HANSOM FINANCE LTD (IN CREDITORS' VOLUNTARY LIQUIDATION) v. YANG HAOYING

HCA 784/2022

[2025] HKCFI 5278

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 784 OF 2022

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BETWEEN

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J U D G M E N T

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A. INTRODUCTION

1.  This is the trial of the claim of the Plaintiff (“Hansom”) against the Defendant (“Mr Yang”) for breach of director’s duties in approving and granting 5 loans totalling HK$799,000,000 (“the 5 Loans”) within 6 months. All 5 Loans were uncommercial and exposed Hansom to risks of default which have materialized. All 5 Loans are now irrecoverable. Further, 2 of the 5 Loans were extended on or around their respective due dates with a lower interest rate, without any commercial basis.

2.  Whilst being a director, Mr Yang was involved in and responsible for approval of loans and the drawdown process. In particular:

(1) He signed the Credit Assessment Reports of the Borrowers as the “approver”, when there was no record of proper due diligence conducted on the Borrowers’ financial position and ability to repay.

(2) In respect of the 3 Loans on 15 September 2017, Mr Yang approved them by written resolutions as the sole director of Hansom.

(3) In respect of the 2 Loans on 14 February and 2 March 2018, Mr Yang approved them as the chairman of the meeting of Hansom’s board and as one of the two directors of Hansom. (the other director being “Wang”)

(4) Mr Yang signed all the loan agreements and repayment agreements for and on behalf of Hansom as its sole signatory.

(5) Mr Yang signed all the drawdown requests for payments of the loan proceeds to third parties.

3.  It is Hansom’s case that Mr Yang breached his duties to act with reasonable skill, care and diligence, to exercise independent judgment and to act in the best interests of Hansom.

4.  Accordingly, Hansom claims a total of HK$799,000,000 as loss by reason of Mr Yang’s breaches.

5.  D’s primary contention is that his role was limited to an “approver”, with all the borrowers and documents already arranged by others. Other persons from the parent company had participated in the process, from negotiating the terms of the loan to instructions for releasing the loan proceeds. He exercised independent commercial judgment based on what he believed to be true information. After consulting other Managing Directors of the parent company, the loan agreement would be signed. The CFO (Wang) and company secretary would sign documents and Wang would finally release the loan proceeds.

6.  Hansom says that this was an abdication of responsibility and plainly not an answer to its claim, as Mr Yang had a non-delegable duty to monitor and supervise others’ work and independent judgment.

B. UNDISPUTED FACTS

B1. The parties

7.  Hansom was incorporated on 1 November 2000 as a private company under the laws of Hong Kong and was a wholly owned subsidiary of Freeman FinTech Corporation Limited (“Freeman”) (now known as ARTA TechFin Corporation Limited), a company listed on the Hong Kong Stock Exchange.

8.  Mr Yang served as a director of Hansom from 22 August 2016 to 10 March 2020 (during which the 5 Loans were granted and defaulted). He served as the sole director of Hansom from 1 September 2016 to 19 September 2017 (during which period three out of the five loans were granted and defaulted). Mr Yang was also appointed as an executive director of Freeman on 20 October 2016.

B2. Hansom’s Operations

9.  Hansom was licensed under the Hong Kong Money Lenders Ordinance, Cap 163, and carried on a money lending business from 2009 to 14 August 2020.

10.  In addition to Mr Yang:

(1) Mr Wang Xiaodong (王曉冬) (“Wang”) was a director of Hansom from 20 September 2017 to 18 May 2018. He was also appointed an executive director of Freeman on 20 October 2016.

(2) Zhao Tong (趙彤) (“Zhao”) was appointed as a director of Hansom from 18 May 2018 to 10 March 2020. Zhao was also appointed an executive director of Freeman on 20 October 2016.

11.  By a special resolution passed on 9 September 2021, Hansom was placed into creditors' voluntary liquidation, with joint and several liquidators appointed pursuant to the Order of Linda Chan J dated 4 May 2022.

B3. THE 5 LOANS

12.  From 15 September 2017 to 2 March 2018, Mr Yang (on behalf of Hansom) entered into agreements to make 5 unsecured loans to 5 borrowers (“the Borrowers”), ranging from HK$109 million to $200 million out of a total of HK$799 million, which were drawn down and paid to third parties (“third party recipients”).

Table 1

No.	Borrower & residence	3rd Party Recipients	Date of loan agreement and due date	Principal (HKD)	Interest rate and reduction	Outstanding Principal (HKD)
1.	Xue Xiaojing (薛小晶) (“Xue”) Mainland	Dong Sheng International Investment Limited (“Dong Sheng”)	15/9/2017 to 14/6/2018 for 9 months (extended to 31/12/2018)	160,000,000	1.25% per month (reduced to 8% pa)	160,000,000
2.	Ju Xiaodong (“Ju”) (巨晓东) Mainland	Dong Sheng	15/9/2017 to 14/5/2018 for 8 months (extended to 10/6/2019)	200,000,000	1.25% per month (reduced to 8% pa)	200,000,000
3.	Li Haijiang (“Li”) (李海江) Mainland	Dong Sheng	15/9/2017 to 14/5/2018	200,000,000	1.25% per month	200,000,000
4.	Liu Xiaoli (“Liu”) (刘晓丽) Mainland	Steel Dust Limited and Dong Sheng	14/2/2018 to 13/8/2018	109,000,000	1.5% per month	109,000,000
5.	Song Xiaojun (“Song") (宋晓军) Mainland	Dong Sheng and Bill Sheng Trade Co Ltd	2/3/2018 to 1/9/2018	130,000,000	1.5% per month	130,000,000
Total				799,000,000		799,000,000

13.  The common features of each of these 5 Loans were that:

(1) The Loan was granted to a Mainland Borrower with no substantial borrowers’ or assists in Hong Kong;

(2) The loan was unsecured;

(3) There was insufficient documentation to support the value of the Borrower’s assets and his/her liability to repay;

(4) The loan proceeds were paid directly to a third party recipient who was a purported creditor of the Borrower, without due diligence conducted on the third party recipient. One such third party recipient (“Dong Sheng”) was common to all 5 Loans.

