THE BANK OF EAST ASIA, LTD v. LABOUR BUILDINGS LTD AND OTHERS

HCMP 769/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 769 OF 2002

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J U D G M E N T

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1.  This case has all the hallmarks of an ordinary debt recovery by a bank against a defaulting customer.

2.  The plaintiff bank (BEA, or the Bank) in 1995 was approached by the 1^st defendant (LBL) with whom there had been no prior connection, asking for financial assistance.  The upshot was that in 1996 it had agreed to lend to this new customer up to $40 million (later increased to $50 million) to meet the cost of redevelopment of its property in Chang Sha Street, Mongkok.  The primary security became a debenture (the 1999 Debenture) by which BEA took a charge over LBL’s assets and undertaking including a legal charge over the land in question.

3.  Demolition and reconstruction began.  The loan was advanced in tranches by instalments.  By 2000 a derelict building had been torn down and replaced by an edifice of 18 floors.  It was leased to the 2^nd  defendant (CSL).  There were also sub-leases, to the 3^rd to 16^th defendants.  They have left, driven off by this litigation, and are no longer involved.  LBL is still the owner, and CSL the lessee in possession.  The building has been remodelled.  Currently it is run as two hotels. 

4.  Of the amount advanced some was repaid, with interest.  This left by 1 March 2002 a balance of $47,139,733.06.  But none of that has been repaid.  BEA sues in contract to recover this amount and accrued interest and costs.  Against LBL and CSL it also sues in default of payment for possession of the property and mesne profits.  As at the first day of trial (3 September 2007) the debt had become $82,402,127.58 with interest accruing thereafter at $27,091.11 per day.

5.  So, a sizeable sum involved, but otherwise, a typical, ordinary debt recovery by a bank?

6.  The defences pleaded indicate an emphatic ‘No’.  This is anything but a typical and ordinary debt recovery.

7.  It is alleged that a particular, perhaps essential ingredient in the transaction was that BEA’s management at the highest level anticipated political advantage in becoming banker to this particular prospective customer. 

8.  A compelling feature of the terms of advance that came to be agreed was that interest margins were pared back to a bare minimum at the request of the borrower.  And the usual practice of a guarantee by the project sponsor, in this case the majority corporate shareholder, was also foregone, again at LBL’s management’s request. 

9.  Whether it was the political motive that had over-riding priority or otherwise, BEA’s servants and agents, namely its officers and solicitors, allowed the 1999 Debenture and prior security documents (inter alia what are called the 1997 Debenture and the Supplement to Debenture) to be executed without proper authority by LBL. 

10.  The result is that the debentures were unenforceable; in particular, the 1999 Debenture is not binding on LBL and BEA’s claim is unsustainable.

11.  Furthermore, or in the alternative, it is pleaded that two former directors of LBL, having their own agenda, contrary to the provisions of the security documents and in particular the 1997 Debenture, caused significant amounts of the advance paid, sub-totalling $10,307,000 and $7,649,411, to be drawn down for purposes otherwise than for the funding of LBL’s redevelopment at Mongkok.  These directors thereby were in breach of their fiduciary duties owed LBL. 

12.  It is alleged that key officers of BEA knew or turned a blind eye to this misconduct; thereby, the defence pleads dishonest assistance by BEA’s officers, alternatively breach of BEA’s duty of care owed to LBL. 

13.  LBL thus counterclaims for a declaration that the 1999 Debenture is null and void, and consequential damages. 

14.  BEA refutes vehemently that there were irregularities in the documents that render the 1999 Debenture and other securities unenforceable.  But if there were they were inconsequential and BEA and its officers and solicitors could not be expected to have been aware of such irregularities, in exercise of the rule in Turquand’s case.  Likewise, it refutes that there was any unauthorized disbursement of some of the loan moneys, much less that BEA knew of this or turned a blind eye.  LBL borrowed money to build a new skyscraper.  The project was completed some years ago.  The building is now occupied and run as a commercial enterprise.  LBL is profiting thereby whilst refusing to honour its commitment to repay the advance.  As Mr Whitehead SC leading the team representing BEA submitted at the outset of the trial:

“	This is a bona fide claim under a debenture where the borrower is in default.  The defence put up is nothing but smoke and mirrors, for the purpose of trying to get out of what is due to be repaid.”

15.  BEA maintains that as its primary position.  Further, it claims the defence is estopped from denying the validity of the 1999 Debenture.

16.  But if the 1999 Debenture is held to be unenforceable, as a counterclaim to the counterclaim it seeks recovery of the money advanced under an ineffectual transaction and interest thereon.

17.  A feature of this case is that there are not a lot of matters of fact which are in dispute; the documents entered into by the parties largely tell the story.  What is in issue is what lies behind the documents and what inferences may be drawn from what has not been recorded.

18.  I come next to give a brief portrait of the parties, followed by a summary of what took place that is not in contention.

19.  As the history unfolds I shall attempt to introduce circumstances which give rise to the defence’s contention that what emerged between the parties was not an ordinary run of the mill commercial relationship between a bank and its customer.  What emerged were failings in the documents so obvious that the BEA and its officers and solicitors could not have avoided being aware of them or put on notice.  A particular example was LBL’s Board’s minutes of the meeting authorizing execution of the 1999 Debenture, which the defence alleges is a forgery, for the meeting never took place.

BEA

20.  The Bank needs no introduction.  It is one of the foremost in Hong Kong with branches in cities throughout the region.

21.  In Hong Kong the Head Office is led by the Chief Executive Officer David Li and a Board of Directors including the Deputy CEO called Joseph Pang. 

22.  There are various departments beneath this senior management, each with its own hierarchy.  Pertinent to this case is the Business Development Department (BDD), whose main function is to drum up new business for the bank, and the Corporate Lending and Syndication Department (CLSD) formerly known as the Project Finance and Syndication Department.  The primary role of the officers of the CLSD is to consider the viability of prospective loans to customers asked for to finance projects, such as redevelopment of realty; thence to negotiate the particular terms with the customer before preparing and submitting a proposal and recommendation to the Bank’s Credit Committee.

23.  The CLSD’s Head of Department and Deputy Head were at the time this history unfolded William Chu and Christine Wong.  They are still with the bank in these positions and were primary witnesses in the trial. 

24.  In 1989 BEA applied to the Taiwan Ministry of Finance for permission to set up a representative office in Taipei.  For overseas banks looking for exposure in Taiwan, that represents the first rung of the ladder.

25.  At this time the ruling political party in Taiwan was the Kuomintang (KMT).  Thus the Ministry of Finance was under the control of the KMT.

26.  In 1989 BEA’s application was refused.  It tried again in 1992.  Again it was refused.  Then in April 1993 after a third attempt the approval came through.

27.  20 months later BEA applied again, this time to upgrade its status to a branch office.  According to press releases, this would allow it to provide banking facilities to Taiwanese investing in Mainland China. 

28.  No Hong Kong Bank at that time had the status of having a branch office in Taiwan, so there was the incentive to secure pole position in this potentially lucrative field. 

29.  But the problems re-emerged, through 1995 and into 1996.  It seems that the Taiwanese authorities were concerned about the level of shareholding in BEA beneficially held by Mainland interests.

30.  It was against this background that LBL came on the scene.

LBL

31.  As its name suggests LBL was born of an infant labour movement in Hong Kong in the 1950’s.

32.  The movement had strong ties with the KMT political party in Taiwan and its membership included not only Hongkongers but also individuals in Taiwan having common interests and goals.

33.  Title to the Chang Sha Street property vested in three founder members called Messrs Ho, Wong & Fung, who held the same in trust for the members of what was then known as the Labour Buildings Association.  The original building on site of five stories was built in about 1959.

34.  LBL was incorporated in 1963 and took title to the Chang Sha Street property.  Following an increase in capital in 1969, the shares were owned by the Hong Kong and Kowloon Trades Union Council (HKTU) as to 27%, by residents of Taiwan as to 32% and by residents of Hong Kong as to 41%.  In 1972 the HKTU assigned about 7% to various member associations and unions of the HKTU.

35.  Two directors in those early years were Pang Chun Hoi (Mr Pang) appointed in 1972 and Liew Nan Kiam (Mr Liew) appointed in 1986.

36.  Following completion of the building on site part of it was let out but some of it was occupied and run as the branch office and main camp of the KMT in Hong Kong.

37.  It is apparent that from these early years there were close ties between the KMT of Taiwan and the HKTU in Hong Kong.  The HKTU it is said was the operational arm of the KMT in Hong Kong, followed instructions given by and was financially supported by the KMT.  Mr Pang, the director I have referred to, was chairman of the HKTU but also a member of the KMT, and acted on instructions given by the KMT.  In Taiwan, the HKTU was recognized as a political and labour entity of Hong Kong.  It adopted for use here the KMT logo.

38.  In early 1996 there was on the face of it a major reconstruction of LBL, though in reality it seems it was all about the KMT assuming a commercial interest in LBL.  It came about in this way.

39.  A company called APH Hong Kong Limited (APH HK) was in 1994 incorporated in Hong Kong.  It was wholly owned by Asia Pacific Holdings Corporation (APHC) which itself was wholly owned by the KMT.

40.  Next, six individual shareholders of LBL, all of the KMT or otherwise connected who owned in total 73.2% of LBL assigned their interests to APH HK which thus became the majority shareholder.

41.  The HKTU and those member unions and associations to whom it had vested some of its shares in 1972 owned the balance of 26.8%.

42.  There were consequential changes to the Board.  Messrs Pang and Liew representing the HKTU and by now veteran directors kept their seats.  Mr Pang was appointed chairman.  Six others were appointed representing the majority shareholder.  Their names are Chen Chao Yang (C Y Chen), David Chen Shin (David Chen), Hsu Chi Ching (Mr Hsu), Huang Han Hsiang (Mr Huang), Charles Ma Chi Chun (Charles Ma) and Yang Chung Che (Mr Yang).

43.  Messrs Yang, Hsu and David Chen were also directors of APH HK.  Charles Ma was a director of the parent APHC.

44.  LBL since its incorporation and to date has not traded as a going concern; its sole asset is the Chang Sha Street building and site and the income generated therefrom.

BEA and LBL Get Together

45.  It was the new management following the restructure of LBL in 1995 who proposed to redevelop the Chang Sha Street site by demolition of the old outdated building and construction of that which now stands in its stead.

46.  Capital had to be raised.  The first connection between the parties seems to have been orchestrated by one Humphrey Wan of the BDD of the BEA, who was doing his job of looking out for new business.  He met Charles Ma and various other officers of LBL in November 1995.  Charles Ma told him of their plans.

47.  Humphrey Wan made a call report, the usual preliminary document which sets out what sort of assistance a customer, actual or potential, is looking for.  As is usual, the call report was circulated amongst various senior figures in BEA, including the CEO, David Li, and his deputy Mr Pang.

48.  The defence notes as significant that Humphrey Wan had underlined the connection with the KMT, and that on his copy Mr Li had noted in handwriting:

“	I like to meet them.  Should we consider to offer the facilities.”

49.  There were further meetings on 11 December 1995, and on several days in January 1996.  Mr Li, the CEO, attended one of them and he and the Deputy CEO appeared to maintain an active interest in the discussions.

50.  A meeting scheduled for 26 January 1996 was preceded by a note circulated amongst BEA’s officers headed:

“	Points to be Raised”.

No.4 read:

“	To request tactfully their assistance for our Taiwan Branch application.”

This was obvious reference to the applications that BEA had been pursuing, to that date without success, for enhanced status to branch office in Taipei.

51.  The defence during the trial was keen to ascertain what was discussed at this meeting, for the agenda underscored their contention that this was no ordinary commercial relationship.  There were no minutes or notes of what was said and Mr Strachan, leading counsel of the defence team, spent much time cross-examining the Bank’s officers on the topic.

52.  Negotiations moved forward.  William Chu and Christine Wong of the CLSD represented the Bank.  Then in May 1996 they jointly made a recommendation to BEA’s Credit Committee in favour of an advance of $40 million to LBL.

53.  Pertinent is the following passage which I repeat verbatim:

“

The Borrower’s ultimate parent company, APH, has a very strong Taiwan background as 99% of its shareholding is owned by the Kuomintang of the Republic of China in Taiwan.  The strong parentage lends us comfort in the integrity of the Borrower.  Also, this Facility could start a closer working relationship with them which would facilitate this Bank’s business expansion in Taiwan.”

54.  Also pertinent were the proposals concerning interest rates and the issue of a project guarantor.

55.  In the negotiations LBL had sought prime plus 0.25% in HKD or LIBOR + 1.5% in US$.  BEA had countered with prime + 0.5% and LIBOR + 2%.  LBL stood firm as to its figures even as BEA proposed to meet it half way.

56.  On the matter of project guarantor, a position that in the normal course would have been occupied by APH HK as majority shareholder, this was rejected on the basis that it was not their practice to provide a corporate guarantor.

57.  In their credit proposal William Chu and Christine Wong said of this:

“

At an interest rate of 0.5% pa over Prime or 1.5% pa over LIBOR, the pricing of this Facility is not particularly attractive.  But having taking into account that the general pricing paid by the APH group of companies in Taiwan is around 50bp, the lower return in this Facility could be treated as a price paid to open up working relationship with APH group in Taiwan in the future.”

This extract as was acknowledged contained a typographical mistake, for what was being offered was an interest rate of prime + 0.25%, the rate that LBL’s management had insisted upon.

58.  They also noted that there would be no corporate guarantee in the face of the refusal to provide one.

59.  By mid-May 1996 the Credit Committee approved the proposal.  An offer was prepared and sent to LBL.

60.  Then there followed a further concession at the request of LBL and acceded to by BEA; the dropping of another usual requirement that the shares of a prospective corporate borrower be pledged to the BEA.

61.  The facility was accepted by David Chen, one of the directors of LBL.  This happened on 7 August 1996. 

62.  And thus, as the defence contends, emerged an agreement whereby BEA was to advance to a new customer funds to finance a project at a much lower interest rate than it was initially and then subsequently prepared to accept, with far fewer precautions to protect it on default than were normal in transactions of this type. 

63.  As the defence contends, it was no coincidence that on 16 October 1996 the Ministry of Finance in Taiwan approved BEA’s upgrade from representative office to branch office.

