KWOK CHIN WING v.21 HOLDINGS LTD AND ANOTHER

HCA 2332/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2332 OF 2004

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BETWEEN

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J U D G M E N T

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The Background:

1.  These facts are not in dispute.

2.  In 1985, Mr. Kwok, together with a Mr. Anthony Chu, formed a company called Rockapetta Industrial Company Ltd, (RICL), to design, manufacture, sell and distribute children’s toys, particularly for children under the age of 3.  Mr. Kwok became a director of RICL on 29 January 1985, and remained so until he resigned on 11 April 2001.

3.  In April 1991, Mr. Kwok and Mr. Chu formed another company, Grand Extend Investments Ltd, (GEIL).  GEIL was a property holding company which was the registered owner of a property in Yau Tong, which housed the offices of the business operations of RICL.  It did not undertake any business activity, and after the Yau Tong property was sold in about 1997, GEIL was an inactive company with no assets.

4.  In November 1992, RICL entered into a joint cooperative enterprise with a PRC company, and formed Shenzhen Rockapetta Toys Company Ltd (SRTCL).  The arrangement with the PRC company was that that company would be paid a guaranteed sum annually and RICL would retain 100% of the profits generated through the business operations of SRTCL.  SRTCL was a wholly-owned subsidiary of RICL.

5.  SRTCL became the manufacturing arm and RICL was the distribution and sales arm of RICL’s business operations.  RICL also owned the land in Shenzhen on which the factories were situated containing the machinery and moulds from which toy production was carried out.

6.  In January 1994, with a view to listing on the Stock Exchange of Hong Kong, (SEHK), the 1st defendant, then known as Rockapetta Holdings Ltd, (Rockapetta) was incorporated in Bermuda and became the holding company of RICL, GEIL, and a number of other subsidiary companies that had previously been formed by Mr. Kwok and Mr. Chu to run various aspects of the business.  Rockapetta was listed on the SEHK and remains listed now, under the name of 21 Holdings Ltd, on the Hong Kong Stock Exchange, (HKSE). RICL continued its existence as the distribution and sales entity of the Rockapetta Group.  GEIL, in the same way continued to hold the property occupied by the Rockapetta Group management in Hong Kong.  SRTCL, as a subsidiary of RICL, continued its role as the manufacturing arm of the Rockapetta Group.

7.  From the time of its listing Mr. Kwok was the chairman and an executive director of Rockapetta.

8.  The 2nd defendant, Mr. Chan was involved in the listing exercise, as he was then working for Morgan Grenfell who gave advice to Mr. Kwok on the listing.  Mr. Chan was invited to be, and became, an independent non-executive director of Rockapetta in July 1994.

9.  Between May 1995 and March 1998, the Rockapetta Group was in need of funds for various purposes, in particular working capital.  During that period Mr. Kwok extended loans totalling $83 million for the purpose of the business of the Rockapetta Group.  In 1995, $23 million was advanced, in 1996, $34 million, in 1997, $21 million, and in 1998, $5 million. These loans were recorded in the accounts of RICL and GEIL, which were the specific subsidiary companies of the Rockapetta Group that had been in need of funds at the time the advances were made.

The dispute:

10.  The central dispute between the parties is as to liability for the repayment of outstanding balance of the loans, a sum of $44.5 million, together with interest thereon. 

The case advanced by Mr. Kwok against Rockapetta:

11.  The case for Mr. Kwok against Rockapetta is put in three ways.  First, it is argued that the loans were advanced to the Group as a whole, and that consequently Rockapetta itself is liable for repayment.

12.  Second, it is argued that in March 2000, in the course of Mr. Chan reaching an agreement with Mr. Kwok, in which Mr. Chan agreed to buy 100 million shares owned by Mr. Kwok[1] in Rockapetta, for the sum of $60 million.  As part of that agreement, it is argued that Mr. Chan, on behalf of Rockapetta, agreed to ensure, and did ensure, that that Rockapetta would repay Mr. Kwok’s outstanding loans, which then stood at $83 million.  It is further said in this respect, that the funds necessary to repay the loan would come from fund raising exercises to be undertaken by Rockapetta under the guidance of Mr. Chan.  In the pleadings this agreement was called the Initial Agreement.

13.  Central to this argument is a contention by Mr. Kwok that on about 17 March 2000, he concluded the agreement to sell his shares to Mr. Chan, by delivering the relevant share certificates to a firm of solicitors, Tony Kan & Co, and that he then went to Macau and received $60 million in payment for the shares.

14.  Third, Mr. Kwok argues that that at a board meeting of the directors of Rockapetta on 19 June 2000, it was agreed between Rockapetta and Mr. Kwok, that in consideration of Mr. Kwok agreeing not to demand immediate payment of the outstanding balance of the loans for so long as he might see fit, Rockapetta would repay the outstanding balance from the price of goods sold by the Group.  In the pleadings this agreement was called the Subsequent Agreement.

Mr. Kwok’s case against Mr. Chan:

15.  Mr. Kwok’s case against Mr. Chan is pleaded first on the basis of the breach of a promise allegedly made by Mr. Chan at the time the share sale was entered into, that he would ensure that Rockapetta repaid Mr. Kwok’s loans. 

