CHINESE UNITED ESTABLISHMENTS LTD. v. CHEUNG SIU KI and Another

IN THE HIGH COURT OF THE HONG KONG

SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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1994, No. A11448

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J U D G M E N T

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1. These were three actions which were ordered to be tried at the same time. The facts of the cases arise out of the acquisition of Wuhan Prosperous Taxi Co. Limited, for convenience I shall refer to this as "the Taxi Company".

2. The Plaintiff in two of the actions, Chinese United Establishments Limited, which I shall refer to as "Chinese United" was formed in March 1993. By a share sale agreement dated the 31st March 1993 Chinese United purchased 50% of the Taxi Company from a company by the name of Jin Loong Investments Co. Limited which I shall refer to as "Jin Loong".

3. As part and parcel of that transaction there was a commission agreement which is also dated the 31st March 1993 whereby Chinese United became liable to pay HK$11,750,000.00 to Wellward Limited. Of that sum there is no dispute that a sum of HK$4 million has been paid and one of the Actions, no. 3721 of 1995, relates to that and is a claim by Chinese United for reimbursement of that amount.

4. Later, in 1993 another company Burlion Holdings Limited, a BVI company, purchased the remaining 50% shareholding in the Taxi Company. There are only two shares in Burlion Limited, one is held by Nice Gain Enterprises Limited on behalf of Mr. Cheung Siu Ki who is the 1st Defendant in all 3 Actions and the other share is held by another company on behalf of Mr. Jimmy Pang Tung Choi who is the Plaintiff in the first Action. Mr. Pang alleges that through a misrepresentation by Mr. Cheung as to the amount which was paid by Burlion for the remaining 50% shareholding in the Taxi Company, he, Mr. Pang, was induced to buy the single share held on his behalf in Burlion at an over inflated price. Mr. Pang's action against Mr. Cheung in this respect has been somewhat downplayed in view of the fact that the primary claim is that the purchase by Burlion which, at the time was the alter ego of Mr. Cheung, was in breach of Mr. Cheung's duties as a director which he owed to Chinese United. In consequence, Chinese United claims the benefit which Mr. Cheung received from that transaction.

HISTORY OF THE TRANSACTIONS

5. It is necessary to set out, at least in outline, the history which led up to the signing of the various contracts. This is not altogether an easy task. There were only two main witnesses in this Action namely Mr. Pang and Mr. Cheung. Their versions of events were divergent and in many instances conflicting. Not only is there comparatively little contemporaneous documentation but much of the documentation is disputed, particularly by Mr. Pang, and it is therefore necessary to examine that dispute as well.

6. The matter was in my view not made any simpler by the fact that quite clearly there were people who could, it seems to me without any difficulty, have been witnesses but they were not called. It was put to me that in many instances they could be expected to be uncooperative, but as will emerge, suggestions have been made that their evidence might well have been thought to be detrimental to either parties' case. Their supposed unwillingness to give evidence has to be measured against the fact that many gave evidence at the trial in the District Court.

7. In reaching my conclusions as to the facts relating to the early history of the case, it is right to say that as a general matter I found Mr. Pang's evidence on this aspect unsatisfactory and as will be elaborated on below I found that in general his evidence as to the history of these transactions unreliable. In respect of the underlying facts relating to these transactions, I regarded Mr. Cheung's evidence as more reliable and likely to be accurate but there are important aspects of his evidence which gave me cause for concern and, indeed, which I do not accept. I consider that at any rate in so far as the historical narrative of how the matters came about, much of Mr. Cheung's evidence is to be preferred over that of Mr. Pang's.

8. The events underlying this Action have given rise to a very large amount of litigation. In this court, there has been a petition presented by Mr. Cheung for relief under section 168A of the Companies Ordinance and in the alternative for winding up on the just and equitable ground. That matter came on for hearing some two years ago and was settled between the parties on terms which still need to be worked out and are in part dependent upon the result of these proceedings. There has been a prosecution of Mr. Cheung in the District Court on a number of charges said to have arisen out of the facts relating to the transactions which are the subject of this case. That prosecution resulted in an acquittal. Little more need be said in respect of that. There have been other High Court Actions. There have also been proceedings in the People's Republic of China which have also arisen out of these transactions.

INTRODUCTION TO THE TAXI COMPANY

9. The history of this matter commences, as far as this Action is concerned, on the 19th November 1992. Mr. Cheung invited, amongst others, Mr. Pang and a Mr. Peter Lau to a dinner which he was giving on his birthday. Mr. Cheung had previously worked in and been a Director of a well-known electronic manufacturing company. He had, however, sometime previously left that company and set up various businesses of his own including a manufacturing business in Shenzhen. Mr. Peter Lau had been a director of one of the subsidiary companies of the electronics company where Mr. Cheung had previously worked. Mr. Lau too had left that organisation. In 1992 he worked for Jin Loong Investments Limited where apparently he held a senior position on the investment side. I was told that there were 3 companies within the Jin Loong group which were all, at that time owned and operated by the same people.

10. In the 1970's Mr. Pang, whilst at university, had taken a summer job in the electronics company and had worked under Mr. Cheung. Mr. Cheung believes that Mr. Pang would have come to know Mr. Lau during that period. In any event Mr. Cheung and Mr. Pang kept up acquaintanship. Mr. Pang had a successful career as a stock broker working for different companies and was at that time working for a well-known stock broking and investment company.

11. During that dinner Mr. Lau told Mr. Cheung that there were a number of investments in China that Jin Loong wished to sell. Amongst those, there was one which he recommended specifically, that was a Taxi Company in Wuhan. He apparently said it was the best investment which they had. Details were not gone into at that stage but Mr. Cheung told Mr. Lau that he was interested in becoming more involved in the China trade and he asked him to introduce him to his boss. This was all said in the presence of Mr. Pang although Mr. Pang did not apparently express any interest at the time. The discussion then was fairly general.

12. A few days later Mr. Pang, Mr. Cheung and Mr. Lau met again to play cards. There was discussion then about the Taxi Company and Mr. Cheung says that he told Peter Lau that he would be interested in being given more information. Mr. Lau said that he would try to make some arrangements about it. Again, Mr. Pang did not express any interest. It seems that Mr. Lau then arranged for a lunch meeting at the Jockey Club with Mr. So, Mr. Lau's boss, and Mr. Cheung. I was not clear from the evidence whether that was at the Jockey Club on Hong Kong side or the Shatin Jockey Club and Mr. Cheung's evidence seemed to change. According to Mr. Cheung, Mr. So tried to enquire of Mr. Cheung about his background and what sort of business he was in. He told Mr. Cheung that the shareholders of Jin Loong were himself and a Mr. Chiu. Mr. So explained that Jin Loong had been set up for about two or three years and had brought lot of money from China to Hong Kong for investment. He was, apparently, keen to impress Mr. Cheung with the extent of his business, explaining that he had substantial backing from banks. Mr. Cheung said, however, that he gained the impression that Mr. So was more like an official rather than a businessman.

13. Mr. Cheung says that the conversation turned to the Taxi Company and Mr. So said that he had other investments which were as good as the Taxi Company. Mr. Cheung, however, told him that he was only interested in the Taxi Company. At that point Mr. So explained that Mr. Zheng Yi was the legal representative of the company and suggested that he should meet him to proceed with the negotiation. Discussion at that stage was in relation to the whole of the company. Mr. Cheung had been told that the company had 20 taxis but there had been no mention of gas station licences. Mr. Cheung says that he had not been anxious to express his interest in the Taxi Company as any expression of excessive interest would have been liable to have raised the price.