14.  Further,

(1) In respect of the 1^st loan (to Xue), 3 days prior to the original repayment date, a repayment extension and lower interest rate were granted without commercial justification.

(2) In respect of the 2^nd loan (to Ju), after default, the repayment date was extended and a lower interest rate were granted without commercial justification.

15.  Credit Assessments Reports were given to Mr Yang. The enclosed, amongst others, identity documents of the Borrower and the permit for the Borrower to remain in Hong Kong up to a certain date. On 13 September 2017, Yang approved the credit assessments of:

(1) Xue, attaching copies of the following supporting documents:

(a) the copy of the business licence of Shanxi Hengxingsheng Trading Co. Ltd. (山西恒兴盛贸易有限公司) (“Shanxi Hengxingsheng”) dated 25 August 2017, a Mainland company purportedly owned by Xue;

(b) the public information search report of Shanxi Hengxingsheng on the National Enterprise Credit Information Publicity System (国家企业信用信息公示系统) (“NECIPS”) dated 13 September 2017;

(c) the capital verification report of Shanxi Hengxingsheng issued by Shanxi Hengjia Certified Public Accountants dated 5 May 2016;

(d) the proof of payment dated 11 September 2017, purportedly made by Xue for the capital of Shanxi Hengxingsheng;

(e) the unsigned financial statements of Shanxi Hengxingsheng as at 31 August 2017.

(2) Ju, attaching copies of the following supporting documents:

(a) the copy of the business licence of Shanxi Deyou Technology Co. Ltd. (山西德佑科技有限公司) (“Shanxi Deyou”) dated 24 May 2017, a Mainland company purportedly owned by Ju;

(b) the public information search report of Shanxi Deyou on the NECIPS dated 13 September 2017;

(c) the unsigned copy of the financial statements of Shanxi Deyou as at 31 August 2017; and

(d) the proof of payment made dated 13 September 2017, purportedly made by Ju for the electricity bill for the address stated in Ju’s PRC ID.

(3) Li, attaching copies of the following supporting documents:

(a) the copy of the business licence of Jinzhong Xinhuasheng Trading Co., Ltd. (晋中市鑫华盛贸易有限公司) (“Jinzhong Xinhuasheng”) dated 8 July 2015, a Mainland company purportedly owned by Li;

(b) the public information search report of Jinzhong Xinhuasheng on the NECIPS dated 13 September 2017;

(c) the unsigned copy of the financial statements of Jinzhong Xinhuasheng as at 31 August 2017.

16.  On 15 September 2017, Mr Yang (for and on behalf of Hansom) granted 3 unsecured loans to Xue, Ju and Li as per Table 1.

17.  Mr Yang subsequently entered into loan agreements with Xue, Ju and Li at a lower interest rate of 1.25% per month, despite the Credit Assessment Reports recommending a higher interest rate of 1.5% per month. In particular, in the case of Ju, an undated set of minutes of meeting between Ju and Mr Yang recorded that Ju had already agreed to pay the 1.5% per month interest rate.

18.  On 19 September 2017, a total of HK$560 million was drawn down by Xue, Ju and Li, who all instructed Hansom to pay his respective loan proceeds to Dong Sheng. Mr Yang approved the relevant drawdown requests. The amount paid to Dong Sheng was HK$560 million.

19.  On 12 February 2018, Yang approved the credit assessments of:

(1) Liu, attaching copies of the following supporting documents:

(a) the public information search report of Beijing Gewu Tianchuang Technology Co. Ltd. (北京格物天创科技有关公司) (“Beijing Gewu Tianchuang”) on the NECIPS dated 12 February 2018, a Mainland company purportedly owned by Liu;

(b) the proof of Liu’s shareholding issued by Beijing Gewu Tianchuang dated 9 February 2018;

(c) the financial statements of Beijing Gewu Tianchuang as at 31 December 2017; and

(d) the credit card statement of Liu issued by China Merchants Bank dated 5 January 2018.

(2) Song, attaching copies of the following supporting documents:

(a) the proof of Song’s shareholding issued by Jinteng Investment Management Co., Ltd. (深圳晋腾投资管理有限公司) (“Shenzhen Jinteng”) dated 9 February 2018, a Mainland company purportedly owned by Song; and

(b) the public information search report of Shenzhen Jinteng on the NECIPS dated 12 February 2018, a Mainland company purportedly owned by Song;

(c) the audit report issued by Shenzhen Xinzhou Certified Public Accountants (General Partnership) dated 28 January 2018 (on the financial statements of Shenzhen Jinteng as at 31 December 2017).

20.  On 14 February 2018, Mr Yang (for and on behalf of Hansom) granted a loan an unsecured of HK$120 million to Liu of which HK$109 million were drawn down as per Table 1. Liu instructed Hansom to pay HK$100 million to Dong Sheng, and HK$9 million to another third party called Steel Dust Limited. Yang approved these drawdown requests in respect of these payments.

21.  On 2 March 2018, Yang (for and on behalf of Hansom) granted a loan of HK$130 million to Song as per Table 1. Song instructed Hansom to pay HK$100 million to Dong Sheng and HK$30 million to Bill Sheng Trade Co Ltd. Yang approved these drawdown requests in respect of these payments.

22.  On 11 June 2018, Yang (on behalf of Hansom) entered into 2 repayment agreements (“Repayment Agreements”) with Xue and Ju to extend their respective repayment periods at a reduced interest rates as per Table 1 without demand for any collateral. By that time, Ju was already in default.