The 1997 Debenture

64.  Members of LBL’s Board met on 17 January 1997 for the purpose of authorizing two of its directors, Mr Pang and Charles Ma, to execute the debenture under seal.

65.  The defence claims that the minutes of this meeting reveal irregularities of such consequence as to render the authorization invalid.  Further, that these were so obvious the Bank’s officers and solicitors must have known or at least were on notice about them.

66.  Two in particular emerged.  The first was that the directors exceeded their power to borrow.  The second, that the meeting was inquorate.

67.  The first stems from LBL’s Articles of Association.  By its terms Table A of the 1^st schedule of the Companies Ordinance (CO) was adopted, save for where the Articles otherwise provided.

68.  Regulation 81 of Table A gave the directors power to borrow monies and issue debentures provided that the moneys borrowed/secured by the directors would not at any time without the previous sanction of the company in general meeting exceed the nominal amount of the share capital of the Company for the time being issued.

69.  The share capital of LBL was $409,400.  There had been no prior increase, and no prior sanction by LBL in general meeting.

70.  BEA’s officers and solicitors would have been aware of this, for they had conducted a search of LBL and had on file copies of the Articles.

71.  The second goes to the requisite quorum for directors’ meetings of LBL. 

72.  Article 12 provided that it should be more than half of their number; so, at the time of the meeting, not less than five.  There were, in fact five present; namely:

C H Pang;

N K Liew;

C Y Chen;

Charles Ma;

C C Hsu.

73.  The three absent directors (C C Yang, David Chen and H H Huang) were it was said represented by proxy; respectively by Messrs Hsu, Hsu and Ma.

74.  The defence points to apparent difficulties.

75.  The first is that the Articles made no provision for the absentee directors to be present by proxy.

76.  The second goes to the matter of conflict of interest.

77.  Article 14 provides that:

“	no director shall vote in respect of any contract in which he is interested or any question arising thereon and if he does vote his vote shall not be counted nor shall he be counted towards the necessary quorum of directors.”

78.  Of those present, and who voted, C C Hsu was a director of APH HK.  And APH HK was a party to a document called the Subordination Agreement and thereby had an interest in the 1997 Debenture. 

79.  The Subordination Agreement as its name suggests subordinated moneys advanced from time to time by APH HK to the loan from the bank.  But there was an exemption, for APH HK had advanced some money in order to get the project started.  Repayment of that was not subordinated.

80.  Charles Ma also voted.  Yet he was a director of APHC, the parent of APH HK.  Based on these relationships it is the defence’s position that the meeting of 17 January was inquorate by two votes. 

81.  There is no concession by BEA that the meeting was inquorate or if it was that it invalidated the vote.  Nor is it conceded that BEA’s officers knew of this or were put on enquiry.

82.  Yet amongst the records retained and discovered was a letter of instruction from JSM to their counterparts representing LBL to the effect that the named directors of APH HK, including Mr Hsu, should abstain from voting.

83.  In any event the debenture was signed on 26 February 1997 and there were drawdowns.

84.  Again the defence contends irregularities, in that some payments were paid into an account of LBL not expressly permitted by the debenture.  The significance of this is that it permitted those funds intended to finance the redevelopment to be siphoned off to an alternative destination for the benefit of the majority shareholder’s rulers, and to the detriment of LBL and the minority shareholders.

85.  Meanwhile, by virtue of what happened shortly afterwards, it would seem that JSM came to recognize that the meeting of 17 January was irregular putting the 1997 Debenture at risk of being unenforceable.

The Supplement to Debenture

86.  The next event was occasioned by a request from LBL, furnished by Charles Ma, for more money; another $10 million.  This was considered and approved by the Credit Committee of BEA, upon the stated basis that a valuation of the project revealed a still satisfactory margin between its worth and money borrowed.

87.  Once again JSM were engaged.  They prepared and sent for signing draft minutes dealing with authorisation of the advance, and execution of what was to be called the Supplement to Debenture. 

88.  The Board met and passed a resolution on 13 October.

89.  But if the Board minutes preceding the signing of the 1997 Debenture were irregular, this was too.

90.  Once again the amount to be borrowed exceeded the share capital of LBL.  Once again the meeting was inquorate; even more obviously than before.  Only three of the directors were present; namely, Charles Ma, Mr Pang and Mr Hsu.  And of them only Mr Pang had no interest.

91.  As it transpired, unlike events that followed the resolution of 17 January 1997, LBL and the Bank did not rely on this resolution for the execution of the Supplement to Debenture.

92.  It is, I think, a safe bet that a member of JSM having retrieved the 1997 Debenture and other security documents for the purpose of protecting the Bank in the increase of funds to be borrowed, then noted the irregularities of the earlier meeting; there was correspondence with the Bank on the topic in October 1997.

93.  This gave rise to the apparent need to ratify; the next topic.

Ratification of the 1997 Debenture?

94.  There was correspondence about this which began when JSM wrote to LBL enclosing draft minutes whose purpose was, inter alia, to have the shareholders ratify LBL’s entry into the 1997 Debenture.  It also authorized the entering into of the Supplement to Debenture.

95.  The EGM was held on 26 November 1997.  The minutes did not, however, follow the draft submitted by JSM. 

96.  At any rate they purported to affirm the terms of the existing advance, to approve the further advance, and to alter the Articles thus to empower the directors to borrow any amount of money.

97.  The defence contends that by virtue of the ratification taking place after the Board meeting and not prior, as per regulation 81 Table A, there was no ratification.  Further, the minutes were flawed and the resolutions which were purportedly passed were invalid.

98.  In respect of that which was said to have ratified the 1997 Debenture, the flaw was that almost certainly — at least on a balance of probabilities — there was insufficient notice of the meeting.  For reasons I shall come to, a significant date on this point is 6 November 1997.  It is said of that, that notice of the meeting most likely was not sent out before that date.  Thus only 19 days notice was given; less than the requisite 21 days by two days.  Only a resolution by those present to abridge time would have saved the situation, and there was none.

99.  The Bank’s officers and solicitors should have been alive to ensure there was adequate notice, and with the chronology before them that notice actually given was very likely inadequate.

100.  The defence also takes issue with the validity of the third of the three resolutions, which was purportedly to give the directors unrestricted power to borrow money and issue debentures, thus removing the limitation imposed by regulation 81 Table A.

101.  Points were made as I shall come to, but the primary one was that having recorded what was proposed, came the result which was:

“	Passed.  As for wording, please request consultant Tai to co-ordinate and amend.”

102.  The reference to “consultant Tai” is to a solicitor in attendance at the meeting called Tai Shek Kwan of the firm Josip Ma & Co., who represented LBL.

103.  The defence contends that a resolution not passed in specific terms but in terms to be formulated later was plainly invalid.

104.  At any event, in reliance on the safe passage of the second resolution, the Supplement to Debenture was executed on 10 December 1997.

The 1999 Debenture

105.  This was the next event in the calendar, because at LBL’s request BEA had agreed to extend the date for repayment of the advance and interest by five years.

106.  The machinery deployed was a release of the 1997 Debenture and Supplement to Debenture consequent upon repayment of what was due, paid for by a fresh advance of like amount upon the security of a new debenture.

107.  It is the defence case that again the transaction suffered from irregularities, and that BEA’s officers and solicitors would have known about them or been put on notice.

108.  The all important authorization for the signatories (this time Messrs Hsu and Charles Ma) emerged in minutes of a Board meeting purportedly held on 17 September 1999.  I say purportedly because that is the date of the record.  Those present were said to be Charles Ma, Mr Pang, Mr Liew, C Y Chen and Mr Huang.

109.  But there were preliminary events, which the defence contend establish that the meeting could not have taken place before 29 October 1999, and probably did not take place at all.

110.  First was that the Credit Committee’s notification of approval of the extension of the advance did not emerge until 14 September, which was faxed to LBL for Charles Ma’s attention on the same day.

111.  JSM were as before instructed.  By letter of 25 October they forwarded to LBL (Attn: Mr Charles Ma) drafts of the appropriate documents, including Board minutes.  Significant in the draft minutes was paragraph 6, depicting a document required:

“

6.

A Letter of Acknowledge to be issued into by Asia Pacific Holdings Corporation (the ‘Covenantor’) in favour of the Lender whereby the Covenantor undertakes to fund the outstanding Construction Costs (as defined in the debenture) (as lender) on terms and conditions therein mentioned;”

112.  By further letter of 28 October, JSM imposed the direction that those directors who held office in APH HK should abstain from voting.  In fact, the draft minutes were so phrased to spell out not only their names, but that of the director of the parent company APHC; presumably Charles Ma.

113.  Charles Ma responded by fax of 27 October calling for a number of amendments for consideration.  Of particular interest is a revision of clause 6 of the proposed minutes.

114.  These amendments were acceptable to the Bank.  JSM wrote on 29 October, a key date as I shall come to:

“	All the amendments made by the Company are accepted by the Bank.  We enclose therefore marked up amended draft for your reference.”

115.  The amendment draft incorporated an amended clause 6, now to read as follows:

“

6.

A Letter of Acknowledge to be issued by Asia Pacific Holdings Corporation (the ‘Covenantor’) in favour of the Lender whereby the Covenantor undertakes to supervise the Borrower in strengthening its financial management and operation so as to fulfil its obligation under the Facilities on terms and conditions therein mentioned;”

And this, the defence says, is compelling evidence that the meeting, if held at all, could not have been held before this date.  And why?  Because the Board minutes of 17 September contained this clause precisely in its redrafted form.

116.  There are the defence contends further irregularities.

117.  Of these, the first is that as before the directors had no power to authorize borrowing beyond the share capital of LBL.  The resolution purportedly passed to give unlimited power at the EGM of 26 November 1997 was not passed as a special resolution, this being an essential ingredient in a resolution to amend the Articles of a company.

118.  The second is that at the meeting a draft of the 1999 Debenture was tabled, when in fact it was not forwarded for consideration until 25 October.

119.  The third, the meeting took place but three days after the Credit Committee of the BEA had approved the extension, well before the terms thereof had been worked out.

120.  The fourth, of the five directors said to have been in Taiwan and in attendance, two and almost certainly a third were not in Taiwan.

121.  Finally, fifthly, the draft minutes appear to have been filled in by Charles Ma, and he almost certainly was not in Taiwan on 17 September.  Furthermore, he crossed out reference to the director of APHC having to abstain from voting.  He of course was that director.  The meeting was thus inquorate.

122.  Furthermore, it is contended that the officers and particularly the solicitors of BEA knew or were on notice about all or most of these irregularities; JSM because they were responsible for the drafting and for overseeing the transaction for the protection of their client, and the officers because of the timing of the meeting relative to the credit approval.

123.  I shall come in due course to BEA’s response.  Suffice to say for the moment that the only irregularity conceded is the date of the meeting, and that otherwise it was proper and sufficient authority for the execution of the 1999 Debenture.

124.  That was entered into and dated 29 October 1999.

The Building is Completed; What Next?

125.  There was a sea change in the structure of LBL which took place in 2001.  The KMT in the shape of APH HK pulled out altogether, selling its interest to an entity with apparently no allegiance to the KMT.  The Board of Directors came to be changed, unsurprisingly.  And although the sale was expressly made subject to mortgage, LBL, having under the old regime begun to reduce the debt, thereafter defaulted in meeting the terms of repayment, which culminated in this action, and the various defences raised.

126.  It now behoves me to condescend to detail.

127.  By assignment of 13 September 2001 APH HK without leave of the Bank or notice to it disposed of all of its shares in a sale to a company called Yan Hei Holdings Limited (Yan Hei).  The consideration of $2,781,600 recognised LBL’s obligation to meet the debt due to BEA, then standing at $46,785,385; Yan Hei expressly undertook to bear responsibility for that debt.  Clause 5 of the assignment read thus:

“

5.

The Transferee and the Transferor must preserve the Bank of East Asia loan to ensure the loan agreement of the Bank of East Asian unchanged, so as to prevent from causing financial confusion, to avoid causing loss.”

128.  The six directors appointed when APH HK first acquired its interest resigned upon completion of the sale.  Mr Pang, the former chairman, had retired in October 1999.  Mr Liew, the other veteran director, retired in August 2001, just prior to the sale.

129.  On the same date Lee Kwok Keung (K K Lee) was appointed.  His background is that in 1989 he became secretary to the HKTU.  Whilst holding that position he was in fact an aide of Mr Pang, who was then chairman of the HKTU.  In 1996 he was made the HKTU’s chairman, in place of the retiring Mr Pang.  He holds both offices to date.  He remains on the Board of LBL and was the sole witness for LBL at this trial, in rather startling circumstances as I shall come to.  Yan Hei was appointed to the Board in May 2002; on the same date so was someone called Leung Muk Lan.  In September 2002 the 2^nd defendant China States Limited (CSL) became a director.  Thus the Board now comprises four directors being K K Lee, Yan Hei, M L Leung and CSL.

130.  CSL was incorporated in September 2001 at about the same time as the sale to Yan Hei.  The next month it took a lease of the entire building.  That is the position to date.  A feature of that is that it pays LBL rent of only $108,000 per month.  This contrasts with the rent earned per floor when three floors of the old building were rented out 12 years ago at $30,000 per floor per month.

131.  The building is now operated as two hotels, called Tatami and Hampton, under the management of a company called Right Gain Management Limited (Right Gain).

132.  A valuation report made in October 2007 reveals the development is worth $102 million.

The Interested Parties — A Breakdown

133.  During the course of the litigation Mr Whitehead’s team undertook a forensic examination of some of the companies now associated with LBL and their members and directors as could be ascertained (some are registered overseas).  Mr Strachan protested at the relevance, but I permitted this course.  In fact as I shall come to there is relevance and I gain assistance in coming to findings of credibility, fact and law.

134.  A key participant as it turns out is David Wah Tsang Chan (David Chan).  He is the proprietor of the firm David W T Chan & Co., the solicitors who have throughout this litigation represented both LBL (the 1^st defendant) and CSL (the 2^nd defendant).  His firm’s former address is at 2001-2, Alliance Building; it has since moved and now occupies 17 Floor, Nan Fung Tower.

135.  David Chan holds all but one share of DWTC Services Limited and is one of two directors of that company.  The other director is Jan Kam.  She is a legal assistant at David W T Chan & Co.

