CHINA ALARM HOLDINGS ACQUISITION LLC AND ANOTHER v. ING ALEXANDER YIM LEUNG (also known as ING YIM LEUNG, ALEXANDER) AND OTHERS

CACV 98/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 98 OF 2016

(ON APPEAL FROM HCA NO 503 OF 2012)

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J U D G M E N T

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Hon Kwan JA (giving the judgment of the Court):

1.  This is the appeal of the 1^st defendant, Alexander Ing, against the judgment of Deputy High Court Judge Keith on 24 March 2016 handed down after a nine‑day trial earlier that year. Judgment was entered in favour of the 1^st plaintiff, China Alarm Holdings Association LLC (“CAHA”), at U$9,911,496 and the 2^nd plaintiff, Pope Investments LLC (“PIL”), at US$5,344,065. A costs order nisi was made that Mr Ing was to pay 50% of the plaintiffs’ costs. The claim was in fraudulent misrepresentation.

Background

2.  The plaintiffs were corporate vehicles incorporated by Pope Asset Management LLC (“PAM”), an asset manager, for specific investments.  William Wells was the president of PAM.  By two subscription agreements for convertible notes in February 2005 and March 2006, the plaintiffs made total investments of about US$15.55 million in China Alarm Holdings Ltd (“CAHL”).  They lost almost the whole of their investments when CAHL went into insolvent liquidation in September 2009.  They sued the directors of CAHL for fraudulent misrepresentation, one of them being Mr Ing, who was also the CEO and majority shareholder of CAHL, claiming that the plaintiffs were induced to invest in CAHL by a number of representations about its operations and the intended use of the capital it was seeking to raise.

3.  Specifically, the plaintiffs alleged Mr Ing had not disclosed that a company controlled by him, Warp Cybertech Limited (“WCL”), had entered into an agreement with CAHL to provide consultancy and management services to CAHL for three years for substantial monthly fees (“the Services Agreement”), and that those services included bribes to corrupt officials in the PRC.  Nor had Mr Ing disclosed that a company owned by him, Stornaway Enterprises Limited (“Stornaway”), had entered into an agreement with CAHL by which CAHL agreed to employ Mr Ing as its CEO for three years for substantial remuneration (“the Employment Agreement”).  It was contended Mr Ing knew that the failure to disclose those matters made the representations false, or at least turned a blind eye to the possibility that it might have made them false.

4.  The representations took the form of several clauses in the final draft of a confidential information memorandum and the two subscription agreements.  As noted by the judge, the memorandum was a very long document.  It ran to 50 pages in all, leaving aside a schedule and some appendices.  The relevant clauses in the memorandum were referred to in the judgment as “the compensation clause” and “the use of proceeds clause” and were found in the last part of the memorandum in a section headed “Organization”, which itself ran to 15 pages.

5.  The subscription agreements were identical save for the principal amount of the notes, the maturity date, and the sum for which the notes could be converted into shares.  They were obviously drafted by lawyers and as noted by the judge were very long.  Each ran to 7 pages plus a short schedule, and there was schedule 2 containing the warranties which ran to 7 pages, and a note instrument which ran to 18 pages including schedules.  The relevant clauses in the subscription agreements were clause 4.1, by which CAHL gave the subscriber (CAHA or PIL, as the case may be) an undertaking, and schedule 2 which contained a number of warranties.  Clause 4.1 was similar in effect to the use of proceeds clause in the memorandum.  The relevant warranties in schedule 2 were clauses 8.1(1), 9.1(4), 9.1(9) and 13.1.

6.  As no liability was found in respect of the compensation clause, the use of proceeds clause in the memorandum and clause 4.1 of the subscription agreements in that these clauses did not induce Mr Wells to cause CAHA and PIL to enter into the subscription agreements, it is unnecessary to set them out.