14. According to Mr. Cheung, it was some 3 days after the lunch meeting with Mr. So that Mr. Yau Kin Kwok (or You Jion Guo in pinyin) telephoned Mr. Cheung. Mr. Yau was a resident of Wuhan. Mr. Cheung had dealt with Mr. Yau for many years at his factory in Shenzhen. Mr. Cheung said that licence restrictions in the PRC dictated that foreign owned companies could only manufacture goods for export; in order to get round those restrictions his company in Shenzhen, like many others, would sell their products at the "back door" to persons from the PRC. According to Mr. Cheung although he had dealt with Mr. Yau for many years the business had in the last few years tailed off as Mr. Yau's interest had turned to more up-market products than those manufactured by Mr. Cheung's Shenzhen factory.

15. According to Mr. Cheung, Mr. Yau telephoned him out of the blue and said that he had heard from "reliable resources" that Mr. Cheung was interested in buying the Taxi Company in Wuhan. Mr. Yau apparently offered his assistance to Mr. Cheung to secure the deal. At that stage Mr. Cheung felt that he did not need Mr. Yau's assistance and thanked him for calling him up, telling him that he was negotiating directly with the Jin Loong people but should he require Mr. Yau's assistance in the future he would contact him. Mr. Cheung could give no explanation for this apparently unsolicited phone call: Mr. Cheung said he asked Mr. Yau about it but he refused to tell him. Neither on that occasion nor later when Mr. Cheung was trying to find out who was controlling things from the PRC side did Mr. Yau reveal who was Mr. Yau's contact.

16. Not long afterwards there was a meeting between Mr. Cheung, Mr. Pang and Mrs. Mei-yee Croll. Mrs. Croll's husband was a licensee in respect of Walt Disney products and Mrs. Croll wished to obtain further contacts in the PRC to assist in their distribution. Mrs. Croll was an acquaintance of Mr. Pang and indeed on the 1st March 1993 she went to work with Mr. Pang at the investment company where Mr. Pang was working. Towards the end of the meeting, Mr. Cheung says that he borrowed Mr. Pang's telephone and called up Mr. Lau to remind him that Mr. Lau was going to arrange a meeting for Mr. Cheung with Mr. Zheng Yi. Because of that conversation Mr. Pang and Mrs. Croll came to know that Mr. Cheung was interested in investing in a Taxi Company. Apparently Mrs. Croll in particular asked Mr. Cheung what the investment was all about. As a result of that conversation, Mr. Pang and Mrs. Croll expressed interest in co-operating in investing in the Taxi Company. At that stage the notion was that the investors would buy the whole of the Taxi Company although there was no discussion then as to whether any potential investment would be of the whole or half the company. Mr. Cheung says that in addition to the taxis he was aware by then that the Taxi Company had gas station licences although he considered that the Taxi Company could subcontract the licences to one of the large oil companies in exchange for royalties.

17. About two or three days later Mr. Cheung went to the offices of Jin Loong at Sun Hung Kei Centre and there saw Mr. Zheng Yi. This was the first of a number of meetings that Mr. Cheung says he had with Mr. Zheng. Mr. Cheung says that when the conversation got round to the question of the sale of the Taxi Company, Mr. Zheng started by explaining the background of the Taxi Company, what kind of licences it had and why they were valuable. Mr. Cheung asked him for a price. He said he would give that later if Mr. Cheung really wanted to buy. I would mention here that because the evidence was at some stages condensed and also because it moved around in sequence, it might have seemed from some of Mr. Cheung's answers that at the first meeting with Mr. Zheng a price was mentioned. In the end I do not consider that it matters a great deal but I think the effect of his evidence was that no price was given at the first meeting. Mr. Cheung then asked him, whether it was possible to buy part of the Taxi Company. Mr. Zheng said that it was the intention of his superior to sell the whole company although Mr. Cheung says that he did not go too deeply into that at the time.

18. A few days later, Mr. Cheung went to see Mr. Zheng again and on this occasion was given copies of various licences and approval letters from P.R.C. government departments relating to the Taxi Company as well as the profit and loss account. Upon Mr. Cheung expressing interest in purchasing the Taxi Company, Mr. Zheng Yi said that the price which he had in mind was RMB50 million. That was apparently calculated on the basis of a P/E ratio of about 8. Mr. Zheng said that it was Jin Loong's intention to sell 100% of the Taxi Company. Mr. Cheung says that he felt the price was very high but he reported the matter back to Mr. Pang and Mrs. Croll. According to Mr. Cheung all three of them thought that the price was high. Mrs. Croll on the other hand was confident of being able to raise a substantial amount from her American client investors. According to Mr. Cheung, Mrs. Croll and Mr. Pang both thought that the gas station licences were very valuable as they could generate a great deal of profit.

19. Mr. Cheung passed copies of documents which he had received from Mr. Zheng onto Mrs. Croll and Mr. Pang. There was then a meeting between the 3 of them at the American Club at which the financial director of Mrs. Croll's then employer also attended. Mr. Cheung says that at that meeting Mrs. Croll and Mr. Pang talked in terms of the gas station licences being extremely profitable and valuable and referred to a company, probably the Winton Group, which their researches had revealed had such licences and those had turned in considerable profit. The outcome of the meeting was that those persons wished to purchase 50% of the Taxi Company. It seems to me that they were keen to limit their investment to 50% not only because it reduced the price but also because it meant that they would have the benefit of the connections in China which were so important to achieving success when it came to making official applications and obtaining licences and consents.

20. When giving evidence Mr. Pang seemed to me to be evasive about whether he knew of the gas station licences at this stage. He readily admitted that on the trip to Wuhan which came later he did see the gas station licences. When cross-examined on the basis of what Mrs. Croll had said in the District Court proceedings, Mr. Pang was prepared to concede that he might have been wrong about not having known of the gas station licences at this stage.

21. A few days after the American Club meeting, and by now this was probably in early January 1993, Mr. Cheung says that he went back to see Mr. Zheng again and discussed the price with him and pressed him again for figures. Mr. Cheung says that he pointed out to Mr. Zheng that the small profit shown in the accounts was insufficient to substantiate such a large price. He pressed Mr. Zheng for something in writing in relation to the profit forecast so that he could show the partners.

22. The precise timing of events in this period is somewhat loose for the reasons I have given but I have pieced together as best I can the history of it primarily from Mr. Cheung's evidence. What, however, is clear is that on the 28th January 1993 Mr. Cheung, Mr. Pang and Mrs. Croll flew to Wuhan to take a look both at the city as a potential place for investment and at the Taxi Company.

23. Again, without the benefit of any evidence from Mrs. Croll the events up in Wuhan have to be gleaned from Mr. Pang and Mr. Cheung's evidence. What is clear is that when the 3 went to Wuhan their interest in investing in the Taxi Company was already quite advanced. Mr. Pang tried to play down that interest but even on his version of events he did make considerable investigations about the Taxi Company, for example he inspected its licences and other documentation and toured around Wuhan to see what potential there might be for the Taxi Company as well as any other potential investments which that company might make.

24. Mr. Lau was already in Wuhan when the parties arrived. Mr. Cheung says that when they arrived they spent the afternoon of the first day in a meeting with Mr. Lau and Mr. Hung (Xiong in pinyin), the general manager of the Taxi Company, discussing the general background of the company, the business, the cost of taxis and likely profit from running a taxi business as well as, for example, gas stations and the general economic environment of Wuhan. Apparently price was not discussed at that meeting in Mr. Cheung's room at the hotel. Mr. Pang's version is somewhat different, but for the purposes of this case I do not see that the differences are important.

25. After the meeting everybody had dinner at the hotel and Mr. Lau gave them copies of a fax which he had received from Mr. Zheng in Hong Kong. That fax contained a document which is entitled "An introduction to Potential Investor on Taxi and Gasoline Station Business in PRC". It has an appendix which is a forecast and budget for 1993/1994. I suspect that the best that could be said of that is that in view of the past earnings history of the Taxi Company that forecast was perhaps optimistic. Nevertheless on that basis, the introduction says that the value put on the Taxi Company was RMB50 million. The interesting point about this document is that it makes reference to Jin Loong intending to place part of the issued share capital with independent investors. According to Mr. Cheung, the document was not discussed over dinner.

