GRAND FIELD GROUP HOLDINGS LTD v. CHU KING FAI AND OTHERS

HCA 771/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 771 OF 2009

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A. INTRODUCTION

(1) The Present Action

1.  The plaintiff is a company incorporated in Bermuda.  Its shares have been listed on the Main Board of the Hong Kong Stock Exchange since 1999.  The plaintiff, through its subsidiaries, carries on business in the development and sale of properties in Mainland China.

2.  The present Action was commenced by one Mr Tsang Wai Lun Wayland (“Mr Tsang”) in the name of the plaintiff pursuant to leave granted by Kwan J by her Order dated 26 February 2009 under section 168BC of the Companies Ordinance, Cap 32 in HCMP 1059/2008.  The claim made by the plaintiff against the defendants as originally pleaded was that the defendants had acted in breach of the fiduciary duties owed by them as directors to the plaintiff.  Specifically, the plaintiff complained of the following matters:

(a) The plaintiff contended that the 1^st defendant had wrongfully sought to improperly influence the directors of the plaintiff to vote at board meetings in favour of Min Tai Group Company Ltd (“Min Tai Group”) and/or for the benefit of the 1st defendant and his family by, inter alia, adopting a practice of paying monies for attending meetings, which practice had begun even before the 1^st defendant became a director of the plaintiff.

(b) Specifically, the plaintiff contended that the aforesaid payments were made for the purposes of influencing the 2^nd, 3^rd, 4^th and 7^th defendants on, or otherwise on account of, the exercise of their voting powers and the discharge of the duties in relation to the matters which they had to consider as directors of the plaintiff including, without limitation, their consideration of, inter alia, whether the following resolutions should be passed by the board of directors:

(i) The resolution passed on or about 14 January 2008 (the “Remittance Resolution”) to approve the remittance of HK$50 million to Yuan Cheng Real Estate (Shenzhen) Limited (“Yuan Cheng”) despite questions having been raised specifically over the legality of the formation of Yuan Cheng.

(ii) The resolution passed on or about 27 May 2008 (the “Yangzhou Project Resolution”) to sanction the acquisition of a project known as Yi Zheng Economic Development High Technology Industrial Park located in the Yi Zheng Economic Development Zone (the “Yangzhou Project”) from Min Tai Development Company Ltd (“Min Tai Development”).

(iii) The resolution passed on or about 15 March 2008 (the “Management Services Resolution”) to sanction the entry of Management Services Agreement (“Management Services Agreement”) by Yuan Cheng with Dongguan City Hua Jia Fu Industry and Trading Ltd (“DCHJF”) and Dongguan City Min Tai Industry and Investment Ltd (“DCMT”), which involved an upfront payment of RMB 8 million by Yuan Cheng.

(iv) The resolution passed on or about 27 May 2008 (the “Zhong Cheng Resolution”) to sanction the entry of a Co-operation Framework Agreement (the “Co‑operation Framework Agreement”) by Yuan Cheng with Shenzhen Zhong Cheng Construction Engineering Company Ltd (“Zhong Cheng”), which required an upfront payment of RMB8 million by Yuan Cheng.

(c) The plaintiff contended that documents for the establishment of Yuan Cheng, which was incorporated as an indirect wholly owned subsidiary of the plaintiff, had been forged upon the instruction and/or authorisation of the 4^th defendant.

(d) The plaintiff complained that on or about 21 January 2008, the 1^st to 4^th and 7^th defendants caused the plaintiff to transfer HK$50 million to Yuan Cheng pursuant to the Remittance Resolution.  The plaintiff’s case was that Yuan Cheng was used as a vehicle in Mainland China to channel the HK$50 million for improper purposes not in the interests of and all with no apparent benefit to the plaintiff and or to enable the same to be applied for the personal benefit of the 1^st defendant, his family or related companies and not‑for‑profit commercial purposes.

(e) The plaintiff complained that the defendants had caused a sum of RMB10 million to be paid by Yuan Cheng to Zhong Cheng pursuant to an agreement entered into between Yuan Cheng and Zhong Cheng on 15 July 2008 (the “Tender Agreement”) for the purposes of satisfying a third-party venture partner of Zhong Cheng’s creditworthiness in relation to another construction project in which Zhong Cheng had been invited to participate.

(f) The plaintiff complained that the defendants had caused another sum of RMB7 million to be paid by Yuan Cheng to Zhong Cheng on 29 August 2008 for the purpose of enabling Zhong Cheng to satisfy another third‑party venture partner of its creditworthiness.

(g) The plaintiff complained that the 1^st to 3^rd and 7^th defendants caused sums totalling RMB33.1 million to be channelled between Yuan Cheng and Shenzhen Hua Ke Nano‑Technology Development Company Limited (“Hua Ke”) from 30 April 2008 to 23 June 2008 which were booked as loans in the accounts of Yuan Cheng.  The plaintiff contended that the fund transfers between Yuan Cheng and Hua Ke were not made bona fide in the interests of the plaintiff.

(h) The plaintiff finally complained about two resolutions passed by the 1^st, 3^rd, 5^th to 8^th defendants at board meetings held on 15 and 20 November 2008 (“Loan Resolutions”) sanctioning Grand Field Property Development (Shenzhen) Company Ltd (“Grand Field Shenzhen”) to borrow RMB50 million to repay a loan owed to Yuan Cheng and to use the balance as operational capital for the plaintiff.

In a nutshell, the plaintiff’s claims under sub-paras (b) to (g) above are that the defendants caused Yuan Cheng to be set up and HK$50 million to be transferred to it so that this money could be used by the 1^st and 2^nd defendants to provide rolling facilities to companies related to or controlled by them.

3.  On the second day of the trial, I was informed by Mr Johnny Mok SC, who appeared with Ms Catrina Lam for the plaintiff, that agreement had been reached between the plaintiff and the 5^th, 6^th and 8^th defendants that the plaintiff would discontinue this action against them on the basis that there would be no order as to costs between the plaintiff and these defendants.  Mr Mok SC informed me that the plaintiff had agreed to do so because these defendants had only become directors of the plaintiff after the occurrence of the matters complained of by the plaintiff. Accordingly, these defendants and Mr Herbert Leung, who had been instructed to appear on their behalf, ceased to participate in the trial.

4.  Further, on the final day of the trial, before Mr Mok SC began to make closing submissions for the plaintiff, he informed me that a global settlement had been reached between the plaintiff and the 3^rd defendant and he invited me to make an order by consent that the action against the 3^rd defendant be discontinued with no order as to costs which I duly did.

5.  In the course of the closing submissions of Mr Raymond Fong, who appeared with Mr Keith Lau for the 1^st, 2^nd and 7^th defendants, Mr Mok SC also indicated that the plaintiff was no longer pursuing its claim relating to the Loan Resolutions.  And in the course of his own closing submissions, Mr Mok SC informed me that the plaintiff was no longer seeking findings of breach of fiduciary duty against the 7^th defendant relating to the Yangzhou Project Resolution and the Zhong Cheng Resolution or indeed in relation to the complaint regarding the channelling of funds between Yuan Cheng and Hua Ke.

(2) Personalities and entities

6.  Mr Tsang and his wife, Madam Kwok Wai Man Nancy (“Mrs Tsang”), (collectively “the Tsangs”), together with their company, Rhenfield Development Corporation (“Rhenfield”), hold about 22% of the plaintiff’s issued share capital.  The Tsangs were the founders of the plaintiff and were formerly executive directors of the plaintiff and its subsidiaries.  Mr Tsang was also formerly the chairman and managing director of the plaintiff and was responsible for formulating the overall strategy of the plaintiff.  On 11 July 2007, the Tsangs resigned from the positions which they held in the plaintiff under the circumstances described in the next section of this judgment.  At the same time, they also resigned as directors of all the subsidiaries of the plaintiff.

7.  The 1^st defendant was chairman of Min Tai Group from its incorporation in Mainland China in 1994 until he resigned from this position in January 2008.  Upon resigning from his position as chairman, the 1^st defendant also resigned as Min Tai Group’s legal representative and his son was appointed as the legal representative in his place.  The 1^st defendant was appointed as an executive director and chairman of the plaintiff on 31 January 2008, upon the resignation of the 4^th defendant.  He was also appointed as chief executive officer (“CEO”) of the plaintiff on 16 October 2008.  He was re‑designated as non‑executive director on 12 October 2009.  At the annual general meeting of the plaintiff held on 21 June 2010, the 1^st defendant failed to be re‑elected as a non‑executive director and therefore ceased to be involved in the management of the plaintiff.

8.  Min Tai Group and its subsidiaries carry on the business of property development in Mainland China.

9.  Until 15 January 2008, the 1^st defendant held 77.78% of the shares in Hua Ke.  On that day, he transferred all his shares to a Mr Hui Zhi Hua (“Mr Hui”) and Mr Hui was appointed as the legal representative and a director of Hua Ke.  It is not in dispute that Mr Hui was all material times also the 1^st defendant’s chauffeur. 

10.  The 2^nd defendant was appointed an executive director of the plaintiff on 5 February 2007.  He was further appointed as CEO and chief operation officer (“COO”) of the plaintiff on 17 April 2007.  The 2^nd defendant’s appointments followed the acquisition, in January 2007, of 180,500,000 shares in the plaintiff by Hong Kong Zhongxing Group Company Limited (“Hong Kong Zhongxing”), a company in which the 2^nd defendant held a 65% interest, for a consideration of HK$19,078,850 (see below).  The 2^nd defendant eventually resigned from his position as executive director, CEO and COO of the plaintiff on 6 October 2008.

11.  The 2^nd defendant used to hold shares in Zhong Cheng.  On 14 June 2007, the 2^nd defendant transferred his 15% shareholding in Zhong Cheng to one Mr Lin Xianghui (“Mr Lin”) who, by reason of a 20% shareholding which he already held and another 25% shareholding which another shareholder transferred to him on the same day, became the largest shareholder of Zhong Cheng (holding 60% of the shares in the company).  The other shareholders of Zhong Cheng at this stage were a Mr Ren Chunxiang (“Mr Ren”), who held 25%, and a Mr Zhang Kechiang (“Mr Zhang”), who held 15%.  The shareholdings in Zhong Cheng changed again on 15 January 2008 when both Mr Lin and Mr Ren transferred their respective shareholdings to Mr Hui.  As noted above, this was also the day when the 1^st defendant transferred his shareholding in Hua Ke to Mr Hui.  Mr Hui and Mr Zhang remained the only shareholders of Zhong Cheng until 21 May 2008 when they transferred their shares to Mr Ren and another shareholder surnamed Zhu (“Mr Zhu”).  Through such transfers, Mr Ren and Mr Zhu held 60% and 40% respectively of the shares in Zhong Cheng.

12.  The 3^rd defendant was, until the annual general meeting of the plaintiff on 9 November 2009 when the shareholders of the plaintiff voted against his re‑election as director, an executive director of the plaintiff.  He was appointed as executive director of the plaintiff on 16 March 2007, on the same day that a Mr Wong King Lam (“Mr KL Wong”) was also appointed an executive director.  Although he was appointed in March 2007, it was not until June 2007 that the 3^rd defendant commenced working full‑time as an executive director of the plaintiff.

13.  I accept the 3^rd defendant’s testimony that he had been sought out and recruited to join the plaintiff as an executive director by the Tsangs and that before that, he had had almost 30 years of experience at senior level corporate management and had worked for a number of globally renowned corporations.

14.  The 4^th defendant was at all material times until his resignation on 31 January 2008, an executive director and chairman of the board of directors of the plaintiff.  He was appointed as executive director and chairman of the plaintiff on 28 August 2007, a little over a month after the resignation of Mr Tsang.  He chaired the meeting of the board on 14 January 2008 when the Remittance Resolution was passed and in fact voted in favour of the resolution.  However, by the time this action came on for trial before me, the plaintiff had, for reasons which were not made known to me, discontinued its action against the 4^th defendant and he did not accordingly participate in the trial.

15.  The 5^th defendant is a certified public accountant in Mainland China.  He was, between 25 June 2008 and 2 November 2009, a non‑executive director of the plaintiff. 

16.  The 6^th and 8^th defendants were, between 25 June 2008 and their resignation on 4 September 2009, independent non‑executive directors of the plaintiff.

17.  The 7^th defendant was, between September 2004 and his resignation on 4 September 2009, an independent non‑executive director of the plaintiff.  He was awarded a PhD in geophysics from Harvard University in 1989 and had been a professor and lecturer at the City University of Hong Kong from September 1998 until June 2007 and was then appointed adjunct professor of Syracuse University in the United States of America.  In recognition of his academic and professional achievements, the Wharton School of the University of Pennsylvania had awarded him the honour of distinguished visiting scholar in finance from 1989 to 1991.

18.  At the time that he was appointed as independent non-executive director of the plaintiff in 2004, he had already been serving as an independent non-executive director of another listed company in Hong Kong, a position he held until July 2005.  In 2008, he was serving as an executive director of another Hong Kong listed company and as an independent non-executive director of a further nine Hong Kong listed companies.

19.  I accept the 7^th defendant’s testimony that in about July 2007, he had been asked unofficially to be the chairman of the plaintiff when Mr Tsang was considering resigning in the midst of the investigations then being conducted by the Independent Commission Against Corruption (“ICAC”) against the Tsangs, but that he had declined the offer because the reputation of the plaintiff had been tainted by such investigations and he felt that it was his professional obligation to the other listed companies on whose boards he also served to avoid giving the public a negative impression that one of their directors was the chairman of a listed company involved in corruption investigations.

20.  The 1^st defendant’s wife, Madam Weng Yulian (“Madam YL Weng”), is an executive director of Min Tai Development in which she holds 90% of the shares. Her sister, Weng Yuqoing (“Madam YQ Weng”), holds the other 10%.

21.  Ms Alison Kwok (“Ms Kwok”) is the sister of Mrs Tsang. She was first recruited by Mr Tsang to join the plaintiff in 2000 but left after about two years.  In about 2004, she was re-employed as an administrative manager of the plaintiff.  In 2007, she was appointed assistant to the financial controller, Mr Thomas Cheng Mei Chau (“Mr Cheng”).  On 5 February 2010, she was appointed an executive director of the plaintiff and as the vice president (business development) of the plaintiff.

22.  On 11 July 2007, coincident with the resignation of the Tsangs from their positions in the plaintiff and the subsidiaries of the plaintiff referred to above, Ms Kwok was appointed a director of almost all the subsidiaries of the plaintiff together with a Mr Ma Xue Min (“Mr Ma”). On the same day, she became the “A” signatory of the bank accounts of the plaintiff and of Grand Field Group Limited (“Grand Field HK”) so that her signature (and the signature of one of the “B” signatories) was required on all cheques drawn on and withdrawals and transfers of funds from these companies’ accounts.  The 3^rd defendant and Mr Cheng were the “B” signatories.

23.  Mr Cheng was appointed financial controller of the Grand Field Group of companies in April 2007 (when the Tsangs were still directors of the plaintiff and Mr Tsang was still its chairman).  He became a member of the management committee of the plaintiff which was formed pursuant to a resolution passed at a board meeting of the plaintiff on 14 January 2008.

24.  Mr Ma joined the plaintiff in 1999 and had been responsible for the plaintiff’s property sales and management in Mainland China since then. Since 2001, he had been the General Manager of the plaintiff’s operations in Dongguan.  As noted above, on 11 July 2007, he was appointed a director of almost all the subsidiaries of the plaintiff together with Ms Kwok.  He was subsequently elected as an executive director of the plaintiff on 2 December 2008.  On 19 October 2009, he was elected chairman of the plaintiff.

25.  As noted above, Mr KL Wong was appointed an executive director of the plaintiff on 16 March 2007 when the Tsangs were still directors of the plaintiff and Mr Tsang was still its chairman.  On 15 November 2007, Mr KL Wong resigned from his position as director.  He rejoined the plaintiff as executive director on 20 November 2009 and continued to hold this position until he resigned again on 15 August 2011.

26.  Mr Song Guang Ping (“Mr Song”) has been working within the plaintiff’s group since before the Tsangs resigned from the positions which they held in the plaintiff and the plaintiff’s subsidiaries. In a report prepared by the 3^rd defendant in April 2008, Mr Song was stated to be in charge of finances in Shenzhen (深圳財務). In a report prepared by Baker Tilly Hong Kong Ltd (“Baker Tilly”), the plaintiff’s auditors, in July 2008, Mr Song was identified as the deputy manager of the investment department (投資部副總經理).

27.  Mr Leung Kin Yuen (who is also known as 梁漢星) (“Mr Leung”) claims to be a financial investment adviser.  In the affirmation which he made on behalf of Mr Tsang in support of his application for leave to institute the present proceedings, he claimed to have acted as a consultant of the plaintiff for a period approximately from 1 May 2007 to December 2007 and to have also been an investment adviser of the Min Tai Group for the 1^st defendant around 2007.

28.  Mr Hui Pui Wai Kimber (“Mr Kimber Hui”) was appointed an independent non-executive director of the plaintiff on 4 August 1999.  He resigned on 21 May 2008.

29.  Mr Lum Pak Sum (“Mr Lum”) was appointed an independent non-executive director of the plaintiff on 5 July 2004.  He resigned on 14 May 2008.

30.  Mr Chan Sung Wai (“Mr Chan”) was appointed an executive director of the plaintiff on 14 November 2007.  He retired on 18 June 2008.

31.  Ms Niu Ning Ning (“Ms Niu”) appears to have been working in the plaintiff or the plaintiffs group of companies for some time.  She was mentioned as being one of as being a member of a working group set up at the time of negotiations between the plaintiff and the Min Tai Groupc in December 2007 (details of which are set out in the next section).  She was described as the deputy financial controller (China) by Mr Cheng in a memorandum which he sent to the 3^rd defendant on 20 June 2008.

32.  Mr Wen Li (“Mr Wen”) was appointed secretary to the management committee on 19 January 2008.

33.  Mr Francis Lim (“Mr Lim”) was elected as an executive director of the plaintiff on 2 December 2008.  He was also appointed as alternative director to Mr Ma and two other directors of the plaintiff, Mr Chen Mudong and Mr Chow Chi Ping David on 9 December 2008.

34.  DCMT owns 51% of the shares in DCHJF.  40% of the shares in DCMT are held by one Madam Cheng Lai Yin (“Madam Cheng”).

(3) The background facts

35.  Under cross-examination, Mr Tsang admitted that the plaintiff was a relatively small listed company whose shareholders were not sophisticated.  Until the appointments of the 2^nd defendant, the 3^rd defendant and Mr KL Wong as executive directors of the plaintiff, the Tsangs were two of only three executive directors of the plaintiff.  I also accept the evidence of the 3^rd defendant that as founders of the plaintiff, the Tsangs considered the plaintiff as their own asset, were extremely autocratic in their management of the plaintiff and would expect, if not demand, those involved in management of the plaintiff to follow their wishes as to how the plaintiff should be operated.

36.  Under the management of the Tsangs, the plaintiff did not fare well.  Its 2005 annual report shows that for the year ended 31 December 2005, the plaintiff had a net profit of HK$3,035,000 only.  The plaintiff’s performance further deteriorated in the years ended 31 December 2006 and 31 December 2007 when it incurred net losses of HK$24,199,000 and HK$48,243,000 respectively.

37.  To make matters worse, from about 2006, the Tsangs were investigated by the ICAC for having been involved in a conspiracy to defraud the shareholders of the plaintiff and the Hong Kong Stock Exchange and in making a false representation to the Hong Kong Stock Exchange.

38.  At the end of December 2007, Mr Tsang (representing the plaintiff) and the 1^st defendant (representing the Min Tai Group) held a meeting which spanned three days from 29 to 31 December 2007 to discuss possible business co-operation between the plaintiff and the Min Tai Group.  The meeting was also attended by the 4^th defendant, Mr Leung and a Mr Ng Fuk Kwan.

39.  The detailed and lengthy minutes of that meeting show that the discussions centred on two main matters.  First, the parties discussed the injection of capital by the Min Tai Group into the plaintiff by acquiring new shares which would be issued by the plaintiff so that the Min Tai Group would become the majority shareholder of the plaintiff.  One point expressly discussed in relation to this was that part of the capital injected into the plaintiff would be used to repay a loan (stated to be in the sum of RMB21 million) owed to the Industrial and Commercial Bank of China.  Another point which was raised was that upon the Min Tai Group becoming the majority shareholder in the plaintiff, the 1^st defendant would be appointed the chairman of the board on which the representatives of the Min Tai Group would constitute the majority.  Secondly, the parties discussed the particular projects the plaintiff and the Min Tai Group could cooperate and work on.  These included the acquisition by the plaintiff of Min Tai Development into which the Min Tai Group would consolidate and inject all of its investment interests in the Yi Zheng Economic Development Zone.  In subsequent documents relating to and discussing the proposed acquisition, the proposed acquisition has variously been referred to as the “揚州項目” and the “揚州專案”.  For ease of reference, I shall refer to it as the “Yangzhou Project”.

40.  Pursuant to a top-up placing agreement dated 11 January 2007 and a supplemental agreement dated 12 January 2007 both between Rhenfield and Hong Kong Zhongxing, Hong Kong Zhongxin acquired 180,500,000 shares in the plaintiff for a consideration of HK$19,078,850.

