FIRST LASER LTD v. FUJIAN ENTERPRISES (HOLDINGS) CO LTD AND ANOTHER

HCA 4414/2001

[2020] HKCFI 495

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 4414 OF 2001

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JUDGMENT

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INTRODUCTION

Introduction

1.  This is the trial of the issue of restitution remitted to this court by the Court of Final Appeal. The original trial of this action took place in October 2007.  On 5 February 2008, this court handed down judgment in favour of the plaintiff (“First Laser”) on the basis that the agreements in issue between the parties were governed by Hong Kong law (the “CFI Judgment”)[1]. On appeal, the Court of Appeal held on 4 April 2011 that the agreements were governed by Mainland law[2]. It allowed the defendants’ appeal, set aside the judgment of this court and ordered the issue of restitution under Mainland law (返還) be remitted to this court for determination (the “CA Judgment”).  First Laser appealed.  On 6 July 2012, the Court of Final Appeal dismissed First Laser’s appeal and directed the issue of restitution under Mainland law be remitted this court for determination[3] (“CFA Judgment”).

The background

2.  The background of this case was summarized in paragraphs 5 to 33 of the CFA Judgment and in greater details in paragraphs 6 to 49 of the CFI Judgment.  Neither the Court of Appeal nor the Court of Final Appeal has overturned the factual findings of this court. The following is a recapitulation of the essential facts for the purpose of this trial.

3.  The 1^st defendant, Fujian Enterprises (Holdings) Company Limited (華閩(集團)有限公司) (“FEHC”), and the 2^nd defendant, Jian An Investment Limited (“JAIL”), are window companies of the Fujian Provincial People’s Government (“Fujian Government”) of the People’s Republic of China (“the PRC”), incorporated in Hong Kong. 

4.  In 1992, FEHC and Fujian Research Institute of Material Structures of the Academy of Science of the PRC (中國科學院福建物質結構研究所) (“FRIMS”) had set up an equity joint venture (中外合資企業) with FEHC under the name of Fuzhou Castech-Phoenix Inc (福州科鳳激光有限公司) which was mainly engaged in the production of two kinds of non-linear crystals commonly known as LBO crystal and BBO crystal.  In about June 1996, following a dispute with FRIMS over its patented technology, namely the incubation furnace, FEHC bought out FRIMS’ interest.  Since then, the equity joint venture became a wholly foreign‑owned enterprise (外商獨資企業) and changed to its present name, Fujian Casix Laser Inc (福建華科光電有限公司) (“FCL”).

5.  FEHC had two other subsidiaries, namely, Casix Limited which is a company incorporated in Hong Kong and Fujian Kexin Technology Development Company (福建科星技術發展公司) (“Fujian Kexin”) which is a company incorporated in the Mainland.  In June 1995, these two subsidiaries together set up Fuzhou Casix Optronics Inc (福州科騰光電技術有限公司) (“FCO”) as an equity joint venture.  Until March 1997, FCO was wholly owned by FEHC.

6.  FEHC caused part of FCL’s business involving the patented technology to be transferred to FCO with a view to relocating the incubation furnace and related operations outside the Mainland to avoid further disputes with FRIMS.  Wang Hongrui (“Wang”), formerly from FRIMS, led his team of scientists and technologists to join FCL and FCO.  They continued to work in the same factory premises as before and used the same machinery.  However, at the time FEHC was in financial difficulties and short of funds.  It urgently searched for a new joint venture partner outside the Mainland who would be willing to pay substantial capital within a short time to buy into FCL and FCO.

7.  It was under those circumstances that Mr Ngan In Leng (顏延齡) (“Ngan”), a Macanese businessman of some substance, and companies owned or controlled by him, came into the picture.  These companies include:

(1)  First Laser;

(2)  Hang Wo Properties Investment and Management Company Limited (恆和物業投資管理有限公司) (“Hang Wo”);

(3)  Casix Optronics Manufacturing Limited (宇星光電企業製造有限公司) (“COM”);

(4)  Bao Shing (Group) Company Limited (寶盛集團有限公司) (“Bao Shing”) which is in fact Ngan’s joint venture with the Fujian Government;

(5)  Fujian Ocean Communication Company Limited (福建大洋通訊器件有限公司) (“Fujian Ocean”); and

(6)  Jenwing Holdings Limited (“Jenwing”).

It would be convenient to refer to Ngan and his companies as “Ngan’s camp”.  It should also be noted that Ngan had no regard to the principle of corporate personality and treated these companies as his alter ego; and FEHC adopted the same attitude in respect of Ngan’s camp.

8.  As result of negotiation between Ngan and Kong Fanli (孔凡立) (“Kong”), the then chairman of the board and general manager of FEHC, Ngan and FEHC agreed to enter into a joint venture under which Ngan was to purchase 51% of the shares in each of FCL and FCO at the total price of US$3,187,500, which was agreed to be HK$24,640,000.  For the purposes of the joint venture, Ngan entered into three separate agreements on behalf of First Laser, Hang Wo and COM with FEHC for the sale and purchase of the shares in FCO and in FCL (collectively, the “three agreements”).  This joint venture was “the Agreement” pleaded by First Laser in paragraph 10 of its Re‑Amended Statement of Claim (“RASOC”).  First Laser further pleaded in paragraph 11 that insofar as the Agreement is in writing, it is evidenced by the following three agreements:

(1)  An agreement dated 12 December 1996 between FEHC and Hang Wo under which FEHC would transfer all its shareholding in FCL and FCO to COM to be held by COM in the ratio of 51:49 for Hang Wo and FEHC respectively (the “Hang Wo Agreement”);

(2)  An agreement dated 12 December 1996 between FEHC and COM under which FEHC would sell all its shareholding in FCL and FCO at the valuation of US$6,250,000, but COM would only have to pay FEHC US$3,125,000, (the “COM Agreement”); and

(3)  An agreement dated 28 December 1996 between FEHC and First Laser (the “First Laser Agreement”) setting out some detailed terms of First Laser’s participation in FCO and FCL after the transfer of the shares in FCO and FCL. 

9.  Under the Hang Wo Agreement, FEHC agreed to transfer all its shareholding in FCL and FCO to COM to be held by COM in the ratio of 51:49 for Hang Wo and FEHC respectively.  Under the COM Agreement executed on the same date, FEHC agreed to sell all its shares in FCL and FCO to COM for US$3,125,000 against a total valuation of US$6,250,000. The net effect was that COM would pay US$3,125,000 to FEHC, which was slightly less than 51% of the valuation; and that COM was to hold 51% of the shares in FCL and FCO for Hang Wo and 49% for FEHC in accordance with the Hang Wo Agreement.  COM would not have to pay for the 49% shareholding as it would be holding it for FEHC.  Effectively, the COM Agreement would be the performance of the Hang Wo Agreement.  Then, about two weeks later, FEHC did not like the idea of having Hang Wo, a property investment company to be its joint venture partner in this high-tech joint venture in optronics.  It suggested setting up another company to replace Hang Wo and even suggested the name “First Laser”.  However, in total disregard of the principle of corporate personality, the parties drafted the First Laser Agreement stating in the preamble about an earlier agreement between them for the sale and purchase of 51% of the investment in the optronics project in Fuzhou.  Then, they increased the consideration to 51% of the valuation and set out payment terms.  That was why I accepted Ngan’s evidence that the First Laser Agreement superseded the Hang Wo Agreement and the COM Agreement.

10.  Then, Ngan caused COM to pay FEHC HK$10 million on 31 December 1996 and caused First Laser to pay FEHC another sum of HK$10 million on 30 April 1997 towards the purchase price of 51% of the shares in each of FCL and FCO.  A balance of HK$4,640,000 was agreed to have been paid by First Laser by treating part of the capital investment in the sum of about HK$9 million incurred by First Laser in setting up COM as FEHC’s contribution to its 49% share capital in COM.  This agreement was confirmed in a memorandum dated 13 March 1998 executed by Kong on behalf FEHC (the “1998 Memorandum”).  Ngan’s camp therefore fully performed COM’s or First Laser’s payment obligation under the COM Agreement or the First Laser Agreement.

11.  On 30 December 1996, i.e. one day prior to the payment of the first sum of HK$10 million by COM to FEHC, the board of directors of FCO passed a resolution consenting to transfer all the shares in FCO to COM in accordance with the COM Agreement, but none of the shares in FCL was transferred to Ngan’s camp.  On Ngan’s evidence, COM would be held by Hang Wo and Jenwing in the ratio of 51:49 for First Laser and  FEHC.  Had all the shares in FCL been transferred to COM, the shareholding in COM would be properly split in the ratio of 51:49 between First Laser and FEHC.  That never happened. 

12.  On 17 July 1997, Wang on behalf of FCL submitted a feasibility study report on production of a special optical fibre instrument (光纖無源器件項目) (“the Project”) to FEHC for consideration.  On 21 July 1997, Kong rejected the proposal and suggested Wang to enquire if Ngan would take on the Project as a personal investment.  Ngan agreed and caused Bao Shing to remit two sums of RMB500,000 to FCL in August and October 1997, a sum of US$500,000 and a sum of US$100,000 to Casix Inc on 12 August 1997 and 17 April 1998 respectively for the purpose of funding the Project.  The two sums of RMB500,000 were acknowledged by FCL as having been received from COM.  Subsequently, Casix returned US$110,000 to Ngan.  Ngan also paid Wang HK$8,000 a month for 26 months for managing the Project, i.e. HK$208,000.  Thus, Ngan’s investment in the Project consisted of RMB1,000,000, US$490,000 and HK$208,000.

13.  On 13 March 1998, about a month before Kong was due to leave FEHC to take up the post of Chief Executive Officer of Bao Shing as representative of the Fujian Government, he signed the 1998 Memorandum setting out the rights of the parties and capital arrangement of COM and FCL.  The memorandum explained that because of some possible legal disputes relating to FCO and the under‑capitalisation problem of FCL, the shares in FCO and FCL were temporarily held by COM and FEHC respectively; that when the problems were resolved, First Laser’s and FEHC’s shareholding in COM and FCL would be regularised (理順股權關係) in the ratio of 51:49; that prior to the said regularisation, COM’s and FEHC’s investments and rights in respect of FCL, COM and FCO shall be governed by three agreements; and that First Laser’s outstanding payment in the amount of HK$4,640,000 under the First Laser Agreement was treated as having been paid by First Laser and representing FEHC’s contribution to the share capital of COM.  The 1998 Memorandum evidenced what I called, “the spirit of the First Laser Agreement”.

14.  In May 1998 Xu Meixing (許美星) (“Xu”) replaced Kong as the deputy chairman of the board of directors of FEHC and the shares in FEHC were reassigned to Sun Ming (孫明), Yang Dongcheng (楊東成) (“Yang”), Chen Ruizeng (陳瑞曾) and Li Jinlin (李金林).  A few months after that the relationship between the parties took a turn.

15.  The conflict between Ngan and FEHC became overt since August 1998.  At a meeting on 18 August 1998, Xu attempted to re‑negotiate the terms of the joint venture with Ngan by suggesting to reverse the share ratio between First Laser and FEHC in COM to 49:51. Ngan refused.  The negotiation continued, but without success.  Ngan sought help from the Governor and other senior officials of the Fujian Government to resolve their dispute, but to no avail.

16.  On 29 September 1998, Ngan wrote to FCL requesting the transfer of the Project to Fujian Ocean which was a Fujian company set up by him specifically for the purpose of taking over the Project.  Wang confirmed to FEHC that the Project was funded by Ngan and sought instruction to effect the transfer after discounting for the costs of the research and development as well as depreciation of plant and equipment used in connection with the Project.  FEHC instructed Wang not to effect the transfer because there were other accounts in relation to other joint ventures with Ngan and his group of companies and other outstanding issues relating to the present joint venture which had not yet been resolved.  Then, presumably for the purpose of tightening his reign over FCL, Xu appointed himself as chairman of the board of directors and Wang and two others as directors of FCL on 3 February 1999.  On 15 April 1999, Xu also appointed Wang as general manager of FCL.

17.  Knowing that FEHC would not allow him to have the Project, Ngan had, since 16 April 1999, been repeatedly requesting FEHC to return his funds invested in the Project.  FEHC ignored his requests. 

18.  On 6 January 2000, Ngan wrote to Xu complaining about the proposed sale of the shares in FCL without COM’s consent.  On 12 January 2000, FEHC replied that the production of LBO crystals and BBO crystals by FCO was in violation of the rights of FRIMS, that FEHC was the 100% legal owner and had de facto control of FCL and that FEHC had full right to dispose of FCL.

19.  On 29 February 2000, FEHC entered into an agreement to sell all its shares in FCL, including the Project, to JDS Uniphase China Holdings Company (“JDS”) for US$60 million.  It is not known when the sale and purchase was completed, but a handover reception was held on 15 May 2000.

20.  On 3 October 2000, the parties accompanied by their lawyers attended two meetings in Zhuhai in an attempt to resolve their dispute, but no settlement could be reached.  However, they recorded their common understanding and their differences in the minutes of the meetings (the “2000 Minutes”).  The 2000 Minutes contained a statement of the above facts mutually agreed to by the parties and acknowledged the contents of the 1998 Memorandum.

The litigations

21.  On 9 October 2001, First Laser commenced the present action against FEHC and JAIL in Hong Kong.  At about the same time, the FEHC commenced legal proceedings in Fujian Higher People’s Court, (福建省高級人民法院 (2001) 閩經初字第43號), seeking a declaration against Hang Wo, COM and First Laser, that the Hang Wo Agreement, the COM Agreement, the First Laser Agreement and the 1998 Memorandum were of no effect (無效).  Ngan’s camp disputed the jurisdiction of the Fujian Higher People’s Court over the agreements.  The Fujian Higher People’s Court held it had jurisdiction.  Ngan’s camp appealed.  Their appeal was dismissed by the Supreme People’s Court on 22 July 2002 and the action was remitted back to the Fujian Higher People’s Court for adjudication.  On 18 July 2003, the Fujian Higher People’s Court delivered judgment declaring that the Hang Wo Agreement, the COM Agreement and the First Laser Agreement were of no effect but dismissing the FEHC’s claim that the 1998 Memorandum was of no effect.  Ngan’s camp appealed to the Supreme People’s Court (中華人民共和國最高人民法院 (2003) 民四終字第19號).  On 3 December 2004, the Supreme People’s Court allowed the appeal in part, but effectively dismissed it.  The Supreme People’s Court held that the Hang Wo agreement, the COM Agreement, the First Laser Agreement and the 1998 Memorandum to the extent that they relate to the transfer of shares in FCO and FCL were all of no effect.

22.  On 17 May 2010, five and half years after the decision of the Supreme People’s Court and well before the hearing of the appeal in the Court of Final Appeal, the Supreme People’s Court issued a judicial interpretation, 《Provisions of the Supreme People’s Court on Several Issues concerning the trial of disputes involving Foreign-Owned Enterprises (I) 》(《最高人民法院關於審理外商投資企業糾紛案件若干問題的規定(一) 》) (“《Provisions (I) 》”) which took effect on 16 August 2010.

23.  The Hong Kong proceedings took much longer to completion.  The parties took seven years to bring the action to trial. Unfortunately, this court went wrong in holding that the First Laser Agreement was governed by Hong Kong law, resulting in appellate proceedings which took another four years.  On 6 July 2012, the Court of Final Appeal held that the First Laser Agreement which was the basis of First Laser’s claim in this action is governed by Mainland law[4] and directed that the issue of restitution under Mainland law be remitted to this court for determination.  Then, six years afterwards, First Laser sought and was granted leave to re‑amend its statement of claim by introducing a new paragraph 38A pleading 《Provisions (I)》.  Another round of witness statements and expert opinions was filed.

First Laser’s case on restitution

24.  First Laser’s primary claim is founded on Articles 18 of 《Provisions (I)》 which came into effect almost two years after its appeal had been dismissed by the Court of Appeal.  This new claim is premised on the innocent party’s right to restitution upon a contract to invest in a foreign-owned enterprise between him as an actual investor（實際投資者）and a nominee shareholder of that enterprise（外商投資企業名義股東） (“nominee investment contract”) being found to be void or of no effect.  Article 18 provides that under those circumstances if the value of the equity held by the nominee shareholder is higher than the value of the actual investor’s investment, whether in the form of money (“investment money”) or property, the actual investor is entitled to be returned his investment money or property plus a reasonable distribution of the enhancement in value of the equity in the enterprise, subject to the nominee shareholder’s claim for a reasonable distribution for his contribution to the enhancement.  The claim is not founded on the First Laser Agreement or any of the three agreements or the 1998 Memorandum.

25.  First Laser’s alternative claim is founded on article 58 of 《The Contract Law of the People’s Republic of China》 (《中華人民共和國合同法》) (“《Contract Law》”) and article 61 of《The General Principles of the Civil Law of the People’s Republic of China 》) (《中華人民共和國民法通則》) (“《GPCL》”).  This claim is premised on First Laser being entitled under these articles to the return of the actual investment sum of HK$24,640,000 as property acquired by FEHC by reason of the First Laser Agreement, which is found to be void and of no effect.  Under article 131 of 《The Opinion of the Supreme People’s Court on Several Issues in Implementing the General Principles of the Civil Law of the People’s Republic of China (Trial Implementation) 》(《最高人民法院關於貫徹執行《中華人民共和國民法通則》若干問題的意見（試行）》) (“《GPCL Opinion》”), the property to be returned includes the original subject matter (「原物」) and “the fruits arising from the original subject matter” (「原物所生的孳息」).  On a proper application of article 58 of 《Contract Law》 and/or articles 61 of 《GPCL》, article 92 of《GPCL》, the “improper profits regime” (「不當得利制度」) and the “principle of fairness” (「公平原則」) under Mainland law, the scope of restitution covers not only the original subject matter transferred under the First Laser Agreement and dividends but also other benefits generated from the original subject matter received by FEHC.  This alternative claim will yield more or less the same result as the primary claim under article 18 of 《Provisions (I)》.  

FEHC’s case on restitution and counter-restitution

26.  FEHC advances ten grounds in opposition to First Laser’s claim.  These are:

(1)  It is not permissible for First Laser to run in the trial of the remitted issue a claim based on article 18 which is a completely new case. 

(2)  The claim under article 18 of 《Provisions (I)》is not pleaded.

(3)  It is not open to First Laser to rely on the “combined effect” of the three agreements, which is also un-pleaded.

(4)  It is not open to First Laser to rely on article 92 of《GPCL》 in its argument based on improper profits under article 91 as article 92 is un-pleaded, has not been addressed by its own expert on Mainland law and has not been put to FEHC’s expert. 

(5)  The evidence of First Laser’s expert on Mainland law must be rejected as its expert is biased and a hired gun.

(6)  On the question of the amount to be returned to First Laser as a reasonable distribution for its contribution to the enhancement in value of FCL’s shares pursuant to article 18 of 《Provisions (I)》, the evidential basis of the First Laser’s contribution is misconceived.

(7)  Article 18 of 《Provisions (I)》 is inapplicable to First Laser’s claim because the First Laser Agreement, which is the basis of First Laser’s claim, is a share transfer agreement and not an agreement between an actual investor and a nominee shareholder of a foreign-owned enterprise.  Furthermore, article 18 is not applicable by reason of article 23 because a final determination has been made by the Supreme People’s Court (已經終審) on the case (案件) in these proceedings[5].

(8)  First Laser’s reliance on article 131 of《GPCL Opinion 》in respect of its claim under article 58 of 《Contract Law》 or article 61 of 《GPCL》 is misconceived according to its own expert on Mainland law.

(9)  Pursuant to article 58 《Contract Law》 or article 61《GPCL》, First Laser is only entitled to be returned the purchase price of HK$20 million and interest as property received by FEHC under the First Laser Agreement.

(10)  The amount which has to be returned to First Laser would be more than offset by the value of the FCO shares which First Laser is liable to return to FEHC by way of counter‑restitution.

27.  Putting aside the pleading point, the procedural objections and the criticisms on First Laser’s Mainland law expert, the main thrusts of FEHC’s defence are that 《Provisions (I)》 is not applicable to the dispute by reason of article 23; article 18 is inapplicable as there was no nominee investment contract between First Laser and FEHC; and there is no evidential basis to support First Laser’s entitlement to a reasonable distribution for its contribution to the enhancement in value of FCL’s shares.  FEHC also relies heavily on the finding of fact of the Court of Final Appeal in paragraphs 112 to 115 of the CFA Judgment which is binding on First Laser making it impossible for First Laser to advance a case of nominee investment contract.

A GLOSSARY OF SOME MAINLAND LAW TERMS

Judicial interpretation

28.  A term which surfaced frequently in the experts’ evidence is “judicial interpretation”.  Judicial interpretations are sometimes titled as “interpretation” (「解釋」), “opinion” (「意見」), or “provisions” (「規定」) in relation to certain specified issues or questions.  It is common ground between the experts that judicial interpretations are not statutory enactments.  They do not create new laws. They are the Supreme People’s Court’s interpretation of existing statutory provisions.  Accordingly, they have effect along with the statutory provisions they interpret.  As such, article 84 of 《The Law on Legislation of the PRC》(《立法法》) against retroactivity does not apply.  Usually, there is no issue of retroactivity of a judicial interpretation.  But, as I shall demonstrate later, judicial interpretations sometimes deal with the issue of retroactivity or non-retroactivity of the statutes they interpret.

29.  Under article 25 of 《Provisions of the Supreme People’s Court on Judicial Interpretation》 (《最高人民法院關於司法解釋工作的規定》), a judicial interpretation takes effect on the date of promulgation, except as otherwise provided for in the judicial interpretation.  The general significance of the date of promulgation is that with effect from that date the judicial interpretation may be invoked by the litigants.

30.  The following judicial interpretations are referred to in this judgment:

(1)  《Provisions of the Supreme People’s Court on the Judicial Interpretation》(《Provisions on Judicial Interpretation》 (《最高人民法院關於司法解釋工作的規定》);

(2)  《Provisions of the Supreme People’s Court on Several Issues concerning the trial of disputes involving Foreign-Funded Enterprises (I) 》 (《最高人民法院關於審理外商投資企業糾紛案件若干問題的規定(一) 》) (“Provisions (I)”);

(3)  《The Opinion of the Supreme People’s Court on Several Issues in Implementation of《General Principles of the Civil Law of the People’s Republic of China (Trial Implementation) 》  》 (《最高人民法院關於貫徹執行《中華人民共和國民法通則》若干問題的意見（試行））》(“《GPCL Opinion》”);

(4)  《The Interpretations by the Supreme People’s Court on Several Issues Regarding the Application of 《Contract Law》 (I)》 (《關於適用《中華人民共和國合同法》若干問題的解釋（一）》) (“《Contract Law Interpretation (I) 》”);

(5)  《The Interpretations by the Supreme People's Court on Several Issues Regarding the Application of 《Company Law of the PRC》 (III)》 (《最高人民法院關於適用《中華人民共和國公司法》若干問題的規定（三）》)(“《Judicial Interpretation on Company Law (III) 》”).

31.  Usually when a judicial interpretation is issued, China Legal Publishing House will publish an explanation on the application of the judicial interpretation edited by a panel of senior judges of the Supreme People’s Court.  Such an explanation was published in relation to 《Provisions (I)》 titled 《Understanding and Application of 《Provisions of the Supreme People’s Court on Several Issues concerning the trial of disputes involving Foreign-Funded Enterprises (I) 》》 (《最高人民法院關於審理外商投資企業糾紛案件若干問題的規定(一)條文理解與適用》) (“《Provisions (I) U&A》”).  It is an authoritative work on the understanding and application of 《Provisions (I)》 relied on by legal practitioners in the Mainland including the experts of both parties.

Legal facts     

32.  One important term which as pointed out by the authors of 《Provisions (I) U&A》 and which must be borne in mind in understanding the application of 《Provisions (I) 》is “legal fact” (「法律事實」).  The authors wrote at page 224:

「引起糾紛的法律事實不僅包括當事人的行為也包括事件。依据法理學原理，法律事實是引起法律關系產生、變更、消滅的行為或者事件，法律事實依其是否由當事人主觀意志決定而分為行為和事件。因此，這里引起糾紛的不僅包括行為還包括事件。」

(Translation:

“The legal fact which caused the dispute include not only the conduct of the parties but also the incident. According to jurisprudence, legal facts are conducts or incidents that creates, changes or extinguishes the legal relationship. Depending on the subjective intention of the parties, legal fact may be divided into conduct and incident. Therefore, the dispute hereby caused includes not only conduct but also incidents.”)

The term “material facts” as understood in the common law concept may not be a near equivalent.  It is also important to note that conduct depends on the subjective intention of the parties, but incidents do not.

“Final adjudication” or “final judgment”(「終審」), “trial de novo” (「重審」) and “re-trial” (「再審」)

33.  Two other important terms are “final adjudication” or “final judgment” (「終審」) and “re-trial” (「再審」).  Despite its similarity to the name of the Court of Final Appeal in Chinese (終審法院), “final adjudication” or “final judgment” (「終審」) in the context of Mainland law is a concept different from the Hong Kong concept of a final appellate judgment.  As explained by the authors of 《Provisions (I) U&A》, “final adjudication” or “final judgment”  means a final judgment on the merits by the first instance or the second instance people’s court, as the case may be, which has come into effect[6]. The Mainland legal system adopts a two instance trial of which the second instance is final (兩審終審制). Litigants proceed to trial at the first instance and obtain a judgment.   If the parties do not appeal within the time limit for appeal, the judgment, even though at first instance, becomes effective and final.  The case has been finally adjudicated.  If a party appeals, the case will undergo a trial de novo(「重審」) at the second instance.  Once a judgment is issued by the court of second instance, regardless it is a judgment of the Higher People’s Court or the Supreme People’s Court, it is a final judgment, which is final and effective.

34.  As explained by the authors of 《Provisions (I) U&A》, “re‑trial” (「再審」) is a special concept under the Mainland legal system which is different from trial de novo (「重審」).  It is invoked by statutory organs in the exercise of their power of adjudication supervision in respect of a decision which has become final and effective.  According to the 《Civil Procedure Law of the People’s Republic of China》 (《中華人民共和國民事訴訟法》), such power of adjudication supervision may be exercised by the People’s Court, People’s Procuratorate (人民檢察院) and the litigant on the grounds that the original court of trial had erred in applying the law.

EXPERT EVIDENCE AND CREDIBILITY OF EXPERT WITNESSES

The approach for receiving and considering expert evidence

35.  This case is founded on Mainland law.  Foreign law has to be pleaded.  It is a fact to be found by the court on the basis of expert opinion.  Each side called one expert in Mainland law.

36.  The proper approach for receiving and considering expert evidence on foreign law was summarised in Shenzhen Development Bank Company Limited v New Century Int’l (Holdings) Limited[7].  Whilst the Court must derive assistance from the expert on foreign law, the court has to consider the expert’s evidence against the expert’s own reasoning and legal analysis.  It may also weigh the expert’s evidence against that of the other party in evaluating what is credible.  In the evaluating process, the Court is entitled, indeed duty bound, to use its own understanding of the Chinese language and contribute its own legal skill and experience to consider the relevant statutes and primary materials in reaching its conclusion, even if such conclusion differs from the experts’ opinions.

First Laser’s expert - Professor Yin

37.  Professor Yin Fei is First Laser’s expert on Mainland law.  He is a professor and dean of the Faculty of Law of the Central University of Finance and Economics.  He has a Ph D degree in laws from the Renmin University of China (中國人民大學).  His major areas of specialty are civil law, property law, law of debts, contract law, law of tort and law of immovable property.  He is a highly qualified academic lawyer.  FEHC has no dispute as to his status as an expert in Mainland law.

38.  Professor Yin was heavily criticized by Mr Yu SC as being a hired gun, biased and playing the role of an advocate for First Laser.  Mr Yu SC even accused Professor Yin of admitting that he was trying to tailor the facts for First Laser.  He produced the relevant part of the transcript in support of his accusation.  That is a very serious accusation to be made against an expert witness.  The alleged admission is also too bizarre to be credible.  A careful reading of the transcript showed that Professor Yin was recorded to have said in Putonghua something inaudible followed by “….我在裁剪事實 (… I am tailoring the facts)” while the interpreter was recorded to have interpreted “唔係我係喺度裁剪事實”.  The inaudible part was obviously caused by the witness continuing with his evidence before what he had said earlier was interpreted.  As it often happens, a witness is speaking so fast and continuously that what is supposed to be consecutive interpretation becomes simultaneous interpretation with parts of what is said by the witness overlapping with what is interpreted by the interpreter making parts of what is said by either of them inaudible.  To my recollection, this was indeed what happened.  It was a misunderstanding.  Counsel was viewing Professor Yin’s evidence with an eye too critical.

39.  The main criticism of impropriety against Professor Yin as an expert arose out of his opinion that there was an agreement of holding (代持) and cross holding (雙重代持) of shares arising out of the relationship between the parties and his avoiding the question of restitution based on an ineffective share transfer agreement.  The criticism is misconceived.  Firstly, it is based on the FEHC’s notion that a share transfer agreement could not at the same time have the effect of an agreement for holding of shares and cross holding of shares arising from the factual circumstances.  That is precisely a matter for expert evidence.  It is wrong to assume, as Mr Yu SC did that there was no such holding of shares under Mainland law and hence Professor Yin was biased. Secondly, the criticism wrongly assumed that in describing an agreement as an agreement for share transfer the Hong Kong courts had intended to say that the only effect of the agreement between the parties was to provide for a share transfer and nothing else.  The essence of Professor Yin’s opinion is that one must look at all the surrounding circumstances and not just the agreement or the words used by the Hong Kong courts in isolation.  That really is a question for this court to decide based on the experts’ evidence.  It is wrong to accuse an expert witness as biased or being a hired gun for advancing an opinion in support of his client’s case.  Mr Chan SC did not make such accusations against Mr Bai for advancing a contrary opinion in support of FEHC’s case and rightly left it to this court to assess his credibility according to applicable legal principles.

40.  Mr Yu SC accused Professor Yin of ignoring highly material rulings of the Court of Final Appeal in paragraphs 112 to 115 of the CFA Judgment.  He quoted as a glaring example that in setting out his assessment of the reasonable distribution of the enhancement in value in FCL shares, Professor Yin ignored Lord Collin’s observation that FEHC contributed US$4 million to the capital of FCL in 1997, 1999 and 2000. Obviously, Professor Yin excluded those contributions because on the basis of incontrovertible evidence the contributions came from FCL’s dividends and reserves from receivables of Casix Inc.  These facts are supported by undisputed documents before this court during the original trial.  These documents were not included in the appeals bundle before the Court of Final Appeal as First Laser thought that issue was outside the scope of the appeal.  However, at the hearing before Lord Collins NPJ, FEHC produced the capital examination reports which led Lord Collins NPJ to make the above observation.  Professor Yin had good reason based on First Laser’s case and incontrovertible evidence for excluding those contributions as coming from FEHC.  In short, those contributions came from common funds according to the spirit of the First Laser Agreement.  It should not be regarded as one party’s sole contributions in exactly the same way as FCO’s dividends applied to purchase staff quarters for the staff of FCO and FCL was treated.  FEHC is now trying to capitalize on an unfair advantage it had obtained before the Court of Final Appeal to discredit Professor Yin. Mr Yu SC’s criticism is not entirely fair.  Paragraphs 161 to 168 contain a full analysis of the contributions to FCL’s capital.

41.  Mr Yu SC criticized Professor Yin as playing the role of an advocate.  The criticism arose out of Professor Yin’s assertion of the existence of a nominee investment contract by conduct and the cross holding of FCO shares and FCL shares (雙重代持) arising from the FEHC refusal to perform its obligation of causing FCL to seek approval for transferring 51% of the shares in FCL to First Laser while he was being repeatedly cross-examined on the basis that the three agreements were only agreements for sale and purchase of shares and the absence of a contract document evidencing the nominee investment contract.  In inferring an agreement one is entitled to have full regard to the background and factual matrix and sometimes also the conduct of the parties both before and after the completion of the agreement.  Professor Yin was advancing his view that a relationship of cross holding of shares or nominee investment contract may co-exist with a share purchase agreement under the special factual matrix of this case.  There was some impatience on the part of Professor Yin in that his point of an agreement by conduct was to his mind not being understood by counsel or being distorted.  Counsel may disagree with his view, but I do not think as such Professor Yin could be unduly criticized as being biased for advancing it.

42.  Professor Yin was criticized for having made an analysis of fact allegedly for the purpose of advancing First Laser’s case.  Mr Chan SC submits that there is nothing wrong with an expert explaining how in his view the law ought to be applied to specific facts in his report or how he interpreted certain primary facts or documents in the context of Mainland law.  In Shenzhen Development Bank Company Limited v New Century Int’l (Holdings) Limited[8], Deputy High Court Judge Lam (as he then was) held that one of the functions of an expert witness on foreign law is,

“where there is no authority directly in point, to assist the English judge in making a finding as to what the court's ruling would be if the issue was to arise for decision there.”

An expert could not properly discharge that function without setting out the factual basis so as to enable him to assist the court in understanding how the foreign court would have applied foreign law to those facts. Professor Yin purposely prepared a separate Appendix 2 (專家意見所依據的案件材料和事實) to clearly set out the facts, findings and supporting materials upon which his opinion was based in order to separate it from the main body of his report containing his opinions on the contents of Mainland law.  The sources of the facts, caveats and assumptions were clearly identified.  In his evidence, Professor Yin explained that he could not discharge his function by talking in vacuo without reference to the facts.  He said[9]:

「因為雖然我向本案提供的是一個中國法律專家的意見，但是我想它肯定應該是建立在一定的事實上，事實上的基礎上的。所以說我不可能完全脫離所有的事實來空講中國法。否則的話，法庭只要看，拿一本中國的法典就夠了，不需要我。但是為咗謹慎起見，我的第一份專家意見裡面我仍然刻意的把有些內容作了些區分。所以附件二本身我還是為了方便起見，我先歸納了我所認識到的事實。然後正文主要是在討論法律問題。」

(Translation:

“Because although the opinion I provided in this case is that of a Mainland legal expert, I think it must be based on certain facts, factual basis. So I can’t talk about Mainland law completely devoid of the facts. Otherwise, the court just needs to pick up some Mainland law authorities and read, I may be dispensed with. But for the sake of caution, I still deliberately made some analysis of facts in my first expert opinion. Therefore, for the sake of convenience, I first summarize the facts I reckon in Annex II. And then discuss the legal issues in the main body of the opinion.”)