26. I would break the narrative to say that Mr. Pang denied ever having seen this document until he was cross-examined about it in the District Court. This denial was despite the fact that the document had been exhibited to Mr. Cheung's 3rd affirmation in the section 168A proceedings. Whether Mr. Pang had a highly selective memory I am not sure. His manner of giving evidence, however, did accord with one who was inclined not to read documents with any care. On balance I accept that all 3 persons did have this document in Wuhan, but that Mr. Pang really did not pay very much attention to it, his attention was, it seems to me, more likely to have been focused on the potentials of the gas station licences and possibly, although there was no oral evidence about it, capital gains on the shares consequent upon flotation on one or more of the stock markets.

27. After dinner, Mr. Cheung spoke to Mr. Peter Lau to see if some accommodation could be reached as to the price and conditions of purchasing the Taxi Company, but Mr. Lau said the matter was out of his hands. There was then a meeting between Mr. Cheung, Mr. Pang and Mrs. Croll in Mr. Cheung's room. Mr. Cheung says the 3 of them were very depressed both because the price was high and also because they could not get Jin Loong's agreement to purchase only 50%. When asked about the reference to selling part of the Taxi Company, Mr. Cheung said that it was his understanding that Jin Loong was willing to sell either a small part of the Taxi Company, in other words less than 50%, or the whole of it. Whereas it might at first appear that there is a major inconsistency in what Mr. Cheung said, it seems to me that there is some consistency to the extent that it was Mr. Cheung's evidence that Jin Loong were unwilling to sell 50% of the Taxi Company because that might lead to a situation where there were deadlock amongst the shareholders of the company and that was undesirable. Mr. Cheung was questioned as to why in his third affirmation he had said that Jin Loong originally wished to look for a joint venturer, whereas in his evidence he was saying that it was Jin Loong's intention to sell 100% of the Taxi Company. Apart from saying that he had understood that Jin Loong wished to sell either 100% or less than 50%, Mr. Cheung maintained his position and pointed out that the affidavit had been drafted by his solicitors. I consider that when read in the context, particularly bearing in mind paragraph 4 and the last sentence of paragraph 7 of this affirmation, the affirmation might be construed consistently with what Mr. Cheung was saying in the witness box.

28. Mr. Cheung says that it was agreed between Mr. Pang, Mrs. Croll and himself that he would contact Mr. Yau to see whether Mr. Yau could help. The three left Wuhan on the 30th January. Mr. Cheung says that Mr. Yau called him back. The surprising thing to me is that Mr. Cheung cannot remember whether that return call was whilst the parties were still in Wuhan or was on the 31st January after they had returned to Hong Kong. In any event, it is said that Mr. Yau told Mr. Cheung that the price of the Taxi Company would be reduced to RMB34 million for the whole company plus the audited net asset value of the company and that if the investors wished to take 50% they could take that on a proportional basis. According to Mr. Cheung, when referring to the RMB34 million Mr. Yau used the expression opening the door. Mr. Cheung in his evidence gave the impression that he did not seek to inquire too deeply as to what the money was or where it was going. Mr. Yau was particularly secretive not only as to his contacts and who he was dealing with but insisted on complete secrecy by Mr. Cheung as to his existence when dealing with the Jin Loong people. During his evidence Mr. Cheung pointed out that he was aware that possibly he was dealing, directly or indirectly, with officials and the consequence of anything going wrong with a transaction, which was dubious at best and probably amounted to bribery, could be serious. In any event in that conversation, Mr. Yau had said that his own remuneration from the deal was taken care of.

29. According to Mr. Cheung's narrative, following the conversation between Mr. Cheung and Mr. Yau, matters apparently moved fairly quickly. Mr. Cheung contacted Mr. Zheng and was then referred by Mr. Zheng to Mr. Lau on the basis that Mr. Zheng was no longer responsible for the deal and that all discussion should take place with Mr. Lau.

30. Apparently Mr. Cheung spoke to Mr. Lau over the phone and was asked to go to the Jin Loong offices where he was given various schedules. Those schedules related to the possible investment by a Hong Kong investment company in the Taxi Company and a forecast of capital investment and operating margins of the Taxi Company. There seems to me to be little doubt that these were prepared at about that time. The copies which are available now have a fax header dated the 13th February of a Mr. Jeffrey Selznick. Mr. Selznick was one of the investors who was apparently a client of Mrs. Croll. It seems almost certain that Mr. Selznick must have received these sheets from Mrs. Croll and faxed them back possibly with his own comments since it seems that these were some of the pages of a fax which he sent back.

31. Mr. Pang denied ever having seen these schedules until very much later. Mr. Cheung's evidence was that he gave them to Mrs. Croll and Mr. Pang. I conclude that he must have done so. The fax header is only explicable on the basis that Mrs. Croll had the documents and if Mrs. Croll had them then it is difficult to understand how Mr. Pang would not have had them, albeit perhaps not looking at them very carefully. The schedule which is headed "Hong Kong Investment Company (as 50% Investor in W.P. Taxi Co.)" is based on the premise that the capitalisation of that company will be $50 million, much of which according to the capital flow forecast was to remain in the company although some of it was to be used for subsequent capital investment in the Taxi Company. The purchase price is put as 50% of the assets of the company as at the 31st March 1993 and a figure of $2,500,000.00 is given. Underneath that is the entry "Premium paid to Jin Loong & Associated Group" and the figure there is given as $17 million.

32. The events of the next two days appear to have been quite active. Mr. Cheung says that he met Mrs. Croll and Mr. Pang at the Fountain Side Restaurant at the Landmark and gave them not only the schedules which Mr. Lau had prepared but also schedules which he too had prepared after seeing Mr. Lau. According to Mr. Cheung, Mr. Pang and Mrs. Croll wanted Mr. Cheung to find out how much Mr. Yau's commission would be so that it could be put down on paper for their investors. As a result of that meeting, Mr. Cheung says that he went back and called Mr. Yau again and insisted that Mr. Yau's commission be spelt out. Mr. Yau told him that his commission would be $11 million and when queried that it was so high Mr. Yau told Mr. Cheung that he should go back to Jin Loong and they would confirm it by reducing their own price. Mr. Yau said that he wanted a Hong Kong company formed into which his commission could be paid.

33. Mr. Cheung says that the next day, the 2nd February, he called Mr. Lau and asked for a reduction. Half an hour later Mr. Lau returned his call and agreed to reduce the premium for the investment from $17 to $6. Mr. Lau apparently said that Mr. So was interested in the background of the investors whom Mrs. Croll could bring in, namely the American investors, and that this made the deal attractive.

INVESTMENT PLAN

34. Of considerable interest in this case is the investment plan which Mr. Cheung says he produced at this time. There are no less than 3 copies of this investment plan which have been exhibited in this case. Each one is different. One of them contains no fax header on it and does not have the words "Attn. Mr. Jimmy Pang" on the front page but has what is apparently agreed to be Mrs. Croll's writing on one of the other pages.

35. Mr. Cheung's evidence is that he prepared the investment plan and faxed it to Mr. Pang from his office at Maxpro in Shatin. Because it was a private matter, Mr. Cheung had called Mr. Pang and asked him to stand by the fax machine at his place of work. Importantly, Mr. Cheung says that that was done on the 3rd February 1993. One of the copies of the investment plan is, apparently, a fax which had a header showing that the fax was sent from "Maxpro 86913252" and the date is given as "2.3.1993". Mr. Cheung says that his fax machine showed the month first and the date second as in the American format.

36. The third copy of the investment plan not only had the "Maxpro" header but also had another header which reads "(MON) 2.15. '93 16:24" clearly indicating it had been faxed on Monday the 15th February 1993.