16.  Second, the case is pleaded on the basis of a fraudulent misrepresentation.  That argument is linked to the contention that Mr. Chan, on behalf of Rockapetta, agreed to ensure that Rockapetta would repay the outstanding loans.  The claim of fraudulent misrepresentation is best described by setting out the particular allegation relied upon, from paragraph 8AA of the re-re-re-amended statement of claim:

“8AA. Further or in the alternative to paragraph 8 above, (Mr. Chan) represented to (Mr. Kwok) and (Joseph) Wan that (Mr. Kwok) would recover the Loans from (Rockapetta) and that (Rockapetta) would be in a position to repay the Loans through a series of fund-raising exercises when, by reason of matters stated in paragraph 20 herein, he intended and/or knew or believed that (Mr. Kwok) would not be able to fully recover the Loans thereby and/or that the funds so raised would not be utilised or made available to settle the Loans.”

17.  Mr. Joseph Wan is the chairman of the Baron Group, and is a financial adviser.  Mr. Kwok accepted that when the transaction that took place in March 2000, and thereafter, Mr. Joseph Wan was his financial adviser.

18.  Mr. Kwok’s claim is further advanced in the particulars of the fraudulent misrepresentation supporting paragraph 8AA, and set out in paragraph 20 of the claim.  The essence of the allegation made is that Mr. Chan so managed or controlled the Group’s finances so as to dissipate or otherwise strip out the assets of the subsidiaries, in particular RICL and SRTCL, so that Mr. Kwok would not be able to recover directly from either or both companies, or from Rockapetta.

The answer to the claim by Rockapetta:

19.  The first answer to the case for Mr. Kwok by Rockapetta is that the loans were made not to Rockapetta, nor to the Group as a whole, but to RICL and GEIL, into whose accounts the various cheques for the loans were paid.  Neither RICL nor GEIL now have funds from which the outstanding amount of the loans might be repaid.  Together with the assertion that the loans were not made to either Rockapetta, or the Group as a whole, go a series of legal submissions related to the liability of corporate entities.

20.  Next, it is argued that in fact there was no Initial Agreement made in March 2000, whereby Mr. Chan agreed to buy 100 million shares in Rockapetta from Mr. Kwok, and that consequently there could have been no collateral agreement, arranged by Mr. Chan, on the part of Rockapetta to take on the liability for loans made to RICL or GEIL.  Together with that submission go a series of legal submissions relating to the power of Mr. Chan to bind Rockapetta.  Rockapetta accepts that a financial transaction did take place in March 2000, but says that the transaction was, as is demonstrated by draft documents discovered by Mr. Kwok, in fact a loan from a company called Winasia Holdings Ltd, (Winasia), to Mr. Kwok upon the security of his shares.

21.  As to the Subsequent Agreement, it is argued that the meeting relied upon, at which it is said the Subsequent Agreement was made, was not a board meeting of Rockapetta, but merely a management committee meeting. The argument is that in the absence of a formal board meeting on the part of the board of Rockapetta at which an appropriate resolution was passed, there could be no agreement as alleged by Mr. Kwok.

22.  It is further contended, both by Rockapetta and Mr. Chan, that Mr. Kwok was in default upon the loan upon his shares, and Mr. Chan in fact acquired Mr. Kwok’s shares from Winasia.

The answer to the case by Mr. Chan:

23.  Mr. Chan first denies making the Initial Agreement with Mr. Kwok to purchase his shares, and consequently denies that he would agree that he ensure that Rockapetta would repay the loans.  He says that rather than the Initial Agreement as alleged by Mr. Kwok, the transaction in March 2000, constituted a loan advance made Mr. Kwok by Winasia on the security of Mr. Kwok’s shares. 

24.  Mr Chan next denies making the representation relied upon by Mr. Kwok, and asserts that, in any event, the Subsequent Agreement could not constitute an agreement as such, because there was no Initial Agreement.  He repeats a submission made by Rockapetta that any discussions that might have taken place at the time of the alleged Subsequent Agreement were merely in the course of management committee meetings, and were not resolutions of the board of Rockapetta. 

25.  Finally, he asserts that any transactions undertaken in 2002, whereby Rockapetta disposed of the assets of RICL were perfectly legitimate transactions.

To whom were the loans advanced:

26.  I am satisfied that there is no doubt at all that the loans made by Mr. Kwok were advanced to the holding company, Rockapetta, generally for its purposes in respect of the Group.  There are a number of factors which clearly point to this conclusion.

27.  First, the uncontradicted evidence of Mr. Kwok was that he made the advances to Rockapetta.  Mr. Chan, the only witness called for, was not in any way involved in the advances.  In Mr Chan’s evidence he was at pains to insist that during the period in which the advances were made he was merely an independent non-executive director of Rockapetta, a role which he saw as being limited to one of oversight only.  Although on the audit committee of the board of Rockapetta, he claimed no knowledge at all of the circumstances of the loans.  Mr. Kwok’s evidence as to the circumstances in which the loans were made was accordingly uncontradicted.

