YICKO GA NETWORK SECURITIES LTD. v. ORIENTAL PATRON ASIA LTD.

HCA9848/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9848 OF 2000

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J U D G M E N T

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The issue

1. Although this case has taken eight days it only involves a short issue of fact which is whether the defendant agreed to purchase from the plaintiff 3,000,000 shares in a company called i-Wood Limited ("i-Wood") which was being launched as a public company on the stock exchange through an Initial Public Offering ("IPO"). The plaintiff's case is that an agreement was made orally in the course of a telephone conversation on 12 October 2000 between Mr Mike Poon ("Mr Poon") of the plaintiff and Mr Rabo Leung ("Mr Leung") of the defendant which agreement was further confirmed in subsequent telephone conversations between these two gentlemen on 14 and 17 October 2000.

Background

2. The plaintiff is a securities dealer registered on the Hong Kong Stock Exchange ("the Stock Exchange"). It acts as a broker for retail and institutional clients trading shares for them on the Stock Exchange. It also acts as an underwriter for the placement of shares when a company is first floated on the stock market through an IPO, which I will need to explain more fully in a moment. Its chairman is Mr Poon, one of the two principal witnesses in the case, who has worked in this field for a number of years now, having graduated from Hong Kong University with an engineering degree. The defendant is more involved in the field of corporate finance with something of a specialty in bringing mainland companies onto the Stock Exchange by selling shares in such enterprises through IPOs. i-Wood is one such company which has factories on the mainland, largely manufacturing furniture. For the purposes of this action the defendant's principals are Mr Joseph Chan ("Mr Chan") and Mr Leung, with the latter in particular said to be the person who made the agreement to buy the shares on behalf of the defendant. Mr Chan and Mr Leung are also well qualified and have considerable experience in securities dealing and in IPOs.

i-Wood's IPO

3. The defendant was appointed as sponsor and lead underwriter by i-Wood to oversee its flotation on the stock market. Mr Leung was put in charge of the IPO on behalf of the defendant. As the sponsor, the defendant had overall responsibility for bringing i-Wood to the market. As appears from the agreement between underwriters (at page 4, Black Volume 1), a number of underwriters were appointed to place the shares on the company's behalf.

Types of IPO underwriter

4. In an IPO a private company will offer its shares to the public, being a percentage of its total shares, which it issues at an initial pre-determined price which, on an appointed date, will trade freely on the stock market at such price as the market will dictate. In this way, a private company will raise capital, usually to fund its expansion, and also for its private shareholders who may keep some of the capital raised by the public offering. There are two kinds of underwriter in an IPO and it is this distinction which has brought about this action. A "Public Offer" underwriter is able to allot shares to members of the general public as well as to institutional investors. Appropriate forms are available for the general public at the offices of the underwriters concerned and at nominated banks. An interested member of the public is able to go and collect the forms, fill them in and apply for the number of shares that he or she wishes to purchase. As such, a Public Offer underwriter is addressing himself to the public at large and, perhaps, although not necessarily, to the smaller type of investor. An underwriter, if invited by the sponsor to participate in the IPO, will specify to the sponsor that he wishes to be a Public Offer underwriter and asks to underwrite a particular number of shares reflecting his particular appetite for the risk involved in the issue. Ultimately, all underwriters bear a risk in such matters referable to the number of shares they are able to dispose of by selling them to potential buyers before the first day of trading. If the issue proves to be unpopular or if market conditions are depressed with few interested buyers, then the underwriter may find himself the unwilling owner of unwanted shares which he is obliged to pay for at the initial price fixed for the public offer, and then either hold them until the market price rises to produce a profit or sell them, on or shortly, after the first trading day for the issue at the market price with whatever consequences that produces, including, as happened in this case, a market price lower than the initial price fixed for the public offer.