I think what Professor Yin did was un-reproachable and there is no merit in the suggestion that he was biased.

43.  Mr Yu SC argues that Professor Yin’s opinion about cross holding of FCL and FCO shares is inconsistent with First Laser’s conduct in selling FCO’s equipment without informing FEHC and in disposing of FCO’s platinum furnace which is FCO’s major asset without informing FEHC.  Sale of FCO’s equipment took place in July 2008 after FEHC had unequivocally repudiated the Agreement and the three agreements and when FCO has ceased business: see also paragraphs 288 to 292.  As for the platinum furnace, it was removed from Fujian to Macau in accordance with the Agreement to relocate production from Fujian to Macau.  The furnace had not been sold and is still standing in FCO’s premises in Macau: see paragraph 295.  There is no factual basis to launch these criticisms.

44.  Mr Yu SC argues that Professor Yin’s opinion is unsound and lacks legal reasoning.  He submits that if Professor Yin’s opinion were to be followed, it would effectively remove all distinctions between a valid contract under which a purchaser of shares would be entitled to sale proceeds of the shares and an invalid contract under which it would not. That is an over-sweeping statement.  It is not Professor Yin’s opinion that this would happen in all cases.  The peculiar features in this case according to First Laser are the parties’ conduct over a period of ten years, the cross holding of shares and First Laser’s or Ngan’s contribution to the Project. The outcome depends on the circumstances of the particular case.  If justice so requires, there is nothing wrong or unsound about Professor Yin’s opinion.  After all, 《Provisions (I)》 was issued to enable proper adjudication of disputes under a void contract.

45.  There are other complaints of inconsistencies in Professor Yin’s opinions and unsound legal reasoning.  I do not find it necessary to deal with all of them.  Suffice it is that I have considered them in the context of the parties’ case and tested them against logic and the opinion of Mr Bai.  Viewed in the round, I consider Professor Yin’s evidence credible.

FEHC’s expert - Mr Bai

46.  Mr Bai is a practising lawyer since 1985.  He graduated from the Renmin University.  He practised in Beijing, Shenzhen and Hong Kong.  He had vast experience in foreign investment law and practice.  He had given evidence as Mainland law expert in the Hong Kong courts before.  First Laser has no dispute as to his expert status.

47.  First Laser did not launch any attack on Mr Bai’s expertise or credibility.  Mr Bai’s demeanour is satisfactory.  His interpretation of the law is rigid and literal.  Though he accepted that 《Provisions (I) U&A》is an authoritative work on the issues of law in dispute in this case, some of his opinion is inconsistent with 《Provisions (I) U&A》.  I evaluate his evidence in the way as I have indicated above.  For reasons as I shall explain in the course of my analysis of his evidence, I do not find his evidence credible.

CREDIBILITY OF FACTUAL WITNESSES

First Laser’s factual witnesses

48.  Ngan In Leng (“Ngan”) testified in the original trial.  His evidence was largely unchallenged and accepted by this court.  He did not testify at this trial because of his ill health, presumably arising out of his old age.  There was no challenge to his evidence and no request for him to be called for cross-examination.  I accept his evidence as I did in the original trial.

49.  Fong Wai Man (“Fong”) is the deputy general manager of Hang Wo in the headquarters in Zhuhai.  She has been the vice president of  the board of directors and deputy general manager of FCO since 2002.  She is a business manager and secretary to Ngan and had been involved in the business of COM since July 1997.  She gave evidence to supplement Ngan’s.  Her evidence is primarily about the payment of additional salaries of HK$8,000 per month to Wang, the distribution of dividends by FCO and the purchase of staff quarters for the staff of FCL and FCO.  In her position, she had direct personal knowledge of the matters in her evidence.  Her evidence is largely supported by incontrovertible documentary evidence and appeared credible.

50.  She was criticized for confirming the accuracy of Appendices 2 and 3 in Professor Yin’s expert report.  What she confirmed as true and correct was, as she expressly stated, “the calculations and the facts stated therein, which are derived from documents and evidence adduced in this action”.  As she explained, she did not draft the appendices and the appendices are accompanied by references to the primary documents or the Hong Kong court judgments, including the CFI Judgment and the CFA Judgment.  She was not adopting or confirming Professor Yin’s opinion on Mainland law which she was in no position to do.  I find her a credible witness and accept her evidence.

FEHC’s factual witnesses

51.  FEHC filed statements from seven witnesses, including Wan Hing Kin (“Wan”), but chose not to call any of them in the original trial.  For the purpose of this trial, it filed a witness statement from Zheng Kaiyuan (“Zheng”).  In his witness statement, Zheng adopted the witness statements and affirmations filed by Wan because Wan died on 4 February 2018 and hence could not come to testify.  However, he offered no explanation for the failure to call Wan and the other witnesses at the original trial or at this remitted trial.  In the circumstances, I excluded the witness statements from Wan as well as the other six witnesses.  I also struck out irrelevant allegations in Section N of Zheng’s witness statement.

52.  Zheng testified.  He claimed to be a finance manager of FEHC since 1993.  But under cross-examination, he admitted he was stationed in Dongguan where he worked for a toy business owned by FEHC until 2011.  That was long after the events in this action and even after the original trial.  Zheng only started to assist Wan in preparing for this action in 2015.  He has no personal knowledge of the matters in dispute.  His evidence is largely made up of his views and speculations based on his reading of documents in preparing for this trial.  Most of his evidence was proven to be incorrect. He gave evidence on accounting principles which he was not qualified to give. Such evidence is inconsistent with common sense.  His evidence, particularly those in Section J and Section K of his witness statement showed that he was incredible and exaggerating.  He readily indulged in speculation.  I do not find him credible.  I give little weight to his evidence, save as supported by credible documentary evidence.

WHETHER 《PROVISIONS (I)》 IS APPLICABLE – ARTICLE 23

Whether 《Provisions (I)》 interprets《Contract Law》 and《GPCL》.  

53.  《Provisions (I) 》 was promulgated on 5 August 2010 to take effect on 16 August 2010.  That date has no bearing on the retroactivity or otherwise of the legislations it interprets.  All that date means is that with effect from that date, the judicial interpretation may be invoked by litigants for the purpose of interpreting the relevant legislations construed by the judicial interpretation.  It is not a date on which the law interpreted by the judicial interpretation takes effect.  The law has always been there and it has effect, retroactive or otherwise, according to its own provisions or, if there is no, according to the judicial interpretation which interprets it.

54.  According to Mr Bai 《Provisions (I)》is not intended to explain or interpret the laws listed in its preamble, including 《Contract Law》 and 《GPCL》 on which First Laser’s claim is founded.  The preamble of 《Provisions (I)》 states as follows:

「為正確審理外商投資企業在設立、變更等過程中產生的糾紛案件，保護當事人的合法權益，根據《中華人民共和國民法通則》、《中華人民共和國合同法》、《中華人民共和國物權法》、《中華人民共和國公司法》、《中華人民共和國中外合資經營企業法》、《中華人民共和國中外合作經營企業法》、《中華人民共和國外資企業法》等法律法規的規定，結合審判實踐，制定本规定。」

(Translation:

“These provisions are formulated to enable proper adjudication of disputes arising from the establishment and changes relating to foreign investment enterprises, and to protect the lawful rights and interests of the parties, according to the General Principles of the Civil Law of the People's Republic of China, the 《Contract Law》of the People's Republic of China, the Property Law of the People's Republic of China, and China The Law of the People's Republic of China, the Law of the People's Republic of China on Sino-foreign Joint Ventures, the Law of the People's Republic of China on Sino-foreign Cooperative Enterprises, and the Law of the People's Republic of China on Foreign invested Enterprises, are formulated in conjunction with trial practice.”)

The thrust of his argument is that those laws are the legal basis for formulating 《Provisions (I)》, but do not form part of the subject matter for interpretation by the provision.  His argument is based on page 11 of 《Provisions (I) U&A》where the authors said that the scope covered by 《Provisions (I)》 is limited to “disputes arising from the establishment and changes relating to foreign investment enterprises”.  Hence, he argues that the purpose of《Provisions (I)》is to resolve practical problems in adjudicating such disputes and not to interpret or explain the various laws stated in the preamble.  

55.  Mr Bai’s opinion is inconsistent with his opinion expressed elsewhere in his expert report. He does not dispute that judicial  interpretations do not create new laws but are explanations or interpretations by the Supreme People’s Court regarding application of  existing laws.  The preamble clearly states that the purpose of 《Provisions (I)》 is to enable proper adjudication of dispute according to the various laws stated therein.  The purpose could not a subject matter for 《Provisions (I)》 to interpret.  Obviously, that purpose is to be achieved by interpreting the laws stated in the preamble according to which the parties’ disputes are to be adjudicated.  As submitted by Mr Chan SC, it simply defies logic to say that being an interpretation, there are no subject laws to be interpreted. 

56.  It is also Mr Bai’s opinion expressed on various other occasions that《Provisions (I)》 is formulated in specification of (細化) or in specialization of (具體化) or extension of (擴展) article 58 of 《Contract Law》 and article 61 of 《GPCL》.   Such opinions contradict his argument that 《Provisions (I)》 does not interpret 《Contract Law》 and 《GPCL》.

57.  Furthermore, article 18 of 《Provisions (I)》 is a clear example of an interpretation of provisions of 《Contract Law》 and 《GPCL》 on the consequences of a contract being found to be void. As stated by the authors of 《Provisions (I) U&A》, in that area of dispute involving nominee investment contracts the legal consequences are more complicated than in the case of dispute under an ordinary contract and there is need for further explanation to be provided by 《Provisions (I)》.

58.  With respect to Mr Bai, his opinion is quite a biased and self‑serving view which I am unable to agree. It is just a desperate attempt to remove the legal basis of First Laser’s claim under a void nominee investment contract.  I accept Professor Yin’s opinion that 《Provisions (I)》 interprets the various statutes set out in its preamble, including 《Contract Law》 and 《GPCL》.  As both experts also agree that 《Contract Law》 and 《GPCL》 are applicable to the three agreements, I find that 《Provisions (I)》is also applicable to a nominee investment contract pleaded by First Laser.

Construction of article 23 and retroactivity

59.  Article 23 is the application provision which sets out the circumstances when 《Provisions (I)》 may be applicable.  It is Professor Yin’s opinion that《Provisions (I)》 is applicable to a case to which 《Contract Law》and/or《GPCL》apply if that case has not been finally adjudicated at the time when 《Provisions (I)》 came into force, regardless whether the legal facts giving rise to the case occurred before or after that date.  The basic thesis of his opinion is that there is no question about non-retroactivity of 《Provisions (I)》 which is not a new legislation but a judicial interpretation which interprets existing law, namely《Contract Law》and《GPCL》which had been in force before the legal facts in issue occurred.  According to Professor Yin, the test of applicability of 《Provisions (I)》 is simply whether the case has been finally adjudicated when 《Provisions (I)》 came into force.  For reasons as I shall explain, this approach is over-simplistic and inconsistent with the view of the authors of《Provisions (I) U&A》.  

60.  According to Mr Bai, 《Provisions (I)》has no retroactive effect and does not apply directly to legal facts which occurred before the date of promulgation regardless whether the case has been finally adjudicated.  It applies by direct application to legal facts which occurred after 《Provisions (I)》has come into force and the case arising from those legal facts has not been finally adjudicated; and indirectly by reference to cases arising from legal facts which occurred before 《Provisions (I)》has come into force, if there were no provisions under the legislations or judicial interpretations then in force applicable to the case but there are applicable provisions under《Provisions (I)》.  I agree with his approach.  But then, he made a quantum leap based on his indirect application mode to argue that 《Provisions (I)》does not apply if there were applicable provisions under the pre-existing legislations or judicial interpretations as well as under《Provisions (I)》.

61.  Before considering the experts’ opinions, it is necessary to understand the development of the non-retroactive principle of the law in China.  That principle is at the heart of this issue of whether 《Provisions (I)》has retroactive effect.  The authors of《Provisions (I) U&A》 said that on the question of retroactivity of the law（在法律溯及力問題）, the principle adopted in《Provisions (I)》is the non-retroactive principle.  By the phrase “question of retroactivity of the law”, the authors must mean retroactivity of statutory enactments and not retroactivity of judicial interpretations.  In the discussion that followed from pages 221 to 224, the authors indeed discussed about retroactivity of legislations and how that question was dealt with by various judicial interpretations. Hereunder is a summary.

62.  China was very much behind the rest of the world in the concept of non-retroactivity of the law.  Except during the Han Dynasty and the Yuan Dynasty, the law in China was basically retroactive. It was only until the end of the Qing Dynasty and the beginning of the Republic of China in 1928 that the concept of non-retroactivity found its way in the criminal codes.  At that time, the principle of non-retroactivity was basically to apply the pre-existing law to conducts which occurred before the new law but to adopt the more lenient punishment under the new law （從舊兼從輕）[10].  This historical background and philosophy have deeply influenced the development of the principle of non-retroactivity of the law in the PRC.

63.  In the Mainland, the principle of non-retroactivity was first legislated in the Criminal Code in 1979 and later in the civil law in 2000  under article 84 of《The Law on Legislation of the PRC》.  Understandably, against the above background, the non-retroactivity principle which evolved was basically to apply the pre-existing law to conduct before the new law with the benefit under the new law （從舊兼有利）[11].  Therefore, in principle, the law is not retroactive but the new law applies where it better protects the personal rights and freedom of the individuals.  This principle is usually adopted in the criminal law.  In the Criminal Code as amended in 1997, it is expressly provided that the law is not retroactive, but it is retroactive where the punishment under the new law is lighter or where the activity is not criminal or not punishable under the new law.  Thus a defendant has the benefit of the new law in respect of his criminal activity before the new law has come into effect.  In constitutional law or other areas of the law, such as civil law, the statutes seldom contain provisions on non-retroactivity.  In practice, this issue is resolved by judicial interpretations giving explanations on whether the legislations they interpret have or have no retroactive effect.  Some judicial interpretations adopt the principle of retroactivity, others adopt the principle of non‑retroactivity. There are also judicial interpretations which adopt both principles. 

64.  The non-retroactivity principle was adopted in article 196 of 《The Opinion of the Supreme People's Court on Several Issues in Implementing 《The General Principles of the Civil Law of the People's Republic of China (Trial)》》issued in 1988 (《1988 年最高人民法院關於貫徹執行《中華人民共和國民法通則》若干問題的意見（試行）》) which came into effect on 1 January 1987.  Article 196 provides that in respect of cases filed after 1 January 1987 in relation to civil conducts which occurred before 1987, the law then existed is applicable; but if the law then existed did not have specific provision governing the dispute, the relevant provisions in that judicial interpretation may be applicable.  The non-retroactivity principle of following the pre-existing law with the benefit under the new law was adopted.

65.  The retroactivity principle was adopted in 《Judicial Interpretation on Guarantee Law》(《擔保法解釋》).  Article 133(3) of that judicial interpretation provides that since the implementation of 《Guarantee Law》, 《Guarantee Law》and this judicial interpretation apply to cases arising out of conducts relating to contracts of guarantee, if the case is in the course of first or second instance trial.  Similarly, 《Contract Law Interpretation (I)》 makes it clear that 《Contract Law》 is retroactive.  Article 2 of that judicial interpretation provides that where a contract is established before the implementation of 《Contract Law》 but the period of performance under the contract overpasses or commences after the implementation of 《Contract Law》, disputes arising from the performance of the contract shall be governed by relevant provisions of Chapter 4 of 《Contract Law》. 

66.  There is also a hybrid situation where the principle of retroactivity and the principle of non-retroactivity were adopted within the same judicial interpretation as in《Opinion on Law of Succession》(《繼承法意見》).  Article 64(1) of that judicial interpretation provides that in a case which had been finally adjudicated but which was ordered to be re-tried after implementation of 《Law of Succession》pursuant to the trial supervision process, the pre-existing law and not 《Law of Succession》is applicable.  In this respect, 《Law of Succession》 is not retroactive.  But article 64(2) provides that in respect of cases which commenced before the implementation of 《Law of Succession》 but have not been finally adjudicated at the date of implementation, 《Law of Succession》 is applicable.  To such cases, 《Law of Succession》 is applicable and retroactive. This judicial interpretation adopted the principle of “segmental application” (「分段適用」). The dividing line is whether a case has been finally adjudicated at the time when the new law comes into force.  This principle was adopted in article 23 of 《Provisions (I) 》.

67.  After considering the historical development of the non-retroactivity principle, the authors concluded at page 224 as follows[12]:

「從以上立法和司法解釋的規定可以看出，我國立法在法律溯及力問題上，基本上采用從舊兼有利原則，即新法原則上沒有溯及力，在有利于當事人時可以適用。我國民事司法實踐中，對於新法對以前發生的事件和行為，根據不同的情況，實行“分段適用” 的原則，即對于新法實施前尚未終審審結的案件，適用新法；對于新法實施前已經終審審結的案件，不適用新法。」 (重點以斜體及粗字體顯出)

(Translation:

“From the provisions of the above legislations and judicial interpretations, it can be seen that on the question of retroactivity of the law, China basically adopts the principle of applying the pre-existing law with the benefit under the new law, that is, in principle the new law has no retroactive effect but may be applied when it benefits the parties.  In China’s civil judicial practice, in relation to facts and conduct which occurred before the new law, it adopts the principle of “segmental application” according to the different circumstances, that is, the new law applies to cases which have not been finally adjudicated before the implementation of the new law; in relation to cases that have been finally adjudicated before the implementation of the new law, the new law does not apply.”

(emphasis highlighted in italic and bold print) )

On the issue of retroactivity or otherwise of the law, the principle is to “apply the pre-existing law with the benefit under the new law” (「從舊兼有利原則」).  The new law is non‑retroactive in the sense that basically it is not retroactive, but it may apply retroactively by segmental application （分段適用）if it is beneficial to the parties (which must mean beneficial to the party whose rights have been infringed or beneficial in the overall interest of justice).  Thus, the new law is also applicable to legal facts which occurred before the new law has come into effect, if the cases arising from those legal facts have not been finally adjudicated; but is inapplicable to cases which have been finally adjudicated.  The dividing line is whether the case has been finally adjudicated.  The new law applies not as a matter of exception, but as an overriding principle to benefit the parties.   Thus, the Mainland concept of non-retroactivity of the law is a fluid concept very different from the concept under the common law.  It may even not be wrong to suggest that the concept of non-retroactivity under Mainland law is only partial non-retroactivity or partial retroactivity under common law.  When considering the issue of non-retroactivity under Mainland law, one must bear in mind the above concept and put aside the common law concept.

68.  Article 23 must be construed against this principle of non-retroactivity of the law in the context of Mainland law.  Article 23 was drafted in simple language.  It reads:

「第二十三條 本規定施行後，案件尚在一審或者二審階段的，適用本規定；本規定施行前已經終審的案件，人民法院進行再審時，不適用本規定。」 (以斜體及粗字體顯出重點)

(Translation:

“Article 23. As to a case which is still in the course of first or second instance trial after these Provisions came into force, these Provisions shall apply. As to a case for which a final judgment has been made before these Provisions come into force, if the People’s Court re-tries the case, these Provisions shall not apply.”) (emphasis highlighted in italic and bold print) )

69.  On a plain reading of the article, it is amply clear that whether a case has been finally adjudicated is a criterion for determining whether 《Provisions (I)》is applicable.  However, according to the authors, that is not the sole criterion.   At page 220 of 《Provisions (I) U&A》, the authors identified two aspects in that article.  They wrote:

「(一)本司法解釋施行後的行為或者事件引發的糾紛而涉訴的案件尚在一審或者二審階段的，該案件尚未終審、當事人的權利義務關系尚未確定，故應適用本解釋的規定。

(二)本司法解釋施行時已經終審後的案件, 當事人申請再審或者人民法院按照審判監督程序決定再審的, 不用本適用本規定。」 (重點以斜體及粗字體顯出)

(Translation:

“(1) Where the acts or facts which brought about the dispute occurred after these Provisions had come into force and the case concerned is still pending under the first or second instance trial, the case has not been finally adjudicated, the rights and obligations of the parties have not been ascertained, the provisions under 《Provisions (I)》 are therefore applicable.

(2) Where the case had been finally adjudicated at the time when these Provisions came into force, the parties apply for re-trial or the People’s Court decides to re-try the case in accordance with the adjudication supervision procedure, these Provisions do not apply.”)

(Emphasis highlighted in italic and bold print) )

Under the first aspect, the authors introduced in their explanation the phrase “the acts or facts which brought about the dispute (giving rise to the case)” to qualify the word “case”.  That phrase has to be read together with the phrase “occurred after these Provisions had come into force”.  Taken together, it would appear to be the authors’ opinion that the determining factor as to whether 《Provisions (I)》applies is not just whether the case has been finally adjudicated at the time when 《Provisions (I)》came into force, but also whether the acts or legal facts occurred after《Provisions (I)》came into force.  This is the simple application of the non-retroactivity principle.  Thus, Professor Yin’s opinion may be an over simplification. 

70.  Then, at page 224 of《Provisions (I) U&A》, the authors drew the readers’ attention to four practical points.  The first two are straight forward.  Under Point 1, they reminded the readers that legal facts include the parties’ conducts as well as incidents which are independent of the parties’ subjective intention.  Under Point 2, they drew the distinction between single act and continuous act and said that in determining whether 《Provisions (I) 》 is applicable, the issue is whether those acts transgress the date of implementation of 《Provisions (I) 》. 

71.  Points 3 and 4 are pertinent.  They show how the non-retroactivity principle in the context of Mainland law applies.  Under Point 3, the authors explained that the non-retroactivity principle anticipates that the new law applies to legal facts which occurred after the law has come to effect.  Hence the new law is applicable to disputes arising from legal facts which occurred after the new law or judicial interpretation has been implemented.  This explains why in relation to the first aspect of the article the authors introduced the phrase “the acts or facts which brought about the dispute (giving rise to the case)” to qualify the word “case”.   The authors were applying the basic principle that the new law has no retroactive effect and therefore has no application to legal facts or conducts which occurred before the new law comes into force.

72.  But the authors did not stop there.  Under Point 4, the authors discussed the scenario where the legal facts occurred before 《Provisions (I)》has come into force.  They wrote at page 225:

「盡管引起糾紛的法律事實發生在的本司法解釋之前，但之前的法律或者司法解釋沒有規定，而本司法解釋有規定的，應參照本司法解釋的規定。」

(Translation:

“Despite the legal facts which brought about the dispute occurred before this judicial interpretation, if there were no provisions under the legislations or judicial interpretations then in force but there are such provisions under this judicial interpretation, reference shall be made to provisions in this judicial interpretation.”)

73.  Even if the legal facts which brought about the dispute occurred before 《Provisions (I)》has come into effect, 《Provisions (I)》is applicable if there are no applicable provisions under the pre-existing legislations or judicial interpretations then in force, but there are under 《Provisions (I)》.  This is the indirect application mode according to Mr  Bai.  Under such circumstances, 《Provisions (I)》has retroactive effect.  This is application of the overriding principle that the new law applies if it is more beneficial to the parties than the pre-existing law.  It is important to note that the authors used the description “no provisions under the pre-existing legislations or judicial interpretations” to describe the circumstances when the new law has retroactive effect.  The same description was used in some of the judicial interpretations reviewed by the authors in paragraphs 64 to 66.  However, according to the principle of non-retroactivity in the context of Mainland law, the new law applies if it is more beneficial to the parties and not where there is a lacuna. The test is whether the new law is more beneficial to the parties or better serves the interest of justice.  It is reasonable to assume that if there are no applicable pre-existing provisions, the new law must be more beneficial which must be at least one of the reasons why the new law is made.  Of course, in reality, if the new law is more beneficial than the pre-existing law, it must necessarily be a situation where there is no provision under the pre-existing law which was as beneficial, i.e. there is no applicable provisions under the pre-existing law.  The description used by the authors as well as in the other judicial interpretations discussed practically covers all circumstances where the new law is more beneficial to the parties or to the interest of justice.  The description used by the authors is probably a convenient and practical shorthand.  Up to this point, I am in agreement with Mr Bai.

74.  However, based on Point 4, Mr Bai argues that in the reverse scenario where there are applicable provisions under the pre-existing legislations, 《Provisions (I)》is inapplicable.  Mr Chan SC disagrees.  He argues that there is nothing in 《Provisions (I) U&A》 to suggest a reverse scenario must necessary lead to a contrary result.  The authors have not specifically discussed about such a scenario.  I agree with Mr Chan.  In relation to human conduct, the inference suggested by Mr Bai may be drawn, but not in relation to interpretation of statutory provisions, particularly in the light of the principle of non-retroactivity in the context of Mainland law.  While the principle is that the new law is basically non-retroactive, the overriding principle is that the new law is applicable if it is more beneficial.  If there are applicable provisions under the pre-existing law which are inconsistent with those in 《Provisions (I)》,《Provisions (I)》is applicable under the overriding principle, if it is more beneficial to the parties.  In a scenario involving inconsistent or conflicting provisions, 《Provisions (I)》would only be inapplicable if it is less beneficial than the pre-existing law.   I think Mr Bai’s argument is an impossible quantum leap.

75.  Other than a bald assertion that there are pre-existing laws applicable to First Laser’s case of nominee investment contract, Mr Bai could not pin-point to any such legislations or judicial interpretations.  There are provisions under《Contract Law》and《GPCL》 providing for restitution of properties passed under a contract or civil act which is found to be void.  But those provisions do not cover the distribution or return of properties acquired under such a contract or civil act.  There is no evidence of any pre‑existing provisions applicable to First Laser’s case of nominee investment contract, let alone that such provisions are as beneficial as article 18.  《Provisions (I)》is certainly more beneficial to the parties and better serves the interest of justice.  In that sense, there is no applicable pre-existing provisions.  《Provisions (I)》is therefore applicable to First Laser’s case indirectly by reference subject to meeting the requirement for segmental application, i.e. that the case has not been finally adjudicated. 

76.  The authors’ second proposition is quite straight-forward.  It explains and amplifies the second aspect of article 23. It applies to a case pending re-trial invoked pursuant to the adjudication supervision procedure.  Such a case has actually had a final adjudication.  The re-trial was ordered because the original trial court might have erred in applying the law then applicable to the parties’ dispute.  The court of re-trial has to determine if the original trial court had so erred.  Therefore, it is only logical that the parties’ rights and obligations should be adjudicated according to the law then applicable at the time of the original trial. 《Provisions (I)》 is therefore inapplicable to the cases mentioned in the second aspect.  Final adjudication is only relevant for the purpose of segmental application.  It should not be taken as the sole criterion for determining the application of《Provisions (I)》

77.  In conclusion, I find, on the true construction of article 23, 《Provisions (I)》 is applicable basically to cases arising from legal facts which occurred after《Provisions (I)》 has come into effect.  In addition, by the operation of the non-retroactivity principle in the context of Mainland law and the judicial practice of segmental application, 《Provisions (I)》may apply indirectly to cases arising from legal facts which occurred before 《Provisions (I)》has come into effect, if there were no applicable provisions under the pre-existing law but there are under 《Provisions (I)》, or if 《Provisions (I)》is more beneficial to the parties.  But, only cases which have not been finally adjudicated when《Provisions (I)》comes into force may qualify for segmental application.  The legal facts in issue in First Laser’s case of restitution occurred before 《Provisions (I)》has come into force.   As there is no evidence of any pre-existing legislations or judicial interpretations which are similar to article 18 of《Provisions (I)》, article 18 is applicable to First Laser’s case of restitution, if it has not been finally adjudicated. 

Has First Laser’s case been finally adjudicated

78.  In paragraph 38.2.(8)(b) of the Re-re-re-amended Defence and Counterclaim (“RRRADC”), FEHC pleaded that “the plaintiff’s cases were finally adjudicated under the PRC Judgment” and that “it is averred that 《Provisions (I)》 have no application”.  Mr Chan SC submits that it is not clear what “the plaintiffs’ cases” refers to.  Despite the ambiguity, there could be no misunderstanding between the parties.  The parties’ focus was on the remitted issue and whether 《Provisions (I)》is applicable to the alleged nominee investment contract.  That must be “the plaintiff’s cases”.

79.  First Laser’s contention is that no final judgment having been made regarding its claim on restitution either in the Mainland or in Hong Kong, 《Provisions (I)》 shall apply.  FEHC’s contention is that the crucial term used in article 23 is “case” (「案件」) as distinguished from the term “issue” or “question” (「問題」) in the context of “a case which is still pending under the first or second instance trial” or “a case for which a final judgment has been made”.  In that context, Mr Yu SC contended in his opening that the “case” (「案件」) had gone to the Court of Final Appeal and therefore had been finally adjudicated.

80.  Professor Yin’s opinion is that there is no distinction between the term “case” and “issue” or “question”.  These terms may be used interchangeably depending on the context. He accepts that the Supreme People’s Court has made a final judgment on the question of whether the three agreements were void but argues that the question as to the effect of these agreements being found to be void, i.e. the remitted issue, had never been adjudicated on, whether by the Hong Kong courts or the Mainland courts, let alone a final judgment.

81.  Mr Yu SC argues that such opinion should not be accepted as Professor Yin accepted under cross-examination that the case had been finally adjudicated (這個個案件已經終審了)[13].  With respect, Mr Yu SC is quoting what Professor Yin said out of context.  That answer was made in the context of what Professor Yin said immediately preceding that.  As the transcripts show, Professor Yin first referred to the parties’ case before the Fukien People’s Court and then the Supreme People’s Court.  Then he said that the dispute between the parties was the validity of the three agreements and the 1998 Memorandum.  It was in that context that Professor Yin said that the case had been finally adjudicated. Despite the imprecise language used, it was obvious that what Professor Yin said had been finally adjudicated was the validity of the three agreements and the 1998 Memorandum, not the “case” meaning the entirety of the parties’ dispute. He was also using the term “case” and “issue” interchangeably. 

82.  I agree with Professor Yin.  The word “case” as used in article 23 does not have a technical meaning.  There may be many facets or issues in a case.  If one only of those issues had received final adjudication, it does not mean all issues had been adjudicated, let alone finally.  The words “case”, “issue” and “question” may be used interchangeably.  The issue of restitution has been remitted by the Court of Final Appeal to this court for a determination.  It has never been adjudicated.  As submitted by Mr Chan SC, the matter can be tested by asking what was the result of such adjudication on the issue of restitution.  The answer must be that the case is pending the determination of this court.  In my view, the issue of restitution has not been determined.  《Provisions (I)》 applies to the parties’ case on restitution.

THE PLEADING AND THE REMITTER

Introduction

83.  First Laser’s case on restitution is founded on a void nominee investment contract between First Laser as the actual investor and FEHC as the nominee shareholder and article 18 of 《Provisions (I) 》.  FEHC raised strong objections to the way First Laser’s case is pleaded.  It attacks First Laser’s pleadings on two fronts.  First, a remittance cannot go beyond the reference and that the trial of a remitter must proceed on the basis of the pleadings existing at the time of the original trial and finding of fact.  It is not open to First Laser to plead a new case of nominee investment contract. Second, First Laser’s case of nominee investment contract has not been sufficiently pleaded.  To establish a claim under article 18 of 《Provisions (I) 》, First Laser has the burden of pleading and proving that a nominee investment contract was concluded between First Laser as the actual investor and FEHC as the nominee shareholder.  Such particulars are lacking.  First Laser may not advance a case which has not been pleaded. 

84.  First Laser’s general response is that it is not running a new case and that FEHC’s criticism is based on the misconceived notion that a share transfer agreement could not at the same time also have the effect of a nominee investment contract.  Moreover, FEHC’s objections had been repeatedly advanced and rejected by this court and the Court of Appeal before when contesting First Laser’s application for leave to file expert evidence relating to 《Provisions (I)》and to re-amend the Amended Statement of Claim (“ASOC”).

The remitter

85.  Mr Yu SC referred to the Privy Council case of Sans Souci Limited v VRL Services Ltd[14] and submits that in considering the scope of the remitter, the court must have regard to the relevant background leading to the order of remission.  From the commencement of this action in October 2001 up to the conclusion of the appeal in the Court of Final Appeal in July 2012, all parties have been proceeding on the basis of the First Laser Agreement being an agreement for sale and purchase of shares.  This was also the position when the matter was litigated before the Fujian Court and the Supreme People’s Court.  At paragraph 60(1) of the CA Judgment, the Court of Appeal specifically held that restitution under Mainland law was to “restore the parties to their pre-contract position”.  At paragraph 58 of the CFA Judgment, Lord Collins NPJ was of the same opinion.  However, in 2016 First Laser suggested for the very first time that it was an actual investor and FEHC was a nominee shareholder in a nominee investment contract to which article 18 of 《Provisions (I)》 applies. 

86.  Against the above background, Mr Yu SC submits that when the Court of Appeal and the Court of Final Appeal ordered remittance of the issue of restitution to be determined by this court, both courts were intending to direct this court to determine what should be returned under the First Laser Agreement, being an agreement for sale and purchase of the FCO and FCL shares.  First Laser may not alter its case as originally pleaded and advance a new case of a nominee investment contract.  He argues that the remitter must logically be the first issue to address, yet First Laser made no attempt whatever to deal with it in its 92-page closing submission.  He suggests that First Laser knew this point is fatal to all its arguments in reliance on Article 18 of 《Provisions (I)》 and has no answer to FEHC’s objections.  The other side of the coin is that the very heavy ammunition engaged by FEHC in the pleading arguments reflects a self-recognition of the lack of substance in its defence.