41.  On 29 January 2007, the Tsangs were arrested by the ICAC in relation to the matters for which they had been under investigation.

42.  On the following day trading of the shares of the company was suspended by the Hong Kong Stock Exchange.

43.  As noted above, shortly after these two events, the 2^nd defendant was appointed as an executive director of the plaintiff.  The appointments of the 3^rd defendant and Mr KL Wong as executive directors of the plaintiff followed just over a month after the appointment of the 2^nd defendant.

44.  At a board meeting of the plaintiff held on 17 April 2007 (which was chaired by Mr Tsang), Mr Tsang proposed that, due to the day-to-day operations of the plaintiff being affected by the ICAC investigations, the 2^nd defendant should be appointed as the CEO and COO of the plaintiff.  In making his proposal, Mr Tsang spoke of the vast experience of the 2^nd defendant in conducting business in Mainland China and stated that the appointment of the 2^nd defendant would assist in the development of the business of the plaintiff and improvement in the business performance of the plaintiff.  The minutes of the meeting record that the 2^nd defendant undertook to use his best endeavours to improve the business performance of the plaintiff and was willing to enter into a target responsibility agreement with the plaintiff.

45.  Pursuant to the proposal of Mr Tsang, the 2^nd defendant was duly appointed CEO and COO of the plaintiff.

46.  Between 23 and 28 April 2007, Mr Cheng and Mr Song conducted a site inspection at Yizheng for the purposes of preparing a report on the Yangzhou Project.  In the report (dated 8 May 2007) which they eventually prepared (the “Cheng & Song Report”), they concluded that the Yangzhou Project was indeed a project which had long-term potential but that there were issues which needed to be considered.

47.  Another report on the investment value of the Yangzhou Project (the “CDRBS Report”) was prepared by the Consolidated Development and Research Bureau of Shenzhen in May 2007.  The 7^th defendant stated in evidence that this report was procured by Mr Leung.

48.  On 1 July 2007, the plaintiff and the 2^nd defendant entered into a Target Responsibility Agreement (“TRA”).  Mr Tsang signed the TRA on behalf of the plaintiff.  The TRA provided for, inter alia, various targets which should be achieved within the term of the TRA (which was stated to be of a period of two years and six months from 1 July 2007 to 31 December 2009).  These targets included minimum annual target profits (最低利潤保證目標), minimum annual sales targets (銷售收入目標) and minimum turnover targets (業務發展目標).  It was also a term of the TRA that the 2^nd defendant would guarantee a minimum return of 10% on investments and that he would personally be liable to compensate plaintiff if this could not be achieved or if the plaintiff suffered any losses on investments or other economic losses by reason of the fault of the 2^nd defendant.  For its part, the plaintiff agreed that in order to assist the 2^nd defendant to meet the agreed targets, it would increase the available operational capital by HK$50 million or RMB50 million before September 2007, by HK$100 million or RMB100 million before March 2008 and by HK$200 million or RMB200 million by September 2008.

49.  On 11 July 2007, a number of events occurred:

(a) As noted above, the Tsangs resigned from the positions held by them in the plaintiff and the plaintiff’s subsidiaries.  In the plaintiff’s announcement dated 10 July 2007 (the “10 July 2007 Announcement”), it was stated that their resignation was with a view to restoring credibility to the board of the plaintiff and to distance the plaintiff from the ICAC investigations into the Tsangs.

(b) The Tsangs wrote to the Hong Kong Stock Exchange stating their agreement to resign as executive directors of the plaintiff with effect from the date upon which the shares of the plaintiff resumed trading on the Hong Kong Stock Exchange.  In the letter, the Tsangs also stated that after their resignation, they would not thereafter undertake any management functions of the plaintiff and/or any of its subsidiaries.

(c) The Tsangs were employed as consultants of the plaintiff with immediate effect.

(d) Trading of the shares of the plaintiff resumed on the Hong Kong Stock Exchange.

(e) As noted above, Ms Kwok was appointed a director of almost all the subsidiaries of the plaintiff together with Mr Ma and also became the “A” signatory of the bank accounts of the plaintiff and of Grand Field HK.

50.  At a meeting of the senior management team (高層管理人員) of the plaintiff on 13 July 2007, it was agreed, inter alia, that Mr Cheng should oversee all the financial matters in the plaintiff’s group of companies, both in Hong Kong and in Shenzhen.  It was also proposed that there should be no management committee and all relevant functions should be carried out by individual managers directly responsible.  No objections were raised to this proposal. Additionally, there were discussions about the TRA and the Yangzhou Project. In relation to the Yangzhou Project, Mr Leung set out what he thought were reasons in favour of the proposed acquisition.  It was further said that the consideration would comprise of cash plus a maximum of four hundred million shares of the plaintiff.  It was also noted that the plaintiff had/would make a request to the vendor to keep HK$30 million of the purchase price as “押金” and to guarantee a profit return of 10%.

51.  Ms Kwok stated, in her evidence, that she started her maternity leave in August 2007 which lasted towards the end of October 2007.

52.  On 27 August 2007, Hong Kong Zhongxing purchased a further 100 million shares in the plaintiff from Rhenfield at a consideration of HK$25 million.

53.  At a board meeting of the plaintiff held a month later on 27 September 2007 (the “27 September 2007 Meeting”), the 4^th defendant (who was at the time still chairman of the plaintiff) proposed that in order to strive to obtain profit-making opportunities before the end of the year, a new company (with a capital of HK$50 million) should be set up in Shenzhen. This was unanimously agreed to by all the directors who attended the meeting: the 2^nd, 3^rd, 4^th and 7^th defendants, Mr KL Wong and two independent non-executive directors, Mr Kimber Hui and Mr Lum.  Mr Cheng was also present at this meeting.

54.  By an authorisation letter dated 5 October 2007 (the “Yuan Cheng Authorisation Letter”), the 4^th defendant authorised one Mr Lau Yin Kam (“Mr YK Lau”) to act on behalf of the directors of Grand Field HK, Ms Kwok and Mr Ma, to handle all administrative procedures relating to the registration of Yuan Cheng including signing all relevant documents.

55.  On 8 October 2007, an application to set up and register Yuan Cheng was filed with the Shenzhen Administration for Industry and Commerce (“Shenzhen AIC”).  Such documents as were required to be executed by Grand Field HK bore the signature stamp of Grand Field HK and Mr YK Lau had signed the Chinese name of Ms Kwok in the space for the authorised signature.  Further the documents submitted in relation to the application stated that the registered capital of Yuan Cheng would be HK$50 million.

56.  On 5 November 2007 Hong Kong Zhongxing entered into a subscription agreement with the plaintiff agreeing to subscribe for 17,000,000 new shares in the plaintiff at a total consideration of HK$6,630,000.

57.  In about December 2007, Castores Magi, a professional appraisal and consultancy firm carrying on business in Hong Kong in providing, inter alia, asset and business appraisals and valuations prepared a valuation of the properties in which Min Tai Development and its subsidiaries had interests (the “Min Tai Properties”) on the instructions of Min Tai Development.  The third draft of this report (the “Castores Magi Report”) was produced in evidence during the trial.  This draft report indicated that the Min Tai Properties located in Yizheng had a value of RMB201,540,000 as at 31 October 2007. 

58.  In about January 2008, RSM Nelson Wheeler, a firm providingaudit and assurance, tax, risk advisory, transaction advisory and corporate advisory services in Hong Kong prepared a draft audit report  and financial statements for the years ended 31 December 2005 and 2006 and the six months ended 30 June 2007 in relation to Min Tai Development (the “Nelson Wheeler Report”). 

59.  At a board meeting held on 14 January 2008 (the “14 January 2008 Meeting”), the Remittance Resolution was passed.  The meeting was attended by the 2^nd, 3^rd, 4^th and 7^th defendants and Mr Chan, Mr Lum and Mr Kimber Hui.  The 4^th defendant was at the time the chairman of the plaintiff and chaired the meeting.  Indeed, it was the 4^th defendant who proposed that HK$50 million should be injected into Yuan Cheng and requested the board to vote on this proposal.  Before the proposal was put to a vote, Mr Chan requested the 4th defendant (as chairman) and the 2^nd defendant (as CEO) to guarantee that the documents and information relating to Yuan Cheng (including those relating to its formation) were genuine and legal.  The 2^nd and 4^th defendants duly provided such assurances.  The matter was then put to a vote and the 2^nd, 4^th and 7^th defendants, Mr Lum and Mr Kimber Hui voted in favour of the proposal whilst Mr Chan abstained.  The 3^rd defendant voted in favour of the proposal on condition that all the materials provided were legal, genuine and accurate.

60.  At the same board meeting, the 2^nd defendant (as CEO) presented a report on the proposed projects which the plaintiff would undertake in the year 2008.  In this connection, Mr Lum pointed out that if the fundraising in relation to any of the proposed projects involved the 2^nd defendant providing a personal guarantee, this might be considered a connected transaction and would require approval from the shareholders.  He also pointed out that if funds needed to be transferred to Mainland China in relation to any transaction, the relevant procedures must be legal.  In response to Mr Lum’s remarks, the 2^nd defendant pointed out that all projects would be presented for consideration by the management committee before being presented to be voted on by the board.

61.  The board went on to consider a project known as the 布吉專案 (“Buji Project”) which had been discussed at the previous meeting of the board.  In the course of such discussions, the 2^nd defendant proposed that the management committee should consist of the chairman, the CEO, Mr Tsang, the 1^st and 3^rd defendants and Mr Cheng.  He also added that the membership of the management committee could be increased or decreased.  In response thereto, Mr Chan pointed out that the proposed membership of the management committee differed from that proposed by the two majority shareholders and neither he himself nor Mr Leung were included.  The 2^nd defendant countered that it would be more manageable for the management committee to have a smaller membership.  Mr Chan disagreed and accordingly, when the matter was put to a vote, he abstained from voting.  All the other directors agreed with the 2^nd defendant’s proposal.

62.  It was then resolved that the management committee should consider if a project known as the Zhang Mu Tou (樟木頭) project (the “Zhang Mu Tou Project”) should be recommended to the board for approval.

63.  Another matter which was discussed at this board meeting was the proposed acquisition of a hotel project in Yangzhou (揚州博時酒店).  In the course of such discussions, the 3^rd defendant sought clarification from the 2^nd defendant as to the exact nature of the business to be carried on.  He also proposed that this was a matter which should be presented to the management committee for approval.  Mr Chan reminded the board that all approval procedures had to comply with the rules of the Hong Kong Stock Exchange and that all information and documents provided had to be true and accurate. The 4^th defendant then proposed that the plaintiff should proceed with the acquisition and both he and the 2^nd defendant confirmed that all information and documentation provided were legal and true.  It was also pointed out that the 2^nd defendant had signed the TRA and provided the personal guarantee.  The matter was put to a vote and all the directors present voted in favour of the proposal except Mr Chan who abstained and the 3^rd defendant who voted in favour of the proposal conditionally upon it being approved by the management committee.

64.  The final matter which was discussed at this meeting was the 3^rd defendant’s proposal that Mr KL Wong should be appointed a non-executive director of the plaintiff because of his knowledge and experience of the Hong Kong Stock Exchange.  Mr Chan also pointed out that Mr KL Wong had greatly contributed to the resumption of trading in the shares of the plaintiff in the previous year and that his appointment would therefore definitely be of benefit to the plaintiff. However, the 4^th defendant indicated that it should first be ascertained whether Mr KL Wong would permanently be stationed in Hong Kong or in Canada before a decision was made.  The proposal was therefore shelved after further discussion.

65.  Three days after the passing of the Remittance Resolution, on 17 January 2008, Ms Niu wrote to Mr Cheng to state that she had taken over the finances and the legal documents and the financial seal of Yuan Cheng on the instructions of the 2^nd defendant. In her letter, she pointed out that in accordance with the articles of Yuan Cheng, Yuan Cheng should have capital of HK$50 million injected into it and that the first tranche of capital in the sum of HK$10 million was required to be injected within three months of the grant of its business licence. As Yuan Cheng had obtained its business licence on 23 October 2007, HK$10 million was required to be injected by 23 January 2008.  However, she suggested that due to the continued depreciation of the Hong Kong dollar against Renminbi, in order to minimise the exchange losses and costs, the HK$50 million should be injected in one go.

66.  On 18 January 2008, a written notification regarding Yuan Cheng (signed on the half of the plaintiff by the 2^nd defendant) was issued by the plaintiff to the board and the members of the management committee.  The notification was also copied to the plaintiff’s finance department, Ms Niu and Mr Song.  Referring to the Remittance Resolution, the notification gave notice of the following matters regarding the registration and administration of Yuan Cheng:

(a) The finance department of the plaintiff would be responsible for remitting HK$50 million to the capital inspection account (驗資賬戶) of Yuan Cheng.

(b) The 2^nd defendant would take up the positions of chairman and managing director of Yuan Cheng and would assume guaranteed responsibilities for the safety and reasonable use of the company’s financial resources and the minimum target returns on investments.  An agreement regarding this would be signed after the board of the plaintiff or the management committee had approved the same.

(c) Ms Niu would temporarily take up the position of accountant of Yuan Cheng whilst Mr Song would take up the position of cashier.  Any use of Yuan Cheng’s registered capital would require the approval of the plaintiff’s board or the management committee.

67.  On the same day, an application for remittance of the sum of HK$50 million to Yuan Cheng was submitted by the plaintiff to its bank.  The signatories to the application were Mr Cheng and Ms Kwok.

68.  At a meeting of the management committee held on 19 January 2008, the following resolutions, inter alia, were passed:

(a) The 2^nd defendant would take up the positions of chairman and managing director of Yuan Cheng and would assume guaranteed responsibilities for the safety and reasonable use of the company’s financial resources and the minimum target returns on investments.  An agreement regarding this would be signed after the board of the plaintiff or the management committee had approved the same.

(b) Ms Niu would temporarily take up the position of accountant of Yuan Cheng whilst Mr Song will take up the position of cashier.  Any use of Yuan Cheng’s registered capital would require the approval of the plaintiff’s board or the management committee.

(c) Mr Tsang would be responsible for appointing a qualified professional manager to assume the management of the De Fu Hua Yuan Phase III (德福花園三期) project as well as the Zhang Mu Tou Project (stated to be projects of Grand Field Shenzhen).  Mr Tsang would also assume guaranteed responsibilities for the reasonable use and capital appreciation of the financial resources of Grand Field Shenzhen and these projects and for the safety, reasonable use and minimum target returns on investment of the plaintiff’s newly increased investments.  An agreement regarding this would be signed after the board of the plaintiff or the management committee had approved the same.

Notification of the resolutions passed at this meeting was given to the board of the plaintiff by a written notice which was also copied to the members of the management committee.  This written notice was signed by Mr Tsang.

69.  On 21 January 2008, the HK$50 million remitted by the plaintiff was deposited into the account of Yuan Cheng.

70.  On 31 January 2008, Hong Kong Zhongxin entered into an agreement with Rhenfield agreeing to purchase 7.95% of the shares of the plaintiff from Rhenfield for a total consideration of HK$80 million. Completion was to take place on 13 March 2008 and on the relevant date, the purchase was duly completed.  Through this purchase and the earlier purchases of shares in the plaintiff made by it referred to above, Hong Kong Zhongxin had, within the period of a year, invested a total of HK$130,708,850 in acquiring shares in the plaintiff.

71.  It about February 2008, a preliminary inspection report (the “Preliminary Inspection Report”) on the potential return on the acquisition of Min Tai Development was prepared by or for the plaintiff.  In the follow up report of the 3^rd defendant dated 11 April 2008 (see below), the 3^rd defendant stated, inter alia, that the Preliminary Inspection Report consolidated into one report the results of the inspections and enquiries previously carried out.  He also commented, inter alia, that the Preliminary Inspection Report was a good reference resource.

72.  At a board meeting of the plaintiff held in the plaintiff’s Shenzhen office on 27 February 2008, it was resolved, inter-alia, that the name of the plaintiff should be changed to “China Land Development Group Ltd”.  All the directors of the plaintiff who attended the meeting, the 1^st, 2^nd, 3^rd and 7^th defendants and Mr Lum, voted in favour of this resolution.

73.  At the same meeting, the 1^st defendant proposed that the 3^rd defendant should follow up on the Yangzhou Project.

74.  Another board meeting of the plaintiff was held in the plaintiff’s Shenzhen office on 6 March 2008.  The meeting was attended by the 1^st, 2^nd, 3^rd and 7^th defendants, Mr Kimber Hui and Mr Lum.  It was noted that Mr Chan had sent his apologies for not being able to attend the meeting due to illness but had expressed his views on the matters to be discussed at the meeting in writing.  The matters which were discussed and/or resolved at the meeting included:

(a) The 2^nd defendant reported on what he had done since taking up the position of CEO in April 2007. He also indicated that as CEO and a shareholder and having signed the TRA, he was prepared to compensate the plaintiff for any errors which he committed.

(b) The 1^st defendant noted that as TRA had been approved by the board, it could not be cancelled without the agreement of the board.

(c) The 1^st defendant also noted that the 3^rd defendant had been asked to follow up on the Yangzhou Project at the meeting on 27 February 2008 and expressed the hope that the 3^rd defendant could present a report at the next board meeting.

(d) The 1^st defendant proposed that Ms Niu should be appointed the deputy financial controller of the group, with a three-month probation period.

(e) Regarding the resolution to change the name of the plaintiff which had been passed at the previous meeting, the plaintiff’s company secretary reported that legal advice had been sought and that the lawyers had indicated that the proposed name might be similar to the name(s) of another company/other companies and might be opposed by such other company/companies.  Having considered what the company secretary had reported, the 1^st and 2^nd defendants nevertheless directed the company secretary to continue to pursue the change of name.

75.  At a board meeting of the plaintiff held on 15 March 2008 (which was attended by the 1^st, 2^nd, 3^rd and 7^th defendants, Mr Chan, Mr Kimber Hui and Mr Lum), the Management Services Resolution was passed.  The minutes of the meeting record that in the discussions which preceded the vote on the resolution, the 2^nd defendant had presented the documents relating to Management Services Agreement for perusal and discussion.  The 1^st defendant had then proposed that the 2^nd defendant should provide a personal guarantee in order to minimise the risks and the 2^nd defendant had agreed to this.  Mr Lum and the company secretary had reported that according to the views of the Hong Kong Stock Exchange, as management services did not fall within the normal business activities of the plaintiff, the “five principles” had to be applied to decide the manner in which the transaction should be disclosed.  When the matter was put to a vote, the 1^st, 2^nd and 7^th defendants voted in favour whilst the 3^rd defendant, Mr Kimber Hui and Mr Lum expressly stated that they voted in favour of the resolution by reason of the guarantee provided by the 2^nd defendant.  Mr Chan abstained.

76.  The minutes of the meeting record that after the meeting, legal advice had been sought by the 7^th defendant in relation to the proposal that the 2^nd defendant should provide a personal guarantee.  The advice was that as the 2^nd defendant did not have any property interest or play any role in or obtain benefit from the project, legally, the 2^nd defendant should not provide any personal guarantee.  The 7^th defendant therefore proposed that a personal guarantee should be obtained from the majority shareholder of the counterparty instead of from the 2^nd defendant.  The minutes record that the 1^st, 2^nd, 3^rd and 7^th defendants, Mr Chan, Mr Kimber Hui and Mr Lum all agreed to this arrangement.

77.  Several other matters were also considered at the meeting:

(a) The 3^rd defendant reported that he had looked into the Yangzhou Project.  He proposed that the board should first decide which party should be responsible for paying the fees of the professionals who should be engaged to conduct the due diligence into the project.  The 1^st defendant indicated that Min Tai would first pay these fees and that if the project was not approved by the board, Min Tai would be responsible for 60% of these fees and the plaintiff would be responsible for 40%.  Mr Lum expressed the view that due diligence and valuation should first be done in relation to every project which should then be considered by the management committee before being recommended to the board for approval.  He hoped that the 3^rd defendant would set out the estimated expenses required.  The 1^st defendant noted that as the project was a connected transaction which required shareholders’ approval and requested the board members to vote on whether or not the plaintiff should proceed.  It was unanimously resolved that the discussions with the opposite party should continue.  The 2^nd defendant agreed that this project as well as that matter regarding the change of name of the plaintiff should together be presented for shareholders’ approval.

(b) In relation to the Zhang Mu Tou Project, the 2^nd defendant reported that consideration was being given to the acquisition of a company in Mainland China for the purposes of carrying on real estate business.  He proposed that Yuan Cheng should acquire this shell company.

(c) In relation to the Buji Project, it was reported that after looking into the records, there were three parties involved in the project — the plaintiff owned 50% whereas 20% of the remaining 50% belonged to a company of which Mr Tsang was the legal representative.  It was therefore pointed out that it was inappropriate for Mr Tsang to be the legal representative of both the Buji Project and that other company and should be replaced as legal representative of the former.  It was proposed that the 2^nd defendant should take over this position.  When the matter was put to a vote, the 1^st, 2^nd and 7^th defendants and Mr Lum voted in favour of the proposal; the 3^rd defendant voted against the proposal but stated that he would reconsider if it was indeed confirmed that Mr Tsang was the legal representative of two parties; Mr Kimber Hui voted against the proposal because he indicated that it was not clear if the change of legal representative was of benefit to the plaintiff but that if it was confirmed that Mr Tsang was the legal representative of two parties, he would be in favour of the proposal; and Mr Chen voted against the proposal.