136.  Another company relevant to the exercise is called C C Services Limited.  Its address is at the office of David W T Chan & Co.  DWTC Services Limited is a director of C C Services Limited.  The other is called Y L Chow.  He owns the remaining share in DWTC Services Limited.

137.  Three further interested parties are a company called DWTC Fortune USA Limited another called Maximus Developments Limited and a person called Chan Hon Tsang; this because they are the shareholders of Yan Hei.  Maximus Development and DWTC Fortune share a common address.

138.  The directors of Yan Hei are C C Services Limited and DWT Services Limited.

139.  I come to the company CSL.  Its majority shareholder is called Elgin Limited.  The registered office of both Elgin Limited and CSL is at the offices of David W T Chan & Co.  Its directors are Elgin Limited, C C Services limited and one Chan Hoi Fang.

140.  Finally to complete the picture I come to the management company Right Gain.  Its major shareholders are Yan Hei and Chan Hon Tsang (a major shareholder of Yan Hei).  Chan Hon Tsang is a director of Right Gain.  The other is someone called Yiu Wan Ying.  His address is at the office of David W T Chan & Co.

141.  So, what comes out of this is that David Chan, solicitor, has by virtue of his control over C C Services Limited and DWTC Services Limited total control over Yan Hei.  And Yan Hei is the majority shareholder of LBL, and a director of LBL.

142.  He is also through his control of C C Services Limited a voice on the Board of CSL.

Funding the Litigation

143.  There was an EGM of LBL conducted on 18 April 2002 which is relevant if not conclusive on this topic.  In attendance was Madam Leung Muk Lan representing Yan Hei, the majority shareholder.  She chaired the meeting.  Also in attendance were various others of the minority shareholders.  The meeting was conducted at the offices of David W T Chan & Co., solicitors to the majority shareholder.

144.  There was reference to this litigation which had begun life in March 2002, a month earlier.  There was reference to some of the monies advanced by loan by BEA for construction costs having gone missing; that this was a serious problem, requiring investigation.

145.  It was resolved that David W T Chan solicitors should represent LBL in the litigation.  It was also resolved that Yan Hei would be responsible for the legal costs.

146.  This was confirmed from the witness box by K K Lee in cross-examination in two exchanges:

“	Q.	Now the next matter is rather important.  Read on ‘items to be determined, all shareholders discussed and resolved as follows.’  And then proposed Resolution No.1.  Details: Appoint David W T Chan Solicitors’ firm as the legal representative of this company to litigate with the Bank of East Asia Limited.’  And then ‘Yan Hei Holdings Limited would be responsible for the legal costs,’ do you see that?
	A.	Yes.
	Q.	And this resolution was unanimously passed.
	A.	Yes.
	Q.	So is it correct that the costs of this litigation are being financed, not by the company itself but by one of its shareholders, Yan Hei?
	A.	Yes.
		…
	Q.	Just one question, Mr Lee.  Yan Hei are paying for this litigation, did you ever ask David Chan how the money for this very expensive litigation is being assembled?
	A.	No, I did not ask it.
	Q.	You never bothered to ask how this litigation is being funded?
	A.	No.  Because Yan Hei has said it would be responsible for the costs.”

147.  Mr Strachan at some point in his closing address said that he had instructions to record that this was not the case; that Yan Hei was not funding the litigation.  Of course, I accept that the instruction was given, although the source was not revealed.

148.  But this statement from the Bar table ran contrary to the unchallenged evidence from his client’s director and sole witness.  Further, there was no evidence or other documentary account that the resolution passed on 18 April 2002 did not spell out the truth, or if it did that it had since been countermanded.

The Evidence of Lee Kwok Keung

149.  K K Lee is fluent in English both in reading and writing but chose to give his evidence in Cantonese.

150.  He made a witness statement for prospective adoption as his evidence in chief.  That was dated 13 February 2006.  He made a supplemental statement on 24 September 2007.  These were written out in English, which he could read and understand.

151.  But from the witness box Mr Lee had to confess that he had signed both without reading them first.  In fact the first time he read either was a few days before giving evidence, having as is usual accepted the invitation to refresh his memory.  Further, whilst he was satisfied with the truth and accuracy of the supplemental statement and adopted the contents for his evidence, he felt obliged to make wholesale alterations to his earlier statement before he could do the same with the contents of that.

152.  Furthermore, Mr Lee had made four affirmations in connection with various interlocutory matters that were advanced in the lead-up to trial.  And he confessed that he had sworn to the truth and accuracy of these without reading any of them either.  Asked why he had not read any of these documents, his response was:

“	Because I was highly busy and I had no time to read.”

153.  Taken in cross-examination to the first witness statement Mr Lee said that, as with the other statement and the four affirmations, it was prepared by LBL’s solicitor David Chan.  Then there was this exchange:

“	Q.	Mr Lee, if you look at the first statement beginning at page 328, it runs to page 340, there is 12 pages.
	A.	Yes.
	Q.	It would only take you I suggest a few minutes to read, wouldn’t it?
	A.	Yes.
	Q.	It would be a very dangerous thing to sign an important document like this without reading it because it may contain matters which were untruthful or erroneous.
	A.	Right.
	Q.	Well, Mr Lee, why did you really sign this?  Is it correct, I suggest to you, that you just signed anything that solicitor Chan writes down for you and puts in front of you to sign?  Is that what the truth of this is?
	A.	Yes.
	Q.	Now, of this statement, and you can take it from me there are 48 paragraphs in it, of which you have either amended part or all of 20 of those 48 paragraphs.
		…
	A.	Yes.”

154.  Thereafter Mr Lee was taken to what were significant changes in his witness statement; in some instance complete paragraphs, otherwise one or more sentences or parts of sentences; there were 16 in all.

155.  In respect of each of these there was this exchange in these or similar words:

“	Q.	You have deleted this paragraph (or sentence) because it’s incorrect?
	A.	Right.
	Q.	And who made that up?
	A.	Solicitor Chan.”

156.  I pause here because at some stage after this counsel on both sides indicated there was disagreement between them as to the meaning of the Chine the questions put to Mr Lee; in particular “Who made it up?”  Those for the Bank said that it meant “Who fabricated the paragraph?”  Those for LBL said it meant “Who prepared the paragraph?”

157.  I was invited to refer this issue to my interpreter as the final arbiter and I did so.  She said that by translating back she came up with the verb “composed”.  It was generally agreed that this was a neutral expression which could go either way, depending upon the context.

158.  What is of particular concern however, is that the passages expunged for being incorrect were all significant and some were fact heavy; for instance that the actual cost of construction of the building was “only $22,894,500, a ‘fact’ he confessed was in fact not correct.  There was other reference to Mr Lee recalling what Mr Pang the then Chairman of the HKTU and of the Board of LBL had told him; namely, the following:

“	He (Mr Pang) said that a construction loan of less than $30 millions should be enough, but owing to some political reasons at Kuomintang the plaintiff (Bank) offered to lend $20 millions more under some excuses …”

He said this was not correct either.

159.  This begs the question, if these were incorrect statements how did they came to be in Mr Lee’s witness statement?  David Chan, the composer of it, could not have got it from Mr Pang.  He was elderly when he retired and died some years ago.  And there is no other apparent source.

160.  And David Chan chose not to clarify by volunteering to go into the witness box himself, though he was in court and aware of the difficulties. 

161.  This material were it to have been deposed to by Mr Lee as truthful and correct would have been against BEA’s interests and in favour of his client, and of its major shareholder which he controlled and controls.

162.  Conscious that I am of the seriousness of this proposition, I have to say that the prospect that “made up” or “composed” means in the context “invented” or “fabricated” is a real one.

163.  Needless to say, this all has an adverse effect when it comes to my assessing the worth of the evidence of K K Lee.

Who or What is Driving the Defence

164.  This becomes apparent from the following circumstances, which have emerged since APH HK left the scene and Yan Hei came to it:

(1)	Until APH HK sold there had been no default with the Bank and no claim of irregularity in the debentures or of misconduct including fraud and forgery.
(2)	This emerged four years after the first drawdown, in October 2001 when Yan Hei became the majority shareholder of LBL.  David Chan controls Yan Hei and all along has been its solicitor.  He became solicitor for LBL.  He also controls CSL, and is its solicitor.  He has represented LBL and CSL throughout the litigation.
(3)	Yan Hei has funded the litigation through the 5½ years to trial, and 42 days of trial.  Four counsel were engaged for the trial.
(4)	To avoid perjuring himself, K K Lee was obliged to strike out large pieces of his witness statement, in circumstances giving rise to the prospect that parts of it had been made up (in the sinister meaning of those words).

165.  In the circumstances I am satisfied that whilst the defendants are LBL and CSL the litigator is in reality Yan Hei, orchestrated and controlled by David Chan.

166.  This has a significance to which I shall return.

The Issues

1.	Was there a political issue, called the Kuomintang Factor, which caused senior management of BEA to disregard getting the loan documents and procedures right?
2.	Was the 1997 Debenture invalid because power to authorize the borrowing was outside the directors’ powers, and or because the meeting authorising its execution was inquorate?
3.	Did BEA dishonestly assist or turn a blind eye to the misappropriation of some of the loan?
4.	(a)	Was the 1997 Debenture ratified by the shareholders and did they authorize the further advance?
	(b)	Did they give the directors unlimited borrowing powers?
5.	Was the 1999 Debenture invalid because of irregularities in the authorizing of its execution; in particular, because the Board minutes of 17 September 1999 were a forgery?
6.	If there were any irregularities in the process leading up to the execution of the securities as to render them invalid but for ratification and or the rule in Turquand’s case, is the integrity of the securities saved by exercise of the rule?
7.	In any event can BEA rely on the doctrine of estoppel to enforce repayment?
8.	If the debentures, in particular the 1999 Debenture, are invalid, is BEA entitled to recover the amount advanced and interest thereon by restitution?

The Kuomintang Factor

167.  There is no question but that LBL through its director and spokesman Charles Ma was able to negotiate more favourable terms than BEA was at first instance prepared to offer.

168.  The defence case as argued, and pressed in cross-examination of the bank officers William Chu and his second in command Christine Wong, goes further.  It is that at various meetings leading up to the making and acceptance of the Bank’s loan offer, the matter of seeking assistance to the upgrade of the Bank’s status in Taiwan through KMT channels was raised, and more likely than not received a favourable response.  After all, the KMT connection was mentioned from time to time; particularly it was referred to in the agenda for the meeting of 26 January 1996, and senior executives including the CEO and his deputy appeared to be taking an unusual interest in what was otherwise an ordinary application to borrow money.

169.  And, it is said, this involvement bore fruit, with the upgrade going through a bit later.

170.  Thus it is contended the Bank was in the unusual situation of being beholden to a customer offering not only unusually favourable terms, but in being lax when it came to the formalities and the documents.  Further, that the Bank assisted or at least turned a blind eye to irregularities which included the channelling of some of the borrowed money away from its purported destination, the construction project, and into KMT pockets.  This was engineered by Charles Ma and Mr Hsu, two of the directors with direct links with the KMT.  Thus, the majority shareholder effectively stole from LBL at the expense of LBL and its minority shareholders.

171.  A feature of the defence’s stance in respect of this issue is that the KMT in the shape of the recently incorporated APH HK came onto the scene suddenly and for the sole purpose of commercial gain; that it was at arm’s length from the minority shareholders, the main one of which was and remains the HKTU.  

172.  My reading of the history and development of what was to become LBL suggests otherwise.  The KMT was from the outset very much involved with LBL and its members including the HKTU which was in effect its branch in Hong Kong.  It provided financial support.  Most of the HKTU were of the KMT.  Far from being arm’s length they were closely knitted together.  The advent of APH HK did not alter that.  It was a restructure of LBL assuredly to provide a more attractive proposition for a lending bank in the funding of the rebuilding.

173.  And that worked.  The excerpt from the report that went to the Credit Committee that I have reproduced at paragraph 53 indicates that the strong parentage influenced the recommendation to proceed.

174.  Mr Strachan’s concerted efforts to get concessions out of William Chu and Christine Wong in lengthy cross-examinations of them both did not in the end achieve that.

175.  Their accounts from the witness box were that there were no notes produced of what took place at the early meetings attended by senior figures from the Bank, including the meeting of 26 January, because no notes were taken.  This particular event was a lunch in BEA’s executive dining room and was more of a social occasion.  The so-called agenda was merely a guide for those present, in case it became opportune to raise a matter in conversation.  Furthermore, as a general rule minutes or notes were not taken when the meeting was attended by those from the upper reaches of the Bank.

176.  Both said they were aware of BEA’s wanting to upgrade its presence in Taiwan to branch status.  Both were aware of the heavy KMT involvement in LBL, that it was the ruling party in Taiwan.  But both denied that there was any pressure exerted by those above them. 

177.  That the CEO and his deputy Mr Pang met representatives of the prospective customer was by no means out of the ordinary and certainly did not establish or even suggest that they were looking to curry favour.

178.  JSM were instructed to protect the Bank’s interests given the size of the advance and they left the detail to them.  Otherwise the loan and its documents proceeded from inception to conclusion as an ordinary commercial loan, like the hundreds of others that are processed by their department of the Bank.

179.  I accept as the truth all that they said on the topic.

180.  As I find the Kuomintang Factor did not amount to anything.  The clues which the defence seized upon to establish this were but straws in the wind.

The 1997 Debenture

181.  Was the authorization to borrow more than the amount of share capital, given at the Board meeting of 17 January 1997, irregular? 

182.  Mr Whitehead did not really seek to argue against that proposition.  The answer is as I find ‘Yes’.

183.  Regulation 81 Table A is clear on the point, limiting the directors accordingly, without previous sanction of LBL in general meeting.  And there was no previous sanction.

184.  The second purported irregularity is that the meeting was inquorate.

185.  But was it?

186.  JSM certainly believed so.  In a letter to LBL’s solicitor of 9 December 1996 on the topic they wrote:

“

We note from the Articles of Association of Labour Buildings Ltd. that (a) quorum of a board meeting consists of half of all directors and (b) interested directors may not be counted in the quorum and may not vote.  Please note that 3 of the directors of Labour Buildings Ltd. namely, 楊宗哲, 許志慶and 陳鑫 are also directors of APH Hong Kong Ltd., another party in the proposed transaction and are accordingly deemed to be interested in the transaction.  Please therefore arrange for the 3 relevant directors abstained from the meeting.”

