participate in the management of TAGZ, but he would provide opinions to Fong.  In my view, there is no admission by Hui that he himself participated in the management of TAGZ.

218.  Ms Tong submitted that as the legal representative of TAGZ, Hui would definitely be involved in TAGZ’s affairs, for the role of a legal representative in a Mainland Chinese company is an important one, which carried with it significant responsibilities, duties, powers and authorities.  Ms Tong relied upon Ming Lai Siu Fun v Tsang Hung Kong[58] in supported by her submission.  With respect, I am unable to accept this submission.  In this case, the role, the duties and the powers of a legal representative in a Mainland Chinese company are not pleaded and are not shown by evidence.  There is no pleaded basis, and there is also no evidential basis, upon which it can be said that Hui must have participated in the substantive operation of TAGZ because of his role of legal representative of the company.

219.  As submitted by Mr Man, the nominal nature of Hui’s TAGZ directorship has an important bearing in considering whether a conflict arises.  In In Plus Group Ltd v Pyke[59], the English Court of Appeal held that the director was not in breach of the no conflict rule, because his role was “nominal … in the concrete sense that he was entirely excluded from all decision-making and all participation in the claimant company’s affairs”[60]. I agree that the same can apply to Hui, who had no substantial role in TAGZ and was only a nominal director in TAGZ.

220.  Second, in the circumstances of this case, it cannot be said that a conflict arises because of the relationship between Hui and Fong.  The mere fact that Fong was Hui’s business acquaintance could not give rise to any conflict.  Hui’s relationship with Fong was not a secret in the Group.  According to KP Chan, he knew that Hui knew Fong, as did everyone in the Group.  When the Group considering employing Hui in 2008, the Group had considered an assessment report dated 23 June 2008 by an agent called Korn Ferry International (“the Korn Ferry Report”).  In that report, Hui’s connection with Tian An was mentioned.  Further, as evidenced by the fact that Hui had stood together with other leaders of the Group on the Further Capital Injection issue, it cannot be said that Hui would prefer Fong’s interests over the Group’s interests.[61]

221.  I am also of the view that there is insufficient evidence in support of the claim that a conflict arises because of the Garden Project and Zhaoqing Project.

(1)  The only evidence showing Hui might have an interest in these two projects is the Korn Ferry Report, in which it is mentioned that these two projects as Hui’s private investments.  However, Hui did not have a sight of the Korn Ferry Report at the material time.  Hui does not accept the correctness of this description in the Korn Ferry Report.  The basis of this description is unknown.  Given the unknown basis of this description in the Korn Ferry Report, I cannot attach weight to this piece of evidence.

(2)  Jong had carried out investigations into the Zhaoqing Project but could not find any evidence indicating that Hui had an interest in the project.

(3)  Hui has disclosed his investments in the 2008 Employment Contract, including his interest in a project in Jiangmen.  There is no reason why Hui would deliberately conceal his interests (if any) in the Garden Project and the Zhaoqing Project in that disclosure.

(4)  The Group’s management had the 2008 Employment Contract (in which the two projects were not mentioned) and the Korn Ferry Report (in which the alleged Hui’s personal interests in the two projects were mentioned) in hands. Had the alleged Hui’s personal interests in the two projects been a real concern, the Group’s management certainly would have approached Hui to seek clarification.  However, as a matter of fact, no one has ever approached Hui to seek a clarification from him.  In other words, even if Hui has some personal interests in the two projects, the Group’s management considered that the 2 projects had nothing to do with the Group’s investment and decision to enter into the Foshan Transaction.

222.  As to the March 2008 Calculations, I accept Hui’s explanation (which is supported by RW) that those calculations were made for purposes of Fong’s intended IPO at that time.  The calculations were titled “IPO Presentation (3/2008)” and the presentation slides relied upon by SW in fact also indicating an IPO presentation.  There is nothing unusual for Hui to do Fong a favour by asking RW to run some figures to enable Fong to consider his plan for IPO, which is not a complicated task.  RW himself said that he could finish the calculation in a matter of 1-2 hours.  There is nothing contradicting RW’s evidence.

223.  SW is also relying upon a valuation report of the Zhaoqing Project done by Joywood China Investment Company (wholly owned by Hui) on 28 March 2008 (“Joywood Report”) to show a close connection between Hui and Fong.

(1)  In January 2008, Tian An commissioned a valuation by Norton for the Zhaoqing Project.  The Zhaoqing Project was valued at HKD 602,500,000 on the basis that the total developable gross floor area of the villas and apartments was approximately 500,000 m square.

(2)  During the period of the March 2008 Calculations, the Joywood Report was carried out on the basis that the total gross floor area of high-rise apartments and villas were 4,220,770 m square, and Norton came to a valuation of RMB 2,900,000,000.

(3)  There is nothing unusual that Fong wanted to obtain a more favourable figure for IPO purposes, and hence asked Hui to do him a favour by providing the Joywood Report to him.

(4)  The provision of the Joywood Report to Fong was a favour to Fong.  However, that does not mean that the connection between Hui and Fong was so close so that Hui would prefer Fong’s interests over the Group’s interests in the Foshan Transaction.