7.  The warranties in clauses 8.1(1), 9.1(4), 9.1(9) and 13.1 of schedule 2 read as follows:

“8.1(1) Since its incorporation, each of [CAHL and its subsidiaries] has carried on its business in the ordinary and usual course without having entered into any material transaction, assumed any material liability, or made any material payment which is not in the ordinary course of its business, and there has not been any material adverse interruption or alteration in the nature, scope or manner of its business …”

“9.1 [Neither CAHL nor its subsidiaries] is a party to any agreement, transaction, obligation, commitment, understanding, arrangement or liability which …

(4) involves or is likely to involve obligations, restrictions, expenditure or receipts of an unusual, onerous or exceptional nature …

(9) is in any way otherwise than in the ordinary and proper course of [CAHL’s and its subsidiaries’] business. …”

“13.1 All information contained in this Agreement or in the documents referred to herein and therein and all other written information concerning [CAHL and its subsidiaries] and/or any part or parts of its business operations assets and liabilities (actual or contingent) supplied by [CAHL] in the course of the negotiations leading to this Agreement to [CAHA or PIL] or its agents was when given true, complete and accurate in all aspects and there is no fact or matter which has not been disclosed which renders any such information or documents untrue, inaccurate or misleading at the date of this Agreement or which if disclosed might reasonably be expected to influence adversely [CAHA or PIL’s] decision to subscribe for the Notes on the terms of this Agreement.”

The findings in the judgment

8.  The judge found that the Employment Agreement and the Services Agreement were not disclosed to Mr Wells.  And it was only in the cross-examination of Mr Ing when he was asked about the precise nature of the services WCL provided under the Services Agreement that he mentioned “probably more than half” of the fees paid under the agreement (in the region of HK$25 million) were paid to “special consultants” who were used to “open doors” in the PRC.  This prompted the plaintiffs to apply for leave to amend the statement of claim (granted by the judge) to allege that one of the main purposes of the Services Agreement was to channel funds for bribes to be paid to corrupt officials in the PRC through the “special consultants”.

9.  On the falsity of the representations, the compensation clause was found to be false in that Mr Ing intended to compensate himself otherwise than in accordance with it.  The use of proceeds clause and clause 4.1 were false in that at least one of the main purposes of the Services Agreement was to be the conduit through which bribes were to be paid to corrupt PRC officials through “special consultants”.  Clauses 8.1(1), 9.1(4) and 9.1(9) were false in that the channeling of funds to “special consultants” seeking improperly to encourage government officials to award contracts to CAHL for reasons unconnected with the merits of its bids meant that CAHL had entered into “material transaction” and assumed “material liability … not in the ordinary course of its business”, that it had been party to an agreement which had been “otherwise than in the ordinary and proper course” of its business, and that it had been a party to an agreement which involved “expenditure … of an unusual, onerous or exceptional nature”.  The non-disclosure of the Services Agreement rendered the warranties in clauses 8.1(1), 9.1(4) and 9.1(9) untrue, inaccurate and misleading, it followed that the warranty in clause 13.1 was thereby rendered false as well.

10.  As to whether the representations were made fraudulently, the judge found they were, in respect of all the clauses that were false.

11.  To establish inducement, the plaintiffs would need to show among other things they would not have entered into the subscription agreements but for the representations, and the question to ask is what they would have done if the representations had not been made at all.  As mentioned earlier, the judge found the compensation clause, the use of proceeds clause and clause 4.1 did not induce Mr Wells to cause the plaintiffs to enter into the agreements in that he would have concluded the agreements without these clauses.  The judge was not convinced that Mr Wells had read these clauses at the time, but even if he did, the judge did not think he paid much attention to them and would not have regarded it necessary to rely on these clauses.  But the position regarding the three warranties in clauses 8.1(1), 9.1(4) and 9.1(9) as well as clause 13.1 was different.  The judge was satisfied Mr Wells would not have invested in CAHL if they had not been given and held that he was induced by these clauses to cause the plaintiffs to enter into the agreements.