The characters represent C C Yang, C C Hsu and David Chen.

187.  Disregarding for the moment that the Articles provide that for a quorum more than half of the directors had to be present, it seems to be somewhat of a dereliction of duty by JSM that having received and studied the Board resolution wherein this direction was disregarded it was not then spotted and made good.

188.  But the question remains, was JSM correct in deciding that the APH HK directors were interested?

189.  Mr Strachan submitted that they were; furthermore, that the director of the parent company APHC was also interested, making thus four in all.  He queried the legitimacy of the three directors not present C C Yang, David Chen and H H Huang being represented by proxy.  He took me to Palmers Company Law at para. 8.303.1:

“	… Proxies may be allowed by the Articles.”

190.  As the Articles of LBL made no such provision their votes had to be discounted.  In any event, two of them were interested and could not be counted anyway.  Further, the two proxies were also interested so should not have voted either in their own right or for the absentees.

191.  The Article going to the issue of interest is no.14, part of which reads:

“

14.

… And no Director shall vote in respect of any contract in which he is interested or any question arising thereon and if he does vote his vote shall not be counted nor shall he be counted towards the necessary quorum of Directors. …”

192.  The interest, Mr Strachan submitted, was clear cut, deriving from those directors who held directorships in APH HK which was an interested party by virtue of the Subordination Agreement.

193.  Mr Whitehead had a contrary view.  He submitted that the purpose of Article 14 was to avoid a conflict of interest, and that meant a direct interest.  The four directors were not personally interested in the proposed contract.  A directorship in an interested party does not constitute an interest.

194.  This view is supported in a judgment by Lightman J in the case Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] BCC 474, where the judge allowed an appeal from a Master’s order for summary judgment and gave leave to defend.

195.  On the point he said at p.476:

“

A director of a company owes a fiduciary duty to the company to act bona fide in the best interests of the company and to prefer its interests to his own where they conflict.  If a director on behalf of the company enters into any arrangement or transaction with himself or with a Company or firm in which he is interested, that arrangement or transaction may be set aside without enquiry as to whether the company has suffered thereby (‘the self-dealing rule’); but it is a defence to such a claim that the shareholders of the company have consented to the transaction, and if the articles of association of the company provide that a director may vote in matters in which he is interested the self dealing rule is excluded.”

At the trial, whose reference is at [1995] BCC 1000, Deputy Judge Steinfeld QC said at p.1014:

“

In consequence as a matter of the general law [a director] is not permitted to enter into a transaction with his company in which he has a personal interest save with the informed consent of the shareholders given in general meeting.  If he does so, the transaction is voidable at the suit of the company.  This rule, often referred to as the ‘self-dealing rule’, is an application of the general principle of trust law which forbids a trustee from profiting from the trust and from placing himself in a position in which his duty to his beneficiaries conflicts with his own personal interest.  It is a rule founded on the proposition that, human nature being what it is, it would be too much to expect any fiduciary in regard to such a transaction to be truly able to place the interests of his beneficiaries above his own personal interests.”

196.  And in a Privy Council case going back two centuries, that being North-West Transportation Co. v Beatty [1887] 12 App Cases 589, Sir Richard Bagally said at p.593:

“

a director of a company is precluded from dealing, on behalf of the company, with himself, and from entering into engagements in which he has a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound by fiduciary duty to protect … Any such dealing or engagement may however, be affirmed or adopted by the company, provided such affirmance or adoption is not brought about by unfair or improper means, and is not illegal or fraudulent or oppressive towards those shareholders who oppose it.”

197.  It is a fact that but for the presence of APH HK in LBL the affected directors would not be on the Board, representing the interests of APH HK.  That is of course a common occurrence, and there is nothing wrong about that, unless a director so appointed advances the cause of the company he represents to its benefit and to the disadvantage of the company on whose Board he is sitting.

198.  As Lord Denning said in Boulting v ACTAT [1963] 1 QB 606 at p.626:

“

Or take a nominee director, that is, a director of a company who is nominated by a large shareholder to represent his interests.  There is nothing wrong in it.  It is done every day.  Nothing wrong, that is, so long as the director is left free to exercise his best judgment in the interests of the company which he serves.  But if he is put upon terms that he is bound to act in the affairs of the company in accordance with the directions of his patron, it is beyond doubt unlawful … or if he agrees to subordinate the interests of the company to the interests of his patron, it is conduct oppressive to the other shareholders for which the patron can be brought to book … So, also, if a director of a company becomes a member of a trade union on the terms that he is to act in the company’s affairs on the instructions of the trade union, or in accordance with the policy of the trade union (rather than according to what he thinks best in the interests of the company), such an agreement of membership is unlawful.  It is contrary to public policy that any director should be made to deny his trust and throw over the interests of those whom he is bound to protect … In each one of these cases the reason is simple: it is wrong to induce another to act inconsistently with the duty of fidelity which he has undertaken by contract or trust to perform.”

199.  With these and other authorities supporting the proposition that a director of a shareholder is not per se interested in a contract entered into by the shareholder, JSM were, as I find, being overly cautious when they gave the direction forbidding those named directors from participating in the vote, albeit that their direction was ignored and they apparently failed to spot that when they received the minutes.

200.  Besides, as Mr Whitehead submitted and I accept, there was no conflict amongst the parties.  The company LBL, its shareholders, principally APH HK and the HKTU, and its Board all had a common goal and that was to redevelop LBL’s property at Chang Sha Street.  Funds had to be borrowed for the purpose.

201.  The Subordination Agreement was not a burden.  It served to regulate repayment of money so far borrowed to get the project underway, for the old building had been demolished and piling for the new one was in the course of construction.  Thus this repayment was exempt from subordination whilst any other borrowing for another purpose was not.  There was therefore no burdening; no hardship on any side, for the money having been borrowed would have had to have been repaid as a debt due in any event.

202.  Dealing with the matter of voting by proxy, Mr Whitehead made the point that Palmer was authority for the proposition that proxies may be allowed by the Articles, but not that they were necessarily disallowed if the Articles were silent about this.

203.  I agree.  There is no rule that I know of that fetters the directors in the conduct of meetings, provided there is no dereliction of their duties to the company.

204.  If there is any doubt about this it is resolved by regulation 100 of Table A which reads in part:

“	The directors may meet together for the dispatch of business, adjourn and otherwise regulate their meetings as they think fit.”

205.  Proxy voting is not prohibited; nor should it be.  It is not a rarity, and has the very practical advantage of allowing a director to participate even when unavailable to attend in person.

The Supplement to Debenture

206.  Mr Strachan submitted in his closing speech at paras. 305 to 328 that this is and was not binding because the meeting of 13 October 1997 was inquorate and the directors who voted exceeded their power to borrow.

207.  But as I have stated the parties did not rely on this meeting and the resolutions purportedly passed.  This was dealt with in General Meeting.

208.  I come to that next.

The Extraordinary General Meeting of 26 November 1997

209.  JSM having discovered the irregularities of the 1997 Debenture alerted the Bank and then LBL to the need for ratification by shareholders.  Charles Ma made mild objection, not on the papers for the purpose of taking advantage of this apparent blunder, but because he believed there already had been ratification at the company’s AGM.  When it was pointed out that that had not happened he accepted there had to be a further shareholders’ meeting.  Besides, he was pressing BEA for the extra advance of $10 million, which had not been paid out, presumably because of the perceived inadequacy of the Board meeting of 13 October 1997.

210.  JSM sent a draft of minutes required to be considered and adopted to LBL by letter of 27 October 1997.  These were so couched to ratify the 1997 Debenture and authorize the entry into the Supplement to Debenture.

211.  Charles Ma’s not hard pressed for attempt to avoid a shareholders’ meeting because he believed there had been ratification already was by letter to BEA dated 5 November.  He also stated that the shareholders knew of and approved the further advance.  He concluded:

“	Therefore, we would be grateful if your bank could give us convenience in the procedural matters.”

212.  The response was a letter over the signature of William Chu dated 6 November 2007, to the effect that a shareholders’ meeting was required to validate the original loan retrospectively and approve the new loan.

213.  Then there followed the EGM, held on 26 November.  There are no longer available any copies of notices sent out for this meeting.  There must have been notice however, for the minutes record that 97.08% of the shareholders were present.

214.  The defence contention of inadequacy of notice derives from regulation 52 of Table A, and the fact that the 3^rd resolution was to alter LBL’s Articles by giving the directors unlimited power to borrow.

215.  Section 13(1) of the CO requires that the altering of a company’s articles require a special resolution, and regulation 52 that for special resolutions notice must be not less than 21 days, exclusive of the day it has been served.

216.  The first matter for consideration and determination is as to whether ratification was possible because regulation 81 of Table A speaks of prior not subsequent ratification.

217.  Mr Whitehead submitted that prior ratification was a contractual provision between the company and its members, and did not displace the common law principle of ratification subsequently.

218.  He quoted from two cases; the first, Bamford v Bamford [1970] 1 Ch 212, in which Harman LJ said from page 237:

“

It is trite law, I had thought, that if directors do acts, as they do every day, especially in private companies, which, perhaps because there is no quorum, or because their appointment was defective, or because sometimes there are no directors properly appointed at all, or because they are actuated by improper motives, they go on doing for years, carrying on the business of the company in the way in which, if properly constituted, they should carry it on, and then they find that everything has been so to speak wrongly done because it was not done by a proper board, such directors can, by making a full and frank disclosure and calling together the general body of the shareholders, obtain absolution and forgiveness of their sins; and provided the acts are not ultra vires the company as a whole everything will go on as if it had been done all right from the beginning.  I cannot believe that that is not a commonplace of company law.  It is done every day.  Of course, if the majority of the general meeting will not forgive and approve, the directors must pay for it … The only question is whether the allotment, having been made, as one must assume, in bad faith, is voidable and can be avoided at the instance of the company — at their instance only and of no one else, because the wrong, if wrong it be, is a wrong done to the company.  If that be right, the company, which had the right to recall the allotment, has also the right to approve of it and forgive it; and I see no difficulty at all in supposing that the ratification by the decision of December 15 in the general meeting of the company was a perfectly good ‘whitewash’ of that which up to that time was a voidiable transaction.  And that is the end of the matter.”

219.  In Rolled Steel Products v British Steel Corp [1986] 1 Ch 246, Slade LJ at p.296 said the same thing rather more succinctly:

“	However, the clear general principle is that any act that falls within the corporate capacity of a company will bind it if it is done with the unanimous consents of all shareholders or is subsequently ratified by each consents.”

220.  Mr Strachan advanced the proposition that in these cases there was no indication that the companies involved had an article requiring ratification to be prior.  If subsequent ratification were sufficient, that would render the provision of the requirement of previous sanction otiose.

221.  It seems to me and I so find that LBL’s members were entitled to meet to ratify a directors’ resolution after the event.  The regulation in Table A in question is not otiose; it simply gives the members the contractual right to ratify by another means.

222.  The point raised by the defence that notice to the shareholders was inadequate arises from the date of the Bank’s letter confirming the need for a meeting, being 6 November 1997. 

223.  Mr Strachan advanced the proposition that more likely than not Charles Ma would not have given notice any earlier than receipt of that confirmation; hence the inadequacy by two days.

224.  Mr Strachan alerted me to the provision of section 114(3) CO which provides that a meeting of a company called on shorter notice than specified either by the CO or the Articles will be deemed to have been duly called:

“	if it is so agreed … by a majority in number of the members having the right to attend and vote at the meeting, being a majority together holding not less than 95% in nominal value of the shares giving a right to attend and vote at the meeting.”

225.  But he went on to submit that that did not assist the cause of the Bank.

226.  He cited the case of re Pearce Duff & Co. Ltd [1969] All ER 222, in which on the point Buckley J said at p.224:

“

… The Companies Act, 1948, s.141(2), requires twenty-one days’ notice in the case of a special resolution, with the proviso as to resolutions being passed on short notice which is to be found in that subsection which I need not read at length.  In my judgment, that proviso requires the persons who agree to a resolution being passed on short notice to appreciate that the resolution is being passed on short notice and to agree to its being so passed with that consideration in their minds.  I think that it is clear that in the present case the shareholders who signed the consent did not have it in their minds at all that the initial notice was defective in point of time.  So, in my judgment, this consent does not cure the matter in that way.”

227.  In this case there is no evidence that the shareholders present and voting, albeit more than 95% of the membership, had appreciated that notice was short and the resolution was passed with that in mind.

228.  The counter to that proposition was put up by Mr Whitehead.

229.  First the practical feature that there is nothing in the evidence to presuppose that notice of the EGM could only have been given on or after 6 November 1997.  After all, there was correspondence going back to 18 October on the topic.  And JSM had sent a draft of the proposed minutes on 27 October, with reference to the requisite notices to be sent out.  It could not, he submitted, in the absence of any evidence to that effect, be said that more likely than not notice was irregular.  The almost 100% turnout suggested on the balance of probabilities that notice had in fact been regular.

230.  And short notice will not of itself render the subsequent meeting invalid. 

231.  He cited the case Browne v La Trinidad (1887) 37 Ch D 1, where Lindley LJ said at p.17:

“

… I think that, so far, Mr Marten’s argument is right, and if the Plaintiff had complained that the meeting of directors convened at such a short notice was not duly convened, and had sought the interference of the Court to prevent the directors from acting on a resolution passed at it, I can understand that he would have had a plausible case.  But he did nothing of the kind.  He took no notice of the matter.  He did not say that it was inconvenient for him to attend, and he did not ask the directors to adjourn it.  He does nothing at all until this notice convening the extraordinary meeting has been issued and circulated, nor until four days before the meeting.  His contention now is that what he calls this irregularity in serving the notice upon him, renders it incompetent for the shareholders to pass the resolution to consider which they have had notice to meet.  It appears to me that, if we gave effect to such an argument as this, we should be paralysing the whole course of business of these companies.  It is competent for directors to call meetings, it is competent for shareholders to pass resolutions, and the most that can be said here is that there is or may be some irregularity, but an irregularity (if such it be) which can be cured at any moment.  In such case the Court never interferes.  I think it is most important that the Court should hold fast to the rule upon which it has always acted, not to interfere for the purpose of forcing companies to conduct their business according to the strictest rules, where the irregularity complained of can be set right at any moment.”