87.  I shall first turn to Mr Yu SC’s observations on the dicta from the CA Judgment and CFA Judgment.  The sentiment of the courts would be clearer if the two paragraphs in the judgments are read together with the immediately preceding paragraph.  In paragraphs 59 and 60(1) of the CA Judgment, Cheung JA said:

“(III) Consequence if proper law is Mainland law

59. Because of the Judge’s decision that the proper law of the contract was Hong Kong law, he dealt with the consequence arising therefrom only in the context of Hong Kong law. As a result this Court is handicapped in addressing fully the consequence in the context of Mainland law because of the absence of findings on this issue.

Contract invalid and the result

60. If Mainland law was the proper law of the contract, then the expert evidence clearly showed that the contract was invalid. The contract was invalid by reason of FCL not having obtained approval to dispose of its shares. Under Mainland law, the innocent party is entitled to two remedies :

(1) Restitution : the parties will be restored (返還) to their pre-contract position.

(2) Compensation : the party at fault (過錯) is liable to pay compensation to the other party.”

88.  In paragraphs 57 and 58 of the CFA Judgment, Lord Collins NPJ said:

“57. The Court of Appeal was handicapped in deciding what First Laser’s remedies were in the event of invalidity of the agreement or agreements under Mainland law. Because the trial judge had dealt with the consequences on the basis of his decision that the proper law of the contract was Hong Kong law, he did not choose between the conflicting evidence of Mainland law on the consequences of invalidity. As the Court of Appeal said (at [59]), it was handicapped in addressing fully the consequences in the context of Mainland law because of the absence of findings on this issue.

58. The experts on Mainland law were agreed that if Mainland law is the proper law of the contract, and the contract is invalid under Mainland law by reason of FCL not having obtained approval to dispose of its shares, the innocent party is entitled to two remedies under Mainland law: first, restitution, or restoration of the parties to their pre-contractual position; second, compensation from the party at fault [過錯].”

89.  In paragraph 59 of the CA Judgment and paragraph 57 of the CFA Judgment, Cheung JA and Lord Collins NPJ said that the court was handicapped in deciding what remedies First Laser was entitled to and were not comfortable with drawing any definitive conclusion on the scope of restitution under Mainland law, which was why the order for remission was made.  When paragraphs 59 and 60 of the CA Judgment and paragraphs 57 and 58 of the CFA Judgment are read together, it is clear that both judges were just quoting their understanding of the general propositions of Mainland law as represented by the legal experts in their reports.  The issue of restitution under Mainland law had not been fully argued before the courts.  The phrase “restoring to the pre-contract position” also begs the question of what the scope of restitution is under Mainland law.  If restitution under Mainland law, then or as it has now developed, includes improper profits (不當得利) or, in an appropriate case, reasonable distribution of the fruits of investment (合理分配股權收益） between the actual investor and the nominee shareholder of an enterprise in issue, I am unable to see why these issues do not fall within the terms of the remitter.  The dicta quoted were far from limiting the scope of the remitter to restitution only to the extent of restoring the parties to their pre-contract position. 

90.  Sans Souci Ltd is an appeal from Jamaica to the Privy Council.  It is a very strong authority binding on this court.  The principles are well‑established. In that case, the hotel manager sued for damages under three heads.  The major head was for gross management fee.  The hotel proprietor disputed mainly on the ground that the correct measure of damages was the manager’s loss of profit, and that in arriving at the loss of profit it was necessary to deduct from the gross fees the so-called “unrecoverable expenses”.  These were expenses which, according to the proprietor, the manager would have incurred in performing its functions and could not have recovered under the terms of their agreement.  The main issue was whether the so-called “unrecoverable expenses” were really unrecoverable.  After the arbitrators issued the award, the proprietor applied to court to have the award set aside or remitted to the arbitrators.  One of the grounds of the application was that the arbitrators had not dealt with the “unrecoverable expenses”.  Harris J dismissed the proprietor’s application.  The proprietor appealed.  The Court of Appeal agreed with the judge except on the ground based on the “unrecoverable expenses”.  It held that the arbitrators had failed to make appropriate finding about the expenses, or to take them into account in assessing damages, or to explain why they had not done so.  The Court of Appeal ordered a remission back to the arbitration tribunal to determine the issue of damages only.

91.  When the matter came back before the tribunal, the proprietor sought to raise two points on damages in addition to the question of “unrecoverable expenses”, and sought to lead fresh evidence in support of those points.  The tribunal refused to entertain either point.  It ruled that the award had been remitted to them for the limited purpose of dealing with the “unrecoverable expenses” to be deducted from the future management fees. It was therefore not entitled to reassess the value of the management fees.  This is similar to Mr Yu SC’s argument today. The proprietor appealed arguing that the Court of Appeal had remitted the question of damages generally, and that in principle all points relevant to damages were open before the arbitrators.  This was rejected by the High Court, again by the Court of Appeal and eventually by the Privy Council.  In delivering the decision of the Privy Council, Lord Sumption held[15]:

“11.  It is apparent from the reasons given by the Court of Appeal in December 2008 that, in ordering a remission, they were concerned only with the way in which the arbitrators had dealt with, or failed to deal with, the “unrecoverable expenses”.  Harrison P., delivering the leading judgment, identified the error or oversight which justified the remission at paragraph 69:

‘Whether or not expenses incurred by the Respondent were in fact ‘unrecoverable’, as claimed by the appellant in its Points of Defence, or reimbursable as contended by the Respondents, should have been determined by the arbitrators. The arbitrators were required to demonstrate in their award that they accepted that the expenses were ‘unrecoverable’, or alternatively payable by the Appellant. At its lowest, the arbitrators should have demonstrated that they considered the issue of ‘unrecoverable expenses’ as contended for by the Appellant.’ 

No other matter is identified by the Court of Appeal as warranting a remission.  Indeed, no other criticism was made of the way in which the arbitrators had dealt with damages.”

After giving a lengthy discussion on the principle of construction of court orders, Lord Sumption rejected the proprietor’s argument that the remitter was ambiguous and dismissed the appeal.  I do not find it necessary to quote those passages as there is no issue of ambiguity about the remitter here.

92.  There are two peculiar features in the present case which distinguish it from Sans Souci Ltd.  First, though the terms of the remitters are very similar, it is crystal clear from the judgments that the remitting court in Sans Souci Ltd was concerned only with the way in which the arbitrators had dealt with, or failed to deal with one specific issue in relation to the expenses, i.e. the “unrecoverable expenses”.  The Court of Appeal specifically directed the arbitrators “to demonstrate in their award that they accepted that the expenses were ‘unrecoverable’, or alternatively payable by the Appellant.”  All but one specific issue relevant to the claim in damages had been resolved, which was whether the expenses were unrecoverable or payable.  The issue remitted in that case was very narrow and limited to one very specific issue. 

93.  In the present case, there was no such concern expressed by the Court of Appeal or Court of Final Appeal.  The issue of restitution was remitted because this court, regrettably erred in its finding on the law applicable to the First Laser Agreement.  As a result, this court totally failed to consider the entire issue of restitution, as if the issue had never come before the court.  What this court has to consider is the entire issue of restitution and not just a specific or defined issue.  The issue of restitution under Mainland law had not been argued or considered by the Court of Appeal or Court of Final Appeal.  In the context of this case, restitution is like an alternative cause of action.  It is almost like an entirely new cause of action or a cross‑claim. There are so many issues, particularly issues relating to 《Provisions (I) 》which was then unknown to the Court of Final Appeal, which is another distinguishing feature I shall next turn to.  But on this basis alone, the present case is distinguishable from Sans Souci Ltd.  The Court of Final Appeal could not have limited the remitter to “restitution under the First Laser Agreement which is an agreement for sale of shares” as submitted by Mr Yu SC.   

94.  Second, there is an important foreign law element in this case which is absent in Sans Souci Ltd.  The Court of Final Appeal ordered that “the issue of restitution under Mainland law” be remitted to this court for determination. Mainland law is not part of the laws of Hong Kong.  Being foreign law, it must be pleaded.  In the meantime, 《Provisions (I)》 was promulgated.  First Laser applied for leave to adduce the joint Mainland law expert report in January 2016.  In contesting that application, similar arguments had been advanced by FEHC albeit with lesser force.  The argument was rejected.  In allowing First Laser’s application, this court held that 《Provisions (I)》 was promulgated in 2010 after the original trial and could not have been pleaded then but is prima facie applicable[16] (the “January 2016 Decision”).  In the absence of an express direction from the appellate court restricting admission of fresh evidence at the hearing of the remitted issue, this court has wide discretion to admit fresh evidence and permit amendment of pleadings and even to re‑open a party’s case.  FEHC sought leave from the Court of Appeal to appeal the January 2016 Decision after this court had refused leave.  It ran the same arguments.  The Court of Appeal gave a short shrift to the arguments and upheld this court’s decision[17]. 

95.  Following that, First Laser applied for leave to amend its ASOC, as new Mainland law issues were raised and foreign law must be pleaded.  Again, FEHC objected and repeated the same arguments before this court.  The principles in Sans Souci Ltd quoted by Mr Yu SC were forefront in the mind of this court when considering First Laser’s application.  A nominee investment contract is not the same as a contract for sale and purchase of shares. If restitution under Mainland law is available to a contract to which article 18 of 《Provisions (I)》 applies and this court is directed to determine the issue of restitution under Mainland law, there is no reason not to allow First Laser to plead 《Provisions (I)》 and the facts in support of a claim under 《Provisions (I)》, provided that the facts pleaded are not inconsistent with the original pleading and the findings of this court.  I consider the amendments sought within the permissible limits of the remitter and granted leave to First Laser to amend the ASOC in July 2016.  FEHC did not appeal against that order.  Amended pleadings were filed by both parties.  I have digressed into the application for leave to file further expert evidence and to amend the ASOC which occurred after the remitter was ordered.  The purpose is to demonstrate the importance of the foreign law element in the trial of the remitted issue.  The foreign law element, including 《Provisions (I)》, existed at the time the remitter was ordered.  It is an important distinguishing feature which must be taken into consideration when construing the remitter. 

96.  The scope of a court order is a matter for construction.  As submitted by Mr Yu SC, a court order has to be construed against the factual matrix.  Though the remitter in the present case is in similar terms to the one in San Souci Ltd, the factual matrix of the two cases are wholly distinguishable.  The terms of the remitter in Sans Souci was tightly defined by Harrison P; while the terms of the remitter in the present case is uncharted.  Another significant distinguishing feature is the additional foreign law element.  On a proper construction against the factual matrix in this case, other than the usual restriction that a party may not run a case inconsistent with the case it has originally pleaded and the facts found in the original trial and the express exclusion of the issue of compensation, the remitter is unrestricted.  It is open to First Laser to plead a contract to which article 18 of 《Provisions (I)》 applies even if it is a new case, so long as its case as pleaded is within the above parameters.  There is no justification to restrict the remitter in the very limited way as submitted by Mr Yu SC.

Whether First Laser is running a new case beyond the remitter

97.  FEHC argues that from the commencement of this action in October 2001 up to the conclusion of the appeal in the Court of Final Appeal in July 2012, all the parties have been proceeding on the basis of the First Laser Agreement being an agreement for sale and purchase of shares and hence it is not permissible for First Laser to change its factual case in the trial of this remitted issue to a case of nominee investment contract based on 《Provisions (I)》. Having reached the conclusion as to the scope of the remitter, FEHC’s argument has to be confined to whether the new case as pleaded is beyond the bounds of the remitter as I have found in the preceding subsection. 

98.  In gist, First Laser’s case under the remitter is that the First Laster Agreement and/or the 1998 Memorandum (construed in the context of the factual background, together with the Hang Wo and COM Agreements), collectively or individually together with the conduct of the parties constitute a nominee investment contract.  Though the claim is founded on a new or different agreement, First Laser is relying on the same three agreements and the 1998 Memorandum which were held by the Supreme People’s Court and the Court of Final Appeal to be of no effect.  It only argues that the combined effect of the three agreements, the 1998 Memorandum and the parties’ conduct constitutes or has the same effect as a nominee investment contract.  Insofar as this nominee investment contract is a new fact and constitutes a new case, it is permissible under the RASOC so long as the primary facts which proves that contract are not inconsistent with the pleadings and the finding of this court in the original trial.

99.  First Laser pleaded no new facts other than the various provisions of Mainland law and adduced no new evidence other than that which is related to determination of the value of the property acquired by FEHC under the void agreements and the increase in value of the shares in FCL by reason of the Project.   Mr Yu SC objects to First Laser pleading 《Provisions (I)》. 《Provisions (I)》 was promulgated in 2010 after the original trial.  It could not have been pleaded before.  This judicial interpretation explains the legislations applicable to First Laser’s claim on restitution.  It is illogical to tie First Laser to its pleadings before 《Provisions (I)》 was promulgated.  It is also illogical that the court should turn a blind eye to this judicial interpretation which is likely to have a significant impact on the determination of the remitted issue.  It  must be borne in mind that judicial interpretations are not new enactments.  They are explanations on existing laws. 《Provisions (I)》 is a judicial interpretation of Mainland laws, including, 《Contract Law》 and 《GPCL》 which fall within First Laser’s fallback claim of restitution.  As submitted by Mr Chan SC, it is absurd to suggest that this court should ignore a source of foreign law which on First Laser’s case is applicable to the issue being tried, particularly when such issues have been fully ventilated in the pleadings and expert evidence. 

100.  Mr Yu SC argues that First Laser should not be allowed to advance a case inconsistent with the findings already made by the court on the basis of the then pleadings.  Otherwise, First Laser would be allowed to challenge the findings of fact already made by the courts through the backdoor.  He referred to the CFA Judgment and argues that all the three courts proceeded on the basis that First Laser’s case was premised on the First Laser Agreement under which the relationship between the parties was one between a purchaser and a seller of shares.  There was no finding that FEHC agreed to invest in 51% shareholding in FCL for and on behalf of First Laser.  He was relying heavily on Lord Collins NPJ’s  findings in paragraphs 107 to 115 of the CFA Judgment.  He further argues, quoting Magic Score Ltd v The Hongkong and Shanghai Banking Corporation Ltd & Anr[18] that any evidence to the effect that the three agreements and the 1998 Memorandum would give rise to a nominee investment contract is inadmissible. 

101.  I am in general agreement with Mr Yu SC’s propositions of the law.  However, I am satisfied that First Laser is not seeking to challenge any finding of this court in the original trial or the finding of the Court of Final Appeal.  So long as First Laser’s factual case on the events which transpired between the parties remain the same as in the original trial, it is open to First Laser to argue on the strength of those primary facts that it has proved its new case of nominee investment contract as pleaded in the RASOC.  As Mr Chan SC rightly submits, a nominee investment contract by conduct may co‑exist with the three agreements and the 1998 Memorandum.  There is no finding whatever by the Court of Appeal or the Court of Final Appeal that a nominee investment contract never existed.  At trial, no new evidence about this nominee investment contract has been adduced.  First Laser only relied on inference to be drawn from facts or evidence presented during the original trial.   Though the case of a nominee investment contract is new, I think First Laser has stayed well within the parameters of the remitter and the RASOC.  I shall take care not to allow any other evidence to slip in through First Laser’s expert on Mainland law and ensure that FEHC would suffer no prejudice or unfairness.

What has First Laser to plead and prove

102.  FEHC argues that to establish a claim under article 18, First Laser has the burden to plead and prove:

(1)  a contract concluded between First Laser as the actual investor and FEHC as the nominee shareholder of a foreign-owned enterprise falling within the scope of article 18;

(2)  that First Laser has obtained a finding of such a nominee investment contract;

(3)  that the nominee investment contract was held to be of no effect; and

(4)  that the value of the shareholding held by the nominee shareholder was higher than the value of the investment put in by the actual investor.

FEHC argues that it is on this basis and upon an application to be made that the court may make an order for reasonable distribution of the gains and benefits from the shareholding after taking into account the actual state of the investment and the nominee shareholder’s contribution to the management of the foreign-owned enterprise. 

103.  First Laser has no dispute that it has to prove requirement (1), i.e. a nominee investment contract.  But I think the phrase “falling within the scope of article 18” means nothing other than such a contract which meets the other requirements.

104.  As for requirements (2) and (3), FEHC’s contention is that it is not the function of this court to determine whether such a contract existed.  It is not what the Court of Appeal and Court of Final Appeal remitted to this court for determination.  First Laser must show that there is already a finding by some other unidentified court that there was a nominee investment contract existing between the parties and that such contract was of no effect.  If not, that must be the end of the restitution claim. 

105.  I am unable to find any justification for such a restrictive view of what was remitted to this court for determination.  There is no doubt that the actual investor has the burden of proving the nominee investment contract and that it is void.  But I am unable to read into article 18 the requirement that there must be a separate finding by another court, firstly, that there was a nominee investment contract; and secondly, that it was void, before the actual investor could invoke article 18.  There is also no expert evidence to support this proposition. The proposition would make an ass of the law.  Carried to the extreme, it would take three sets of legal proceedings before the actual investor could obtain restitution.  Not even the court which annulled the contract has jurisdiction to order restitution in the same set of proceedings.  That cannot be right. There is no reason why a court tasked with determining the issue of restitution, whether in Hong Kong or the Mainland, may not determine the issue of restitution in the same set of proceedings as it determines the existence, validity or otherwise of a nominee investment contract.  Had this court correctly found that the First Laser Agreement was governed by Mainland law and was void, it would have made a determination on restitution (albeit not under 《Provisions (I)》which not existed then) in the same set of proceedings.  I think requirement (2) is superfluous and requirement (3) is met if that the party seeking restitution has pleaded the fact that the parties had entered into a nominee investment contract and that it was void.  The party may prove that the contract has been held to be void in a previous court ruling or may prove it is void in the restitution proceeding. 

106.  I agree that requirement (4) is a requirement which has to be met.  I should add that upon proving requirements (1) and (3), the actual investor has to prove the value of the foreign-owned enterprise based on the actual state of the investment and the nominee shareholder has to prove its contribution to the management of the enterprise if it wants to claim a reasonable distribution.  But that does not prevent actual investor from proving his contribution to counterbalance the nominee shareholder’s.

Has First Laser’s case been adequately pleaded

107.  The parties lodged almost 340 pages of written submissions, approximately half of which is about pleading.  The central issue in dispute about pleading is which is the contract to which article 18 of 《Provisions (I)》 applies and which First Laser is relying on in support of its case on the remitted issue.  FEHC argues that First Laser has not pleaded the nominee investment contract.  The only agreement pleaded and sued upon by First Laser is the Agreement pleaded in paragraph 10 of the ASOC, i.e. the Agreement, which insofar as it is in writing is evidenced by the First Laser Agreement.  All along, the courts in Hong Kong and the Mainland adjudicated on the basis that the First Laser Agreement was an agreement for sale and purchase of 51% of the shares in each of FCL and FCO and that it superseded the earlier Hang Wo Agreement and the COM Agreement.  It is never pleaded that the 1998 Memorandum constituted a contract between the parties.  FEHC complained particularly that First Laser never pleaded that the First Laser Agreement constituted a nominee investment contract which is an important element in First Laser’s new case on restitution or that a nominee investment contract was formed by the combined effect of the three agreements and the 1998 Memorandum.  FEHC further argues that the Hang Wo Agreement, the COM Agreement and the 1998 Memorandum were irrelevant because the two agreements were superseded and in any event First Laser is not a party to those agreements and First Laser’s claim was also not founded on the 1998 Memorandum. 

108.  First Laser could not have pleaded 《Provisions (I)》in the ASOC as it was not yet promulgated at the time First Laser commenced this action.  However, 《Provisions (I)》and various other provisions of Mainland law were pleaded in the RASOC.  First Laser also repeated its reliance on paragraphs 17, 18, 20 to 24 of the ASOC and paragraphs 6, 17, 19, 25A(4), (5), and (8) to (10) of the Re-Amended Reply.  Along with those amendments, First Laser pleaded in paragraph 38A(a)xi:

“Under Article 18, “the actual investor” in 51% equity of FCL was the Plaintiff, whereas “the nominal investor (sic)” in that 51% was the 1st Defendant.”

There was no mention of a nominee investment contract.  But in the context of paragraph 38A, a nominee investment contract must have been put in issue or implied.  “The actual investor” and “the nominal investor” must mean an actual investor and nominee shareholder of a nominee investment contract under article 18.  Otherwise, the phrase “under article 18” would be superfluous.

109.  In response, FEHC raised the issue of estoppel arising from the judgment of the Supreme People’s Court and the CFA Judgment.  It asserted in paragraph 38.6(4) of its RRRADC:

“On a proper reading and interpretation of the said two Judgments, each of them held that the facts of the case gave rise to a relationship of agreement for transfer of shares, rather than a relation where the Plaintiff provided actual investment and that the 1st Defendant was to be a shareholder nominally.”

(Emphasis highlighted in italic and bold print)

Again in paragraph 38.6(5), FEHC pleaded:

“In the alternative, the Plaintiff is estopped from raising the argument that the Plaintiff and the 1st Defendant were respectively “實際投資者” (i.e. actual investor) and “名義股東” (i.e. nominal shareholder). Any argument that the primary facts pleaded by the Plaintiff gave rise to a relationship whereby (i) the Plaintiff was the party providing the actual investment and (ii) the 1st Defendant was to be a shareholder nominally could, and should, have been raised by the Plaintiff before the Courts in Hong Kong in its attempt (albeit under Hong Kong law) to obtain a declaration of beneficial interest over the 51% of the shareholding in FCL.”

(Emphasis highlighted in italic and bold print)

110.  These two sub-sub-paragraphs indicate FEHC understood First Laser’s case is founded on the same primary facts as pleaded and found by this court in the original trial as giving rise to a relationship or contract of actual investor and nominee shareholder.  The word “relationship” instead of “contract” was used in the plea probably because FEHC was asserting issue estoppel.  But there should be no doubt in its mind that the nominee investment contract is the article 18 contract relied on by First Laser.

111.  From its RRRADC, I am satisfied that FEHC knew what contract is being relied on by First Laser as the article 18 contract.  From the voluminous expert evidence filed by the parties, particularly the list of agreed and disagreed issues, I am well satisfied that FEHC was adequately informed of the case it has to meet and was well prepared to meet that case.  This is also the impression I formed while following the experts’ evidence and cross-examination by Mr Yu SC.  It is clear that the alleged nominee investment contract arose from the parties’ conduct or performance of the three agreements which were found to be void. 

112.  In response to FEHC’s criticism on inadequacy of First Laser’s pleading in its opening submission, First Laser replied in paragraph 4.2 of The Plaintiff’s Note of Reply (Opening) (“The Note”) as follows after quoting paragraphs 10 and 11 of the ASOC:

“This Agreement was achieved by the combined effect of the First Laser Agreement (3^rd Agreement) dated 28 December 1996, the Hang Wo Agreement (1^st Agreement), the COM Agreement (2^nd Agreement) and the Memorandum of 13 March 1998 (“1998 Memorandum”) set out at paragraphs 25-27 and 42 of the CFI Judgment and analysed in the CFI Judgment.”

113.  This reply is very confusing.  The term “this Agreement” in the context of The Note after quoting paragraphs 10 and 11 of the RASOC, to an objective understanding, must refer to “the Agreement”, i.e. the joint venture agreement between Ngan and FEHC before any of the three agreements was entered into as pleaded in paragraphs 10 and 11 of the ASOC, not the First Laser Agreement or the nominee investment contract. Anyway, “the Agreement” was apparently not relied on by First Laser as the nominee investment contract. Against the background of FEHC’s criticism, First Laser must have used the term “this Agreement” as meaning the nominee investment contract.  Indeed, that was so understood by FEHC as reflected in its complaint that this “combined effect” was also not pleaded.  In the face of the plea of 《Provisions (I)》, it must be obvious to any legal practitioner that the “combined effect” is the formation of a relationship of actual investor and nominee shareholder which is central to the issue of First Laser’s restitution claim.  What brought about this combined effect is a plethora of facts in the factual matrix, including the Agreement, the three agreements, the 1998 Memorandum and the parties’ conduct.  Though the nominee investment contract was not clearly identified, it is obvious that it is not an independent or standalone contract but one which arose by the parties’ conduct under the circumstances. 

114.  In paragraph 9.2 of First Laser’s Reply Closing Submission First Laser formally identified the “combined effect” and the nominee investment contract.  Mr Chan SC said:

“Hence, the pertinent question that the Court has to decide is not the open question of whether a contract between “實際投資者” and “名義股東” existed and that such contract is held to be of no effect. Instead, the Court must determine whether the First Laster Agreement and/or the 1998 Memorandum (construed in the context of the factual background together with the Hang Wo and COM Agreements and the parties’ conduct), all of which were already held by the Supreme People’s Court and Court of Final Appeal to be of no effect, collectively or individually constitute a contract between “實際投資者” and “名義股東” within the meaning of Article 18 《Provisions (I)》 in order to decide what provisions of Mainland law on restitution are applicable to the plaintiff’s claim.” (Emphasis highlighted in italic and bold print.)

First Laser’s plea is unsatisfactory.  But there is no doubt that First Laser has impliedly pleaded a nominee investment contract.  It was so understood by FEHC.  Effectively, First Laser identified the nominee investment contract as a relationship of or contract between an actual investor and nominee shareholder which co-exists with a relationship of vendor and purchaser of shares under the First Laser Agreement.  This relationship of actual investor and nominee shareholder was created by the factual matrix including the Agreement, the three agreements created pursuant to the Agreement, the 1998 Memorandum and the conduct of the parties.  If FEHC wants to identify a nominee investment contract required under article 18, the short answer is that it is a contract created by conduct under the above circumstances.

115.  If one were to start afresh to plead a case of nominee investment contract based on 《Provisions (I)》, one could have done so with the admirable clarity as suggested by Mr Yu SC.  However, First Laser had commenced proceedings 19 years ago before 《Provisions (I)》was promulgated.  It is now stuck with pleadings which it cannot undo but can only add to.  The difficulties it faced are understandable.  Undesirable as First Laser’s pleading may be, FEHC knew what case it had to meet and responded appropriately.  It is not prejudiced.  Its complaint is artificial.  There is no merit in its objection.  If FEHC really did not know what case it had to meet, it would have and should have asked for further and better particulars. Had it done so, it would have been informed of the contents in paragraph 9.2 of Mr Chan SC’s submission.  Alternatively, it should have applied to strike out First Laser’s pleading.  For FEHC to raise the issue of inadequacy of the pleading at the closing submission stage is regrettably too late and would serve no useful purpose.  It cannot expect this court to dismiss First Laser’s claim for inadequacy of pleading after spending ten days hearing the merits and experts’ evidence, particularly when it is manifestly obvious that FEHC knew the case it has to meet.  Justice requires the merits to be determined on the basis of the nominee investment contract as understood by FEHC, albeit badly pleaded by First Laser.

116.  FEHC criticized First Laser’s failure to plead that the nominee investment contract was found to be void.  In my view, it is not necessary.  It suffices if First Laser is able to show that the nominee investment contract is void.  Even if there is any failure in this aspect of the pleading, FEHC would suffer no prejudice as a result.  The failure is technical and can be rectified.

Failure to plead article 92 of GPCL

117.  FEHC  objects  to  First  Laser’s  reliance on  article  92  of  《GPCL》 quoted by Mr Chan SC in his opening.  Article 92 provides:

「第92條 沒有合法根據, 取得不當利益, 造成他人損失的, 應當將取得的不當利益返還受損失的人. 」

(Translation:

“Article 92 If profits are acquired improperly and without lawful basis, resulting in another person’s loss, the illegal profits shall be returned to the person who suffered the loss.”)

FEHC argues that the article has not been pleaded or addressed in First Laser’s written opening or The Note. There is no expert evidence from First Laser’s expert, while FEHC’s expert was not cross-examined at all.

118.  First Laser’s response is that this article has been pleaded “by implication” because it has expressly pleaded article 131 of 《GPCL Opinion》 which explains the effect of article 92 of 《GPCL》. In paragraph 38.17 of the RRRADC, FEHC responded to First Laser’ plea.  It is impossible to apply article 131 of 《GPCL Opinion》 without having regard to article 92 of 《GPCL》.  That was this court’s observation in the January 2016 Decision when granting leave to file expert evidence.  As result, experts of both parties addressed article 92 of 《GPCL》 in their expert opinions.  The suggestion that First Laser’s expert had not given evidence to that effect is incorrect.  Moreover, First Laser had expressly made reference to the principles of Mainland law already pleaded in the Reply, including paragraph 25A(9) which referred to FEHC’s “liability under accepted principles of Mainland civil law in respect of restitution, return, unjust enrichment, return of the purchase price and/or monies paid/transferred over, as well as all improper/unjust gains and/or profits”; and paragraph 25A(10) which referred to “the notions and doctrine of honesty, fidelity and integrity, and equity and fairness in relation to, inter alia, the remedies available to the Plaintiff under Mainland law”.

119.  Furthermore, First Laser is not asserting a standalone cause of action under article 92 of 《GPCL》. First Laser’s fallback position is to rely on article 58 of 《Contract Law》 or article 61 of 《GPCL》 and article 131 of 《GPCL Opinion》.  Article 131 of 《GPCL Opinion》, along with other applicable principles such as the principle of fairness and the improper profits regime, define and explain the scope of restitution under those articles of 《Contract Law》 or 《GPCL》.  Thus, the court simply cannot ignore the improper profits regime when considering the scope of restitution under article 58 of 《Contract Law》 and article 61 of 《GPCL》.  FEHC’s complaint is frivolous.  In any event, the absence of express pleading of article 92 is highly technical and can be rectified without any prejudice to FEHC.

Conclusion

120.  Having resolved the criticism about the pleading, the pertinent issue between the parties is whether the First Laser Agreement and/or the 1998 Memorandum construed, in the context of the factual matrix together with the Hang Wo Agreement, the COM Agreement and the 1998 Memorandum, all of which were already held by the Supreme People’s Court and the Court of Final Appeal to be of no effect, collectively or individually constitute a nominee investment contract between First Laser as the actual investor and FEHC as nominee shareholder within the meaning of article 18 of 《Provisions (I)》 which co-exists with the First Laser Agreement. 

THE FACT

Introduction

121.  In this section, I shall expand on some of the facts found in the original trial which provide the basis on which a new relationship of actual investor and nominee shareholder of a nominee investment contract may be inferred.  I shall highlight facts which evidence that the parties were conducting their affairs in accordance with the spirit of the First Laser Agreement.  This spirit of the First Laser Agreement only featured once in paragraph 92 of the CFI Judgment because it has little bearing in an action for breach of that agreement, but it assumed great significance in this trial. This spirit laid the foundation of First Laser’s case of nominee investment contract.

122.  I shall also elaborate on the five findings of fact by the Court of Final Appeal which are heavily relied on by FEHC as setting the factual limits within which First Laser may run its case of nominee investment contract.  Those facts are binding on this court.  The finding in this section is not to be taken as a challenge of the findings of the Court of Final Appeal.  It only explains the truth underlying the facts found by the Court of Final Appeal and put them in the proper context or perspective.  Indeed, I shall demonstrate in the next section that the finding of facts in this section only compliment and supplement those of the Court of Final Appeal and are in no way inconsistent with them.

The legislation framework under which foreign-owned enterprises operate

123.  Before analyzing the facts, it would be helpful to understand the legislation framework under which foreign-owned enterprises operate in the Mainland.  Setting-up of foreign-owned enterprises is strictly controlled in the Mainland under《The Law of the People’s Republic of China on Foreign Capital Enterprises》 (《中華人民共和國外資企業法》) which is among one of the statutes construed by 《Provisions (I)》.  The Bureau of Industry and Commerce is the administrative authority responsible for approving the setting up of such foreign-owned enterprises.   It ensures among other things that only foreign enterprises of benefit to the Mainland would be allowed to be established in the Mainland and that their capital must come from a foreign source.  The policy reason is to attract investments, in terms of both technology and funds, beneficial to the Mainland from outside the Mainland.  Hence, there is a system of capital verification requiring that the capital must be provided by the foreign investors, i.e. the shareholders on record.  Funds coming from any other source will not qualify for that purpose.  Even if paid by third parties, such contributions will be recorded as having been made by the shareholders on record.  In other words, it is impossible for First Laser or anyone other than the shareholder on record, i.e. FEHC, to contribute to the authorised capital of FCL.  Similarly, transfer of shares in such enterprises has to be approved by the bureau.  This is to ensure that these enterprises will only be operated by qualified investors and for the purposes for which they were established.  Such transfer will not be approved unless the authorized capital has been fully paid up.  The process for approval would take some time.

124.  In the Mainland, dividends of a company could only be paid to and received by the shareholders on record.  Hence, the dividends of FCO could only be paid to and received by COM while those of FCL could only be paid to and received by FEHC.  That is why Lord Collins NPJ observed in paragraph 107 of the CFA Judgment that First Laser did not receive dividends from FCL; and in paragraph 115(3) that dividends from FCL were paid to FEHC.

The background and making of the Agreement and the three agreements

125.  FEHC was in financial difficulties in 1996 as a result of the Asian financial crisis.  In fact, it could not overcome its difficulties even in 2008.  Following its litigation with FRIMS, it planned to relocate FCO’s and FCL’s operation to outside the Mainland to avoid infringement action by FRIMS arising out of FCL’s and FCO’s continued use of the incubation furnace technology.  It urgently searched for a new partner outside the Mainland who would be able and willing to pay a substantial price to buy into FCL and FCO and to provide substantial funds for the companies’ development within a short time.  It was under that setting that Kong of FEHC invited Ngan to discuss about a joint venture with FEHC in optronics business.