B4. Yang’s Role in the Defaulted Loans

23.  At all material times, Mr Yang approved the 5 Loans on Hansom’s behalf, in that:

(1) he was the sole signatory on behalf of Hansom (as a director) to enter into the loan agreements with all the Borrowers and the Repayment Agreements;

(2) he signed each of the credit Assessment Reports of the 5 Loans in the capacity of “approver”;

(3) in respect of Xue, Ju and Li, Yang approved their loans by way of written resolutions as the sole director of Hansom;

(4) in respect of Liu and Song, Yang acted as the chairman of Hansom’s board meetings approving these loans as a director (together with Wang) by way of written resolutions;

(5) in respect of the Repayment Agreements, Yang acted as the chairman of Hansom’s board meetings and approved it as a director (together with Zhao) by the board minutes; and

(6) after the 5 Loans were approved, the Borrowers’ drawdown requests were approved by Yang.

24.  To date, there has been no recovery in relation to the 5 Loans.

C. ISSUES

25.  The following are agreed issues in this case:

(1) What duties did Mr Yang owe to Hansom as its director with respect to the 5 Loans?

(2) Did Mr Yang breach his directors’ duties with respect to the 5 Loans?

(3) Did Hansom suffer loss and damage by reason of Mr Yang’s breach of duties, if so, what is the quantum?

D. THE EVIDENCE

D1. Documentary evidence

26.  The key Hansom’s case primarily rested on documents in the following broad categories:

(a) The loan agreements;

(b) board resolutions or minutes evidencing Hansom’s approval of the 5 Loans;

(c) Credit Assessment Reports of the Borrowers with enclosures;

(d) Borrowers’ drawdown requests and Hanson’s approvals thereof; and

(e) documents relating to recovery of the 5 Loans.

27.  There is no challenge to their authenticity.

28.  Mr Yang failed to produce any documents.

D2. Witnesses

29.  The principles for assessing the credibility of witnesses have been summarized in Hu Lan v David Golden [2023] HKCFI 873 at §36:

(1) Generally speaking, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility.

(2) Importance should be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events.

(3) The court will also attach importance to the consistency of the witness’ evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence. The latter type of consistency is often tested by a comparison between the witness’ oral testimony and his or her witness statement.

(4) The court should consider a witness’ motive for deliberately not giving truthful testimony. For example, telling the truth may prejudice his interest, or a just determination of the litigation may affect his interest.

(5) It is essential to have regard to the entirety of a witness’ evidence. A witness can make mistakes, but the mistakes do not necessarily affect other parts of his evidence. Likewise, a witness may lie. However, lies themselves do not mean necessarily that the entirety of that witness' evidence is to be rejected. A witness may lie in a stupid attempt to bolster his case, but the actual case nevertheless remains good irrespective of the lie.

(6) On the other hand, where it is shown that a witness has been discredited over one or more matters to which he has testified, this fact is relevant to the assessment of his overall credibility.

(7) While the court is entitled to take demeanour into account when assessing testimony, it should be borne in mind that demeanour can be deceptive and is therefore to be approached with care.

30.  Mr Glen Ho, one of the liquidators, gave evidence on behalf of Hansom. His evidence was largely based on documents, which were not complete. That was no criticism of him as a liquidator or witness. He was truthful.

31.  Whilst working with Hansom, Mr Yang was not the keeper of documents. He had left Hansom for 2 years by the time he filed his Defence in 2022. It was understandable that he would not have access to Hansom’s documents. (§§1 and 2). He was straight forward and frank. He plainly was under the belief that approving a loan and releasing loan proceeds was the work of a team. However, as will be demonstrated below, even accepting that his work was limited to certain steps, he fell below what the law expected of him.

E. LEGAL PRINCIPLES

32.  I gratefully adopt the summary of Mr Lam and Mr Lau, counsel for Hansom and will deal with the submissions of Ms Choy along the way.

33.  The director’s duty of care is now codified in Section 465 of the Companies Ordinance (Cap. 622), which provides, amongst others, that:

“(1) A director of a company must exercise reasonable care, skill and diligence.

(2) Reasonable care, skill and diligence mean the care, skill and diligence that would be exercised by a reasonably diligent person with —

(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and

(b) the general knowledge, skill and experience that the director has.”

34.  Kwan J (as she then was) explained in Re Copyright Ltd [2004] 2 HKLRD 113 at §§34-35:

(1) Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors.

(2) Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions. (underline added)

(3) No rule of universal application can be formulated as to the duty referred to above. The extent of the duty, and the question whether it has been discharged, must depend on the facts of each particular case, including the director’s role in the management of the company.

(4) Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them.

35.  Ms Choy also relies on the following paragraphs in the same case in relation to delegation of duties:

“49. What is important about this report is that it set out meticulously how the business was operated. From reading the report, Mr Tsang had no reason to think that the accounts of that business were not kept or that they were not handled in a proper manner, as Mr Chan would not have been able to give such detailed figures in the report without proper records. Moreover, it was expressly stated in the report that further detailed accounting records would be prepared and they would be audited.

…

55. I find that Mr Tsang was not in breach of ss.121 and 122 and he was not to be blamed for the failure of the Company to comply with these provisions. He had taken reasonable steps to comply with the requirements of the statute. He had reasonable ground to believe and did believe that the functions of keeping proper books of account and complying with the statutory requirements had been delegated to competent and reliable persons. He did not abrogate his responsibility in the affairs of the Company as the non-executive director. He had asked for and was supplied with financial reports of the business, although the reports were not up-to-date and were given to him somewhat late.”

…

68. On the evidence before me, I do not think the allegation of abrogation of responsibility is made out. Although as a non-executive director, Mr Tsang did not take part in the day-to-day operation of the Company, it was not the case that he took no part whatever in the management or that he took no steps to keep himself informed of the affairs of the Company.”

36.  With respect to Ms Choy, these passages that she quoted are case sensitive. They do not establish the principle that a director who delegates his duty will always be absolved from liability, but a director who had reasonable belief in a state of affairs and took reasonable steps (in that case to comply with statutory duties) will not be found liable for abrogation of responsibility.