12.  Mr Ing raised a limitation issue in that six years had lapsed since the date the cause of action accrued, by the latest this would be 3 March 2006 when the second subscription agreement was made, but the writ was issued only on 27 March 2012.  The judge held the plaintiffs could rely on section 26(1) of the Limitation Ordinance, Cap 347 which provides that the period of limitation shall not begin to run until the plaintiff has discovered the fraud or concealment or could with reasonable diligence have discovered it.

13.  The judge rejected an argument of Mr Ing based on recital (F) of the framework agreement dated 12 November 2009 for the debt restructuring of CAHL to the effect that the three claims against CAHL (referred to as “the Existing Convertible Bonds” in the framework agreement; made up of the convertible notes issued under the two subscription agreements with CAHA and PIL, referred to as “the Investor Bonds” in the framework agreement, and the convertible notes originally issued to Citadel and UBS and which had been assigned to PIL, referred to as “the Citadel Bonds” in the framework agreement) were to be reduced by a total of US$20.5 million, apportioned pro rata among them.  The liquidators of CAHL exercised the right to apply the US$20.5 million to reduce the outstanding amount under the Citadel Bonds only, and the claims of CAHA and PIL under the two subscription agreements were not reduced.

The issues on appeal

14.  Four main issues were raised in Mr Ing’s appeal.

15.  The first goes to the finding of falsity of one of the representations, namely, that “special consultants” were used to “entertain” lavishly corrupt government officials in the PRC in order to persuade them to favour CAHL improperly and to award contracts to CAHL regardless of whether it deserved to be awarded them (“the Misrepresentation Issue”).

16.  The second relates to the finding of inducement, namely, that Mr Wells was induced by clauses 8.1(1), 9.1(4), 9.1(9) and 13.1 of schedule 2 to the subscription agreements to cause the plaintiffs to enter into these agreements (“the Inducement Issue”).

17.  The third seeks to attack the finding that Mr Wells could not have discovered the facts relevant to the plaintiffs’ right of action with reasonable diligence (“the Limitation Issue”).

18.  The fourth relates to the construction of recital (F) of the framework agreement and whether the judge was correct to hold that the US$20.5 million reduction in the debt restructuring did not reduce the plaintiffs’ claims under the two subscription agreements (“the Quantum Issue”).

The Misrepresentation Issue

19.  Mr Horace Wong, SC[1] submitted that the judge’s finding on the falsity of the relevant representation was “plainly wrong” and contrary to established principles on the proper approach to drawing inferences of serious misconduct in that the allegation must be proved with evidence of a commensurate cogency, that any such inference must be compelling and properly grounded in the primary facts found, citing the judgment of Ribeiro PJ in Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387 at §§181 to 187.  It was contended that the judge reached the conclusion that the use of “special consultants” to “entertain” government officials was very different from the legitimate practice of using connections to give CAHL the opportunity to pitch for contracts by a process of inferences without proper foundation and that his conclusion was mere conjecture.

20.  Counsel’s arguments went along these lines:

(1) There was no evidence that CAHL obtained any contracts or benefits for any reasons other than its own merits, or how the use of “special consultants” was any different from the legitimate practice of using connections to give CAHL the opportunity to pitch for contracts.

(2) The judge found it significant Mr Ing had not mentioned in six witness statements but only disclosed in cross-examination that a sizeable amount of the fees paid to WCL went to “special consultants” for “entertaining” lavishly corrupt government officials.  He failed to take into account that the witness statements were all filed before the statement of claim was amended to plead this misrepresentation.

(3) The judge found it appeared that the payments to “special consultants” were not known within CAHL, that another director Professor Steven Kwok Siu Tong did not recall any specific occasion on which the use of “special consultants” was discussed or was told that CAHL used them, and that the financial controller Ms Eppie Tseng may not have known about them.  Mr Wong sought to attack these findings contending that the judge failed to take proper account of various matters in the witness statements and oral testimony of these witnesses.