224.  Third, Hui had first disclosed his directorship in TAGZ in the 2008 Employment Contract on 30 September 2008 before commencement of his employment in the Group on 1 October 2008.

(1)  The parties to the 2008 Employment Contract are Chinachem Agencies Ltd (“CAL”) and Hui.  In the contract, it is stated (a) “[CAL] is part and parcel of the Group” and (b) “[Hui] shall serve the Company and the Group in the capacity of Group General Manager and shall carry out such duties as the boards of the Group may from time to time direct”.  It is clear that “boards of the Group” would include the Chime Board and the SW Board.

(2)  Dr Kung signed the 2008 Employment Contract on the Group’s behalf.  According to KP Chan, the signed copy or the final draft of the contract had been circulated amongst the Chime Directors, and he himself also retained a copy.  Accordingly, all the Chime Directors were aware of Hui’s directorship in TAGZ, but none of them had ever raised any objection or asked Hui to resign from his position in TAGZ.

225.  Fourth, Hui’s evidence under cross-examination is that he made a further disclosure of his directorship in TAGZ to Parker before the 4 December 2009 Chime Board Meeting.  Given that Parker’s position at that time was “Director of Corporate Governance” of the Group, disclosure to Parker would constitute sufficient disclosure to the Group.  As to the date of the disclosure, I accept Hui’s case that the disclosure to Parker was made before 4 December 2009.

(1)  Jong does not have personal knowledge of this matter and hence SW cannot have a positive case on this issue.

(2)  Hui has given evidence that the disclosure was made him to Parker before the 4 December 2009 Chime Board Meeting.  Hui explained that in or around November 2009, according to his understanding, JL was inclined to support the Foshan Transaction. Hence, Hui thought that it would be a proper time for him to speak to Parker. In my view, Hui’s explanation accords with the chronology of events and is inherently probable.

(3)  I draw an adverse inference against SW by reason of the absence of Parker and the JA’s failure to make enquiries with Parker on the date of disclosure.

(a)  In his Defence filed on 1 September 2017, Hui has pleaded that verbal disclosure to Parker was made before 12 December 2009.[62] On 21 August 2023, Hui’s solicitors have written to SW’s solicitors and stated that Hui may invite the court to draw adverse inferences from Parker’s absence.  SW’s solicitors responded that Parker formally ceased his employment on 20 January 2017 with the Group and joined ENM Holdings Ltd (“ENM”), and ENM is an independent listed company which the Group has a 44% stake therein.

(b)  That Parker is now working in ENM does not mean that SW cannot call Parker to give evidence in this trial.  Jong admitted that he spoke to Parker in early 2023.  Jong also accepted that he had no difficulty in calling Parker to give evidence in this case.

(c)  Jong agreed that Parker is not a potential defendant in respect of the matters in these proceedings.

(d)  Jong said that Parker was introduced by Hui to the Group.  However, Jong admitted that Parker had given evidence against Hui in legal proceedings in 2016 or 2017.  Jong also admitted that he is confident that Parker was not in Hui’s “pocket”.  In view of these, the fact that Parker was introduced by Hui to the Group is not a satisfactory reason explaining why SW decided not to call Parker to give evidence in this trial. 

(e)  Jong said that in respect of the date of disclosure, the burden of proof is on Hui, and Hui could call Parker to give evidence.  However, Hui has given evidence on the date of the disclosure.  Hui has also given notice to SW that he would ask the court to draw an adverse inference against SW by reason of the absence of Parker in the trial.  Notwithstanding having that notice, SW has chosen not to call Parker and is unable to provide any satisfactory explanation as to why Parker is not called.  In the circumstances, it would be open to the court to draw an adverse inference to tip the balance against SW as Hui has established a prima facie case.[63]

(f)  Clearly, Parker is a material witness concerning the date of the disclosure from Hui to Parker.  In view of all the above, there is no good reason explaining why SW did not call Parker to give evidence in this trial.

(g)  SW has tried to argue that in respect of Hui’s disclosure to Parker, the burden of proof is on Hui.  Hence, SW has no obligation to call Parker to give evidence to give evidence in this trial.  I respectfully disagree.

(h)  In Sit Ka Chun v Wing Wong Scaffolding Ltd & Ors[64], after reviewing the authorities, Master Alexander Tang said:

“76. Based on the above authorities, in my view, the doctrine of adverse inference can be summarized as follows:-

(a) While there is no general duty to assist an opponent in litigation and a claim can be struck out for lack of supporting facts, once there exists a sufficiently particularized claim whereby an issue is crystallized, it is the policy of the law that parties generally have to put forward all evidence (whether witness or documents) which they control/possess, whether favorable or unfavorable, to help elucidate the truth.

(b) As such, if a party can be reasonably expected to provide certain evidence but fails to proffer such without good reason, an issue arises as to whether he has violated the policy of the law, and imposed an illegitimate impediment upon his opponent’s ability to challenge the party’s case/prove the opponent’s case.