232.  This case was followed by Deputy Judge K K Pang (as he then was) in Hong Kong, in the case Yick Hok Wing v Chan Yook Ming [1997] 1 HKC 49.  Suffice for me to read from the headnote, held at para.(2):

“

(2)

Short notice did not itself render the subsequent meeting invalid.  The court would be reluctant to interfere with an irregularity in convening a meeting which could be cured at any time.  But where there was prima facie evidence to suggest that the notice of meeting was highly irregular, the court was entitled to examine the intention of those convening the meeting by considering the nature and effect of the resolutions passed in order to decide whether the directors were competent to act in the meeting.  Browne v La Trinidad (1887) 37 Ch D 1 and Re Homer District Consolidated Gold Mines, ex p Smith (1888) 39 Ch D 546 applied (at 56H-57G).”

233.  It serves for me to find, and I do so, that the best that the defence could hope for is that notice could have been short by only 2 days out of 21 and that is by no means certain.  At the meeting where very nearly all the shareholders were present all resolutions were unanimously passed.  And there was nothing controversial about the resolutions, looking to pursue courses of action for the common good.

234.  For me to hold the meeting was invalid for want of notice would be to presuppose there was want of notice with nothing concrete to go on and then take a purely technical point where there was no miscarriage of justice.

235.  I decline to do so, and find no such invalidity.

236.  I come next to deal with the defence’s case that the resolution purportedly passed as resolution 3 could not hold good for two reasons; the first, that the resolution being a special one requires not less than three quarters who voted to vote in favour of it.  There was however nothing on the record to show the numbers who voted for or against (if any); the second, that the wording was invalid for want of specificity.

237.  As to the first matter of voting; it is dealt with in the text Company Law in Hong Kong - Practice and Procedure.  I quote from para.5.121:

“	Special Resolutions
	Introduction
	A special resolution is a resolution passed by not less than three quarters of the votes cast by members at a general meeting of which not less than 21 days’ notice, specifying the intention to propose the resolution as a special resolution, has been duly given.”

I have already dealt with the notice point.  At 5.123:

“	Further, pursuant to section 116(2) of the CO, unless a poll is demanded, a declaration of the chairman that a special resolution is carried on a show of hands shall be conclusive evidence of the fact without proof of the number of proportion of the votes recorded in favour of or against the resolution.
	…
	However, a chairman’s declaration is not conclusive where on the face of the declaration, it is shown that the resolution has not been passed by the majority required by the statute.”

238.  Standing back, and reading the minutes as a disinterested observer, and recognizing that a special resolution is usually required for the more important things that a company is required to do, it would not be difficult to treat the chairman’s commentary of:

“	Passed, as for wording please request consultant Tai to co-ordinate and amend.”

as in fact shorthand for passed unanimously on the terms spelt out. 

239.  Mr Tai the solicitor in attendance representing LBL was I am sure not in attendance for fun.  He was there to ensure that the meeting was conducted appropriately such that resolutions purportedly passed were in fact passed.

240.  There was nothing to suggest otherwise; I am prepared so to find.

241.  As to the lack of specificity; I come to that next.

242.  It is a matter of common sense and natural justice that a vital feature of the passing of a special resolution to change the borrowing powers of the directors requires the resolution passed to match that which was put up to the members.

243.  But that does not mean in precisely the same wording.

244.  The matter was dealt with in the case In re Moorgate Mercantile Holdings Limited [1980] WLR 227.  Slade J was dealing with whether or not a special resolution had been validly passed in terms of section 141(1) of the Companies Act 1948.  First at p.230 he rehearsed the relevant terms:

“	Section 141(2) of that Act, omitting an immaterial proviso, defines a ‘special resolution’ as follows:
	‘	A resolution shall be a special resolution when it has been passed by such a majority as is required for the passing of an extraordinary resolution and at a general meeting of which not less than 21 days’ notice, specifying the intention to propose the resolution as a special resolution, has been given: …’”

Then he analysed various authorities before stating at p.241:

“	… In the light of this analysis of the authorities and of the wording of section 141(2), I shall now attempt to summarise what are in my judgment the relevant principles relating to notices of, and the subsequent amendment of, special resolution:
	(1)	If a notice of the intention to propose a special resolution is to be a valid notice for the purposes of section 141(2), it must identify the intended resolution by specifying either the text or the entire substance of the resolution which it is intended to propose.  In the case of a notice of intention to propose a special resolution, nothing is achieved by the addition of such words as ‘with such amendments and alterations as shall be determined upon at such meeting’.
	(2)	If a special resolution is to be validly passed in accordance with section 141(2), the resolution as passed must be the same resolution as that identified in the preceding notice; the phrase ‘the resolution’ in section 141(2) means ‘the aforesaid resolution’.
	(3)	A resolution as passed can properly be regarded as ‘the resolution’ identified in a preceding notice, even though (a) it departs in some respects from the text of a resolution set out in such notice — for example by correcting those grammatical or clerical errors which can be corrected as a matter of construction, or by reducing the words to more formal language — or (b) it is reduced into the form of a new text, which was not included in the notice, provided only that in either case there is no departure whatever from the substance.
	(4)	However, in deciding whether there is complete identity between the substance of a resolution as passed and the substance of an intended resolution as notified, there is no room for the court to apply the de minimis principle or a ‘limit of tolerance.’ The substance must be identical. Otherwise the condition precedent to the validity of a special resolution as passed, which is imposed by section 141(2), namely that notice has been given ‘specifying the intention to propose the resolution as a special resolution’ is not satisfied.
	(5)	It necessarily follows from the above propositions that an amendment to the previously circulated text of a special resolution can properly be put to and voted on at a meeting if, but only if, the amendment involves no departure from the substance of the circulated text, in the sense indicated in propositions (3) and (4) above.”

245.  In this case I have already stated that no copy of the notice calling the meeting has been found.  But I believe it not improper to take as read that it would have been in terms of the minutes which were recorded in Chinese.

246.  I am reading from an English translation appropriately certified.  The relevant parts are as follows:

“	Propose III
	Cause of Business:	In view of the present actual situation and Bank loan requirement, it is intended to have minor addition and deletion to the articles of association of this Company, please check and discuss.
	Particulars:	…
		2.	To increase Article 17 of the original articles of association:
			‘	The directors may exercise all the powers of the company to borrow money, even to exceed the nominal amount of the share capital of the company for the time being issued, and to mortgage or charge in undertaking, property and uncalled capital, or any part thereof, and to issue debentures, debenture stock, and, subject to section 57B of the Ordinance, convertible debentures and convertible debentures stock, and other securities whether outright or as security for any debt, liability or obligation of the company or of any third party.”

It was following this passage that was recorded:

“

Resolution:

Passed, as for wording, please request consultant Tai to co-ordinate and amend.”

247.  What becomes apparent and important in the context is what Mr Tai achieved in the drafting of the resolution for notification to the Registry.  Was it in a text involving no departure from the substance of the circulated text?

248.  That which came to be filed was in the following form:

“Company No.9545
THE COMPANIES ORDINANCE (CHAPTER 32)
------------------------------
SPECIAL RESOLUTION
OF
LABOUR BUILDINGS LIMITED
------------------------------
Passed on the 26th day of November, 1997
------------------------------
At an Extraordinary General Meeting of the Members of the Company duly convened and held at 8th Floor, Mascot House, 746 Nathan Road, Kowloon on Wednesday the 26th day of November 1997 the following Special Resolution was passed:
THAT the Articles of Association be and they are hereby amended in the following manner, namely:
(a)	…
(b)	By the insertion of Article 17 as follows:
	‘	The proviso of rule 81 of Table A does not apply to the Articles of Association of the Company.  Thus, the Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and to issue debentures, debenture Stock, and subject to section 57B of the Companies Ordinance, convertible debentures and convertible debenture stock, and other securities whether outright or as security for any debt, liability or obligation of the Company or of any third party.’
			(Signed)
			Chairman Pang Chun Hoi”

249.  Mr Strachan complained that the words in italics were added post resolution.

250.  I agree that this is so.  But not as I find to change the substance of what was passed.

251.  Mr Tai had made amendment, but not as I find to depart in any way from the substance.

252.  I am satisfied that what happened at the meeting was that the special resolution giving the directors unlimited power to authorize borrowing was properly passed.

253.  Thus at the meeting of 26 November 1997, the members:

(a)	ratified the 1997 Debenture;
(b)	authorized the Supplement to Debenture;
(c)	resolved to give the directors unlimited power to borrow.

The 1999 Debenture

254.  I now come to this security which by virtue of the extension for repayment of the loan asked for by LBL and approved of by BEA’s Credit Committee purported to replace the 1997 Debenture and Supplement to Debenture, and became, as it is now, the current security.

255.  I have already spelt out the grounds upon which the defence relies with the primary one being that the Board meeting authorizing execution of the new security, whose purported minutes record that it was held on 17 September, did not take place, so that the minutes are a forgery.

256.  In his closing submission Mr Whitehead conceded that I am entitled to infer that the date is wrong; that the minutes could not have come into existence before 29 October 1999.  He is right to do so.  The analysis undertaken by the defence cannot lead to any alternative.  But there is strong opposition to the allegation that there was no meeting, and that the minutes are a forgery.

257.  In response to that, Mr Strachan submitted that this was not just about a document having been accidentally dated with the wrong date.  The sole signatory of the minutes Charles Ma had sent a fax to JSM of 30 October 1999 which recorded in part:

“

2.

The Board of Directors had a meeting and discussed the matters of loan documents and signing long ago.  Director Hsu and I will come to sign on behalf.”

258.  This he submitted establishes there was deception, for the day before, being the earliest date possible, is hardly “long ago”.  Furthermore, there is the difficulty that Mr Pang, one of the directors purportedly present, did not leave Hong Kong for the whole of 1999.  As he thus submits:

“	It is crystal clear that [LBL] did not hold the ’17 September 1999’ board meeting on another date.”

259.  Thus it is the defence case that the minutes are a forgery, a lie unto themselves.

260.  That is the matter I shall now address.

The Law on Forgery

261.  As with all matters that go to establish facts out of evidence in dispute, the burden of proof falls upon he who alleges.  The standard of proof in civil cases is upon a balance of probabilities.  This standard does not change even if the allegation is a serious one such as one of dishonesty.  But nevertheless what is required to establish the misconduct complained of is a degree of probability commensurate with the occasion.

262.  This principle was examined by the Court of Final Appeal in Hong Kong in the case ADS v Brothers [2000] 3 HKCFAR 70.  In that case the judge at first instance had made a finding of fact on an allegation of fraud.  I record first a part of the headnote:

“	Fraudulent trading
	(1)	The standard of proof in civil cases, in which serious allegations of misconduct such as fraud were in issue, was on the preponderance of probabilities, but the degree of probability must be commensurate with the occasion.  ‘Commensurate with the occasion’ did not mean that the court was looking for a degree of probability higher than the civil standard.  Rather, it meant that the more inherently improbable the act in question, the more compelling would be the evidence needed to satisfy the court on a preponderance of probabilities.  Here, the Judge understood perfectly well what was required.”

Lord Hoffmann said at p.78:

“

In Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 at pp.586-587 Lord Nicholls of Birkenhead pointed out that if proof is required on a preponderance of probabilities (ie, a probability of >0.5 on a scale from 0 (impossibility) to 1 (certainty)), it is inconsistent to require a ‘degree of probability commensurate with the occasion’.  This suggests some other degree of probability, higher than >0.5, somewhere between the civil standard and the criminal standard, which the courts have wisely never attempted to define as a point on the probability scale.  The correct analysis is that the court is not looking for a higher degree of probability.  It is only that the more inherently improbable the act in question, the more compelling will be the evidence needed to satisfy the court on a preponderance of probability.

As an exercise in terminological hygiene, this analysis is, if I may respectfully say so, timely and faultless…”

At p.91 he went to the well-established rule that an allegation of fraud has to be pleaded with sufficient particularity to give the defendant fair notice of the case he has to meet.  Then he went on to say:

“

In addition to particularity in the pleadings, fairness requires that the adverse findings which the Judge will be invited to make should have been put squarely to the witness in cross-examination, so that he can have the opportunity to offer an explanation.  The Court has examined in detail the relevant parts of the cross-examination of Mr Brothers and I cannot find any place in which the two allegations about his state of mind were adequately put to him.”

And finally, at p.96:

“

In my opinion, therefore, the evidence to contradict Mr Brothers is insubstantial.  It is hard to escape the conclusion that when the Judge made his finding at para.6.13.45 that Mr Brothers ‘deliberately withheld the cash flow and, notwithstanding his belief in support, he was dishonest in doing so’, he must have forgotten what he had said 250 pages earlier in his judgment about the standard of proof required to sustain a finding of dishonesty.  The onus was on ADS to prove by compelling evidence that Mr Brothers concealed the cash flow.  The evidence must be sufficient to overcome the inherent improbability that he would have done so.  In my view, they produced nothing more than a speculative theory.  They did not discharge the burden of proof and for that reason also the misrepresentation appeal must be dismissed.”

263.  The principle was central to findings of fact and law that the CFA made and delivered judgment on in the infamous case Nina Kung v Wang Din Shin [2005] 8 HKCFAR.  I recite part of the headnote:

“

If someone wished to dispute the validity of a will … he bore the evidential burden of putting the relevant ground of challenge in issue.  F had positively pleaded forgery in circumstances necessarily implying the existence of a broader conspiracy.  He had the evidential burden of adducing evidence probative of such forgery.  When weighing up and assessing the probabilities to be ascribed to such evidence, the court must bear in mind the seriousness of the misconduct alleged, recognising that it carried an inherent degree of improbability.  Also, here the court was invited to reach a conclusion of forgery as an inference on the basis of circumstantial evidence, but any such inference must be properly grounded in the primary facts.  Inferences of fraud or serious misconduct could only be drawn where such inferences were compelling; it was not permissible merely to choose what might be the more likely of two guesses if neither was properly justified by the primary facts.”