(4) The conclusion that “special consultants” were used to “entertain” government officials to persuade them to favour CAHL improperly and to award contracts to it regardless of whether it deserved to be awarded was based on the assumption that the entertainment of officials and the expenditure spent on building connections could only have been made improperly and illegitimately.  There was no basis or evidence for such conclusion.  The judge reached this conclusion by drawing inferences from (a) there was no document relating to the use of “special consultants” and (b) the use of “special consultants” was not disclosed until Mr Ing’s cross-examination, but neither of the primary facts in (a) or (b) could justify an inference that CAHL’s payments were related to bribery, or support a finding that CAHL used “special consultants” to improperly secure favourable treatment.

(5) The judge found it significant there was a lack of documents to evidence the entertainment expenses and/or cash payments to “special consultants” and that would mean an inability for CAHL or WCL to claim tax deductions for the expenses, and drew the inferences that Mr Ing thought they were not or might not be regarded as legitimate business expenses, and the benefit to be derived from the contracts which CAHL might not otherwise have been awarded was worth more than the reduction in tax which CAHL or WCL would otherwise have had to pay.  It was improper for the judge to draw such inferences in the absence of relevant evidence, in particular when there was no cross-examination of Mr Ing on the tax returns or tax treatment of relevant expenses or the lack of legitimacy in the accounting treatment of relevant expenses.

21.  The judge’s findings that are challenged in the Misrepresentation Issue, the Inducement Issue and the Limitation Issue are all findings of fact.  They were arrived at by a process of inferences drawn from findings of primary fact, in which the judge took into account the demeanour and credibility of witnesses and the inherent probabilities.  The “plainly wrong” test applies to these findings of fact arrived at by inferences, and Mr Wong has not contended otherwise.

22.  We do not accept that the judge had failed to direct himself properly on the correct approach in drawing inferences in relation to serious misconduct, or that he had failed to apply the standard that the inferences drawn must be compelling and proved with commensurate cogency.  The detailed judgment handed down within a month after the trial demonstrated the thoroughness and care with which the judge considered and analysed the evidence and submissions.  He did not overlook the gravity of an allegation of fraud[2].  As shown in the findings of the judgment we have summarised earlier, in a number of instances, he gave the benefit of the doubt or the argument to Mr Ing.

23.  The words of the Canadian Supreme Court in Housen v Nikolaisen [2002] 2 SCR 235 at §14 are particularly apt to describe the present situation:

“The trial judge has sat through the entire case and his ultimate judgment reflects this total familiarity with the evidence. The insight gained by the trial judge who has lived with the case for several days, weeks or even months may be far deeper than that of the Court of Appeal whose view of the case is much more limited and narrow, often being shaped and distorted by the various orders or rulings being challenged.”

24.  Of similar effect are these words of Lord Hodge in Carlyle v Royal Bank of Scotland [2015] UKSC 13 at §22:

“It is the first instance judge who is assigned the task of determining the fact, not the appeal court. The re-opening of all questions of fact for redetermination on appeal would expose parties to great cost and divert judicial resources for what would often be negligible benefit in terms of factual accuracy. It is likely that the judge who has heard the evidence over an extended period will have a greater familiarity with the evidence and a deeper insight in reaching conclusions of fact than an appeal court whose perception may be narrowed or even distorted by the focused challenge to particular parts of the evidence. …”

25.  The submissions of Mr Wong are tantamount to asking the appeal court to re‑try the issues and re‑consider the evidence evaluated by the judge, by seeking to pick holes in his analysis and reasoning. This is not the proper role of an appeal court in an appeal against findings of fact.  As was emphasized in a number of judgments of the Court of Appeal (see China Gold Finance Limited v CIL Holdings Limited, CACV 11/2015, 27 November 2015, §§11 to 25), the primary role to assess the evidence and make relevant findings of fact is with the trial judge, the appellate process is not a platform for the appellant to repeat submissions on the evidence and factual aspects already considered by the judge in the hope that the appeal court may be persuaded to come to a different view.