126.  The parties hastily entered into the joint venture agreement without having agreed to all the terms.  That agreement is described as “the Agreement” in paragraph 10 of the ASOC.  As Lord Collins NPJ observed in paragraph 116 of the CFA Judgment, the terms of the joint venture were never agreed and decisions were made on an ad hoc basis.  The Agreement was not a binding or enforceable agreement.  It was just an agreement to agree.  But pursuant to this agreement to agree, Ngan’s camp and FEHC entered into the three agreements.  On 12 December 1996, Hang Wo and FEHC entered into the Hang Wo Agreement while FEHC and COM entered into the COM Agreement for the sale of all the shares in FCO and FCL to COM.  COM was the intended investment vehicle to hold all the shares in FCO and FCL.  The COM Agreement was the performance of the Hang Wo Agreement.  About a fortnight later, FEHC and First Laser entered into the First Laser Agreement because FEHC did not like the idea of having a joint venture in high-tech optronics industry with Hang Wo which is a property development company.  The First Laser Agreement was to supersede the Hang Wo Agreement and the COM Agreement.  Under the First Laser Agreement, 51% of the shares in each of FCO and FCL were to be transferred to First Laser, FEHC was to keep the remaining 49% shareholding as its interest in the joint venture.

The First Laser Agreement

127.  The First Laser Agreement is not merely an agreement for sale and purchase of shares.  It is of the nature of a joint venture agreement under which First Laser shall actively and immediately participate in the operation and management of FCO and FCL.  Actually that agreement was never performed.  First Laser contends that FEHC was in breach. FEHC contends that the three agreements, including the First Laser Agreement, were void.  That contention was accepted by the Supreme People’s Court. Nevertheless, these agreements do not disappear like a puff of smoke in the air.  They are part of the background in First Laser’s claim in restitution. Particularly, they are evidence of the parties’ intention on which the relationship of actual investor and nominee shareholder may be inferred.  

128.  The preamble of the First Laser Agreement states that FEHC had agreed to sell 51% of its investment in the optronics project in Fuzhou for the purpose of setting up a joint venture.  It then set out the valuation of the investment to be US$6,250,000 and stipulated that First Laser would pay US$3,187,500 for the 51% interest (agreed to be HK$24,640,000) and the payment terms.  The preamble reads:

「為共同發展高科技項目，[華閩] 、[第一激光] …同意將[華閩]… 的光電子項目中的51%的股權轉讓給 [第一激光] …」

(Translation:

“For the purpose of joint development in high technology projects, FEHC and First Laser … agree to … transfer 51% of FEHC’s interest in its optronics project to First Laser.”)

From this preamble, it is clear that the common intention with which the parties conducted their affairs in the three years which followed was to jointly develop the optronics project or business carried out by FCO and FCL.  And as the terms of the agreement show, First Laser was intended to actively and immediately participate in this joint venture. 

129.  The First Laser Agreement contained the following terms:

(1)  upon completion of the share transfer（股份轉讓之後）, the ratio of the shareholding of FEHC and First Laser would be 49:51;

(2)  the net asset value of the project to be sold was agreed to be US$6,250,000, hence, FEHC would sell 51% of its shareholding to First Laser for US$3,1875,000 (agreed to be HK$24,640,000);

(3)  upon admission of First Laser into the business（介入後）, the boards of directors of FCO and FCL would be reorganized, the composition of the new boards would be subject to consultation;

(4)  upon admission of First Laser into the business, both parties agree to bear all the debts of the business according to ratio of their shareholding;

(5)  If First Laser so requests, FEHC would provide all financial and company documents relating to the project;

(6)  at the request of First Laser, part of the production line would be relocated to Macau, FEHC agreed to provide full assistance; both parties would try their best endeavour to maintain smooth production and sale in Fujian and Macau;

(7)  First Laser would pay FEHC HK$10 million within ten days of execution of the agreement and the balance by two instalments within three months; and

(8)  both parties would form a working party as soon as possible for the purpose of liaison and handling the related matters and would instruct lawyers in the PRC to handle matters relating to the change in ownership of the relevant companies.

130.  Clause (1) is a re-statement of the ultimate goal of shareholding ratio between the parties in FCO and FCL.

131.  Clauses (7) and (8) demonstrate that although the parties contemplated that the formal transfer of shares would require further procedures requiring a working team, the services of PRC lawyers and an indefinite period of time to complete, about half of the purchase price must be paid within 10 days of execution of the agreement, i.e. by 7 January 1997, and the balance within three months.  This reflected FEHC’s dire need for finance and urgency in transferring the optronics business out of Fujian. 

132.  More importantly, these clauses explain why clauses (3) and (4) made specific provision for the reconstruction of the boards of directors and assumption of rights and obligations of FCL and FCO, particularly their debts or liabilities, immediately upon First Laser’s admission into the business; and made specific provision for immediate payment of the first instalment of the purchase price instead of upon transfer of the shares which the parties contemplated would take an indefinite period of time. 

133.  The First Laser Agreement is not merely an outright sale and purchase agreement of shares as a passive investment.  The preamble and the terms of the agreement manifestly demonstrated that the purpose of the sale of the shares in FCL and FCO to First Laser was to enable the parties to jointly develop a high-tech project and that First Laser being the majority shareholder will take an immediate role and actively participate in the optronics project.  Though the agreement was void and of no effect, the parties’ express intention and the parties’ conduct during the three years which followed do not vanish as if they never existed. They stand as evidence of the spirit of the First Laser Agreement on which a relationship of an actual investor and nominee shareholder under a nominee shareholding agreement may be inferred.

Performance of the Agreement and the spirit of the First Laser Agreement

134.  Then the parties came to realize there were two problems which prevented them from proceeding in accordance with the First Laser Agreement. First, FEHC anticipated some possible litigations by FRIMS against FCO (and FCL as well as shown in the 2000 Minutes later).  Second, as FCL is a foreign-owned enterprise, the transfer of its shares required approval from the Bureau for Industry and Commerce.  Since FEHC was unable to meet the capital contribution requirement and had no means to do so, the transfer could not be effected.  The parties anticipated that the transfer of FCL’s shares may take an indefinite period of time to complete.  As indicated in the 1998 Memorandum and again in the 2000 Minutes, to protect First Laser from litigation, the parties agreed to revert back to the arrangements under the COM Agreement by transferring all the shares in FCO to COM temporarily instead of to First Laser and for FEHC to retain the shares in FCL until the capital contribution requirement of FCL could be met.  Then, the parties’ shareholdings in FCO and FCL would be regularized in accordance with the First Laser Agreement.  This is the underlying reason which explains why, as Lord Collins NPJ observed in paragraph 112 of the CFA Judgment, what the parties did bore little relationship to the First Laser Agreement.  But what the parties did was strictly in accordance with the spirit of the First Laser Agreement at least until late 1998 before FEHC had a change of mind. 

135.  Ngan’s camp promptly paid the first instalment of HK$10 million within three days, the second instalment of HK$10 million within three months according to clause (7) of the First Laser Agreement and the balance by way of set-off.  On the same day of payment of the first instalment, Ngan conducted a board of directors meeting of COM in which a resolution was passed appointing himself as managing director and Wang as general manager of FCL in accordance with clause (3) of the First Laser Agreement.  On 20 January 1997, COM issued a notice appointing Ngan, his daughter and Wang as directors of FCL.  These appointments were invalid because of Ngan’s habitual disregard of the concept of corporate identity. Nevertheless, they showed his subjective intention in immediately participating in the management of FCL.

136.  As I have found in paragraph 40 of the CFI Judgment, since 31 December 1996, FEHC, FCL and FCO treated Ngan’s camp as a shareholder of FCL and FCO.  Ngan and his daughter actively participated in the management of FCL and FCO as de facto directors.  Decisions regarding the operation and management of FCL and FCO were referred to Ngan and Kong for their joint approval.  Financial statements of FCL and FCO, requests for increase in remuneration for staff of FCL and FCO, request for purchase of staff quarters for FCO and FCL, reports on construction of a building complex for FCL, requests for payment of construction costs of the complex, requests for funds for setting up a branch office of FCL and recommendation of a bonus share scheme for the staff of FCL were referred to both Kong and Ngan for consideration and approval. 

137.  COM purchased factory buildings to house the plant and machineries of FCO and FCL.  Ngan caused FCO to apply its dividends in purchasing staff quarters for staff of FCO and FCL without requiring contribution from FCL or FEHC.  Not only did FEHC give the Project to Ngan, it permitted Ngan to carry it out under the wings of FCL using FCL’s manpower, equipment and resources.  These were not unilateral acts on the part of Ngan or First Laser.  FEHC encouraged and acknowledged Ngan’s participation in the management of FCO and FCL and consulted him on management issues of both companies.  Their conduct went well beyond casual or mere consultation.  It is evidence of active participation by Ngan as a business partner in the management and important decision making of FCL and FCO.  All these events would not have occurred if First Laser and FEHC did not regard First Laser as a participating investor of FCO and FCL.  It is important to note that these events occurred before the shares in FCL were transferred to COM or First Laser.  Obviously, the parties were acting in accordance with the spirit of the First Laser Agreement with a common intention for a mutual purpose and benefit.  These findings have not been disturbed by the Court of Final Appeal.

138.  The parties even went that far as to agree that FCO’s dividends should be applied as the parties’ joint contribution to the capital of FCL. Their intention was that when the two problems were resolved, the parties’ shareholdings in FCO and FCL would be regularized in accordance with the First Laser Agreement.  The first step FEHC or FCL took to solve FCL’s under‑capitalization problem was to apply to the authorities on 21 April 1997 for reduction of its authorised capital from US$15.15 million to US$7 million.  On 29 September 1997, FCL passed a resolution at its third board meeting acknowledging that as the shareholders’ relations had not been regularized, certain unpaid dividends would be temporarily placed in FEHC’s account and not to be distributed.  The intention was to keep the funds in the account for use as the parties’ joint contribution to the capital of FCL subsequently.

139.  By March 1998, fifteen months lapsed since the execution of the First Laser Agreement.  First Laser had performed its part of the agreement and was actively participating in FCO and FCL.  It also invested in the Project.  However, the under-capitalization problem of FCL remained un‑resolved. Kong was about to leave FEHC to take up appointment as the Chief Executive Officer in Bao Shing as Fujian Government’s representative.  On 13 March 1998, he signed the 1998 Memorandum[19] setting out the parties’ agreement under the First Laser Agreement, their respective contribution, the performance of the First Laser Agreement as at that date.  The 1998 Memorandum stated as follows: 

「根據 [FEHC] 與 [First Laser] 96年12月簽署的 “關於轉讓福州光電子項目” 的協議精神， … 一些財務問題進行磋商，形成以下備忘錄。

一、鑒於一些歷史原因，如 [FCL] 的700萬美元的注冊資本金尚有250萬美元未到位；[FCO] 亦有一些法律糾紛未理順。因此，目前在法律上 [FEHC] 暫時全資擁有 [FCL] ，COM（現由First [Laser] 的股東全資擁有）暫全資擁有 [FCO] 。待上述問題解決之後，應即理順股權關系。[COM] 和[FCL] 的股比為[First Laser] 股東51%，[FEHC] 49%。

二、雙方同意在目前暫時未理順法律關系的情況，關於上述3個企業 ([FCL] 、[COM] 、[FCO] )，的投資和權益仍按雙方96年協議定的條款執行。

三、鑒於 [First Laser] 在組建 [COM] 時投入了大量的資金且在理順法律關系之後[FEHC] 亦是 [COM] 的持股49%股東，為此，[First Laser] 要求將尚未支付給 [FEHC] 的轉讓51%上述企業股權的尾數港幣464萬港元轉為 [FEHC] 對 [COM] 的出資。考慮到 [First Laser] 的意見，[FEHC] 同意將上述的464萬港元轉為 [FEHC] 對 [COM] 的出資，但由於日前 [FEHC] 在法律上暫不是 [COM] 的股東，因此，上述出資在帳務處理上安排為可轉貸款（不計息）體現，待法律關系理順之後即可將貸款轉為股權。

四、… 」 (重點以斜體及粗字體顯出)

(Translation:

“In accordance with the spirit of the [First Laser Agreement] signed by [FEHC] and [First Laser] in December 1996, … some financial issues were negotiated, reached the following memorandum.

1. that for some historical reasons, such as the fact that US$2.5 million of the registered capital of US$7 million had not yet been injected into [FCL] and that there were some outstanding legal disputes relating to [FCO], [FEHC] was still temporarily wholly holding [FCL] while [COM] was still temporarily wholly holding [FCO]; when the above problems were resolved, [First Laser’s] and [FEHC’s] shareholding in [COM] and [FCL] would be regularized in the ratio of 51:49;

2. that prior to the said regularisation, [COM’s] and [FCL’s] investments and rights in respect of [FCL], [COM] and [FCO] shall be governed by the agreements of 1996; and

3. that as [First Laser] incurred significant costs in setting up [COM] and as [FEHC] would hold 49% of the shares in [COM] upon the said regularisation, the outstanding payment in the amount of HK$4.64 million due from [First Laser] to [FEHC] under the First Laser Agreement was treated as having been paid by [First Laser] and representing [FEHC’s] capital contribution to [COM].”) (emphasis highlighted in italic and bold print)

140.  Under the memorandum, FEHC acknowledged that it and COM were holding the shares in FCO and FCL respectively as a temporary arrangement pending resolution of the two problems.  It assured First Laser that it would perform its part of the agreement and the shareholding in FCO and FCL would be regularised in time.  By “regularised”, FEHC was assuring First Laser that it would have its 51% interest in FCL and at the same time asserting its right to 49% interest in FCO held by COM.  When that regularisation would happen was indefinite.  But the parties were still committed towards performing the First Laser Agreement.  FEHC assured First Laser that until that happened, the parties’ relationship would continue to be governed by the agreements of 1996, i.e. the three agreements.  The memorandum explained why the shares in FCO were transferred to COM and not to First Laser and why FEHC was still holding all the shares in FCL.  It explained not only why what the parties did bore little relationship to the First Laser Agreement, it expressly acknowledged in the preamble that what they did were in accordance with the spirit of the First Laser Agreement. 

141.  All went very well until May 1998 when Xu and a new management replaced Kong and his team.  After an incubation period of about three months, Xu had second thoughts and started to wriggle out of the First Laser Agreement. FEHC dragged its feet in resolving FCL’s under-capitalization problem.  Despite the previous agreement to apply the dividends from FCO and FCL as the parties’ joint contribution to the capital of FCL as mentioned in paragraph 138, FEHC ignored Ngan’s request to acknowledge his intended contribution as the parties’ joint contribution. 

142.  In the meantime, the Project turned out to be successful.  In October 1999, the prospect of a sale of FCL together with the Project at an unthinkable profit surfaced after the Project was showcased at an international exhibition.  As reported by Wang in a board meeting of FCL on 13 October 1999, the Project achieved commendable results and attracted off-shore buyers.  FEHC and Xu with their control over FCL harboured the intention of touting the success and prospects of the Project and decided to explore the possibility of selling FCL with the Project as a whole secretly.  As noted in paragraph 3 of the minutes of that meeting, the board resolved that the prospect and negotiation of the sale be restricted to within the board of FCL and FEHC.  Ngan’s camp was deliberately excluded, whereas previously Ngan was kept in the loop even for minor matters such as treatment of FCL’s interest income. 

143.  On 8 December 1999, FEHC passed a board resolution to approve the intended sale of its 100% shareholding in FCL to an “international corporation in the industry” (「國際上有關企業」) which as FEHC pleaded at 29(1) of its RRRADCC referred to JDS.  On 13 December 1999, the reduction in FCL’s authorised capital was approved.  Shortly after that, FEHC paid up the reduced authorised capital using loans and dividends from FCL.  It then obtained approval from the Bureau for Industry and Commerce and completed the sale of the shares in FCL to JDS in February 2000.  This shows that approval from the bureau for transfer of the shares in FCL to First Laser was not an impossible hurdle.  FEHC dragged its feet in processing the transfer because it reneged from the First Laser Agreement or its spirit in order to tout the success and prospect of the Project.  When the occasion presented itself, FEHC sold FCL to JDS for a huge profit to solve its own financial problems.  

144.  The disagreement between the parties became overt after the sale of FCL to JDS on 29 February 2000.  The parties had a negotiation meeting in Zhuhai on 3 October 2000 in an attempt to settle their dispute.  No agreement was reached.  But the minutes of that meeting recorded the events leading to the making of the First Laser Agreement, First Laser’s participation in the Project and the reasons why the shares in FCL had not been transferred to First Laser.  It acknowledged and adopted the 1998 Memorandum and confirmed that Ngan solely funded the Project.  The minutes noted the following:

「一、 雙方達成以下共識：

1、 有關華閩向寶盛轉讓光電子項目部分股權的背景和過程，97年6月5日華閩給省政府辦公廳《關于對福州光電高科技項目處理情況的匯報》作了基本描述。

2、 96年12月12日華閩與恒和簽訂了《關于設立澳門宇星光電企業有限公司的協議》，但未對宇星的注冊資本作出約定。同日，華閩與宇星簽訂了《關于轉讓福州光電子項目股權的協議》。經過雙方當事人的確認，簽署上述兩份協議是為了應付物構所可能對華科和科騰提起的訴訟保全而採取的措施。…

3、 98年3月13日，華閩…與第一激光 …，就澳門宇星光電企業製造有限公司和福建華科光電有限公司權益和資金安排等問題進行了磋商，并簽訂了《關於澳門宇星光電企業製造有限公司和福建華科光電有限公司權益和資金安排問題的備忘錄》(下稱《備忘錄》)。雙方約定，在未理順法律關係的情況下，關於華科、宇星、科騰的投資和權益仍按雙方96年協議議定的條款執行。

4、 第一激光在華閩認可的期限內支付了2000萬港幣的股權轉讓金，轉讓金尾款464萬港幣的處理已在《備忘錄》中另有約定。

5、 鑒於一些歷史的原因(詳見《備忘錄》)與《協議》，有關的華科股東變更的批准登記手續沒有辦理。

6、 光電子項目包括了華科、科騰、宇星，在工商登記上，華科是華閩全資擁有，科騰和宇星則是顏延齡先生全資擁有，雖然沒有文字上的明確約定，實際上雙方都參與了華科、科騰和宇星的經營管理。

  7、  光纖無源件項目的開發研製階段是在華閩不同意立項的情況下由顏延齡先生單方出資進行的，在研製完成後繼續進行的生產開發和銷售階段，是在華科進行的。」

(Translation:

“I. The two sides have reached the following consensus:

1. A description about the background and process of the transfer of part of the equity in the optronics project from [FEHC] to [Bao Shing], was given by [FCHC] to the Provincial Government Office in its “Report on the Processing of Fuzhou Optronics High-tech Projects on June 5, 1997”

2. On December 12, 1996, [FEHC] and [Hang Wo] signed the [Hang Wo Agreement], but no provisions was agreed on the capital funding of [COM]. On the same day, [FEHC] and [COM] signed the [COM Agreement]. Both parties confirmed that the two agreements were signed as protective measures in dealing with possible litigations by FRIMS against [FCL] and [FCO]. ...

3. On March 13, 1998, [FEHC] ... and [First Laser] ... entered into negotiation on the rights and funding arrangements of [COM] and [FCL] and signed the [1998 Memorandum] (hereinafter referred to as “Memorandum”). The two parties agreed that before the legal relationship had been regularised, the investment and rights of [FCL], [COM] and [FCO] will still be governed by the terms agreed by the two parties under the 1996 agreements.

4. First Laser paid the transfer fee of HK$ 20 million within the period allowed by [FEHC], and the payment of the remaining balance of HK$4.64 million had been agreed in the Memorandum.

5. For some historical reasons (see the Memorandum for details), the approval for change of shareholders of [FCL] under the Agreement have not been processed.

6、 In the registered record of the Bureau of Industry and Commerce, the optronics project includes [FCL], [FCO] and [COM]. [FCL] is wholly-owned by [FEHC], [FCO] and [COM] are wholly-owned by Ngan. Though there was no express agreement, in reality both parties participated in the operation and management of [FCL], [FCO] and [COM].

7. The development phase of the optronics component project was carried out by Ngan who solely funded the project when FEHC did not agree to proceed with the project. After the development phase was completed, the phase of manufacturing and sale of the components was continued by FCL.”)

145.  The 2000 Minutes confirmed the contents of the 1998 Memorandum.  In particular, paragraph 2 confirmed that the Hang Wo Agreement and COM Agreement were signed as protective measures against possible litigations against FCO and FCL by FRIMS; paragraph 4 confirmed that the sum of HK$4,640,000 paid by Ngan in setting up COM be treated as FEHC’s contribution to the capital of COM and as Ngan’s payment of the outstanding balance payable under the COM Agreement; paragraph 6 acknowledged that both parties participated in the operation and management of FCO, FCL and COM; and paragraph 7 acknowledged that the research and development of the Project was funded solely by Ngan.  Thus, even ten months after the sale of FCL to JDS when FEHC has clearly repudiated the First Laser Agreement, FEHC acknowledged that prior to that the parties had been conducting themselves in accordance with the spirit of the First Laser Agreement.

146.  It would be reasonable to assume that had FEHC performed its part of the agreement, Jenwing, including its 49% interest in COM, would have been transferred to FEHC and inter-company shareholding would have been arranged to reflect First Laser’s 51% interest in FCO.  That did not happen because FEHC decided to renege from the First Laser Agreement towards the end of 1998.  While what the parties did bore little relationship to the First Laser Agreement, it is beyond dispute that until the end of 1998 what they did was according to the spirit of the First Laser Agreement and with the intention that when the two problems were resolved steps would be taken resulting in the First Laser Agreement being performed to the letter.  The transfer of 100% interest in FCO to COM was only a temporary arrangement.  It was not a sale and purchase of shares in FCO simpliciter, but part of a bigger arrangement, the ultimate aim of which was to create a joint venture with First Laser holding 51% of the shares in each of FCO and FCL and FEHC holding the remaining 49%.  It was one of the ad hoc arrangements under the joint venture.

FINDING OF THE COURT OF FINAL APPEAL

Introduction

147.  FEHC relied heavily on the following finding of fact by the Court of Final Appeal in support of its defence:

(1)  The First Laser Agreement was an agreement relating to the sale and purchase of the FCL and FCO shares; and that the arrangement was in the nature of a joint venture, the terms of which were never agreed: paragraphs 10, 18, 111-116 of the CFA Judgment.

(2)  The evidence does not support First Laser’s case that the First Laser Agreement was treated as binding and effective by the parties, or that there was any requisite reliance: paragraph 13 of the CFA Judgment.

(3)  First Laser did not participate in the capital contributions for FCL that took place after December 1996: paragraph 115(1) of the CFA Judgment.

(4)  The 1998 Memorandum made it clear that ownership in the FCL shares had not been transferred to First Laser; and that FEHC was still holding them (and in context this did not mean holding them for First Laser: paragraph 115(2) CFA Judgment.

(5)  Only FEHC received dividend payments from FCL while First Laser did not: paragraph 115(3) CFA Judgment.

These findings are binding on this court.  Mr Yu SC submits that First Laser may not run a case inconsistent with those facts. I have no disagreement with his propositions.  But “not inconsistent” is not the same as “contrary” or “otherwise than”.  There can be room for other findings which are not inconsistent with those facts found by the Court of Final Appeal. 

148.  The purpose of the analysis in this section is not to question those findings but to put the findings in their proper context and to explain the truth underlying those findings. First, it must be noted that those findings were made in the context of whether the First Laser Agreement was a valid agreement under Hong Kong law.  They may not have the same significance when considering the parties’ conduct in the context of Mainland law which is what this remission hearing is about.  Second, I shall demonstrate below that there are incontrovertible evidence explaining those findings.  Of particular importance are the reasons why the shares in FCO were transferred to COM and not to First Laser and why FEHC continued holding the shares in FCL.  Once the underlying reasons for these facts are known, one understands why what the parties did bore little relations to the First Laser Agreement.  If what the parties did is viewed against the parties’ intention as expressed in the 1998 Memorandum, one immediately sees that what the parties did were in fact in accordance with the spirit of the First Laser Agreement.  It was the parties’ intention that once the two problems (possible litigation against FCO and FCL’s under-capitalization problem) were resolved, steps would be taken to ensure what the parties had done would fall in line with the First Laser Agreement.  This spirit of the First Laser Agreement assumes great significance in First Laser’s case based on a void nominee investment contract.

Finding (1): The joint venture the terms of which were never agreed and what the parties did bore little relationship to the First Laser Agreement

149.  The first finding is extracted from paragraphs 10, 18, 111-116 of the CFA Judgment.  Paragraphs 18 and 112 are pertinent.  At paragraph 18, Lord Collins NPJ said:

“The First Laser Agreement was an agreement relating to the sale and purchase of the FCL and FCO shares, and in commercial terms was only part of the transaction. The reality of the matter was that the arrangement was a joint venture. But the terms of the joint venture were never agreed, and the relationship between the parties was fluid and decisions were taken on an ad hoc basis without reference to any underlying agreement.”

At paragraph 112, Lord Collins NPJ said:

“What the parties did bore little relationship to the First Laser Agreement.”

150.  Lord Collins NPJ rightly observed in paragraph 18 of the CFA Judgment that the First Laser Agreement was an agreement relating to the sale and purchase of the FCL and FCO shares but that was only part of the transaction.  Throughout this trial, FEHC repeatedly emphasized the first part of the above dictum, arguing that the First Laser Agreement is a simple agreement for sale and purchase of shares and nothing else.  It totally ignored what Lord Collins NPJ said in the second part of that dictum that the agreement was only part of the transaction.

151.  The finding of fact in the previous section has brought out what Lord Collins NPJ said about the other parts of the transaction or joint venture and the spirit of the First Laser Agreement.  It accords entirely with both of Lord Collin’s observations.  That joint venture is, in fact, “the Agreement” pleaded in paragraph 10 of the ASOC.  This joint venture agreement is identified and described in paragraph 11 as an agreement which insofar as it is in writing, is evidenced and/or contained by a written agreement dated 28 December 1996, which was the First Laser Agreement.  First Laser went on to plead that the First Laser Agreement superseded two earlier agreements, i.e. the Hang Wo Agreement and the COM Agreement.  This Agreement is the joint venture referred to in paragraphs 1 and 2 of the CFI Judgment.  It is also the joint venture referred to in paragraph 116 of the CFA Judgment.  As Lord Collins NPJ said, “the overall picture is that the terms of the joint venture were never agreed” and “decisions were made on an ad hoc basis”.  The Agreement is not a valid and binding agreement.  It is an agreement to agree or a gentlemen’s agreement.  The agreement sued in this action was “the Agreement”, i.e. the joint venture agreement.  But, as the subject matter of First Laser’s claim whether under the Agreement or the First Laser Agreement is the shares in FCL, the focus at trial conveniently fell on the First Laser Agreement.  Furthermore, as the parties’ dispute could be sufficiently resolved by looking at the agreement in the context of an agreement for transfer of shares, that description was adopted by the court as a general description and as a matter of convenience.  There was no determination as to what the Agreement or what the First Laser Agreement was not.  There was no consideration or determination as to whether the First Laser Agreement also involves a relationship between actual investor and nominee shareholder.  That could not have been an issue as 《Provisions (I)》 had not yet been promulgated.

152.  The Hang Wo Agreement, the COM Agreement and the First Laser Agreement were ad hoc arrangements entered into pursuant to the Agreement or its spirit.  There was an agreement to agree on a 51:49 joint venture but decisions on how it was to be carried out were made on an ad hoc basis.  Otherwise, First Laser would not have paid HK$20 million to FEHC, all the shares in FCO would not have been transferred to COM, the 1998 Memorandum and the 2000 minutes would not have been signed, Ngan would not have paid for the building of a complex for FCL and for setting up a branch office for FCL; he would not have used dividends from FCO to subsidise staff of FCO and FCL in purchasing staff quarters; and all the communications between FEHC and First Laser about capital contribution to FCL would not have happened, just to mention a few.

153.  At paragraph 112 of the CFA Judgment, Lord Collins NPJ said that what the parties did bore little relationship to the First Laser Agreement.  His Lordship must be particularly referring to the transfer of the shares in FCO to COM instead of to First Laser and the total failure to transfer the shares in FCL to First Laser.  The findings in the previous section accord entirely with what Lord Collins NPJ said at paragraph 112.  Those findings supplement Lord Collins NPJ’s observation with more examples of what the parties did which were not done by or for First Laser, but they supplement Lord Collins NPJ’s observation with the underlying reasons or explanations for those conducts (i.e. possible litigations from FRIMS and FCL’s under-capitalisation problem).  Those explanations are evidenced in writing in the 1998 Memorandum and again in the 2000 Minutes.

154.  FEHC argues that the 1998 Memorandum was found to be void by the Court of Final Appeal.  That does not mean the memorandum just vanished in thin air.  The document is here.  What had been done in accordance with the 1998 Memorandum are facts and not in dispute.  The 1998 Memorandum and those facts do not cease to be part of the background to be consider in this remission hearing.

155.  It is important to note that as stated in the preamble, the 1998 Memorandum was entered into in accordance with the spirit of the First Laser Agreement. That is an acknowledgement by the parties that in 1998 they were acting in accordance with the spirit of the First Laser Agreement.  It is equally important to note that the overall theme of the memorandum is that once the problems mentioned therein were resolved, everything will be regularised in accordance with the First Laser Agreement, not just its spirit.  The First Laser Agreement will be followed to the letter.  The joint venture will take the form of COM, which will be held by First Laser and FEHC in the ratio of 51:49, holding 100% of the shares in FCO; and First Laser holding 51% of the shares in FCL and FEHC continue holding 49% of the shares in FCL.

156.  Paragraph (1) of the 1998 Memorandum acknowledged that there were legal disputes relating to FCO and the under-capitalization problem in FCL.  Impliedly the reason for transferring the shares in FCO to COM instead of to First Laser was because of the legal disputes which was why “COM was still temporarily wholly holding FCO”.  The legal disputes were probably some pending or possible litigations by FRIMS (物購所) as stated in paragraph 2 of the 2000 Minutes made shortly before the present litigation commenced[20].  The reason for not transferring the shares in FCL was because the authorised capital had not been fully injected into FCL and approval for the transfer would not be given until the capital had been fully injected into FCL.  That was why FEHC acknowledged that “FEHC was still temporarily wholly holding FCL”.  What is significant is that FEHC went on and gave an assurance that “when the above problems were resolved, First Laser’s and FEHC’s shareholding in COM and FCL would be regularised (理順股權關係) in the ratio of 51:49”.  Thus the holding by COM of all the shares in FCO and by FEHC of all the shares in FCL was only a temporary arrangement.  In other words, when the problems were resolved, steps would be taken to transfer 51% of the shares in FCL to First Laser so that First Laser would hold 51% interest in FCL and to adjust the shareholding structure in COM (by transferring the shares in Jenwing to FEHC so that FEHC would hold 51% interest in COM.  Thus, in March 1998, the parties were working towards the performance of the First Laser Agreement in accordance with its terms.  In the interim period, they were conducting themselves in accordance with the spirit of the First Laser Agreement.  That was also why FEHC said that prior to the regularisation, the parties’ rights and obligations were to be governed by the three agreements.  Thus, although what the parties did bore little relations to the First Laser Agreement, they were in fact acting according to the spirit of the First Laser Agreement.  These findings have not been emphasised strongly enough in the CFI Judgment as the focus at the original trial was on breach of the First Laser Agreement.

157.  The above findings are totally consistent with Lord Collins NPJ’s observations.  They are findings made in the original trial which were not disturbed by the Court of Appeal and Court of Final Appeal.  These findings explain the truth underlying the observations of the Court of Final Appeal.  They explain why this court held that the parties conducted their affairs in accordance with the spirit of the First Laser Agreement, a finding which has not been overturned.  These findings are not inconsistent with or  contrary to the findings of the Court of Final Appeal.  They only supplement those findings with the underlying truth, lest the findings of the Court of Final Appeal be misunderstood or misconstrued.

Finding (2): No evidence that First Laser Agreement was treated as binding and effective by the parties and no reliance by FEHC

158.  In dismissing First Laser’s case of estoppel by convention Lord Collins NPJ said at paragraph 113 of the CFA Judgment:

“… the evidence does not support First Laser’s thesis that the First Laser Agreement was treated as binding and effective by the parties, or that there was any requisite reliance (in the context of estoppel by convention) …”

159.  This court is bound by this finding.  This finding mirrors Finding (1).  As explained in the above subsection, because of the two problems, the parties partially reverted back to the COM Agreement. Hence, there is no evidential nexus between the parties’ conduct and the First Laser Agreement.  However, the unequivocal intention as expressed in the 1998 Memorandum is that when the two problems were resolved, steps will be taken to regularise the parties’ shareholding in FCO, FCL and COM.  Again, what underlies the parties’ conduct is the spirit of the First Laser Agreement.  In any event, Finding (2) is irrelevant insofar as First Laser’s case of nominee investment contract is concerned. 

Finding (3):  First Laser did not participate in capital contribution of FCL

160.  Lord Collins NPJ held at paragraph 115(1) of the CFA Judgment that First Laser did not participate in the capital contributions which took place after December 1996.  That is a true statement but it must be understood in the factual context that under Mainland law only the shareholder on record may contribute to the share capital of a foreign-owned enterprise.  Even if the funds actually came from First Laser, it would be recorded as coming from FEHC.  The statement may therefore be supplemented with further unchallenged evidence of the underlying truth at the original trial.  Such supplement should not be regarded as inconsistent with the finding of the Court of Final Appeal.

161.  As already set out in the background, at the time FEHC was in financial difficulties.  It had no means to contribute to the outstanding capital required for FCL and was urgently looking for a partner who was able to provide funds to buy into FCO and FCL and to relocate the operation of these companies to outside the Mainland.  Then Ngan came into the scene.  As indicated in the 1998 Memorandum, the parties understood right from the beginning that FCL’s under‑capitalisation problem was the major impediment to the approval required for the transfer of 51% of its shares to First Laser.  The first step FEHC or FCL took to solve this problem was to apply to the authorities on 21 April 1997 for reduction of its authorised capital from US$15.15 million to US$7 million.  In accordance with the spirit of the First Laser Agreement, FCL passed a resolution at its third board meeting on 29 September 1997 acknowledging that as the shareholders’ relations had not been regularized, certain unpaid dividends would be temporarily placed in FEHC’s account and not to be distributed.  The intention was to keep the funds in the account for use as the parties’ joint contribution to the capital of FCL subsequently.