37. The narrative of the investment plan is important for a number of reasons. First of all it mentions the licences such as the gas station licence and indeed makes considerable emphasis of it; secondly, it is written in terms of the investment company acquiring 50% of the equity of the Taxi Company from Jin Loong. It also mentions a buyback guarantee to be given by the management of the investment company to be effective at the end of the 3rd year at a rate of 150% of the original investment. Reference to management can only be the management of what turned out to be Chinese United and not to Jin Loong or any of the Chinese parties. Interestingly, it also refers to a proposed listing of the Taxi Company on the Wuhan and Hong Kong stock exchanges. Paragraph 9 of the descriptive part of the investment plans reads as follows:

"Preliminary sales and purchase agreement.

Jin Loong has agreed to sell 50% of its equity share holding in the Taxi Co to the Investment Co at a price based upon the audited net asset value as at 31-3-93 and a premium calculated as per attached schedule. Jin Loong will guarantee that the net profit for the Taxi Company will not be less than 7.5 million per year, any shortfall will be make good by Jin Loong."

Schedule I of that document is of further interest in that it lists, in the version which apparently has Mrs. Croll's hand-writing, the typed words "Payable to Jin Loong HK$6,000,000". In the versions which have the fax headers at the top the words "Jin Loong" have been apparently erased and the words "the Co." in handwriting inserted therein. How that came about no one has ventured to suggest. Underneath that there is an entry "Payable to Investment Broker HK$11,000,000.-".

38. Mr. Pang initially said in his evidence that the fax was sent to him in March. Indeed he had put that as the date in one of the affirmations which he filed in the winding-up proceedings. It was Mr. Cheung's contention, however, that although a mistake had initially been made in the drafting of his Third affirmation in the winding-up proceedings, and the date of the 2nd March had been repeated, he was quite sure that the true date on which he had faxed the investment plan to Mr. Pang was indeed the 3rd February. He could date this because he could remember that he had met Mrs. Croll in Central on about the 13th or 15th February. She had been waiting for the investment plan so she could give it to her United States investors. When she learned from Mr. Cheung that one had been prepared but that she had not received it from Mr. Pang, she asked Mr. Cheung for his copy. Mr. Cheung had given her his copy which he had with him but, since that was his only copy, when he returned to his office in Shatin, he asked Mr. Pang to fax him back a copy of the investment plan. This according to Mr. Cheung, accounts for the third copy of the investment plan which is in the court bundles, that is the one which has at the top a fax header showing the date of 15th February. That header is of precisely the same type as a fax of the 30th April which was referred to in the course of this case as the "Boss Cheung" fax. This was a fax which was admittedly sent by Mr. Pang from the offices of the investment company where he worked to Mr. Cheung. In that fax, as part of the fax header, there is a 10 figure number. I thought at first that this would be a fax number but was corrected and it seems to be a different number which is put on each fax by the fax machine.

39. When Mr. Pang was questioned about the date on which the investment plan was faxed to him it appeared to me that he became noticeably nervous. It happened both in chief and under cross-examination. I would say that in any event Mr. Pang, in giving his evidence, did it in a manner which did not seem to me to be very convincing. Whatever he said was peppered with the words "Well, Well,". That comes out only partly in the transcript since quite sensibly many of those were left out in transcription. In cross-examination when questioned as to whether he faxed back the copy of the investment plan on the 15th February, his answer was "Well, I can't remember exactly, but, well, I would like to disagree then. That's your version." At the time this seemed to me to be a very unconvincing denial but was more in the nature of an answer by somebody who was prepared to contest almost anything that was put to him.

40. Mr. Pang maintained that he could also date the receipt of this fax from Mr. Cheung because Mrs. Croll came to work at the investment house where he was working on the 1st March. He said he remembered receiving the fax and passing it straight to Mrs. Croll because she wanted it for her American investors. When questioned as to whether he read the document he was evasive, suggesting at one stage that he would have read it a few days later, and then when he was reminded of his evidence in the District Court he appeared to change it eventually ending up after a long and rambling statement by saying: "If this the case then I had better say no". The same comments seem to me to be appropriate in respect of this statement as in respect of the previous one.

41. Although I have already mentioned that Mr. Pang in his affirmation in the winding-up proceedings had put the date of receipt of this fax as the 2nd March, in fact it seems to me on reading that affirmation the date of the 3rd February fits more comfortably with the chronology which is set out there.

42. Mr. Cheung's evidence in respect of the faxes is not without its difficulties either. In the first place the fax that was received was not produced in this Court. Mr. Cheung did seem to have forgotten about the fax for a considerable period of time. The explanation as to how the fax was received was not apparently given in the District Court. One thing is clear, however, and that is that a copy of the fax with the header of the 15th February which appears to come from the investment house where Mr. Pang worked was apparently in the hands of Mr. Cheung's solicitors on the 16th September 1994. Mr. Ho, Mr. Cheung's solicitor, gave evidence that he had seen it. Although at one stage Mr. Tang S.C. who appeared for Mr. Pang was apparently preparing to attack the evidence of Mr. Ho, it seems to me that Mr. Ho gave the sort of evidence which I would have expected apart from one matter. It seems that Mr. Ho did not approach discovery of documents in quite the way that would be expected. It appears that Mr. Cheung did give Mr. Ho what seemed to Mr. Ho to be the fax with the header on it and Mr. Ho appreciated that this could be used in cross-examination of Mr. Pang. However, for the purposes of the winding-up proceedings, the significance of the date of 3rd February was not particularly important and the document was of marginal interest in perhaps assisting an attack on the credibility of Mr. Pang. Indeed Mr. Ho said in evidence that it was not until this case was well under way that the significance of the date became apparent to him. I can well understand this. Nevertheless, it seems to me that this document should have been disclosed much earlier.

43. Taking all these matters into account, I consider that the only reasonable conclusion on the evidence is that the investment plan must have been faxed back from the investment house where Pang was working on the 15th February; I also hold that this fax was sent by Mr. Cheung to Mr. Pang on the 3rd February. In so saying, I take into account that although it is no doubt possible to forge almost any document I consider that if it were intended to forge the header of the fax machine of the investment house where Mr. Pang was working, this would pose considerable problems. There is at least one place in the sequence where the header of the 15th February overlaps that of the 3rd February. It does it in such a way that I would be more than surprised that Mr. Cheung, having seen him in the witness box, would be capable of doing or supervising. It is no doubt conceivable that a fax header such as that of the 15th February could be superimposed by transparencies and then by a process of photocopying the resultant product be made to look genuine; it is also conceivable that the document could be digitally processed and a fax header of the 15th February could be superimposed. But in my view the evidence put forward falls very far short of raising a case that the document with the fax header of the 15th February is a copy of a forgery.

44. It was Mr. Cheung's case that he had worked out the 150% buyback option which he, as the management of the investment company, was prepared to offer the investors on the basis that they could perhaps get a 15% return for money in the bank. Whether or not Mr. Cheung was good for the money which he guaranteed the investors seems to me to be dubious, nevertheless, no doubt he was optimistic that the investment company would prosper and that there would be no question of being called upon to honour the guarantee. On this aspect of the case, it was Mr. Pang's evidence that he considered that the buyback would be by Jin Loong. In view of the clear statement contained in the investment plan I fail to see how that could have been the suggestion. Furthermore, as a matter of practical reality, I do not see that Jin Loong would have been prepared to give such a guarantee.

45. One of the reasons which Mr. Cheung gives for dating the fax of the investment plan back to him by Mr. Pang as being the 15th February is that Mr. Cheung says that he urgently needed a copy of it because he wished to use it at a dinner which was held for the investors at the East Ocean Restaurant. He said that at that dinner each of the investors, who were primarily subordinates of Mr. Pang at the investment house, Mrs. Croll's investors being overseas, were given a copy of the investment plan and it was discussed. Quite to what extent it was discussed seems to me to be open to doubt. I think it may have been talked about more in general terms than in specific detail, nevertheless, I do hold that the investment plan was there and that each of the investors whom Mr. Pang had found had a copy. I note here, for example, that this is one of the situations where evidence from other persons might have been valuable. The dinner at the East Ocean Restaurant took place some time around the 15th to 17th February.