78.  On 25 March 2008, Yuan Cheng entered into the Management Services Agreement with DCHJF and DCMT pursuant to which, among other things, DCHJF appointed Yuan Cheng to provide management services for the retail shops (the “Shops”) located at a development of which DCHJF was the registered owner and developer.  The gross floor area of the Shops was approximately 30,000m² of which a gross floor area of 10,425m² had been leased and the remaining gross floor area of 19,575m² had not yet been released.

79.  Under the Management Services Agreement, DCHJF agreed to pay Yuan Cheng 25% of the rental on the Shops but if the rental exceeded RMB4.03 million per annum, the rental in excess of this amount would be shared 50:50 between DCHJF and Yuan Cheng.  Further, DCHJF guaranteed that Yuan Cheng would receive a minimum of RMB1.45 million per annum.  In return, Yuan Cheng agreed to pay to DCHJF a refundable security deposit of RMB9 million which would be returned to Yuan Cheng in full without interest within 30 days after the expiry of the Management Services Agreement within 90 days upon receipt of a notice of termination of the Management Services Agreement by DCHJF from Yuan Cheng.  In the event that the Management Services Agreement was terminated by DCHJF due to the breach of Yuan Cheng, the security deposit would be immediately returned to Yuan Cheng in full without interest upon the date of termination.  DCMT irrevocably and unconditionally guaranteed to Yuan Cheng the performance by DCHJF of its obligations to repay the security deposit to Yuan Cheng and to pay the agreed service fees due to Yuan Cheng in accordance with the Management Services Agreement.

80.  On the same day, the plaintiff gave notice to the Tsangs that their appointment as consultants of the plaintiff was terminated.  The written notice was signed by the 1^st defendant as chairman and the 2^nd defendant as CEO.

81.  On 27 March 2008, Yuan Cheng entered into a Supplemental Agreement (the “Supplemental Agreement”) with DCHJF and DCMT pursuant to which some of the terms of the Management Services Agreement were varied.  In particular, the security deposit was lowered to RMB8 million and the amount of service fees payable by DCHJF was varied to RMB1.45 million per annum, which would be due and payable to Yuan Cheng by four equal instalments of RMB362,500 each on the last day of each quarter.

82.  An announcement giving notice of the Management Services Agreement and the Supplemental Agreement was published by the board of the plaintiff on the same day.  In addition to giving details of these two agreements, the announcement stated that the entering into of these two agreements constituted a discloseable transaction for the plaintiff under the Listing Rules of the Hong Kong Stock Exchange (“Listing Rules”) and that a circular containing details of the agreements would be dispatched to the shareholders of the plaintiff within 21 days after publication of the announcement.  There is no suggestion by the plaintiff or the Tsangs that such circular was not dispatched.

83.  On 28 March 2008, Yuan Cheng transferred RMB8 million to DCHJF in accordance with the Management Services Agreement and the Supplemental Agreement.

84.  Such documentary evidence as has been placed before me shows that DCHJF made payments of RMB362,500 each to Yuan Cheng on 30 April 2009, 27 July 2009 and 2 November 2009.

85.  In accordance with the terms of the Management Services Agreement, it was terminated on 31 March 2010. 

86.  On 11 April 2008, the 3^rd defendant sent the follow-up report on the Yangzhou Project (the “Follow Up Report”) which he had been requested by the board to prepare to the members of the board, copied to Mr Cheng and Mr Wen.  In the Follow Up Report, the 3^rd defendant set out a list of and summarised the various reports and materials (totalling over 400 pages) which he had referred to in preparing the report.  These included, inter alia, the Cheng & Song Report, the CDRBS Report, the first draft of the Castores Magi Report, the Nelson Wheeler Report and the Preliminary Inspection Report.  He also noted that most of these materials had been provided to him by Mr Wen.

87.  Further, in addition to providing a brief introduction to the background to the Yangzhou Project and the companies involved, the 3^rd defendant also summarised the work which had already been done and which needed to be done in future.  With regard to the work to be done in future, the Follow Up Report stated that these included resolution by the board to proceed with conducting due diligence, conducting due diligence and if the results of the due diligence showed that the project was worth investing in, presenting it for approval by the board and by the shareholders in general meeting (as it was a connected transaction).

88.  In his covering email, the 3^rd defendant invited recipients of the Follow Up Report to provide opinions and proposals and apologised for the fact that as the attachments to the report (which consisted of the various reports and materials he had referred to) were voluminous, they could not be attached to his email.  He therefore invited anyone who wished to make reference to these materials to contact him or Mr Wen.

89.  On 15 April 2008, Mr Tsang wrote to the directors of the plaintiff to complain about two matters:

(a) that the names and/or signatures of Ms Kwok and Mr Ma had been misused and/or forged in the setting up of Yuan Cheng; and

(b) that someone had, on 27 March 2008, made use of documents which had been falsely stated to have been signed by a director/directors of Grand Field HK to have Mr Tsang surreptitiously replaced as legal representative of Grand Field Shenzhen by the 2^nd defendant.

90.  At a board meeting of the plaintiff held on 16 April 2008 which was attended by the 1^st, 2^nd, 3^rd and 7^th defendants, Mr Kimber Hui, Mr Lum and Mr Cheng (the “16 April 2008 Meeting”), the board considered and discussed, inter alia, the following matters:

(a) It was resolved that Ms Kwok and Mr Ma be replaced as directors of the subsidiary companies of the plaintiff by Ms Chen Yu and Mr Hui.

(b) A new wholly-owned subsidiary company should be set up to be used in investing in two projects including the Yangzhou Project.  The board resolved that the plaintiff should proceed with discussions with the counterparties to these projects, sign letters of intent in relation to them and provide all requisite disclosure.  It was stated that as both projects related to the Min Tai Group, they were connected transactions and the letters of intent should expressly state that the projects were subject to approval by the shareholders in general meeting.  If no such approval was forthcoming, the deposits paid should be repaid within one month with 10% interest.

(c) Reference was made to the letter which had been sent by Mr Tsang.  The 2^nd defendant provided an explanation of the matter and, in particular, pointed out that an agent had been authorised by the then chairman of the plaintiff (the 4^th defendant) to carry out the relevant procedures.  A copy of the Yuan Cheng Authorisation Letter was shown to the board members and the 2^nd defendant stressed that all procedures had been reasonable and legal.

91.  Another board meeting of the plaintiff was held on 27 May 2008.  By this time, Mr Kimber Hui and Mr Lum had resigned.  The meeting was therefore attended by the 1^st, 2^nd, 3^rd and 7^th defendants.  Mr Leung attended as representative of Mr Chan.  The board discussed and considered, inter alia, the following matters:

(a) In connection with the Yangzhou Project, a draft agreement relating to the proposed acquisition of Min Tai Development (the “Draft Agreement”) was presented for discussion.  The 2^nd defendant reported that the proposed purchase price for the purchase of all the shares in Min Tai Development and a shareholder’s loan of HK$90 million was HK$88 million, of which HK$40 million would be payable in cash and HK$48 million would be payable in the plaintiff’s shares.

(b) The 1^st defendant disclosed that he was connected to Min Tai and would therefore not vote on the proposed transaction.  The 2^nd defendant indicated that he was not a connected party in relation to the proposed transaction.

(c) The directors present (except the 1^st defendant) then voted on the feasibility of the proposed transaction.  The 2^nd, 3^rd and 7^th defendants voted in favour whilst Mr Leung abstained. 

(d) It was noted that as the proposed transaction was a connected transaction, in accordance with the rules of the Hong Kong Stock Exchange, if the proposed transaction was to proceed, an independent financial adviser was required to be engaged and an independent committee of board members was required to be set up to make necessary arrangements.

(e) The 1^st defendant proposed that an agreement be entered into between Yuan Cheng and Zhong Cheng for Yuan Cheng to provide property construction management services to Zhong Cheng.  The service deposit would be RMB5 million for a 10 year term or RMB500,000 per annum.  Both the 1^st and 2^nd defendants declared that they were not connected to Zhong Cheng.  The feasibility of entering into the proposed agreement was put to a vote and the 1^st, 2^nd, 3^rd and 7^th defendants voted in favour whilst Mr Leung abstained.

92.  On 4 June 2008, Mr Tsang commenced HCMP 1059/2008 in which he sought:

(a) Leave to bring proceedings on behalf of the plaintiff against the 1^st, 2^nd and 3^rd defendants, Mr Chan, Mr Kimber Hui and Mr Lum.

(b) There be an order that an independent auditor be appointed for and on behalf of the plaintiff to investigate and report to the court on the financial position of Yuan Cheng and in particular the whereabouts of the HK$50 million remitted thereto by the plaintiff.

Mr Tsang’s application was supported by affirmations made by himself, Mr Leung and Ms Kwok.

93.  On 10 June 2008, Ms Kwok, on behalf of Grand Field HK, took out an administrative action in the Futian Peoples’ Court (深圳市福田區人民法院) against Yuan Cheng and the Shenzhen AIC seeking revocation of the registration of Yuan Cheng.  This action resulted in an administrative decision by the Futian Peoples’ Court on 23 October 2008 that the licence of Yuan Cheng should be revoked.  An appeal against this decision by Yuan Cheng and the Shenzhen AIC to the Shenzhen Intermediate Court in November 2009 was successful.  Accordingly, Yuan Cheng remains a validly formed company in Mainland China.  In the 2009 and 2011 Annual Reports of the plaintiff (by which time Mr Ma had been appointed chairman and Mr KL Wong had been reappointed and Ms Kwok had been appointed executive directors of the plaintiff), Yuan Cheng was stated to be a subsidiary of the plaintiff.

94.  On 17 June 2008, resolutions were passed by the boards of Grand Field HK and Yuan Cheng that they should enter into and execute the Co-operation Framework Agreement with Zhong Cheng.  The Co-operation Framework Agreement was duly executed for and on behalf of Grand Field HK, Yuan Cheng and Zhong Cheng on the same day.  Under the Co-operation Framework Agreement, it was agreed, inter alia, that during the 10 year term thereof, Grand Field HK (or third parties specified by Grand Field HK) would appoint Zhong Cheng as the contractor for property development projects and Zhong Cheng would accept such appointments.  It was further agreed that Yuan Cheng would provide various management services in relation to these property development projects for which Zhong Cheng would pay it 90% of the after-tax profit from the projects.  Additionally, it was agreed that Grand Field HK would pay Zhong Cheng RMB5 million as deposit to secure the performance of Grand Field HK under the agreement within seven days of the commencement thereof and that on each anniversary date of the commencement of the agreement, RMB500,000 would be automatically transferred from the said deposit to Zhong Cheng towards payment or prepayment of amounts due to Zhong Cheng under the property development projects undertaken by it pursuant to the agreement.  It was further agreed that if Grand Field HK acted in breach of or failed to perform its obligations under the agreement, Zhong Cheng would have the right to forfeit the said deposit or the remainder thereof.  Conversely, if Zhong Cheng acted in breach of or failed to perform its obligations under the agreement, Zhong Cheng would be required to refund to Grand Field HK an amount equal to twice the said deposit or the remainder thereof.  It was also agreed that if the agreement was terminated before the end of the term thereof, Zhong Cheng would refund the remainder of the deposit to Grand Field HK.

95.  On the same day that the Co-operation Framework Agreement was executed, the shareholders of Zhong Cheng executed an undertaking under (the “Zhong Cheng Undertaking”) which it irrevocably undertook to Yuan Cheng (under the detailed terms thereof), inter alia:

(a) that in the event that the shareholders wished to transfer all or part of their shares in Zhong Cheng, Yuan Cheng would have the right (but not the obligation) to acquire all or part of such shares; and

(b) that if the shareholders of Zhong Cheng or any third party wished to subscribe for newly issued shares of Zhong Cheng, prior written consent would need to be obtained from Yuan Cheng which would also have the prior right (but not the obligation) to subscribe for the same number of newly issued shares at the same price.

The said undertaking was an annexure to the Co-operation Framework Agreement and, by virtue of clause 13.3 thereof, was agreed to form part of the agreement.

96.  On the same day, the plaintiff published an announcement relating to the Co-operation Framework Agreement.  The announcement stated, inter alia, that the directors of the plaintiff were of the view that the entering into of the Co-operation Framework Agreement including the payment of the security deposit thereunder was in the interest of the plaintiff and the shareholders as a whole as it provided a good opportunity for the plaintiff and its subsidiaries to secure a long-term and stable main contractor for its property development projects in Mainland China and at the same time provided a stable income source for the plaintiff and its subsidiaries.  The announcement went on to state that the directors of the plaintiff considered that the terms of the Co-operation Framework Agreement including payment of the security deposit were on normal commercial terms, which were fair and reasonable, and were in the interests of the plaintiff and its shareholders as a whole.

97.  The security deposit of RMB5 million provided for under the Co-operation Framework Agreement was paid by Yuan Cheng to Zhong Cheng on 23 June 2008.  This sum was eventually repaid by Zhong Cheng to Yuan Cheng in two tranches, RMB4 million on 27 May 2009 and RMB1 million on 31 May 2009.

98.  In the notes to the financial statements in the 2009 annual report of the plaintiff, it was stated that the security deposit had been repaid because the Co-operation Framework Agreement had been cancelled.  In the same section of the Notes, it was also stated that against the Co-operation Framework Agreement, on 7 July 2008, Yuan Cheng had signed a services and investment contract (the “Services and Investment Contract”) with Zhong Cheng to act as a project manager for a particular named project and for Zhong Cheng to provide building and construction services and building materials for that project.  It was further stated that according to the terms of theServices and Investment Contract, Yuan Cheng had paid a deposit of RMB5 million to Zhong Cheng and Zhong Cheng would distribute 90% of the profit after tax generated from the project to Yuan Cheng.  It was also reported that the Services and Investment Contract had also been cancelled and the deposit had been fully refunded in cash.  No complaint has been made by the plaintiff in relation to the Services and Investment Contract.

99.  It was also on 23 June 2008 that a Letter of Intent in relation to the Yangzhou Project (the “Letter of Intent”) was executed between Metro China Investment Ltd (“Metro China”), a wholly-owned subsidiary of the plaintiff, and Min Tai Development.  The Letter of Intent provided, inter alia, as follows:

(a) Due diligence would commence on 15 July 2008.  Min Tai Development had an obligation to provide assistance to Metro China in respect thereof, including providing all necessary figures and documentation and replying to questions.

(b) During the period of the due diligence, Metro China would have exclusive right to negotiate for the proposed acquisition.

(c) Metro China would pay HK$5,000,000 to Min Tai Development as earnest money within 10 working days of the execution of the Letter of Intent.  Unless the parties were able to reach an agreement relating to the proposed acquisition, the earnest money would be refunded (without interest).

(d) Upon completion of the due diligence, if Metro China wished to acquire the Yangzhou Project, the acquisition agreement would need to be signed before 30 September 2008.

(e) The Letter of Intent did not constitute any binding acquisition agreement between the parties.

100.  The earnest money of HK$5 million payable under the Letter of Intent was paid to Min Tai Development by Yuan Cheng on behalf of Metro China on 24 June 2008.

101.  On 14 July 2008, the plaintiff entered into a placing agreement with a placing agent known as Head & Shoulders Securities Ltd (the “Placing Agreement”) whereby the plaintiff conditionally agreed to place 100 million shares in the plaintiff at the price of HK$0.16 in order, inter alia, to finance the proposed acquisition of the Yangzhou Project (the “Placement”).

102.  By five payments made between 21 October 2008 and 1 November 2008, Min Tai Development repaid RMB4.4 million to Yuan Cheng.  Under cross-examination, Mr Lim expressed the view that this was probably equivalent to HK$5 million at the exchange rate at the time.

103.  On 15 July 2008, the Tender Agreement was entered into pursuant to the Co-operation Framework Agreement under which Yuan Cheng engaged Zhong Cheng to tender for construction work in relation to a project known as 海怡方花園項目 (the “Haiyifang Project”).  The Tender Agreement stated, inter alia, as follows:

(a) The construction fees for the Haiyifang Project (which had a construction area of 1,600,000m²) were estimated to be $5,800,000,000.

(b) Yuan Cheng engaged Zhong Cheng to tender for the construction work in relation to the Haiyifang Project.

(c) The developer of the project required bank capital verification (銀行資信證明).  The capital required for this purpose (in the sum of RMB10 million) would be provided by Yuan Cheng and would be paid within two days.

(d) The deadline for the tender was 29 July 2008.  If there was no progress made by Zhong Cheng in this regard by this date, the said sum would be repaid without interest to Yuan Cheng by 30 July 2008.

(e) In the event that the tender was successful, the provision of the capital and the sharing of the profits would be made in accordance with the Co-operation Framework Agreement.

104.  On 15 July 2008, Yuan Cheng transferred RMB10 million to Zhong Cheng pursuant to the Tender Agreement.  On 28 July 2008, the said sum was repaid by Zhong Cheng to Yuan Cheng.

105.  On 29 August 2008, Yuan Cheng transferred RMB7 million to Zhong Cheng.  This sum was repaid to Yuan Cheng by Zhong Cheng on 5 September 2008.  The 2^nd defendant stated in evidence that the said sum was transferred to Zhong Cheng for the similar purpose of capital verification.

(3) Witnesses

106.  Mr Tsang, Ms Kwok, Mr Leung and the 1^st, 2^nd, 3^rd and 7^th defendants made various affirmations in HCMP 1059/2008.  By the Order of Master Levy dated 11 November 2009, these affirmations were ordered to stand as the witness statements of the parties in this action.  It was further ordered that the deponents to the affirmations should attend trial for cross-examination upon their respective affirmations.

107.  Additionally, Mr Tsang, Ms Kwok and Mr Francis Lim made witness statements on the behalf of the plaintiff and the 1^st, 2^nd, 3^rd, 5^th, 7^th and 8^th defendants and Chen Yu made witness statements on the defendants’ side.

108.  As there was no order that any of the witness statements should stand as evidence in chief and as Mr Leung, Chen Yu and the 1^st, 5^th and 8^th defendants did not appear at the trial to testify, their affirmations and/or witness statements are not evidence before me.

109.  I should also mention that Mr Leung had also signed three other statements on 23 and 24 June 2008 in which he essentially retracted what he had said in the affirmation he had previously made.

110.  On the very first day of the trial before me, Mr Tsang made and filed a supplemental witness statement in which he claimed to have repeatedly requested Mr Leung to attend the trial as his witness but that Mr Leung had refused to do so.  Mr Tsang claimed that he had made one final attempt to call Mr Leung and to request him to attend trial the day before the commencement of the trial but that Mr Leung had told him that he would not come to Hong Kong to attend trial as a witness because he had already been unlawfully detained twice by the 1^st and 2^nd defendants respectively in 2008.  Mr Tsang claimed that Mr Leung had told him that the 1^st defendant had threatened him that he should not act as a witness in these proceedings, otherwise, he should not even dream of being able to work and live in Shenzhen and that Mr Leung was therefore afraid to attend trial as he feared for his personal safety and the safety of his wife and only daughter.  In his oral testimony, Mr Tsang elaborated on what he had said in his supplemental witness statement and claimed that Mr Leung had told him that the two instances of unlawful detention were in and around April 2008 and on 23 and 24 June 2008.

111.  The 3^rd defendant testified and was cross-examined at length as to the circumstances under which Mr Leung had made the three statements retracting what he had said in his affirmation.  In particular, the 3^rd defendant testified that of the three retraction statements made by Mr Leung, the first had been made in Mainland China and that a copy had been faxed to him before Mr Leung and the 2^nd defendant had attended at the office of the plaintiff in Hong Kong on 24 June 2008 where the second and third statements had been made.  The 3^rd defendant testified that he saw Mr Leung going in and out and going to the toilet with no sign of any unlawful detention.  I accept the testimony of the 3^rd defendant in this regard.

112.  Conversely, I reject the testimony of Mr Tsang that Mr Leung had been unlawfully detained by the 1^st and 2^nd defendants. If Mr Leung had indeed been detained and threatened in April 2008, it is improbable that he would have made his affirmation, which was dated 6 May 2008.  Further, if Mr Leung had indeed been detained and threatened a second time on 23 and 24 June 2008 and had been forced to make his retraction statements, it is improbable that he would not have told Mr Tsang about this by 13 August 2008 when Mr Tsang had made his third affirmation.  Yet nothing was said in Mr Tsang’s third, fourth, fifth and sixth affirmations.  Indeed, Mr Tsang’s own evidence in his supplemental witness statement was that he had previously “repeatedly requested” Mr Leung to attend the trial as his witness but that Mr Lau had refused to do so.  If this were indeed true, it is inconceivable that Mr Leung would not have told Mr Tsang about the alleged detentions and threats on all those occasions when he had told Mr Tsang that he would not testify.  There is also no credible explanation provided by Mr Tsang as to why, if he had already been told repeatedly by Mr Leung that he would not testify, he had not made a witness statement stating this until the first day of the trial.

113.  In the circumstances, if I am wrong in holding that the affirmation of Mr Leung is not evidence before me, I would, in any event, attach no weight to the evidence contained in the affirmation.