162.  As at March 1998, when FEHC signed the 1998 Memorandum, the undoubted intention of the parties was to solve the under-capitalization problem of FCL and have 51% of the shares in FCL transferred to First Laser after that problem was resolved. Their plan was to meet FCL’s capital contribution requirement by using the dividends from their joint venture, i.e. FCO and FCL.  Since the parties had agreed to the 51:49 ratio for their respective investment in both FCL and FCO, contributing the dividends from these two companies to the share capital of FCL was in reality equivalent to the parties each making the capital contribution in the same ratio. 

163.  Pursuant to the 1997 resolution[21], FCL expressly mentioned in a fax dated 6 August 1998 to FEHC, the plan of applying the profits of FCL and FCO in the sum of around US$826,000 towards solving the under-capitalization problem of FCL.  This fax was before this court at the original trial but not before the Court of Final Appeal as it was considered outside the scope of the appeal.

164.  On 12 August 1998, Wang wrote to the boards of FCL and FCO about the pressing need to resolve the under-capitalization problem.  This letter was also before this court but not the Court of Final Appeal for the same reason. 

165.  On 17 August 1998, COM reiterated to FEHC the need to resolve the under‑capitalization problem by using the dividends of FCL and FCO.  A similar message was repeated by Ngan on 25 September 1998.

166.  On 19 October 1998, FEHC wrote to COM agreeing to apply the dividends of FCL and FCO for 1997 for resolving FCO’s under-  capitalization problem and asked COM to remit the dividends from FCO to FCL for that purpose.  This is strong evidence of FEHC’s acknowledgment of its status as a nominee shareholder for COM or First Laser. 

167.  In a follow up letter dated 21 October 1998, First Laser requested Wang for a written confirmation that FCO’s dividends to be applied as capital for FCL would be regarded as capital contribution by both FEHC and First Laser.  On the same day, FCO made a written request to Ngan’s son to arrange for FCO’s dividend of US$718,731.92 to be paid to FEHC’s account.  On 3 November 1998, FCL replied to First Laser that after consulting FEHC, it was agreed that all of FCL’s and FCO’s dividends shall be applied to solve the under‑capitalization problem.  On 17 November 1998, presumably out of extra caution, First Laser wrote to FEHC requesting for such a confirmation.  Several requests and letters were exchanged, but no confirmation was forthcoming from FEHC.  Those correspondence were also before this court at the original trial but not before the Court of Final Appeal as being outside the scope of the appeal.  Ultimately, the plan fell through because FEHC ignored First Laser’s request for confirmation which First Laser reasonably sought. Hitherto, only FCL agreed to give the confirmation but FEHC did not.  The parties were in a deadlock since November 1998.  FCO’s dividends were not remitted to FEHC due to want of a confirmation from FEHC.  By this time, FEHC was clearly wriggling out of the three agreements and the 1998 Memorandum.

168.  On 13 December 1999, the reduction in FCL’s authorised capital was approved.  Shortly after that, FEHC paid up the reduced authorised capital using loans from Casix Inc and dividends from FCL.  It then obtained approval from the Bureau for Industry and Commerce and completed the sale of the shares in FCL to JDS in February 2000.  This also shows that approval for share transfer from the bureau is not an impossible hurdle.  However, FEHC took advantage of the Mainland law and its position as the sole shareholder of FCL on record and argued before the Court of Final Appeal that no dividends were ever paid to First Laser and that First Laser never contributed to the capital of FCL since December 1996.  Though factually correct, the argument was made of half-truth only.

169.  On First Laser’s case, the funds from FCL and its subsidiary used to contribute to the share capital of FCL were common funds belonging to First Laser and FEHC in the agreed ratio.  In a letter to the Fujian Government dated 3 July 2000, FEHC mentioned its financial difficulties and explained how the under-capitalization problem was ultimately resolved by means of capital reduction, FCL’s dividends and a loan of US$874,000 from Casix Inc.  FEHC also acknowledged that although the capital was fully paid up to facilitate the sale of FCL to JDS, FEHC was still indebted to FCL in the sum of US$874,000.  This letter was only disclosed by FEHC two years after the conclusion of the hearing before the Court of Final Appeal.  On First Laser’s case, First Laser was entitled to 51% of the dividends of FCL and the loan from Casix Inc as acknowledged in the 1998 Memorandum.  Thus, the capital contribution purportedly made by FEHC was jointly made by FEHC and COM or First Laser in the agreed ratio.  The evidence of FEHC’s contribution made at a time when the parties’ relationship had turned sour and when FEHC was acting contrary to the spirit of the First Laser Agreement or in breach of the 1998 Memorandum is of little probative value in deciding who actually contributed to the capital of FCL

170.  The above facts are not in dispute. They are supported by incontrovertible evidence before this court during the original trial.  In addition, they are supported by FEHC’s letter to the Fujian Government.  On my finding, the funds used by FEHC to contribute to the capital of FCL after December 1996 were common funds belonging to FEHC and COM or First Laser under the spirit of the First Laser Agreement.  This finding is not inconsistent with the finding of the Court of Final Appeal.  It explains (but not disputes) why on record First Laser had not participated in the capital contribution of FCL after 1998, but in truth it had contributed in the agreed ratio.  It complements Lord Collins NPJ’s finding by putting it in the proper context of capital contribution to a foreign-owned enterprise under Mainland law and the factual context of what the parties had agreed on how to contribute to the capital of FCL when the shareholding has not been regularised. It is wrong to construe his Lordship’s finding in the absence of the above context. 

Finding (4): FEHC not holding shares in FCL for First Laser

171.  At paragraph 115(2) CFA Judgment, Lord Collins NPJ held that the 1998 Memorandum made it clear that ownership in the FCL shares had not been transferred to First Laser; and that FEHC was still holding them (and in context this did not mean holding them for First Laser).  FEHC placed heavy emphasis and reliance on this finding.  That observation was made when Lord Collins NPJ was considering whether “FCL shares were treated as owned as to 51% by First Laser” plainly through the prism of Hong Kong law under which the concepts of legal and beneficial ownerships are well recognized.  Those observations may not have the same significance in this remission hearing when this court is required to consider the issue of restitution under Mainland law.  In terms of context, it was in the context of shareholding under Mainland law because the 1998 Memorandum was written in the Mainland by a mainlander relating to shares of mainland enterprises and agreements (or at least the First Laser Agreement) governed by Mainland law.  In terms of time, the 1998 Memorandum was written in March 1998.  In March 1998, FEHC was indeed still holding all the shares in FCL. 

172.  There is no concept of trust or equitable interest under Mainland law.  A shareholder on record owns and holds the shares for himself.  He cannot hold them for another.  On the other hand, there is a concept of nominee shareholding under Mainland law as recognised in article 18 of 《Provisions (I)》.  As the authors of《Provisions (I) U&A》 explained, a nominee shareholder has all the rights of a shareholder.  He holds the shares for himself and not on trust for another and is entitled to dividends from the shareholding.  Understood strictly in this light, Lord Collins NPJ’s dictum is also correct even when viewed in the context of Mainland law.  But, it is not to be understood or construed (as Mr Yu SC tries hard to impress upon this court) as his Lordship’s finding that FEHC was not or could not be a nominee shareholder holding 51% of the shares in FCL for First Laser as the actual investor in the context of Mainland law.  Such finding, if indeed made, is not inconsistent with the finding of the Court of Final Appeal made in the context of Hong Kong law, with which I am in total agreement.

Finding (5): Only FEHC received dividends from FCL

173.  At paragraph 115(3) of the CFA Judgment, Lord Collins NPJ held that FEHC received dividends from FCL and noted that at FCL’s board meeting in September 1998 it was resolved that the undistributed profits in the amount of RMB 10,986,000 be distributed to FEHC. As already discussed above, under Mainland law, only the shareholder on record may contribute to the capital of the enterprise and, likewise, only the shareholder on record may receive dividends despite that he is only a nominee shareholder.  As discussed above, during its communication with First Laser between October and November 1998, FEHC acknowledged that the dividends from FCL would be applied as the parties’ joint contribution towards FCL’s capital according to the agreed share ratio in just the same way as FCO’s dividend would be applied.  If the dividends did not belong to the parties in the agreed ratio, there was no reason why FEHC should have so acknowledged.  In effect, FEHC was acknowledging that it held 51% of the dividends of FCL as nominee shareholder of COM or First Laser and at the same time asserting that COM held 49% of the dividends of FCO as nominee shareholder of FEHC.  In so doing, the parties were conducting themselves according to the 1998 Memorandum and the spirit of the First Laser Agreement.  For the same reasons as stated in the preceding subsection, this finding is not inconsistent with Lord Collins NPJ’s finding.  It is an incontrovertible truth underlying the finding of Lord Collins NPJ, which this finding does not seek to challenge.

Issue estoppel

174.  Issue estoppel was raised by FEHC at the eleventh hour in its supplemental closing submission. FEHC argues that First Laser is estopped from disputing what the Court of Final Appeal has found. Having shown that the above findings are not inconsistent with the findings of the Court of Final Appeal, FEHC’s objection based on issue estoppel does not arise.

175.  No authority has been cited by FEHC as to how the principle operates.  Mr Chan SC referred me to three authorities.  In Spencer Bower and Handley on Res Judicata, the authors succinctly stated the subject matter of issue estoppel as follows[22]:

“An express decision will not necessarily create an issue estoppel. Only determinations which are necessary for the decision, and fundamental to it will do so. Other determinations, however positive, do not.”

In Blair v Curran[23], the court cited Spencer Bower and defined the meaning of “fundamental determination”.  It said:

“in the phraseology of Lord Shaw, “a fact fundamental to the decision arrived at” in the former proceedings and “the legal quality of the fact” must be taken as finally and conclusively established (Hoystead v Commissioner of Taxation (2). But matters of law or fact which are subsidiary or collateral are not covered by the estoppel. Findings, however deliberate and formal which concern only evidentiary facts and not ultimate facts forming the very title to rights give rise to no preclusion.”

These principles are well established and were applied in Hong Kong in Cheung Ting Kau Vincent v Koo Siu Ying[24].  I also adopt the same principles.

176.  The facts relied on by FEHC are facts which the Court of Final Appeal found in rejecting First Laser’s argument that it had an arguable case of estoppel by convention.  Lord Collins NPJ said at paragraph 107:

“This question does not arise in view of my conclusion as to applicable law, but since the matter has been fully argued I will express a view.”

Thus, in view of his Lordship’s conclusion that estoppel by convention was a matter of substantive rather than procedural law which did not exist under the governing Mainland law, the question of estoppel by convention does not arise.  The plea of estoppel by convention stood to be rejected whether or not the facts supported it.  The Court of Final Appeal’s subsequent comments on whether the facts arguably supported an estoppel by convention cannot possibly be “essential” to the conclusion reached.  The dicta in the entire subsection from paragraph 107 to 116 are clearly obiter.  They are not fundamental to the decision arrived at in the former proceedings and could not give rise to issue estoppel. 

177.  FEHC suggests that the concept of obiter findings only apply to propositions of law and not to findings of fact.  That is plainly wrong in the light of the decisions in Parakou Shipping Pte Ltd v Jinhui Shipping and Transportation Ltd[25].

178.  Furthermore, it is trite that issue estoppel only arises where the issues are the same: see Spencer Bower[26]. Here, the Court of Final Appeal was dealing with the question of estoppel by convention and whether there was a sufficiently certain assumed state of affairs, namely that the First Laser Agreement was valid and that First Laser was treated as the 51% beneficial owner of FCL, to support an estoppel under Hong Kong law.  It is a different issue from the one at hand, which is whether there was a nominee investment contract between First Laser and FEHC for the purpose of article 18 of 《Provisions (I)》.

A NEW RELATIONSHIP AND NOMINEE INVESTMENT CONTRACT

A new relationship

179.  Though the First Laser Agreement is an agreement for sale and purchase of shares, it is not an agreement for sale and purchase of shares as a passive investment only, which was what Mr Yu SC repeatedly tried to impress upon this court as the true nature of that agreement and that the only relationship between the parties was one of vendor and purchaser.  As Lord Collins NPJ said, that (sale and purchase of shares) is not the entirety of that agreement.  The true nature of the agreement was a joint venture and the true relationship between the parties was one of partnership which co-exists with the relationship of vendor and purchaser shares.   The joint venture was to jointly develop a high-tech optronics project represented by FCO and FCL under which First Laser would immediately and actively participate in FCO and FCL as an equal if not the majority participating shareholder. 

180.  Because of the problems caused by possible litigations from FRIMS and FCL’s under-capitalization issue, the shares in FCO were transferred to COM instead of to First Laser, while the shares in FCL were continued to be held by FEHC.  That was a temporary arrangement only.  The parties’ common intention was that when the two problems were resolved, the shareholding in FCO and FCL would be regularised and steps would be taken to ensure what the parties had done would fall in line with the First Laser Agreement.  The parties anticipated that the share transfer would take an indefinite period of time to complete.  Despite that the shares in FCL were not transferred to First Laser in accordance with the First Laser Agreement, First Laser promptly made the first instalment payment for the shares within days and the second instalment by cheque and the balance by way of set-off within 3 months as required under the First Laser Agreement.  Most importantly, Ngan’s camp immediately and actively participated in FCO and FCL.  COM purchased factory premises for FCO and FCL and paid for the building complex for FCL etc.  Ngan made important decisions for FCL and caused COM to apply the dividends from FCO towards payment for staff quarters for staff of FCO and FCL. 

181.  By March 1998, the parties had carried on this de facto partnership for fifteen months.  The shareholding in FCO and FCL were still not regularised.  However, the parties were committed not only towards regularising the shareholdings but also in running the joint venture through their joint participation in FCO, FCL and COM.  Though what the parties did had little relationship with the First Laser Agreement, they were in fact carrying out the joint venture in accordance with the spirit of the First Laser Agreement.  Kong executed the 1998 Memorandum acknowledging that the COM and FEHC were temporarily holding the shares in FCO and FCL respectively.  While in the context this did not mean COM was holding any of the shares in FCO for FEHC nor was FEHC holding any of the shares in FCL for First Laser as there is no concept of beneficial interest under Mainland law, there was an understanding that when the two problems were resolved, the shareholdings in FCO, FCL and COM would be regularised and the First Laser Agreement would be performed to the letter.  How much longer it was going to take for the share transfer to complete remained indefinite and uncertain.  First Laser legitimately expected to acquire its 51% shareholding in each of FCO and FCL under the First Laser Agreement and the 1998 Memorandum.  First Laser’s expectation to acquire the interest in FCL must increase with time and with its contribution to the joint venture by way of operation and management of FCO and FCL.  Under the circumstances, a closer and tighter relationship must have arisen from the special circumstances of the case since the 1998 Memorandum as the parties were working towards their ultimate goal of acquiring 51:49 interest in each of FCO and FCL in the years to come.

182.  This new relationship co-exists with the existing vendor and purchaser relationship as well as partnership relationship.  Had FEHC not changed its mind, the shareholdings in FCO and FCL would have been regularised and the shares in FCL would have been transferred to First Laser in just the same way as they were transferred to JDS.  Though the three agreements and the 1998 Memorandum were held to be invalid, the above relationship and the parties’ conduct pursuant to that relationship did not disappear. FEHC cannot brush off this new relationship, the de facto partnership relationship in the joint venture, the de facto partnership relationship in FCO and FCL, and First Laser’s expectation by obstinately arguing that the relationship between the parties was just one of vendor and purchaser of shares.

The nominee investment contract

183.  At common law, it would not be difficult to infer a trust arising from such a tight relationship.  But the concept of trust and beneficial interest is unknown to Mainland law.  However, according to  Professor Yin, there is a near equivalent concept of share-holding    （代持）between an actual investor and a nominee shareholder under an  “anonymous investment contract” or “nominee investment contract” (「穩名投資協議」).  Under such a contract, the purchaser of shares is the investor while the vendor who is the shareholder on record intending to sell is the nominee shareholder.  As the term suggests, the relationship under such a contract is one of a relatively long or even indefinite duration when the nominee shareholder holds the shares for the actual investor particularly under situations where the actual investor actually participates in the enterprise invested.  Such relationship does not exist in a sale and purchase agreement for shares as a passive investment in which the share transfer would be completed within a reasonably short period of time.

184.  Professor Yin further opined that under 《Contract Law》 a contract may be created in writing, orally or by conduct, just as it is under common law.  The background of this case, the three agreements, the 1998 Memorandum, the conduct of the parties, particularly the fact that Ngan on behalf of First Laser was actively participating with FEHC in the operation and management of FCO, FCL and COM, and that FEHC had received the proceeds of sale in full for fifteen months are legal facts on which a contract by conduct may be inferred.  Having regard to these legal facts, Professor Yin is of the opinion that the relationship between the parties was a share-holding relationship（代持）to enable First Laser to acquire the benefit of 51% of the shares in FCL and a cross share-holding arrangement（雙重代持）to enable FEHC to acquire the benefit of 49% of the shares in FCO pending regularisation（理順）of the shareholdings in FCO and FCL.  He was able to infer such a nominee investment contract between First Laser and FEHC.

185.  Mr Bai disagrees.  The basis of his argument is that there is no express or written nominee investment contract and that the relationship between the parties is just one of purchaser and vendor of shares as a passive investment.  This first limb of his argument may be readily dismissed by reason of article 10 of 《Contract Law》which provides:

「當事人訂立合同，有書面形式、口頭形式和其他形式。

 法律、行政法規規定採用書面形式的，應當採用書面形式。當事人約定採用書面形式的，應當採用書面形式。」

(Translation:

“A contract may be made in a writing, in an oral conversation, as well as in any other form. A contract shall be in writing if a relevant law or administrative regulation so requires. A contract shall be in writing if the parties have so agreed.”)

There is no evidence that such a nominee investment contract is required to be in writing by law or by the parties’ agreement.  Even if there is such a requirement in respect of nominee share-holding in a foreign-owned enterprise and the nominee investment contract is void for want of writing or state approval, it is not fatal to First Laser’s claim which is rested on the premises that such a contract is void.  As I have found that the First Laser Agreement is not merely a simple sale and purchase agreement for shares, but a joint venture agreement, the true nature of the parties’ relationship was one of partnership relationship under a void agreement.  The second limb of Mr Bai’s argument may also be dismissed for comparing like with unlike.  He deliberately confined his vision to the First Laser Agreement as an agreement for sale and purchase of shares only and turned a blind eye to the bigger arrangement of a joint venture of which the agreement form part.

186.  In my view, Professor Yin’s opinion is very logical.  All the factual circumstances and the parties’ conduct I have mentioned above are legal facts which create a legal relationship with legal consequence.  Legal facts need not be the result of the parties’ intentional or conscious conduct.  They may arise from factual circumstances independent of the parties’ intention and may create legal consequences, including contractual consequence.  I accept Professor Yin’s opinion.  This nominee investment contract arose from the factual background including the Agreement, the three agreements, the 1998 Memorandum and the parties’ conduct.  The parties conducted themselves in accordance with the spirit of the First Laser Agreement as if they were partners in the joint venture and shareholders of FCO and FCO.  The fact that the FEHC permitted First Laser to participate as de facto partner in the joint venture and de facto shareholder in FCL and FCO is its recognition that its rights as shareholder of FCL and FCO is somehow and in some way subject to the rights of First Laser.  These legal facts enable this court to draw as the only irresistible inference that FEHC and First Laser were engaged in a relationship of nominee shareholder and actual investor under a nominee investment contract.  This contract is collateral to the Agreement, the three agreements, individually or collectively, which have been held to be void.  Under this nominee investment contract, which I conveniently call “collateral contract” using the common law term, FEHC was to hold 51% of the shares in FCL as nominee shareholder for First Laser and the balance of 49% in its own right as shareholder and actual investor until the shareholdings in FCO and FCL were regularized.  Similarly, COM was holding 49% of the shares in FCO as nominee shareholder for FEHC and the balance of 51% in its own right as shareholder and actual investor. 

187.  Mr Yu SC argues that the parties and terms of this contract has not been pleaded.  This has not been raised by the pleading.  Being a collateral contract and having regard to the background, the parties must be First Laser and FEHC and the aforesaid terms could be readily inferred or implied into this collateral contract.  This collateral contract co-exists and stands and falls with the three agreements and 1998 Memorandum.  It governs the parties’ relationship, rights and obligations under the three agreements and 1998 Memorandum for as long as that relationship is extant.  It would cease to exist if the First Laser Agreement were valid and has been fully performed.  It would be void if the 1998 Memorandum and the three agreements including the First Laser Agreement, individually or collectively, are held to be void. 

Whether the nominee investment contract constitutes an article 18 contract

188.  Mr Bai argues that the relationship of actual investor and nominee shareholder only exists in the case of fresh capital injection into a newly set up foreign-owned enterprise.  He emphasized the distinction between “capital injection” (「出資」) and “share transfer” (「轉讓」).  In his opinion, the relationship between an actual investor and a nominee shareholder does not exist in a relationship between a purchaser and vendor of shares.  His opinion is premised on his obstinate view that the First Laser Agreement is an agreement for sale and purchase of shares as a passive investment only and his obstinate refusal to accept that the parties were engaged in a joint venture. He argues that a nominee investment contract only arises in capital injection in the setting-up of a foreign-owned enterprise.  However, there is no express provision at all, either in Article 18 or in any other articles of 《Provisions (I)》, stating that nominee investment contract only exists in the setting up of a foreign-owned enterprise. 

189.  It is important to note that the term used in article 18 is “actual investor” (「實際投資者」) and not “party actually providing the capital” (「實際出資人」).  Mr Bai accepts that “investing” (「投資」) is a broader concept and necessarily includes the concept of “providing capital” (「出資」).  But he could not offer any reason why the restrictive meaning should be adopted in construing the term “actual investor” (「實際投資者」) in Article 18, which is a term of wide import. 

190.  Mr Bai called in aid《Judicial Interpretation on Company Law (III) 》 in which the terms “providing capital” (「出資」) and “party providing capital” (「出資人」) are used.  He suggests that the concept of “anonymous investment” or “nominee investment” (「隱名投資」) is in fact about “providing capital” (「出資 」).  The subject matter of that judicial interpretation is about a contract between “the party actually providing capital” (「實際出資人」) and “the party in name providing capital” (「名義出資人」)[27].

191.  Mr Chan SC submits that if Mr Bai were correct, article 18 would have used the same definitions as well.  The fact that different terms are used only show that what article 18 intends to cover is not limited to the setting-up situation as suggested by Mr Bai but the wider concept of investment, including investment by way of acquisition of shares. 

192.  I am unable to see how Mr Bai could draw any support from《Judicial Interpretation on Company Law (III) 》.  As stated in its preamble, that judicial interpretation deals with the applicable law in adjudicating disputes about “setting up companies” (「公司設立」), “contributing to its share capital” (「出資」), and “confirmation of shareholding rights” (「股權確認」).  The subject matters considered in that judicial interpretation are setting up of a company and the provision of its capital by “promoters” (「發起人」) and the first shareholders.  The context is about investment in the narrow sense.  It is therefore appropriate to use the term “providing capital” (「出資」).  Throughout that entire judicial interpretation, it is only article 18 that provides for transfer of share by an existing shareholder to a purchaser or transferee.  In that context, it is about a transfer of investment in the broad sense.  But the subject matter in that transfer is shares in respect of which the capital has not been fully paid.  In reality, the issue is about “providing capital” (「出資」).  In my view, this judicial interpretation does not support Mr Bai’s thesis that the term “investing” or investment” (「投資」) as used in article 18 of 《Provisions (I)》 should be construed in the narrow sense.

193.  Usually, in the context of Mainland law, a sale of shares involves the seller, being “the original investor” (「原投資者」), selling his “investment” (「投資」) in the subject company to the purchaser whereupon the purchaser is treated as the investor even though no further capital injection is to be made by the purchaser.  This concept is manifested in paragraph 1 of the approval document issued by Bureau of Foreign Economic and Trade (對外經濟貿易局) in respect of the sale of the shares in FCO to COM[28], in which the sellers, i.e. the two original shareholders of FCO, were described as “the original investor” (「原投資者」) and the subject matter of sale is described as “investment” (「投資」) . 

194.  Mr Bai relied on the following passage at pages 154 and 155 of 《Provisions (I) U&A》 to support his opinion that a nominee investment contract only exists in the case of providing capital in setting up a new foreign-owned enterprise:

「隱名投資一般表現為，隱名投資人作為實際投資者，單獨或與具名人共同投資，在我國境內設立外商投資企業。隱名投資人還有可能是藉用或者冒用他人的名義在境內設立外商投資企業。本司法解釋沒有對借用或者冒用他人的名義在境內設立外商投資企業的情形予以規範。」

(以斜體及粗字體顯出重點)

(Translation:

“The usual feature of an anonymous investment is that an anonymous investor as the actual investor sets up, alone or jointly with a named person, a foreign-funded enterprise in the Mainland. An anonymous investor may also borrow or fraudulently use the name of another to set up foreign-funded enterprise in the Mainland. This judicial interpretation does not regulate the establishment of foreign-funded enterprises in the Mainland by borrowing or fraudulently using the name of another other.”)

(Emphasis highlighted in italic and bold print)

195.  Mr Chan SC submits that what the authors described is the “usual feature” of a nominee investment contract but not the only or exclusive feature which such a nominee investment contract must have.  Furthermore, even the authors also expressly stated that there may be other situations where a nominee investment contract may exist.  Mr Bai’s opinion is clearly too narrow to be correct.

196.  Mr Bai relied on his experience as a practitioner in the law and practice of foreign-owned enterprises that he had never seen a nominee investment contract in a share transfer transaction.  Mr Chan SC submits the fact that Mr Bai did not have such experience does not mean that article 18 is confined to the situation where the expert had experience on.  The reality may well be that investors are more ready to engage the services of lawyers in the setting up of an enterprise while vendors and purchasers of shares are less inclined to do so, as in the present case and despite the size of the investment.  I can give Mr Bai’s experience little weight.

197.  Again, Mr Bai sought to rely on his own experience that share transfers do not generally take a long period of time for approval and there would be no need for “transitional” arrangements of the type put forward by Professor Yin.  His opinion was in general terms which was more applicable to a simple agreement for sale and purchase of shares without active participation by the purchaser and long and indefinite transitional duration of the type as in the First Laser Agreement. The transfers Mr Bai talked about have no similarities with the First Laser Agreement.  Contrary to Mr Bai’s contention, the authors of 《Provisions (I) U&A》 also recognised at page 118 that share transfers may take a long period of time for approval and may result in the purchaser participating in actual management for a very long period of time before the transfer is complete[29].

198.  Indeed, as pointed out by Mr Chan SC, the requirement for approval is recognised by the authors of 《Provisions (I) U&A》 as a common source of dispute when the nominee shareholder took advantage of the lack of approval resulting in the contract being found void to deprive the actual investor of the fruits of his investment (which is what this case is about), and the unfairness which the laws as interpreted by《Provisions (I) 》 are designed to redress.  The authors wrote at page 168 and 169:

「有時候，名義股東甚至會以未經審批等藉口主張合同無效，意圖獨占實際投資者的投資收益。對這種違反誠信原則的行為，如果實際投資者因不能實現其合同目的而請求解除合同、由名義股東承擔違約責任，人民法院應予支持。」

(Translation:

“Sometimes, nominee shareholders may even suggest that the contract is invalid on the pretext that approval was not forthcoming, with intention to take over the investment income of the actual investor. Towards such violation of the principle of good faith, if the actual investor requests to terminate the contract because the underlying purpose cannot be achieved and seeks to hold the nominee shareholder liable for breach of contract, the people's court shall give support to such claims.”)

The authors’ observation suggests that delays in obtaining approval from the approving authorities for transfer of shares in foreign-owned enterprises are not uncommon.  I prefer Professor Yin’s which is consistent with that of the authors of《Provisions (I) U&A》.

199.  Mr Bai relied on the authors’ observation that “nominee investment arrangements are used for the purpose of circumventing the need for administrative approval” (「隱名投資行為本身就是規避審批機關審批的行為」) to support his argument that a relationship of actual investor and nominee shareholder under a nominee investment contract could not exist in a share transfer transaction since share transfers require approval from relevant administrative authorities.

200.  As submitted by Mr Chan SC, such argument defies logic since approval from administrative authorities is not only required for setting up foreign-owned enterprises but is also required for transfer of shares in such enterprises as well.  There is simply no difference as far as the requirement for administrative approval is concerned.  The kind of relationship in the present case is an interim one covering a long transitional period pending approval.  Furthermore, circumventing approval (規避審批) is plainly not a prerequisite for the formation of a nominee investment contract.  In any event, the transitional arrangement between the parties in the nature of a nominee investment contract was in some sense an arrangement to avoid the consequence of lack of approval.  Mr Bai’s argument is unconvincing.

201.  Mr Bai argues that there are necessary contents (必備內容) in a nominee investment contract, including the parties’ agreement that the nominee shareholder acts on behalf of the actual investor in exercising shareholders’ rights; and that the actual investor acquires profits/income of its investment from the nominee shareholder, etc.

202.  Mr Bai was unable to quote any authority to support the requirement of such necessary contents.  I am unable to find any such requirements in 《Provisions (I)》, particularly the requirement to make provision for distribution of investment income.  Quite to the contrary, the authors of 《Provisions (I) U&A》wrote at page 166 that distribution of income from investment is a matter of agreement.  Furthermore, article 15(3)[30] provides that in the absence of agreement, the court should support the actual investor’s claim for investment income as well as the nominee shareholder’s claim for reasonable remuneration.  Such a term may be readily implied into a contract.  Mr Bai’s opinion about the requirement of necessary contents in a nominee investment contract simply cannot be correct.  Mr Yu SC accused Professor Yin of acting as an advocate for his client.  Apparently, Mr Bai was a more aggressive advocate.

Whether First Laser is estopped from proving the share-holding relationship (代持) by reason of the CFA Judgment

203.  FEHC argues that by reason of the Court of Final Appeal’s finding in paragraphs 112 to 116 of the CFA Judgment First Laser is estopped from asserting a case of share‑holding relationship. This question of issue estoppel has already been considered relating to the specific findings of the Court of Final Appeal in those paragraphs.  Here, FEHC’s argument is launched on a broader base that the CFA Judgment is a bar to the finding of the existence of this relationship.

204.  In paragraphs 107 to 116 of the CFA Judgment, the Court of Final Appeal was considering whether, on the assumption that Hong Kong law were applicable to the First Laser Agreement, there would have been an arguable case on estoppel by convention.  Thus, the focus of the Court of Final Appeal was to find if the acts and conducts relied upon by First Laser showed that there was a common assumption that the First Laser Agreement and 1998 Memorandum were valid and subsisting sufficient to establish an estoppel by convention such that notwithstanding the absence of approval for the transfer of the FCL shares, the First Laser Agreement was valid under Mainland law and that First Laser had a 51% shareholding.  Neither of those two common assumptions which First Laser failed to establish is relevant to the issue at hand, which is whether First Laser can be regarded as an actual investor and FEHC a nominee shareholder in respect of the 51% shareholding in FCL.  The nominee share-holding concept under Mainland law is wholly different from the common law concept of beneficial shareholding which does not exist under Mainland law.  In conclusion, the two common assumptions which First Laser failed to establish are not the same as the issues raised by First Laser’s case of nominee investment contract and for reasons as explained in the preceding sections the various findings of the Court of Final Appeal relied on by FEHC, properly understood in their context, actually support First Laser’s case of nominee investment contract.

Conclusion

205.  All in all, I reject Mr Bai’s opinion and accept Professor Yin’s as more logical.  For reasons as I have already explained, I find that a new relationship was born out of the special circumstances of the case by the time of the 1998 Memorandum.  The relationship is one which exists between an actual investor and nominee shareholder under a collateral nominee investment contract.  This relationship and contract co-exists with the relationship of a vendor and purchaser of shares in a contract for sale and purchase of shares, such as the First Laser Agreement.  It stands or falls with the First Laser Agreement.  As the First Laser Agreement was held to be void, so too must the collateral nominee investment contract. 

206.  On the true construction of article 18 of 《Provisions (I)》, the article may be invoked without the nominee investment contract being first held by a court to be void.  There is no dispute that the value of the 51% shares in FCL is higher than the equity value of FCL at the time of its sale to JDS.  The nominee investment contract having now been found by this court to be void, First Laser is entitled to restitution under article 18(1) of 《Provisions (I)》.

RESTITUTION

Introduction

207.  First Laser’s primary claim in restitution is founded on articles 58 and 59 of 《Contract Law》, articles 61 and 92 of 《GPCL》, article 131 of 《GPCL Opinion》and article 18 of 《Provisions (I)》which construes these articles.  The parties have lodged almost 900 pages of expert evidence for the purpose of this remission trial.  Insofar as the voluminous evidence on the construction of these articles is concerned, I do not find it necessary to analyse the experts’ evidence and opinion in great detail.  Suffice it is to say that I have read them, understood them and come to a concluded view on the proper construction of the article.  In broad terms, Professor Yin’s opinion is largely in line with the views of 《Provisions (I) U&A》 and with common sense. 《Provisions (I) U&A》 is an authoritative work by senior and well-respected judges of the Supreme People’s Court.  It deserves much weight.  Mr Bai’s opinion insofar as it contradicts 《Provisions (I) U&A》 has to be disregarded.  I agree with most of the opinion of Professor Yin and disagree with Mr Bai’s where it differs from Professor Yin’s. 