(c) If this happens, the law has tools in its armoury to compensate for such in the fact-finding process. In gist, depending on the factual matrix, the fact finder can be persuaded to draw an inference from the party’s conduct that the unavailable evidence is materially unfavorable to such party, and will be sufficient to bridge an evidential lacuna in his opponent’s case on the available facts.” (Emphasis added)

(i) It is plain that Parker’s evidence would be relevant to Hui’s disclosure to Parker. With the aforesaid principles in mind, that the burden of proof on this issue is on Hui is not a satisfactory explanation as to why SW did not call Parker to give evidence in this trial.

(j) SW has also argued that Hui could call Parker, and since Hui did not do so, an adverse inference should be drawn against Hui. I also respectfully disagree. In cross-examination, Hui has not been asked why he did not call Parker to give evidence in this trial. Without giving an opportunity to Hui to explain, it is impermissible to ask the court to draw an adverse inference against Hui.

(4) Jong said that the Deacons Advice was rendered in an email on or around 16 December 2009. After Hui made the verbal disclosure to Parker, the Group would need to spend some time to prepare the instructions. After giving instructions to Deacons, since Deacons had never been involved in the Foshan Transaction, Deacons would need some time to get themselves familiar with the relevant background and look into the matter. Between 4 December 2009 and 16 December 2009, there were only 9 working days (excluding Saturdays and Sundays). Bearing all these in mind, it is inherently probable that Hui made the disclosure to Parker at a time before 4 December 2009.

226.  The Related Party Policy provides that until the Group has an internal audit and/or compliance department, “responsibility for monitoring this policy shall be vested in the Internal Control department under the Director – Corporate Governance”.  There is no evidence showing that in 2009, the Group had an internal audit or compliance department.  In other words, when Hui made the disclosure to Parker, in accordance with the Related Party Policy, Parker (being the Director of Corporate Governance of the Group at that time) was the one being responsible for compliance matters in the Group.  Hui’s disclosure to Parker would constitute disclosure to the Group.

227.  Ms Tong relied upon Wong Lung v The Chinese University of Hong Kong Employees’ Credit Union[65] and submitted that Hui’s disclosure is clearly insufficient.  In that case, DHCJ Wilson Chan (as he then was) said:

“19. Unless otherwise provided by the articles of association, there must be full disclosure of the material facts to and a resolution by the shareholders in general meeting approving the offending transaction in order for the fiduciary to avoid liability. Importantly, mere disclosure to the board is not sufficient under the general law in the absence of express provision in the constitution displacing this default position [see:Grand Field Group Holdings (Supra) at paragraph 4.3 per Cheung JA].

20. A director or officer cannot avoid liability by resigning in order to do that which, had there been no resignation, would have been a breach of fiduciary duty [see: Meagher, Gummow & Lehane’s Equity Doctrine & Remedies (5^th ed., 2015) at [5-105]; Liao Chen Toh v Loyal Intl Enterprises Co Ltd, HCA 2302/2014 (Decision dated 20/04/2016), at paragraph 63 per DHCJ Kent Yee].

21. As to what constitutes sufficient disclosure of the material facts to give rise to informed consent by the principal: –

(1) The burden of proving full disclosure as to the nature and extent of his interest lies with the fiduciary and it is not sufficient for him to merely state that he has an interest or to make such statements as would put the principal on inquiry; nor is it a defence to prove that had he asked for permission it would have been given. Whether there is sufficient disclosure depends on the facts of each case, and the nature of disclosure [see: Hurstanger Ltd v Wilson[2007] 4 All ER 1118, at [33]-[36] per Tuckey LJ].

(2) Depending on the circumstances, it may not be sufficient for a fiduciary to provide a copy of the relevant documents to the beneficiary. The fiduciary should draw particular attention to terms which are onerous or adverse to the beneficiary’s interest and it matters not that the beneficiary could have appreciated or discovered it had they made the necessary investigations [see:United Dominions Corp Ltd v Brian Pty Ltd (1985) 60 ALR 741, at 744].

(3) The fiduciary must specify the magnitude of what he stands to gain in the transaction in order to bring home the potential conflict of interest, particularly where the beneficiary consists of unsophisticated persons and in situations not conforming with usual market practice [see: Hurstanger Ltd(Supra) at [36] per Tuckey LJ].” (Emphasis added)

228.  With respect, SW may not derive any assistance from the Wong Lung case.  Bearing in mind that SW is a SPA used by the Group for the purpose of entering into the Foshan Transaction and Chime is the operating entity in the Group, in the circumstances set out in this subsection, I am satisfied that Hui’s disclosure is sufficient.

229.  Fifth, SW is bound by its own pleas in the SOC, ie no later than 16 December 2009, Hui has disclosed his directorship in TAGZ to the Chime Board. None of the Chime Directors has ever raised any issue concerning Hui’s directorship in TAGZ.  That can only mean that no one in the Chime Board considered that Hui’s directorship in TAGZ would put Hui in any conflict of interest in relation to the Foshan Transaction. 