46. It seems that on the day following the dinner at the East Ocean Restaurant, Mr. Pang and Mrs. Croll suggested to Mr. Cheung that they should be given a reward for their efforts in finding investors. That was acceded to. I will come to the matters relating to the shareholdings later.

47. During the second part of February matters began to move very quickly. The company, Chinese United, was acquired and two subscriber shares were issued to Mr. Cheung and Mrs. Croll. They were made directors and a bank account was opened up with OTB. In addition Wellward Limited was also acquired and the wife of the accountant who dealt with Mr. Cheung's affairs and her sister became the directors and shareholders of Wellward Limited. On the 1st March Mrs. Croll joined the investment company where Mr. Pang was a director.

48. According to Mr. Cheung, in early March Mr. Pang and Mrs. Croll told him that they could only come up with a total investment on the part of themselves and their investors of $9 million in the case of Mr. Pang and $3 million in the case of Mrs. Croll. Mr. Cheung said that this posed a considerable problem because this was far short of the $25 million that had been expected and the deal was expected to go through on the 31st March. Indeed auditors had already been arranged to go up to Wuhan to conduct the audit. Mr. Pang and Mrs. Croll were apparently asking that the time to raise the money should be deferred as long as possible.

49. Mr. Cheung says that he explained to them that it would not be possible to go back to the middleman with anything vague and in the end the three of them decided that they should ask for a deferment of $11 million to be paid three years later. This, according to Mr. Cheung, is what he requested Mr. Yau whose answer was that he would consider it. The next day, apparently Mr. Yau returned the call, Mr. Yau said that it would not be possible to defer payment of the whole of the $11 million but it was acceptable if a minimum of $4 million was paid first and the balance of $7 million would be deferred on 2 conditions. One was that a penalty of $750,000.00 would be paid and the second was that the deferred payment would carry interest of 1% per month compounded monthly. Mr. Cheung says that he told Mr. Yau that he would accept the interest but asked whether the penalty of $750,000.00 could be waived. Mr. Yau then suggested that Mr. Cheung should go back to Jin Loong and ask them for a further reduction; he said that if he did go back to them, he would find that Jin Loong would reduce the amount by a further $750,000.00.

50. Mr. Cheung says he then contacted Peter Lau again and asked for a reduction without naming the amount and later that same day Mr. Lau called him back to say that Mr. So wished to see him at the Sun Hung Kai Centre. When Mr. Cheung went to Mr. So's office, he was told that Mr. So liked the background of the American investors and hence was prepared to agree that the premium to Jin Loong would be reduced to $5.25 million. Mr. Cheung was evidently quite excited about the outcome of this meeting and apparently contacted Mr. Pang and Mrs. Croll immediately. The upshot was that another dinner was arranged with the local investors who were primarily Mr. Pang's subordinates and colleagues. That dinner took place at the Dynasty Club sometime in mid or early March and the question of the deferred payment was discussed.

51. Mr. Cheung says that it was at that meeting at the Dynasty Club that the question of the deferred payment being financed by an option arrangment was discussed. He says that he was against it from the beginning and that although it was discussed it was finally agreed at that meeting that there should be a loan subscription because that was the only way of ensuring that the money would be paid in three years time. Mr. Cheung explained that from his point of view an option provided no security because those holding the option might decide not to take it up. Mr. Cheung says that the buyback arrangement for the $11 million that was deferred would no longer stand but that in relation to the $12 million that was being subscribed immediately it would stand.

THE 31ST MARCH AGREEMENTS

52. On the 31st March 1993, three agreements were executed the first was a joint venture agreement between Chinese United Establishments and Jin Loong, the second was a share sale agreement also between the same parties and thirdly there was a commission agreement between Chinese United and Wellward Limited.

53. The profit guarantee by Jin Loong was originally put into the draft agreement for sale and purchase, but according to Mr. Cheung it was coupled with a capital investment commitment. This perhaps is not surprising but in any event was not acceptable and hence the profit guarantee clause came out of the agreement. The capital commitment was restricted to an oral agreement and that which was contained in clause 9 of the Joint Venture Agreement.

54. Under the commission agreement a total payment of $11,750,000.00 was to be paid as commission to Wellward. It is Mr. Cheung's evidence that this money was the commission to be paid to the broker namely Mr. Yau. A Board minute of Chinese United had been prepared by the solicitors who were acting for Chinese United at the time and that was signed by Mr. Cheung. That Board minute purports to record a Board meeting on the 1st April said to have been attended by Mr. Cheung and Mrs. Croll, (using her Chinese name Chiu Mei Yee). According to Mr. Cheung he discussed the matter with the solicitor and he was advised that it might be safer if a Board minute were prepared and signed by both Mr. Cheung and Mrs. Croll. Mr. Cheung says that he then prepared a Board minute himself which was duly signed by Mrs. Croll recording approval by Chinese United for the commission agreement. Mr. Cheung says that this was signed by Mrs. Croll in the presence of Mr. Pang probably sometime in April but prior to the 4th May 1993 at the Fountain Side Restaurant in the Landmark.

55. Mr. Cheung says that this minute was sent to Mr. Chou, who was the accountant who was acting as the company secretary for Chinese United at the time on the 4th May under cover of a memorandum. Mr. Cheung said that he went to the trouble of drawing up this minute because he had been advised by the solicitor that although the minute which the solicitor had prepared and Mr. Cheung had signed on the 31st March was valid, if it was challenged, difficulty might arise.

56. Considerable controversy arises over this minute. Apparently Mr. Cheung having gone to the trouble of having it prepared forgot about it.

57. In May 1994 Mr. Cheung had been required to pass the statutory record books of Chinese United to Mr. Pang and those then in control of Chinese United. Apparently, Mr. Cheung noticed that there were Board minutes stapled into the statutory record book but did not check whether this minute was there. Some difficulty arises here because it is agreed that when discovery took place, the minutes had been unstapled from the statutory record book and not all minutes were initially produced on discovery. The statutory record book does have staple marks where minutes were probably stapled. Certainly some of the minutes which have been produced in court also bear staple marks showing that probably more than one set of minutes were stapled in the book on top of each other.

58. The matter became more complicated because Mr. Cheung says that in paragraph 9 of his ninth affirmation there is a wrong indication as to the time when a copy of this minute was taken. Mr. Cheung says that sometime after that affirmation had been made and filed, it came to his notice that it might be said that the timing were wrong and he drew that to his solicitors' attention. He was told that although a wrong impression might be given in fact the wording when taken very literally would not be incorrect.

59. When first challenged by Mr. Pang in solicitors' correspondence as to the execution of the commission agreement, as I will revert to later, the reply from the solicitors acting on Mr. Cheung's instructions was that Mr. Pang was the co-owner of Wellward Limited.

60. Mr. Pang in his evidence said that he did not accept that Mrs. Croll had signed the minutes because he did not see her sign them. In my view, in the circumstances of this case, that is not sufficient. In view of my findings already, it would be apparent that that Mr. Pang was somewhat haphazard about documents and probably did not pay very much attention to them. Moreover, it is quite a likely possibility that, with a simple thing like a short document, it had been passed to Mrs. Croll requiring her signature and Mr. Pang may have forgotten about it. The most important point, however, is that it is agreed on all sides that the signature does look like Mrs. Croll's signature.

61. Mrs. Croll has not been called to deny that she signed the document. Mr. Pang says that he has lost contact with Mrs. Croll. It seems that he has not been in contact with her for about a year. I find that surprising. Knowing of the importance of the case coming up, the importance of Mrs. Croll's signature on this document and the importance as to whether Mrs. Croll as a director knew of the commission agreement, one would have expected Mr. Pang to have kept in touch with her. She did after all give evidence in the District Court which took place in early 1996.