114.  Mr Tsang, Ms Kwok and Mr Lim testified on behalf of the plaintiff.  On the defendants’ side, the 2^nd, 3^rd and 7^th defendants testified.

115.  I was not impressed by the testimony of Mr Tsang.  Many of the assertions made in his first affirmation which was adopted by him as part of his testimony were vague and unspecific.  Much of what he said was not based upon his own personal knowledge or any concrete evidence but merely his own suspicions.

116.  I found Mr Tsang evasive.  For example, when asked whether he agreed with the positive comments about the Yangzhou Project which had been recorded as having been made by Mr Leung at a meeting of the senior management of the Company on 13 July 2007, he sought to avoid answering the question by saying that he was not given any voting right for or against the Yangzhou Project when this was not even the question posed to him.

117.  He also refused to admit facts even when they were patently true on the face of contemporaneous documents.  For example, although it was clear from the minutes of meetings held between him and the 1st defendant in December 2006 that he had agreed to various matters, when it was put to him that these were matters he had agreed to, he tried to argue that they were matters which had merely been requested by the 1^st defendant or had been discussed when on the face of the minutes, these were matters he had agreed to.

118.  Another instance of Mr Tsang refusing to admit patently true facts was his denial of having been appointed to the management committee of the plaintiff when it was expressly stated in the minutes of the board meeting held on 14 January 2008 that he would indeed be one of the members of the management committee.  Further, he had signed a document dated 19 January 2008 which recorded the decisions which the management committee had made at its meeting on that date.  In this regard, I reject his evidence that he had signed this document only because the 1^st defendant had invited him to be present at the meeting and he had been told that he was required to sign to simply to prove that he had attended the meeting.

119.  I also found much of Mr Tsang’s testimony contrived.  In particular, when challenged as to why he did or did not do something, he repeatedly resorted to saying that as he was not a director of the plaintiff at the relevant time, he did not pay attention to its affairs nor was he consulted by Ms Kwok.  I find these explanations incredible and unconvincing.

120.  Mr Tsang also sought to attribute positive comments made about the Yangzhou Project at a meeting of the senior management of the plaintiff on 13 July 2007 to the 1^st defendant.  However, when pressed, he had to admit that the 1st defendant was not even a director of the plaintiff on that date.

121.  In my consideration of the plaintiff’s claims below, I will also identify other areas of Mr Tsang’s evidence which I find to be incredible or unconvincing.

122.  Ms Kwok’s testimony centred on the hotly contested issues regarding the circumstances surrounding the formation of Yuan Cheng and the remittance of HK$50 million to Yuan Cheng.  As will be apparent from my discussion of these issues below, I do not find Ms Kwok’s testimony in this regard credible or convincing.

123.  Although Mr Lim testified, he was not appointed as an executive director of the plaintiff until 2 December 2008.  He therefore had no personal knowledge of any of the controversial matters in issue.  Instead, his knowledge about the matters about which he testified was primarily acquired from documents which he perused after having been appointed an executive director or from what he was told by others.  He also expressed his opinions about various matters.  I did not find his testimony helpful.

124.  The 2^nd defendant made three affirmations in HCMP 1059/2008.  Those affirmations were stated to have been made behalf of the defendant in those proceedings which is the plaintiff in the present proceedings.  He also made a witness statement in these proceedings which was filed by the solicitors then acting for the 1^st to 3^rd and 5^th to 8^th defendants.  Although he initially attended the trial and testified, adopting his affirmations and his witness statement as his evidence in chief, after three days of cross-examination, he lost his temper and refused to attend court to continue his cross-examination.  His cross-examination was therefore not completed.  Further, counsel for the 1^st and 7^th defendants, who were also originally his counsel but ceased to act for him after he failed to return to continue to testify, were deprived of the opportunity of re-examining him.  In the circumstances, I attach no weight to his testimony.

125.  The 3^rd defendant made two affirmations in HCMP 1059/2008 on behalf of the defendant in those proceedings.  He also made a witness statement in these proceedings which he drafted and filed himself.  He adopted these as his evidence in chief.  I found the 3^rd defendant to be a truthful and impressive witness.  He struck me as being a principled, careful and meticulous person.  I have no hesitation in preferring his evidence to that of Mr Tsang and Ms Kwok.

126.  The 7^th defendant made three affirmations in HCMP 1059/2008 on behalf of the defendant in those proceedings.  He also made a witness statement in these proceedings which was filed by the solicitors then acting for him and for the 1^st and 2^nd defendants.  I also found the 7^th defendant to be a truthful and impressive witness and would prefer his evidence to that of Mr Tsang and Ms Kwok.

B. THE CLAIMS

(1) Bribery of directors

(i) The law

127.  I accept the submissions of Mr Alexander Tang, who appeared on behalf of the 3^rd defendant (and had completed his closing submissions before the plaintiff agreed to discontinue its action against the 3^rd defendant), that an allegation of bribery is undoubtedly an allegation of the most serious kind and that accordingly, the following well-known observations in the speech of Lord Nicholls of Birkenhead in Re H & Others (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563, 586 are apposite:

“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.

Although the result is much the same, this does not mean that where a serious allegation is in issue the standard of proof required is higher.  It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred.  The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established.  Ungoed-Thomas J. expressed this neatly in In re Dellow’s Will Trusts [1964] 1 W.L.R. 451, 455: ‘The more serious the allegation the more cogent is the evidence required to overcome the unlikelihood of what is alleged and thus to prove it.’”

128.  I also agree with Mr Tang that the following passages in the judgment of Carnwarth LJ in Mohammad Jafara-Fini v Skillglass Ltd & Ors [2007] EWCA Civ 261 at §§40 & 44 are pertinent (not only to the plaintiff’s claim of bribery but also to the other claims of the plaintiff):

“40. Thus in civil proceedings, the ‘presumption of innocence’ is not so much a legal rule, as a common sense guide to the assessment of evidence. It is relevant not only where the cause of action requires proof of dishonesty, but, wherever the court is faced with a choice between two rival explanations of any particular incident, one innocent and the other not. Unless it is dealing with known fraudsters, the court should start from a strong presumption that the innocent explanation is more likely to be correct.

…

44. In adversarial proceedings there is a temptation to concentrate on the rival explanations, and to assume that disproof of one is tantamount to proof of the other. In The Popi M [1985] 1 WLR 948, 955‑6, Lord Brandon cautioned against that approach. He recalled Sherlock Holmes’ famous observation to Dr Watson (In ‘The Sign of Four’):

‘… how often have I said to you that, when you have eliminated the impossible, whatever remains, however improbable, must be the truth?’”

He gave three reasons why such guidance was inappropriate to the process of fact-finding by a judge at first instance, the first being:

“… the judge is not bound always to make a finding one way or the other with regard to the facts averred by the parties. He has open to him the third alternative of saying that the party on whom the burden of proof lies in relation to any averment made by him has failed to discharge that burden. No judge likes to decide cases on burden of proof if he can legitimately avoid having to do so. There are cases, however, in which, owing to the unsatisfactory state of the evidence or otherwise, deciding on the burden of proof is the only just course for him to take.”

(ii) The parties’ contentions

129.  As noted above, under this claim, the plaintiff complained that the 1^st defendant had sought to improperly influence the directors of the company to vote at board meetings in favour of the Min Tai Group and/or for the benefit of the 1^st defendant and his family by, inter alia, adopting a practice of paying them money for attending meetings, which practice had begun before the 1^st defendant became a director of the company in January 2008.  The plaintiff alleged that the specific board resolutions which the 1^st defendant had sought to influence by these alleged payments included the Remittance Resolution, the Yangzhou Project Resolution, the Management Services Resolution, and the Zhong Cheng Resolution.  It was alleged that these payments were in the nature of corrupt payments and had been received by the 2^nd, 3^rd, 4^th and 7^th defendants wrongfully and in breach of their duties and it was contended that these defendants are liable to account to and make restitution for such payments to the plaintiff. 

130.  In response, the defendants’ pleaded case is that they admit that the 3^rd and 7^th defendants had received a one-off cash payment of RMB3,000 but that this sum was lawful and legitimate reimbursement for transportation expenses and/or overtime allowance.  The defendants contend that since around January 2007, most of the plaintiff’s board meetings had been held in Hong Kong, with the exception of 4 board meetings which took place at its Nanshan office in Shenzhen on or about 10 September 2007, 29 September 2007, 27 February 2008 and 6 March 2008.  They further contend that there were also two occasions on which the board of directors of the plaintiff was required to travel to Xiamen in September 2007 to examine investment opportunities and to Shenzhen for staff functions in November 2007.  They contend that payments of RMB3,000 were made by the plaintiff on only one occasion to the 3^rd and 7^th defendants and five other persons including the financial controller and the company secretary who were all the participants at one of the meetings in Nanshan as reimbursement for transportation expenses or as overtime allowance.  They contend that the payment had been made by the order, and with the authorisation of, the 2^nd defendant as CEO, executed by the administration manager at the plaintiff’s office in China, Chen Yu, and paid out using the plaintiff’s funds.  They therefore deny that the payments were made by the 1^st defendant as alleged by the plaintiff, that the 2^nd defendant had ever received any payments and that any payments had been made to improperly influence the directors.

131.  Although the plaintiff’s allegations of corruption were made as against the 1^st, 2^nd, 3^rd, 4^th and 7^th defendants, as noted above, the plaintiff has already dropped all its claims in this action as against the 3^rd and 4^th defendants.

(iii) Discussion

132.  The plaintiff’s evidence in support of its contentions was set out in affirmations made by Mr Tsang and Mr Leung.  As discussed above, Mr Leung did not testify and his affirmation is therefore not evidence before me.

133.  As regards Mr Tsang, he was not able to give any evidence of having personal knowledge of any payments allegedly inappropriately made by the 1^st defendant.  His evidence on this aspect of the case therefore consisted entirely of claims to have been told various things by certain people. 

134.  In particular, he stated in his affirmation that he had been told by Mr KL Wong that the 1^st and 2^nd defendants had entertained certain directors of the plaintiff, namely, the 3^rd and 7^th defendants, Mr Kimber Hui, Mr Lum and Mr KL Wong, repeatedly to feasts and luxurious entertainment in Shenzhen at the expense of the 1^st defendant.  Mr Tsang also stated that Mr KL Wong had told him that the 1^st defendant had thereafter distributed approximately HK$5,000 in cash to each of the attending directors many times before the meetings held at the headquarters of the plaintiff in Nanshan but that the 1^st defendant had never provided any reason for such cash distribution.  Mr Tsang further stated that he had been told by Mr KL Wong that when the 1^st defendant offered cash to him, he had initially tried to refuse to accept the money but had accepted it reluctantly ultimately.

135.  Mr Tsang also stated that he had been told by the 3^rd defendant that the 1^st defendant had made a cash distribution to the 7^th defendant and that the 1^st defendant had intended also to pay cash to the 3^rd defendant but the 3^rd defendant had refused to accept the money.  Mr Tsang added that the 3^rd defendant’s denial of having accepted cash from the 1^st defendant had been contradicted by the 1^st defendant who had told Mr Tsang on one occasion when Mr Tsang was chatting with him at the Nanshan headquarters of Shenzhen Min Tai that as every director attending the meetings held in Shenzhen would receive HK$5,000, on one occasion when the 3^rd defendant had only received HK$4,000, he had requested the balance of $1,000 from the 1^st defendant. Mr Tsang stated when he asked the 1^st defendant to provide further details, the 1^st defendant had refused to do so.  However, Mr Tsang claimed that during meetings with the 1^st defendant, the 1^st defendant had often mentioned that the directors of the plaintiff should work for the 1^st defendant’s “private interest” as they had accepted advantages from him.

136.  Under cross-examination by Mr Tang, Mr Tsang appeared to change his story and said (contrary to what he had said in his first affirmation) that the 3^rd defendant had in fact admitted to him during a casual conversation in a relaxing atmosphere whilst having tea that he had been treated well by the 1^st defendant and that although he had initially wanted to refuse the money offered by the 1^st defendant, when he saw the others take it, he had also accepted it.  Mr Tsang further alleged that the 3^rd defendant had told him that whereas the others had accepted the services of prostitutes offered by the 1^st defendant, he had declined such services.  Under re-examination, Mr Tsang explained that he had not mentioned the 3^rd defendant’s alleged admission of having received money from the 1^st defendant in his first affirmation because the conversation with the 3^rd defendant in which the 3^rd defendant had made such admission had taken place after he had made his affirmation.  I do not find this explanation at all convincing as Mr Tsang had made five further affirmations and a witness statement since his first affirmation and also had an opportunity to expand upon what he had said in his affirmations when he started his viva voce evidence.  No mention whatsoever was, however, made of this alleged conversation until his cross-examination.

137.  In his affirmation, Mr Tsang also relied upon the affirmation of Mr Leung in support of his allegation that the 1^st defendant had paid bribes to the directors.  As discussed above, Mr Leung was not called to testify and I shall not have any regard to his affirmation.  However, under cross-examination, Mr Tsang again stated that Mr Leung had told him that the 1^st defendant had paid bribes to the directors and that he himself had also received a share of the bribes.

138.  When challenged under cross-examination by Mr Fong as to why he had not asked Mr KL Wong to testify in support of his allegations, Mr Tsang explained that he had not done so because Mr KL Wong had left the plaintiff.  When confronted with the 2011 Annual Report of the plaintiff which showed that Mr KL Wong had only resigned on 15 August 2011, Mr Tsang then claimed that he had not asked Mr KL Wong to testify because it had not occurred to him to do so since Mr KL Wong had left the plaintiff in 2007 or 2008.

139.  I do not find Mr Tsang’s explanation as to why Mr KL Wong had not been asked to testify to be at all convincing.  In this regard, I note that having resigned for the first time in November 2007, Mr KL Wong was re-appointed a director of the plaintiff on 20 November 2009 and remained a director until he resigned again in August 2011.  As late as on 29 September 2010, Master Ko had extended the time limited for the plaintiff to file its supplemental witness statements to 6 October 2010. Further, I note that the witness statement of Ms Kwok was not filed until March 2011. There was accordingly ample opportunity for Mr Tsang to have invited Mr KL Wong to testify on behalf of the plaintiff.

140.  The 7^th defendant’s evidence on this issue was first set out in his first affirmation made in July 2008.  In this affirmation, the 7^th defendant referred to the allegations which had been made by Mr Tsang that the 1^st defendant had on various occasions made cash payments to him and the rest of the directors for the purpose of securing agreement to anything that the 1^st defendant would propose.  The 7^th defendant stated that he denied such allegation of greed and bad faith and went on to say that the truth was that such payments had been made either to reimburse the directors for the expenses which they had incurred for business purposes or to compensate them for having worked overtime.  He also expressed his belief that Mr Leung was at all material times fully aware of this.  He went on to state that he recalled that “one such occasion” was in about September 2007 when he, the 1^st, 2^nd and 3^rd defendants, Mr Chan, Mr Kimber Hui and Mr Lum had had a very long meeting at the office of the plaintiff in Shenzhen in which they had had a long and detailed discussion on the future business direction and strategy of the plaintiff.  The 7^th defendant testified that the meeting lasted for hours and well into the evening with only a break for dinner.  He stated that after the meeting, he received RMB3,000 as compensation for having worked overtime.  He further stated that he considered and still considers that to be his legitimate entitlement.  He went on to express his view that it was unfair for Mr Tsang and Mr Leung to allege, on the basis of such legitimate reimbursement and compensation to the directors, that they had somehow been bribed by the 1^st defendant to be his puppets.

141.  The 7^th defendant again dealt with this issue in his supplemental witness statement made in February 2011.  Here, he confirmed that he had once, and only once, received a payment of RMB3,000, during the period when he was a director of the plaintiff, as compensation for having worked overtime.  He stated that the said payment was made to him and everybody including the company secretary, financial controller and others who had attended the meeting until very late in Shenzhen.  He further stated that the payment had been made in cash by Chen Yu, the then administration manager of the plaintiff who worked at the plaintiff’s Shenzhen office.  He also stated that as far as he was aware, the 2^nd defendant had authorised the said payment.  He added that this incident had been investigated by the ICAC and that it was his understanding that they had been cleared of any wrongdoing.

142.  Under cross-examination by Mr Mok SC, it was pointed out to the 7^th defendant that he had, in his affirmation, stated that he adopted and confirmed as true and accurate the evidence contained in the affirmation of the 3^rd defendant dated 29 July 2008.  It was then pointed out to him that what the 3^rd defendant had stated in his affirmation was as follows:

“It is simply untrue that the cash payments ranging from HK$3,000 to HK$5,000 have been made to the directors as bribes. Such payments have been made either to reimburse us for the expenses that we have incurred for business purposes or to compensate us for having worked overtime.”

143.  The 7^th defendant was challenged by Mr Mok SC as to who it was who had told him that the payments made by the company were either for reimbursement of business expenses or compensation for overtime.  In response, the 7^th defendant stated that when the RMB3,000 was paid to him, what was said was that this was given by the company as compensation (補貼) without stating for what purpose.  He testified that it was he himself who interpreted this as compensation for overtime because the meeting had gone on until very late.  Mr Mok SC then challenged the 7^th defendant’s explanation by pointing out that if the 7^th defendant had been told that the payment was compensation (補貼), he would not have agreed with what had been stated by the 3rd defendant in the paragraph quoted above because “補貼” could not mean “reimbursement of business expenses”.  The 7^th defendant agreed with Mr Mok SC that “補貼” could not mean “reimbursement of business expenses” but stated that he thought the money had been paid as compensation for having attended the meeting until late into the evening.  Mr Mok SC then challenged the 7^th defendant by pointing out that what the 3^rd defendant had stated in the paragraph quoted above was not just that the payments had been compensation for overtime but that they had been either reimbursement of business expenses or compensation for overtime and compensation for having a meeting until late at night had nothing to do with reimbursement of business expenses.  The 7^th defendant then pointed out that the wording in the passage quoted above had been put forward by the 3^rd defendant and he conceded that he may have only concentrated on the reference to compensation for overtime and overlooked the wording which had been used by the 3^rd defendant which included reference to reimbursement of business expenses.

144.  Pointing to the word “payments” (in the plural) set out in the above passage from the affirmation of the 3^rd defendant, Mr Mok SC then suggested that this meant that more than one payment had been made to the directors.  However, the 7^th defendant countered that “payments” (in the plural) could mean payments have been made to more than one person and that that was how he had interpreted would had been set out in the passage.

145.  Under further cross-examination, the 7^th defendant testified that in addition to the single payment of RMB3,000 which he had received, he had also made claims for transportation expenses.  He then readily agreed with Mr Mok SC that such claims for transportation expenses would not have been claims for sums of HK$3,000 to HK$5,000 and that these amounts claimed could not be said to be the reimbursements of business expenses of HK$3,000 to HK$5,000 referred to by the 3^rd defendant. However, he reiterated that he had only received only one payment of RMB3,000.

146.  It was then pointed out by Mr Mok SC that the 7^th defendant had himself stated as follows in his first affirmation:

“I crave leave to refer to paragraphs 8 to 10 of Leung’s Affirmation and paragraph 16 to 21 of the Plaintiff’s First Affirmation in which it is alleged that Mr Chu, the chairman of the Company, has on various occasions made cash payments to me and the rest of the Directors for the purpose of securing agreement to anything he would propose that the board level of the Company.

…

I strong [sic] deny such allegation of greed and bad faith.  The truth is that such payments have been either to reimburse us for the expenses that we have incurred for business purposes or to compensate us for having worked overtime. ...  I still recall that one such occasion was in about September 2007, the Directors had a very long meeting at the headquarter office of the Company in Shenzhen, the PRC ….  The meeting lasted for hours and well into the evening with only a break for dinner.  After it was finished, I received RMB3,000 as compensation for having worked overtime.”

147.  Mr Mok SC put it to the 7^th defendant that these two paragraphs read together indicated that more than one payment had been made and that the payments had been made for two purposes.  It was also suggested by Mr Mok SC that what the 7^th defendant had denied in the above paragraphs was not that the 1^st defendant had made payments but merely the allegation of greed and bad faith.  The 7^th defendant however insisted that what he meant was to deny that the 1^st defendant had made payments.  He also explained that the reference to more than one payment having been made was in reference to the allegation which had been made by Mr Leung in his affirmation and that both he and the 3^rd defendant had merely adopted the wording used in Mr Leung’s affirmation when making their own affirmations.  He added that he had said that “the truth is that such payments have been made either to reimburse us for the expenses which we have incurred for business purposes or to compensate us for having worked overtime”, because he had himself received one payment which he had interpreted as overtime but that for the other directors, payments could have been made for reimbursement of business expenses.  The 7^th defendant also disagreed with Mr Mok’s suggestion that he had tried to change his story in his witness statement.

148.  The 3^rd defendant’s initial evidence on this issue was set out in his first affirmation made in July 2008.  Having referred to the allegations contained in the affirmations of Mr Tsang and Mr Leung that the 1st defendant had on various occasions made cash payments to him and the other directors for the purpose of securing agreement to anything he would propose at the board level of the plaintiff, the 3^rd defendant first adopted the evidence of the 7^th defendant as contained in his first affirmation and stated that the allegation of bribery was completely frivolous and that all the bribery allegations of Mr Tsang were without basis and wholly speculative.