Application of《GPCL》and 《Contract Law》

208.  This right to restitution of property transferred under a contract which is found to be void is founded on articles 58 and 59 of 《Contract Law》and article 61 of 《GPCL》.  《GPCL》 was promulgated on 12 April 1986 and came into force on 1 January 1987.  It is a piece of general legislation which regulates people’s civil rights and liabilities in the Mainland.  It is applicable to the parties’ dispute.

209.  《Contract Law》 was promulgated 15 March 1999 and came into force on 1 October 1999.  It governs specifically the rights and liabilities of the parties to a contract.   Though 《Contract Law》came into force after the parties had entered into the Agreement, it is applicable to the Agreement and the three agreements by virtue of the second limb of article 1 of 《Contract Law Interpretation (I) 》.  There is also no issue about retroactivity.  Articles 1 to 3 provide as follows:

「第一條　合同法實施以後成立的合同發生糾紛起訴到人民法院的，適用合同法的規定；合同法實施以前成立的合同發生糾紛起訴到人民法院的，除本解釋另有規定的以外，適用當時的法律規定，當時沒有法律規定的，可以適用合同法的有關規定。

第二條　合同成立於合同法實施之前，但合同約定的履行期限跨越合同法實施之日或者履行期限在合同法實施之後，因履行合同發生的糾紛，適用合同法第四章的有關規定。

第三條　人民法院確認合同效力時，對合同法實施以前成立的合同，適用當時的法律合同無效而適用合同法合同有效的，則適用合同法。」

“Translation:

“Article 1. If a dispute on a contract established after the implementation of 《Contract Law》 is brought to the people's court《Contract Law》 shall apply. If a dispute on a contract established before the implementation of 《Contract Law》 is brought to the people's court, except this judicial interpretation provides otherwise, the legal provisions then existing shall apply; where there was no such legal provision, relative stipulations in《Contract Law》 may apply.

Article 2. Where a contract is established before the implementation of《Contract Law》 but the period of performance under the contract overpasses or commences after the implementation of 《Contract Law》, a dispute arising from the performance of the contract shall be governed by relevant provisions of Chapter 4 of《Contract Law》.

Article 3. In determining the validity of a contract before the people's court, if a contract established before the implementation of《Contract Law》 is void according to the legal stipulations then existing but valid according to《Contract Law》, 《Contract Law》 shall apply.”)

Thus, insofar as the provisions in《Contract Law》provide more specificity than《GPCL》or there are no applicable provisions under 《GPCL》, the provisions in《Contract Law》apply by virtue of article 1 of 《Contract Law Interpretation (I) 》

The right to restitution

210.  The right to restitution is founded on Article 61 of 《GPCL》and article 58 of《Contract Law》.   Article 61 of 《GPCL》provides:

“民事行為被確認為無效或者被撤銷後，當事人因該行為取得的財產，應當返還給受損失的一方。有過錯的一方應當賠償對方因此所受的損失，雙方都有過錯的，應當各自承擔相應的責任。

雙方惡意串通，實施民事行為損害國家的、集體的或者第三人的利益的，應當追繳雙方取得的財產，收歸國家、集體所有或者返還第三人。 (重點以斜体體和突體顯示）

(Translation:

“After a civil act has been determined to be null and void or has been rescinded, the party who acquired property as a result of the act shall return it to the party who suffered loss. The defaulting party shall compensate the other party for the losses it suffered as a result of the act; if both sides are at fault, they shall each bear their proper share of the responsibility.

If the two parties maliciously collude together to carry out a civil act that harms the interests of the state, the collective unit, or a third parties, the property acquired by both parties shall be recovered and returned to the state or the collective unit or returned to the third parties.”

(emphasis highlighted in bold and italic print)

211.  Article 58 《Contract Law》provides:

「合同無效或者被撤銷後，因該合同取得的財產，應當予以返還；不能返還或者沒有必要返還的，應當折價補償。有過錯的一方應當賠償對方因此所受到的損失，雙方都有過錯的，應當各自承擔相應的責任。」

          (重點以斜體和突體顯示）

(Translation:

Property acquired as a result of a contract shall be returned after the contract is confirmed to be null and void or has been rescinded; where the property cannot be returned or the return is unnecessary, it shall be reimbursed at its estimated price. The party at fault shall compensate the other party for loss incurred as a result therefrom.  If both parties are at fault, each party shall respectively be liable.)

(emphasis highlighted in bold and italic print)

Article 59 of 《Contract Law》provides:

「當事人惡意串通，損害國家、集體或者第三人利益的，因此取得的財產收歸國家所有或者返還集體、第三人。」

(Translation:

“If the parties maliciously colluded together to harm the interests of the state, the collective, or a third parties, the property obtained was returned to the state or returned to the collective or a third parties.”)

212.  Professor Yin and Mr Bai have no dispute that both 《Contract Law》 and 《GPCL》 are applicable to the parties’ dispute and that there is no issue of retroactivity.  《Contract Law》 provides more specificity in content than 《GPCL》 in respect of one particular class of civil act, namely, contract. Articles 58 and 59 taken together have the same effect as article 61 of 《GPCL》 except that article 58 provides for the additional situation where property acquired as a result of the contract, i.e. the original subject matter, cannot be returned or its return is unnecessary.  A property cannot be legally returned where title in the property has been lawfully passed to a third parties.  It cannot be physically returned if it no longer exists or has been destroyed.  If property has been incorporated into another property under circumstances such that the costs or inconvenience of its removal outweigh the value of the property, its return is unnecessary.  Under such circumstances, the obligation of the party who has acquired the property is to “reimburse the estimated value of the property acquired” (「折價補償」) as a result of the contract which was void.

213.  There is also no dispute, whether applying Article 61 of 《GCPL》 or applying Article 58 of 《Contract Law》, that the property acquired as result of the act (因該行為取得的財產) or property acquired as result of the contract (因該合同取得的財產) shall be returned when the relevant contract or act is held to be void.  Whether the restitution claim is founded on 《GCPL》 or on《Contract Law》, the legal consequences are the same.  The primary obligation is on the party in receipt of property acquired as result of the contract (因該合同取得的財產) to return the property or to “reimburse the estimated value of the property acquired” (「折價補償」), if it could not be returned; and to pay compensation according to fault.  Compensation is outside the scope of this remission trial. 

214.  FEHC argues that the property acquired being money could be returned in species.  Alternatively, the value of the property to be reimbursed is just the value of the actual investment sum, i.e. what First Laser had paid for the shares in FCL.  This would be the position under common law.  First Laser argues that as the property could not be returned FEHC has to reimburse the value of the property, including, the value of the property and the enhancement (or such portion of it as this court may decide) in value of the shares in FCL which the property acquired by FEHC would otherwise have earned for First Laser, had the contract not been held to be void.  According to Professor Yin, under Mainland law, this dispute has to be determined according to the juridical basis of “the right to claim” (「請求權」).  Mr Bai has no dispute that this is the proper approach under Mainland law.  There is a fundamental difference in approach between the common law and Mainland law, which must necessarily lead to different results.

Juridical basis of right to claim reimbursement value of property acquired

215.  According to Professor Yin, the juridical basis of the right to claim for return of the property acquired as the result of a void contract may be a “right to claim rights in property” (「物權請求權」) or a “right to claim improper profits” (「不當得利請求權」); but if the property acquired could not be specifically returned, a claim for reimbursement of the value of the property acquired could only be a right to claim improper profits.   Mr Bai disagrees.  He argues that a claim for reimbursement of the value of the property acquired may be a right to claim rights in property or a right to claim improper profits.  But other than quoting some academic articles, Mr Bai could offer no explanation how such a claim, not being one for return of specific bank notes or coins, could be founded on a right to claim rights in property.  The most he could say, treating the price paid by First Laser as cash, is that money is species goods (種類物).  It is a fungible that could be replaced by items of the same species.  That argument could only apply to specific bank notes or coins, but First Laser’s payment was made by cheques and set-off.  Moreover, Mr Bai’s argument is flawed because under Mainland law, ownership of or property in money passes when the money is transferred to another person.  Like common law, ownership in chattel passes with possession. The right to claim rights in property is extinguished when the money was handed over.  Therefore, the only available right of claim is a right to claim improper profits.  Furthermore, according to Professor Yin, the word “property” under Mainland law (「物」) refers to movable or immovable property, but and money is neither.   This is all the more so in the case of money represented by cheques, credit cards or, as is very common nowadays in the Mainland, by electronic money.  Mr Bai has no dispute with this proposition.  Thus, a claim for return of money cannot be made under a right to claim rights in property.   Moreover, according to the authors of 《Provisions (I) U&A》, even in the case of a claim for return of purchase price paid under an ordinary agreement for sale and purchase of shares, the juridical basis is a right to claim improper profits.  The authors wrote at page 97:

「在股權轉讓合同的情況下，如轉讓人已經受領了轉讓款的，應根據不當得利規則返還受讓人該筆款項。」

(Translation:

“In the case of a share transfer contract, if the transferor has already received the transfer money, the transferee should return the money in accordance with the principle of improper profits.”

Furthermore, it defies logic to say that there is no need to apply the improper profits regime when Article 18 of 《Provisions (I) 》, as a judicial interpretation, deals with exactly the same issue of restitution when a contract is held to be void or of no effect. 

216.  As I have said, I shall not go into details of the experts’ arguments.  I accept Professor Yin’s proposition as it is in line with the opinion of the authors of 《Provisions (I) U&A》 at page 181[31]:

「根據《民法通則》等61條和《合同法》第58條的規定… ，當事人要求返還原物時，其請求權基礎可以是物權請求權，也可以是不當得利請求權；但如果是主張折價補償，則當事人的請求權基礎就只能是不當得利返還請求權。」

(Translation:

“According to the provisions of article 61 of 《GPCL》 and article 58 of 《Contract Law》 … when the party requests for return of the original property, the basis of its right to claim may be a right to claim rights in property, it may also be a claim for improper profits; but if the claim is for reimbursement of the property at its estimated price, the basis of the party’s claim could only be a claim for unlawful profit.”)

217.  The authors went on to explain that as the nominee shareholder had acquired the status of shareholder of the foreign-owned enterprise, the actual investor may not ask to substitute himself for the nominee shareholder as the shareholder on record of the enterprise.  He may not require the nominee shareholder to transfer the shares to himself as such transfer requires approval by the bureau responsible for administration of such enterprises.  If the actual investor has contributed to the share capital by way of property, he cannot seek return of the property as the property has become vested in the enterprise.   Then the authors concluded at the end of page 181 that the actual investor may only claim for return of improper profits by invoking the improper profits regime.  They wrote:

「… 在隱名投資協議認定為無效的情形下，實際投資者只能依據不當得利制度請求外商投資企業名義股東，將所獲得利益返還給自已，因為名義股東，沒有以實際投資者的財產出資，但獲得了股權。」

(Translation:

“In the case where the anonymous investment agreement is found to be invalid, the actual investor can only invoke the unlawful profit regime to require the nominee shareholder of the foreign-funded enterprise to return the benefit obtained to himself, because the nominee shareholder acquired the shares but had not actually contributed the capital contribution by himself as the actual investor.”)

218.  Again, at page 191, the authors wrote:

「在對上一條 [Article 18 of Provision (I)] 的說明中，我們已經談到，關於因合同無效引起的返還財產問題，如果請求返還的對象是原物，則在我國不承認物權行為理論的背景下，請求權基礎既可以是物權請求權，也可能是不當得利返還請求權，但如果返還的對象不是原物，而是折價補償，則只能以不當得利為請求權基礎……在隱名投資協議被認定無效的情形下，由於實際投資者請求返還的對象不能是名義股東所持股權本身，也不能是實際投資者已經投入企業的實物資產，只能折價補償，因而其請求權基礎只能是不當得利。」

(Translation:

In the commentary on the preceding article [article 18], we have discussed the issue of return of property arising from a void contract, if the subject matter of the request for return is the original property, then on the premise that the Mainland does not recognise the theory of right to claim rights in property, the basis of claim may be either a right to claim rights in property, or it may also be a claim for unlawful profit; but if the claim is for reimbursement of the property at its estimated price, the basis of the party’s claim could only be  a claim for unlawful profit. … In the case where an anonymous investment agreement is found to be invalid, since the subject matter to be returned as claimed by actual investor cannot be the shares held by the nominal shareholder itself, or the actual property which the actual investor has invested in the enterprise, he can only be reimbursed the estimated value of the property, thus the basis of its claim can only be a claim for unlawful profit.”

219.  The authors’ comments are very authoritative statements in relation to a claim under article 58 of 《Contract Law》 and article 61of 《GPCL》.  The reasons advanced by the authors as quoted in the above passages have put it beyond dispute that the juridical basis of a claim by an actual investor of a nominee investment contract for reimbursement of his investment sum when such contract is held to be void may only be founded on a right to claim improper profits. What makes the profits improper is the fact that they were acquired by the nominee shareholder without having actually contributed to the capital investment needed to generate the profits.

220.  Moreover, on the facts, there is no room for an argument of a claim founded on the right to claim rights in property.  The purchase price for FCO’s and FCL’s shares were paid by way of two cheques of HK$10 million each issued by COM and by First Laser and a set-off of HK$4,640,000.  There is no argument that FEHC was in the position to return those cheques.  Even if it could, a cheque is a chose in action such that the cashed cheque is not the same as the un-cashed cheque.  The set-off is also a chose in action.  These are not physical properties.  Insofar as these payments are treated as payments in money, the money is neither movable nor immovable property under Mainland law and is not capable of providing the basis for the claim of a right to claim rights in property.  First Laser’s claim for reimbursement of price paid could only be founded on a claim in improper profits in that FEHC was paid the price, kept it for its own use and as a result obtain improper profits at the expense of First Laser.

Improper profits regime

221.  Having decided the juridical basis of such a claim, the authors went on at page 182 to consider the obligation of the party who had received the improper profits.  They referred to article 92 of《GPCL》 which defined the improper profits regime.   Article 92 provides: -

「沒有合法根據，取得不當利益，造成他人損失的，應當將取得的不當得利返還受損失的人。」

(重點以斜體和突體顯示）

(Translation:

“If profits are acquired improperly and without a lawful basis, resulting in another person’s loss, the improper profits shall be returned to the person who suffered the loss.”)

(Emphasis highlighted in italic and bold print)

222.  Article 131 of the 《GPCL Opinion》is a judicial interpretation which construes article 92 of 《GPCL》.  It provides:

「返還的不當利益，應當包括)原物和原物所生的孳息。利用不當得利所取得的其他利益，扣除勞務管理費用後，應當予以收繳。」 (重點以斜體和突體顯示）

(Translation:

“The improper profits to be returned shall include the original subject matter and the fruits arising therefrom. Other benefits obtained by using the improper profits net of the labour service overheads shall be forfeited.” )

(Emphasis highlighted in italic and bold print)

Article 131 introduced the term “original subject matter” (「原物」) which must refer to the property acquired as result of the civil act or contract.  It defined “improper profits to be returned” (「返還的不當利益」) as including the “original subject matter” and the “fruits arising from the original subject matter” (「原物所生的孳息」).  It also referred to “other benefits” obtained by using the improper profits (「其他利益」) which has to be forfeited to government after deducting labour service and overheads.  According to Mr Bai, under Mainland law damages arising from a void contract do not include a share in profits or dividends, whether actually obtained or should have obtained, had the contract not been found to be void.  He is therefore of the view that the improper profits to be returned under article 131 is limited to the original subject matter and benefits arising from the original subject matter, i.e. interest or dividends.  All other benefits, net of labour costs obtained by using the improper profits shall be forfeited to the government.  Hence, he argues that even if a claim for reimbursement is founded on improper profits, the reimbursement does not include the benefits obtained by using the property acquired as a result of a void contract.  But Mr Bai could offer no explanation for the distinction between benefits arising from the original subject matter and other benefits obtained by using the property acquired.  Nor could he cite any authority in support of his proposition.

223.  Mr Bai’s opinion is obviously based on his misunderstanding of article 131.  He classified improper profits into two categories, benefits arising from the original subject matter and other benefits which shall be forfeited to the government under article 131. According to his opinion, enhancement in value of the shares in FCL which FEHC tried so hard to keep has to be forfeited to the government.  That could not be what FEHC is contending.  His opinion is confusing.  As pointed out by the authors of 《Provisions (I) U&A》 at page 181 and 182, the second sentence of article 131 about forfeiture of other benefits is to be construed restrictively in the light of article 61(2) of 《GPCL》[32] to benefits acquired by the parties maliciously colluding together in using the improper profits to harm the interests of the state, collective units and third parties.

224.  The terms “the original subject matter” (「原物」) and “fruits arising from the original subject matter” (「原物所生的孳息」) were introduced by article 131.  The term “original subject matter” is in simple language.  It means what it says.  But the term “fruits arising from the original subject matter” (「原物所生的孳息」) is not without significance.  As a legal term, it owes its origin to the Latin word “fructus” meaning produce of the land, including fruits from trees, eggs from hens and cubs from livestock etc[33].  It is a term relative to and distinguishable from the term “original subject matter”.  The term 「孳息」(“fruits”) is not to be misunderstood as「之息」 (“interest arising from something”).  It originated from《Theory on Migration》by Jiang Tong of Western Jin Dynasty (晉江統《徙戎論》)[34], which is a theory advocating for repatriating Hun (匈奴) settlers to their place of origin.  The term basically means breeding and breathing.  The word 「息」carries with it the sense of “breath” or “breathe” and not “interest” as it is used in the commercial sense nowadays.  It is more than milk from a cow, but includes the cubs it reproduces.  In terms of investment, it has a wider meaning than “interest” or “dividend”.  It includes both dividends and capital growth.  It is this wider meaning which was adopted by the authors in 《Provisions (I) U&A》. I make no secret of the fact that the above analysis of the term 「孳息」is derived from my knowledge of the Chinese language and not from 《Provisions (I) U&A》. The authors of《Provisions (I) U&A》are Chinese scholars.  The meaning of the term must be so well known to them that they did not find it necessary to give any explanation.  But it is necessary in the context of this judgment to enable better understanding of a Chinese term in the English language.  I feel duty-bound to apply my knowledge of the Chinese language in construing this term.

225.  Understood in this light, the term “fruits arising from the original subject matter” (「原物所生的孳息」) in article 131 should be given the widest possible meaning as meaning any benefits except “other benefits” (「其他利益」) within the meaning of article 61 of 《GPCL》 and 59 of 《Contract Law》; and the term “other benefits” (「其他利益」) should be construed restrictively to mean only benefits acquired by using the improper profits (including the original subject matter and the fruits) in harming the interests of the state, collective units or a third parties.  Thus, the term “fruits arising from the original subject matter” includes interests, dividends and capital growth or enhancement in value arising from the original subject matter.  The term “other benefits” are not part of the fruits but secondary benefits obtained by using the original subject matter and the fruits to harm the interests of the state, collective units and third parties.

Article 18 of《Provisions (I) 》 - Distribution of improper profits

226.  First  Laser’s  primary  claim  is founded  on  article 18(1)  of 《Provisions (I)》. That article sets out the principle on how improper profits are to be distributed between the actual investor and nominee shareholder, if the “value of the equity” (「股權價值」) held by the nominee shareholder is higher than the “actual investment sum” (「實際投資額」).  That article provides as follows:

「實際投資者與外商投資企業名義股東之間的合同被認定無效，名義股東持有的股權價值高於實際投資額，實際投資者請求名義股東向其返還投資款並根據其實際投資情況以及名義股東參與外商投資企業經營管理的情況對股權收益在雙方之間進行合理分配的，人民法院應予支持。」

(Translation:

“Where a contract between the actual investor and the nominee shareholder of a foreign-funded enterprise is determined to be void, if the value of the equity held by the nominee shareholder is higher than the actual investment value, and the actual investor requests the nominee shareholder to refund the investment money and pleads for reasonable distribution of the equity proceeds between both parties on the basis of the state of the actual investment as well as the nominee shareholder’s participation in the business management of the foreign-funded enterprise, it shall be upheld by the people’s court.”)

If a nominee investment contract is void or held to be void, the innocent party may claim restitution under article 18(1) if the “value of the equity” (「股權價值」) held by the nominee shareholder is higher than the “actual investment sum” (「實際投資額」) or under article 19(1) if that value is less.

227.  After explaining the meaning of the term “original subject matter”, “fruits arising from the original subject matter” and “other benefits”, and after discussing the different theories and the obligation of restitution from page 182 to 185, the authors concluded at page 185[35] that the subject matter to be returned under the improper profits regime includes not only the original subject matter but also the fruits arising from that original subject matter (原物所生的孳息) such as interests, dividends, and enhancement in value of the investment.  They recommended the mode of distribution of the enhancement in value as follows: 227*

「我們認為，不當得利返還請求權的客體不僅指原物及原物所生的孳息，也包括基於原物產生的其他收益，如投資收益，對此，應無疑問。雖然不當得利返還請求權的範圍應僅包括所受利益的客觀價值，而不是指受益人所獲得的全部益，但並不意味著受損人不能張超過客觀價值的利益。根據《民法通則》的平原則，對於超過客觀價值的那部分利益的歸屬，應按照創造該部分利益的貢獻大小米進行分配，而不應簡單的將其劃歸益人或受損人。將這一原則適用到實際投資者和外商投資企業名義股東之間，則得到如下結論：對於超過實際投資額及其受益的客觀價值的那部分利益，如果實際投資者的實際投資額的貢獻大，則他就應獲得較大份額，而如果是名義股東參與管理的貢獻更大，則他應獲得較大份額。也就是說，對於超過實際出資者額的股權價值，在扣除可帶來的平均收益之後應將其他超過部分在實際投資者與名義股東之間進行分配，而分配的基礎，就是實際投資款與名義股東的經營管理在股權收益作出的貢獻大小。」

(重點以斜體和突體顯示）

(Translation:

“In our opinion, the subject matter of the right to claim improper profits not only refers to the original subject matter (given to the recipient under the contract which is found to be void or of no effect) and the fruit derived from that original subject matter, but also other income arising from that original subject matter, such as investment income, there should be no doubt about this. Although the scope of the right to claim illegal profit should only include the objective value of the (original) thing given to the receiving party, rather than all the benefits received by the receiving party, it does not mean that the (the party giving the original subject matter) cannot claim the benefits which exceed the objective value (of the original subject matter). According to the principle of fairness under the 《General Principles of Civil Law》, the benefit which exceeds the objective value should be distributed according to the contribution of the parties creating that benefit, rather than simply allocating it to the party receiving or the party giving (the original subject matter). Applying this principle to the actual investor and the nominal shareholder of the foreign-invested enterprise, the conclusion is: that part of the benefit which exceeds the objective value of the actual investment amount and the its (income), if the actual investor’s contribution is large, he should get a larger share, and if the contribution of the nominee shareholder in the management of the enterprise is greater, he should get a larger share. That is to say, the equity value (of the enterprise) which exceeds the actual investor's amount net of the probable average income that can be obtained (from the enterprise) should be distributed between the actual investor and the nominee shareholder, and the basis of the distribution is the actual investment amount (of the actual investor) and the nominee shareholder’s contribution by way of operation and management of the enterprise.”)

(Emphasis highlighted in italic and bold print)

(The translation is a little awkward, being constrained by the language used by the authors.  Words in parenthesis were added to put the terms in the proper context in which they were used.)

228.  Accordingly, I find that in a claim under article 18(1), the actual investor is entitled to be returned the value of the actual investment sum, interests, dividends, and a reasonable distribution of the benefits arising from the investment represented by the enhancement in value of the equity based on the actual value of the enterprise invested at the material valuation date.  Prima facie, the actual investor is entitled to receive as a reasonable distribution of the benefits a portion of the enhancement in value which his actual investment sum has to bear on the overall value of the enterprise invested at the time when the nominee investment contract was made (the “investment ratio”) subject to a discount representing a reasonable remuneration for the nominee shareholder’s participation, if any, in the operation and management of the enterprise.  The burden is on the actual investor to prove the value of the enterprise, his actual investment sum and the investment ratio.  If the nominee shareholder wishes to seek a reasonable distribution for his contribution to the operation and management of the enterprise, he has the burden of proving the value of his contribution.  Though not expressly so required, there is nothing to prevent the actual shareholder from adducing evidence of his contribution to operation and management to support a higher distribution or to counter-balance the nominee shareholder’s claim for contribution.  But even without so doing, the actual investor is, per se, entitled to distribution of the enhancement in value according to the investment ratio. 

229.  As for the date of valuation of the equity for the purpose of assessing a reasonable distribution of the enhancement in value of the equity, that date should be the date when the party seeking to avoid the nominee investment contract successfully repudiated or avoided the contract and informed the other party or when the contract was held by a court to be void whichever the earlier.  The shares in FCL were sold to JDS on 29 February 2000.  By that sale, FEHC has put the shares in FCL beyond recall. FCL had obtained approval from the administrative authorities for the transfer of its shares to JDS.  The transfer could not be reversed nor could COM or First Laser compel JDS to transfer the shares to either of them.  The date of sale is the appropriate valuation date and the sale price provided the best evidence of the value of the shares in FCL.

The parties’ case

230.  First Laser claims return of the purchase price and a reasonable distribution of the dividends and enhancement in value arising from FCL’s shares for the period from the date of the First Laser Agreement to the date of sale of FCL’s shares to JDS calculated on a ratio in excess of 51%.  It advanced three basis for a higher distribution ratio.  First, the value of FCL was very much enhanced by the value of the Project which was solely contributed by Ngan.  At paragraph 26 of the RASOC, First Laser pleaded:

“JDS purchased all the shares in FCL solely because of the value of the Project as evidenced by the fact that JDS only took over the Project but not the other production facilities of FCL on completion of the purchase.”

Second, First Laser contributed RMB6,38,099.44 by applying the profits of FCO in purchasing staff quarters for employees of FCO and FCL in Fuzhou as pleaded in paragraph 19(d) of the Re-amended reply.  Third, it paid Wang a monthly sum of HK$8,000 for 26 months as remuneration for his management of the Project. 

231.  FEHC disputes First Laser’s claim but has not put forward any positive case regarding the impact of the Project on the value of FCL or the contributions it had made since the First Laser Agreement which caused or contributed to the enhancement in value of FCL.  At paragraph 28 of its RRRADC, it only puts First Laser to strict proof of its pleaded case.  Even in response to the RASOC filed specifically in 2016 for the purpose of the remitter, FEHC chose not to specifically traverse or address First Laser’s allegation at paragraph 26 of the RASOC.  It only denied that the Project substantially enhanced the value of FCL and repeated its demand for strict proof.  The only new point pleaded is its contention that this court found that the investment in the Project was made by COM and not by First Laser. 

232.  Presumably, FEHC is relying on paragraph 114 of the CFA Judgment when Lord Collins NPJ was considering First Laser’s case of estoppel by convention.  His Lordship dismissed First Laser’s reliance on the investment in the Project on the basis that the investment was made not by First Laser but “as the judge found, by COM”.  While it is true that the funds were remitted by COM, this court’s finding is that having regard to the various admissions contained in the contemporaneous correspondence, the payments were made at the direction of Ngan or First Laser.  There is nothing unusual about a payment being made by one on behalf of another, whether it be COM or even a third party.  At paragraph 126 of the CFI Judgment, I found:

“126. … Though the money was remitted by COM, it was not disputed that the money came from Ngan’s camp. There were numerous correspondences from the 1^st Defendant and FCL confirming that the investment came from Ngan’s camp. The best evidence relating to the Project is the agreement of the parties as recorded at the meeting on 3 October 2000 in which the parties agreed that Ngan provided the capital for the research and development while FCL provided the manpower and facilities for the subsequent product development and sale. In the light of the evidence, though the payments were made by COM, I accept that they were made at the direction of the Plaintiff and were payments by the Plaintiff.”

(Emphasis highlighted in italic and bold print)

There is no reason to assume that the Court of Final Appeal intended to overturn the above finding of fact.  In fact, at paragraph 83 of the CFA Judgment, Lord Collins NPJ referred to the last sentence of the above quoted paragraph without the slightest indication of disapproval.  I do not think the Court of Final Appeal ever intended to overturn that finding of this court.  Moreover, FEHC has not advanced any basis for assuming that finding of this court was overturned.  In the absence of any factual appeal, there is simply no basis to so assume.  FEHC’s plea is an erroneous contention contrary to the express finding of this court at paragraph 126 of the CFI Judgment which has not been overturned by the Court of Appeal or Court of Final Appeal and against which finding there was no appeal. 

233.  FEHC offered little by way of pleading other than putting First Laser to strict proof.  The one really substantial defence put up by FEHC is counter-restitution.  It is not a counterclaim.  FEHC’s case is that if First Laser is entitled to restitution, FEHC is entitled to counter-restitution as First Laser is required to restore FEHC to its pre‑contract position by returning the monetary value of 100% of the shares in FCO transferred to COM plus all the dividends received by COM since the transfer. FEHC asserted that that value is more than enough to off-set First Laser’s claim in restitution.  FEHC would forgo the surplus as there is no counterclaim.

234.  First Laser also advanced some evidence to support the Project’s contribution in enhancing the value of FCL’s shares. FEHC disputed the evidence.  In my view, the dispute is a meaningless and futile exercise.  Whether the Project enhanced the value of the shares of FCL is academic because the value of the shares in FCL has indisputably been enhanced and First Laser is, per se, entitled to a reasonable distribution of the enhancement according to the investment ratio, i.e. the agreed share ratio subject to FEHC’s proof of its contribution to the operation and management over and above its 49% obligation.  While there is no dispute that Ngan solely funded the project, there is also no dispute that the project was carried out using the manpower and facilities of FCL.  In the original trial, I assumed that the parties’ contribution to be the same as the agreed share ratio.  Apart from Ngan’s funding, there is no evidence to show either party has contributed to the operation and management over and above its respective obligation. 

Some finding of fact in the original trial

235.  I adopt my finding about the background of this case.  I repeat and adopt the following findings at paragraphs 2, 41, 117 and 128 of the CFI Judgment;

“2. … The Project was about research, development and production of fibre collimator, fibre optic isolator, fibre optic circulator and fibre coupler. That Project turned out to be a success and enhanced the value of the shares in FCL.

41. On 17 July 1997, Wang Hongrui, on behalf of FCL, submitted a feasibility study report on production of a special optical fibre instrument (光纖無源器件項目) i.e. the Project, to the 1^st Defendant for consideration. On 21 July 1997, Kong rejected the proposal and refused to inject funds into FCL’s subsidiary in the United States, Casix Inc for implementing the Project because of the business risk involved. He suggested Wang Hongrui to enquire if Ngan would take on the Project as a personal investment. As a result, Ngan remitted RMB 1 million to FCL on 1 August 1997, US$500,000 to Casix Inc on 12 August 1997 and US$100,000 to Casix Inc on 17 April 1998 for the purposes of the Project.

117. This is an obvious case of a state-owned corporation while in the progress of performing the balance of its obligation in transferring the shares in FCL, took advantage of its own default by not obtaining the necessary approval when it realised that the value of the shares in FCL had been significantly enhanced by the Project invested by the Plaintiff and then unconscionably sold all the shares of FCL in breach of its contractual obligation for its own benefit.

128.  However, the Plaintiff could find comfort in that the award under the proprietary claim or contractual claim would also include 51% of the enhancement in the value of the FCL shares as a result of the Plaintiff’s investment in the Project.”

236.  The above findings were never challenged on appeal.  The Court of Final Appeal referred to the above findings in paragraphs 25 and 83 of the CFA Judgment but did not disturb these core findings. Paragraphs 2 and 41 of the CFI Judgment are factual background leading to the Project.  Paragraph 117 is the inference drawn by this court from FEHC’s conduct including in particular its change of mind since a change in its management and shareholders in May 1998.  When the prospect of sale of FCL with the Project surfaced, FEHC decided to depart from the spirit of the First Laser Agreement, appropriated the Project to FCL and sold it together with FCL to JDS.  That finding has been further explained in paragraphs 142 and 143 above.

The purchase price First Laser paid for the shares in FCO and FCL

237.  Another finding of fact made in the original trial which needs elaboration as result of the new arguments advanced by FEHC is the purchase price First Laser paid for the shares in FCO and FCL.  At the original trial, there was no dispute that the purchase price for First Laser’s 51% interest in FCO and FCL was HK$24,640,000, of which HK$20,000,000 was paid by cheque issued by COM and First Laser and the balance of HK$4,640,000 was treated as having been paid by First Laser setting off against FEHC’s capital contribution to its share capital in COM as acknowledged in paragraph 3 of the 1998 Memorandum.  The parties proceeded on that basis during the original trial.  Now that the issue of the parties’ respective contribution is raised for the purpose of determining the reasonable distribution, FEHC changed its stance.  Mr Yu SC argues that the price paid by First Laser was only HK$20,000,000, which is what FEHC is prepared to return to First Laser, and not HK$24,640,000 as claimed by First Laser.  He argues that the amount of HK$4,640,000 treated as having been paid was just an accounting entry, which had not been paid and could be reversed.  As this issue was not fundamental to the CFI Judgment, I allow this issue to be re-opened.

238.  The overwhelming and incontrovertible evidence is that the parties agreed that the price First Laser or COM had to pay for 51% of the shares of each of FCO and FCL was HK$24,640,000 based on the valuation of US$6,250,000 for the two companies and that First Laser paid HK$20 million by cheque.  The only question is not what was the agreed price for the shares but whether the sum of HK$4,640,000 had been paid.  The only available and incontrovertible evidence is to be found in paragraph 3 of the 1998 Memorandum in which FEHC acknowledged:

“that as [First Laser] incurred significant costs in setting up [COM] and as [FEHC] would hold 49% of the shares in [COM] upon the said regularisation, the outstanding payment in the amount of HK$4.64 million due from [First Laser[ to [FEHC] under the [First Laser Agreement] was treated as having been paid by [First Laser] and representing [FEHC’s] capital contribution to [COM].”