Ribeiro PJ, delivering judgment, also referred to Re H & Others (Minors) at p.440:

“	G.4	The relevance of Re H to the respondent’s case on forgery
		181.	There was much discussion as to the extent to which the principle explained in Re H & Others (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563, is applicable in the present case in relation to the respondent’s allegation of forgery.
		182.	The majority in the House of Lords in Re H & Others (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 held that the civil standard requiring proof on a balance of probabilities continues to apply where, in civil proceedings, an allegation is made of criminal (or similarly serious) misconduct, but explained that such standard is to be applied flexibly, factoring in the inherently greater improbability of serious misconduct as compared with lesser forms of misconduct, and therefore requiring the person bearing the burden of proving the allegation to prove it with evidence of a commensurate cogency.  The well-known passage in the speech of Lord Nicholls of Birkenhead states as follows:
			‘	The balance of probability standard means that a court is satisfied an event occurred if the court considers that, on the evidence, the occurrence of the event was more likely than not.  When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability.  Fraud is usually less likely than negligence.  Deliberate physical injury is usually less likely than accidental physical injury.  A step-father is usually less likely to have repeatedly raped and had non-consensual oral sex with his under age stepdaughter than on some occasion to have lost his temper and slapped her.  Built into the preponderance of probability standard is a generous degree of flexibility in respect of the seriousness of the allegation. (at p.586)”

Finally on the topic, is the case of siders that, on the evidence, the occurrence of the event was more likely than not.  When assessing the probabilities the court will have in mind as a factor, to whatever ece and Ivy Wong.  Ribeiro PJ said at p.354:

“	53.	The meaning and evidential status of the Chinese memorandum is discussed further below in the context of the Court of Appeal’s judgment.  Just what can be inferred on the basis of that document is in issue.  However, what is entirely clear is that fraud — by necessary implication fraud on the part of Lawrence and Ivy Wong — cannot legitimately be inferred, whether on the basis of the Chinese memorandum or on the basis of any of the other evidence in the case.
	54.	The fraud theory was simply not open to the Judge.  It is nowhere pleaded.  It was not explored in evidence and was never put to either Lawrence or Ivy Wong when they gave evidence at the trial.”

He then went on to quote a passage from the judgment of Lord Hoffmann in ADS v Brothers I have already referred to.

Is Forgery Made Out?

264.  Returning now to the facts of this case.  The fraudster, if fraud there was, was Charles Ma.  Realistically it could be no one else, for his signature and his alone is on the minutes, well recognisable from numerous letters and documents in the trial.

265.  Yet Charles Ma was not called to give evidence, to face fairly and squarely the serious allegation that he had committed fraud.  And there was no explanation as to why not, beyond that he is “probably somewhere in Taiwan”.  Needless to say he was not joined as a party or independently sued; there has been no complaint made to the police.  There is thus no evidence which might go to establish what did, or did not, take place prior to execution of the 1999 Debenture.

266.  It goes without saying that if there was a Board meeting but that it took place on a later date prior to the signing of the 1999 Debenture it could not be branded a forgery.

267.  There is this further anomaly; forgery invariably is an act undertaken to create something out of nothing for personal illicit gain.  Where is Charles Ma’s motivation to undertake seriously dishonest activity?  There is nothing contentious.  97% of LBL’s membership had voted in favour of the Bank’s participation in the project back in 1997.  It was entirely for the benefit of LBL that the 1999 Debenture be executed.  Nobody complained at the time or thereafter that the directors had not approved of and authorized the extension in the shape of this document.  Throughout the years of the project there had been unanimity in the meeting of minds.

268.  These are all compelling features of the case which go to the inherent improbability of Charles Ma committing so grave a sin as to have made up the minutes.

269.  Could the meeting have been held in circumstances where not all those said to have been at the meeting were physically present?

270.  Mr Whitehead took me back to Company Law in Hong Kong at 5.05:

“Alternative modes of conducting meeting
The gist of a meeting being the meeting of the minds, it is also not necessary that all persons must attend a meeting face-to-face in the same place provided that there are adequate audio-visual links to enable all persons to hear and be heard and to see and be seen.  In the words of Browne-Wilkinson V-C inByng v London Life Association:
‘	The rationale behind the requirement for meetings in the 1985 Act is that the members shall be able to attend in person so as to debate and vote on matters affecting the company.  Until recently this could only be achieved by everyone being physically present in the same room face to face.  Given modern technological advances, the same result can now be achieved without all the members coming face to face; without being physically in the same room they can be electronically in each other’s presence so as to hear and be heard and to see and be seen.  The fact that such a meeting could not have been foreseen at the time the first statutory requirements for meetings were laid down, does not require us to hold that such a meeting is not within the meaning of the word ‘meeting’ in the 1985 Act…’
The more difficult question, however, is whether a general meeting could be held through telephone conference.  It was held in Re Associated Color Laboratories Ltd that a meeting could not be held over the telephone or by similar means.  That is however not conclusive.  First, the Court placed specific emphasis on the company’s articles which provided for a physical meeting or a written resolution signed by all and said that the framers of the articles could not be taken to have contemplated a third way, namely, directors’ meetings over the telephone.  Second, this case was cited by counsel for the plaintiff in Byng v London Life Association in support of the argument that a meeting required an assembly of persons who were present face to face at one time and place and not separate assemblies at different places which, as cited above, was dismissed by the Court.  Applying the reasoning of Browne-Wilkinson V-C, there is no sound reason why a meeting could not be conducted via a telephone conference (let alone a video conference) during which all members could hear and be heard simultaneously and instantaneously.  This is also consistent with the dicta of Tadgell J in the Australian case of Bell & Another v Burton & Others on directors’ meetings:
‘	No doubt there is no necessity nowadays — if there ever was — that directors should gather physically together at a directors’ meeting.  In appropriate circumstances they may meet by assenting to a document, or by telephone, video link, or other electronic means which caters for a meeting of their minds.’”

271.  I have already referred to regulation 100 Table A which entitles the directors to conduct meetings as they see fit.  With some of the directors in Hong Kong and others in Taiwan it seems quite feasible that some less formal approach was taken, particularly as there could have been no potential dissent to what was to be resolved.  There could have been a conference call, or contemporaneous exchange of emails, or voting by proxy.  All these alternatives in the context I find to be perfectly reasonable and feasible. 

272.  As Ribeiro PJ said at p.360 in Ming v Ming:

“	Whether at the end of the day the court is entitled to draw the inference sought by the plaintiffs therefore depends on the evidence as a whole, the evidence both for and against such inference.”

273.  In the circumstances of this case I am not satisfied that the allegation of forgery of the minutes has been made out.

274.  The other allegations of irregularity of the minutes fall away consequent upon my findings on the validity of the EGM of 26 November 1997.

Improper Disbursements

275.  These allegations were pleaded in the Statement of Defence as amended.

276.  Paragraph 15 provided a number of excerpts from the 1997 Debenture.  At 15(f):

“	(f)	Clause 12.01 provides that:
		‘	All payments to be made hereunder by the lender to the Borrower in respect of each Drawing shall on the date of such Drawing be made available by the Lender to the Borrower by crediting the Current Account or by a cheque or cheques made payable to the Borrower or to its order or as the Borrower shall direct and drawn on a licensed bank in Hong Kong in immediately available funds.”

Paragraph 26 reads:

“	26.	Further or in further alternative, the Defendants aver and say that:
		(a)	The payment provision of the alleged banking facilities was provided for in Clause 12.01 of the 1st Debenture as pleaded in paragraph 15 hereinabove.
		(b)	On divers dates from 24th February 1997 to 8th July 1998, in breach of Clause 12.01 and without any or any proper authority from the 1st Defendant, the Plaintiff made payments of the total sum of HK$10,307,000,00 directly to 2 accounts of the 1st Defendant maintained with a Taiwan-controlled Hua Nan Commercial Bank operated by Kuomintang’s signatories instead of the designated current account under the 1997 Debenture.
		(c)	The said accounts in Hua Nan Commercial Bank were not operated for the benefit of the 1st Defendant and had nothing to do with the project of the Property.  The current management of the 1st Defendant was unable to trace the whereabouts of the fund transferred to the Hua Nan Commercial Bank accounts.
		(d)	Further, the Plaintiff, as the 1st Defendant’s banker, has a duty to exercise reasonable care and skill to handle the 1st Defendant’s bank accounts and the banking facilities being granted.  The Plaintiff has been in breach of this duty in relation to the said payments of HK$10,307,000.00 made by the Plaintiff.  Further, by reason of matters set out in paragraphs 23, 24 and 25 above and also in paragraphs 27 and 27A herein below, insofar as the Plaintiff had actual knowledge of the matters referred to therein in addition to the circumstances hereof, it is averred that in making the said payments of HK$10,307,000.00 directly to the said 2 accounts maintained with a Taiwan-controlled Hua Nan Commercial Bank, the Plaintiff had acted in knowing breach of Clause 12.01 of the 1st Debenture and had dishonestly assisted directors of the 1st Defendant at the material times in misappropriating the said HK$10,307,000.00 which should not have been paid out in the manner that was done and was therefore liable to account to the 1st Defendant for the same.  Accordingly it is averred that the 1st Defendant is not liable to the Plaintiff for any such amount.
		(e)	Further or alternatively, the Plaintiff should be ‘put on inquiry’ about the funds transferred or withdrawn by the 1st Defendant for this matter.
		(f)	The 1st Defendant had not retained the said HK$10,307,000.00 or any part thereof and the payment by the Plaintiff of the said HK$10,307,000.00 conferred no benefit on the 1st Defendant.”

Paragraph 27(b) onwards reads in part:

“	27	(b)	By …allowing monies to be drawn down by the 1st Defendant to pay back a total sum of HK$7,649,411.00 to APH which APH had previously, if at all, channelled through the 1st Defendant for payment out for various purposes of APH which were, to the knowledge of the Plaintiff, not for the benefit of the 1st Defendant (particularly when the Plaintiff could have but did not require the said sum of HK$7,649,411.00 to be subordinated to the indebtedness under the 1997 Debenture), the Plaintiff dishonestly assisted in the breaches of fiduciary duties of the directors of the 1st Defendant.  In any event the Plaintiff was at the very least in breach of its duty as set out in paragraph 23 above not to release any facilities under Tranches B and C;
		(c)	The Plaintiff knew that the said sum of HK$7,649,411.00 was not for the benefit of the 1st Defendant in that:
			(i)	The Plaintiff had a copy of the letter dated 17th October, 1996 from the 1st Defendant to its then solicitors which contained a breakdown of an alleged loan of HK$6,100,000.00 from APH to the 1st Defendant.  The breakdown included items such as loans of HK$2,430,000.00 to a shareholder of the 1st Defendant and management fees of HK$540,000.00 to APH which were unrelated to the construction project.  The parts of the loan alleged to have been used for construction purposes were under a separate heading described as ‘工程款’ in the said letter;
			(ii)	The amount of alleged shareholders’ loan from APH to the 1st Defendant at the HK$6,100,000.00 as at 17th October, 1996 was allegedly increased to HK$7,649,411.00 as at the date of the Subordination Agreement dated 26th February, 1997, when there was no activity on the part of the 1st Defendant in relation to the construction project during that period which would have necessitated any increase of such shareholder’s loan;
			(iii)	The Plaintiff did not permit monies to be drawn from Tranche A (which was for construction expenses) for repayment of the HK$7,649,411.00 but instead permitted a sum of HK$2,859,304.00 and another sum of HK$4,790,107,000 to be drawn respectively from Tranche B and Tranche C for such repayment;
		(d)	The applying for and using of such increased banking facilities, in particular for repaying the HK$7,649,411.00 to APH, in the name of D1 in manner as pleaded in (b) of this paragraph by one or more of the directors of the 1st Defendant at the material time were in breach of their fiduciary duties as directors to the 1st Defendant.
		(e)	The 1st Defendant avers that it has suffered loss and damages because of the said assistance of the Plaintiff to breach of fiduciary duties by directors of the 1st Defendant at the material times, or alternatively because of the Plaintiff’s said breach of duty to the 1st Defendant as set out in paragraph 27(b) above, and that the 1st Defendant would use whatever damages it is entitled to hereunder to offset against any liability it might have to the Plaintiff under these proceedings.
			…
		(h)	Instead of insisting on all shareholder’s loans from shareholders to the 1st Defendant to be subordinated to the banking facilities as one of the conditions for drawdown (as the Plaintiff is entitled to do under the Subordination Agreement with APH and the 1st Defendant), the Plaintiff without any or any proper inquiry or investigation permitted shareholders’ loans of HK$7,649,411.00 to be paid off with monies drawn down under Tranches B and C of the 1997 Debenture;
	…”

Finally in the counterclaim at paragraph 49:

“

49.

In the premises, the Plaintiff was liable to the 1st Defendant as constructive trustee, or alternatively in damages for breach of duties (including breach of contractual duty if (which is denied) the 1997 Debenture and the 1999 Debenture were valid and effective) and/or for dishonest assistance in the breach of fiduciary duties by the directors of the 1st Defendant (as hereinbefore pleaded), in relation to any misappropriation of funds obtained from the Plaintiff by the 1st Defendant’s directors before 2001.  Pending full discovery, the 1st Defendant avers that the amounts of $10,307,000.00 and $7,649,411.00 respectively referred to in paragraphs 26 and 27 above were part of the misappropriated fund.”

277.  The Hua Nan account in question is one of several held by LBL in its name.  The $10,307,000 was the sum total of seven drawdowns made by BEA into that account at the request in turn of Charles Ma or Mr Hsu between February 1997 and July 1998.

278.  The complaint is that the Bank knew or ought to have known that Charles Ma and Mr Hsu were of the KMT, to whom they owed allegiance ahead of their loyalty to LBL, and that they knew or ought to have known that paying the money otherwise than as designated in clause 12.01 of the 1997 Debenture put it at risk of being spirited away and thus otherwise than for use in the construction project.  Mr Strachan submitted:

“

603.

Thus P, when remitting the said 7 sums to the order of Charles Ma or Hsu Chi Ching, appeared to be content not to act in accordance with either of the only two methods of payment provided for by the 1st Debenture.  The consequence of the remission of these funds by inter bank transfers was that it rendered the destination of the funds very difficult to trace and facilitated the dissipation of the funds by the Kuomintang signatories (Charles Ma and Hsu Chi Ching) who operated the accounts.”

279.  What was lately established, by virtue of a court order asked for and made during the trial, requiring the Hua Nan Bank to produce LBL’s bank accounts for the period, was that at least some of these amounts were transferred to APH HK, which ran an account or accounts at the same bank.