26.  The focus of the appeal court is whether the primary judge has fallen into palpable errors of such nature which could give rise to grounds for intervention, and that the error is sufficiently material to undermine his conclusion.  That the appeal court may reach a different conclusion on the facts is not in itself a ground for intervention, as there are many areas that judges can reasonably reach different conclusions in relation to findings of fact.

27.  None of the matters raised in Mr Wong’s submissions can be regarded as palpable errors in the judgment.  That there was no evidence CAHL obtained any contracts or benefits for reasons other than its own merits is beside the point.  The judge was fully cognisant of the difference between the legitimate practice of using connections to create opportunities to pitch for business, and the illegitimate means of using connections to get preferential treatment irrespective of whether CAHL deserved to get business on its own merits. In drawing the inference that very substantial sums were not intended for legitimate business expenses, the judge was clearly entitled to take into account the silence of Mr Ing in six witness statements, his reasons why this was not mentioned in the witness statements (which was rejected[3]) and how this evidence emerged in cross-examination; that Mr Ing was not specific about the recipients of the largesse and did not want to know who needed to be paid as long as the “special consultants” “get the job done”; and that Mr Ing would not like to “publicise … openly” the type of fees for “business development” services.

28.  As for the evidence of Professor Kwok and Ms Tseng, the judge had considered their evidence in some detail.  We do not think he made any factual error as contended by Mr Wong.  The judge had not overlooked Professor Kwok’s evidence on the practice of using “advisors” to help make connections in China[4]. He was entitled to take the view that Ms Tseng “may not have known” about the payments to the “special consultants” in light of the contemporaneous documents – she made no reference to them in the reconciliation she sent to Mr Wells in October 2008 giving a list of CAHL’s operating expenses, and there was no disclosure of any internal documents of CAHL on the use of “special consultants” or the payments to them.

29.  The complaint that there was no exploration in the evidence about CAHL’s tax returns or tax treatment of the payments to the “special consultants” is misconceived.  The judge was not making any findings on the tax position of CAHL, but merely commenting on the absence of documents if these very substantial amounts were indeed legitimate business expenses which should be tax deductible.

30.  It is entirely permissible for the judge to draw the inferences he did on the Misrepresentation Issue in the face of the evidence as a whole.  The conclusion he reached by a process of inferences on the primary facts found is not one which no reasonable judge could have reached.  The “plainly wrong” requirement for the appeal court to intervene is clearly not met.

The Inducement Issue

31.  The complaint here is that the judge’s conclusion (that Mr Wells was induced by clauses 8.1(1), 9.1(4), 9.1(9) and 13.1 to cause the plaintiffs to enter into the agreements) was inconsistent with his finding that Mr Wells did not read or read carefully the compensation clause, the use of proceeds clause and clause 4.1, and had decided to invest based on only those parts of the memorandum he relied on and the due diligence carried out for the plaintiffs.  The judge should have adopted the same approach when he came to deal with inducement as regards clauses 8.1(1), 9.1(4), 9.1(9) and 13.1.  And as Mr Wells was not aware of the representations in these clauses, they could not have operated on his mind and had no impact on his actions and the representations would not be actionable.  The judge however took a contrary view and said whether Mr Wells “actually read [the clauses] does not really matter” because “it would have been surprising if they had not been included in the two subscription agreements”[5]. It was wrong to infer that Mr Wells would have somehow known about these clauses because they were provisions he would have expected to be included in the agreements.

32.  Furthermore, the question of inducement is to be assessed with reference to the particular representee as opposed to an objective reasonable bystander.  Mr Wong submitted that the judge fell into error in adopting what was essentially an objective test in categorizing the relevant clauses as “standard clauses”[6]. The fact that they were standard clauses only goes to suggest that a reasonable person would expect them to be included in the agreements.  The judge had conflated the question of whether Mr Wells would have desired the inclusion of these clauses with the question whether he was in fact aware of them.  Whether the clauses were standard clauses is immaterial unless Mr Wells had actually read them.