62. In the Plaintiff's reply speech when the Court expressed some scepticism of the effort that might have been made to find Mrs. Croll who was after all a stock broker who had worked with well-known stock broking and investment houses' in Hong Kong and was married to a Disney licencee, a suggestion was made that Mr. Pang might be recalled to give evidence as to the effort which had been made to locate Mrs. Croll. That suggestion was not pursued and indeed it was likely that an attempt to patch up evidence in the closing stages of a reply speech may not have found favour. Sir John Swaine S.C. in his speech pointed out that if Mrs. Croll had been called as a witness her evidence might, on the basis of what she had said in the District Court, quite possibly have been favourable to Mr. Cheung in many respects.

CAPITAL STRUCTURE

63. It is more convenient to deal with the parties' contentions as to the capital structure separately. Mr. Pang gave evidence that during the dinner, and it is not 100% clear as to which dinner, Mr. Cheung recommended an option scheme for the purchase of the shares. He says that the original arrangment was that 50% of the shares in Chinese United would be bonus shares and the remainder of the shares would be issued at a premium. The bonus shares would be issued at $10 per share and the premium shares at $1,000. Later that was changed to $1 and $100 respectively. According to Mr. Pang the bonus shares were to be divided equally amongst Peter Lau, Jin Loong (specifically Mr. So Bun), Mr. Cheung and himself. Mr. Cheung would be obtaining the shares because he brought in the deal in the first place and would be running Chinese United. Mr. Pang would be obtaining the bonus shares because he was arranging the finance from the investors. This would therefore mean that each of these four persons would receive 1/8 of the authorised capital i.e. 125,000 (originally 12,500) bonus shares, in other words shares which would be issued at par value. Mr. Peter Lau's shares and the Jin Loong's shares were to be paid for by Mr. Cheung and Mr. Pang so that those persons would receive their shares for free. That arrangement was then varied slightly because Mrs. Croll was to be bringing in $3 million investment money and Mr. Pang himself was also bringing in a substantial amount and as a result they were to receive bonus shares themselves.

64. Mr. Pang then says that Mr. Peter Lau wished to sell his shares, namely the 125,000 bonus shares and it was eventually agreed that he would be selling those for $800,000.00. Mr. Pang says that he and Mr. Cheung agreed to purchase those shares from him. The arrangement was that Mr. Lau would receive the payment for those shares in instalments. Since Mr. Pang's office was in town it was more convenient that Mr. Lau should come to Mr. Pang's office to receive the cheques.

65. Mr. Pang says that the payment for Mr. Lau's entitlement was made as follows: initially both Mr. Pang and Mr. Cheung paid $100,000.00 each. There has been no cheque or other evidence produced to demonstrate that payment although Mr. Pang says that the payment was made sometime in May 1993. It is clear that Mr. Pang paid a cheque for $200,000.00 on the 28th June 1993. Payment of that is evidenced by a cheque on the reverse of which is Mr. Lau's Assetvantage account number. The next payment, however, is on the 20th December 1993 and there is a copy of a cheque and Mr. Lau under subpoena produced his bank statements which shows receipt of that amount as well as a further amount on the 8th January also of $200,000.00. Mr. Pang says that he was reimbursed $100,000.00 by a cheque from Mr. Cheung for the 28th June payment and although he says he was reimbursed for the other payments, no evidence or trace of that can be found. Mr. Pang agreed in cross-examination that it was unlikely that the money could have been passed over the gambling table since Mr. Cheung and Mr. Pang, although fond of gambling, did not gamble to that extent.

66. I do not accept Mr. Pang's version of events about the purchase of an alleged shareholding from Mr. Lau. Not only is there no evidence of reimbursement by Mr. Cheung but the payment dates of the 20th December and 8th January seem to be so far away from the date of agreement to buy those shares that in my view more than doubt about it is raised. This has to be coupled with the fact that quite clearly in September of 1993, Mr. Pang received $20 million from the investment house for which he worked as an ex gratia payment as a result of his agreeing not to contest the penalty imposed by the Securities and Futures Commission in respect of the creation of a false market. Hence by September 1993 he would have been able to pay off the balance without any difficulty.

67. Moreover, I do not accept Mr. Pang's version of the split of the bonus shares. As Mr. Cheung pointed out if that had been the arrangement he would have been guaranteeing 150% return to the other investors in the event that things went wrong and stood to gain only 12.5% of the profits if things went well. The figures represented a risk to reward ratio that he would have been "nuts", to use his own words, to entertain.

68. One aspect of Mr. Pang's evidence which I considered quite telling was his evidence in relation to the alleged option scheme for the raising of the capital in relation to the premium shares. It was Mr. Pang's evidence that at the meeting at the Dynasty Club the suggestion had been made that the delayed payment should be financed by an option scheme. This matter took up some part of the evidence. Mr. Pang's evidence in this regard was by no means satisfactory. He was cross-examined about his evidence in the District Court and the discrepancies between the firm stance that he took then and the slightly different history which he gave in this Court, which in itself seemed to me to change.

69. My conclusion on the evidence is that an option is something which Mr. Pang had wanted. It might have been something with which he was familiar in the normal course of his work. I have no doubt that it was raised at the meeting at the Dynasty Club, but on balance I hold that Mr. Cheung is correct that it was not something agreed. Nevertheless, Mr. Pang continued to press for the $11 million deferred payment to be financed by an option arrangement rather than a loan arrangement. At one point it seems that Mr. Cheung agreed to this, but he told Mr. Pang that as a penalty he would have to pay for 125,000 bonus shares which Mr. Cheung had agreed to transfer to Mr. Yau. It was Mr. Cheung's evidence that he had persuaded Mr. Yau to accept 125,000 of Mr. Cheung's bonus shares in exchange for the right to the deferred payment of $7.75 million (which would be the $11 million when interest was added). In addition Mr. Cheung was demanding that if Mr. Pang were to insist on there being an option arrangement rather than a loan Mr. Pang would have to give up part of his management shares. These arrangements were abandoned because on Mr. Pang's part he was not willing to give up his management shares. Mr. Cheung said that although he then did not insist on Mr. Pang giving up part of his management shares he still required him to pay for the 125,000 shares that were going to be exchanged with Mr. Yau in return for the $7.75 million ($11 million) debt.

70. As it transpired that transaction did not take effect. Mr. Cheung said that on one of his trips to Wuhan he explained the background to Mr. Yau, who thus learnt of the arrangement with Solar Power (the company used as the vehicle by Mr. Pang and the investors which he found to hold their shareholding in Chinese United). Apparently Mr. Yau was unwilling to take shares in Chinese United because some of the shareholders were privileged to the extent that Mr. Pang and his investors, under the guise of Solar Power Ltd, were paying for their investment on deferred terms.

71. Indeed, whether or not the full details as related by Mr. Cheung are accurate, perhaps the most telling matter in this is the fax which has been referred to as the "Boss Cheung" fax. That is a fax which was sent on the 30th April 1993 by Mr. Pang to Mr. Cheung. It is in very apologetic terms and in it Mr. Pang acknowledges that he has used the wrong expression and that the purchase of shares in Chinese United by Solar Power would be by loan subscription. Mr. Cheung, whose evidence in this respect I accept, says that this fax related to the suggestion that had been made by Mr. Pang that the shares would be purchased on an option arrangement. Indeed Mr. Pang also said much the same. It seems to me that, whatever was the arrangement before that fax, after the 30th April the notion that there would be an option arrangement in relation to the payment of the shares was at an end.

72. This fax followed a document dated the 1st April 1993 which was on Chinese United letter head, which makes clear that the $11,000,000 was being treated as a loan. Although it was put to Mr. Cheung that this latter document had been back dated, Mr. Cheung denied that. Whether or not it was back dated does not seem to me to be determinative in this case.

73. The accounts of Chinese United show the transaction as a loan rather than as an option arrangement in respect of the shares. To an extent Mr. Pang seems to have had some responsibility for the preparation and maintenance of the accounts, at any rate in the period after mid 1994 when he became primarily involved in the running of Chinese United.

74. I would also add that it seems that Solar Power exercised voting rights consistent only with their having a shareholding and not merely owning options.