230.  In my judgment,

(1)  Hui has disclosed his directorship in TAGZ in the 2008 Employment Contract, which has been circulated to the Chime Directors.  Since Chime is the sole shareholder of SW, disclosure to the Chime Directors constitutes sufficient disclosure as regards SW.

(2)  That Hui knew Fong was not a secret in the Group and was known to the Chime Directors.

(3)  Before the 4 December 2009 Chime Board Meeting, Hui made a verbal disclosure of his directorship in TAGZ to Parker.  Given Parker’s role in the Group at that time, this constitutes sufficient disclosure.

(4)  Ms Tong submitted that in the 30 September 2009 Declaration, Hui did not mention his relationship with Fong or his role as TAGZ’s legal representative and as Chairman of the TAGZ Board. Nor did he mention the fact that he had sat on the TAGZ Board together with Fong as Vice Chairman for close to 8 years since August 2000. However, in view of the analysis set out in the above, I am of the view that Ms Tong’s complaint regarding the insufficiency of the 30 September 2009 Declaration could not be material.

(5)  Hui has never intended to conceal his directorship in TAGZ.

E2.4   Failure to act in the best interest of SW and to exercise reasonable care and skill

231.  As to SW’s claim that Hui has breached the duties to act in the best interest of SW when negotiating the Foshan Transaction, the following principles would need to be borne in mind:

(1)  In Re Smith & Fawcett Ltd[66], Lord Greene MR said:

“[Directors] must exercise their discretion bona fide in what they consider - not what a court may consider - is in the interests of the company, and not for any collateral purpose.”

(2)  In Gore-Browne on Companies (45^th ed) at §15(10), it is stated:

“[The duty] is prima facie subjective, in that the court will not consider it broken merely because, in the court’s own opinion, the particular exercise of power was not to promote the success of the company for the benefit of its members; a fortiori the court will not take it on itself to order that a particular power vested in directors should be exercised in a particular way. On the other hand, the subjective test applies only where there is evidence of actual consideration of what will best promote the success of the company. Where there is no such evidence, the proper test is an objective one, namely whether an intelligent and honest man in the position of a director of the company concerned could have reasonably believed that the exercise of a power would promote the success of the company.”

(3)  It is of vital importance to distinguish between (a) a failure to act in the company’s best interests and/or negligence and (b) a commercial decision which independent directors could legitimately come to different conclusions.

(a)  In Moulin Global Eyecare Holdings Ltd v Olivia Lee Sin Mei[67], Gummow NPJ said:

“36. …… Where what is at stake is liability for failure by a director to discharge a non-proscriptive duty, such as that to act to bona fide in the interests of the company, a court of equity may be reluctant to intervene in the absence of sharp practice …...” (Emphasis added)

(b)  In Wong Luen Hang & Anor v Chan Yuk Lung & Ors[68], Chu JA (as she then was) said:

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

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

(c) In Sanju Environmental Protection (Hong Kong) Ltd v Wang Lishan[69], Recorder Jin Pao SC said:

“…... matters of management are within the responsibility of the directors, and that it would be wrong for the court to substitute its own opinion for that of management or indeed to question the correctness of a management decision where it has been arrived at in good faith. The court is not a supervisory board over decisions within the powers of management honestly arrived at …… ” (Emphasis added)

(d) To substantiate a claim that the director has failed to act in the company’s best interests, it must be proved that: (a) the director did not subjectively believe that it was in the company’s interest; (b) the director did not give it any actual consideration; or (c) a reasonable director in his position could not have reasonably believed that it was for the benefit of the company.[70]

(e) The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the best interests of the company, still less whether the court might have acted differently. The issue is one of the director’s state of mind.[71]

232.  The reminder given by Harris J in Chinaculture.com Ltd v Lam Ting Ball Paul & Ors[72] is very apposite:

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

233.  In relation to SW’s claim that Hui has failed to exercise reasonable care and skill, the relevant principles are as follows:

(1)  At common law, directors owe a duty to the company to exercise reasonable care, skill and diligence that would be exercised by a person (a) with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and (b) the general knowledge, skill and experience that the director has.[73]

(2)  In Bishopsgate Contracting Solutions Limited v David Thomas O’Sullivan[74], Linden J cited Palmer’s Company law §§8.2810 and 2811 with approval:

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

(3)  In the performance of their duties, directors are entitled to delegate and to rely upon professional advice.

(a)  In Sanju[75], Recorder Jin Pao SC said:

“47. … although the delegation of responsibility and functions by directors is permissible, the directors are subject to a residual duty to ensure that there is a system in place for checking upon the performance of the delegated functions …”

(b)  In Re Pro4Sport Ltd (in liq)[76], HH Judge Behrens (sitting as a judge of the High Court) said:

“46. I accept that Mr Adams was obliged to exercise his own independent judgment. However the fact that he was relying on advice is to my mind an important factor in determining if he was in breach of his duty to exercise reasonable care.”

(c)  In Green v Walkling[77], Bernard Livesey QC (sitting as a deputy judge of the High Court) said:

“36. …… The fact that a director has taken advice will be a relevant and important factor to be taken into account when determining the validity of an allegation against him that he has acted in breach of his duties.”