28.  Mr. Kwok’s evidence was that he learned from the Group Financial Officer, Mr. Leung Yuk Liu, that funds were needed for working capital, particularly for the activities of RICL or GEIL.  Mr. Kwok offered to provide the necessary funds personally and drew a number of cheques.  The first three cheques[2] were drawn simply to “Rockapetta”, but banked by Mr Leung to the accounts of RICL.  In consequence of that, when annual accounts were prepared, the advances were shown first in the accounts of RICL, and subsequently in the consolidated accounts of the Group. 

29.  That the first three cheques were drawn payable to “Rockapetta” and not to RICL specifically, is plain evidence that Mr. Kwok intended the advance to be to the holding company, Rockapetta, for its general use, and not a specific advance to RICL.

30.  Neither Rockapetta nor Mr. Chan called Mr Leung to give evidence to contradict Mr. Kwok’s assertions.

31.  It is right that subsequently cheques which were drawn for loan advances by Mr. Kwok were directly payable to RICL or GEIL, but the system having been established at the beginning, with the first three advances, having plainly been made to Rockapetta, I am satisfied that it was nothing more than mere accounting convenience that the subsequent cheques were made out to RICL or GEIL. 

32.  I have no doubt at all that if Mr. Kwok or Mr Leung were asked at the time of the advances: to whom were the advances made; both would have responded: to Rockapetta.

33.  Next, it was not in dispute that those involved in the administration of Rockapetta, whether during Mr. Kwok’s chairmanship, or Mr. Chan’s chairmanship, treated Rockapetta and its subsidiaries as one indivisible entity.  Thus, in the conduct of the business of the Group, monies within Rockapetta itself or the various subsidiaries were transferred freely amongst the companies in the Group, applying them wherever they were needed. The evidence of Mr. Kwok was that it did not matter within which company funds might be held, wherever funds were required for a particular subsidiary, the funds would simply be transferred from one subsidiary to another within the Group. 

34.  Not only was that evidence not contradicted, but Mr. Chan confirmed in evidence that that procedure continued during the time that he was chairman of the Group.  However, he seemed quite unable to recognise the logic that that principle might be applied to the repayment of Mr. Kwok’s loans to RICL or GEIL.  I found his apparent confusion over this concept to be quite disingenuous, particularly having regard to his professional background and his evidence as to the way in which funds were freely used amongst the Group.

35.  Although the annual reports of Rockapetta Group showed the advances as being recorded in the accounts of both RICL and GEIL specifically, from the annual report for the year ended 31 December 1999, the reports record that interest was payable by the Group.  Prior to the year ended 31 December 1999, the loans had been interest free.  The liability for interest arose during that year.  Mr. Chan, as chairman of the Rockapetta Group, signed the annual reports the year ended 31 December 2000, and 31 December 2001, in which such statements were contained.

36.  Mr. Chan is an experienced merchant banker and a chartered accountant.  I accept Mr. Ramanathan’s submission that the precise terminology would not have been lost upon him, and I reject Mr. Chan’s explanation of the expression as a mere accounting practice.  If, as Mr. Chan contends, Rockapetta is not liable for the advances made under the loans, then there is no basis at all upon which the annual report for the Group should record that the interest was payable by Group.  Instead, the annual report would show that the interest for the loans was payable by RICL and GEIL specifically.

37.  Included in the draft, but unexecuted, documents prepared by Mr. Kwok’s solicitors for the transaction that took place in March 2000, was a deed proposed to be made by Mr. Kwok, RICL, GEIL and Rockapetta. The recitals to that deed are in the following terms:

“(A)   As at the date hereof, (Mr. Kwok) has through RICL advanced to (Rockapetta) a loan in the amount of HK$69,000,000.00 (“First Loan”). The terms for the First Loan are more particularly set out in a memorandum of loan dated 31^st March 1999 a copy of which is appended hereto as Appendix A (“First Memorandum”).

(B)   As at the date hereof, (Mr. Kwok) has through GEIL advanced to (Rockapetta) another loan in the amount of HK$14,000,000.00 (“Second Loan”). The terms for the Second Loan are more particularly set out in a memorandum of loan dated 31^st March 1999 a copy of which is appended hereto as Appendix B (“Second Memorandum”).

(C)   The whole of the proceeds of the First Loan were used by (Rockapetta) for general working capital purposes.

(D)   The whole of the proceeds of the Second Loan were used by (Rockapetta) for general working capital purposes.

(E)   In light of the above, the parties hereto are desirous of making certain confirmations with regard to each of the First Loan and the Second Loan.”

The two memoranda referred to were letters dated 31 March 1999, in which both RICL and GEIL had formally acknowledged the existence of the loans. Previously there was no formal recognition of the loans other than accounting entries. The draft deed went on to confirm that the loans were in fact owed by Rockapetta to Mr. Kwok and that Rockapetta agreed that the terms of the loans as set out in the respective memoranda would be legally binding and enforceable against Rockapetta as if the references RICL and GEIL were references to Rockapetta.