37.  More recently, Falk J (as she then was) in Re Keeping Kids Co [2021] EWHC 175 (Ch) at §§858-861 elaborated as follows:

“(1) The directors’ ability to delegate, and more generally to rely on staff members, is subject to qualification. Today there is a recognised duty to monitor employees upon whom significant reliance is placed and to ensure that there are in place appropriate supervisory and review systems. That the reliance must in the particular circumstances be consistent with the discharge of the duty of reasonable skill and care by the director.

(2) Proper delegation does not involve abdication. There is always an overall duty to supervise. An important aspect of the role is to ensure that material risks are identified and managed, including financial risks. In addition, the extent of delegation that can properly be made to, and reliance that can be placed on, staff members will depend on the circumstances. In particular it will depend on whether the directors have reason to be concerned about the competence or integrity of the relevant staff member or members, the quality of information being provided, or their willingness to carry out the Board’s instructions. (underline added)

(3) Directors’ obligations to ensure that they have a sufficient knowledge and understanding on an ongoing basis would include, where appropriate, following up on matters previously discussed. When that would be required would depend on the subject matter and the degree of trust that could reasonably be placed in the staff member or members concerned. It is obviously good practice to follow up on important "action points” agreed at a previous meeting. Beyond that, the extent of follow-up would depend on the significance of the issue and whether there was any cause for concern, for example a doubt arising as to whether an agreed action has been implemented. Material risks, including in relation to the company’s financial position, should be assessed on an ongoing basis.”

38.  By way of illustration, the courts have held directors to be liable for breach of duty of care extending credit without adequate safeguards in the following cases. In ChinTung Futures Ltd. (In Liquidation) v Arthur Lai Cheuk-kwan and Others [1994] 1 HKLR 95, the plaintiff company was a broker on the futures exchange and, as a result of the stock market crash, a customer of the company defaulted on a futures trading account held with the company, leading to a loss of about $83.97 million. Bokhary J (as he then was) held at §§112-113 that the director was liable for breach of duty as:

(1) There was no guarantee.

(2) “It had no knowledge of the Thai general, Seletar, Mr Sukham or anybody else on the basis of which it could afford to be reasonably confident that default would not occur if the market crashed, or that legal proceedings would be fruitful in the event of default.”

(3) The account operated at a heavily discounted margin.

(4) The account was opened practically without any safeguard.

39.  Ms Choy submits that this case is distinguishable because ChinTung involved highly volatile products, namely, futures, whereas the present case involved loans. I do not think the distinction is material. What is material is the both cases involved lending or extending credit to an obviously unreasonable extent.

40.  In Australian Securities and Investments Commission v Avestra Asset Management Limited (In Liquidation) [2017] FCA 497 at §218, Beach J held that the directors failed to act with reasonable care and diligence in authorizing the company to make a loan in view of the following circumstances:

“Those circumstances include the fact that the loan accounted for approximately 75% of the investments made by the Avestra Credit Fund, and Avestra did not undertake due diligence regarding the intended use of the loan proceeds and did not obtain readily realisable security in respect of the loan…”

41.  Ms Choy submits that this case is distinguishable on the facts as it did not involve loans granted to private individuals but a company for its further investment in funds. The considerations are wholly different. The fact that there was a breach in those circumstances does not mean the same can be said in the present case.

42.  Once again, I do not find this distinction material. The reasons for decision was focused on the lack of due diligence and lack of security.

43.  Ms Choy further relies on 2 authorities in her opening submission, but they are no longer applicable in the light of the authorities cited by Mr Lam.

44.  The first is Re Brazilian Rubber Plantations and Estates Limited [1911] 1 C 425. Ms Choy submits that a director: (1) is not bound to bring any special qualifications to his office; and (2) is not bound to take any definite part in the conduct of the company’s business.

45.  Without disrespect, her first proposition is contrary to the "second limb" envisioned under Section 465(2)(b), as clarified by the Annotated Companies Ordinance (Cap.622) at [465.04].

“The second limb, contained in s 465(2)(b), provides for a subjective test which can raise the standard expected of a director above the minimum objective standard, depending on the particular knowledge, skill and experience that the director concerned possesses. If the particular director has low level of knowledge, skill and experience, that does not mean that s 465(2)(b) will bring the standard of care expected of that director below the minimum objective standard under s 465(2)(a). This is because every director must meet the standards of both paras (a) and (b).”

46.  The second proposition is also contrary to Re Copyright Ltd [2004] 2 HKLRD 113 as directors have the continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business.

47.  The second case is Lagunas Nitrate Company v. Lagunas Syndicate [1899] 2 Ch.392. Ms Choy submits there would not be a breach of duty unless, in a business sense, a director’s conduct was grossly negligent.

48.  With respect, gross negligence is not the applicable standard under s.465 of the Companies Ordinance.

49.  This Court, of course, reminds itself that whether there was a breach of director’s duties is a highly fact sensitive exercise. Each case must be decided on its own facts.

E1. Duty to exercise independent judgment

50.  As explained in Law of Companies in Hong Kong, Fourth Edition, 2023 at §8.160:

(1) Directors are required to exercise independent judgment and must not fetter their discretions.

(2) The fiduciary duty to act in good faith in the interests of the company imposes a positive obligation on directors, such that directors are not permitted to blindly follow the instructions of another director.

(3) A company’s shareholders are entitled to have its officers independently consider and decide the company’s affairs. Simply following the instructions of another without putting the director’s own mind to the matter could also amount to a breach of the director’s duty of care.

51.  Even if a director does rely upon others in the conduct of the company’s affairs, he must, at all times, be at liberty to satisfy himself as to any matter in relation to the company’s business: Re Boldwin Construction Co Ltd [2011] 3 HKLRD 430 at §12, CA.