280.  As can be seen in the excerpts from the pleadings, the $7,649,411 represents the total of $2,859,304 and $4,790,107, being amounts the Bank permitted to be excluded from the Subordination Agreement.  Further, the Bank permitted these sums to be repaid out of funds allocated for the project.

281.  It is said of this that the Bank’s officers by allowing the Subordination Agreement to be framed in this way knowingly assisted Charles Ma and others with allegiance to APH HK to favour APH HK at the expense of LBL.  Further, that the total figure was accepted at face value without any evidence that this was the total due.

282.  This resulted, Mr Strachan submitted, in Charles Ma being:

“	given a free hand by [BEA] to draw down $7,649,411 under the loan facility.  He was therefore enabled to dissipate such monies in anyway he saw fit.”

And further:

“

By disbursing the said sums at the instigation of Charles Ma and Hsu Chi Ching [BEA] dishonestly assisted the breaches of trust on the part of those persons.  It is also contended that P dishonestly assisted breaches of trust in connection with D1’s entry into the 2nd Debenture and the drawing of monies thereunder: …”

283.  In response, Mr Whitehead submitted that the annual accounts independently audited for the years under review made available by LBL to the Bank in terms of both debentures disclosed the total indebtedness which was acknowledged, properly reported and had never been disputed during the relevant times.  These accounts showed that by the end of 2000 the total amount due to the Bank was $44.385 million.  At that time $42.104 million had been expended on the project.

284.  These accounts were not then and have not now been challenged.  K K Lee was of no help to the cause; he said he had no personal knowledge of the accounts and he did not even know how much was borrowed from the Bank.

285.  But an interesting feature emerged following his wholesale redacting of his witness statement once in the witness box.  Clause 35 reads (in its original form) as follows:

“

35.

I was specifically asked by the 1st Defendant’s solicitors as to an alleged loan owed by the 1st Defendant to APH.  As the Chairman of HKTU (the 2nd largest shareholder of the 1st Defendant), I was always informed by Mr Pang sitting as the chairman of the 1st Defendant’s board.  I was not aware of any loan from APH to the 1st Defendant because the 1st Defendant had no expenses at all.  The 1st Defendant was merely the conduit of funding of HKTU missions by Kuomintang.  From my experience and knowledge of the practice of Kuomintang, the alleged sum of $7,649,411 ($2,859,304 + $4,790,107) should be funds for carrying out different political missions by different groups of Kuomintang members.”

Then it was that he required the last two sentences (in heavy case for ease of reference) to be crossed out explaining in cross-examination that they were incorrect.

286.  But of course he overlooked that LBL did have the expenditure associated with the project and that had to be funded.  So the 3^rd to last sentence was obviously wrong as well.

287.  Mr Whitehead went on to make four points concerning the drawdowns which totalled $10.307 million.  I spell them out verbatim:

“	204.1.	First, both accounts at Hua Nan Bank to which the 7 drawings were made belong to LBL, not to Mr Ma, not to Mr Hsu and certainly not to KMT.
	204.2.	Second, the signatories of these accounts were the directors of LBL including Mr Pang who represented the interest of HKTU.
	204.3.	Third, the Defendants made no genuine attempts to trace these monies until they made an application for a Bankers’ Books Order on the 26th day of the trial upon the suggestion from the legal team of the Bank.  In compliance with the order, Hua Nan Bank duly produced the bank statements in relation to the accounts of LBL and APH on 22 October and 5 November respectively.
	204.4.	Fourth and most important, the evidence establishes that this HK$10,307,000.00 was used for nothing else but the benefit of LBL.”

He went on to show from the material released how all but $700,000 of this amount can be seen to have gone to meet project costs.

288.  Further, he took me to the Hua Nan records to show that the two amounts which the defence now contends were wrongly utilised are in fact one amount; namely the $10.307 million which was used almost entirely for the construction project.

289.  I am satisfied on analysis that it has not been established that there was anything untoward in the disbursement of funds; in particular the specific sums referred to.

290.  Th  There is nothing to the point that the Subordination Agreement was in terms that unfairly favoured the majority shareholder to the detriment of LBL.  After all, there was a debt properly due, on account of project costs.  So it was repayable and BEA had agreed to fund the project costs and other incidental expenditure.  It was all part of the original terms negotiated and then settled. 

291.  I   I treat as accurate the accounts independently audited and the analysis undertaken by Mr Whitehead’s team to show that there was no spiriting off of any of the money.  In the result they were not able to account for every dollar.  But that is hardly surprising after this passage of time and with no project manager available to assist. 

292.  But in truth the burden is not on the Bank to prove any of this.

293.  There was as I find no misappropriation, no dishonest assistance by the Bank’s officers, and no breach of any fiduciary duty owed by the Bank to its customer LBL.

294.  For completeness I shall briefly touch on the law going to a bank’s duty where funds held in the Bank are misappropriated causing loss to the customer.

295.  The case of Barclays Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363 is on the point, the only material difference being that in this case the money taken was the customers, not the capital of a loan advanced.  I do not find this distinction to be a material one.

296.  St  Steyn J (as he then was) whose judgment it was, made the observation that the obligation should not be too irksome, for this would unreasonably hamper the effective transacting of bank business.  He quoted from the judgment in Lipkin Gorman (a firm) v Karpnale Ltd [1992] All ER 331 wherein Alliot J considered what a bank’s relevant contractual duties are towards a customer.

At p.349:

“

(1)

The bank is entitled to treat the customer’s mandate at its face value save in extreme cases.  (2) The bank is not obliged to question any transaction which is in accordance with the mandate, unless a reasonable banker would have grounds for believing that the authorised signatories are misusing their authority for the purpose of defrauding their principal or otherwise defeating his true intention.  (3)  It follows that if a bank does not have reasonable grounds for believing that there is fraud, it must pay.  (4)  Mere suspicion or unease do not constitute reasonable grounds and are not enough to justify a bank in failing to act in accordance with a mandate.  (5) A bank is not required to act as an amateur detective.”

Steyn J went on to identify a factor which might well be decisive at p.377:

“	Having stated what appears to me to be the governing principle, it may be useful to consider briefly how one should approach the problem.  Everything will no doubt depend on the particular facts of each case.  Factors such as the standing of the corporate customer, the bank’s knowledge of the signatory, the amount involved, the need for a prompt transfer, the presence of unusual features, and the scope and means for making reasonable inquiries may be relevant.  But there is one particular factor which will often be decisive.
	That is the consideration that, in the absence of telling indications to the contrary, a banker will usually approach a suggestion that a director of a corporate customer is trying to defraud the company with an initial reaction of instinctive disbelief.  In Sanders v MacLean (1883) 11 QBD 327 at 343 Bowen LJ observed:
	‘	But the practice of merchants, it is never superfluous to remark, is not based on the supposition of possible frauds.  The object of mercantile usages is to prevent the risk of insolvency, and of fraud; and any one who attempts to follow and understand the law merchant will soon find himself lost if he begins by assuming that merchants conduct their business on the basis of attempting to insure themselves against fraudulent dealing.  The contrary is the case.  Credit, not distrust, is the basis of commercial dealings; mercantile genius consists principally in knowing whom to trust and with whom to deal, and commercial intercourse and communication is no more based on the supposition of fraud than it is on the supposition of forgery.’
	That was, of course, a very different case, and the relationship between merchants is very different from the relationship between a banker and a customer.  But, it is right to say that trust, not distrust, is also the basis of a bank’s dealings with its customers.  And full weight must be given to this consideration before one is entitled, in a given case, to conclude that the banker had reasonable grounds for thinking that the other was part of a fraudulent scheme to defraud the company.”

Steyn J held on the facts that there was no want of probity on the part of Barclays Bank and no question of assisting a breach of trust arose.

297.  This judgment was expressly approved of and followed when Lipkin Gormanwent on appeal whose reference is [1989] 1 WLR 1340.

298.  In this case the only feature that might be said to have been out of the ordinary was that LBL in its drawdown notices requested the Bank to pay the funds on 7 occasions other than in strict accordance with clause 12.01 of the 1997 Debenture. 

299.  Mr Strachan made the point that this demonstrated that the Bank’s officers were ready to permit conduct that was in breach of the Debenture and permit drawdowns in anyway requested. 

300.  My view is that that was a technical breach in the extreme; one that could hardly have raised even half an eyebrow, given that it was an account in the customer’s name.  There was otherwise no clue of any dishonest activity; certainly not cogent and compelling evidence of dishonest activity.

The Turquand Rule

301.  The discussion that follows presupposes a result, contrary to that which I have arrived at, that there were irregularities not subsequently rectified by ratification at the various times now well documented when the security was charged or extended.

302.  In such circumstance the defence contends that the Bank’s officers and solicitors had actual knowledge of these irregularities or were put on notice about them so that the Bank could not seek protection behind this rule.

303.  The case is The Royal British Bank v Turquand [1856] 6 E&B 327.

304.  The rule states that a third party dealing with a company is presumed to know the contents of documents lodged with the Registrar and which are thus open to inspection, such as the Memorandum, the Articles, Annual Returns and so on. But the third party need not inquire into the regularity of internal proceedings, also known as the indoor management, conducted by the company.  Thus he may assume that steps which need to be taken for a particular act to be properly authorized have been taken.

305.  The rule is rationalized in Company Law in Hong Kong at para.9.012:

“

A third party dealing with a company may sometimes find it difficult to ascertain whether the transaction in question is duly authorised by the company even if he has examined the provisions of the memorandum or articles of association of the company before he enters into the transaction with the company.  For example, they are not in a position to compel the directors to prove that the shareholders have endorsed the transaction in question or insist on inspecting the minutes-book of the company.  For this reason, the law provides some protection to an outsider who deals with the company in good faith.”

306.  The application of the Turquand rule to a banker/outsider was considered by the House of Lords in Mahony v East Holyford Mining Co [1875] LR 7 HL 869 in which the official liquidators/respondent tried to recover from the bankers/appellant the amount of cheques signed by the purported directors and secretary of a bubble company, who had never been properly appointed.  Lord Chelmsford said at p.889:

“

We have a right to assume that the bankers, acting with proper caution, before they commenced transactions with the company, referred, as they were bound to do, to the articles of association, to ascertain in what manner the account which had been opened was to be drawn upon.  Beyond the particulars of the objects of the company, and information as to the mode in which the account was to be dealt with, which alone the bank was concerned to know, I do not consider that any more preliminary inquiries were necessary.”

Lord Hatherley provided guidance on the operation of the rule at p.894:

“	… when there are persons conducting the affairs of the company in a manner which appears to be perfectly consonant with the articles of association, then those so dealing with them, externally, are not to be affected by any irregularities which may take place in the internal management of the company.  They are entitled to presume that that of which only they can have knowledge, namely, the external acts, are rightly done, when those external acts purport to be performed in the mode in which they ought to be performed.  For instance, when a cheque is signed by three directors, they are entitled to assume that those directors are persons properly appointed for the purpose of performing that function, and have properly performed the function for which they have been appointed.”
	…
“	Now, if the question came to be which of two innocent parties (as it is said) was to suffer loss, I apprehend, my Lords, that in point of law what must be considered in cases of that kind is this: which of the two parties was bound to do, or to avoid, any act by which the loss has been sustained.  I think there can be no doubt that in this case the shareholders of the company were the persons who were bound to see that nobody usurped or assumed the office of director unduly; … Now whose business was it to see that that was all done properly?  It was the business of the shareholders to see that it was done, and properly done … if there is a fault on the one side or the other, it is on the side of those who allowed these transactions to take place, when they were not conducted by persons legitimately appointed on the part of the company.  On the other hand, on the part of the bankers, I see no possible mode by which they might have pursued their inquiries in the manner contended for at the Bar without requiring all the minute-books of the company to be produced to them, and without conducting a detailed investigation into all the transactions of the company as to the appointment of directors and the like — a duty they were not called upon to perform, and a duty which, if it was objected to, they could not have insisted upon performing.”

307.  A third party is entitled to assume the internal regularity of a company in executing a mortgage under seal even though the Board meeting of the company which authorised the execution of the mortgage was inquorate; see: County of Gloucester Bank v Rudry Merthyr [1895] 1 Ch.629.  In this case there was internal irregularity in the shape of an inquorate meeting which authorised execution of a mortgage.  It was held “that as between the company and the mortgagers, who had no notice of the irregularity, the execution of the deed was valid.”

308.  And here lies an established exception to the Turquand rule, namely, that the third party cannot pray in aid the rule if he knows of the irregularity or is put on enquiry by the circumstances; see, for example Liggett (Liverpool) v Barclays Bank [1928] 1 KB 48.

309.  A case in point is Rolled Steel Products v British Steel Corporation [1986] 1 Ch.246.  In this case a director procured the company to execute a guarantee in favour of a third party for the personal benefit of the director.  The third party was aware of the impropriety.  The Court of Appeal held the third party could not enforce the guarantee against the company.  Slade LJ said at p.292:

“

In the absence of notice to the contrary, the lenders would thus have been entitled to assume, on the authority of the principle in Turquand’s case, and on more general principles of the law of agency, that the directors of the borrowing company were acting properly and regularly in the internal management of its affairs and were borrowing for the purposes of the company’s business … However, a party dealing with a company cannot rely on the ostensible authority of its director to enter into a particular transaction, if it knows they in fact have no such authority because it is being entered into for improper purposes.  Neither the rule in Turquand’s case nor more general principles of law of agency will avail him in such circumstance.”

310.  The third party can be assumed to be put on enquiry as to an irregularity where there are unusual circumstances that ought to arouse his suspicion.  In these cases the rule shall not apply; see Company Law in Hong Kong at 9.014.

311.  Did BEA have knowledge or was it put on notice qua its officers or solicitors in their capacity as agent of BEA?

312.  In the circumstances of this case the spotlight really falls on JSM.  Although Christine Wong and William Chu had the material capacity to inspect and ensure regularity of procedures and documents, there would hardly have been any point were they to have done so having engaged lawyers whose role was expressly to protect the Bank’s interests with particular expertise in the performance of this important function.

313.  In this respect I repeat verbatim short extracts from Mr Strachan’s cross-examination of Christine Wong:

“	Q.	Because of the nature of your work, may the court take it that you have at least some familiarity with matters such as ensuring that your customer is properly authorised to borrow money from you?
	A.	In our usual procedures we would get our lawyer to handle the corporate authorisation because it is a very technical matter and on many occasions at the same time we have to deal with many customers at the same time, it’s impossible for us to review each and every single customer so we rely on our lawyer on their professionalism.  And let me emphasis the point here.  As this is a very technical issue we are confident that our lawyers are professional enough that they can handle all these matters properly and appropriately.”