38.  It is right that there is no evidence that this document was ever executed by those shown as parties in the draft deed.  But that it was drafted by the Mr Kwok’s solicitors, in March 2000, is clear evidence that Mr. Kwok’s instructions to his solicitors at that time were as set out in the recitals described above.  The most significant factor arising from this is that at that time no issue had ever arisen as to whether or not Rockapetta itself would be liable for repayment of the loans, or that liability for the loans might lie only within the corporate entities known as RICL or GEIL.

39.  The draft deed is consistent with the first case advanced by Mr. Kwok, namely that the loans were advanced to Rockapetta.  In that it does not refer to any obligation on the part of Mr. Chan to obtain an agreement from Rockapetta that it would take on the liability for the loans, it is inconsistent with the second case advanced by Mr. Kwok.

40.  It was of course, sensible of those advising Mr. Kwok to deal specifically with this issue because the fact that the loans were recorded within the Group accounts as loans to RICL and GEIL, tended to indicate that liability lay with the subsidiary companies, although the interest statements indicated to the contrary. 

41.  It is important that those instructions were given by Mr. Kwok, at a time when he would have been quite unable to anticipate the future dispute, namely that Rockapetta would deny liability for the loans, and insist that liability lay solely with RICL  and GEIL.  That those instructions were given demonstrates that at all times Mr. Kwok and the Group had treated the loans as being loans to Rockapetta, for its general working capital purposes, and not loans, the liability for which lay specifically and solely with the subsidiaries who had actually used the funds.  That is entirely consistent with the way in which Mr. Kwok, and Mr. Chan, had administered the Rockapetta Group.

42.  Mr. Chan was obliged to acknowledge that he knew nothing of the circumstances in which the loans had been granted.  Although he had been an independent non-executive director at the time the loans were advanced he was not in any way involved in the advances.  His evidence was that he knew nothing of them except in his capacity as a member of the audit committee of Rockapetta, in which circumstance he learned of their existence by their reference in the Group accounts.  He was at pains to distance himself from any knowledge of the company's activities during the time he was an independent non-executive director.  As I have said, Mr Leung was not called by either Rockapetta or Mr. Chan. 

43.  There is accordingly no evidence at all to challenge Mr. Kwok’s evidence that the loans were to Rockapetta is a Group, and not specifically to RICL or GEIL.

44.  Prior to March 1999, no interest had been payable on the loans.  The two letters of 31 March 1999, from Mr. Kwok to RICL and GEIL, and countersigned by Mr. Chu for the two companies, dealt with matters of interest and due date.  The letters recorded that the loans were unsecured and would be repayable on 1 April 2000, or such other day that parties agreed.  The letters also recorded that interest would then accrue at prime lending rate in Hong Kong dollars as quoted by Hongkong and Shanghai Banking Corp Ltd.  It was this interest for which Rockapetta subsequently acknowledged liability in the annual reports.

45.  Mr Li argued that there could not have been a loan to the Group because there was no such legal entity as the group.  But a “group of companies” is recognised by the Companies Ordinance, Cap 32, (CO) and is defined by s 2 CO, in the following terms:

“ ‘group of companies’ means any 2 or more companies or bodies corporate one of which is the holding company of the other or others;”

46.  I find nothing intrinsically offensive with the concept that a person may advance funds to a group of companies by giving those funds to the chairman of the group, i.e. the chairman of directors of the holding company, with it being understood between the person advancing funds and the chairman of directors that although the funds are to be used by a specific subsidiary of the group, the holding company will be responsible for repayment of the advance. 

47.  That is entirely consistent with the obligation under s 124 CO, to prepare group accounts for the holding company.  That obligation reflects the consequence that in reality, the accounts of the subsidiaries impact upon the financial health of the holding company.  By s 126 CO, the group accounts laid before a company:

“....shall give a true and fair view of the state of affairs and profit or loss of the company and the subsidiaries dealt with thereby as a whole, so far as concerns members of the company.”

48.  While it is right that there is no separate legal entity such as a “Group” that does not, in my view, prevent an arrangement surrounding an advance, described in paragraph 46 above, from being made.  That is the arrangement that I have found Mr. Kwok made when, in his capacity as a private individual and a lender, and in his capacity as chairman of directors of the Rockapetta Group, he made arrangements with Mr Leung to advance funds to Rockapetta, which funds were ultimately used by RICL and GEIL.

49.  Finally, as a result of fund-raising exercises undertaken by Rockapetta, partial repayment of loans were made.  When Mr. Chan as chairman of Rockapetta became aware of those repayments he took no steps. He did not assert then that Rockapetta was not liable for the loans.  It was not until, as will be described later, Mr. Kwok made a statutory demand for repayment of the balance of the loans, that Rockapetta, under Mr. Chan’s chairmanship, endeavoured to take steps to recover the repayments that have been made, asserting that Rockapetta was not liable for those repayments.

50.  Ultimately Rockapetta was obliged to abandon those proceedings and judgment was given in favour of Mr. Kwok.  Although efforts were made to renew the issue in these proceedings was no proper basis upon which the issue could be renewed, and that was accepted by counsel. Rockapetta’s abandonment of that position goes further to substantiate the conclusion that it then accepted liability for the loans.