149.  It is important to note, at this juncture, that the evidence of the 7^th defendant which the 3^rd defendant adopted included the evidence relating to the single occasion in September 2007 when the directors of the plaintiff had each been given RMB3,000 after they had attended a very long meeting at the office of the plaintiff in Shenzhen which had lasted until well into the evening.  I am of the view that that is why the 3^rd defendant went on to state that “the truth is that” from January 2007 until the date of his affirmation in July 2008, most of the board meetings of the plaintiff had been held in its Hong Kong office but that there had been four board meetings held in the Shenzhen office.

150.  The 3^rd defendant also dealt with Mr Tsang’s allegations that he had been told of the corrupt payments by Mr KL Wong and Mr Leung.  With regard to Mr Tsang’s allegation that he had been told of these by Mr KL Wong, the 3^rd defendant said that he had recently spoken to Mr KL Wong and that the latter had said that he was not aware of the things said in Mr Tsang’s affirmation relating to him and had insisted that someone had put words into his mouth.  With regard to Mr Tsang’s allegation that he had been told of the alleged corrupt payments by Mr Leung, the 3^rd defendant noted that Mr Leung had retracted his previous evidence and had admitted that what he had previously said was at substantial variance with the truth.

151.  The 3^rd defendant went on to state as follows:

“It is simply untrue that the cash payments ranging from HK$3,000 - HK$5,000 have been made to the Directors as bribes. Such payments have been made either to reimburse us for the expenses that we have incurred for business purposes or to compensate us for having worked overtime.”

152.  The 3^rd defendant also dealt with the allegation of bribes in his witness statement made in March 2011.  Having referred to the allegations which had been made by Mr Leung in his affirmation, he produced the three written statements which had been made by Mr Leung retracting such allegations.  I have already adverted to these written statements above.

153.  The 3^rd defendant then went on to confirm that he had once and only once received a payment of RMB3,000 as reimbursement for the expenses he had incurred for business purposes such as travelling expenses.  He stated that the payment had been made to him and everybody, including the company secretary, financial controller and others, who had attended the meeting until very late in Shenzhen.  He added that the payment had been made in cash by Chen Yu and that as far as he was aware, the 2^nd defendant had authorised the making of “the said payments”.  Like the 7^th defendant, the 3^rd defendant pointed out that the matter had been investigated by the ICAC almost two years previously and that it was his understanding that they had been cleared of any wrongdoing.

154.  In his oral testimony in chief, when asked to comment on Mr Tsang’s allegation that he had admitted receiving bribes during a casual conversation in a relaxing atmosphere whilst having tea with Mr Tsang, the 3^rd defendant reiterated that he had never received any bribes but only the sum of RMB3,000.  He accused Mr Tsang of lying and said that he had been outraged and shocked when he first read Mr Tsang’s allegations.

155.  The 3^rd defendant explained that whilst it was true that he had met with the Tsangs, the atmosphere under which they had met was certainly not warm or relaxing.  He stated that he had met the Tsangs for lunch in a Chinese restaurant and that this had taken place after the papers in HCMP 1059/2008 had been served on him and all the other directors at the time.  He explained that this had resulted in two of the independent non-executive directors, Mr Lum and Mr Kimber Hui, resigning and that after this, Mrs Tsang had approached him and told him that Mr Tsang would like to meet him.

156.  The 3^rd defendant stated that he felt embarrassed and awkward at the lunch meeting because Mr Tsang had previously thrown a tantrum against him and had accused him of being bad.  He explained that Mr Tsang had told him not to be caught in the middle of the dispute between Mr Tsang and the other major shareholder and that since the other directors had left the company, he should also leave.  The 3^rd defendant said that his response to Mr Tsang was simple and crisp.  He stated that he had told Mr Tsang that he had given up his post of assistant general manager at a factory with several thousands of employees to join the plaintiff and that he would only leave if he was given three months’ salary in lieu of notice.  He added that what he said to Mr Tsang had caused everyone at the lunch to look embarrassed and that soon after, he had left.

157.  The 3^rd and 7^th defendants’ evidence that the bribery allegations had been investigated by the ICAC and that they had been cleared of any wrongdoing was not challenged under cross-examination.

158.  Indeed, it is Mr Tsang’s own evidence (as stated in his first affirmation) that he had made a report to the Commercial Crime Bureau of the Hong Kong Police Force (“CCB”).  There is no evidence or even any suggestion that the CCB has taken any action against any of the directors or the defendants.

159.  Having regard to and applying the legal principles as set out in the citations from the authorities which I have referred to above, I am of the view that the plaintiff has failed to discharge its burden of proving the allegations of corruption against the defendants.  In particular, as the allegations are very serious, very cogent evidence is required.  However, the plaintiff’s evidence consists essentially of hearsay statements made by Mr Tsang about what he had allegedly been told by Mr Leung and Mr KL Wong and about admissions allegedly made by the 1^stand 3^rd defendants.

160.  As to what he had allegedly been told by Mr Leung, I have already explained that Mr Leung has signed what are contradictory statements.  I have also expressed the view above that I reject the purported explanation sought to be provided by Mr Tsang as to why Mr Leung had not attended court to testify.  With regard to Mr KL Wong, I have already expressed the view above that Mr Tsang’s explanations as to why Mr KL Wong was not called to testify (or even to make an affidavit or sign any written statement) are wholly unconvincing.  In the circumstances, I am of the view that little if any weight can or should be attached to the hearsay statements made by Mr Tsang as to what he had allegedly been told by Mr Leung and Mr KL Wong.

161.  I also agree with the submission made by Mr Fong and Mr Lau that an adverse inference should be drawn against the plaintiff by reason of his failure to call Mr KL Wong in accordance with the principles laid down in the often cited judgment of Lam J (as he then was) in Ip Man Shan Henry v Ching Hing Construction Company Ltd [2003] 1 HKC 256, 307 in view of Mr Tsang’s wholly incredible and unsatisfactory explanation that he had not called Mr KL Wong to testify on behalf of the plaintiff because it had not occurred to him to do so.

162.  I reject Mr Tsang’s testimony that the 1^st and 3^rd defendants had made admissions of the corrupt payments to him.  I accept the 3^rd defendant’s testimony that he had made no such admission to Mr Tsang.  In any event, I am of the view that it is simply inherently improbable and incredible that if the 1^st and 3^rd defendants had been engaged in making and receiving corrupt payments, they would openly have admitted the same to Mr Tsang, especially in circumstances where Mr Tsang had already accused the directors of wrongdoing and was himself under investigation by the ICAC regarding matters related to the plaintiff.

163.  Conversely, I accept the testimony and explanations of the 3^rd and 7^th defendants denying that they had been paid or that they had received any corrupt payments and regarding the circumstances and nature of such payments as had been made.

164.  Accordingly, I dismiss the plaintiff’s claims against the 1^st, 2^nd and 7^th defendants regarding the alleged giving and receipt of bribes.

(2) Breach of fiduciary duties by the defendants in the setting up of Yuan Cheng and using it to provide rolling facilities

(i) The law

   (a) Directors duties

165.  As noted by the learned judge in Extrasure Travel Insurances Ltd & Anor v Scattergood and Anor [2003] 1 BCLC 598 at §87 (an authority which was cited by and relied upon by both sides), it is trite law that a director owes to his company a fiduciary duty to exercise his powers (i) in what he (not the court) honestly believes to be the company’s best interests, and (ii) for the proper purposes for which those powers have been conferred on him.  Mere incompetence is not a breach of fiduciary duty: it might give rise to a claim for breach of the tortious or contractual duty of care.

166.  In the same case, the learned judge also held (at §§89 and 90) that fiduciary duties are not less onerous than the common law duty of care but are of a different quality.  Fiduciary duties are concerned with concepts of honesty and loyalty, not with competence.  Accordingly, a director is not in breach of his fiduciary duty if he honestly, but unreasonably and mistakenly, believes he is pursuing the company’s best interests.  A director’s duty is to do what he honestly believes to be in the company’s best interests.  The fact that his alleged belief was unreasonable may provide evidence that it was not in fact honestly held at the time: but if, having considered all the evidence, it appears that the director did honestly believe that he was acting in the best interests of the company, then he is not in breach of his fiduciary duty merely because that belief appears to the trial judge to be unreasonable, or because his actions happen, in the event, to cause injury to the company.

167.  As regards proper purposes, the learned judge held (at §92) that it is unnecessary for a plaintiff to prove that a director was dishonest, or that he knew he was pursuing a collateral purpose.  In that sense, the test is an objective one.  The court must apply a four stage test:

(a) identify the power whose exercise is in question;

(b) identify the proper purpose for which that power was delegated to the directors;

(c) identify the special purpose for which the power was in fact exercised; and

(d) decide whether that purpose was proper.

The third stage involves a question of fact.  It turns on the actual motives of the directors at the time.

168.  Whilst Counsel for all the parties participating in the trial cited and relied on the principles laid down in Extrasure (supra), there was one minor area of dispute between Mr Fong and Mr Lau, on the one hand, and Mr Mok SC, Ms Lam and Mr Tang, on the other.  Mr Fong & Mr Lau contended that in order to establish a breach of fiduciary duty on the part of a director, a plaintiff must prove both that the director did not honestly believe what he was doing was in the company’s best interests and that the powers conferred upon him have been exercised for an improper purpose.  However, Mr Mok SC, Ms Lam and Mr Tang submitted that proof either that the director did not honestly believe what he was doing was in the company’s best interests or that the powers conferred upon him have been exercised for an improper purpose would be sufficient to establish liability on his part.  I am of the view that, on the authorities, it is the contention of Mr Mok SC, Ms Lam and Mr Tang which is correct.

   (b) Section 358 of the Companies Ordinance

169.  Mr Fong, Mr Lau and Mr Tang sought to rely on section 358 of the Companies Ordinance on behalf of their respective clients.  Section 358(1) provides as follows:

“If in any proceedings for negligence, default, breach of duty, or breach of trust against a person to whom this section applies it appears to the court hearing the case that that person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that, having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused for the negligence, default, breach of duty breach of trust, that court may relieve him, either wholly or partly, from this liability on such terms as the court may think fit.”

170.  Mr Mok SC argued, however, that section 358 has no application in the present case.  This is because it is expressly provided in section 358(4) that the persons to whom this section applies are, inter alia, “officers of a company”.  He further pointed out that under section 2(1) of the Ordinance, “company” is defined to mean “a company formed and registered under this Ordinance or an existing company”.  However, the plaintiff was incorporated in Bermuda and is registered in Hong Kong under Part XI of the Ordinance. It is therefore a “non-Hong Kong company” as defined in sections 2(1) and 332 of the Ordinance but not “a company formed and registered under [the Companies] Ordinance”.

171.  Mr Mok SC further submitted that registration under Part XI does not bring a non-Hong Kong company within the definition of a “company” under section 2(1).  He submitted that this is reinforced by:

(a) Section 332 of the Ordinance which provides that only Part XI (not Part XIII where section 358 appears) is to apply to “all non-Hong Kong companies, that is to say, companies incorporated outside Hong Kong which, after the commencement of this Ordinance, establish a place of business in Hong Kong …”.

(b) The term “company” in section 358 is not subject to a more extensive definition beyond what is contained in section 2(1) as found in other sections of the Ordinance, for example, sections 156 and 168C(1).

(c) Unlike section 168BC (pursuant to which the plaintiff was granted statutory leave) which applies to a member of a “specified corporation” which is defined in section 2(1) to mean “a company or a non-Hong Kong company”, section 358(4) only provides that the person to whom section 358 applies are “officers of a company”.

172.  In further support of his argument, Mr Mok SC drew my attention to Akai Holdings Ltd v Ernst & Young (2009) 12 HKCFAR 376 in which the Court of Final Appeal confirmed that section 357 (also under Part XIII) only applies to a company incorporated and registered in Hong Kong and does not apply to a limited company which was incorporated outside Hong Kong but registered under Part XI of the Companies Ordinance and having a place of business in Hong Kong.

173.  I agree with Mr Mok SC.  On the plain wording of section 358(4), the persons who can rely on section 358(1) to seek relief from the court are officers of “a company” which is in turn defined in section 2(1) as meaning “a company formed and registered under this Ordinance”.  The plaintiff is not such a company.  Accordingly, I find that in so far as the defendants have sought to rely on section 358 to seek relief from this court, they are not so entitled.

(ii) The Parties’ Contentions

174.  As noted above, the plaintiff’s case is that the defendants caused Yuan Cheng to be set up and HK$50 million to be transferred to it so that this money could be used by the 1^st and 2^nd defendants to provide rolling facilities to companies related to or controlled by them[1].  Under this main case, the plaintiff relies on the following contentions:

Yuan Cheng

(a) The setting up of Yuan Cheng was not authorised and was not known to the Tsangs.  It was effected by the use of documents on which the signature of Ms Kwok had been forged.

(b) By 14 January 2008 at the latest, the 2^nd to 4^th and 7^th defendants knew or ought to have known that the establishment of Yuan Cheng involved forged documents.  In support of this contention, the plaintiff alleges that the 3^rd defendant had prepared a report (the “Au Report”) setting out in detail his enquiries about the establishment of Yuan Cheng and his conclusion that the establishment of Yuan Cheng involved unlawful acts, and in particular, the forgery of the signature of Ms Kwok.  The plaintiff further alleges that the Au Report was distributed to, inter alia, the 2^nd to 4^th and the 7^th defendants prior to the 14 January 2008 Meeting at which queries were raised specifically over the legality of, inter alia, the formation of Yuan Cheng.  The plaintiff also alleges that at the said meeting, the board was informed that Ms Kwok had not signed any documents for the establishment of Yuan Cheng.

(c) Notwithstanding the knowledge of the second to fourth and 7^th defendants, they failed and/or refuse to conduct any enquiries as to whether Ms Kwok had signed any documents for the establishment of Yuan Cheng.  On the contrary, the 1^st to 4^th and 7^th defendants proceeded to pass the Remittance Resolution.

(d) After the Remittance Resolution had been passed, wrongfully and in breach of their duties, the 1^st to 4^th and 7^th defendants caused the plaintiff to transfer HK$50,000,000 to Yuan Cheng to put this sum under the control of Yuan Cheng which was an unauthorised and unlawful entity.  Yuan Cheng was then used as a vehicle in Mainland China to channel the said sum for improper purposes not in the interests of and/or with no apparent benefit to the plaintiff and/or to enable the same to be applied for the personal benefit of the 1st defendant, his family or related companies and not for proper commercial purposes.

(e) Wrongfully and in breach of their duties to the plaintiff, the 1^st to 3^rd defendants and the 7^th defendant caused or procured the delivery of the financial documents of Yuan Cheng, including cheque-books, chops and seals, bank cards, keys to safe-deposit boxes to Madam Cheng, the niece of the 1^st defendant’s wife.

Yangzhou Project

(f) Wrongfully and in breach of their duties to the plaintiff, the 1^st to 3^rd and 7^th defendants had failed and refused to conduct any proper enquiry or due diligence into the proposed acquisition of the Yangzhou Project and all the entire share capital of Min Tai Development and had proceeded to pass the Yangzhou Project Resolution as a result of which Yuan Cheng paid over the sum of HK$5 million to Min Tai Development.  It is alleged that the 1^st to 3^rd and 7^th defendants knew or ought to have known that the terms as outlined in the Letter of Intent and the Draft Agreement are contrary to commercial sense and detrimental to the interests of the plaintiff, given that one of the effects of the said transaction (if proceeded with) would be to use the plaintiff’s money to repay a loan of HK$90 million reportedly owed by Min Tai Development to the 1st defendant.  It is also alleged that as at June 2007, Min Tai Development had a negative asset value of HK$7.7 million according to the Nelson Wheeler Report.

(g) Wrongfully and in further breach of their duties to the plaintiff, the 1^st to 3^rd and 7^th defendants had failed and/or refused to cause Yuan Cheng or the plaintiff to recover the earnest money of HK$5 million paid under the Letter of Intent to Min Tai Development.

Hua Jia Fu

(h) Wrongfully and in breach of their duties to the plaintiff, the 1^st to 3^rd and 7^th defendants passed the Management Services Resolution even though the transaction was not in the interests of the plaintiff but was brought about because of the connection between DCHJF and the Min Tai Group and had further caused Yuan Cheng to pay RMB8,000,000 to DCHJF pursuant to the terms of the Management Services Agreement and the Supplemental Agreement.  The plaintiff contends that the 1^st to 3^rd and 7^th defendants had failed to act bona fide in the interests of the plaintiff because the Management Services Agreement and the Supplemental Agreement were not on normal commercial terms and were blatantly disadvantageous to the plaintiff in that:

(1) Yuan Cheng was required to put up an unreasonable and disproportionate payment of RMB8,000,000 to DCHJF up-front, in return for receiving management service fees of only RMB1.45 million per annum for two years, notwithstanding that the facilities of the property under management had not been completed as at April 2008.

(2) Although the obligation of DHJF to refund RMB8 million after two years was guaranteed by DCMT, there was no security given to Yuan Cheng and the plaintiff to ensure that the refund would be fully made.

(3) At the very least, Yuan Cheng had allowed DCHJF and/or DCMT to make use of a substantial sum for a long period of time at no interest or other compensation.

Zhong Cheng

(i) Wrongfully and in breach of their duties to the plaintiff, the 1^st to 3^rd and 7^th defendants:

(1) Failed and/or refuse to conduct any or any proper enquiry into the terms of the Co-operation Framework Agreement.

(2) Proceeded to pass the Zhong Cheng Resolution to endorse and proceed with the Co-operation Framework Agreement.

(3) Caused RMB5 million to be paid by Yuan Cheng to Zhong Cheng purportedly as a refundable security deposit pursuant to the Co-operation Framework Agreement.

        The plaintiff contends that the Co-operation Framework Agreement was entered into without any or any proper authorization by the board of directors of Grand Field HK as the only directors at all material times were Ms Kwok and Mr Ma[2]. It is also contended that the terms of the Co-operation Framework Agreement were manifestly disadvantageous to the plaintiff in that Zhong Cheng was paid 10 times its annual fee even before any work was started.  The plaintiff further contends that the transaction under the Co-operation Framework Agreement was highly irregular and improper in that the licence to carry out the construction work which Zhong Cheng would be appointed to carry out belonged to Zhong Cheng so that Yuan Cheng could have no assurance that it would be able to enjoy or lawfully receive 90% of the profits derived by Zhong Cheng from the exploitation of its construction licence. 

(j) The plaintiff also complains about the announcement relating to the Co-operation Framework Agreement which, as noted above, was published on the day on which the Co-operation Framework Agreement was entered into, contending that the 1^st to 3^rd and 7^th defendants had failed to disclose that, contrary to the announcement, Zhong Cheng is in fact closely connected with the 1^st defendant and/or the Min Tai Group, which is controlled by the 1^st defendant’s family.

(k) Wrongfully and in breach of their duties to the plaintiff, the defendants caused the sum of RMB10 million to be paid by Yuan Cheng to Zhong Cheng purportedly pursuant to the Tender Agreement for the purpose of satisfying a third-party venture partner of Zhong Cheng’s creditworthiness in relation to another construction project in which Zhong Cheng had been invited to participate.  The plaintiff contends that the payment to Zhong Cheng was improper and not in the interests of the plaintiff for a number of reasons, including, in particular, that the construction project referred to in the Tender Agreement did not in fact exist.

(l) Wrongfully and in breach of their duties to the plaintiff, the defendants caused a further sum of RMB7 million to be paid to Zhong Cheng by Yuan Cheng for the purpose of enabling Zhong Cheng to satisfy another third-party venture partner of its creditworthiness.

Hua Ke

(m) Wrongfully and in breach of their duties to the plaintiff, the 1^st to 3^rd and 7^th defendants caused sums totalling RMB33.1 million to be channelled between Yuan Cheng and Hua Ke which were booked as loans in the accounts of Yuan Cheng (the “Fund Transfers”).  The plaintiff contends that the Fund Transfers were not made bone fide in the interest of the plaintiff in that:

(1) The amounts transferred to Hua Ke were booked as loans in the account of Yuan Cheng with no security and interest.

(2) Of the sum transferred by Yuan Cheng to Hua Ke, RMB27 million was borrowed by Yuan Cheng from a bank at a commercial rate of interest with security put up by Yuan Cheng.

(3) The said transfers were fictitious transactions purportedly created to make mispresentation to the authorities that the money of Yuan Cheng was not lying idle in the banks.

(4) The plaintiff was put in serious jeopardy of possible default by Hua Ke of not repaying the substantial funds transferred.

(5) The alleged loans to Hua Ke were unlawful according to PRC law.

(n) A further complaint made by the plaintiff relating to the transfers between and is that the 1^st and/or 2^nd defendant failed and/or refused to disclose his interest in Hua Ke at the first opportunity at a meeting of directors or in writing to the directors.

Underlying the above contentions is the plaintiff’s claim (which I have already rejected above) that the 1^st defendant had paid bribes to the directors including the 2^nd, 3^rd, 4^th and 7^th defendants in order to influence them to act in the manner complained of above.