52.  Ms Choy submits that as held in Boldwin Construction, there needs to be evidence showing that the director could not trust his staff or that they were suspicious:

“11. In so saying, Romer J also went on to indicate that it was permissible for a director not to give continuous attention to the affairs of the company. Similarly, it was self-evident that a director should be in a position to trust company officials to carry out their duties in relation to the running of the company. It would only be in cases where there were reasons to consider that another official could not be relied upon, that a director might be at fault if he failed to take further steps in relation to any particular duty.

12. Hence, in relation to many matters, directors will no doubt rely upon what is done by company officials and their fellow directors in relation to the affairs of a company. But that is not to say that the ultimate responsibility does not lie upon the director. If a director has cause to be suspicious, or reasonably believes there is such cause, then the director may incur liability if he does not satisfy himself in relation to all matters relating to the company’s affairs.” (underline added)

E2. Duty to act bona fide in the best interests of the Company

53.  Whether a director has breached the duty to act bona fide in the best interests of the company ordinarily applies a subjective test, ie whether the director honestly believed that his act or omission was in the interests of the company. The issue is as to the director's state of mind. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company's interest; but that does not detract from the subjective nature of the test: China Metal Recycling (Holdings) Ltd v Chun Chi Wai [2021] HKCFI 378 at §62.

54.  In any event, honest belief without any reasonable basis cannot be a defence to breach of director’s duties. It is not an excuse that a director blindly followed the act of other directors: China Metal at §214.

55.  Where there is no evidence that the director gave actual consideration to the interests of the company, the proper test to be applied is an objective one, i.e. whether an intelligent and honest man in the position of a director of the company concerned could, in the whole of the existing circumstances, have reasonably believed that the transaction was for the benefit of the company: China Metal at §63.

F. DUTIES OWED TO HANSOM AS A DIRECTOR

56.  As Ms Choy submits, there is no document to show what the scope of Mr Yang’s duties was in Hansom. Mr Ho could not say for sure what Mr Yang’s duties were either. Mr Yang’s evidence was that there were no employees in Hansom and Mr Ho was not able to contradict this.

57.  Mr Ho also admitted that there is no document to show the scope of duties of Wang and he did not know how Mr Yang and Wang divided their duties between them.

58.  I do accept, as stated in Yang-WS, that Mr Yang's role was that of an “approver” (審批人) of loans.

59.  Ms Choy submits that the assessment of competence will need to address the defendant’s role (assigned or assumed), duties and responsibilities, taking into consideration the part the defendant was expected to play in the management and organization of the company and its business: Re CFO Lending Ltd: Secretary of State v. Keeble [2022] EWHC 2503 (Ch) at §177, In the absence of evidence addressing the role, duties, and responsibilities of the director meant that the relevant complaint of incompetence supporting unfitness was not established: at §214.

60.  In CFO Lending, the director had the “leading role” in the company but there were no specifics about the role given by P. P could not show the linkage between D’s role and the alleged wrong (ie misuse of client information). D’s case was that his role mainly related to marketing and advertising but operational compliance was the responsibility of the other 4 directors who had admitted liability.

61.  The present case is different. Mr Yang was the sole or one of the 2 directors of Hansom charged with approval of loans. The other Managing Directors and officers were of Freeman. Even in the absence of contractual documents defining the scope of his duties, there is nothing to suggest that the statutory duty of care imposed by s.465 Companies Ordinance should not apply to Mr Yang in the role of an approver.

62.  Specifically, Mr Yang has obtained a postgraduate degree in IMBA (Financial). He studied a 2-year course which included accounting, corporate finance and financial management. He had over 12 years of experience in the financial industry, having worked with major financial institutions including Ping An Trust Co Ltd and Zhongtai Securities (specifically on investment in shareholding). The board of Freeman recommended him to be Hansom’s director, based on his working experience and gave him high remuneration. With such qualifications and experience, Mr Yang should be held to the standard of care expected of a director under s.465 of the Companies Ordinance.

G. DID MR YANG BREACH HIS DUTIES AS A DIRECTOR WITH RESPECT TO THE 5 LOANS?

G1. The workflow in approving loans

63.  In his Defence (§§1 and 2) and witness statement (§2), Mr Yang referred to a workflow of approving loans (“Workflow”) that involved other people (probably from Freeman).

64.  I also accept that, Hansom not having staff, the process of gathering information had to be delegated to others. However, it remained Mr Yang’s duty to vet the information obtained from due diligence, review the Credit Assessment Reports and come to an independent judgment.

65.  Mr Yang did in fact personally review the Credit Assessment Reports and attachments. He admitted that he had approved the 5 Loans and that, if he had refused to approve the same, Hansom would not have granted the Loans or paid them to third party recipients.

66.  He would consider the source of the information and the logic of proving its veracity. He would review the terms of the loan agreement. He and other people (項目推進人), including Managing Directors of Freeman, would consider whether the loan was for the benefit of Hansom and was safe to lend, and then come to a consolidated decision. Then Mr Yang would sign the loan agreement and related agreements.

67.  Where the loan proceeds were to be issued to third party recipients, Mr Yang was not involved in the process directly. However, he would ask the actual “operator” for the reason why money was to be released to third party recipients and review the due diligence done by that officer on the third party recipients. It was only after being satisfied with the logic of having the third party recipients and the operator’s confirmation that there was no risk in law that Mr Yang would sign the documents authorizing release of the loan proceeds to the third party recipients.

68.  Mr Yang would supervise the loan process to ensure that it complied with the company’s requirements, discuss with the professional officers in charge at every step, and assess the logic of the loan and source of funding in the light of the “market conditions”. He exercised independent judgment in such circumstances based on what he believed to be true information. Before signing the loan agreement, Mr Yang would consider the asset position of the borrower, the purpose of the loan, the market for re-financing, match the profit with risk and supervise officers in assessing the background of the borrower.