51.  For the these reasons I am satisfied that Mr. Kwok’s primary case, that the loans were to Rockapetta, is made out.  As a result of fund-raising exercises, partial repayment of loans were made by Rockapetta.  There is no dispute that the balance of the loans have not been repaid, nor has interest been paid.  Consequently Mr. Kwok is entitled to judgment for the amounts claimed of $44.5 million, together with interest thereon.

The Initial Agreement:

52.  In a civil action, the onus lies on the plaintiff to establish his case on the balance of probabilities.  When that case is contrary to the contemporaneous documents the plaintiff faces an extremely high hurdle.  In this case, Mr. Kwok has not been able to overcome that hurdle.

53.  The central point of the Initial Agreement was argued by Mr. Kwok to be an agreement in March 2000, with Mr. Chan, that Mr. Chan would purchase 100 million shares owned by Mr. Kwok and Rockapetta for the sum of $60 million.  That contention is completely contrary to the contemporaneous signed and draft documents.

54.  It was not properly explained in the course of the trial why the actual documents that were in fact executed in March 2000, did not form part of the evidence.  Certainly, no agreement for sale and purchase of shares, signed by Mr. Chan and Mr. Kwok, (or even Victory Wall), and dated in March 2000, was produced.  No bought and sold notes dated March 2000, were produced. 

55.  To the contrary, an agreement for sale and purchase of Victory Wall’s shares in Rockapetta to a company, MCC814 Holdings Ltd, dated 21 March 2001, signed by Mr. Kwok on behalf of Victory Wall, and Mr. Chan on behalf of  MCC814 Holdings, was produced.  Also produced was a deed of assignment made between Victory Wall and Winasia, which recorded that Victory Wall had deposited with Winasia 100 million shares in Rockapetta as security for a share mortgage, and a document demonstrating that Victory Wall had entered into an agreement to sell the shares to MCC814, for a sum of $24 million.  That document too was signed by Mr. Kwok and the common seal of Victory Wall, and on the common seal of Winasia.

56.  The solicitor who acted for Mr. Kwok in the transaction from the firm of Kao Lee & Yip was not called to give evidence.  Mr. Joseph Ma, who also acted for Mr. Kwok as a financial adviser in the transaction was not called to give evidence.  Mr. Joseph Wan, from the Baron Group, was not called to give evidence.  The only evidence as to the transaction was Mr. Kwok’s oral assertion that there had been an agreement for sale and purchase of shares, for which he had received $60 million.

57.  In addition to the signed documents referred to in paragraph 55 above, a number of draft documents were put before the court by Mr. Kwok.  Three documents, in draft form, but dated 2 March 2000, comprised a draft put option, a draft share pledge, and a draft loan facility letter with Winasia did not reflect the transaction contended for by Mr. Kwok. A draft loan agreement dated 15 March 2000, in respect of a term loan facility for the sum of $60 million to be made between Winasia International Holdings Ltd, (Winasia), and the company which held Mr. Kwok's shares, Victory Wall, and an undated Escrow Agreement to be made between Victory Wall, Winasia, and a Mr. Edward Ma, were entirely inconsistent with the share sale contended for by Mr. Kwok.  Mr. Edward Ma was not called to give evidence as to the nature of the transaction.

58.  Mr. Kwok’s case was that in March 2000, he went to the office of solicitors Tony Kan & Co and delivered the share certificates.  He said that this was the final act in the sale of shares to Mr. Chan.  The receipt was dated 16 March 2000.  It was necessary to subsequently amend the receipt to correctly reflect the particular share certificates that had been delivered by Mr. Kwok.  The amended receipt, duly signed, records that Tony Kan & Co would hold the share certificates to the order of Victory Wall until such time as Victory Wall would execute a share charge of the shares to a third party and that Tony Kan & Co would then hold the shares to the order of the charge.

59.  A fax from Tony Kan & Co to Kao Lee & Yip dated 16 March 2000, enclosing letter of an offer of a term loan facility of $85 million to Rockapetta by Winasia was produced.  An undated memorandum pursuant to s 182(2) Moneylenders Ordinance, Cap163, recording a loan made by Winasia to Victory Wall for the sum of $60 million was produced. This document was signed by Mr. Kwok on behalf of Victory Wall. 

60.  There is no doubt that Mr. Kwok went to Macau on 17 March 2000, when he opened an account with the Macau Seng Heng Bank. Although not all the documents relating to the deposits made on that day are produced I am satisfied on the balance of probabilities that the sum of $60 million was deposited to that account on that day by Mr. Kwok.  It was initially Mr. Kwok’s evidence that Mr. Chan was present in Macau on that day but in the face of Mr. Chan’s travel records, Mr. Kwok was obliged to resile from the assertion.  No explanation was ever offered as to why this aspect of the transaction should have taken place in Macau.  That Mr. Chan was not present in Macau on that day when the payment was made, is inconsistent with the assertion that he was the purchaser of the shares in March 2000.