5. The other type of underwriter is a "Placing Underwriter" who is required to "place" his allocation of shares with his clients. This exercise requires an underwriter to address a basically different type of investor being on most occasions his own regular clients. These would be private investors who trade shares on a regular basis and who might be expected to take a larger allocation of shares than an investor applying for shares through the public offer allocation. More importantly, a Placing Underwriter would look to his institutional clients to take up shares in this category. For example, these might be pension funds, mutual funds or other companies who might be interested in acquiring, to add to the jargon, a substantial tranche of shares for their investment portfolio. If an underwriter chooses to underwrite under the "placing" category, he stands to earn a more substantial commission than an underwriter dealing in the public offer category of shares. That is the advantage of this category of shares, and it also provides the investor with a better chance of obtaining all of the shares that he has applied for, but this also carries the additional risk for the underwriter of not disposing of a weak issue to what is a more discerning or "savvy" type of client. Switching unwanted placing shares to public offer shares, where they would be available to a larger category of potential buyer, is not possible unless there has been a very substantial over subscription of shares. The risk of "getting caught" with unwanted shares in this category of shares is something that the potential underwriter needs to judge carefully in deciding whether he wishes to underwrite this category of shares, and if he does, the number of such shares that he wishes to underwrite.

6. From that general overview of these two types of underwriting in an IPO, I turn to the evidence upon which the outcome of this matter must be decided.

The plaintiff's involvement

7. As sponsor and lead underwriter, the defendant wished to appoint other underwriters to ensure that the shares were effectively marketed to as wide and audience as possible and in such a way that the initial offer became fully subscribed. The prospectus shows that Mr Leung succeeded in doing this with various underwriters taking up their respective percentage allocation of shares under the two categories of public offer shares and placing shares as determined by those underwriters in consultation with Mr Leung. The plaintiff's situation appears (at page 157, Black Volume 1) as a Placing Underwriter for 3,750,000 shares.

8. As to how they found themselves in this position is not difficult to establish. Mr Leung asked his colleague, Mr Chan, whether he knew of any potential underwriters for this IPO. He said that he knew, amongst others, Mr Poon, with whom he had previously dealt and said that he would speak to Mr Poon about the matter. Other than that, Mr Chan had no involvement in the IPO. In early September 2000, Mr Chan said that he telephoned Mr Poon as well as other brokers who he felt might be interested. As he was not familiar with the detail of the IPO, their conversation was a general one. Mr Poon expressed an interest and so Mr Chan gave him Mr Leung's telephone number in case he wised to pursue the matter any further. Mr Chan also told Mr Leung that Mr Poon had expressed an interest and that he should resolve matters with him. Mr Chan's evidence is that he did not and could not provide Mr Poon with much detail about the matter because of his lack of involvement and because at that time much of the important data, such as the offer share price, had not been fixed. He was only concerned to elicit whether Mr Poon was interested to be one of the underwriters in the IPO and he then left it to Mr Poon to speak to Mr Leung and fill in the gaps.

9. Mr Poon's account of his initial contact with Mr Chan differs. He says that when he was approached by him he expressed an interest but made it very clear that he would be looking to be an "IPO Underwriter but not a Placing Underwriter". In giving evidence, Mr Poon was anxious that I follow this point, as he was with Mr Chan at the time of their initial contact. Ms Cheng, who appears for the defendant, submits that had he been so specific, given the importance that he now attaches to the matter, one might have expected him to have referred to this in his witness statement which contains nothing about "but not a Placing Underwriter". This is a particularly striking omission, says Ms Cheng, given Mr Poon's evidence that Mr Chan had even gone so far as to assure him that he would not need to "get tickets", meaning to place shares, and that there would be no risk. This is a matter to which I must return in deciding whose evidence is to be preferred in a case where there is so much divergence of recollection between the witnesses.

10. The next stage concerns Mr Poon's contact with Mr Leung. Both have spoken of a brief discussion. Mr Poon referred to this being in the nature of "a double confirmation", something of a memorable phrase of his which he used on several occasions in the course of his evidence. Both agreed that the discussion was in money terms and in round figures without reference to numbers of shares to be underwritten because their price had yet to be fixed. Mr Leung says that he agreed that the plaintiff's commitment was to be in the order of $3 million. Mr Poon suggests that it was more general and in the range of $500,000 to $3 million. Mr Leung was then told to address himself to the plaintiff's dealing director, Miss Alice Yiu ("Miss Yiu"), who would take charge of the mechanics of the arrangements because Mr Poon was shortly to take a holiday in the United States. Mr Poon's evidence on this is that he had briefed Miss Yiu about his understanding with Mr Chan, now "double confirmed" with Mr Leung, that the plaintiff was to be an IPO Underwriter but no of the "placing" variety.

"A mistake of ours?"