69.  In my view, the Workflow could not be faulted as a matter of principle.

G2. A double-check mechanism adopted by Mr Yang

70.  Ms Choy submits that Mr Yang’s evidence under cross-examination showed that Hansom adopted a “double-check” mechanism for loan approvals. Mr Yang’s decision to approve a loan was not final but the process required at least 2 executive directors from Freeman to finalize approval. Wang had the right to not sign cheques to release the loans. This mechanism ensured that there was check-and-balance within the process. Mr Yang was not responsible for conducting site visits or reading all documents before approval of loans. This was done by Wang who would report his due diligence results to him. Mr Yang would discuss the credit assessment separately with Wang and Zhao Tong (“Zhao”), to ensure that there was consistency in their assessment before signing his approval.

71.  Whilst this may all be true, it has to be remembered that Hansom was a legal entity in and of itself. Zhao and Wang were not employees of Hansom. They could have been misled by Mr Yang’s (inappropriate) approval of a loan to release the loan proceeds. The fact that Zhao or Wang had wrongly given a further blessing to the loan would not absolve Mr Yang from liability. Ensuring “consistency” in the views of Wang, Zhao and/or Mr Yang would not discharge Mr Yang’s duties as a director if Mr Yang’s approval was wrongly given in the first place. That is not “elevating” (to use Ms Choy’s word) Mr Yang’s duties to essentially encompass all steps involved in the loan approval process. The Court is merely holding him to his duties as an “approver”. It is also not “courtroom hindsight” as Ms Choy submits because the Court assesses his conduct at the time of approval.

72.  Accordingly, existence of the double-check mechanism in itself did not absolve Mr Yang from liability.

G3. Credit assessment of the Borrowers

73.  Mr Yang claimed to have followed the Workflow when doing the credit assessment of the Borrowers. The Credit Assessment Reports were prepared by Zhao. Mr Yang had asked Zhao about the source of information and logic of the assessment. He had reason to trust the professional integrity of other Managing Directors and officers whom he had consulted. However, the credit assessments were problematic.

74.  Firstly, the information obtained by Zhao was seriously inadequate. All of the Borrowers were natural persons. All of Zhao’s credit assessments concluded that the Borrowers’ creditworthiness was satisfactory, solely on the basis of the alleged net asset value of the Borrowers’ shareholding in private companies in the Mainland, as stated in the financial statements. (Each of these companies in which the relevant Borrower held shares will be referred to as “the Borrower’s company”.) Zhao applied a discount of 50% to the value, except for Song, whose shareholding was subject to a discount of 30%.

75.  Common to all of Zhao’s assessments were that:

(1) The financial statements of the Borrowers’ companies (save for Song’s) were not verified or audited;

(2) There was no information as to the personal assets, income earning capacity or liabilities of each Borrower;

(3) There was no information as to the liabilities of each Borrower.

(4) There was no request for security, in particular security over the shares held by each Borrower;

(5) No attempts were made to verify whether there was any encumbrance on the Borrowers’ alleged shareholding in the companies.

76.  In summary, the information available could hardly convince any reasonable lender that the Borrowers had financial ability to repay. It should have prompted a lot more questions from Mr Yang instead of blindly relying on Zhao.

77.  Secondly, the lack of ability to repay was glaringly apparent. Mr Yang testified that when he met with Xue, Ju and Li, he knew that each of those Borrowers intended to (i) obtain a further loan from another financial institution to repay the loan from Hansom; and (ii) to pledge their shareholding in their respective companies for that purpose. Such information would have alerted any professional lender to the risk that these Borrowers had no ability to repay such huge loans. Even so, no security (eg over the shares of the Borrower’s respective company) was sought from the Borrowers or even considered. Mr Yang’s explanation that the interest proposed was already over the banks’ usual rates could not be an answer in such circumstances.

78.  Ms Choy submits that Mr Yang did not rely on the provision of security but the ability of the Borrowers to get refinancing and the profitability of their businesses.

79.  With respect, the minutes of meeting (in the form of Qs and As) with those 3 Borrowers did not even record their intention to each take out a loan to repay Hansom’s loans. Further, there simply was nothing that could show that the Borrowers could get refinancing.

80.  Thirdly, there was serious lack of documentation. This was confirmed by Mr Glen Ho when he was referred to the Workflow. This tallied with Mr Yang’s own evidence that he had not read all the documents but only asked Wang about the source of information.

81.  Mr Lam referred to the lack of documentary evidence as to litigation and bankruptcy searches against each of the Borrowers. I place no weight on this because it is not Hansom’s case that any of the Borrowers were bankrupt or was involved in litigation.

82.  Fourthly, Zhao’s suggested discount to the value of the Borrowers’ shareholding was flawed.

83.  With respect to Xue’s loan, Xue’s company was assessed to have “ordinary liquidity in assets” (资产流动性一般). Mr Yang testified that he only relied on 2 matters, namely (a) the balance sheet and (b) what Wang purportedly told him about the nature of the business of Xue’s company. Mr Yang spent a lot of time explaining why the income from receivables would be relevant in assessing liquidity in assets. However, a company’s income and expenses simply would not shed light on the nature of its assets (be they liquid or not).

84.  There were also numerous apparent inconsistencies in the loan documentation as regards Xue. Her Credit Assessment Report stated that the paid-up capital of Xue’s company was RMB120 million as at 11 September 2017. However, the Credit Assessment Report in the file showed that only RMB20 million was paid-up.

85.  Mr Yang claimed that Wang had confirmed with an independent accountant in the Mainland that the RMB100 million was in fact paid – in cash. Once again, there were simply no documents to confirm Wang’s assertion. Further, it was simply odd that RMB100 million was deposited by cash into the bank account for paid up capital. Even using the highest denomination of RMB100 notes, that would have required a million bank notes.

86.  Yang did not notice that the date on the bank slip for cash deposit, 11 September 2017, was after the draft accounts prepared up to 31 August 2017. Inevitably the draft accounts were inaccurate and unreliable.