175.  In response to the plaintiff’s contentions summarised in sub-paras (a) to (e) in the previous paragraph (the “Yuan Cheng Contentions”), the defendants’ case is as follows:

(a) Yuan Cheng was duly and lawfully established as a wholly owned subsidiary of the plaintiff in Mainland China with the unanimous consent and/or approval of the plaintiff’s board of directors in or around September 2007.  The establishment of Yuan Cheng was made bona fide in the best interests of the plaintiff in view of its hitherto disastrous business performance under the management and leadership of the Tsangs.  The incorporation of Yuan Cheng did not involve the use of forged documents and/or of unlawful acts.  In support of these contentions, the defendants relied on the following matters:

(1) After the 2^nd defendant and Hong Kong Zhongxing had been brought in as a strategic investor of the plaintiff in 2007, the plaintiff’s financial position significantly improved, as illustrated by the increase of its cash balance from HK$2.5 million to HK$71,000,000 within the 12 months in 2007.

(2) The plaintiff was able to exploit the 2^nd defendant’s numerous connections in Mainland China in obtaining lucrative business opportunities, which, if successful, would have yielded a decent share of profits for the plaintiff.  However, negotiations in all those projects had fallen through because of the plaintiff’s hitherto poor business performance and its poor reputation as a result of the investigations by the ICAC into the Tsangs.

(3) At the time, the plaintiff had only one wholly owned foreign enterprise (“WOFE”) in Mainland China, Grand Field Shenzhen, which was the corporate vehicle through which the plaintiff had previously entered into commercial transactions in Mainland China. However, since Grand Field Shenzhen was itself involved in lawsuits (and its bank accounts frozen) and was widely known to be a subsidiary of the plaintiff, a lot of potential business partners were driven away.

(4) Concerned with the situation, the plaintiff’s board of directors decided to set up another WOFE in Mainland China.  The resolution to do this was passed at the 27 September 2007 Meeting.  Yuan Cheng was the WOFE which was set up pursuant to this resolution, its name having been deliberately chosen to distance it linguistically and reputationally from the plaintiff and its poor record.

(5) At the time of the passing of the said resolution at the 27 September 2007 Meeting, the Tsangs had been appointed as and were consultants of the plaintiff.  As such, they were fully informed of the board’s decision to set up Yuan Cheng and gave unreserved support for the same.

(6) After the passing of the said resolution, the 4^th defendant instructed his subordinate, Mr Xiao Zhi Dong (“Mr Xiao”) to prepare all the necessary documentation for Yuan Cheng’s incorporation.  Mr Xiao was not familiar with the setting up of WOFEs in Mainland China and propose engaging a professional agent for this purpose.  Eventually, the 4^th defendant signed the Authorisation Letter referred to above.  YK Lau signed Ms Kwok’s name on some of the application documents because Ms Kwok was on maternity leave.

(b) With regard to the Au Report, the defendants’ case is that it was not a report on enquiries made by the 3^rd defendant or his conclusions and was accordingly not signed by him.  Instead, it was a written record of the views and suspicions regarding the establishment of Yuan Cheng which Mrs Tsang had told the 3^rd defendant about in late November/early December 2007 and which he had made at her request (as she had difficulty in expressing herself in writing, having only been educated to middle school level).  As Mrs Tsang had expressly prohibited the 3^rd defendant from disclosing the Au Report to anyone, he had not given it to anyone. However, to the best of the 3^rd defendant’s knowledge, Mrs Tsang had given the Au Report to Mr Chan.

(c) The remittance of HK$50 million from Grand Field HK to Yuan Cheng was authorised by the 2^nd defendant as CEO as its agreed capital injection pursuant to the board resolution passed at the 27 September 2007 Meeting and the Remittance Resolution.  The telegraphic transfer application document relating to the said remittance was signed by Ms Kwok and Mr Cheng.  Ms Kwok was known to act in accordance with Mrs Tsang’s wishes and approval.

(d) It was admitted by the defendants that Madam Cheng had obtained Yuan Cheng’s books and financial documents from the 2^nd defendant and had retained them for a short period in around mid-2008, during which time she had rendered assistance to Yuan Cheng’s management and affairs.

176.  The defendants’ case in response to the plaintiff’s contentions as summarised in para 174(f) and (g) above (the “Yangzhou Project Contentions”), is as follows:

(a) Min Tai Development was at all material times an investment holding company which, through its subsidiaries, acted as a “land bank” holding significant amounts of land in Mainland China for potential development, including the Yangzhou Project.

(b) The plaintiff’s proposed acquisition of Min Tai Development and the Yangzhou Project were discussed at the 16 April 2008 Meeting.  As Madam YL Weng was an executive director of Min Tai Development, and the proposed acquisition would therefore be a connected transaction under the Listing Rules, the board resolved that any letter of intent to be signed in respect of the proposed acquisition or to be made conditional upon approval being obtained from the shareholders of the plaintiff in general meeting in accordance with the relevant requirements under the Listing Rules and that if no such approval was obtained, the plaintiff should be entitled to be refunded any deposit paid to Min Tai Development.

(c) No final agreement on the terms and conditions for the proposed acquisition had been reached.  Under the terms of the Letter of Intent, Metro China was not under any obligation to enter into a formal acquisition for the Yangzhou Project unless it so wished upon the completion of the due diligence exercise.

(d) The Nelson Wheeler Report had been commissioned jointly by the Tsangs and the 1^st defendant.  As the Yangzhou Project had not been proceeded with, the said report remained a draft.

(e) The HK$90 million was not a debt owed by Min Tai Development to the 1^st defendant. Instead, the said sum was the personal investment of Madam YL Weng in the Yangzhou Project, which was to be converted into registered/invested capital.  Such conversion was not yet complete when the Nelson Wheeler Report was drafted and was therefore not reflected as such in the same.

(f) The plaintiff, through Yuan Cheng, paid HK$5 million to Min Tai Development on behalf of Metro China pursuant to the Letter of Intent.  The reason why the said sum was channelled through Yuan Cheng was because Metro China had only been set up for a short time and did not have its own bank account.

(g) At the material time, the plaintiff’s board held the honest and genuine belief that the proposed acquisition of Min Tai Development, with its large land bank for future development, would be an excellent long-term investment for the plaintiff which focused on real estate development in Mainland China. This was especially so given the stringent controls imposed by the Mainland Chinese government on land transactions.  It was agreed that the purpose of the proposed acquisition was not to make a quick profit but would be for the purpose of long-term investment which would turn out to be profitable.  The view of the board had been shared by the Tsangs in as early as April 2007 when they were still directors of the plaintiff and were also in favour of acquiring Min Tai Development as a long-term investment.  Accordingly, it was denied that the proposed acquisition of Min Tai Development was contrary to commercial sense and/or detrimental to the interests of the plaintiff.  On the contrary, the proposed acquisition was commercially worthwhile and would be in the best interests of the plaintiff. Further, the decision to acquire Min Tai Development was one which was within the range of positions a reasonable board and/or a reasonable director would have made, given the facts and what was known at the time, and the 1^st to 3^rd and 7^th defendants acted honestly, reasonably and bona fide in the best interests of the plaintiff at all material times.

(h) In response to the plaintiff’s specific allegation that the defendants had failed and/or refuse to conduct any proper enquiry or due diligence, the defendants pointed out that in addition to obtaining the Nelson Wheeler Report, Mr Tsang had, in his capacity as executive director and chairman, already sent Mr Cheng to conduct the site inspection at Yizheng which had resulted in the preparation of the Cheng & Song Report.  The defendants further contend that Mr Tsang had also caused to be prepared an acquisition proposal on the Yangzhou Project and that the fifth and 7^th defendants had paid another due diligence site visit of the Yangzhou Project in around late 2007.

(i) The Placement was not proceeded with as a result of Mr Tsang’s application for interim injunctive relief on 19 July 2008 in HCMP 1059/2008.  Accordingly, the acquisition agreement which was provided for in the Letter of Intent was not signed and subject to the necessary adjustments for expenses, the earnest money was refunded in full in the amount of RMB4.4 million.

177.  The defendants’ case in response to the plaintiff’s contentions as summarised in para 174(h) above (the “Hua Jia Fu Contentions”), is as follows:

(a) The conclusion of the Management Services Agreement and the Supplemental Agreement were pure commercial decisions within the exclusive management powers of the plaintiff’s board, and are not open to question by Mr Tsang as an individual shareholder of the company.

(b) The Management Services Agreement and the Supplemental Agreement were on normal commercial terms, which were fair and reasonable, and were in the best interests of the plaintiff.  Entering into these agreements were decisions which were within the range of decisions which a reasonable board and/or reasonable directors would have reached.  In support of these contentions, the defendants relied on the following matters:

(1) With the reputation of the plaintiff badly damaged as a result of the investigations by the ICAC into the Tsangs and the subsequent criminal charges against them, it was very difficult for the plaintiff to enter into any substantial business transactions.

(2) In the circumstances, the plaintiff’s board came to the decision that the plaintiff had to look for opportunities to diversify its business and to look for additional income sources.

(3) The management service fees payable under the agreements were determined after arm’s length negotiations between Yuan Cheng and DCHJF with reference to market rates quoted by property management and consultancy services companies providing similar services in Mainland China.

(4) The deposit paid under the agreements was determined in a similar manner and was considered by the directors as reasonable taking into account that DCHJF would be required to incur substantial expenses in marketing and promoting the Shops so as to facilitate the provision of the services by Yuan Cheng.

(5) Under the Management Services Agreement and the Supplemental Agreement, Yuan Cheng was entitled to a guaranteed amount of management service fees of RMB1.45 million. Further, DCHJF was obliged to repay the deposit to Yuan Cheng in full upon termination of the engagement whether by DCHJF or Yuan Cheng.  Such repayment was protected as DCHJF was obliged to make the refund even with the termination was caused by a breach on the part of Yuan Cheng.

(6) The obligations of DCHJF were fully guaranteed and secured by DCMT.

(7) In view of the aforesaid and the fact that the Shops, as of mid‑2008, constituted a large commercial complex with hundreds of shop tenants and a busy livelihood, the board genuinely and honestly considered the transaction commercially sensible and advantageous to the plaintiff and its shareholders as a whole.

178.  The defendants’ case in response to the plaintiff’s contentions as summarised in para 174(i) to (l) above (the “Zhong Cheng Contentions”), is as follows:

(a) The Co-operation Framework Agreement was entered into pursuant to a board resolution of Grand Field HK passed by its directors, Ms Chen and Mr Hui at a properly convened board meeting held on 17 June 2008.

(b) Ms Chen and Mr Hui were appointed as directors of Grand Field HK on 20 April 2008 with immediate effect.  Their appointments were subsequently confirmed unanimously by the shareholders of Grand Field HK on 16 July 2008.

(c) The conclusion of the Co-operation Framework Agreement by Grand Field HK was a pure commercial decision within the exclusive management powers of the plaintiff’s board, and is not open to question by Mr Tsang as an individual shareholder of the company.  The decision to conclude the Co-operation Framework Agreement was a decision which was within the range of decisions which a reasonable board and/or reasonable directors would have made having regard to the situation at the time the decision was made.

(d) Relying on the following matters, the defendants contend that the Co-operation Framework Agreement was on normal commercial terms, which were fair and reasonable, and were in the best interests of the plaintiff and its shareholders as a whole:

(1) With the plaintiff’s principal area of business being in real estate development in Mainland China, it was of vital importance for the plaintiff to affiliate with an entity holding a construction licence in Mainland China, such as Zhong Cheng.

(2) In entering into the Co-operation Framework Agreement, the plaintiff would benefit from Zhong Cheng’s right to embark on different projects of real estate construction in Mainland China.  It provided a good opportunity for the plaintiff and its subsidiaries to secure a long-term and stable main contractor for its property development projects in Mainland China and, at the same time, provided a stable income source for the plaintiff and its subsidiaries.

(3) The security deposit in the amount of RMB5 million was determined after arm’s length negotiations between the parties to the Co-operation Framework Agreement and was refundable pursuant to the terms thereof.  The plaintiff’s board generally and honestly considered that it was fair and equitable to Grand Field HK and Zhong Cheng.

(e) The 1^st to 3^rd and 7^th defendants acted honestly, reasonably and bona fide in the best interests of the plaintiff at all material times.

(f) With regard to the payment of RMB10 million by Yuan Cheng to Zhong Cheng  pursuant to the Tender Agreement,  this was paid at the request of Zhong Cheng’s partner in the Haiyifang Project which Yuan Cheng had engaged Zhong Cheng to tender for.

(g) The conclusion of the Tender Agreement was a pure commercial decision within the exclusive management powers of the plaintiff’s board of directors, and is not open to question by Mr Tsang as an individual shareholder of the plaintiff.  In any event, the concluding of the Tender Agreement was a decision which was within the range of decisions which a reasonable board and reasonable directors would have made having regard to the situation at the time it was made.

(h) The Haiyifang Project was a project which at all material times did and still does exist.

(i) The Tender Agreement was in the best interests of the plaintiff and its shareholders as a whole, especially in view of the strategic relationship between Yuan Cheng and Zhong Cheng under the Co-operation Framework Agreement.

(j) Yuan Cheng had fully recovered the sum of RMB10 million from Zhong Cheng.

(k) The payment of the sum of RMB7 million by Yuan Cheng to Zhong Cheng was for similar purposes and under a similar, but separate, arrangement as the Tender Agreement.  Yuan Cheng fully recovered the sum of RMB7 million from Zhong Cheng after the relevant construction project was not proceeded with.

179.  With regard to the plaintiff’s contentions as summarised in para 174(m) above (the “Hua Ke Contentions”), the defendants’ case is that the Fund Transfers were carried out lawfully for the purpose of enabling Yuan Cheng to convert its working capital from Hong Kong dollars to Renminbi (the “Forex Arrangements”).  The Forex Arrangements were necessary in light of Yuan Cheng’s operational needs amid the tightened foreign-exchange regulations in Mainland China.  The defendants rely in particular on the following matters in support of their case:

(a) Since the plaintiff’s injection of HK$50 million into Yuan Cheng in or around January 2008, this amount had been deposited in Hong Kong dollars in a foreign currency account held by Yuan Cheng with the China Construction Bank.  Under the then prevailing foreign exchange control regulations in Mainland China, any conversion of such funds from Hong Kong dollars to Renminbi was subject to a limit of US$200,000 per week.

(b) In the period between January and April 2008, Yuan Cheng converted part of the Hong Kong dollars in its account to Renminbi on 10 occasions.  The amount converted totalled around RMB14.15 million. The conversion of the funds from Hong Kong dollars to Renminbi was commercially sensible in view of the appreciating value of the Renminbi.

(c) After the 10^th conversion, the China Construction Bank tightened its foreign exchange policy and refused to allow Yuan Cheng to further convert its funds from Hong Kong dollars to Renminbi on the ground that such conversion was not justified by actual operational needs.  As a result, about HK$34 million remained in Yuan Cheng’s account.  This posed a serious problem for Yuan Cheng since the amount already converted into Renminbi was insufficient for its various working capital needs at the time.

(d) After strenuous negotiations with various banks and officials from the State Administration of Foreign Exchange, by a loan agreement and a pledge agreement both dated 3 June 2008 entered into between Yuan Cheng and the Shanghai Pudong Development Bank (“SPDB”), Yuan Cheng successfully obtained RMB27 million by way of a loan from SPDB in return for pledging the unconverted HK$34 million as security.

(e) Despite such loan and pledging arrangements, Yuan Cheng was informed by its Mainland Chinese bank that it could not simply keep the funds idle in its accounts but had to utilise the funds for its operations, since that was its stated purpose of foreign exchange when making the application under the said agreements.

(f) Under such circumstances, the plaintiff’s board agreed with Hua Ke to make the Funds Transfers in Renminbi on a temporary basis, such that Hua Ke would re-transfer the same to Yuan Cheng when demanded within a short period of time.

(g) The choice of Hua Ke as a transferee company was a pure commercial decision based on its trustworthiness and reliability as a company, as well known by the 1^stand 2^nd defendants at the time.  Under the arrangement, no financial assistance in substance or consideration was given to Hua Ke, and only Yuan Cheng benefited from the Fund Transfers.

(h) The legality of the Forex Arrangements was confirmed by a legal opinion issued by the Guangdong Wansheng Law Firm which stated that the Fund Transfers were legal and proper.

(i) The sums transferred to Hua Ke under the Fund Transfers were fully repaid to Yuan Cheng.  In view of the commercial benefits to Yuan Cheng, it suffered no loss whatsoever under the Forex Arrangements.

(j) The Fund Transfers made under the Forex Arrangements were fully disclosed to the plaintiff’s shareholders by way of a public announcement dated 10 October 2008.  Although the disclosure was slightly delayed, such delay was not deliberate or otherwise in breach of the duties owed by the defendants to the plaintiff.

(iii) Discussion

180.  In order to properly consider the parties’ rival contentions, it is necessary to understand the background and context against which the various events which have given rise to the plaintiff’s claims against the defendants occurred.

181.  Of fundamental importance is the fact that the plaintiff was a relatively small listed company set up by the Tsangs who were extremely autocratic in their management of the plaintiff as they treated the plaintiff as their own asset.  Even after Hong Kong Zhongxin had invested HK$130,708,850 in acquiring shares in the plaintiff, the Tsangs remained the largest shareholders in the plaintiff, holding 22.1483% of the shares in the plaintiff.  Hong Kong Zhongxin held 22.1415%.

182.  I accept the testimony of the 3rd defendant that the Tsangs had effectively been forced to resign from their positions in the plaintiff as this was the condition by the Hong Kong Stock Exchange for the resumption of trading in shares in the plaintiff.  That such resumption of the trading in shares in the plaintiff occurred on the very same day that the Tsangs wrote to the Hong Kong Stock Exchange to express their agreement to resign with effect from the date upon which the shares of the plaintiff resumed trading and to state that after their resignation, they would not thereafter undertake any management functions of the plaintiff and/or any of its subsidiaries is the best evidence in support of the 3rd defendant’s testimony in this regard.

183.  I also accept the testimony of the 3^rd defendant that the appointment of Ms Kwok as a director of almost all the subsidiaries of the plaintiff together with Mr Ma and her also becoming the “A” signatory of the bank accounts of the plaintiff and of Grand Field HK on the very same day was for the purposes of having a “gatekeeper” to look after the interests of the Tsangs in view of their resignation and their statement to the Hong Kong Stock Exchange that they would no longer undertake any management functions.  I reject Mr Tsang’s testimony that Ms Kwok’s appointment as director was because of the invitation of the members of the board of directors and that her appointment as signatory of the bank accounts of the plaintiff and its subsidiaries was due to the trust placed on her by the board.

184.  It is important to note that the Tsangs were also appointed as consultants of the plaintiff on the same day.  I accept the testimony of the 3rd defendant that as consultants, the Tsangs had at all material times been informed of the affairs of the plaintiff including its personnel and business decisions both in Hong Kong and in Mainland China.

185.  It is also of significance not only that Mr Tsang was appointed a member of the management committee of the plaintiff by reason of a resolution passed at the board meeting of the plaintiff on 14 January 2008 but that Mr Tsang’s membership on this committee had been proposed by the 2^nd defendant who had also stated that all projects would be presented for consideration by this committee before being presented to be voted on by the board.

186.  I find that as a result of the above arrangements, the Tsangs continued to be able to take and did take an active interest in the operations of the plaintiff and the management of its affairs.  They were also able to control the finances of the plaintiff through Ms Kwok being the “A” signatory of its bank accounts.  I reject the suggestions by Mr Tsang in his testimony that as he was no longer a director of the plaintiff, he did not pay any attention to its affairs nor was he consulted by Ms Kwok.

187.  Another important aspect of the background against which the plaintiff’s contentions must be considered is the position of the 2^nd defendant. Not only was his appointment as CEO and COO of the plaintiff proposed by Mr Tsang, the latter had, in making such proposal, spoke in glowing terms of the vast experience of the 2^nd defendant in conducting business in Mainland China and had stated that the appointment of the 2^nd defendant would assist in the development of the business of the plaintiff and improve its business performance.  The 2^nd defendant had then entered into the TRA which exposed himself to personal liability to the plaintiff should his efforts at improving and developing the business of the plaintiff fail.  It is therefore not without some irony that Mr Tsang, through the plaintiff, now complains that the efforts which the 2^nd defendant appears to have made to develop the business of the plaintiff were in fact instead efforts to benefit himself, companies connected to him and/or the 1^st defendant and/or companies connected to him.

188.  I accept the evidence of the 3^rd defendant that it was Mr Tsang who had invited the 1^st defendant to become chairman of the plaintiff, not only because of his wealth of experience and success in real estate business in Mainland China but also because he was a member of the National Committee of the Chinese People’s Political (“NCCPP”) and Mr Tsang wanted to make use of the 1^st defendant’s status to have more connections in Mainland China so as to assist the plaintiff’s real estate business there.

189.  Yet another important aspect of the factual background is that between January 2007 and January 2008, which is around the period of time when the plaintiff alleged that the wrongful acts of the defendants complained of occurred, Hong Kong Zhongxin invested a total of HK$130,708,850 in acquiring shares in the plaintiff.  The plaintiff contends that these funds had been made available by the 1^st defendant and/or his wife.  Whether or not this was true, the fact remains that such an amount had been invested by the 1^st and/or 2^nd defendants in the plaintiff and there is no evidence that the 1^st and/or 2^nd defendants and/or any entities related to them was short of funds or in need of rolling credit facilities.