61.  None of the foregoing draft documents, or those few documents that were signed, are in any way consistent with a share sale and purchase transaction as asserted by Mr. Kwok.  They are however entirely consistent with the case of Mr. Chan, that in order to raise money for Rockapetta, a loan was arranged for Mr. Kwok against his shares.

62.  It may well have been that the share mortgage that appears to have been arranged, by way of an advance from Winasia were all part of a particular scheme to enable Mr. Chan to buy the shares.  If that were the case it might be possible to find the Initial Agreement was made as pleaded.  But in the absence of evidence from either the solicitor or Mr. Joseph Wan or Mr. Joseph Maher, the documents presented cannot be taken as anything other than at face value.  It is, I suppose, possible that the share mortgage arrangement was a device to get around some particular legal technicality that might have stood in the way of the transaction argued for by Mr. Kwok, but if it was the evidence did not explain the circumstances.

63.  Mr. Kwok impressed me as being a decent, honest, and genuine man, but one who was quite out of his depth when it came to complex financial arrangements.  I accept his evidence that in many aspects of his business life he was entirely dependent upon experts such as lawyers and accountants and bankers to make arrangements for him.  He was, as Mr. Li sensibly accepted, disarmingly frank at times.  When presented with a question for which a convenient answer consistent with his case was patently obvious, on a number of occasions he frankly said that he did not know the answer.  A less honest man would have taken the opportunity to give the convenient answer.

64.  But this is a case where, notwithstanding my belief that Mr. Kwok is an honest man, and my rejection of Mr. Chan as a witness capable of belief, Mr. Kwok’s evidence is so completely contrary to the contemporary documents but I am unable to accept his assertion of the Initial Agreement.  I have little doubt that he may have wished to have such an arrangement made, but the evidence is not sufficient to establish that such an arrangement was put in place by his professional advisers on his behalf.

65.  It was part of Mr. Kwok’s case that in conjunction with the sale and purchase of shares Mr. Chan would raise a series of fund-raising exercises which would facilitate funds being made available to enable Rockapetta to repay the loans.  It is right that a share placement took place in March 2000, as a result of which funds were raised and as a result of which two cheques were drawn by Rockapetta, in favour of Mr. Kwok, totalling $25 million.  These cheques were applied in reduction of Mr. Kwok’s loan.

66.  But that does not go in any way to support Mr. Kwok’s assertion that there could have been a sale of his shares to Mr. Chan at the same time.

67.  If the weight of the evidence supports the conclusion that Mr. Chan did not reach an agreement with Mr. Kwok in March 2000, to buy his shares, as it does, then there is simply no basis to say that as part of that agreement Mr. Chan promised Mr. Kwok that Rockapetta would repay the loans.  If there was no agreement for sale and purchase of the shares, there was simply no need for Mr. Chan to make any promise to Mr. Kwok in relation to Rockapetta repaying the loans.

68.  The contention that Mr. Kwok agreed to sell his shares to Mr. Chan in March 2000, is also inconsistent with signed documentation produced that demonstrates that Mr. Kwok was in default on the share loan from Winasia, that Winasia exercised its powers under the loan agreement, and upon the exercise of those powers disposed, of the shares to Mr. Chan.  The circumstances surrounding that aspect of the transaction took place are made all the more confusing by the fact that notwithstanding documentation indicating the fact that Mr. Kwok was in default on the loan, a receipt for full repayment of the loan, remarkably signed on 25 December 2001, was produced.

69.  All of these documents are inconsistent with pleaded Initial Agreement.

70.  The Initial Agreement Mr. Kwok sought to establish was entirely inconsistent the terms of a civil action commenced by Mr. Kwok in March 2006 under number HCA 567/2006, against Mr. Joseph Wan. There, Mr. Kwok pleaded an Indorsement of Claim in the following terms:

“3 In March, 2000, (Mr. Kwok) surrendered his interest in and control of (Rockapetta) by surrendering his shares in (Victory Wall) to the order of (Rockapetta); Winasia International Holdings Ltd (hereinafter called Winasia”); Business Securities Ltd, and acted in accordance with their instructions and directions to enable (Rockapetta) to conduct a series of external fund raising exercises commencing in March, 2000 in return for:-

(1) an agreed sum for the surrender of the agreed number of shares by (Victory Wall) being paid by (Mr. Chan) (acting through MCC 814 Ltd) and Ma Yun Kai (acting through Winasia);

(2) (Mr. Kwok) be entitled to recover from (Rockapetta) the loans which he had previously advanced to its subsidiaries; and

(3) the commitment of Ma Yun Kai (acting through Winasia) and (Mr. Chan) (acting through MCC 814 Ltd) to take necessary steps to secured such a loan recovery right of (Mr. Kwok) against (Rockapetta); and

(4) the above named parties’ agreement to elaborate and fine tune the above commitments and to set them out in writing before the commencement of the surrender by (Mr. Kwok) of the said shares of (Victory Wall)

(hereinafter called the (“Surrender Agreement”)” (sic)

71.  The Indorsement of Claim went on to plead that Mr. Wan had failed to carry out these instructions and to properly secure in clear terms Mr. Kwok’s ability to recover the loans from Rockapetta.