11. A fundamentally important document in this case is the defendant's letter of invitation to the plaintiff which found its way to Miss Yiu (see page 1, Black Volume 1). Its terms are unequivocal. It solicits the plaintiff's participation as Placing Underwriters and not as Public Offer Underwriters which Mr Poon says he had been so clear and insistent and on which he had briefed Miss Yiu before his departure. Notwithstanding his explicit instructions to this effect, which Ms Cheng does not accept, Miss Yiu signed up to the plaintiff to the terms of the letter of invitation without further inquiry or amendment. This was done by means of the letter of confirmation which came with the invitation (see page 2, Black Volume 1). She also signed a power of attorney on 4 October 2000 authorizing the defendant to sign the relevant documents on the plaintiff's behalf (see page 112, Black Volume 1). In early October 2000, those Agreements were sent to her, plainly confirming the plaintiff's participation as a Placing Underwriter.

12. There is, I am afraid, a yawning gap in the plaintiff's evidence which has been caused by its having decided not to call Miss Yiu. It has emerged from other evidence that she is in Hong Kong and therefore available to come to court. Had Mr Poon instructed her that the plaintiff's participation was to be as a Public Offer Underwriter only, it would have been most instructive to hear from her why she committed the plaintiff to a different scheme of underwriting obligation. Ms Cheng, of course, submits that it is inconceivable that Miss Yiu, a 10 year veteran in the field, would have so misunderstood the clearest instruction from Mr Poon that the plaintiff was to be only a Public Offer Underwriter. This serves to indicate that he did not give such an instruction. Ms Cheng submits that this is because Mr Poon had not given by way of "double confirmation" or otherwise any indication to Mr Chan that he was only prepared to accept the "no risk" public offer underwriting obligation. Nor had Mr Chan told him that this was understood and that he would not have to "find tickets". Ms Cheng goes on to submit that if I disbelieve him on this part of the case, I should pause long and hard to accept anything else that he has to say on the even more important issues on the evidence.

13. There is no doubt that Miss Yiu's absence from the witness box represents a material gap in the plaintiff's evidential trail as to what instructions she actually received from Mr Poon. Mr Poon has even said that she afterwards prepared a report for him on the matter. This report has not been placed before the court.

14. Leaving aside Miss Yiu's absence from the case, the fact is that the plaintiff was recruited, if I can express it in this way, as a Placing Underwriter. Mr Poon concedes that this was its mistake. This therefore forms the platform from which this action has been launched. The question for me to decide is whether Mr Leung, having been approached by Mr Poon once he had discovered Miss Yiu's error, agreed to unscramble their arrangements as reflected in the underwriting agreements and to purchase the remaining 3,000,000 i-Wood shares which the plaintiff had not divested itself of.

15. Before I consider the evidence itself, it may be helpful to consider the implications of such a course for both parties. I say that because as so often happens where there is no common ground between the parties on the vital parts of the evidence, a consideration of the inherent probabilities of the situation as presented on either side of the argument can be helpful in deciding where the truth lies. Ms Cheng says that everything points away from Mr Leung agreeing to buy these shares from the plaintiff on the first day of trading or indeed beforehand. A starting point is the fact that from the outset the defendant had come to a view about this issue which was not a "bullish" one. During this period there was little interest amongst investors in purchasing this type of share which was not first line issue. As an IPO, it was very modest. In terms of value and size, it was the smallest allowable under the listing rules to qualify for an IPO. In order to ensure that all the issued shares would be taken up, Mr Leung was anxious to find as many underwriters as he could to give it maximum exposure. The defendant who, as sponsor and lead underwriter, was in a position to give to itself as much underwriting exposure as it wished in fact allotted to itself a small percentage. This was a reflection of its modest expectations. In the event, the issue became over-subscribed but only to a small extent. One broker required a further 2,900,000 shares which the defendant had to exercise its option to call for more shares to be issued by the company to satisfy that demand. Nevertheless, in terms of over-subscription this did not amount to very much in the overall scheme of IPOs. In the circumstances, where great things were not expected of this issue, which in fact proved to be the case and the modest original commitment made by the defendant, is it likely, asks Ms Cheng rhetorically, that the defendant would agree to take up shares from the plaintiff which exceeded his original commitment? On a minimum basis, assuming a mistake had been made by the plaintiff, which had somehow been contributed to by Mr Chan having indicated to Mr Poon that he would not have to find tickets, and therefore an element of "conscience" was present, it still would have made no commercial sense for the defendant to agree to take over a great majority of the plaintiff's commitment on the first day when it would have been highly uncertain how the shares would perform. In any event, it was not the defendant's policy to speculate with the shares on his own behalf in this way.