33.  We do not think the above criticisms are justified on a proper reading of the judgment.  As submitted by Mr Douglas Lam, SC[7] for the plaintiffs, the findings of the judge must be read in context and as a whole.

34.  The judge had found Mr Wells “a straightforward and honest man”, “a relatively cautious man – not someone who would take unnecessary risks”[8]. By the time of the first subscription agreement, he had by then decided to invest in CAHL based on “(a) those parts of the memorandum on which he unquestionably relied, and (b) his own due diligence through his staff…”[9]. Whilst Mr Wells played an important part in the decisions to invest in CAHL, the decisions were subject to the approval of PAM’s clients.  And he was assisted by the staff of PAM and the professional advisers in carrying out due diligence on CAHL.  The subscription agreements were drafted by lawyers, as the judge had found[10]. They were reviewed by the staff and the attorneys of PAM prior to execution[11].

35.  The judge contrasted the compensation clause and the various use of proceeds clauses with the warranty clauses in schedule 2, and went on to say that “the three warranties are so standard that it would have been surprising if they had not been included in the two subscription agreements.  So whether Mr Wells actually read them does not really matter.”[12]

36.  It is important to note what the judge said immediately after:

“[Mr Wells] would have wanted to know that warranties had been included in the subscription agreements to cover the possibility that CAHL had not entered into any transaction which was not in the ordinary course of its business or which involved onerous or unusual expenditure. Even if he had not read these warranties, I am sure that he would have been told that there were warranties in the subscription agreements which protected the plaintiffs against that possibility.”[13]

37.  And he continued later on in a similar vein:

“Again, whether Mr Wells actually read clause 13.1 does not really matter. He would have wanted to know that a warranty had been included in the subscription agreements to cover the possibility that relevant information had not been disclosed, and he would have been told that there had been.”[14]

38.  The references to “he would have been told” meant that Mr Wells would have been told by the staff of PAM or the professional advisers, who had reviewed the subscription agreements prior to execution by him.  That there was no evidence Mr Wells had asked the staff or professional advisers and was actually told is immaterial.  The judge found it sufficiently compelling (“I am sure that he would have been told”) and was entitled to draw the inference that Mr Wells would have been told about the existence of the standard warranties, by those who reviewed the agreements for him, as “there is a limit to what even a comprehensive exercise of due diligence will reveal” and warranties are “always sought”, and Mr Wells, being a relatively cautious man who would not take unnecessary risks, “would have expected nothing less”[15]. It is in those circumstances that the judge did not think it really matters whether Mr Wells had actually read the warranties personally.

39.  As submitted by Mr Lam, this finding accords with commonsense.  As the judge had found, Mr Wells was not “all that comfortable with detail”[16]. Besides, it is unrealistic to expect a company CEO or president to personally go through all the clauses and fine details of a legal document which ran into many pages when there were staff or professional advisers who undertook that task for him.  And so it was the staff or professional advisers who told Mr Wells about the existence of the warranties.

40.  There is no inconsistency of the finding relating to the standard warranties with the finding concerning the other provisions.  The judge was entitled to draw the inference that Mr Wells was aware of the standard warranties.  Nor do we think he was mistaken about the correct test and applied an objective test by referring to the warranties as standard provisions.  We are in no doubt about this as the judge had set out correctly the relevant legal principles before he considered the evidence and arguments on inducement[17].

41.  There is no basis to interfere with the findings on inducement.

The Limitation Issue

42.  The issue here is whether the plaintiffs could have discovered with reasonable diligence the facts relating to the very substantial amounts paid to “special consultants” to channel funds for bribery.  The judge decided the plaintiffs could not have discovered the facts with reasonable diligence.  He found that the only document which could have put Mr Wells on notice about the expenditure prior to 27 March 2006 (six years before the issue of the writ) was the unaudited profit and loss statement for the first six months of 2005.  Although the figures for management and consultancy services shown were not insubstantial, he did not think “Mr Wells could reasonably have been expected to ask about them”[18]. In any event, all of this was before Mr Ing had revealed in cross-examination the use made of “special consultants” and the expenditure on their “entertaining”, and trial counsel for Mr Ing “accepted that Mr Wells could not have discovered those facts with reasonable diligence”[19].