72.  A claim in virtually identical terms was brought against the solicitors who acted for Mr. Kwok in the transaction, Kao Lee & Yip under number HCA 568/2006.  In this action, as with that against Mr. Wan, the claim was made based upon professional negligence.

73.  Both of these writs were issued on 15 March 2006, but were not served, and were renewed for a further year in March 2007.  They were still not served and allowed to lapse.

74.  The assertions made in the two writs are completely contradictory to the case mounted by Mr. Kwok now.  In both sets of proceedings he asserts that his advisers failed to achieve an agreement between himself and Rockapetta for the repayment of loans.  Now he asserts that in the Initial Agreement, such an agreement was reached.

75.  Finally, the terms of the Initial Agreement were completely contrary to the public statements were made by Rockapetta at the time the transactions took place.  These statements, required by the stock exchange, were in both English and Chinese, and Mr. Kwok was obliged to say that although he did not understand the English versions he could read the Chinese.

76.  In determining whether or not Mr. Kwok has established the Initial Agreement I have had regard first, to the complete absence of contemporary documentation consistent with Mr. Kwok’s assertion that the Initial Agreement.  I have had regard, second, to the extensive contemporary documentation, both signed and in draft, demonstrating that an agreement other than that now asserted by Mr. Kwok was reached.  I have had regard, third, to Mr. Kwok’s quite contradictory assertions of the terms of the agreement made in the writs that he issued against his professional advisers. 

77.  In the light of those matters I am quite unable to find on the evidence the existence of the Initial Agreement.

78.  Mr. Ramanathan made the bold submission that as the end result of the transaction, purportedly evidenced by the documents, was the same as the transaction for which Mr. Kwok contended I should find in Mr. Kwok’s favour.  There is no legal basis whatsoever in which that would be right.

79.  In his closing submissions Mr Li drew my attention to the fact that the solicitors for Mr. Kwok had lodged witness statements from three persons, Mr. Yiu Kui Leung, who was the manager of, and a director of, RICL from February 1989 until October 1999, and a director of Rockapetta from January 1994, to December 2001; Mr. Leung Yuk Liu, who was the Financial Controller and Company Secretary of Rockapetta at all relevant times, and Samantha Lau Yuk Yi, who was a marketing and administrative assistant with RICL from September 1999.

80.  Although witness statements had been put in by those persons they were not called the trial.

81.  Mr. Li reminded me of the rule that where a party declines to call a witness in respect of whom he has served a witness statement, the court may draw an adverse inference against that party: see Phipson on Evidence, 17^th Edn § 11-15.  Mr. Li was entitled to say that the witness statements would have assisted Mr. Kwok.

82.  Mr Ramanathan explained from the bar table that efforts had been made to locate each of these three witnesses, but they could not be found.  I note that the witness statements were dated June 2005, 5 ½  years prior to the trial. 

83.  No evidence was called from the defendants to contradict the statement made by Mr Ramanathan that the witnesses could not be found, or to suggest that any of the three witnesses were in fact available and that the reality of the situation was that Mr. Kwok had failed to call them.  No complaint was made at the time when Mr. Ramanathan informed me that the witnesses could not be located. 

84.  The rule is not absolute, and if a proper explanation can be given for a failure to call a witness who might otherwise reasonably be expected to be called, then the adverse inference sought to be drawn by Mr. Li, may not necessarily be drawn: see Cross & Tapper on Evidence  10^th Edn p 46. That is the case here.  When Senior Counsel makes such a statement of explanation from the bar table, and that statement is neither disputed by evidence nor challenged at the time, the absence of the witnesses is satisfactorily explained.  In those circumstances I decline to draw the adverse inference sought by Mr. Li.

The Subsequent Agreement:

85.  Mr Li submits, correctly in my view, that if the Initial Agreement cannot be established, then there could be no Subsequent Agreement.  He is able to make that submission because it was Mr. Kwok’s case that the Subsequent Agreement came about because of the alleged non-performance of Initial Agreement.  That must be right.  The claim based on the Subsequent Agreement must equally fail.

86.  In those circumstances it is not necessary for me to consider the argument as to whether or not the minutes upon which Mr. Kwok relied were board minutes, recognising and recording decisions made by Rockapetta, or merely management committee records, and consequently of no legal effect and not binding upon Rockapetta.

The claim for fraudulent misrepresentation:

87.  A representation of a present intention is a sufficient representation of an existing fact to form the foundation of an action for deceit: see Clerk & Lindsell on Torts, 19^th Edn, §§ 18-09.  But in order to establish the fraudulent misrepresentation alleged in this case it is necessary for Mr. Kwok to establish that in March 2000, when the transaction was initiated, Mr. Chan then knew and intended that at some stage in the future, an issue would arise over the repayment of loans, and that he would then be able to strip the assets from RICL and GEIL, so as to defeat Mr. Kwok’s claim.

88.  The evidence falls far short of establishing that there was an agreement in March 2000, by Mr. Kwok to sell his shares to Mr. Chan.  In the absence of establishing that agreement, it is impossible for Mr. Kwok to establish that at that time Mr. Chan made the fraudulent misrepresentation pleaded.  The evidence equally falls far short of demonstrating that particular misrepresentation pleaded in this case.