16. Mr Hingorani, who has mounted a very vigorous presentation of the plaintiff's case, concedes nothing on the probabilities of the case and points to the evidence of what actually occurred which, he says, clearly demonstrates that such an agreement was in fact concluded. If motive is required for what Mr Leung agreed to, the truth is that he was more sanguine about the share's prospects on the first day of trading than he is now prepared to admit and he saw an opportunity for profit.

The evidence

17. Although counsel, particularly Mr Hingorani, have investigated the evidence in minute detail over a number of days, with Mr Leung in the witness box for the better part of four days, it falls within a very short compass and is uncomplicated.

Mr Poon

18. Mr Poon returned from holiday on or about 9 October 2000 to discover that, contrary to what he says he had agreed with Mr Chan and Mr Leung, the plaintiff was committed to be a Placing Underwriter. He was not prepared to risk that sort of exposure, so he set about trying to at least restore the situation to what he had originally agreed with the other two. He made a telephone call to Mr Chan setting out all of this. Up till then the plaintiff had not "placed" any shares but as many as 800,000 shares had been disposed of under the public offer section of the issue. This of course is strongly relied on Mr Hingorani as an indication that Mr Poon expected to be and considered the plaintiff to be a Public Offer Underwriter and therefore had made no attempt to place shares with its own clients.

19. The vital conversation is one held in the afternoon of 12 October 2000. Mr Poon spoke on the telephone to Mr Chan, and as they started to speak, Mr Leung came past Mr Chan's office, and so he was invited in and Mr Chan told Mr Poon to speak to Leung directly. He turned the speaker phone on so that everybody in the room could hear what was being said. Mr Harold Kwan, a broker from another firm who had come to discuss an unrelated matter with Mr Chan, says that he also was in the room at the time and that he overheard everything that was being said. Mr Chan and Mr Leung have no recollection of Mr Kwan being there and so his presence is not admitted, although they did not go as far as denying that he may have been there. Having seen Mr Kwan give his evidence, I am completely satisfied that he was present. As to what he says he heard and now recollects, I will return to presently.

20. As to this conversation, Mr Poon's evidence was that Mr Leung had told him that many people wanted the shares and that if he did not want them then he (Mr Leung) would take them. Mr Poon told him that he did not want the risk and Mr Leung said that if the plaintiff did not want them he could sell them to the defendant at $0.80 per share on the first day of trading - 3,000,000 shares. Mr Poon told Mr Leung that he would do so and that he would not mind paying for the handling charges, commission and transaction levy. Presumably, he was prepared to pay those charges as a small price to release himself from the risk of holding unwanted, and as he saw it, risky shares. He says that he then repeated himself and said that if there was a gain that the gain would go to the defendant, adding "I hope you make money, I don't need it". When that was clear in his mind, he then went on to discuss the allocation of shares in the public offer section. He asked Mr Leung to discuss this with Miss Yiu to see what could be done with those shares. He indicated that they had disposed of 800,000 shares under this scheme. He was certain that 600,000 of those shares would be taken up by the subscribers who had applied for them, leaving in round terms 3,000,000 shares which Mr Leung said he would buy off him on the first day at $0.80 each. So that is how, on his case, the agreement was arrived at.

21. After that, according to him, Mr Chan telephoned to confirm the agreement - the problem was solved and he need not worry about it any further. He asked Mr Chan why the defendant did not wish to keep shares as House shares, and Mr Chan told him that this was because the defendant was having cash-flow problems and they could not afford to hold so many shares. This question of the defendant's cash-flow has served to set off another enquiry giving rise to a discovery application in the course of the trial upon which I had to rule. I will need to make further brief reference to this presently.

22. As to the shares that had been applied for under the public offer section, it was agreed that Mr Leung would go to the custodian bank, the Standard Chartered, to see how many of the applications could be retrieved and allocated to the "placing" allocation. The bank would only allow this to happen if this was dealt with by the lead underwriter, hence Mr Leung's presence. 600,000 shares were retrieved in this way, leaving this gross or round figure of 3,000,000 shares which became the subject of the alleged agreement. This was done on the following day, 13 October 2000, which was the closing date for allocations and therefore the last day when a retrieval exercise of this sort could be done under the rules.