43.  Mr Wong took several points.  First, he contended that the judge had incorrectly applied a subjective rather than an objective test.

44.  The judge had explained why Mr Wells could not “reasonably” have been expected to ask about the not insubstantial expenditure, because of his “understandable concern” whether the large amount due to a related company referred to in the accompanying balance sheet related to his own investment, and why the revenue was so disappointing compared with the projections.  Although an objective standard must be applied, it is permissible to factor in the “personal characteristics” of the plaintiff to some extent in deciding what diligence the plaintiff could reasonably have been expected to have shown.  The plaintiff is not assumed to have been someone else (Peconic Industrial Development Ltd v Lau Kwok Fai (2009) 12 HKCFAR 139 at §§30 to 31).  We do not think it unjustified for the judge to take into account the specific concerns as part of the personal characteristics of Mr Wells in assessing the extent of diligence which he could reasonably be expected to have shown.

45.  Second, Mr Wong submitted the judge was plainly wrong in holding that the only document which could have put Mr Wells on notice about the expenditure was the unaudited profit and loss statement for the first six months of 2005.  He pointed to an email from Mr Ing to Mr Wells on 20 February 2006 which had an attachment of the latest financial projections for CAHL, showing inter alia the forecast of substantial operating expenses for 2006 (US$19.32 million), 2007 (US$42.87 million) and 2008 (US$56.79 million).

46.  The judge had considered the financial projections and Mr Wells’ evidence relating to the projections in the earlier part of the judgment[20], noting it was Mr Wells’ suspicion that “the projections were neither likely nor realistic”, and that Mr Wells was hoping the profits would be large enough to justify the investment.  We do not think the judge could be criticized in attaching no significance to the financial projections.

47.  Third, Mr Wong sought to withdraw the concession of his predecessor that “Mr Wells could not have discovered those facts with reasonable diligence” in her oral closing submissions.  We were referred to BT Pension Scheme Trustees Ltd v British Telecommunications PLC & Anr [2011] EWHC 2017 at §44 for the relevant principles concerning withdrawal of a concession made by a party in the court below.  We refuse to allow the concession to be withdrawn for these reasons.

48.  It was expressly conceded by trial counsel that Mr Wells could not have discovered the use of “special consultants” and the expenditure on their “entertaining” with reasonable diligence[21]. The judge took that concession into account in holding in favour of the plaintiffs on this issue.  It would not be right to allow a party to blow hot and cold in the circumstances.

49.  More importantly, Mr Wong had criticized the judge for not setting out clearly or fully why he held that the plaintiffs had discharged the burden of showing the relevant facts could not have been discovered with reasonable diligence.  Mr Wong suggested that no prejudice could have been occasioned to the plaintiffs in allowing the concession to be withdrawn, as the plaintiffs were represented by the same team as in the court below and could have readily assisted the appeal court on the relevant evidence and submissions to support their case.  The relative brevity with which the judge made the finding on reasonable diligence is entirely understandable.  In light of the concession of counsel, the judge obviously did not find it necessary to deal with other evidence and submissions at length.  It would not be appropriate for this court to re‑open the issue and consider evidence and submissions on its own for the first time, quite apart from the consideration that a finding on this issue would require evaluation of the evidence which could be affected by the credibility and demeanour of witnesses.  This is not the proper function of the appeal court.