87.  With respect to all Loans except the one to Song, the credit assessment of the Borrowers’ companies just set out the business scope as taken from the business licences, without ascertaining what each company’s actual business was. This demonstrated that the matter was never genuinely investigated.

88.  The valuation of the Borrowers’ companies in the Credit Assessment Reports was only based on draft or unaudited financial statements of the companies purportedly owned by Xue, Ju, Li and Liu, and Mr Yang admitted that he did not ask why the draft financial statements were not signed. He only asked Zhao, without asking for any supporting documents as to the reliability of these statements.

89.  With respect to Song’s loan, whilst the financial statements were purportedly audited, no attempt was made to conduct any due diligence on the veracity of the figures stated therein, especially the purported long-term investments worth RMB 250,000,000, purportedly all acquired in 2017. Without such long-term investments, the NAV of the company would only be RMB 16,000,000.

90.  Given the substantial amount of each Loan, it was plainly insufficient for Mr Yang simply to take the companies’ financial statements at face value. In any event, there was no assurance that the Borrowers’ companies would or were able to repay the Loans in the event of default, as a review of the financial statements of the companies show:

(1) The companies of Xue, Ju and Li were unable to generate any positive net cash flow from their operating activities; and

(2) The companies of Ju and Li were reliant on borrowings.

91.  Mr Yang said that he tried to ascertain whether Zhao’s assessments were reliable by consulting Wang. Mr Yang in fact claimed that Wang had considered a lot of things. Aside from this being undocumented, Mr Yang had not sought further information to substantiate Zhao’s assessments of the borrower’s creditworthiness.

92.  With respect to Liu’s loan,

(1) Liu’s credit card statement only showed a credit limit of RMB28,000. That could not be sufficient proof of financial ability to repay a potential loan of HK$160 million.

(2) The search record of Liu’s company showed “正在加载，请稍后”. There was no attempt to obtain a complete version of the search.

93.  Having regard to the analyses above, the credit assessment of each Borrower was wholly flawed. Ms Choy asks whether Mr Yang had reason to distrust anybody involved in the Workflow. In my view, there was reason to do so, given the glaring deficiencies in Zhao’s due diligence. I find that a reasonable director would not have approved the 5 Loans, let alone a director with the financial experience of Mr Yang.

G4. Payments of loan proceeds to third party recipients

94.  Yang-WS claimed that payment of loan proceeds to third party recipients was a “reasonable and usual commercial arrangement”. Before making such payments, the “operator” had prepared the results of due diligence to Mr Yang. Mr Yang had reason to believe in the results of due diligence done by a Managing Director of a listed company.

95.  However, such due diligence on the third party recipients was not documented. Based on the available request forms for drawdown signed by the third parties, there were no checks even on their identities or the reasons for making payments to them.

96.  Mr Yang’s evidence was that the loan proceeds were paid to the third party recipients pursuant to an arrangement that was akin to that of “external guarantee, internal lending” (外保內貸), which was a common practice for Mainland borrowers, in order to overcome the problem of inability to carry out cross-border transfers into the Mainland:

“… 因為借款人在海外需要通過“外保內貸（中國大陸之外的地區提供擔保，在中國大陸提供借款）”的方式將資金轉回內地使用（依據當時操作人員的描述），所以只能通過第三方收款，之後再以各種方式將資金用於自己的企業運營等…” ( §1).

97.  Such an explanation cannot withstand scrutiny.

(1) The arrangement was not documented.

(2) There was no evidence supporting any external “guarantee”.

(3) The 5 Loans were not “internal (Mainland) loans” but were all granted in Hong Kong in Hong Kong dollars.

(4) The purported problem of the inability to transfer funds from Hong Kong into the Mainland does not sit well with the fact that the HSBC transfer application forms submitted by Hansom all showed that the funds were transferred to Dong Sheng’s account in the Mainland directly (with a Beijing address of the recipient) without any problem. Mr Yang’s suggestion that the transfers were to an offshore account of Dong Sheng and hence did not contravene the prohibition on cross-border transfers was a new piece of evidence in the witness box unsupported by objective evidence.

(5) Mr Yang had no idea of the “confirmation of remittance” (汇款确认书) notwithstanding that it had Hansom’s chop on it. As the director and without any employees, he did not even know who could have used Hansom’s chop and for what purpose. The same applied to the HSBC payment application form which stated that the purpose of the payment was “service fee”, which Mr Yang again claimed he had no involvement in.

98.  I find the payment to third party recipients to be totally unsupported by reasons.

G5. Approving and extending defaulted loans without commercial bases

99.  The only known assets purportedly owned by the Borrowers were their shareholding in the Borrowers’ respective company. No business or assets in Hong Kong were identified. And yet Mr Yang approved the repayment extensions in respect of the loans to Xue and Ju with no demand for security (particularly when Ju was already in default at that time) and at a substantially reduced rate of interest from 15% to 8% per annum.

100.  Mr Yang admitted under cross-examination that he had considered asking for high interest rates in exchange for lack of securities, but he applied the interest rates in line with Hansom’s commercial rates.

101.  Ms Choy submits that:

(1) One should not look at the matter with the benefit of hindsight, as this is not the correct way to fix liability on a director. The test is whether Mr Yang honestly believed that this was in Hansom’s interest. I agree that the interest rate in itself could not be decisive of Mr Yang’s fault.

(2) Mr Glen Ho very fairly accepted under cross-examination that Hansom had previously granted other unsecured loans and those were not defaulted. Mr Yang was entitled to rely on the past successful experience and hold the view that this would be, like in the past, in line with Hansom’s interest. There is no evidence challenging such honest belief on his part. With respect to Ms Choy, that was not the bases relied on by Mr Yang in approving the 5 Loans. There is also no evidence before this Court as to why those past loans were unsecured.