23. The next crucial date is 17 October 2000. Under the terms of the issue, the plaintiff had to pay for its entire subscription of 3,750,000 shares which was done by Mr Poon who wrote out a cheque. The purchase itself was actually completed on 19 October 2000 with the cheque being credited to the defendant's account on that day. He then tried to speak to Mr Chan to "double confirm" the arrangement but he could not get through to him. He then spoke to Mr Leung to confirm that he would be selling the 3,000,000 shares to him on the first day of trading. This conversation was recorded and has been transcribed. It appears at pages 51 and 52 of the Bundle of Witnesses' Statements. Both parties rely on it - the plaintiff to support its case that there was an agreement for the sale and the defendant to prove the contrary! Its terms are as follows :

"(English Translation)

Transcript of a Tape Recorder

Date: 17th October 2000

Madam: Mr. Chan's office

Mike Poon: Is Joe Chan here?

Madam: Joe is out ...

Mike Poon: ah ....

Madam: .... will not come back today!

Mike Poon: Will not come back today?

Madam: Yes

Mike Poon: I'll call his cell phone then!

Madam: Fine. Bye bye

Mike Poon: .... wait .... Annie ....Annie

Madam: What?

Mike Poon: Is Rabo Leung here?

Madam: Rabo is here, looking for him? Hold on ....

 

Rabo Leung: Hello

Mike Poon: Rabo, this is Mike!

Rabo Leung: Yes ....yes....what?

Mike Poon:

That is - I still haven't given you the Placing List yet. And we have only get 600,000 odd tickets, should the remainder be put into House?

Rabo Leung: Use House then

Mike Poon: House, no problem with it?

Rabo Leung: No problem, no problem, no problem

Mike Poon: Then I'll give them back to you at the original price on the first day, 80 cents

Rabo Leung: You just go ahead and sell them, someone will want them

Mike Poon:

O.K. Anyway, I'll give them back to you at 80 cents, so to avoid .... to avoid .... that is .... I won't take the risk - I don't really want to, sorry

Rabo Leung: Never mind, you just go ahead and sell them

Mike Poon: Fine! Thank you, thank you.

Rabo Leung: OK .... OK. Bye"

Mr Poon says that the jargon of their industry is such that when Mr Leung said to him "just sell it", it meant that he, Mr Leung, would buy it. As a result of this conversation he felt at ease that the agreement was confirmed and that the defendant would buy the shares off him.

24. He seeks to reinforce his case on the agreement by saying that having regard to what was agreed with Mr Leung, the plaintiff kept the shares until the first day of trading. No attempt was made to place shares which the plaintiff could have done very easily. He suggests that the issue was reasonably lively and became over-subscribed, which I have already referred to, and that given the demand that the plaintiff would have been able to rid itself of its entire allocation. Its inactivity in this regard since 12 October 2000 therefore can only be explained by the fact that the shares were spoken for and not available for placement.

Mr Harold Kwan

25. Not surprisingly, Mr Hingorani lays great store by the evidence of Mr Kwan. A neutral, no axe to grind, a person who fortuitously was there when the speaker phone was on and who can now tell the court what really happened. Subject to the vagaries of any witness' ability to recollect accurately, all of this is fair and proper comment by Mr Hingorani. Mr Kwan's involvement as a witness came about quite by chance. About two weeks after this conversation he met Mr Poon in Sheung Wan and from their conversation, it became clear that he had overheard the speaker phone discussion. Given his neutrality - it is clear that he bears the defendant no grudges, nor the plaintiff any particular favours - I have been particularly careful to understand his evidence and the way that he has given it. Witnesses of this sort can be decisive in such circumstances.