50.  We reject all the grounds of appeal on this issue.

The Quantum Issue

51.  This issue relates to the construction of the framework agreement and the material provision in recital (F) of which reads as follows:

“The Investor, as the holder of the Citadel Bonds and the Investor Bonds (collectively, the Existing Convertible Bonds), is the largest creditor of [CAHL] as at the date of this agreement with aggregate claims under such bonds of at least US$40,565,195 and [CAHL] has agreed to transfer the Convertible Bond to the Investor upon [China Alarm International Holdings Ltd’s; “CAIHL’s”] issuance of the Convertible Bond to [CAHL]. As consideration for such transfer, the Investor will surrender to [CAHL] a portion of the Existing Convertible Bonds in an aggregate principal amount of US$20.5 m, thereby reducing the Investor’s claims against [CAHL] by US$20.5 m.”

52.  The framework agreement was entered into by PIL as “the Investor” in relation to the debt restructuring of CAHL following its liquidation with CAHL, its liquidators, CAIHL and others. CAHA was not a party to this agreement.  By the restructuring, PIL had transferred to it the convertible bond of US$20.5 million which CAIHL had issued to CAHL and CAHL’s debt was reduced by that amount.  What was in dispute was which of CAHL’s debts did it reduce – whether its debt to PIL under the Citadel Bonds (as submitted by the plaintiffs) or its debts to CAHA and PIL under the Investor Bonds as well, to be applied pro rata according to the amounts outstanding on each of the notes (as argued by Mr Ing).  At the time, US$10 million was owed to CAHA under the first subscription agreement, US$5,555,561 was owed to PIL under the second subscription agreement, and US$20 million was owed to PIL in respect of the Citadel Bonds[22].

53.  The judge held that the effect of the words in recital (F) (“the Investor will surrender to [CAHL] a portion of the Existing Convertible Bonds”) is to deal with the issue of apportionment and it was for PIL to determine which of its claims against CAHL was to be reduced by the US$20.5 million.  In the absence of such a determination, it was for CAHL to decide which of the claims against it was to be reduced by that amount.  There was no evidence of any such determination by PIL.  The judge was referred to a letter of CAHL’s liquidators to PIL dated 13 September 2014 by which they applied the US$20.5 million to reduce the outstanding amount under the Citadel Bonds only[23]. Accordingly, he held that the US$20.5 million did not reduce CAHA’s or PIL’s claims under the two subscription agreements[24].

54.  Mr Wong took issue with the judge’s construction, emphasizing the term “the Existing Convertible Bonds” in recital (F) (that this term was defined to include the Citadel Bonds and the Investor Bonds) and a sentence in clause 3.3 of the agreement (“The Investor agrees that upon the transfer of the Convertible Bond to the Investor, the Investor’s claim against [CAHL] under the Existing Convertible Bonds shall be reduced by the USD20.5 million face value of the Convertible Bond.”).  He submitted that the agreement should be construed to mean that the reduction shall apply to the Citadel Bonds and the Investor Bonds.  This was a submission made to the judge[25] and was rejected.  The judge was entirely correct to focus on the words “the Investor will surrender to [CAHL] a portion of the Existing Convertible Bonds”.  The outstanding amount under the Citadel Bonds applied by the liquidators to reduce the claims against CAHL was “a portion of the Existing Convertible Bonds”.  We do not think clause 3.3 of the agreement would detract from the judge’s construction, as contended by Mr Wong.  And it is wholly unnecessary to resort to implied terms as Mr Wong has submitted.

55.  There is no merit in this ground of appeal.

Conclusion and orders

56.  For the above reasons, we dismiss Mr Ing’s appeal.

57.  There is no reason why costs should not follow the event.  We make an order nisi that Mr Ing should pay the plaintiffs’ costs of the appeal, with a certificate for two counsel.

58.  The plaintiffs put in a respondents’ notice putting forward five grounds that the judge’s decision should be affirmed on the additional grounds that the judge should have found in their favour on various other matters.  They were addressed by Mr Wong in his written submission and it was only in Mr Lam’s written submission that the plaintiffs gave notice the respondents’ notice would not be pursued.  We make an order nisi that the plaintiffs should pay Mr Ing’s costs attributable to the respondents’ notice.