(d)  In Keay, Directors’ Duties (4th ed) §8.138, it is stated:

“[D]irectors are entitled to rely on the advice of professionals who are appropriately qualified and independent, where the advice is within the expertise of the adviser and where the directors has provided the adviser with the correct information and context, and the director has assessed the advice so far as his or her expertise and knowledge permits.”

(e)  In Hedger v Adams[78], Behrens J held, inter alia, that the number of ways in which the subject agreement could have been more favourable to the company were not factors for establishing the director’s duty of care (§41) and factoring in such a consideration was “redolent of hindsight” (§44).  Further, although the director was obliged to exercise his own independent judgement, “the fact that the director was relying on advice was…an important factor” in determining if he was in breach of duty of care (§§46-47).

(4)  Negligence is not the same as mere errors of judgment.  In assessing a negligent claim against a person who is alleged to have acted in breach of the standard of reasonable care and skill, the approach is to allow for a margin of differing opinion and even error.[79]

234.  Hui, JL, Jong and Mr Christopher Chan (a former JA) all appreciated the value and the attractiveness of the Foshan Site.

(1)  In his evidence, Hui said:

“…… 呢塊地係全佛山A區最靚嘅地，第一，地鐵站出口；第二，湖邊，洲際酒店斜對面，AIA後街。我認為呢塊地到今日都仲係最靚嘅地”

(2)  A few months before the 6 November 2009 Meeting, JL personally visited the Foshan Site.  As recorded in the minutes of that meeting, JL was “of the view that the project should be viable and the region easily accessible from Guangzhou”.  Subject to everything being in order, it was JL’s intention to support the project.

(3)  As shown in the minutes of the Exco meeting held on 7 November 2012, Mr Christopher Chan took the view that “[t]he adjacent development of the project was very good. From the perspective of property development, this project was a good property project”.

(4)  In cross-examination, Jong also agreed that the Foshan Project could be a good project due to the good location of the Foshan Site.  Jong said “a good project can become a bad project if you pay too much, so that is the part that I’m complaining.”

(5)  In the 9 December 2009 Chime Board Meeting, JL and KP Chan did not vote against the proposed resolution approving the Foshan Transaction.  As recorded in the minutes of that meeting, JL “opined that the location of the property was good and therefore he would not object to the proposed investment. However, since he had hesitations on some of the arrangements, he would abstain in voting.”  KP Chan “opined that given the low projected rate of return of the proposed investment and the uncertainties on the income tax and land value-added tax issues, he would abstain in voting.”

235.  So there is no query as to the attractiveness of the Foshan Site.  The focus is the terms upon which the Foshan Transaction was entered into.

236.  Regarding the price paid by SW in the Foshan Transaction, the following facts have to be borne in mind:

(1)  Negotiation of the Foshan Transaction began in April 2009.  The initial purchase price proposed by RW on behalf of Hui was based on a land premium of RMB 428,000,000.  This is identical to the figure in the March 2008 Calculations. It yields a price of RMB 1,498/m square (RMB 428 million divided by 285,540 m square).

(2)  The Mainland real property market was rising in 2009.  This was confirmed by Jong.[80] In a rising market, it is reasonable for Hui to adopt the March 2008 Calculations in proposing the purchase price to the other side at the beginning of the negotiation.

(3)  Unsurprisingly, the initial proposed price was not accepted by Fong.  In July 2009, Fong returned with a land premium of RMB 856,620,000 (ie RMB 3,000/m square).  The counter-proposed price from Fong was accepted by Hui in August 2009.  Hui’s decision to accept the counter-proposed price from Fong was made in a rising market.  That price was in line with the valuation in the 1^st Norton Report.

(4)  On 28 October 2009, a neighbouring residential site (“the Neighbouring Site”) was auctioned and sold at a price of RMB 3.82 billion (with a price of RMB 6,494.80/m square). This figure was more than a double of Fong’s proposed figure in July 2009.

(5)  Hui then informed Norton of the fluctuating market and asked Norton to consider the updated value of the Foshan Site.  Subsequently, on 5 November 2009, Norton provided its 2^nd Norton Report, in which the value of the Foshan Site as at 31 October 2009 was estimated at RMB 1.24 billion (ie the price of around RMB 4,342/m square). This is also the figure in the Norton Final Report.

(6)  On 10 December 2009, Hui sent out the 10 December 2009 Memorandum, informing the Chime Directors of the result of an auction of a piece of “commercial/residential land” near the Foshan Site at the price close to RMB 8,000/m square on 8 December 2009.

237.  SW raised several criticisms concerning the price of the Foshan Transaction.

238.  The first criticism concerning the appropriateness of using the Neighbouring Site as a comparable, for the Neighbouring Site is a residential site and the Foshan Site is not.  My view is as follows:

(1)  Although the Foshan Site is not a 100% residential site, it has a residential element. According to Article 13 of the relevant Land Grant Contract, up to 28-31% of the site are designated to be “apartment-type” offices (“公寓式办公建筑物”).  According to Hui, the “other” offices (“其余办公建筑物”) could also be “SOHO” (meaning small office and home office) units.  A “SOHO” unit is a unit within which there would be office area and residential area. 