26. He had been in Mr Chan's office discussing an unrelated transaction. Mr Leung came into the office and the two of them spoke about the i-Wood flotation. Mr Leung said that Mr Poon did not appear to know the difference between a Placing Underwriter and a Public Offer Underwriter. Mr Chan then telephoned Mr Poon and put on the speaker phone. Mr Kwan recognized Mr Poon's voice at the other end. Mr Chan telephoned to clarify the situation with him. Mr Kwan then came to the crux of his evidence. At first, he tried to refer to his witness statement as an aide-memoire as he gave the evidence. I had to instruct him that he would not be able to do so. That was a perfectly understandable reaction for somebody wishing to recollect a conversation that had occurred two years ago. He then proceeded, doing his best, from memory. Mr Leung said that the plaintiff was a Placing Underwriter. Mr Poon then said that there had been a misunderstanding between them. The witness then paused for some time as he tried to get the evidence out. I have made a marginal note to this effect in my notebook because it made an impression that he should have come to a halt. Again, this cannot possibly be a criticism of a witness in such circumstances. I considered that he was trying to do his best in a difficult situation. He said that Mr Leung asked Mr Poon how many applications for shares had been made. Mr Poon said 800,000. Mr Leung asked if it was possible to move those applications into the placing section. Mr Poon said that it was not possible to shift all of them because he did not know how many applicants had submitted direct applications but he thought that he could transfer 600,000 from public offer to placing. The witness then paused again - he was obviously thinking about the evidence that he was giving. I have made another marginal note to this effect. I wondered whether perhaps he had forgotten, but after a clear pause he was then able to go on with what he wished to say which was that Mr Poon then asked Mr Leung about the remaining 3,000,000 shares. Did Mr Leung want Mr Poon's company to take them? Mr Leung said that Mr Poon's company should take them "in-House" first, and then he told him that on the first of trading he should sell them into the market at $0.80 per share. Mr Leung said that he had already made all the arrangements and that there would be no problem. Mr Poon said alright - on the first trading day he would sell them out for $0.80 and the profit gained over $0.80 would go to the defendant. He asked whether he should sell to the defendant. Mr Leung replied that would be so or to somebody arranged by the defendant. Thereafter, both parties repeated themselves several times, speaking of the same topic using different words. His impression from this was that on the first trading day Mr Poon would sell into the market at $0.80 and that Mr Leung or somebody arranged by him would purchase the shares. Thereafter, one of the parties of the conversation reminded the others that the public offer shares would need to be retrieved because the deadline for this was on the following day. In cross-examination he was hard pressed by Ms Cheng but he remained unmoved that this is the effect of what he had heard without now being able to reproduce the precise words used, which of course would have been remarkable given the passage of time.

Mr Rabo Leung

27. His evidence started on day 3 and was concluded on day 6. His was a long and gruelling experience in the witness box. Together with Mr Poon and Mr Kwan his evidence will be determinative of the action, although I must of course have regard to all of the evidence in the case.

28. His evidence about the initial contact with Mr Poon was that they had a general conversation about the project. He asked Mr Poon whether he wanted to be an IPO underwriter, using this expression as a general term. He did not specify which kind of underwriter. They discussed the matter in broad money terms and on the basis that Mr Poon would take a commitment of between 2 and 3 million dollars. Once Mr Poon expressed an interest in being an underwriter on the flotation, he left it with him but he would send him a letter of invitation with the details which could be signed if the terms were agreeable. In cross-examination he indicated that although the letter was a standard letter of invitation he had made more specific arrangements with the other underwriters including the type of underwriter that they wished to be. Following this conversation everything went according to plan until the events surrounding the telephone conversation of 12 October. As I have already recounted he sent the letter out which was returned and signed by Miss Yiu without amendment together with the Power of Attorney. He assumed, therefore, that the plaintiff wished to underwrite the shares in accordance with the terms of the letter of invitation as a Placing Underwriter.

29. He says that the defendant sought about 11 underwriters which was a large number for a small issue such as this one. Market sentiment was not good and so it was thought advisable to spread the risk.

30. After all the underwriting agreements were in place he says that Mr Poon telephoned him. He thought that was in early October, although he could not be more precise than that. Mr Poon asked him if anything had been done incorrectly. He had intended to be a Public Offer Underwriter and not a Placing Underwriter. Mr Leung replied that it was now too late to do anything about it. The letter of confirmation had been signed and all the paper work had been lodged. A change was not possible. Mr Poon said that he did not wish to commit to such a large amount and that $500,000 was his limit. According to Mr Leung, when he told Mr Poon that the arrangements could not be altered, Mr Poon's response was "not that big". "Not very happy but reaction not very strong. At the time I did not think further about it. He said his company would not wish to risk so much money, to underwrite so many shares and money." Mr Leung's response to this was as the plaintiff had signed up as a Placing Underwriter the predicament that Mr Poon found himself in was not the defendant's responsibility.