239.  FEHC acknowledged that First Laser or Ngan’s camp incurred significant costs in setting up COM.  During the original trial Ngan said under cross-examination that his investment in FCO through COM was to the tune of over HK$30 million.  He produced a list of expenditures which he paid on behalf of FEHC.  The expenditures included payment for factory building of HK$1 million and other deposits into the account of COM.  All these payments added up to HK$4,639,311.70 which is just HK$700 short of the amount acknowledged in the 1998 Memorandum.  These payments were not disputed.  By inference, these payments must be part of the “significant costs” acknowledged by FEHC in the 1998 Memorandum which “was treated as having been paid by First Laser and representing FEHC’s capital contribution to the share capital of COM. 

240.  Mr Yu SC argues that Ngan’s investment of over HK$30 million in COM was not pleaded or mentioned in his affirmation or witness statement.  I need not make any finding on that piece of evidence.  But Ngan’s evidence about the sum of HK$4,639,311.70 was admitted in evidence in the original trial.  It is admissible to explain the 1998 Memorandum.  This evidence was not really challenged during the original trial.  It is highly credible.  The joint venture could not operate merely by transferring the shares in FCO and FCL to COM and by COM paying FEHC HK$20 million.  COM did not play a passive role as a holding company only.  The production lines, the plant and machinery and inventories etc could not be transferred to Macau without further working capital being invested in COM to pay for relocation and installation costs, to acquire factory buildings for housing the production lines, stock, plant and machinery and to acquire new equipment such as vehicles etc.  FEHC could not expect receiving the consideration of HK$24,640,000 without having to plough back any of it for the purpose of advancing the joint venture just as Ngan did in incurring setting up costs for COM.  The parties’ contributions to the working capital of COM were obviously result of decisions made on ad hoc basis.  The acknowledgement by FEHC in the 1998 Memorandum is credible. Likewise, with FEHC’s contribution of HK$4,640,000 as capital for COM, Ngan’s camp was also required to make a matching contribution of HK$4,829,388.  These two sums and the HK$20 million paid to FEHC made up about HK$30 million.  I accept Ngan’s evidence that this sum of HK$4,640,000 was treated for a good reason and for good consideration as the balance of First Laser’s or COM’s payment for the purchase price for 51% of the shares in FCO and FCL under the First Laser Agreement.  It is also evidence of the parties’ observance of the spirit of the First Laser Agreement.  Accordingly, the total price paid by First Laser for the shares in FCO and FCL was HK$24,640,000.

241.  Another upshot arising from this piece of evidence is FEHC’s interest in COM, but that is outside the scope of this remitter.  It has not been pleaded.  The COM Agreement may also be governed by Macanese law.  The parties’ legal team may be grinding their axes for another long drawn piece of litigation.

First Laser’s contribution – Wang’s remuneration

242.  There is no dispute that Ngan took up the Project after Kong, on behalf of FEHC, expressly denounced it.  Ngan invested US$410,000 and RMB1,000,000.  There is no dispute that he paid Wang HK$8,000 for 26 months during the span of the Project until the sale to JDS.  The dispute is as to whether the payments were for Wang’s remuneration for his work on the Project.  Another major dispute is whether the Project enhanced the value of the shares in FCL.  In addition, another important issue is how to quantify this contribution, if the contribution is proven.

243.  FEHC relied on Section K of Zheng’s witness statement regarding Casix Inc and an entity named Telelight Communication Corp (“Telelight”) to challenge First Laser’s evidence as to the purpose of the remuneration to Wang.  Mr Chan SC objected to inclusion of Section K as the issue had not been raised at the original trial and did not feature in FEHC’s amended pleadings for the remitted issue.  Particularly, this court had made a finding in the original trial on this issue.  Mr Chan SC complains that as a result, First Laser had no opportunity to investigate into the assertions and respond.  I do not consider this court’s previous finding about this remuneration fundamental to the decision.  I am prepared to re-open this issue as the parties’ contribution is at the heart of this remission hearing. According to FEHC, the evidence about Telelight goes to explain the reason for Ngan’s monthly payments of HK$8,000 to Wang.  In light of the above, I would be more relaxed about procedural objections.  I admitted the evidence on de bene esse basis. 

244.  Zheng advanced a conspiracy theory between Kong, Ngan and Wong unknown to FCL and FEHC to take the Project out of FCL by Kong formally rejecting it and Ngan picking it up.  He added colour to that conspiracy by asserting that after Kong left FEHC, Kong joined Bao Shing as Chief Executive Officer.  Based on the timing when Telelight was set up and that Ngan and Kong were its directors, Zheng suggested that the Project was carried out by Telelight and the monthly sums paid to Wang were remunerations for this secret Project undertaken by Telelight.  He said that FCL sold crystals worth US$208,614 and US$457,442 to Telelight in 1999 and 2000 respectively not knowing that Telelight was owned by Ngan, Kong and Wang, seemingly suggesting that they were used in the Project.  He further suggested that Ngan, Kong and Wang profited from the Project when Telelight was acquired by Oplink Communications Inc (“Oplink”) in April 2000 at the price of US$12 million.  These are new evidence.  The conspiracy is contrary to the finding made in the original trial based on unchallenged evidence.  Without clear pleading, it is impossible for First Laser to know the precise issues in respect of which the evidence is sought to be adduced and what investigation and response to make.

245.  Furthermore, some of the assertions are clearly unfounded. Telelight was not set up by Ngan, Kong or Wang.  It was not until 8 February 1999 that Ngan became the secretary and one of the two directors of Telelight. Kong had no role at all, though there is evidence from a hearsay source that he is the president on a date unknown and when Telelight was inactive.  The evidence about the acquisition by Oplink is fragmented and obscure.  As shown by the Agreement of Merger dated 24  March 2000 and other related documents[36] produced by Zheng, the acquisition was more complicated than what Zheng suggested.  It involved three parties, namely Oplink, its subsidiary, Oplink Acquisition Corp (“Oplink Sub”) and Telelight.  Under the Agreement of Merger, Oplink Sub was to merge into Telelight.  There were 100,000 Oplink Sub common shares created as a result, which had a price US$12 million in the stock market.  There is no evidence who, and if Ngan, Kong and Wang, were the owners of those 100,000 Oplink Sub shares.  Without more evidence about details of the acquisition and US company law, it is dangerous to assume that Ngan and Kong profited US$12 million from the acquisition. 

246.  Zheng had no personal knowledge of the facts which he asserted.  His assertions are mostly speculative and founded on erroneous basis or without any basis at all.  His evidence is fragmented. There is no nexus between Telelight and the Project.  As already pointed out above, the issues raised by his evidence are un-pleaded and un-defined.  Having heard the evidence, I consider its prejudicial effect heavily outweighs its probative value.  I exclude Section K of his witness statement.  What remains is the unchallenged evidence that Ngan paid Wang a subsidy of HK$8,000 per month for 26 months as his remunerations for the managing the Project, i.e. HK$208,000.

247.  Zheng’s assertion about Kong being employed by Ngan in Bao Shing as Chief Executive Officer demonstrates his ignorance about the facts of this case or his irresponsible attitude as a witness.  He relied on Exhibits ZKY-29 and YDC-34 to support his allegation about Kong’s appointment as Chief Executive Officer of Bao Shing.  Ngan had not concealed anything about Kong’s appointment in Bao Shing.  In paragraphs 119 and 120 of his witness statement, Ngan disclosed his relationship with Bao Shing and Kong’s relationship with Bao Shing.  Though Ngan regarded Bao Shing as his company, it is a joint venture owned by Ngan and the Fujian Foreign Trade Centre Group which is a state enterprise.  In paragraph 120, Ngan said that after Kong left FEHC, Kong was appointed by Fujian Foreign Trade Centre Group as its representative in Bao Shing in the capacity of Chief Executive Officer.  Kong was just as much an official of the Fujian Government in Bao Shing as he formerly was in FEHC.  The colour painted by Zheng is wholly unjustified and misleading.

First Laser’s contribution  – Purchase of staff quarters

248.  FCO and FCL share common staff who came from FRIMS.  On 19 May 1997, the finance department of FCO submitted a report to FEHC stating that “the company plans to purchase 31 houses in the urban area of Fuzhou city in order to solve the housing problems of its 33 employees transferred from FRIMS to FEHC.”  The report suggested that that staff should contribute part of the purchase price according to the standards applicable to sale of public houses belonging to the state, which amounted to approximately RMB1,660,000 and the balance of about RMB7,030,000 should be met by FCO using the dividends of 1996 declared and distributable to its shareholder.  The report was approved jointly by Kong on behalf of FEHC and by Ngan on behalf of Ngan’s camp.  It is not disputed that Ngan applied dividends payable by FCO to COM towards purchasing staff quarters for staff of FCO and FCL in accordance with the arrangement previously agreed between the parties.  In the end, 32 staff quarters were purchased for 32 employees including general managers, assistant general managers, management and technical personnel of FCO and FCL with funds of RMB6,638,099.44 from FCO’s dividends distributed to COM. 

249.  There was some argument that the staff quarters purchased were FCO’s investment.  Such argument could not stand as the quarters were acquired by the staff in their own names with subsidies from FCO.  The subsidies were business expenses for the common staff of FCO and FCL.  The expenses were approved by FEHC and Ngan according to the spirit of the First Laser Agreement.  According to the same spirit, the funds were also common funds belonging to First Laser and FEHC in the same share ratio of 51:49 in the same way as would FCL’s dividends belong to the parties.  It cannot be treated as First Laser’s own contribution to their joint investment over and above its obligation under the joint venture.

First Laser’s contribution - The Project in enhancing value of FCL’s share

250.  There is no dispute that the Project was solely financed by Ngan.  In paragraph 70 of his witness statement, Ngan asserted that the Project turned out to be extremely successful and the products therefrom were publicised and gained fame at an international exhibition.  At paragraph 104, he said he believed that JDS purchased FCL solely or predominantly because of the Project, since JDS only took over the Project but did not want any of the production lines and facilities of FCL which were transferred to FCO upon completion of the purchase.  Ngan was cross‑examined in respect of his belief and understanding at the original trial, but his evidence was not seriously challenged.  His evidence may be summarised as follows:

(1)  The development of the Project was successful; the technology developed was showcased at an international exhibition which attracted interest from offshore corporations.

(2)  JDS was interested in purchasing the Project only and did not want the other aspects of FCL’s business.

(3)  JDS had an eye on FCL’s capability in manufacturing optronics instruments (光纖無源器件) which could not be achieved without the development of the Project.

(4)  JDS had a strategy of buying up all businesses capable of  manufacturing optronics instruments in order to monopolize the market, and was at the time in the process of acquiring six or seven other similar businesses around the world.

(5)  JDS even agreed to the first asking price of US$60 million without trying to negotiate it downward.  JDS snapped up the deal to avoid losing it due to the low acquisition cost compared to its other acquisitions, the smallest being US$300 million in value.

Points (1) and (5) were not challenged at the original trial.  No evidence has been adduced by FEHC to contradict them at this hearing.  I accept those facts as proved.  Though points (2), (3) and (4) were not challenged at the original trial, they are now being disputed.  They are of the nature of hearsay and the source of the information was unidentified.  I shall re-open those issues.

251.  Ngan’s oral evidence was supported by the following contemporaneous documents:

(1)  After funding the Project, Fong was updated on the progress of the Project regularly by Wang on how the funds injected were being applied for the purpose of the Project.  This is supported by a letter dated 24 March 1998 from Casix Inc to Wang seeking directions for accounting treatment of interest income of Casix Inc.  Wang forwarded it to Fong. This is also evidence of First Laser’s participation in management of FCL.   This letter was issued at about the same time as the 1998 Memorandum when both parties were acting in accordance with the spirit of the First Laser Agreement.

(2)  As recorded in the minutes of a board meeting of FCL dated 13 October 1999, Wang reported to the board of FCL[37] the development, production, business operation, market analysis and future prospect (開發、生產經營情況、市場分析以及遠景預測) of the Project.  He reported at paragraphs 1 and 2 of the report as follows:-

「1、 開發光纖元器件項目已經取得可喜的成果；該項目發展前景廣闊，是公司今後發展的主幹項目，也必須看到該項目的發展將會遇到激烈的競爭，有機遇，也有挑戰。…

2、會議認為，當前光纖無源器件市場看好，國外同業有意向收購，估計整體轉讓能夠爭取好的價格。會議同意進行整體轉讓的探討，由王洪瑞董事放出整體轉讓的意向，若有具體對象意向收購，由周惠源董事主持…進行具體洽商；洽商情況應及時報告董事會。轉讓方案由董事會確定後報華閩（集團）董事會確認方可實施。」 (重點以斜體和突體顯示）

(Translation:

1. The development of fiber optic component project has achieved commendable results; the project has wide prospects for development and is the major item of the company's future development. We certainly anticipate that the development of this project will encounter fierce competition, there will be opportunities and challenges ...

2. The board meeting considered that the current market for fiber optic components is promising, and foreign counterparts have intentions of acquiring it. It is estimated that the sale of the project as a whole will secure a good price. The meeting agreed to explore sale of the project as a whole. Director Wang Hongrui may release an intention of sale of the project as a whole. If there a prospective purchaser has intention to acquire the project, Director Zhou Huiyuan will take over ... and conduct negotiations; the negotiations should be reported to the board of directors forthwith. The sale proposal shall be confirmed by the board of directors and submitted to the board of directors of FEHC for ratification before implementation.”)

(Emphasis highlighted in italic and bold print)

252.  This report was written by Wang who was a director of FCL.  It was attended by six members of the board of directors of FCL including Yang and chaired by Xu who was the chairman of the board of FEHC.  Yang, who had filed a witness statement as a representative of FEHC at the original trial, was ultimately not called as a witness.  No explanation has been given as to why he was not called as a witness at the original trial and in the trial of the remitted issue.  Xu who was the chairman of FCL and FEHC and who attended that board meeting was also not called to testify.  In the circumstances, I consider the contents of the minutes unchallenged and credible.

253.  Paragraph 1 of the minutes is evidence of the success of the Project and that the Project was going to be the major contributor in FCL’s future development.  Paragraph 2 of the minutes evidenced the interest expressed by foreign investors in the project and FCL’s intention to sell the Project with FCL as a whole to secure a good price.  Thus, to the controlling mind of FCL, the Project was the essence of the sale and the rest of FCL was ancillary.  But there is no evidence that JDS thought likewise.  The minutes support points (1) and (3) of Ngan’s evidence.  These points are also supported by the documents produced by Zheng considered towards the end of this subsection.  In the circumstances, points (1) and (3) of Ngan’s assertion in the preceding paragraph must be taken as proved.  The undisputed evidence that FCL’s production line and facilities were transferred to FCO also partially supports point (2) of Ngan’s evidence.  But JDS’ strategy is not a matter known or obvious to Ngan.  In the absence of evidence as to the source of the information or Ngan’s belief, I cannot be satisfied that the Project was the sole or predominate reason for JDS’ acquisition.  Likewise, I can give no weight to point (4) of Ngan’s assertion.  Having tested Ngan’s evidence against the totality of evidence, I am not satisfied that Ngan’s evidence goes that far as to prove that the Project was the only or predominant reason for JDS’ acquisition.  It was probably a happy speculation on the part of Ngan. 

254.  FEHC relied on Section J of Zheng’s witness statement on this issue of the parties’ contribution to the value of the shares in FCL.  Mr Chan SC objected to inclusion of Section J regarding Casix Inc as the issue has not been raised at the original trial and did not feature in FEHC’s amended pleadings for the remitted issue.  Mr Chan SC raised similar complaints as those relating to Section K of Zheng’s witness statement.  Casix Inc represents the Project and the evidence goes to show that JDS’ purchase of the shares in FCL had nothing to do with the Project.  Prima facie the evidence is relevant.  For that reason, I would be more relaxed about procedural objections.  I admitted the evidence on de bene esse basis. Having heard the evidence, I consider the issues raised are manifestly obvious.  Zheng’s witness statement was filed 16 months ago.  The argument that First Laser did not have proper opportunity to investigate is disingenuous.  It was First Laser’s conscious decision not to investigate or respond.  I admit Section J into evidence.

255.  Zheng’s evidence is that Casix Inc was incorporated by Wang and three others in 1996 in Los Angeles.  It had an office only.  Its principal business was to provide technical support and sale service.  It did not carry out any production or research.  It was merely a sales agent for FCL.  Zheng produced an internal report and a memorandum of FCL dated 31 March 2000 and 26 October 2000 respectively and a report from FEHC to the Fujian Government dated 3 July 2000 as basis for his evidence.

256.  The internal report stated that Casix Inc was incorporated in early 1996 as a subsidiary of FCL for the purpose of FCL’s business in north America.  It mentioned that since 1998 the headquarters of Casix Inc, which must be referring to FCL, had undergone some strategic adjustment (戰略性調整）and moved from its traditional business to optronics communication area.  There is no dispute that Casix Inc was in operation before the Project commenced.  The internal memorandum noted that Casix Inc had a turnover of US$15 million and pre-tax profit of US$47,721.  The report also mentioned a loan of US$874,006 to FEHC which was used to contribute to FCL’s capital.  The fact that Casix Inc was conducting business as a sales agent of FCL is not inconsistent with First Laser’s case that it also carried out the Project on behalf of Ngan.  The fact that the Project was not mentioned in the report is neither here nor there because that might not be the purpose of the report. Furthermore, there is no surprise that the Project was not mentioned as it was a side-line and capital incurring activity expressly agreed to be outside the scope of FCL’s operation.  The reliance placed by FEHC on its report to the Fujian Government is its own statement that Casix Inc was a subsidiary of FCL for the purpose of conducting its business in America.  For the same reasons, it is neither here nor there.

257.  But the point which Zheng sought to prove is inconsistent with incontrovertible evidence that Kong refused to inject funds to Casix Inc to implement the Project, that between August 1997 and April 1998 Ngan remitted RMB1,000,000 to FCL and US$600,000 to Casix Inc (but a surplus of US$190,000 was returned to Ngan) through COM for the Project.  While it was possible that prior to August 1997 Casix Inc operated solely as a sales agent of FCL, it is unlikely that its role would not have expanded thereafter upon receiving Ngan’s funds of RMB1,000,000 and US$410,000 (total equivalent of HK$4 million).  FCL’s report and memorandum are internal documents of FCL and FEHC. FEHC’s report to the Fujian  Government was prepared by FEHC for the purpose of seeking directions for return of FCL’s authorised capital.  There is every reason not to mention the Project as it was an independently funded operation outside the business of FCL.  All these documents were created after the dispute have turned overt and when it was FEHC’s intention to seize the Project from Ngan or First Laser.  Viewed against the background and the incontrovertible evidence, these documents are clearly self-serving.  I give them little weight.

258.  One important fact mentioned in the report is FCL’s strategic change from the traditional technology to optronics communication technology.  This statement supports First Laser’s evidence that the Project proved successful and upon completion, the technology was transferred to FCL for production. The turnover of US$15 million probably included optronics components produced and sold as result of the Project.

259.  Zheng’s further evidence is that JDS is a leading player in the industry and the real purpose of the acquisition was to expand its production base by relocating its production lines to the Mainland so as to increase its production capability within a short time and to strengthen its global competitiveness.  One of the conditions of the acquisition as stated in clause 6.3(a) of the Equity Transfer Agreement is that FEHC shall “take any steps necessary to wind up, dissolve and liquidate Casix Inc”.  JDS did not keep any of Casix Inc’s facilities.  The acquisition had nothing to do with the Project. 

260.  The major thrust of Zheng’s argument is based on clause 6.3(a).  In my view, the inference goes against the thrust of his argument.  Both JDS and FCL are in the optronics industry.  JDS wholly acquired FCL, including Casix Inc and therefore the Project.  Apart from requiring Casix Inc to be wound up, JDS also required FEHC to covenant not to use the word “Casix” in the name of any of its subsidiaries.  The most obvious reason for requiring Casix Inc to be wound up and liquidated was to exterminate it so that it will never be a competitor against JDS, that it will never make any claim, in industrial property rights or whatever, against JDS and will never be a source of liability.  The inference must be that JDS was very concerned about the industrial property right and goodwill Casix Inc had or might have over the Project rather than that JDS was not interested in the technology developed by Casix Inc as a result of the Project.  Otherwise, why should JDS not allow Casix Inc to exist under FCL’s wings as before and to prohibit FEHC from using the word “Casix” in its subsidiaries.  Casix Inc and therefore the Project must be a material consideration for the acquisition.

261.  Zheng relied on the following articles or newspaper cuttings in support of his assertions.  First, Zheng referred to a statement released at the reception ceremony for the transfer of the shares in FCL to JDS on 15 May 2000.  It introduced JDS as a famous optronics enterprise ranking 82^nd amongst 500 enterprises in the industry in the world.  It stated that FCL was JDS’ first acquisition in South-East Asia region; it will inject significant capital into FCL to carry out research, expand its production and at the same time to relocate some of its production lines in United States and Canada to FCL.  The tone conveyed by this statement is that the acquisition was to expand JDS production capability.  Nothing was mentioned about the Project or FCL’s significance in the industry.  It lends weight to Zheng’s evidence.

262.  Second, Zheng referred to a newspaper cutting from Fuzhou Evening News dated 18 May 2000 reporting as follows:

「JDS名列世界500強第82位，是全球最大的光纖通訊器件跨國公司。

被并購的FCL是國際光電領域出色的高科技生業，專為世界各地的許多知名公司和研究機構提供各類高品質的電子元器件。…

據介紹，FCL最大的制約因素是資金短缺 … 并購 “華科” 代表了JDS全球制造戰略的一項重安轉移，“華科” 先進的材料科學專長是通向下一代光通訊網絡器件的鑰匙。」

(Translation:

“JDS ranks 82^nd among the world’s top 500 and is the world’s largest cross-national company in fiber optic communication devices.

FCL acquired is an outstanding international high-tech enterprise in the field of optronics, providing various high-quality optronics components for many well-known companies and research institutions around the world. ...

As introduced, FCL’s biggest constraint is the shortage of funds ... Acquisition of FCL represents a relocation of JDS’ global manufacturing strategy. FCL’s advanced expertise in material science is the key to the next generation of optronics communication network devices.”)

This report was published three days after the above statement.  It mentioned the value of FCL to JDS’ business operation as an outstanding international high-tech enterprise in the field of optronics.  Certainly, JDS would not have spent US$60 million to purchase merely a company in optronics with some land and buildings in the Mainland and some relatively small production capability.  It must be because of some intrinsic value to JDS’ optronics business.  It could not be anything but FCL’s optronics business which FCL switched to and what Wang reported as “commendable result” of the Project carried out by Casix Inc.

263.  Third, Zheng referred to a newspaper cutting from Fuzhou Daily News dated 30 August 2000.  It repeated more or less the contents of the statement issued at the reception ceremony.  But it quoted an interesting remark from Wang:

「… 當時FCL的母公司（FEHC）因在東南亞金融風暴中受重創，已無力對FCL進一步注入新的發展資金。同時，FEHC本身由於債務纒身同樣面臨資產重組，為使FCL不受FCHC巨額債務影響，為FCL引入新的股東，成為FEHC的必然選擇。」

(Translation:

“At that time, FCL’s parent company (FEHC) was severely hit by the South-east Asian financial crisis and was unable to further inject new funds for development into FCL. At the same time, FEHC itself also was facing restructuring due to its debts. In order to protect FCL from the huge debt of FCHC, introducing new shareholders to FCL has become FEHC’s inevitable choice.”)

Worth noting from this newspaper report is FEHC’s open admission to the press of its financial difficulties.  Three years and eight months down in time since Ngan came into the scene, FEHC was still in dire financial condition, laden with debts and facing re-structure.  Its financial condition explains FEHC’s change of mind and gave it the motive and urge to seize the Project from Ngan to save itself.

264.  Next, Zheng referred to a newspaper cutting from Fujian Daily News dated 16 November 2001 which reported that JDS had transferred some of its production lines to FCL in Fujian and another company in Shenzhen as evidence that its acquisition of FCL was not for the Project. Zheng also produced some documents about winding up of Casix Inc.  These newspaper cutting and documents have nothing to add to those discussed above.

265.  Stripped of the publicity element in documents of this kind, the overall impression from Zheng’s evidence considered against the totality of the evidence is that the principal purpose of JDS’ acquisition of FCL was to expand its business and production capability in the PRC and that FCL with its technology in optronics, experience and goodwill provided the springboard for that purpose.  The Project enhanced the overall image and the value of FCL.  It probably was one of the major reasons for the acquisition, but not the sole or predominant reason as Ngan asserted.

266.  In conclusion, I find that the Project carried out by Casix Inc was successful.  The technology developed was transferred to FCL and turned into production.  It was showcased at international exhibitions which attracted interest from offshore corporations.  JDS’ principal purpose in acquiring FCL was to use it as a springboard to the PRC and to take advantage of the investment environment there in expanding its business and production capability.  While the Project enhanced the overall image and the value of FCL and was probably one of the major consideration for the acquisition, it was not the sole or predominant reason.  The Project did enhance the value of the shares in FCL.  But for Ngan’s vision and funding the Project, JDS would not have set its eye on FCL.  Ngan has some contribution in enhancing the value of FCL.  Given the state of the evidence, I am unable to assess quantitatively the bearing the Project had in JDS’ mind when making the acquisition. 

267.  At the original trial, I took a pragmatic approach and assumed that while Ngan contributed the capital, FCL contributed the manpower in developing the Project.  Having re-opened the issue and heard more evidence, I do not think that approach fair.  Ngan’s camp contributed by way of capital and remuneration paid to Wang.  Wang could not have carried out the Project in the United States while he was working full time for FCL and FCO in the Mainland or Macau.  The Project must have been carried out by Casix Inc which was a subsidiary of FCL as evidenced by Wang’s note to FEHC in September 1998[38]. FCL must have contributed significantly to the success of the Project by way of manpower.  But FCL’s contribution, including Wang’s initiative, could not have been treated solely as FEHC’s.  Ngan’s camp also had a 51% share in that contribution.  Ngan’s capital contribution is something over and above the agreed share ratio.   The evidence does not make it possible for a quantitative assessment of how much over and above the agreed share ratio Ngan’s camp has contributed by reason of the Project.  On the other hand, there is no evidence of FEHC having contributed anything over and above the agreed share ratio.  Again, I have to adopt a pragmatic approach.  The fairest approach is to adjust the agreed ratio upwards by giving credit to Ngan’s monetary contribution to the Project. 

268.  Under the COM Agreement, the total value of FCL and FCO was  agreed  to  be  US$6,250,000,  based  on  their  net  asset value  as  at 31 December 1996 of RMB32,207,987.67 and RMB21,519,788.21 respectively, totalling RMB53,727,775.88.  The exchange rate adopted was RMB8.596444[39] per US dollar.  Under the First Laser Agreement, the purchase price for 51% of the interest in FCL and FCO was agreed to be US$3,187,500, equivalent to HK$24,640,000.  On this basis, the exchange rate for HK$/US$ was 7.730196[40] and that for RMB/HK$ was 1.112060[41] in December 1996.  The price First Laser paid for 51% of the shares in  FCL was HK$14,770,848.10[42].  The value of 49% of the interest in FCO kept by FEHC was HK$9,482,128.86[43].

269.  There are three currencies involved in this action.  The HK$/US$ rate is very stable because of the peg.  The RMB/US$ rate as well as the RMB/HK$ rate fluctuate somewhat and more so since the turn of the century because of the fast economic development in the Mainland.  For the purpose of assessing restitution and counter-restitution, I shall use the Hong Kong dollar as the base currency.  I shall use the HK$/US$ rate of 7.730196, the RMB/US$ rate of 8.596444 and the RMB/HK$ rate of 1.112060 in relation to transactions around the time of the three agreements.  As for the RMB/HK$ rate at other material times, I shall adopt the exchange rate published by the Inland Revenue Department.   Renminbi  appreciated to 1.068823 per Hong Kong dollar in April 1998[44]; 1.065687 in February 2000[45]; and 0.883475 in December 2008[46].

270.  The parties’ combined investment in FCL was RMB32,207,987.67 or HK$28,962,454.97[47].  First Laser’s 51% investment in FCL was RMB16,426,073.71[48], equivalent to HK$14,770,848.10[49].  The  parties’ combined investment in FCO was RMB21,519,788.21, equivalent to HK$19,351,283.39[50].  FEHC’s 49% investment in FCO was RMB10,544,696.22[51] equivalent to HK$9,482,128.86[52].

271.  Ngan’s capital contribution to the Project included US$410,000, equivalent to HK$3,169,380.36[53]; RMB1,000,000, equivalent to HK$935,608.61[54]; and HK$208,000 being the subsidy to Wang.  His total capital contribution to the Project was HK$4,312,988.97[55]. Thus, Ngan’s or First Laser’s total investment in FCL, inclusive of the Project, was HK$19,083,837.07[56] and the parties’ total investment was HK$33,275,443.94[57].  The revised share ratio is therefore 57.35 : 42.65[58].  The share ratio in respect of the parties’ investment in FCO remains unchanged.

Conclusion

272.  In paragraph 228, I have found as a matter of Mainland law that the scope of restitution in the case of a nominee investment contract which is void or held to be void and to which article 18 of 《Provisions (I)》applies includes the original subject matter, i.e. the investment money, and the fruits arising from that original subject matter which the actual investor would have obtained if the contract were not void or had it not been held to be void.  Those fruits include the usual profits of the investment, i.e. dividends and enhancement in the value of the investment.

273.  First Laser’s claim in restitution includes:

(1)  the investment amount of HK$14,770,320 paid under the First Laser Agreement in respect of the shares in FCL;

(2)  its investment in the Project in the amount of HK$4,313,011,

(3)  its expenditure in purchasing staff quarters in the amount of RMB6,638,099.44;

(4)  reasonable distribution of the proceeds of sale of FCL’s shares to JDS in the amount of US$60 million as determined by this court;

(5)  interest in respect of the investment amount;

(6)  interest in respect of the investment in the Project; and

(7)  interest in respect of the reasonable distribution of proceeds of sale of FCL’s shares.

274.  I reject First Laser’s claim for the expenditure in purchasing staff quarters as the expenditure was, according to the spirit of the First Laser Agreement, from common funds spent for common purpose.  I also reject its claim for interest on the investment amount and on the investment in the Project as those funds were used to produce the enhancement in the value of the shares in FCL which is reflected in the adjustment in the sharing ratio and which First Laser benefitted from.  Such claims would be double counts.

275.  At paragraphs 237 to 240, I dealt with the parties’ argument about a sum of HK$4,640,000 which was treated as having been paid by Ngan’s camp towards the balance of the purchase price for 51% of the shares in each of FCL and FCO by way of set-off against FEHC’s contribution to the capital of COM.  Mr Yu SC argues that this amount was treated as having been paid by way of accounting treatment and should be reversed by way of accounting treatment.  With respect, I do not agree.  There was real cash paid by Ngan’s camp on behalf of FEHC as its contribution towards the share capital of COM twenty-three years ago.  It was not a mere accounting entry.  Even if it were, a reversal now would only produce a debt which is statute barred.  This sum of HK$4,640,000 has to be treated as having been paid to FEHC and as part of the purchase price for 51% of the shares in FCL and FCO.  I have assessed First Laser’s investment amount under the First Laser Agreement in FCL to be HK$14,770,848.10 and the investment in the Project to be HK$4,312,988.97, totalling HK$19,083,837.07.  This sum of HK$19,083,837.07 is the original subject matter acquired by FEHC under the void nominee investment contract which should be returned to First Laser in full.

276.  The equity value of FCL is represented by the proceeds of the sale of its shares to JDS of US$60 million, i.e. HK$463,811,760[59] which also includes the capital investment by the parties and First Laser’s investment in the Project. First Laser should only be allowed a reasonable distribution of the equity value net of their combined investment in FCL and the Project.  Otherwise, there would be   double counts.  The net enhancement value is therefore HK$430,536,316.06[60].  For reasons as explained in paragraph 271, I have adjusted First Laser’s sharing ratio upwards to 57.35 : 42.65.  Accordingly, I assess the reasonable distribution to First Laser to be HK$246,912,577[61].  First Laser should also be entitled to interest on the said sum at the rate of 1% above the prime rate from the date of completion of the sale of the shares in FCL to JDS.

277.  Mr Yu SC argues that for First Laser to be restored to the pre-contract position under the remitter First Laser is only entitled to be returned the price and interest.  He criticises First Laser’s claim as being the same as a claim for damages for breach of the First Laser Agreement.  With respect, his argument is based on his misconception that restitution under Mainland law is the same as that under common law.  As explained in paragraphs 215-220, under Mainland law First Laser is entitled to claim return of property acquired by FEHC as result of the contract which is held to be void or reimbursement of the value of the property if it could not be returned.  FEHC is unable to return the property acquired.  The juridical basis of a claim for reimbursement of the value of property acquired under a void nominee investment contract is a right to claim improper profits which includes value of the original subject matter and the fruits arising from that original subject matter.  In the circumstances, there is no surprise that the results are similar to a claim for breach of contract under common law, but the juridical basis and approach are different.  Furthermore, article 18 of 《Provisions (I)》has removed the restrictions created as result of a void contract and enables justice to be better served according to the spirit of the agreement which the parties had entered into.  The scope of restitution available to First Laser is wider than that under common law.   It is guided by the notions of fairness.  It requires the court to gauge the parties’ contributions to the enhancement in value to FCL.   The same is very often true under Hong Kong law in a claim founded in breach of contract and one founded in professional negligence, though the tests for remoteness of damages are different.

278.  The value of the original subject matter and the fruits arising therefrom are HK19,083,837.07 and HK$246,912,577.00, respectively.  Accordingly, I assess the sum to be returned to First Laser to be HK$265,996,414[62].

COUNTER-RESTITUTION

The parties’ case

279.  Originally, FEHC pursued a counterclaim in this action for a declaration that each of the three agreements and the 1998 Memorandum is invalid, of no effect and not binding on FEHC.  That counterclaim was withdrawn at the original trial with leave of this court.  As Mr Yu SC rightly admitted, FEHC has no counterclaim as such.