(2)  As to whether Hui’s interpretation of “其余办公建筑物”in Article 13 of the Land Grant Contract is correct or not, based upon the evidence before me, I am unable to come to a definite conclusion.  However, “公寓式办公建筑物”in Article 13 would clearly be residential buildings.  Thus, it is clear that the Foshan Site can partly be used for residential purpose.

(3)  There are similarities between the Foshan Site and the Neighbouring Site, ie location, and both sites containing residential elements.  In assessing the value of the Foshan Site in the 2^nd Norton Report, a 33% discount was applied to RMB 6,494.80, hence arriving at RMB 4,342.

In my view, since there are similarities between the Foshan Site and the Neighbouring Site, it is permissible to use the value of the Neighbouring Site as a comparable in assessing the value of the Foshan Site.

239.  The second criticism concerning the initial consideration as stated in the GDSTH Contract when GDSTH acquired the Foshan Site in January 2008, ie RMB 110,010,000.  However, the relatively much lower price as stated in the GDSTH Contract does not necessarily mean that the valuations in the Norton Reports are unreliable.  There is no dispute that in 2009, the Mainland real property market was rising.[81] Concerning the significant increase in the value of the Foshan Site, KP Chan in his evidence said that he did not raise any query on this issue, nor did he see anything which indicated that someone in the Group had asked about this increase in price.  In any event, none of the Chime Directors considered that there were any problems with the Norton’s valuations at all material times.  I am of the view that there is no merit in this criticism.

240.  The third criticism concerns the simplicity of the Norton Reports. However, at the material time, none of the Chime Directors (including JL and KP Chan) considered there to be any issue in respect of the Norton Reports.  I do not think that the third criticism can be any foundation of a claim against Hui.

241.  The fourth criticism concerns that one-third of the office floor area of the Foshan Site that is restricted for the developer’s self-use

(1)  The Self-Use Portion has been taken into account by Norton in its valuation, as confirmed by its letter dated 4 December 2009.

(2)  The impact of the Self-Use Portion on the value of the Foshan Site has been factored into account under Clause 2(a) of the Dividend Adjustment Agreement that:

(a)  Tremendous warranted to SW that it shall use its best efforts to enable the one-third of the office floor area of the Foshan Site that is described as restricted for the developer’s self-use to be sold legally to third parties; and

(b)  If Tremendous is unable to perform this warranty within 3 years of completion or before the project is open to sale, Tremendous guarantees that it will repurchase the
Self-Use Portion at market price from GDSTH or pay SW a dividend equivalent to the difference between the price for repurchasing the Self-Use Portion and its market price; and

(c)  Tremendous guarantees that if the Self-Use Area subsequently can be sold legally, SW would have the priority to purchase the units at the Self-Use Portion at market value according to its proportion of shareholding in STH.

242.  It is worth to note that in cross-examination, Jong agreed that in December 2009, regarding the value of the Foshan Site, RMB 4,000/m square could be a genuine view.  I attach full weight to this admission.  With this admission from Jong, it would not be open to SW to argue that Hui’s reliance on the Norton Final Report is unreasonable.

243.  In her oral final submissions, Ms Tong referred me to the table in §3.3.1 of the Report of SW’s expert Mr Lau Chun Kong (“Lau”) dated 22 February 2019.  Ms Tong submitted that based upon the information in that table, the Mainland real property market in 2008 and 2009 was not rising.  I do not think that SW can derive any assistance from this table.

(1)  This table is in fact the movement of Guangzhou Office index during 2008 and 2009.  The table shows that in 2008, the market had a fall.  However, in 2009, the trend was indeed continuously rising.

(2)  Given Jong’s evidence as set out in [242] above and in footnote 80, and KP Chan’s evidence as set out in [174] above, it would not be open to SW to argue that the Mainland property market was not rising in 2009.

244.  In my judgment, Hui has sufficient reasons to believe and he did genuinely believe that the Foshan Site is valuable and attractive.  Further, it is reasonable for him to rely upon the Norton Reports.  There is no sufficient basis to say that in assessing the price paid by the Group in the Foshan Transaction, Hui failed to act in the best interest of the Group or failed to exercise reasonable care and skill.

245.  The fact that Hui genuinely held a favourable view of the Foshan Transaction would need to be borne in mind.  KP Chan, although did not share the same view, accepted that it was fair to say that Hui simply took a positive view on the market and did not want the opportunity to be missed.  The 10 December 2009 Memorandum is simply a document conveying this message from Hui to the other Chime Directors.

246.  Regarding the removal of the Put Option, the Put Option was initially proposed as a favourable term for the Group.  However, Fong was not agreeable to the same.  In a rising market, it would not be unreasonable for not insisting on the Put Option in order to have a deal.  It is worth to note that JL did not take issue with the removal of the Put Option. The Put Option was present in a draft term sheet dated 21 September 2009, which was sent to JL.  There is no evidence showing JL ever raising an objection or query as to the subsequent deletion of the Put Option.