89.  There is every reason to be extremely suspicious of Mr. Chan’s conduct in this transaction.  In his second witness statement, made in January 2006, Mr. Chan made the following statement:

“I must point out that the reason why I was prepared to purchase Kwok’s shares in (Rockapetta) in March 2001 with full knowledge of the existence of the loans was that I knew full well the Loans were advanced to the subsidiaries of (Rockapetta), and not (Rockapetta) nor the so-called “Group”.  Moreover, I befriended Kwok for many years and I trusted that he would not called the Loans owed to RICL and GEIL immediately, which were the core business and asset-holding companies of (Rockapetta).  In any case, even if he did recall, (Rockapetta) could simply dispose of or close down the RICL and GEIL and (Rockapetta) would not be in any way jeopardised.” (sic)

That is a truly remarkable statement. First, Mr. Chan asserts friendship with Mr. Kwok, but then goes on to say that Mr. Kwok demanded repayment of a loan which was not denied, Mr. Chan would engage in commercial steps to ensure that the loan could not be repaid.  The statement demonstrates an utter lack of personal or commercial morality from an experienced financial man and a chartered accountant.  A person with such morality is not a person who is capable of belief. 

90.  Unfortunately, the statement, and by finding that Mr. Chan is not a person who is capable of belief, does not assist Mr. Kwok.  That is because the statement is not capable of constituting an assertion of a fraudulent misrepresentation in March 2000, as pleaded, as it is a statement of intention on the part of Mr. Chan in March 2001. 

91.  Consistent with the absence of commercial morality demonstrated in that statement, the asset stripping of RICL, in order to defeat Mr. Kwok’s attempts to recover his loans from that company, is precisely what Mr. Chan proceeded to put into effect. 

92.  In 2002, Mr Kwok had issued a statutory demand to RCIL for the loans.  This was essentially ignored by Mr. Chan, the then chairman of the Group.  Mr. Kwok issued a winding up petition based on the statutory demand on 8 July 2002.  Mr. Chan immediately put in hand steps to change the name of RICL.  Mr. Chan said that he did so, so that it would not appear to be related to the Rockapetta group.  He said he did this to protect the good name of Rockapetta.  He then proceeded to take steps that effectively disposed of the assets of RICL.  He did this through a series of documents he prepared himself, apparently without legal advice, and which, remarkably, he signed by himself, on behalf of all of the parties involved, whether Rockapetta as the holding company, RICL as the vendor or purchaser, a company he controlled himself. 

93.  In fact, Mr. Chan himself, personally, ended up acquiring the real estate in Shenzhen that had previously belonged to the Rockapetta Group, for a sum of about $450,000.  The building on the land acquired by Mr. Chan, through a company, had cost the Rockapetta Group some $4 million to build.  Having regard to the nature of the documents prepared by Mr. Chan which began the asset stripping exercise and the fact that he personally acquired what was previously Rockapetta property, one is inevitably extremely suspicious of the transaction.  It can hardly be seen to be arms length, and Mr. Chan has benefited personally.

94.  It is only because, on the face of the documentation, the acquisition of the real estate made by the company under the control of Mr. Chan were apparently from orders of a Shenzhen court, that there might be any basis upon which the transaction might be accepted as being legitimate.  But there can be no doubt at all that the circumstances raise grave suspicion and doubt on Mr. Chan’s conduct and involvement in the series of transactions that had this result.

95.  If the claim is to be mounted upon the basis of fraudulent conduct on the part of Mr. Chan in respect of the steps that he took in the latter part of 2002, which resulted in the disposal of the assets of RICL, then it would be necessary for the transaction is that took place be properly and clearly explained in evidence and understood.  On the basis of the evidence before me I am unable to reach any conclusions about the series of transactions.  Mr. Kwok was not a party to those transactions and was unable to give evidence concerning them.  Mr. Chan’s evidence as to what took place was, at best, confusing, lacking in detail, and insufficient to constitute a clear explanation.

96.  But that the transactions cannot be properly explained, does not establish Mr. Kwok’s case in fraud.  Had the transactions been examined by a forensic accountant it may well be that a fraud could be demonstrated.  But having regard to the very high standard of proof required when fraud is alleged, the evidence falls far short.

97.  The claim for fraudulent misrepresentation, whether mounted based upon a representation made in March 2000, or upon Mr. Chan’s conduct in 2002, simply cannot succeed.

Conclusion and costs:

98.  For the foregoing reasons Mr. Kwok’s claim against Rockapetta succeeds. There will be judgment for Mr. Kwok against Rockapetta for the sum of $44.5 million together with interest thereon.  There will be an order nisi that Rockapetta must pay Mr. Kwok’s costs in the action on a party and party basis.

99.  For the foregoing reasons Mr. Kwok’s claim against Mr. Chan fails.  There will be an order nisi that Mr. Kwok must pay Mr. Chan’s costs in the action on a party and party basis.

100.  Leave is reserved to apply in the event the parties are unable to agree upon the amount of interest or the terms of judgment.