280.  In the amendments made in response to First Laser’s claim under article 18 of 《Provisions (I)》, FEHC raised for the first time a plea of counter-restitution in paragraph 38.20 of its RRRADC as follows:

“Even if, which is denied, the Plaintiff is entitled to restitution under Mainland law, this is subject to the Plaintiff’s liability to procure counter-restitution to be made (1) for the value of 100% shareholding in FCO to be assessed (or credit to be given for such value) and (2) the dividends declared by FCO at least I thee sum of about RMB 13,138,492.27”

FEHC claims the return of all dividends distributed to COM in the sum of RMB23,802,718.60; value of the fixed assets represented by the precious metal in the sum of RMB14,735,670.26; all accumulated profits in the sum of RMB27,380,435.80; and the proceeds of sale of FCO in the amount of RMB1,600,000. The total amount of claim is RMB54,381,332.19. 

281.  Mr Chan SC submits that FEHC cited no principle or provision under Mainland law to support the counter-restitution plea, the scope of counter-restitution or the basis on which First Laser should be made liable for the shares received by COM.  He argues that First Laser is somewhat handicapped in dealing with this aspect of FEHC’s case in that the factual and legal basis for counter-restitution is not entirely clear. 

282.  With respect, I do not see it that way.  “Counter-restitution” just means restitution claim by the opponent under the same Mainland law as relied on by First Laser under its claim in restitution.  It is the reverse of First Laser’s case in respect of the shares in FCO.  The factual basis relied on by FEHC are the same nominee investment contract and First Laser being the nominee shareholder with FEHC being the actual investor in respect of 49% of the shares in FCO.  First Laser knows the case it has to meet and has adequately prepared to meet it as amply demonstrated by Fong’s witness statement.  Its case is that FCO ceased business after 2008 and its current equity value is less than the original investment sum.  Article 18 of 《Provisions (I)》is inapplicable.  First Laser has no dispute that it is obliged to return part of the dividends distributed to COM and part of the current equity value of FCO to FEHC in accordance with article 19.

FCO’s dividends

283.  In paragraph 38.20 of its RRRADC, FEHC claimed restitution of the dividends in the amount of RMB13,138,492.27.  That was based on the first two distributions of 1996 and one in 1997.  In his affirmation, Ngan disclosed those three distributions of dividends.  Before the hearing, Fong voluntarily disclosed two further distributions in 2002 and 2003 in the respective amounts of RMB8,465,226.13 and RMB2,200,000, even though no claims have been made by FEHC in respect of these dividends.  First Laser has no objection for those amounts to be included in FEHC’s claim. But according to First Laser, a substantial part of the dividends in the amount of RMB6,638,099.44 had been applied towards subsidising the staff of FCO and FCL in purchasing staff quarters.  The disposal of these dividends is summarised as follows:

Year	Amount of dividend RMB	Date of receipt by COM	Amount applied towards housing subsidy	Amount retained by COM
1996	2,300,000.00	04/08/1997	2,300,000.00	0.00
1996	1,200,000.00	22/08/1997	1,200,000.00	0.00
1996	3,689,188.97	11/05/1998	3,138,099.44	551,089.53
1997	5,949,303.50	13/10/1998	0.00	5,949,303.50
2002	8,465,226.13		0.00	8,465,226.16
2003	2,200,000.00		0.00	2,200,000.16
Total	23,803,718.60		6,638,099.44	17,165,619.60

FCO was quite a successful company.  It made profits of nearly RMB24 million in seven years.  Had it not been for its contribution to the housing subsidy, it would have fully recovered its capital investment in six years by way of dividends.  Had FCL contributed a proportionate share in the subsidy, FCO would have broken even well before 2002. 

284.  As I consider the housing subsidy was part of the business expenses of FCO and FCL under the spirit of the First Laser Agreement, it should be treated as the parties’ joint contribution from their common funds to the operational expenses of FCL and FCO in the agreed share ratio.  It is not subject to counter-restitution. Therefore, only dividends net of the said contributions are subject to counter-restitution, i.e. RMB17,165,619.60.  These are fruits obtained through the joint efforts in operation, management and funding in the agreed ratio of 51:49.  Accordingly, FEHC is only entitled to 49% of the above sum, i.e. RMB8,411,153.60[63].

Article 19 of 《Provisions (I) 》 – Distribution of the equity value of FCO

285.  Under article 19 of《Provisions (I)》, where the nominee investment contract is found to be void, the actual investor is entitled to be returned the equivalent value of the shareholding.  Alternatively, if the nominee shareholder unequivocally indicates his intention to abandon the shares or to continue to hold them, the court may order them to be sold by auction and have the net proceeds of sale returned to the actual investor.  Article 19 provides:

「實際投資者與外商投資企業名義股東之間的合同被認定無效，名義股東持有的股權價值低於實際投資額，實際投資者請求名義股東向其返還現有股權的等值價款的，人民法院應予支持；外商投資企業名義股東明确表示放棄股權或者拒絕繼續持有股權的，人民法院可以判令以拍賣、變賣名義股東持有的外商投資企業股權所得向實際投資者返還投資款。」

(Translation:

“Where a contract between the actual investor and the nominee shareholder of a foreign-funded enterprise is determined to be void, if the value of the equity held by the nominee shareholder is lower than the actual investment sum, and the actual investor requests the nominee shareholder to return the price equivalent to the current value of the equity, it shall be upheld by the people’s court; if the nominee shareholder of a foreign-funded enterprise unequivocally indicate its intention to forego the equity or refuse to continue to hold the equity, the people’s court may order the equity held by the nominee shareholder of a foreign-funded enterprise to be auctioned or sold and the proceeds be returned to the actual investor.”)

First Laser or COM on its behalf has no intention to abandon the shares in FCO.  The issue is therefore whether the current equity value of FCO is less than its value at the time of the COM Agreement.  If it is higher, then distribution under article 18 is appropriate.  If it is less, article 19 applies.

The approach in valuation

286.  According to Zheng, FCO had been sold at an undervalue for RMB1,600,000 and the net asset value as shown in FCO’s Audit Report for the financial year ended 31 December 2008 prepared by Fujian Zhongzhicheng Certified Accountants Ltd（福建眾智成會計師事務所有限責任公司） (the “2008 Audit Report”) produced by Ngan is unreliable.  Hence, he argued that the equity value of FCO as at 31 December 2008 should be assessed as the sum of the book value of precious metal of RMB14,735,670.25 among the fixed assets, the profits after tax of RMB27,380,435.80 and the proceeds of sale of FCO in the sum of RMB1,600,000.  On that basis, the equity value of FCO as at 2008 was RMB43,716,106.06.  Zheng was a witness as to fact but attempted to give evidence as an accounting expert in advising this court how the valuation should be made, which he is not entitled to do.  His evidence, even if he were an expert, does not make sense.  He totally disregarded other important data in the valuation reports, such as current assets, current liabilities, and fixed assets other than precious metal.  He just picked and chose what he thought would give a higher equity value.  There is also no reason why profits after tax of the various years which do not appear in the balance sheet of 2008 should be taken into account and cumulatively.  Profits after tax is, in simple terms, the difference between income and expenditure after allowing for profits tax.  They are represented by the assets in the company.  Unless the profits were distributed as dividends, they would simply be booked as retained profits and carried forward to the next financial year and reflected in its net asset value and undistributed dividends.  If the profits were distributed, the net asset value would be reduced.  Current assets and some fixed assets may have been sold to generate the cash required for making distribution.  That is why a corresponding liability item of undistributed dividends is recorded in the balance sheet.  By adding these profits year after year as Zheng suggested would be to create double entries upon double entries.  I reject his evidence as un-principled.

287.  Mr Bai advanced a different approach in valuation.   In short, he takes the view that all the shares in FCO were transferred to COM under a separate share transfer agreement which was valid and had been formally approved by the Bureau of Foreign Economic and Trade. The shares cannot be returned.  There is no scope for the restitution of the FCO shares or purchase price, and that the remedy available to FEHC is a claim for a reasonable price for the shares which were transferred to COM. Mr Bai adopts the value of 100% of the shares in FCO under the COM Agreement or First Laser Agreement, i.e. RMB21,519,788.31 or HK$19,351,283.39.  The fallacy of his opinion is that FEHC lawfully sold all the shares in FCO to COM under a valid agreement and was paid HK$24,640,000.  Yet, on his expert opinion, FEHC can still have a further remedy against a non-party to the COM Agreement, i.e. First Laser, under the First Laser Agreement or under a nominee investment agreement which are both void for HK$19,351,283.39.  I have to rhetorically ask what damage has FEHC suffered and why should it be paid the price twice.  Such reasoning is, with greatest respect, unbalanced and smells strongly of smoke from a hired gun.

288.  Understood in terms of Mainland law, FEHC is claiming return of the value of property acquired by First Laser as result of the void nominee investment contract, i.e. all the shares in FCO transferred to COM.  The shares were transferred with the approval of the Bureau of Foreign Economic and Trade.  They cannot be returned.  FEHC’s right to claim can only be a right to claim for improper profits.  It is entitled to claim the value of the original subject matter and fruits arising from that subject matter, including dividends and enhancement in value of the equity, if any under article 18 of 《Provisions (I)》; or under article 19 if the value is less than the value of the original subject matter.  Since FEHC is claiming 100% of the value of the shares in FCO, its claim must be subject to counter-counter-restitution by First Laser in respect of the purchase price it paid for the 51% shares in FCL.  Though there was no plea of counter-counter-restitution by First Laser as such, it is not necessary as FEHC has to show its entitlement against the undisputed fact that First Laser had paid for 51% of the shares in FCO.  Furthermore, if FEHC is entitled to counter-restitution, it must be on the basis that First Laser has established its case of nominee investment contract and is therefore holding 49% of the shares in FCO as FEHC’s nominee shareholder and the other 51% as the actual investor who had paid the purchase price under the nominee investment contract which was held to be void.

289.  Hereunder, I shall analyse the parties’ evidence and make my valuation as to the equity value of FCO as at 31 December 2008. Based on that valuation, I shall assess the value to be returned to FEHC after taking into account counter-counter-restitution to First Laser in respect of the price it had paid for 51% of the shares in FCO.  

The proceeds of sale of FCO

290.  Zheng adopted Wan’s affirmation and alleged that in July 2008, Ngan sold FCO together with its production lines and transferred its staff to Caston (福州科彤光電技術有限公司). The basis of his allegation is a webpage statement from Caston to that effect[64].  Hence, he suggested that FCO is now an empty shell with no assets and that the valuation of FCO as at 31 December 1996 should be adopted for the purpose of counter-restitution. 

291.  Ngan denied that COM had sold FCO to Caston but instead asserted that FCO had sold certain fixed assets and inventories together with various ancillary instruments and materials to Lu Wensheng（陸文勝）under an Equipment Transfer Agreement in for RMB1,600,000 on 5 July 2008.  After that FCO ceased business.  Despite requests, First Laser

was unable to produce a schedule of assets sold under the Equipment Transfer Agreement.  Eventually, First Laser’s solicitors confirmed that the schedule could not be located.  The situation is unsatisfactory.  However, the balance sheet in FCO’s 2008 Audit Report as compared with that in the audit report for 2007 showed a reduction in value of fixed assets in the amount RMB2,076,121.28 and a reduction in current liability in the amount of RMB808,828.18[65].  The cash flow table also showed a receipt of RMB1,236,800 as proceeds from disposal of fixed assets, intangible assets and long term assets[66].  These entries are supportive of First Laser’s case.  More significantly, fixed assets in the value of RMB14,455,830.43 is still shown in the balance sheet suggesting that the platinum furnace is still recorded as an asset of FCO.  Though the auditors stated that they were unable to verify the fixed assets as they were situated outside Fujian, Fong confirmed that to her knowledge the platinum furnace is still being kept in FCO’s factory premises in Macau.  All these support Ngan’s evidence that what were sold were just some plant and equipment, not production lines or FCO as a whole including the platinum furnace.  There is no indication that a sale of the magnitude as suggested by FEHC had been covered up in the 2008 Audit Report. 

292.  FEHC complained that it was not until seven years and two months after the sale that First Laser first disclosed the sale in Ngan’s 4^th Affirmation filed on 14 September 2015 and only upon sight of Wan’s affirmation filed on behalf of FEHC.  FEHC suggests that First Laser withheld the information from FEHC while the appeals were being heard with the motive of removing the assets out of reach of FEHC in case it lost the appeal.  It argues that these facts indicated that FEHC was never a 49% actual investor of FCO; First Laser never held those shares as nominee of FEHC; and that COM did not hold the shares in FCO for FEHC.  FEHC also argues that adverse inference may be drawn from such secrecy. 

293.  There is nothing seriously adverse to be drawn from First Laser’s withholding information about the sale.  At least until 4 January 2011, First Laser had a judgment from this court for damages for breach of the First Laser Agreement and FEHC’s position was that it was the sole owner of the shares in FCL while COM was the sole owner of FCO.  FEHC’s stance was confirmed by the Court of Appeal and Court of Final Appeal.  Under that situation, there was no reason why First Laser or COM should inform FEHC about the sale.  Zheng’s suggestion that the subjective intention or belief of First Laser and FEHC that they were respectively not nominee shareholder and actual investors in respect of 49% of the shares in FCO is neither here nor there.   This is because under Mainland law legal consequences may arise as result of incidents or legal facts independent or regardless of the parties’ subjective intention.  In just the same way as I have found there was a relationship of actual shareholder and nominee shareholder created by the conduct of the parties under the special circumstances of this case in respect of 51% of the shares in FCL, I find the same relationship was created in respect of 49% of the shares in FCO with First Laser as the nominee shareholder and FEHC as the actual investor.

294.  I accept Ngan’s evidence that what were sold were just some plant and equipment and not entire production lines or all major assets of FCO including the platinum furnace or FCO as a whole.  The proceeds of sale under the Equipment Transfer Equipment and the platinum furnace had been entered into the books of FCO and reflected in the balance sheet.  The 2008 Audit Report provides a reliable basis for assessing the net equity value of FCO.

Value of fixed assets represented by precious metal – the platinum furnace

295.  Zheng argued that the valuation in the 2008 Audit Report is unreliable because it had wrongly excluded the value of the platinum furnace which had a book value of RMB14,735,670.25 plus appreciation in value of platinum over the years.  He produced FCO’s audit reports for 1999 and 2008 prepared by Fujian Huaxing Certified Public Accounts Ltd[67], presumably on the instruction of FCO while under the management of Ngan’s camp.  They were obtained by FEHC from the Fuzhou Bureau of Industry and Commerce.  The auditors certified that subject to the inability to verify the fixed assets including the platinum furnace and to carry out actual stock checking of other assets which were all located outside the Mainland, the reports complied with the relevant accounting regulations and substantially reflected the financial position of FCO for the respective years.  These are contemporaneous documents submitted by FCO to the Fuzhou Bureau of Industry and Commerce for official purposes.  Some of these reports were submitted before litigation commenced.  I consider the valuation contained in these reports reliable. 

296.  The value of fixed assets throughout 1996 to 2008 fluctuated between RMB14 million to RMB17 million.  Sometimes, the reports contained specific mention of the book value of precious metal among the fixed assets. Sometimes they did not.  The audit report for 2007 showed that the fixed assets had a book value of RMB21,114,285.51 and a discounted value of RMB16,531,951.71 after allowing for depreciation.  In the report, the auditors stated that they were unable to verify the fixed assets in precious metal with a book value of RMB14,386,748.23 as it was located in Macau.  The precious metal must refer to the platinum furnace.  The 2008 Audit Report showed that the fixed assets had a book value of RMB16,044,193.55 and a discounted value of RMB14,455,830.43 after allowing for depreciation.  In the report, the auditors stated that they were unable to verify the fixed assets with a book value of RMB16,044,193.55 as it was unable to make a physical inspection.  The auditors did not mention what the fixed assets were and whether they included precious metal.  But the value of the fixed assets is about the same.  This indicated that the book value of the furnace of about RMB16 million had always been taken into account in the audit reports for the various years, including 2008.  Zheng’s assertion that the platinum furnace had “disappeared” and had not been taken into account in the 2008 Audit Report is a speculative and a rather irresponsible statement.  Furthermore, if the furnace had been secretly sold as part of the production lines, FCO would have to account for the value as stated in the 2008 Audit Report just the same.

297.  The only remaining criticism is that the appreciation in the value of platinum has not been taken into account in the valuation.  But FEHC produced no evidence at all on the value of platinum.  The value of platinum fluctuates with time.  A quick check on the internet[68] showed that the spot price of platinum fluctuated between a low of US$248.50 per ounce on 11 March 1985 to a high of US$960.00 per ounce on 3 March 1980 before the date of the First Laser Agreement.  The spot price as at the date of valuation of FCO and FCL under the three agreements was US$367.90 per ounce and as at the date of the sale of the shares in FCL to JDS was US$463.50 per ounce.   Hereunder is a table summarizing the spot prices on or around these various dates:

Date of spot price	Spot price US$ per ounce	Reference dates
29/12/2008	946.70	Date of 2008 Audit Report
28/02/2000	463.50	Date of sale to JDS
27/12/1999	423.80	Date 2000 Audit Report
30/12/1996	367.90	Date of the First Laser Agreement
03/04/1995	457.10	Date before the First Laser Agreement
22/07/1991	368.70	Lowest price since decline in 1990
30/07/1990	488.10	Date before the First Laser Agreement
11/03/1985	248.50	Date before the First Laser Agreement
03/03/1980	960.00	Date before the First Laser Agreement

298.  There is no evidence when the furnace was acquired.  As the spot prices between 3 April 1995 and 30 July 1990 show, it could have been acquired at a value higher than that as at the date of the First Laser Agreement.  There is no evidence how the value of the furnace is related to the spot price of platinum in the precious metal market or how the platinum in the furnace could be converted into marketable platinum to be traded on the spot market and the cost of such conversion.  Though there was a 150% appreciation in the value of platinum in the precious metal market between the date of the First Laser Agreement and 31 December 2008, it is nevertheless within the range between 1980 and 2008.  As there is no evidence when the furnace was acquired, this court is handicapped from assessing its appreciation in the value.  I have to accept the book value of the furnace for the purpose of assessing the equity value of FCO.  This value has been reflected in the balance sheet in the 2008 Audited Report.  It should not be separately taken into account as suggested by Zheng.

FCO’s equity value

299.  The asset, liability and net asset value of FCO as at 31 December 2007 and 31 December 2008 are summarised in the table below:  

Item	Value as at 31/12/2007 RMB	Value as at 31/12/2008 RMB
Current assets	2,232,918.72	1,164,419.25
Fixed assets	16,531,951.71	14,455,830.43
Other assets	20,420.59	17,425.87
Current liabilities	-5,073,416.96	-4,264,588.78
Net asset value	13,711,874.06	11,373,086.77

300.  Having analysed the various heads of FEHC’s claim as suggested by Zheng above, I come to the conclusion that Zheng’s and Mr Bai’s approaches in assessing FCO’s equity value are flawed and there is no reason to doubt the reliability of the valuation of RMB11,373,086.77 as at 31 December 2008 as stated in 2008 Audit Report.  In reality, FCO was not a loser because its equity value plus the dividends generated during the 12 years of operation totaled RMB28,538,707.37, which was much higher than its original valuation as at 31 December 1996.

Distribution of the equity value of FCO

301.  The valuation of FCO at the time of the COM Agreement or First Laser Agreement was agreed to be RMB21,519,788.21.  That is the original investment sum.  The equity value of FCO as at 31 December 2008 was RMB11,373,086.77 only, which is less than the original investment sum.   FEHC is therefore only entitled to a distribution according to article 19 of《Provisions (I)》.

302.  FEHC claims return of 100% of the shares in FCO.  Though FEHC is entitled to be returned the value of all the shares in FCO, there is no dispute that it received the purchase price for 51% of the shares.  It is therefore only entitled to be returned 49% of the equity value, i.e. RMB5,572,812.48.  First Laser is entitled to the other 51% either in its own right as the actual investor or by way of counter-counter-restitution.

Conclusion

303.  In conclusion, FEHC is entitled to be returned dividends in the sum of RMB8,411,153.60 and the equity value of RMB5,572,812.48, totalling RMB13,983,966.08. Applying the exchange rate of 0.883475 in December 2008, FEHC is entitled to be returned HK$15,828,366.

ALTERNATIVE CLAIM UNDER 《CONTRACT LAW》 OR GPCL

The law

304.  First Laser’s alternative claim is based on article 58 of 《Contract Law》 and/or article 61of《GPCL》; the improper profits regime （不當得利制度） under article 92 of 《GPCL》 as construed by article 131 of the 《GPCL Opinion》; and the fundamental principle of fairness （公平原則）under Mainland civil law.  The advantage of First Laser’s reliance on this alternative claim is that the remedy under these provisions may be invoked upon proof that the contract as result of which property was acquired by FEHC has been found to be null and void or has been rescinded.  There is no need to prove that the contract is a nominee investment contract.

305.  FEHC argues that the principle of fairness has not been pleaded.  In paragraph 25A(10) of the RRADC, First Laser pleaded:

“(10) the Plaintiff shall also rely upon inter alia the notions and doctrine of honesty, fidelity and integrity, and equity and fairness, in relation to inter alia the remedies available to the Plaintiff under PRC law against the 1^st Defendant insofar the same is relevant.”

I think the principle of fairness has been adequately pleaded.  Mr Bai has also given expert evidence on the principle under Mainland law.  FEHC has no misunderstanding about First Laser’s alternative claim.

306.  According to Mr Bai, the principle of fairness is one of the fundamental principles of Mainland Law.  This principle operates only when there are no norms under the civil law regulating certain specific activities.  If relevant norms exist, those civil law norms should be applied first.  It is Mr Bai’s opinion that the principle of fairness has already been built in article 58 of 《Contract Law》. 

307.  This notion or principle of fairness is a very wide one.  It applies to fill in lacunae in the law.  The authors of 《Provisions (I) U&A》 repeatedly mentioned this principle as an underlying principle of《GPCL》.   Indeed, the term “spirit of fairness and reasonableness” (「公平合理的精神」) appeared four times in 《GPCL》 in addition to eight other references to the term “fairness” (「公平」).   Although there is a strong element of fairness incorporated in article 58 of 《Contract Law》, the principle cannot, per se, be said or be deemed to have been excluded by the article, when not even the word “fair” or “fairness” has been mentioned in that article.  

308.  The principle is reflected in article 10 of 《Provisions (I)》 which deals specifically with the scenario of a share transfer contract in respect of which the necessary approval has not been obtained.  It supplements the inadequacy of article 58 of 《Contract Law》 by enabling the purchaser of shares in an enterprise a reasonable distribution not only of the dividends but also of the other fruits of the investment including the enhancement in the value of the investment.   The authors wrote[69]:

“第三，實踐中還有比較特殊的情況，即外商投資企業股權價值經過受讓方經營管理產生了增值，受讓方是否可享有增值的部分利益，對此我國法律也沒有明確規定。王澤鑑先生主張不當得利人實際上獲得的超過所受利益之客觀價值的那部分利益，可以通過無因管理或者侵權制度予以解決，不應由不當得利制度調整。史尚寬先生和孫森焱先生則認為可以通過不當得利制度解決，但應根據當事人的貢獻予以決定。我們認為，如果由於受讓方特殊經營的貢獻使企業價值明顯超過平均收益，可依據公平原則酌情考慮讓受讓方分配部分增值，另如受讓方在經營管理的同時還投入了自有資金，使企業在混合資金的狀態下實現增值，各自資金比例亦可作為增值分配的參考因素。” 。 (重點以斜體和突體顯示）

(Translation:

“Third, in real practice there are special cases, for example, the value of the equity of a foreign-funded enterprise has increased through the effort and management of the transferee. Mainland law has no clear provisions as to whether the transferee can enjoy the enhancement in value of the equity (under such circumstances). Wang Zejian Mr. argues that (the dispute as to) that the part of the benefits received by the person improperly benefited over above the objective value of the benefit given to him can be resolved on the basis of (rights arising from) voluntary management or tort, rather than by the improper profits regime. Mr. Shi Shangkuan and Mr. Sun Senxuan believe that the right can resolved through the improper profits regime, but it should be decided according to the parties’ contributions. In our opinion, if the value of the enterprise is significantly enhanced beyond the average income (of such an enterprise) due to the contribution of the transferee’s special efforts and management, it may be appropriate in the exercise of discretion and in accordance with the principle of fairness allocate to the transferee part of the enhancement in value, in addition, if the transferee also invests its own funds while operating and managing the enterprise, so that the enterprise can enhance its value with the combined funds, the respective capital ratio can also be a factor to be taken into account in distributing the enhancement in value.”)

(Emphasis highlighted in italic and bold print)

The authors emphasized that the court may in the exercise of its discretion and in accordance with the principle of fairness award the transferee, i.e. the actual investor, part of the enhancement in value in recognition of his contribution in the operation and management of the enterprise and if the transferee also invested its own funds a share according to the ratio of his capital contribution.  This article adopted the principle of distribution under article 18(1).

309.  The principle of fairness would be best understood by examining what are improper profits.  According to the authors of 《Provisions (I) U&A》, what makes the profits improper is the keeping of them by someone, who has not put in capital to earn the profits which should have been given to the party contributing the capital, had the contract between them not been held to be void[70].  Article 58 of《Contract Law》sets out the general principle on distribution of property acquired as result of such a contract.  Article 18 of 《Provisions (I)》gives more specific directions on how such property should be distributed between the parties.  It was designed to specifically rectify this inequity by allowing the actual investor a share not only in the dividends but also in all fruits of its investment including its enhancement in value.

310.  Article 18 does not encompass all circumstances.  At least one circumstance which calls for intervention by this principle of fairness is where property has been acquired, on the basis of First Laser’s alternative case, pursuant to some agreement or arrangement which does not qualify as a nominee investment contract which is void or found to be void.   Even accepting Mr Bai’s evidence about the limited scope within which this principle may operate, the facts of the present case, if proven, present a lacuna for the principle of fairness to intervene.

Discussion

311.  All factual issues, including most of the Mainland law issues relevant to the application of this principle of fairness have been discussed when considering First Laser’s primary claim based on a nominee investment contract.  I adopt those findings including in particular,

(1)     that the juridical basis of the right to claim for return of the property acquired by FEHC as the result of a void contract is the right to claim improper profits;

(2)     that reimbursement of the value of property acquired under a void contract includes the value of the original subject matter, i.e. the investment money; the usual benefits arising from that original subject matter, such as interests and dividends; and other benefits, such as enhancement in value of the investment which the actual investor would have obtained if the contract were not void or had not been held to be void; and

(3)     the fair manner of distribution of the enhancement in value of the original subject matter as between the party who contributed it, i.e. the actual investor and the recipient, i.e. the nominee shareholder, as suggested by the authors[71].

312.  This is not a case where the parties mutually abandoned the First Laser Agreement because of some impossibilities.  The fact that dividends from FCO and FCL were paid to COM and FEHC respectively was not because of any change in the parties’ intention, but because of constraints imposed by Mainland company law.  Because of possible litigations from FRIMS and the under-capitalization problem of FCL the parties did not perform the First Laser Agreement to the letter.  Instead, they conducted themselves at least up to March 1998 or possibly the end of that year according to the spirit of the First Laser Agreement with the intention that when the problems were resolved, steps would be taken to have the shares in FCO, FCL and COM regularized and to make everything fall in line with the First Laser Agreement.  That did not happen because of a change of mind on the part of FEHC.

313.  This is not a case where in breach of its obligation, Ngan’s camp refused to contribute to the share capital of FCL to enable the shares in FCO and FCL to be regularized.  Ngan’s camp was prevented from contributing to the share capital of FCL by constraints of the Mainland law and FEHC’s conduct.  Despite agreement to apply dividends from FCO and FCL as contributions to the capital of FCL and despite Ngan’s camp was ready and willing to remit the dividends from FCO to FEHC to solve FCL’s under capitalization problem, FEHC dragged its feet.  On the face, the parties fell out because of FEHC’s failure to give the confirmation that FCO’s dividend would be treated as the parties’ joint contribution to the capital of FCL.  In truth, they fell out because of a change of mind on the part of FEHC following a change in its management team.

314.  This is not a case where approval from the Bureau of Industry and Commerce was not forthcoming which prevented the shares in FCL from being transferred to COM or First Laser.  FEHC had the obligation under the First Laser Agreement, not just its spirit, to cause FCL to seek approval for the transfer of its shares to First Laser.  FEHC deliberately defaulted.  And when the Project funded by First Laser proved to be successful, FEHC decided to appropriate it to FCL to the exclusion of Ngan’s camp or First Laser.  It paid up the outstanding capital of FCL and sold the shares to JDS.  There was no problem in paying up the capital and obtaining approval from the Bureau for transferring the shares to First Laser.  FEHC dishonestly stole the Project and sold it together with FCL to rescue itself from its own financial problems.

315.  This is not a case in which the three contracts were destined to be void.  FEHC took advantage of the Mainland law which puts it in the peculiar position of being able to decide the validity of the First Laser Agreement.  If it performed its part of the agreement (by seeking approval for the transfer of the shares in FCL to First Laser), the agreement would have been valid.  If it refused to perform as it did, the agreement was held to be void.  It deliberately defaulted and craftily engineered a situation to make the three agreements and 1998 Memorandum void.  

316.  This is a case where FEHC had second thoughts on the joint venture after partnering for four years.  Then in view of the tremendous enhancement in value of the shares in FCL by reason of the Project, FEHC decided not only not to honour the spirit of the First Laser Agreement, but also to steal the Project from Ngan’s camp or First Laser by selling the shares in FCL to rescue itself from its own financial problems.  It took advantage of its own default to render the three contracts and the 1998 Memorandum void and successfully sought a declaration from the Mainland courts to that effect.  These facts cry out loudly for the principle of fairness to intervene to right the wrong engineered by FEHC.

317.  As for the scope of restitution, I adopt my findings in relation to First Laser’s primary case.  The property acquired as result of the arrangement or contract which was held to be void was the property transferred to FEHC, i.e. the price of HK$46,400,000 paid by First Laser and COM on the direction and behalf of First Laser.  As regards the portion of the investment relating to FCL, the property to be returned under article 58 of 《Contract Law》 or article 61of 《GPCL》 includes the original subject matter which was the price; and the fruits arising from the original subject matter, namely the dividends and enhancement in value of the shares in FCL.  All these properties are in the possession of FEHC by reason of its status as the shareholder of FCL on record.  FECL’s contributions towards making of these fruits and enhancement in value consisted of its share of the equity, i.e. 49% interest in FCL and its management.  What First Laser contributed which FEHC did not were such part of the purchase price apportioned to its intended 51% interest in FCL; its management; its capital investment in the Project and subsidy to Wang for his management of the Project.  The value of FCL was greatly enhanced.  FEHC sold FCL for a huge profit.  For the same reasons as given by the authors of 《Provisions (I) U&A》, the keeping by FEHC of the entirety of the fruits of the joint investment is improper because FEHC has not provided the entirety of the capital needed to generate those fruits.  The principle of fairness requires that these fruits be distributed between First Laser and FEHC regardless whether there was any nominee investment contract or the nature of the agreement or arrangement between them.  If there was a nominee investment contract which was void, First Laser would be entitled to a reasonable distribution under article 18 of 《Provisions (I)》 as it sought in the primary case.  If there is no, First Laser is entitled to restitution under article 58 of 《Contract Law》 and/or article 61of 《GPCL》, article 92 of《GPCL》as construed under article 131 of 《GPCL Opinion》considered in the light of the principle of fairness.

318.  Even though article 18 of 《Provisions (I)》 does not apply to the distribution of fruits arising from a contract other than a nominee investment contract which is void or found to be void, the principle of fairness requires the same principle of distribution be adopted.  Adopting the principle as suggested by the authors at pages 185 and 186 of 《Provisions (I) U&A》 as quoted in paragraph 227 above, I can only arrive at the same result, i.e. a distribution of the equity value of FCL according to the adjusted ratio of 57.35:42.65[72] by giving credit to First Laser for its extra contribution by way of funding the Project. 

319.  The principle of fairness also requires First Laser to return what FEHC had contributed to FCO and a reasonable distribution of the fruits from FCO, i.e. the dividends and the 49% of the equity value of FCO as at 31 December 2008, there being no enhancement in value.

320.  The approach I took in assessing the value of the property to be returned to First Laser under its alternative claim is same as the approach I adopted in considering its primary claim under article 18.  I can only arrive at the same results.  Accordingly, I adopt the same conclusion as I reached in First Laser’s primary claim under articles 18 and 19 of 《Provisions (I)》.

CONCLUSION

321.  I am satisfied that First Laser is entitled to be returned the sum of HK$265,996,414 by way of restitution and FEHC is entitled to be returned the sum of HK$15,828,366 by way of counter-restitution.  First Laser should be awarded the net sum of HK$250,168,048.  Accordingly, I enter judgment in favour of the plaintiff in the sum of HK$250,168,048 against both defendants with interest.  Interest shall be calculated on the principal sum of HK$265,996,414 from the date of completion of the sale of the shares in FCL to JDS until 31 December 2008, and on the principal sum of HK$250,168,048 from 1 January 2009 until the date of this judgment at the rate of 1% above the prime rate fixed by Hong Kong and Shanghai Banking Corporation and thereafter at judgment rate until payment.  In default of agreement, the date of completion shall be taken to be 1 May 2000 on a convenient assumption that the sale and purchase was completed fourteen days before the handover reception ceremony.

322.  I do not find it necessary to make separate costs orders for the claim in restitution and counter-restitution as the issues involved in both claims are practically the same and FEHC’s evidence on the counter-restitution is mostly rejected.  The plaintiff should be awarded costs as being wholly successful. Accordingly, I make a costs order nisi that the 1^st defendant shall pay the plaintiff’s costs of the remission proceedings with certificate for two counsel and that there be no order as to costs as against the 2^nd defendant.