247.  SW has also made some submissions concerning the LVAT and other tax issues.  With respect, there is no merit in the submissions.

(1)  Concerning the LVAT, the matter has been thoroughly discussed in the 9 December 2009 Chime Board Meeting.  Hui was of the view that certain local governments would only charge 1% to 3% of selling price as LVAT at the time of sale. The LVAT regulations have not been enforced fully since 1994 and thus 3% provision would be considered as adequate.  In Jong’s evidence, Jong accepted that “this is the commercial judgment where people debate about, and then work around the price, and the terms … people would still invest, with or without this assumption. But you know, people look at it holistically”.  In my view, whether a 3% provision would be sufficient in taking care of the LVAT is a calculated risk, and whether it is worth to take this calculated risk should be a matter reserved for the directors.  It cannot be said that Hui has breached any duty by holding the view expressed in the 9 December 2009 Chime Board Meeting.

(2)  As to the income tax issue, the matter has been dealt with by Clause 2(b) of Dividend Adjustment Agreement.

248.  SW also relies upon a guarantee provided by Chime specified in the SPA in support of its claim against Hui.  This guarantee (“the Chime Guarantee”) was eventually executed by Hui on 10 February 2010.  In my view, SW cannot rely upon the Chime Guarantee in support of its claim against Hui:

(1)  SW did not have any substantive operation.  In his email dated 20 January 2010, Jong expressed a view that he regarded the provision of the Chime Guarantee in support of SW’s obligations under the SPA was not unreasonable.  Jong only said that the provision of the Chime Guarantee was a major derivation from the principal terms of the transaction and should have to be pre-approved in future.

(2)  Hui in fact was authorized by the 9 December 2009 Chime Resolution and the 12 December 2009 SW Resolution to make necessary amendments to the transaction.  No one in fact has said that the provision of the Chime Guarantee in support of SW’s obligations under the SPA is unnecessary.  In the circumstances, Hui cannot be criticized of adding the Chime Guarantee in the SPA.

(3)  The Chime Guarantee in fact was ratified by the Chime Board on 20 January 2010.  Given this fact, SW cannot make out any case against Hui by relying upon the Chime Guarantee.

(4)  Without prejudice to the above, in any event, the Chime Guarantee would not cause any loss to SW.  Bearing in mind that the only plaintiff in this case is SW, I am of the view that SW cannot make out a case against Hui by relying upon the Chime Guarantee.

249.  It is indisputable that in 2009, the Mainland real property market was rising.  In late December 2009, it would not be unreasonable for Hui to take the view that the return of the Foshan Transaction would be satisfactory. Subsequently, the Mainland real property market had a downturn in 2010 and 2011.  Jong accepted that nobody could predict properly market movements correctly at all times.  Jong also said that he was not seeking to blame Hui for the downturn of the market.

250.  With all the aforesaid in mind, without prejudice to my ruling on the pleadings issue, I am of the view that based upon the evidence, SW cannot make out a case against Hui based upon the no conflict rule.

E2.5  Causation

251.  SW is claiming against Hui for damages in a substantial amount.  As said in the above, in order to succeed on this claim, SW must prove causation.  The only causation pleaded by SW is the one pleaded in SOC §81, ie had disclosure of Hui’s continued directorship in TAGZ, his previous involvement in the Foshan Transaction by virtue of the said directorship and his prior directorship with Fong been made, the SW Board would have adopted a more prudent and cautious approach towards the Foshan Transaction. 

252.  In my judgment, there is no sufficient evidence proving the causation as pleaded in SOC §81.

(1)  Hui in fact disclosed his directorship in TAGZ in the 2008 Employment Contract, and in his verbal disclosure to Parker before the 4 December 2009 Chime Board Meeting.  No one in the Group had ever complained about his directorship in TAGZ, no one had ever asked Hui to resign from TAGZ, and no one had ever raised that the Foshan Transaction should be considered carefully or be reconsidered because of Hui’s directorship in TAGZ.

(2)  According to KP Chan, everyone in the Group knew that Hui knew Fong.

(3)  With all the aforesaid in their knowledge, SW Directors still approved the Foshan Transaction by the 12 December 2009 SW Resolution.

253.  SW is trying to rely upon KP Chan’s evidence to prove the causation issue.  At §37 of his witness statement, KP Chan said:

“Had Hui properly disclosed his connections with Fong to the Chime Board, I would expect the Chime Board to have insisted on exercising greater scrutiny of the actions of Hui in connection with the Foshan Transaction. For instance, the Chime Board would have insisted that Hui did not vote on the Foshan Transaction in his capacity as a Chime director, in which case the Foshan Transaction would not have gone ahead.”

254.  Under cross-examination, KP Chan said that had Hui properly disclosed his connections with Fong to the Chime Board, he would call for an adjournment to further study the figures in the Foshan Transaction.  He would also suggest that Hui should not vote in the Chime Board when the Chime Board was considering the Foshan Transaction.[82] However, KP Chan did not say what he would do at the SW Board level.