Are a little further on:

“	Q.	And presumably, Ms Wong, when you’re proposing to lend moneys to a company you yourself get such information about that company as you can from official sources, such as its articles, and you do not rely exclusively upon your solicitors to get from the other side its Articles of Association and transmit them to you after the agreement has been executed.  Long question.
	A.	I don’t agree.  Because to me it is a very technical issue and very administrative thing and we let our lawyer to handle these issues.  And I knew that LBL had its own legal representative.  And the LBL’s lawyer had the responsibility to ensure that when his client signed on any documents that they got sufficient corporate authorisation to do so.”

314.  She and William Chu were entitled to rely on JSM’s certifying the correctness of the documentation and their opinion that the borrower (LBL) had full power to borrow at the various stages of the transaction; for instance by a letter of six pages of 27 February 1997 to that effect following execution and registering of the 1997 Debenture.

315.  So what of JSM?  Did they have knowledge or were they put on enquiry about irregularities, assuming that there were irregularities, that invalidated the securities?

316.  Given the task they were required to perform the answer can only be ‘yes’.  It was after all vital in the interests of the Bank to ensure the securities were enforceable.  By their own directions the 1997 Debenture was rendered unenforceable because the meeting authorizing it was on their view inquorate.  Although I have found otherwise there was also the difficulty about the directors’ limited power to borrow.  It was it seems their good fortune that LBL was prepared to co-operate by ratifying that debenture.  And there was the potential if not actual danger associated with the validity of the Board minutes of the meeting to authorize execution of the 1999 Debenture.

317.  I regret to have to say that JSM did not during the course of this transaction live up to their hard-won reputation for excellence of performance and reliability.

318.  That said, does the knowledge gained through performing as the bank’s solicitors and agents get to be attributed to the Bank, so as to bind the Bank?

319.  Mr Whitehead submitted not so, at least not in the circumstances of this case.  He took me to an excerpt from Gore-Browne On Companies, (45^th edition) at 8[20]:

“	Where the third party is a company, only notice to those in the company who are involved in the deal will defeat the rule.”

320.  He contended that as JSM are not persons in the Bank involved in the deal there is not notice.

321.  He also took me to the case of Saffron Walden Second Benefit Building Society v Rayner [1880] 14 Ch. D 406 which he contended supported the proposition that notice given to solicitors is not good notice to the persons for whom the solicitors are acting.  I quote from the headnote:

“	The Plaintiffs took a mortgage of a reversionary share in a testator’s estate, and gave notice of the incumbrance to a firm of solicitors who were acting for the trustees and executors in a Chancery suit to which the testator had been a party, and were employed by them in all matters relating to the testator’s estate in which professional assistance was required.  The solicitors wrote accepting the notice on behalf of the trustees. … There was no further proof of their having received notice of it until after notices of other incumbrances had been duly given to them:-
	Held, by the Court of Appeal, reversing the decision of Bacon, V.C., that notice to the solicitors was not good notice to the trustees.
	…
	Held, therefore, that the Plaintiffs must be postponed to the subsequent incumbrancers.
	Held, that the solicitors in accepting service of the notice on behalf of the trustees were not guilty of a misrepresentation of fact for which they could be made liable, but were acting under an opinion common to both parties, but which was erroneous in point of law, that their employment as solicitors enabled them effectually to accept service of the notice.”

322.  Mr Strachan on the other hand submitted that applying the ordinary rules of agency, the answer is clearly ‘Yes’.  He quoted from Bowstead and Reynolds on Agency, 18^th edition.  At Chapter 8, Principles and Third Parties, under the sub-heading Knowledge Acquired Through Agent:

“	(1)	The law may impute to a principal knowledge relating to the subject matter of the agency which the agent acquires while acting within the scope of his authority.
	(2)	…
	(3)	Where the principal has a duty to investigate and make disclosure, he may have imputed to him not only facts which he knows but also material facts of which he might expect to have been told by his agents.”

323.  There is further authority but suffice for me to say that I side with Mr Strachan on the point.

324.  The quote from Gore-Brown is limited to a particular situation not apposite to this case. 

325.  And the circumstances in Saffron Walden are distinguishable.  This can be seen upon a reading of the first part of the judgment of James LJ, at p.408.

“

JAMES, L.J.:-

In this case it is my misfortune to differ from the conclusion at which the Vice-Chancellor has arrived.  In the first place, his Lordship appears to have been of opinion that the notice given on behalf of the Plaintiffs to Messrs Stevens & Bawtree, who were persons acting as solicitors for the executors and to some extent for the trustees, was in itself sufficient notice to create a priority and to make the trustees liable to the same consequences as if the notice had been given to them personally.  That appears to me a startling proposition.  It would be imposing a most tremendous burden upon trustees to say that merely because they have employed a solicitor in effecting an investment of the trust funds upon mortgage, they have made him their agent to receive any notices of subsequent incumbrances or dealings by the cestuis que trust of that trust fund.  I cannot see any principle leading to such a conclusion.  I have had occasion several times to express my opinion about the fallacy of supposing that there is such a thing as the office of solicitor, that is to say, that a man has got a solicitor not as a person whom he is employing to do some particular business for him, either conveyancing, scrivening, or conducting an action, but as an official solicitor, and that because the solicitor has been in the habit of acting for him, or been employed to do something for him, that solicitor is his agent to bind him by anything he says, or to bind him by receiving notices or information.  There is no such officer known to the law.  A man has no more a solicitor in that sense than he has an accountant, or a baker, or butcher.  A person is a man’s accountant, or baker, or butcher, when the man chooses to employ him or deal with him, and the solicitor is his solicitor when he chooses to employ him and in the matter in which he is so employed.  Beyond that the solicitorship does not extend, and a man is not an agent for the purpose of receiving notice of an incumbrance created by a cestui que trust because he was the solicitor employed to invest the moneys, or even because afterwards he, for convenience, received from the mortgagor the interest and handed it by direction of the trustees to the different persons entitled to receive it.”

326.  In this case JSM were actually performing their function for and on behalf of BEA when knowledge was theirs if they had been alert to it.  This is enough to bring them within the rule that that knowledge was imputed to the Bank.

327.  Thus were I to have found there was irregularity, the Bank would not have been able to avoid the consequences by virtue of the indoor management rule propounded in Turquand’s case.

Estoppel

328.  Given the findings I have made on fact and law the Bank’s reliance on estoppel is now otiose.  But I shall deal with the plea in brief outline in case it becomes material.

329.  It emerges in paragraphs 16A and 26A of the Reply in this way:

“	1997 DEBENTURE ACTED UPON AND TREATED AS VALID BY 1ST DEFENDANT AND ITS DIRECTORS AND SHAREHOLDERS
	16A.	At all material times before the commencement of these proceedings the 1997 Debenture had been acted upon and treated as valid by the 1st Defendant, its directors and shareholders, and by the Plaintiff.  The 1997 Debenture was therefore binding on the 1st Defendant.  The 1st Defendant has acquiesced in and/or waived the alleged irregularities (if any) in the making or execution or otherwise of the 1997 Debenture now relied on, and/or is estopped from denying the validity of the same.
	1999 DEBENTURES ACTED UPON AND TREATED AS VALID BY 1ST DEFENDANT AND ITS DIRECTORS AND SHAREHOLDERS
	26A.	At all material times before the commencement of these proceedings the 1999 Debenture had been acted upon and treated as valid by the 1st Defendant, its directors and shareholders (including Yan Hei (Holdings) Limited), and by the Plaintiff.  The 1999 Debenture is therefore binding on the 1st Defendant.  The 1st Defendant has acquiesced in and/or waived the alleged irregularities (if any) in the making or execution or otherwise of the 1997 and 1999 Debentures now relied on, and/or is estopped from denying the validity of the same.”

330.  Mr Whitehead submitted that if it were to be found that there have been irregularities in the indoor management of LBL which were either known to the Bank or of which the Bank was put on enquiry, LBL by its conduct and that of its members and directors became estopped from denying the validity of the Debentures.

331.  He summarized the acts and I repeat that summary verbatim:

“	1.	The 1st and 2nd Debentures were signed by the directors of LBL and were affixed with the common seal of LBL.  The Debentures were registered against the Property and LBL in the relevant registries and became public documents.  The 1st Debenture was executed in the presence of LBL’s solicitors.
	2.	LBL submitted various documents (including architect certificates and progress reports) to the Bank pursuant to the terms of the Debentures.
	3.	LBL drew down under Tranches B and C to pay the Bank management/front-end fees under the Debentures.
	4.	The loan facility was reported to LBL’s shareholders in general meeting.
	5.	Shareholders holding 97.08% of the shareholding of LBL ratified and sanctioned the 1st Debenture and the loan facility at the EGM in November 1997.
	6.	LBL has repeatedly acknowledged the indebtedness in writing.
	7.	LBL negotiated the increase in facility from HK$40 million to HK$50 million and entered into the Supplemental Debenture.
	8.	LBL made drawn downs under the Debentures and accepted payments into its bank accounts.
	9.	LBL made repayments and obtained re-advances from the Bank.
	10.	LBL drew down under Tranches B and C to pay interest to the Bank under the Debentures.
	11.	LBL used the monies advanced by the Bank for the construction of the new building on the Property which is now used to run two hotels.
	12.	LBL recognised the loan facility in its audited financial statements.
	13.	LBL obtained from the Bank an extension of 1 month for the repayment of the indebtedness under the 1st Debenture.
	14.	LBL repaid the whole indebtedness under the 1st Debenture to the Bank on 29 October 1999.
	15.	LBL sought written consent from the Bank for sub-letting various units in the new building.
	16.	LBL repaid a total sum of HK$4.2 million to the Bank under the 2nd Debenture.
	17.	At no time before the commencement of this action did LBL dispute the validity and binding effect of the Debentures.”

332.  I was taken to the case Hong Kong Rifle Association v Hong Kong Shooting Association [2007] 4 HKLRD 121.  In that case Saunders J said that if the validity of proceedings at a meeting is to be challenged, appropriate action has to be taken at a reasonable time.  He said on the point at p.136:

“

70.

The law is that if the validity of proceedings at a meeting is to be challenged because of the absence of a quorum, appropriate action must be taken within a reasonable time.  If a meeting has reached decisions which are acted upon and treated as valid by all concerned, it is not within the competence of a person, not concerned at the time, to much later seek to invalidate the proceedings because of a lack of quorum: see Shackleton on the Law and Practice of Meetings (10th ed., 2006) para.6-06, and Re Plymouth Breweries (1967) 111 SJ 715.”

333.  Neither side challenged the correctness of this proposition.  However Mr Strachan noted that it dealt with the irregularity of inquorate meetings not those meetings which did not take place at all.  BEA cannot rely on the doctrine to keep alive an unenforceable contract.  So, as far as the all important current security is concerned, the doctrine cannot apply.

334.  Mr Strachan also noted that it related to a challenge made later by a person not concerned at the time.  In this case the challenge is by the company itself which of course all along has been concerned.

335.  Dealing first with the second perceived distinguishing feature; I find I have to beg to differ.  Earlier in the judgment I found in the circumstances that although the litigation is in the company’s, LBL’s, name, undeniably the driving force is the more recently arrived new majority shareholder Yan Hei.  The reality is that a new owner of the company is challenging steps taken (or not taken) by the old owners.  And to Mr Whitehead’s list of acts undertaken can be added:

“	that Yan Hei became a member of LBL on the basis that the security was valid and subsisting, giving an undertaking (albeit to a third party) that its terms of repayment would be honoured.”

336.  As to the first point:  Mr Whitehead took me back to the basics, and an extract from Snell’s Equity, 31^st edition, paras 10-01 and 10-02, whereat it is recorded, at 10-02:

“

10.02

Application of the doctrine … Estoppel by representation of fact at common law was traditionally treated as a rule of evidence and not as a cause of action and the Court of Appeal has recently affirmed this principle although with some reluctance and on the basis that the flexibility of equity could mitigate its operation.  It follows that it remains the law that no action can be founded upon an estoppel by representation of fact.”

337.  Then he submitted:

“	We are not saying because of estoppel we have got a valid contract, because estoppel cannot form a cause of action.  What we are saying is we have a contract which is valid and because of the subsequent conduct of [LBL] they are estopped from alleging and proving that the contract is not valid.
	…
	There is no rendering enforceable a contract that is otherwise unenforceable.”

338.  I accept the force of this argument.

339.  Were it to have been needed the doctrine of estoppel does arise.  LBL’s subsequent conduct did confirm the validity of both Debentures.

Restitution

340.  Much time and energy has been spent in the pleadings and argument concerning this, BEA’s, fallback position.

341.  By virtue of the Bank’s success in respect of its primary claim I propose not to deal with this alternative claim.

Overview

342.  I have come to the final stages of the judgment.  It has been an intensely interesting and colourful journey with both sides represented by counsel who most ably argued their cases thereby making my task the easier for which I thank them.

343.  That said, I believe it appropriate to make the following remarks. 

344.  I think it would have been a grave miscarriage of justice if through want of regularity in a technical sense LBL now driven by a new majority shareholder could avoid repaying a loan raised to finance the construction of a tower block it now owns.

345.  Compounding that injustice would be that the price the majority shareholder paid for its shares recognized the amount due on the loan, and its undertaking to the vendor shareholder that the debt would be honoured.

346.  Mr Whitehead described the litigation, which incorporated the allegations of fraud and forgery against directors Charles Ma and Mr Hsu and dishonest assistance by Christine Wong and William Chu of BEA, as both adventitious and opportunistic.  As I find this is an entirely appropriate sentiment.

Conclusion

347.  The Bank has made out its claim; LBL is contractually bound to meet the amount due and payable under the 1999 Debenture with interest calculated as per the contract up to the date of this judgment thereafter at the judgment rate until payment.

348.  The relief shall be as claimed for against LBL and CSL with liberty to apply generally.

349.  The counterclaims of LBL and CSL are dismissed.

350.  Costs, nisi, excluding those provided for shall be at the contractual rate taxed if not agreed on an indemnity basis with certificate for three counsel.