190.  In the circumstances, I see much force in the submissions made on behalf of the defendants that it did not make commercial sense for the 1^st and/or 2^nd defendants to have invested over HK$130 million in order for them and/or their related entities to benefit from the alleged use of the much smaller amounts involved under the plaintiff’s various complaints.

191.  Conversely, I do not accept the plaintiff’s submission (relying on the evidence that the share price of the plaintiff was less than HK$0.10 per share at the beginning of 2007 but had once reached a high of HK$0.64 in November 2007, after the Tsangs had resigned) that the 1^st and 2^nd defendants had wished to seek control of a listed company and benefit from the extraordinary rise and fluctuation in the price of the plaintiff’s shares. After all, when Hong Kong Zhongxin had first begun to invest in the plaintiff, the plaintiff was indisputably in dire straits and there was therefore no certainty that the price of the plaintiff’s shares would rise.

192.  In considering the plaintiff’s various complaints under this section, I also bear in mind my rejection of the plaintiff’s allegations of bribery against the defendants as it is part of the plaintiff’s case that the defendants had been compromised by the alleged bribes in making the decisions and doing the acts complained of. 

193.  I turn now to consider the plaintiff’s various complaints.  In discussing these complaints, as the targets of the plaintiff’s complaints have changed over time, for the sake of brevity, I shall use the term “defendants” to refer to whichever of the defendants remain the targets of each of the various complaints.

(a) Yuan Cheng Contentions

194.  For the reasons set out below, I have no hesitation in rejecting the plaintiff’s case that the setting up of Yuan Cheng was not authorised, was not known to the Tsangs and was effected by the use of forged documents.  I also reject the plaintiff’s case that the Remittance Resolution had been wrongfully passed for the improper purpose alleged by the plaintiff and that the remittance of HK$50 million to Yuan Cheng was wrongful and for improper purposes.

195.  I accept the defendants’ case and evidence that Yuan Cheng was bona fide set up by the plaintiff’s board for proper purposes because a corporate vehicle which ostensibly had no connection with the plaintiff needed to be set up due to the poor reputation of the plaintiff (by reason of its poor track record and the fact that the Tsangs were being investigated by the ICAC).  That this was the motivation behind the setting up of Yuan Cheng is also supported by the fact that the board of the plaintiff had even gone so far as to try to change the name of the plaintiff.

196.  Further, I find that, contrary to the suggestion of Mr Tsang, there was nothing surreptitious in the manner in which Yuan Cheng had been set up.  On the contrary, its setting up (with a capital of HK$50 million) was expressly unanimously agreed to by all the directors who attended the 27 September 2007 Meeting and recorded in the minutes of that meeting.  The proposal for the setting up of Yuan Cheng had in fact been made by the 4^th defendant (against whom the plaintiff had inexplicably already dropped its claim by the time of the trial) and the directors who voted in favour of the proposal included Mr KL Wong and two independent non-executive directors, Mr Kimber Hui and Mr Lum, against whom the plaintiff has not made any allegation of wrongdoing.  Indeed, had the 4^th defendant, Mr KL Wong, Mr Kimber Hui and Mr Lum voted against the resolution, it would not even have been passed.

197.  I accept the explanations provided by the defendants regarding the circumstances under which Mr YK Lau signed the documents relating to the setting up of Yuan Cheng pursuant to the Yuan Cheng Authorisation Letter. I find that Mr YK Lau was authorised to sign and did sign Ms Kwok’s name on some of the documents as a matter of convenience, in particular since she was on maternity leave.  Again I note that the Yuan Cheng Authorisation Letter was signed by the 4^th defendant against whom the plaintiff has dropped its claims.

198.  I accept the testimony of the 3rd defendant regarding the preparation of the Au Report.  I find that it was not a report on enquiries made by him or his conclusions but was instead a written record of what he had been told by Mrs Tsang who had also told him to keep such matters confidential to himself.  I also accept the testimony of the 3^rd defendant that he did as requested by Mrs Tsang.  I therefore find that, contrary to the plaintiff’s contention, the Au Report was not made known to the directors of the plaintiff by the 3^rd defendant before the 14 January 2008 Meeting.  I also accept the testimony of the 7^th defendant to this effect.

199.  In this regard, I have little difficulty in rejecting the testimony of Mr Tsang which again serves to illustrate the unsatisfactory nature of his testimony.  In his first affirmation made in June 2008, Mr Tsang claimed that on 5 December 2007, the 3^rd defendant had already reported that the incorporation of Yuan Cheng involved illegalities and that, as far as Mr Tsang was aware, the report had been circulated to all directors of the plaintiff before 14 January 2008 Meeting.  Quite typically of Mr Tsang’s testimony, he did not say how he had become aware that the Au Report had been allegedly circulated.

200.  Under cross-examination, Mr Tsang initially stated that he had learned about the circulation of the Au Report from his wife and that it was not the 3^rd defendant who had told him that Au Report had been circulated.  He claimed that he had learned from the 3^rd defendant in November 2007 that someone had set up Yuan Cheng without authority.  Incredibly, he claimed that as he was not a director, he did not bother to look into it.

201.  Under further cross-examination, Mr Tsang then claimed that it was the 3^rd defendant who had told him about the circulation of the Au Report.  When it was then pointed out to him that he had previously said that it was his wife who had told him about the circulation of the Au Report, he said that he had been confused.  When pressed again as to who it was who had told him about the alleged circulation of the Au Report, Mr Tsang said that the 3^rd defendant had told his wife about it and that his wife had told him that the 3^rd defendant had prepared the report.  However, he then said that it was the 3^rd defendant who had told him that he had prepared and circulated the report in January 2008.

202.  On this issue, I take note of the fact that whilst Mrs Tsang would have been the obvious witness to have been called to testify on behalf of the plaintiff and whilst she was present in court on many days during the trial, no explanation has been provided by the plaintiff as to why she was not called to testify.  In the circumstances, I accept the submissions made by Mr Fong and Mr Lau that I would be entitled to make an adverse inference against the plaintiff on the issue in accordance with the principles laid down in Ip Man Shan Henry (supra).  However, I should emphasize that even absent such adverse inference, I would still have accepted the testimony of the 3^rd defendant.

203.  The plaintiff sought to make much of the fact that Mr Au had cast a conditional vote in favour of the Remittance Resolution and that Mr Chan had abstained from voting on the resolution to support its contention that the Au Report had been made known to the members of the board before the 14 January 2008 Meeting.  I accept the 3^rd defendant’s explanation that he had cast the conditional vote because of what he had been told by Mrs Tsang but had been told to keep secret.  I am also of the view that if the Au Report had indeed been made known to the members of the board before the 14 January 2008 Meeting, there is no reason why there is no reference to it in the minutes of the meeting.

204.  As regards Mr Chan’s abstention from voting on the Remittance Resolution, I also accept the testimony of the 3^rd defendant that Mr Chan did often abstain from voting on resolutions.  Indeed, at the same meeting, he also abstained from voting on the proposed acquisition of a hotel project in Yangzhou as well as the resolution to set up the management committee and the membership thereof.

205.  I accept the defendants’ case and find that the Tsangs had been fully informed of the board’s decision to set up Yuan Cheng and to remit the sum of HK$50 million capital injection to Yuan Cheng and had given their support for the same.  In my view, this conclusion is well supported by the evidence:

(a) Under the TRA, which Mr Tsang had signed on behalf of the plaintiff, the plaintiff had expressly agreed that in order to assist the 2^nd defendant to meet the agreed targets thereunder, the plaintiff would make available operational capital by HK$50 million or RMB50 million before September 2007.  I accept the testimony of the 7^th defendant that this in fact anticipated the injection of HK$50 million into Yuan Cheng.

(b) The Remittance Resolution was passed at the 14 January 2008 Meeting.  As noted above, it was at the same meeting that the 2^nd defendant proposed (and all the other directors present, except Mr Chan, agreed) not only that a management committee should be set up and that all projects should be presented for consideration by this committee but also that Mr Tsang should be a member of the management committee.  It is inconceivable that if the directors had wished to conceal the setting up of Yuan Cheng and the remittance of the HK$50 million to Yuan Cheng, they would have proposed or agreed to these arrangements.

(c) On 18 January 2008, just four days after the passing of the Remittance Resolution, a written notice making reference to the resolution and the proposed remittance of the HK$50 million to Yuan Cheng was issued by the plaintiff to its board and the members of the management committee.  The notice was also copied to Mr Cheng.

(d) On the same day, Ms Kwok and Mr Cheng signed the application for the remittance of the sum of HK$50 million to Yuan Cheng.  I reject Ms Kwok’s testimony that she simply did so unquestioningly on the instructions of the 2^nd defendant and without informing the Tsangs as wholly incredible.  She was, as I have found, the “gatekeeper” whom the Tsangs had appointed to look after their interests and, on her own admission, the HK$50 million remittance was the largest remittance she had ever signed, the largest cheques she had previously signed being for sums in the region of HK$100,000.

(e) Similarly, I reject the testimony of Mr Tsang that Ms Kwok did not seek his consent or advice about the remittance and his explanation that she had not done so as it had nothing to do with him since he was neither part of the management nor a director and was not required to be consulted.  I find that Mr Tsang must have been aware of the remittance but had approved (or at least not objected to) Ms Kwok signing the application for the remittance.

(f) In the document recording the resolutions passed at the meeting of the management committee on 19 January 2008, explicit reference was made to Yuan Cheng in the first and fourth resolutions.  Mr Tsang did not deny that he signed this document. However, he sought to explain away his signature of this document by claiming that whilst he was not a member of the management committee, he had signed the document just to show he had attended the meeting and had not noticed that paragraph 1 thereof referred to Yuan Cheng.  I do not accept Mr Tsang’s testimony in this regard which I find to be wholly incredible.

206.  It is important to note that the plaintiff’s allegations and case regarding the setting up of Yuan Cheng and the remittance of the HK$50 million to it is the first and the most integral part of its overall case that Yuan Cheng had been set up and HK$50 million transferred to it so that this money could be used by the 1^st and 2^nd defendants to provide rolling facilities to companies related to or controlled by them.  The Yangzhou Project Contentions, the Hua Jia Fu Contentions, the Zhong Cheng Contentions and the Hua Ke Contentions relate to how the plaintiff contends that the alleged HK$50 million rolling facilities were allegedly misused by the defendants.  It is also an essential element of the plaintiff’s case that the directors of the plaintiff had been compromised by the bribes allegedly paid to them by the 1^st defendant.  Accordingly, my rejection of the plaintiff’s case regarding the setting up of Yuan Cheng and the remittance of the HK$50 million is effectively a rejection of the plaintiff’s overall case against the defendants, in particular in view of my rejection also of the plaintiff’s allegations of bribery.  Put another way, with my rejection of the plaintiff’s case regarding the setting up of Yuan Cheng and the remittance of the HK$50 million, the basic foundations for the Yangzhou Project Contentions, the Hua Jia Fu Contentions, the Zhong Cheng Contentions and the Hua Ke Contentions fall away.  It is therefore not necessary for me to consider these aspects of the plaintiff’s case which must also fail.  However, for the sake of completeness, I will also deal with these other contentions.

(b) Yangzhou Project Contentions

207.  As noted in my discussion of the background facts above, in the lengthy discussions between Mr Tsang (representing the plaintiff) and the 1^st defendant in December 2007, there were already discussions about the acquisition by the plaintiff of Min Tai Development and the Yangzhou Project.  It is therefore ironic that Mr Tsang and the plaintiff now contend that the defendants were acting in breach of their duties to the plaintiff in considering and in resolving to continue to consider and discuss the acquisition of the Yangzhou Project.  Essentially, the plaintiff’s case is that the acquisition of the Yangzhou Project was, in Mr Tsang’s words, a “rubbish project” in relation to which the defendants had failed and refused to conduct any proper enquiry or due diligence and that the defendants had caused the plaintiff to enter into the Letter of Intent for the sole purpose of making available HK$5 million for the use of Min Tai Development.  It is also the plaintiff’s case that the defendants had failed and/or refused to cause Yuan Cheng or the plaintiff to recover the said sum of money from Min Tai Development.

208.  For the reasons set out below, I find that there is no merit in the plaintiff’s case and that the defendants had, throughout, actually acted bona fide in the best interests of the plaintiff and for proper purposes.

209.  First and foremost, I find that the Yangzhou Project was not a “rubbish project” as contended by Mr Tsang for the plaintiff.  On the contrary, based on the numerous reports relating to the Yangzhou Project which had been prepared and which I have referred to in my discussion of the background facts above, I accept the defendants’ contentions and find that Min Tai Development was at all material times a valuable investment holding company which acted as a “land bank” holding significant amounts of land in Mainland China for potential development.  This land included the land for the Yangzhou Project.

210.  Further, fundamental to the plaintiff’s case that the Yangzhou Project was a “rubbish project” and that the Letter of Intent were contrary to commercial sense and detrimental to the interests of the plaintiff are the contentions that one of the effects of the proposed transaction would be to use the plaintiff’s money to repay a loan of $90 million owed by Min Tai Development to the 1^st defendant and that based on the Nelson Wheeler Report, Min Tai Development had a negative asset value of HK$7.72 million and was therefore not worth the proposed price of HK$88 million proposed to be paid for its acquisition.

211.  In this regard, I accept the explanation provided by the 7th defendant that under the Draft Agreement, the plaintiff would not only be acquiring Min Tai Development but also the $95 million debt which it owed to the 1st defendant. Taking into account that the $95 million debt would be acquired at the same time and would not need to be repaid by Min Tai Development, its negative equity of $7.72 million as shown in the Nelson Wheeler Report would turn into a net positive value of about $88 million.  Accordingly, the proposed acquisition price of HK$88 million would have been a fair price to pay. It was also reflected in the Preliminary Inspection Report and that part of the Follow Up Report in which the 3^rd defendant made reference to the Preliminary Inspection Report that the debt would be converted into capital of Min Tai Development.

212.  Under cross-examination, Mr Tsang had tried to argue that whilst he had initially been interested in the Yangzhou Project, after he had been given further information about the project in around May or June 2007, he had decided that the Yangzhou Project was not worth investing in.  However, when confronted with the minutes of the senior management meeting held on 13 July 2007 at which Mr Leung is recorded as having spoken highly of the Yangzhou Project, he was forced to admit that it was in fact worth pursuing.

213.  The facts and evidence also clearly demonstrate that there is absolutely no substance or merit in the plaintiff’s contention that the defendants had failed and refused to conduct any proper enquiry or due diligence.  The minutes of the board meeting of the plaintiff held on 27 February 2008 record that the 1st defendant had proposed that the 3^rd defendant should follow up on the Yangzhou Project.  This was raised again by the 1st defendant at the following board meeting held on 6 March 2008 at which the 1^st defendant had noted that the 3^rd defendant had been asked to follow up on the Yangzhou Project at the previous meeting and had expressed the hope that the 3^rd defendant could present a report at the following board meeting.

214.  At the following board meeting held on 15 March 2008, the 3^rd defendant did indeed report that he had looked into the Yangzhou Project.  Although it does not appear from the minutes of that meeting that he was able to present a detailed report, he proposed that the board should first decide which party should be responsible for paying the fees of the professionals would be engaged to conduct the due diligence into the project.

215.  As noted in my discussion of the background facts above, the 3^rd defendant then presented the very detailed Follow Up Report to the members of the board on 11 April 2008, five days before the board meeting held on 16 April 2008.  Undoubtedly, this was to allow the members of the board to properly consider the Yangzhou Project ahead of the meeting.

216.  As further noted in my discussion of the background facts above, at this meeting, the board resolved that the plaintiff should proceed with discussions with the counterparties to the Yangzhou Project, sign a letter of intent in relation to them and provide all requisite disclosure.  It was also stated that the Yangzhou Project was a connected transaction so that the letter of intent should expressly state that the project was subject to approval by the shareholders in general meeting.  If no such approval was forthcoming, the deposit paid thereunder should be repaid within one month with 10% interest.

217.  At the following board meeting held on 27 May 2008, the Yangzhou Project Resolution was passed after the Draft Agreement was presented for discussion and the 1^st defendant had disclosed that he was connected to Min Tai and would therefore abstain from voting.

218.  The Letter of Intent itself provided that due diligence would commence on 15 July 2008.

219.  I also accept the testimony of the 7^th defendant that he had visited the site of the Yangzhou Project with the 5^th defendant and that the 5^th defendant had also flown to Yangzhou a number of times and had brought auditors with him as part of the due diligence relating to this project.  The 5^th defendant had been chosen as one of the plaintiff’s representatives because he was a specialist in asset management particularly of properties in Mainland China.

220.  In the light of the foregoing, it is clear that far from failing and refusing to conduct any proper enquiry or due diligence, the defendants had in fact carefully ensured that proper enquiries and due diligence were conducted prior to the passing of the Yangzhou Project Resolution and would continue to be conducted after the execution of the Letter of Intent.

221.  The evidence also very clearly demonstrates that there is no merit in the plaintiff’s allegation that the defendants had failed and/or refused to cause Yuan Cheng or the plaintiff to recover the earnest money of HK$5 million. In particular, there is clear documentary evidence proving that on 30 September 2008, the 7^th defendant had sent an email to, inter alia, his fellow directors and the Company Secretary, Ms Rosena Leung, stating that the 5^th defendant had informed him of the cancellation of the Yangzhou Project, requesting the 3^rd defendant to draft a formal termination letter and pointing out that as there had been agreement to split the cost 60/40, the counterparty would return HK$5 million after subtracting the plaintiff’s share of expenses.  This then put in motion various steps taken to formally terminate the project and to recover the earnest money, including, in particular, the drafting of the formal termination agreement by the 3^rd defendant, the first draft of which he circulated by email on 3 October 2008.  On 16 October 2008, the 3^rd defendant circulated the final draft of that agreement.  In the meantime, Mr Cheng had written to Mr Song on 10 October 2008 pointing out that the 3^rd defendant had directed that a report on the expenses be prepared for approval by the board of the plaintiff.  There followed further emails dated 10 and 13 October 2008 respectively from the 3^rd defendant and Mr Cheng on this issue and on 28 October 2008, Mr Cheng wrote to the 5^th defendant again to chase him for a reply on the issue of the expenses.

222.  The HK$5 million (or the balance thereof) was repaid by five payments totalling RMB4.4 million between 21 October 2008 and 1 November 2008.  The plaintiff has argued that as the money was not repaid directly by Min Tai Development but by another entity, this proves that it had been made use of by Min Tai Development instead of being held by Min Tai Development. I do not accept that that such an inference can or should be drawn.  In any event, even if this were the case, I agree with the defendants’ submissions that this does not prove that there was anything wrong with the manner in which the defendants considered and dealt with the Yangzhou Project.

223.  Finally, it must be borne in mind that all the above allegations made by the plaintiff, which I have rejected, are made in support of the plaintiff’s main case that the defendants had wrongfully set up Yuan Cheng and caused HK$50 million to be transferred to it to provide rolling facilities for use by the 1^st and/or 2^nd defendants and/or entities related to them.  It is the plaintiff’s case that the HK$5 million paid as earnest money under the Letter of Intent formed part of the use of such rolling facilities.

224.  I also reject the plaintiff’s case in this regard.  I am of the view, and I find, that the HK$5 million was paid pursuant to a genuine transaction which the defendants had, bona fide in the interests of the plaintiff and for proper purposes, caused the plaintiff’s subsidiary, Metro China, to enter into.  I accept the defendants’ contention and evidence that the payment of a sum of money as earnest money is normal under such a transaction.  I am also of the view that it is inconceivable that the defendants would have gone to all the trouble (and on the plaintiff’s case, the pretence) of, inter alia, having the matter considered at numerous board meetings, having the enquiries and due diligence done by the 3^rd, 5^th and 7^th defendants, having the very lengthy report prepared by the 3^rd defendant and having the Letter of Intent and the Draft Agreement drafted and prepared, just to have use of the HK$5 million for a period of only about five months.  In this regard, I see force in the point made by the 7^th defendant in his testimony that if the 1^st and/or 2^nd defendants had not invested over HK$130 million in acquiring the shares of the plaintiff, that sum would have yielded much more interest than the interest saved from having use of the HK$5 million for such a short period.

225.  For the above reasons, I reject the plaintiff’s claims based on the Yangzhou Project Contentions.

(c) Hua Jia Fu Contentions

226.  As noted above, the plaintiff’s pleaded case is that the Management Services Agreement and the Supplemental Agreement were not normal commercial terms and were blatantly disadvantageous to the plaintiff for the reasons pleaded.  There was no suggestion or allegation in the plaintiff’s pleadings, or indeed in the testimony of any of the witnesses called on behalf of the plaintiff, that the transaction provided for in these agreements was a sham transaction.

227.  However, in cross-examining the 2^nd defendant, Mr Mok SC skilfully elicited from the 2^nd defendant a few answers which seemed to suggest that the agreements were a sham.  Based on these answers, in the plaintiff’s closings submissions, the plaintiff submitted that the agreements were sham transactions and were never intended to be carried out according to their terms, in that no services were intended to be supplied by Yuan Cheng.  The plaintiff went further and contended that the announcement published by the plaintiff’s board on 27 March 2008 contained blatantly false representations and constituted a fraud on the Hong Kong Stock Exchange, the shareholders and members of the public.  However, no amendment was made by the plaintiff to its pleadings to plead a case based on these contentions.