255.  Bearing in mind that the causation as pleaded in the SOC is “… had such disclosure been made, the board of [SW] would have adopted a more prudent and cautious approach towards the Foshan Transaction …” (emphasis added), KP Chan’s evidence does not support the case pleaded by SW.

256.  The case on causation as pleaded by SW is not proved.

E2.6  Expert evidence

257.  The parties have adduced expert evidence concerning the valuation of the Foshan Site.  SW’s expert is Lau, and Hui’s expert is Mr  Sham CK William (“Sham”).  The respective assessments of the value of the Foshan Site by the two experts are as follows:

(1)  As at 31 October 2009 (“the 2009 Valuations”):

Lau - RMB 126.5 million to 150 million

Sham - RMB 922 million to 982 million

(2)  As at 17 May 2019 (“the 2019 Valuations”):

(a)  “clear site” basis:

Lau - RMB 1.094 billion to 1.223 billion

Sham - RMB 1.555 billion to 1.73 billion

(b)  “as is” basis[83]:

Lau – RMB 4.637 billion

Sham – RMB 5.07 billion

258.  There is also a valuation report by Jones Lang LaSalle (“the 2012 JLL Report”) dated 20 September 2012.  The JLL Report was commissioned by CAL. According to the JLL Report, as at 15 July 2012, the capital value of the Foshan Site was RMB 1.11 billion (subject to vacant possession) and RMB 1 billion (subject to the alienation restriction concerning the Self-Use Portion).

259.  In my view, as to the 2009 Valuations, it would not be necessary to go into the details of those valuations and to determine whose valuation is more accurate.   As said in [107] above, this is not a trial of a claim against Norton.  The issue is whether it would be reasonable for Hui to rely upon the Norton Reports.  The 2009 Valuation by Sham assessed the value of the Foshan Site at RMB 922 million to 982 million.  The 2012 JLL Report assessed the value of the site at RMB 1.11 billion to RMB 1 billion.  One must not forget that there was a downturn in the Mainland real property market in 2010 and 2011.  In view of all these, it cannot be said that Hui’s reliance on the figure provided in Norton Final Report, ie RMB 1.24 billion, is unreasonable.  See also Jong’s admission as set out in [242] above.

260.  The 2019 Valuations would be relevant to the mitigation issue mentioned below.

E2.7  Mitigation

261.  As mentioned in [81] above, Chime and SW entered into the Settlement Agreement with Fong and Tremendous on 6 September 2016, under which the Group would receive RMB 185 million from Fong, and the Group would exit from the Foshan Transaction.

262.  I agree with Mr Man that the Settlement Agreement is not a reasonable mitigation of loss by SW.  In order to have a reasonable mitigation, SW should assess the potential growth in the value of the Foshan Site before agreeing to the figure in the Settlement Agreement.  Even according to Lau’s 2019 Valuation, the value of the Foshan Site as at 17 May 2019 (“clear site” basis) would be RMB 1.094 billion to 1.223 billion.  This is very close to the figure in the Norton Final Report, ie RMB 1.24 billion.  Had the Foshan Site been retained, SW could likely have recouped its losses.

263.  In my judgment, SW has not reasonably mitigated its loss and damage by failing to take steps to assess the potential growth in the value of the Foshan Site before agreeing to the figure in the Settlement Agreement.

E2.8  Statutory Reliefs

264.  Based upon my ruling on the pleading issues and the discussion as set out in the above, SW has failed in its claim against Hui.  In the circumstances, it would not be necessary for me to go into the Statutory Reliefs.

E3.  Other matters

265.  The above would be sufficient for the disposal of this case.  With no disrespect to counsel, I am not prepared to address each and every point raised by counsel in their respective submissions in this judgment.  For avoidance of doubt, the points raised by counsel which have not been expressly dealt with in this judgment should not be regarded as having been overlooked by this court. All the points made by counsel in their respective written and oral submissions in fact have been duly considered.

F.  ANSWERS TO THE ISSUES

266.  Based upon the above, the answers to the issues as set out in Section D above are as follows:

(1)  At the time of the 12 December 2009 SW Resolution, Hui was not a de facto director of SW.

(2)  Issue 2 does not arise.

(3)  Issue 3 does not arise.

(4)  SW has suffered loss and damage in respect of the Foshan Transaction.

(5)  SW has failed to prove that the loss and damage are caused by Hui.

(6)  Not necessary to consider issue (6).

(7)  SW has not reasonably mitigated its loss and damage.

(8)  Not necessary to consider issue (8).

267.  As a result of the above, SW’s claim must be dismissed.

G.  DISPOSITION

268.  I dismiss SW’s claim.

269.  Costs should follow the event.  There be a costs order nisi that costs of these proceedings (including costs reserved) be to Hui, with a certificate for 3 counsel, to be taxed if not agreed.  Unless an application for variation of this costs order nisi is made by a summons within 14 days, the costs order nisi shall become absolute without a further order.

270.  Lastly, I am grateful to all counsel for the helpful assistance rendered to this court.