75. Mr. Cheung's analysis of the proposed shareholding seems to me to be the more likely and indeed to correspond with such documents as existed at the relevant time. The essential format of the shareholding was that there was to be 500,000 bonus or par value shares and the remainder of the shares were to be issued at a premium. The bonus shares or par value shares were to be management shares. Primarily Mr. Cheung was to take those subject to shares being allotted to Mrs Croll and Mr. Pang in consideration for their raising capital and in proportion to their success in that respect. Hence Mr. Pang was to receive 11,500 (or 115,000 as later denominated) shares and Mrs. Croll 2,000 (later 20,000) bonus shares.

76. On 4th May 1993 Mr. Cheung sent a memo to Mr. Chou the accountant. The memo sets out the proposed shareholding. The document relates to shares of $10 par value and premium shares of $1,000. There is no dispute that later this became $1 and $100 respectively and the quantities of shares was correspondingly multiplied by 10. One matter which seems to me to lend credence to the accuracy of the dating of this memo is the fact that Ready Harvest International Limited is named as the holder of 24,000 par value shares. This was one of Mr. Cheung's companies and the company in fact used to hold those shares was another company, Nice Gain Limited. Wellward Limited is shown as having 12,500 shares. It is said by Mr. Cheung that this represented the shares which Mr. Cheung had agreed with Mr. Yau to exchange with Mr. Yau for the deferred payment. The change to this structure came with the Burlion transaction when Mr. Cheung agreed to sell 125,000 of the par value shares to Mr. Pang.

THE COMMISSION PAYMENT

77. It follows from what I have said that I consider that on the face of the documents from almost the very beginning all the investors knew, or at least had in their possession documentary statements showing, that an investment broker was to be paid $11 million. It seems to me that they must have known this payment was to be made to some party who was responsible for introducing the deal. The suggestion is that it is not to be surprised at if substantial sums have to be paid to those responsible for introducing, or at least responsible for, good business propositions in the PRC. When one looks at the overall figures the difference between the amount set out as the value of the company in the first documents produced namely RMB50 million and the price for half the Taxi Company in the investment plan namely $19.5 million is not that great. The difference is greatest in relation to the structuring of the payment. The fact that it was agreed that part of the payment would be deferred was another major difference.

78. When it came to it Mr. Tang, no doubt appreciating the difficulties facing him in relation to Mr. Pang's denials of knowledge of the Commission Agreement, was quick to point out from the very beginning that it did not matter whether Chinese United knew that a commission was payable to Wellward, what was of primary importance was whether Wellward was in fact a disguise for Mr. Cheung in that it was beneficially owned by Mr. Cheung or that he had the benefit of it.

79. The Lam sisters became the directors and shareholders of Wellward on 27th February 1993. It was not until 4th July 1995 that Mr. Yau (You Jian Guo) and a Ms. Li Xiao Ping became Directors. Neither the Lam sisters nor Mr. Yau nor Ms. Li were called to give evidence nor was any hearsay evidence sought to be tendered in respect of them or indeed in respect of Mr. Chou the accountant to whom the Lam sisters were related.

MR. YAU

80. I have to say that almost everything that Mr. Cheung had to say about Mr. Yau in this case had a hollow ring about it. I am not satisfied that an intermediary, whether in the form of Mr. Yau or otherwise, was needed or used.

81. Mr. Cheung's evidence about how Mr. Yau originally contacted him is strange to say the least. At a time when Mr. Cheung was trying not to appear enthusiastic it is odd that a business acquaintance with whom he had fallen out of contact should suddenly ring up.

82. The need for Mr. Yau's assistance in the negotiations is not clear to me. It seems to me that looking at the documents and in particular the Introduction to potential Investor, that Jin Loong were always prepared to sell part of the shareholding. It may be that they were not keen to sell exactly half as that might lead to a deadlock situation. Indeed I note that in the Joint Venture Agreement there are provisions relating to the procedure in the event of deadlock. In view of the apparent recognition by all concerned of the need for connections when doing business in the PRC and the absence of connections in Wuhan of either Mr. Cheung or Mr. Pang or anybody else connected with Chinese United, the need to keep those who did have appropriate connections linked to the company was clearly apparent. This it seems was not lost on those with whom Mr. Cheung and Mr. Pang were negotiating. That need was by no means lessened by the fact that even on the Investment Plan the importance of the gas station licences was highlighted by the relative value put on them. Good connections would seem to be a feature in relation to making good use of the gas station licences.

83. I have already drawn attention to the discrepancy in Mr. Cheung's evidence in relation to the telephone call with Mr. Yau at the end of the Wuhan trip in January 1993. I found his evidence in this respect unconvincing.

84. I should also mention that I felt that some of Mr. Cheung's evidence appeared to show careful "preparation". On at least one occasion when Mr. Cheung was being cross-examined in relation to what Mr. Yau was said to have done the wording he used followed almost exactly that which he had used in chief and it had an artificial air about it.

85. The fact that I doubt the role played by Mr. Yau in the negotiations does not detract from the fact that payment may have been agreed to be made to facilitate the deal. To whom that payment was to be made is quite another question. As I have already said I consider that the investors in Chinese United were aware that such payment was to be made and that Mrs Croll signed the Minute authorising the execution of the Commission Agreement.

86. The first question to be decided is to whom did Wellward belong. The evidence shows that Wellward was set up at the instigation of Mr. Cheung. The arrangements were made with and through his accountant to hold the company and to have nominee Directors. None of the relevant people came to give evidence as to the circumstances in which they held the company or what they were told about their nominee shareholding and directorships at the time.

87. Interestingly the Lam sisters were never trusted to be signatories of the Wellward account. Until 1995 Mrs Cheung was the sole signatory. It seems that she was replaced in that year by Ms Li Siu Ping, who was the Director (the signatures are clearly the same even if the romanisations of the name and the identifications are not).

88. When first challenged about Wellward and the payment made to it, the answer provided by Mr. Cheung's solicitors that Wellward was half owned by Mr. Pang was ludicrous. Mr. Cheung's explanation for it was that is what he was told by Mr. Yau to say. Apart from the fact that by that stage Mr. Pang had bought one of the Jin Loong companies and therefore might have been familiar with the Jin Loong personnel, I can see no point in Mr. Yau having given such advice.

89. It is admitted that $4 million was paid by Chinese United to Wellward on the 27th April 1993. It is also not in dispute that that sum was paid out for the benefit of Mr. Cheung and largely went to pay for his shares in Chinese United. It is Mr. Cheung's case that he used money which he had in his factory in the PRC to pay Mr. Yau. The method by which that was done was a rather complicated arrangement of illegal transfers of funds to Hong Kong by black market deals done on the telephone. This was described in Mr. Cheung's 2nd affirmation in these proceedings answering interrogatories.

90. Mr. Cheung said that the money was then taken up to China in small amounts of $200,000-$400,000. Mr. Cheung says that he received receipts from Mr. Yau but on the strict understanding that he would never use them except against Mr. Yau. The understanding was so strict that Mr. Cheung would not produce those receipts even when prosecuted in the District Court and even though they would seemingly have been very relevant.

91. After discovery was pressed for the receipts were said not to be available. The explanation given was that Mr. Cheung had returned them to Mr. Yau after the District Court trial and had in return been exempted from liability to pay the balance of $7.75 million due in respect of the commission. I regret that I am unable to accept Mr. Cheung's explanation as to the receipts. I cannot understand how if Mr. Yau were so concerned that Mr. Cheung should not reveal the receipts to anyone he should give them to Mr. Cheung in the first place. In the second place if Mr. Yau were so worried that details of the payments to him should become known I do not understand how it was acceptable to him that Mr. Cheung might give evidence about them in the District Court and in this Court. Nor can I understand how Mr. Yau allowed himself to be made a Director with his own signature appended to the document when the only transaction of the company had been to execute a Commission agreement in respect of a transaction from which he wished to distance himself.