228.  I am of the view that the plaintiff should not be allowed to put forward and rely on such an unpleaded case in its closing submissions.  In my view, such serious allegations as are now sought to be relied upon by the plaintiff should have been properly pleaded and the defendants should have been given an opportunity to properly consider and adduce evidence to deal with them.  Although in cross-examining the third and 7^th defendants, Mr Mok SC did put to them what the 2^nd defendant had said, it was put on the basis of the plaintiff’s interpretation of what the 2^nd defendant had said.  I do not consider that in those circumstances, the defendants had been given a proper chance to consider and adduce evidence to deal with the new case now sought to be relied upon by the plaintiff in its closing submissions.

229.  Another reason why it appears to me that the plaintiff should not be allowed to put forward and rely on its new and unpleaded case is that the answers given by the 2^nd defendant under cross-examination which are relied upon by the plaintiff are, in my view, not as clear as the plaintiff contends and appear to be inconsistent with other answers which he gave.  Thus, whereas the 2^nd defendant answered “Nothing” in response the question “You said return was 20% — my question is what service did Yuan Cheng have to provide to get this return?” and also “Yes, it was a fixed return investment” in answer to the double-barrelled question “So the arrangement was that money would be placed with Hua Jia Fu and Hua Jia Fu would regularly give some money back to Yuan Cheng by way of return totalling 20% and Yuan Cheng did not have to do anything.  Is that right?” and these answers are relied upon by the plaintiff to contend that the Management Services Agreement and the Supplemental Agreement were shams (because in reality, no services were intended to be performed by Yuan Cheng), in a later answer, the 2^nd defendant said that “The service in question was a kind of management” which is what was provided for under the agreements.

230.  Another example of inconsistent answers having been given by the 2^nd defendant was that the 2^nd defendant had stated “In fact it was a fixed investment” as part of his answer to the question “So it is very clear from what you have told us that this arrangement was in fact a loan arrangement between Yuan Cheng and Hua Jia Fu —is that correct?”.   This, as well as his answer to the second question referred to in the previous paragraph, are relied upon by the plaintiff to support its contention that the transaction under the Management Services Agreement and the Supplemental Agreement was a loan of money to Hua Jia Fu in return for a “fixed return” in the sum of RMB362,500 per quarter.  However, the 2^nd defendant had also prefaced his answer with “What sort of logic is this?” and had also continued to say “Why is it turned around in such a way calling it a loan?”  Further, in answer to the next two questions posed by Mr Mok SC, the 2^nd defendant had answered “It is not in the nature of the loan.  Haven’t you perused the document?  Is it a loan agreement?” and “There was not a loan agreement and such a loan agreement did not exist.”

231.  For the sake of completeness, I should add that even if I were to allow the plaintiff to run its new and unpleaded case, I would not be persuaded that the Management Services Agreement and the Supplemental Agreement were sham agreements and that the transaction provided thereunder was not a Management Services Agreement at all but a loan of money to Hua Jia Fu based on those parts of the testimony of the 2^nd defendant relied upon by the plaintiff.  This is because I am of the view, as discussed above, that the testimony of the 2^nd defendant sought to be relied upon by the plaintiff is equivocal and it would not be safe for me to rely upon them, especially in the circumstances under which the 2^nd defendant had not completed his testimony.

232.  Turning then to consider the plaintiff’s case as originally pleaded, I am not persuaded the defendants had failed to act bona fide in the interests of the plaintiff in passing the Management Services Resolution and in causing Yuan Cheng to pay the security deposit in the sum of RMB8 million to DCHJF pursuant to the Management Services Agreement and the Supplemental Agreement.

233.  On the contrary, I accept the testimony of the 3rd defendant that the then board of directors of the plaintiff honestly and genuinely considered that whilst the transaction under these agreements departed somewhat from the core conventional business of the Grand Field Group as a real estate developer, not only would it increase the revenue of plaintiff, it would also be in the best interests of the plaintiff to diversify its business.  The board also genuinely considered the business venture commercially sensible and advantageous to the plaintiff since Yuan Cheng would be entitled to a guaranteed annual consultancy fee of RMB1,450,000 in any event.  Further, DCHJF was obliged to repay in full the security deposit to Yuan Cheng upon termination of the engagement whether by DCHJF or by Yuan Cheng and even if the termination was caused by a breach on the part of Yuan Cheng.  The board also took into account the fact that additional protection would be provided for Yuan Cheng by DCMT unequivocally and unconditionally guaranteeing to Yuan Cheng the performance by DCHJF of its obligations to repay the security deposit to Yuan Cheng and to pay the agreed service fees due to Yuan Cheng in accordance with the Management Services Agreement.  The 3^rd defendant’s explanations in this regard were not challenged by the plaintiff in cross- examination.

234.  As discussed in my consideration of the background facts above, the board had considered the terms of the Management Services Agreement carefully and had, in particular, placed emphasis on the guarantee of the performance by DCHJF.  Thus, when the Management Services Resolution was put to the vote, the 3rd defendant, Mr Kimber Hui and Mr Lum had expressly indicated that they had voted in favour of the Resolution by reason of the guarantee which the 2^nd defendant had proposed that he would provide.  However, when legal advice was obtained that it would not be appropriate for the 2^nd defendant to provide the guarantee, it was proposed that DCMT should do so and this was considered and approved by the board.

235.  I should add that in finding that the board of the plaintiff had honestly and genuinely believed that entering into the Management Services Agreement and the Supplemental Agreement was in the best interests of the plaintiff, I have borne in mind that both Mr Kimber Hui and Mr Lum, against whom the plaintiff makes no complaint, also voted in favour of the Management Services Resolution.

236.  I have also taken account of the testimony of the 3^rd and 7^th defendants, which I accept, that they had gone to the location of the Shops in July 2008 and had verified that there was a large and busy commercial complex there with hundreds of shop tenants.  Additionally, I have noted that DCHJF had made payments of RMB362,500 each to Yuan Cheng on at least three occasions in April, July and November 2009. 

237.  Much has been made by the plaintiff of the consideration by the board of the “five tests” (or “five principles”) which the plaintiff contends would have determined whether or not the transaction would have needed to be subject to independent shareholders’ approval.  In the plaintiff’s closing submissions, it is also claimed that the 3^rd defendant had explained in cross-examination that that was why the security deposit was reduced to RMB8 million because RMB9 million would have exceeded some of the “five tests” so that shareholders’ approval would have been required.

238.  In my view, the plaintiff’s contentions do not accurately reflect the evidence.  As stated in the minutes of the relevant board meeting, the issue had in fact been raised by Mr Lum and the Company Secretary who had reported that according to the views of the Hong Kong Stock Exchange, as management services did not fall within the normal business activities of the plaintiff, the “five principles” had to be applied to decide the manner in which the transaction should be disclosed.  The board was therefore considering the issue from the perspective of whether or not the transaction had to be disclosed, not whether it would have to be subject to shareholders’ approval as alleged by the plaintiff. 

239.  Further, contrary to the plaintiff’s contentions, the 3rd defendant had not explained in cross-examination that the security deposit had been reduced to RMB8 million because RMB9 million would have exceeded some of the “five tests” so that shareholders’ approval would have been required.  What the 3rd defendant in fact stated under cross-examination was that he had no idea what the “five tests” were about.  Further, when it was put to him that he did understand that if the amount failed the five tests, the transaction would very likely be subject to shareholders’ approval, his response was that he did not know about the rules.  When he was then asked whether he got the impression that the 2^nd defendant had not wanted to get shareholders’ approval, his response was that it had not come to his mind and that he did not have this impression in his mind so that he could not answer the question posed to him.

240.  It is also important to bear in mind that on the same day that the Supplemental Agreement was entered into, the board published an announcement giving notice of the Management Services Agreement and the Supplemental Agreement in which it was stated that the entering into of these two agreements constituted a discloseable transaction under the Listing Rules.  In my view, this clearly shows that the minutes of the board meeting held on 15 March 2008 accurately record that the board had considered the “five principles” to determine whether of the transaction should be disclosed, not whether it should be subject to shareholders’ approval as contended by the plaintiff.

241.  It is also important to note that the announcement had gone on to state that a circular containing details of the agreements would be dispatched to the shareholders of the plaintiff and that there is no suggestion by the plaintiff or the Tsangs that such circular was not duly dispatched.  Accordingly, there is no substance in any suggestion by the plaintiff that the defendants had sought to avoid seeking shareholders’ approval of the transaction in order to conceal the same from the Tsangs.

242.  In any event, I note that these are not matters which have been pleaded in support of its contention that the defendants had acted in breach of their duties in passing the Management Services Resolution and in causing Yuan Cheng to pay the security deposit of RMB8 million thereunder.

243.  Yet another matter which the plaintiff has not pleaded but has sought, in closing submissions, to make much of was the allegation that part of the RMB8 million had not been repaid to Yuan Cheng.  In the Notes to the Consolidated Financial Statements in the 2011 Annual Report of the plaintiff, it was stated that as the recoverability of the RMB8 million deposit was uncertain, an allowance of impairment loss of RMB5.9 million had been made as at 31 December 2010.  It was further stated that part of the said deposit, in the sum of RMB2.5 million, had been refunded in cash during the year ended 31 December 2011.

244.  There is a dispute between the parties as to whether the balance of the deposit has been repaid.  The plaintiff asserts that it has not been repaid but the 7^th defendant said, in re-examination, that he had been told by Chen Yu that the balance had been repaid.  I make no finding on this issue, which, in my view, has been raised in a highly unsatisfactory manner by the plaintiff.  Not only had it not been pleaded but even in the plaintiff’s opening submissions, no positive assertion was made by the plaintiff that the security deposit had not been repaid.  Instead, the plaintiff’s written opening only contained an assertion that there was no suggestion or evidence that the security deposit of RMB8 million had been refunded to Yuan Cheng when it must have been known to the plaintiff that it had been stated in its own 2011 Annual Report that RMB2.5 million had been refunded.  Further, it was only in re-examination that Mr Tsang asserted that the security deposit had not been refunded.

245.  In any event, I am not satisfied, in particular because of the highly unsatisfactory manner in which this issue has been raised, that I should take into account whether or not the security deposit had been repaid in full. By reason of the manner in which the issue has been raised, I know not why the balance of the security deposit has not been recovered or indeed what, if any effort, has been made by the plaintiff and Yuan Cheng (which have long ceased to be under the control of the defendants) to recover the same.  I should add that even if I had found that part of the security deposit had not been repaid, this would not have caused me to reject the defendants’ case that they had honestly and genuinely considered that the transaction was in the best interests of the plaintiff.  It is pertinent to bear in mind in this context the principle that if a director honestly believes that he is acting in the best interests of the company, then he is not in breach of his fiduciary duty merely because his actions happen, in the event, to cause injury to the company.   

246.  There is also a dispute between the parties as to whether or not Madam Cheng is the 1^st defendant’s niece.  The plaintiff contends that she is whilst the defendants deny this.  The plaintiff was not able to adduce any evidence to prove that Madam Cheng is the niece of the 1^st defendant. However, they contend that the 3^rd defendant had admitted under cross-examination that Madam Cheng is indeed the niece of the 1^st defendant.

247.  I am of the view that the 3rd defendant’s testimony in this regard was not clear.  During the relevant part of his cross-examination, he was asked whether Madam Cheng’s father was one Zheng You Zhong.  His response was that he didn’t remember and needed to check. He was then asked whether Madam Cheng’s mother was Madam YQ Weng.  His response was again not conclusive.  The notes of the testimony prepared by the plaintiff’s solicitors record that his answer was “Yes, should be”.  My notes record that he said “It seems like it”.

248.  However, in an earlier part of his testimony, he had also said that the 1^st defendant had provided the birth date of his wife and that of the father of Madam Cheng and that based on those dates, it was not logically possible that Madam Cheng was his niece.

249.  Given this unsatisfactory state of the evidence, I am not satisfied that the plaintiff has proven that Madam Cheng is the niece of the 1^st defendant.

250.  In any event, the plaintiff’s contention that Madam Cheng is the niece of the 1^st defendant is essentially part of the plaintiff’s case that the defendants had created rolling facilities for use by the 1^st and/or 2^nd defendants and/or entities connected with them by the wrongful incorporation of Yuan Cheng and the remittance of the HK$50 million to it which I have already rejected.

(d) Zhong Cheng Contentions

251.  Although it is clear from the evidence that the respective amounts of RMB5 million, RMB10 million and RMB7 million paid to Zhong Cheng have been repaid to Yuan Cheng, the plaintiff appeared to be labouring under the mistaken belief, even as at the date of the plaintiff’s written Opening[3], that these sums had not been repaid.  However, by the time of the plaintiff’s closing submissions, the plaintiff accepted that such sums have been repaid and the position it took was that the matters complained of under the Zhong Cheng Contentions were another illustration of and part of the alleged misuse by the 1^st and 2^nd defendants and/or entities connected with them of the alleged rolling facilities created by the incorporation of Yuan Cheng and the transfer of HK$50 million to it.

252.  As I have already rejected the plaintiff’s case regarding the alleged rolling facilities, the plaintiff’s claims under the Zhong Cheng Contentions necessarily also fall away.  However, for the sake of completeness, I shall deal briefly with the plaintiff’s contentions.

253.  I accept the testimony of the 3^rd and 7^th defendants that the Co-operation Framework Agreement was a genuine transaction which was entered into for the benefit and in the best interests of the plaintiff.  It is not in dispute that in order to participate in real estate development in Mainland China, various different licences are required.  Zhong Cheng was an entity which held such valuable licences.  I accept the testimony of the 3^rd and 7^th defendants that by entering into the Co-operation Framework Agreement with Zhong Cheng, the plaintiff would indirectly benefit from the licences held by Zhong Cheng and its rights thereunder to carry on different real estate construction projects.  I also accept their testimony that the board of directors honestly and genuinely considered that the terms of the Co-operation Framework Agreement, including, in particular, that providing for the payment of the deposit of RMB5 million (from which RMB500,000 would be deducted annually) were in the best interests of the plaintiff, given that the plaintiff (or rather Grand Field HK, the vehicle used by the plaintiff) would be entitled to 90% of the after-tax profits from construction projects undertaken by Zhong Cheng.  Further, although not expressly referred to in the testimony of the 3^rd and 7^th defendants, I note that the Zhong Cheng Undertaking provided further protection to the plaintiff.

254.  I also accept the submission of Mr Fong and Mr Lau that the Services and Investment Contract subsequently entered into between Yuan Cheng and Zhong Cheng (about which the plaintiff makes no complaint) is cogent evidence that the Co-operation Framework Agreement was genuine and not simply a device created to make use of the alleged rolling facilities.

255.  I find that the Tender Agreement was a genuine transaction entered into for the benefit and in the best interests of the plaintiff and that the RMB10 million paid to Zhong Cheng thereunder was for the purpose provided for under the Tender Agreement.  One main allegation made by the plaintiff in relation to the Tender Agreement is that the Haiyifang Project was non-existent.  I reject the plaintiff’s allegation.  The only evidence adduced by the plaintiff in this regard was a report prepared by a firm of Mainland Chinese lawyers which was exhibited to the sixth affirmation of Mr Tsang. I find the report wholly unconvincing and the plaintiff did not even call whoever prepared this report to testify.

256.  I agree with the submission of Mr Fong and Mr Lau that since the tender for construction work in relation to the Haiyifang Project was being submitted by Zhong Cheng on behalf of Yuan Cheng, it was reasonable for Yuan Cheng to have provided the said sum for the purposes of the bank capital verification required by the developer of the project.

257.  With regard to the payment of the sum of RMB7 million, the burden of proving that the payment was improper, and that in causing such payment to be made the defendants had acted in breach of their duties to the plaintiff, rests on the plaintiff.  I am of the view that the plaintiff has failed to discharge such burden as it has failed to adduce any relevant evidence.

258.  Additionally, I agree with the submission of Mr Fong and Mr Lau that if the payments of RMB10 million and RMB7 million had been devices created by the defendants for the purposes of making use of the alleged rolling facilities, it would not have made any sense for the defendants to have arranged for the RMB10 million to have been repaid to Yuan Cheng on 28 July 2008 and then for another RMB7 million to be paid to Yuan Cheng just about a month later (and then repaid very shortly thereafter).  They could simply have had Zhong Cheng hold onto the RMB10 million for a longer period.

259.  For the above reasons, I reject the plaintiff’s claims based on the Zhong Cheng Contentions.

(f) Hua Ke Contentions

260.  It is the plaintiff’s case that the Fund Transfers complained of under the Hua Ke Contentions were yet further instances of the alleged misuse by the 1^st and 2^nd defendants and/or entities connected with them of the alleged rolling facilities created by the incorporation of Yuan Cheng and the transfer of HK$50 million to it.

261.  As I have already rejected the plaintiff’s case regarding the alleged rolling facilities, the plaintiff’s claims under the Hua Ke Contentions are necessarily also consequently rejected.  For the sake of completeness, I shall deal briefly with the plaintiff’s contentions.

262.  I find that the Fund Transfers were made under the circumstances and for the reasons set out in the announcement of the board of the plaintiff dated 10 October 2008 and as explained by the 7^th defendant in his testimony.  Such explanations are clearly backed by and wholly consistent with the objective evidence relating to the Fund Transfers including, in particular, the sizes of the first 10 currency conversions made by Yuan Cheng and the dates thereof and of the various transfers.  I further note whilst Mr Tsang had, in his sixth affirmation, referred to and sought to rely on a legal opinion prepared by a Mainland Chinese law firm to try to undermine the defendants’ explanations about the Fund Transfers, the Mainland Chinese lawyer who gave this legal opinion was not called to testify and the plaintiff appeared to place no further reliance on the legal opinion. 

263.  Further, it is important to note how the Hua Ke Contentions came to be made by the plaintiff.

264.  In the first affirmation of the 3^rd defendant, in addressing the allegations made by Mr Tsang (in his first affirmation) that there had been misappropriation of the funds remitted to Yuan Cheng (which, at that stage, did not include any allegations relating to the Fund Transfers or Hua Ke), the 3^rd defendant stated that the allegations of Mr Tsang were nothing but speculation and that there was no evidence in support of such serious allegations.  He went on to say that there was copious evidence demonstrating the contrary and proceeded to exhibit such documents to his affirmation.  These documents included a draft of a report prepared by Baker Tilly attaching a Cash Flow Statement of Yuan Cheng covering the period from 23 October 2007, the date of incorporation of Yuan Cheng, to 30 June 2008.  The details of Fund Transfers were set out in this Cash Flow Statement. 

265.  Latching onto the disclosure of the Fund Transfers in the Cash Flow Statement, in his third affirmation, Mr Tsang started to contend that the Funds Transfers supported his case that the 1st defendant, with the acquiescence of the of the directors, was using Yuan Cheng as the vehicle for suspect cash payments which were not bona fide in the interests of the plaintiff.  In particular, Mr Tsang claimed to have been provided with information by an unnamed source in Mainland China that:

(a) The cash repayments which had been made by Hua Ke had not been made by Hua Ke but by the Min Tai Group.

(b) For the purpose of the repayments, the Min Tai Group had arranged for short-term loans of about 15 days from an unnamed underground financial entity at a monthly interest of 5% per month (or at an annual interest rate of 60%).

(c) The short-term loans were obtained specifically for making the repayments to Yuan Cheng so as to satisfy what Mr Tsang called the interim audit conducted by Baker Tilly.  It appears that Mr Tsang was referring to the exercise carried out by Baker Tilly which resulted in the above draft report.

(d) Upon completion of the interim audit, the relevant cash receipts would be withdrawn from Yuan Cheng again to repay the short-term loans advanced by the underground financial entity.

266.  I have no hesitation in rejecting the above allegations made by Mr Tsang.  Not only has he not produced a single piece of evidence to prove his allegations, even up until trial, he has not identified his so-called source.  In rejecting Mr Tsang’s allegations, I have borne in mind that RMB25 million of the funds repaid by Hua Ke were paid to Yuan Cheng by a company named 深圳市亞洲置業投資有限公司 (Shenzhen Asia Property Investment Co Ltd).  However, there is no evidence that this company is part of the Min Tai Group or made the repayment on behalf of the Min Tai Group.

267.  In my view, had the Fund Transfers not been genuine transfers made under the circumstances and for the reasons set out in the aforesaid announcement and as explained by the 7^th defendant, it is inconceivable that the defendants would have produced the Cash Flow Statement in evidence when they well knew that Mr Tsang was already accusing them of misusing and misappropriating the funds of Yuan Cheng.

268.  For the above reasons, I reject the plaintiff’s claims based on the Hua Ke Contentions.

C. CONCLUSION

269.  In the light of my findings above, I dismiss the plaintiff’s remaining claims against the 1^st, 2^nd and 7^th defendants.

270.  I make an order nisi that the plaintiff do pay the 1^st, 2^nd and 7^th defendants’ costs of this action, with a certificate for two counsel.

271.  I thank counsel for their able assistance for which I am very grateful.