102.  Placing oneself in the position of a director in the then circumstances, one Loan was already in default whilst another was due in 3 days. Not seeking security in such circumstances coupled with a substantial reduction in interest showed that Mr Yang did not act in the interest of Hansom. He may have acted on an honest belief but that belief did not have a reasonable basis.

G6. Breach of duty to exercise independent judgment

103.  Whilst Mr Yang could delegate investigation work to others and the Workflow showed teamwork, it was his duty, as approver, to satisfy himself that the due diligence done by others was adequate for him to approve a loan and make further enquiries if it was not; and that he would not mislead Wang into believing that Mr Yang’s approval was in the interests of Hansom when it was not. Wang may have his responsibility to bear but that does not absolve Mr Yang’s.

104.  The breaches analyses in Sections G above demonstrated that Mr Yang granted the 5 Loans based on inadequate due diligence done by Wang on each Borrower and each Borrower’s company. He also approved the extension of time for repayment of 2 loans on wholly uncommercial bases. The 5 Loans were uncommercial, granted without proper credit assessment and detrimental to Hansom. Any subjective belief to the contrary is clearly unsustainable for lack of reasonable basis.

105.  Whilst Mr Yang maintained that he exercised independent judgment and considered the source of information and logic before approving the Loans, this was inconsistent with his evidence:

(1) He relied on oral confirmations from Wang eg as to paid up capital or that due diligence had been conducted when one would expect him to have asked for documentary proof.

(2) Despite the meeting minutes between Mr Yang and Xue, Ju and Li which recorded that the Borrowers accepted the interest rates proposed by Hansom, Mr Yang said that he had not discussed the specific interest rate with the Borrowers during the meetings and insisted that a lower interest rate was accepted as a result of Wang’s further discussions with the Borrowers. However, this was contradicted by the meeting note with Ju which specifically referred to Ju’s acceptance of the interest rate of 1.5%.

(3) Mr Yang failed to identify glaring inconsistences regarding the purpose of the loans across the loan documentation. For all 5 Borrowers, the drawdown requests for payments of loan proceeds to the third party recipients stated that the relationship was “Creditor – repayment of loan”. This was plainly inconsistent with the following:

(a) For loans to Xue, Ju and Li, the undated funds transfer confirmations stated instead that they “confirmed to lend” to Dong Sheng;

(b) For loans to Liu and Song, the HSBC drawdown application forms to Dong Sheng stated that the purpose of payment as a “service fee”; and

(c) For the loan to Xue, the meeting minutes documenting Mr Yang’s interview with Xue stated the purpose of the loan to be for trade and future listing of the Hong Kong Stock Exchange.

(4) Mr Yang consistently referred to “market conditions” in his evidence to justify his approval of the 5 Loans and Repayment Agreements. However, what the market conditions were could not be ascertained from any Credit Assessment Report.

106.  I find that Mr Yang had failed to exercise independent judgment when reviewing the information given to him and deciding if it was adequate or reliable enough to act on. If he had relied on Wang, that reliance was wholly misplaced and unreasonable, given Mr Yang’s personal background in the financial industry.

G7. Breach of duty to act bona fide in the best interests of Hansom

107.  The above evidence showed that Hansom was exposed to great risk of non-recovery at the time the 5 Loans were approved. Applying a subjective test, Mr Yang may have honestly believed that his approval of the 5 Loans and their relevant extensions were in the best interests of Hansom. However, that belief had no leg to stand on in view of the analyses in Section G above.

108.  Further, Mr Yang could not have acted in the best interests of Hansom when:

(1) The relevant Credit Assessment Reports recommended an interest rate of 1.5% per month, but Mr Yang approved the loans to Xue and Ju at an interest rate of 1.25% per month without any recorded explanation. In the case of Ju, he had already agreed to the 1.5% per month interest rate.

(2) Mr Yang approved the repayment extensions to the loans to Xue and Ju: (a) at a reduced interest rate; (b) accepted discounted settlement for interest accrued on these loans; and (c) without demanding any security for Xue and Ju’s loans (particularly when Ju had already defaulted at that stage).

109.  Mr Yang submitted that his actions in approving the repayment extensions led to subsequent repayments by 3 of the Borrowers (namely, Xue, Ju and Liu). However, those repayments were only for interest and the amount was insignificant (HK$24.5 million) compared to the size of the loans drawn down by these Borrowers (HK$469 million).

110.  I find that Mr Yang had breached his duty to act bona fide in the best interests of Hansom.

H. LOSS AND DAMAGE

111.  Breach of any one or more of the 3 duties set out in paragraph 3 above is enough to establish liability in this case. But for his breaches of duty, the 5 Loans would not and ought not to have been approved by Mr Yang or repayment extended. I find causation of Hansom’s loss to be established.

112.  There is no dispute between the parties as to the amount of Hansom’s loss – HK$799 million.

113.  Hansom has not justified its claim for compound interest and I do not see any basis to order it.

114.  Costs should follow the event and be to Hansom.

I. ORDER

115.  The claim in breach of director’s duties is established. I therefore order as follows:

(1) There be judgment to the Plaintiff for damages in the sum of HK$799 million;

(2) Interest on the judgment sum at the rate of P+1% from the date of the writ (25 June 2024) to the date of judgment and thereafter at judgment rate until payment.

(3) To the extent that the Plaintiff recovers or will recover part of such losses from other parties (such as the borrowers), the Plaintiff will account for such recoveries to ensure that there is no double recovery for any loss suffered.

(4) On a nisi basis, costs should be paid by the Defendant to the Plaintiff.

(5) There be summary assessment of the Plaintiff’s costs. The Plaintiff shall lodge and serve a costs statement by 8 December 2025. The Defendant shall lodge and serve his grounds of objection within 21 days thereafter. Summary assessment shall be conducted on paper unless an oral hearing is directed.

116.  I thank counsel for their assistance. The succinct presentation in respect of each Loan by Mr Lam and Mr Lau are particularly useful.