92. Mr. Cheung said that he had paid the last $900,000 of the $4 million after Mr. Pang had denied knowledge of Wellward. It seems surprising that Mr. Cheung should continue to make the payments but not protect himself in any way.

93. As I have said, I do not accept Mr. Cheung's evidence about the receipts and Mr. Yau's conduct in relation to them. If such receipts had existed they would have been returned to Mr. Yau at a time when Mr. Cheung's obligations as to discovery were known to him and indeed he was well aware of the case being put against him in these proceedings.

94. That Mr. Yau did exist is clearly a fact evidenced by the Wellward company documents. Apparently the accountant did meet Mr. Yau outside Hong Kong when proceedings first started. But it seems to me that at the relevant time, that is in 1993, Wellward had been set up at the direction of Mr. Cheung. It was held at his direction. At that stage Wellward was not intended to have any assets. It seems to me most likely that Mr. Cheung did intend to use the company as a conduit through which payments could be channelled to those to whom Mr. Cheung wished to pay off for the deal. He also intended at least at one stage to use it to hold the 125,000 shares which he said he was going to use to swap for the entitlement for the deferred payment. But I am not satisfied that at that stage the Company was held in trust for Mr. Yau or anybody else other than Mr. Cheung.

95. Whereas I expect that Mr. Cheung would at some stage have had to pay a considerable sum to those connected either with Jin Loong or the Taxi Company obviously a large portion of that was deferred. Clearly Mr. Cheung did not use the $4 million paid by Chinese Untied to Wellward to grease the necessary palms. If Mr. Cheung wishes to satisfy the Court that he used an equivalent sum from other sources disguised so as to prevent detection then it would fall upon Mr. Cheung to establish that. That he has failed to do. His explanation as to the convoluted arrangements of spiriting money from the PRC to Hong Kong and then taking it back to Wuhan do not seem to me to make sense. He could have withdrawn the money from the bank in Hong Kong, in small amounts and it would thereafter have been untraceable. It would certainly have been as untraceable as the money said to have been used. Even if some money were paid I have not been satisfied as to how much and to proceed further would be to speculate.

BURLION

96. Sometime in the summer of 1993 Mr. Cheung became aware that Jin Loong wished to dispose of its remaining 50% shareholding in the Taxi Company. He arranged to put that shareholding into the name of Burlion Limited which is a BVI company. There is no dispute that Mr. Cheung (Nice Gain) holds his share in Burlion Limited in trust for Chinese United since, of course, at the time he was a director of Chinese United and by taking an interest in Chinese United's major asset, he put himself in a conflict situation.

97. Burlion purchased its interest in the Taxi Company for $6 million. However, at about the time the deal was going through Mr. Cheung agreed to sell Mr. Pang one share, namely 50%, of Burlion for a price of $10.5 million. Mr. Pang says that for that $10.5 million he also received 62,500 Chinese United shares. Mr. Pang says that this was on the basis that Mr. Cheung had told him that the price which Burlion was paying for 50% of the Taxi Company shares and 125,000 Chinese United shares was $21 million. There is of course nothing to support Mr. Pang's suggestion in this regard, the allegation is hotly denied by Mr. Cheung. Mr. Cheung's case is that he sold Mr. Pang the one Burlion share and 125,000 of his own Chinese United shares.

98. Mr. Cheung on the other hand said that the deal was somewhat different. He said that Mr. Pang had got to know about the fact that Mr. Cheung would be buying the remaining half of the Taxi Company and wanted to be part of that deal. In September 1993 when the transaction between Burlion and Jin Loong to purchase the remaining 50% of the Taxi Company was being put through Mr. Pang suddenly become very cash rich. Because of investigations by the Securities and Futures Commission into transactions by Mr. Pang and the investment house of which Mr. Pang was a director, Mr. Pang was ordered to be suspended for 21/2 years and his company was fined $3.5 million. The uninitiated might have supposed these were penalties. However, for Mr. Pang this was a stroke of good fortune. The implication of correspondence from solicitors advising Mr. Pang (and it seems the investment house) at that time was that the investment house was apparently anxious that the matter should be allowed to drop and that nothing further should be done by way of challenging the rulings and that it was prepared to support Mr. Pang if he did not appeal. That support in the end took the form of an ex gratia payment of $20 million. That was agreed to be paid to Mr. Pang, this was in addition to other substantial sums under his service agreement. As the correspondence from the investment company produced by Mr. Pang bears out, that compensation was agreed in a severance agreement dated the 10th September and paid on the 28th September.

99. It seems clear on the evidence that Mr. Pang paid Mr. Cheung's wife a total of $8.5 million of which $7.5 million had been paid by the 15th September. That was of course about 2 weeks before Mr. Pang received the $20 million ex gratia payment. It also seems probable to say the least that Mr. Cheung's wife used the payment from Mr. Pang to pay the balance of $5 million that Burlion was paying Jin Loong for the 50% shareholding in Chinese United.

100. Despite the fact that Mr. Pang obviously tapped his own resources to pay for his share in Burlion, the timing of the events is clearly such that I consider it an almost inevitable conclusion that there is some link between Mr. Pang being about to receive the payment and his being prepared to agree to pay $10.5 million for the Burlion share.

101. I have found Mr. Pang to be an unsatisfactory witness in other respects and I am not satisfied as to Mr. Pang's evidence about the purchase of the Burlion share either. It is for him to establish the alleged misrepresentation and I find that he has failed to do so. I am not satisfied that Mr. Cheung represented to Mr. Pang that the price paid by Burlion was $21 million. I do not accept Mr. Pang's version of events that Jin Loong was selling 125,000 of its own shares to Burlion. If that had been the case there seems to me to be no reason that would not have been included in the sale agreement. The arrangements between the parties about the shareholding in Chinese United seem to me to have changed from time to time. In September 1993 they were still fluid to the extent that it seems no share certificates had been issued.

102. The reconstruction which has taken place by the 2 protagonists in this case seems to me to have been at least partly coloured by wishful thinking and imprecise memory. I doubt that the real history of the transactions between the parties will ever emerge. It does seem likely however, that with his windfall $20 million imminent Mr. Pang would have been prepared to pay a lot of money for a substantial part of an investment which at the time he obviously thought was likely to be highly remunerative.

103. There remains the matter of the balance of $2 million over and above the $8.5 million which was admittedly paid by Mr. Pang to Mr. Cheung's wife. Mr. Cheung's evidence in that regard was again not particularly satisfactory. There was a remittance of $2 million by Mr. Pang which was sent to the Taxi Company. Mr. Cheung said his understanding at that time was that the payment was on behalf of Burlion. Mr. Cheung did not proffer any convincing reason as to why Mr. Pang should have been quite so generous as to remit such a large sum of money. He merely said it was to meet the Taxi Company's capital requirement. What Mr. Cheung did say however was that he dealt with Mr. Pang on the basis that he still owed him $1 million. That I can understand on the basis that each man owned half of Burlion and since Mr. Pang paid $2 million on behalf of Burlion therefore it should be apportioned between them. On that basis Mr. Pang would still have owed Mr. Cheung $1 million.

104. Mr. Cheung said that later, after discovering the ledgers and journal adjustments, following discovery, he had found that Mr. Pang was not putting this as a payment on behalf of Burlion, but instead as a payment on behalf of Chinese United. Then after consulting accountants Mr. Cheung had changed his mind about crediting half the payment of $2 million. In my view by then it was too late. In any event I can see no reasonable explanation for Mr. Pang having remitted the $2 million to the Taxi Company other than that it was part of the payment for the Burlion share which was then used to finance the Taxi Company. In conclusion it seems to me that Mr. Cheung's initial approach must have been the correct one, namely that since he and Mr. Pang owned Burlion half the payment by Mr. Pang was properly treated by him as a reduction of the $2 million owing.

105. At the conclusion of this hearing I was asked by the parties not to make any orders but to leave the parties to draw up an order based on my findings. I will leave the parties to make application to have the matter restored when they are ready and I will deal with any further matters which the parties may wish and with the orders.