31. Turning to the speaker phone conversation he says that he was walking passed Mr Chan's office when he was called in. Mr Chan said that he was speaking to Mr Poon about i-Wood and he asked him to speak to Mr Poon directly. He then turned the speaker phone on. Mr Poon said that they did not wish to take so much stock. He said that he would sell it to the defendant. Mr Leung says that he told Mr Poon that there was no need to do that and that he could sell it on the market. Mr Poon asked whether he needed to worry about him doing that. Mr Leung said that there was no need to worry. He thought that Mr Poon was worried that if he sold so many shares on the market that would depress the price. Mr Leung's view of this was that Mr Poon had no alternative but to do so - if he did not wish to hold so many shares then he would have to sell them on the market. He also recollects Mr Poon's speaking to him about the question of any profit that might be made on such a sale and offered to give the defendant the profit. Mr Leung's reply was that if he made a profit he should keep it. There was no need to give that to the defendant. He denies making any agreement on the telephone to purchase these shares from the plaintiff.

32. As to the presence of Mr Kwan in the room, he says that he had no recollection of anybody being there other than Mr Chan. By way of comment he observed that if there was a third party in the room he would never have made any agreement with a person on the telephone. It would be a confidential matter and he would not want any third party to hear what was going on. In any event he would not have made such an agreement. He was not prepared to take that sort of risk. Market sentiment was not good and he wanted to reduce the risk hence the spread of underwriters. In any event as a matter of internal company procedure he could not have reached any outright agreement. This needed approval from all the partners and a resolution in writing agreeing to it, just as there was a written resolution to authorize the defendant to take up its original allocation of shares. He also gave evidence about switching public offer shares to the placing section. Mr Poon wanted to know whether that might be done easily enough. He pointed out to him the difficulties about the need to have an over-subscription to the tune of 15 times before that could happen and then he spoke of the arrangement that was eventually made, which was to go the next day and retrieve as many public offer applications before the closing date. There is no dispute about that.

33. Lastly, he also made the comment that if he had agreed to buy 3 million shares from the plaintiff he would have used those shares to satisfy the request from another broker for 2.9 million shares rather than exercise the option to call for a further issue of shares by i-Wood.

34. As to the tape conversation, which I have previously set out in full, he says that what he was telling Mr Poon was to sell on the market and that someone would buy the shares and not that, he would buy the shares from him through the market.

35. He was then cross-examined by Mr Hingorani in great detail and at length with a view to demonstrating that his memory was defective as to the dates and order of the telephone conversations that he had had with Mr Poon. All of this was designed to demonstrate that Mr Leung is not a witness whose evidence can be trusted. At one stage it was even suggested that he was making the evidence up as he was going along. The length and nature of the cross-examination, which was entirely fair and proper, caused the witness to give a number of confused and indeed incorrect answers which I am bound to have regard to when I come to assess the veracity of his evidence. He had clearly lost his way on the dates of the various conversations with Mr Poon, and the order of those conversations.

Mr Joseph Chan

36. I have by way of introduction made reference to Mr Chan's evidence already but it is useful if I made more specific mention of it now.

37. His evidence was rather general and perhaps not as firm as one might have expected. The justification for this was that he did not have any direct involvement in the IPO. He did say that he was asked to find underwriters by Mr Leung. He agreed to help. Perforce his conversation with Mr Poon was general. He asked him to speak to Mr Leung if he was interested in participating. There was no question of Mr Poon having said that he did not wish to be a Placing underwriter nor of Mr Chan saying that he would not have to look for tickets. After that he recalls having spoken to Mr Poon again in early October. Mr Poon was telling him that he had wanted to be a Public Offer underwriter and not a Placing underwriter. He knew nothing of the project and so he asked him to get in touch with Mr Leung. As to the speaker phone conversation his recollection was not detailed. He recollects that the two spoke to Mr Poon and his clients' selling on the market. He says that if an agreement had been made whereby the defendant agreed to buy 3 million shares that he would have recollected such a thing having taken place. In any event he says that had a firm commitment been made, it would have had to have been approved by the board. He also makes the point that purchasing shares on a speculative basis, as is implied in the agreement which Mr Poon has described, would be contrary to the policy and practice of the defendant that does not trade shares on its own account. As to Mr Kwan's presence, he says that he had no recollection about that. If an agreement was to be made he would have asked Mr Kwan to leave the room. He never makes agreements when third parties are present. He says that he never indicated to Mr Poon that the defendant was having cash flow problems by way of explaining why the defendant was not prepared to take these 3 million shares into its own house.

38. In cross-examination he, amongst other things, indicated that he had several conversations with Mr Poon at about that time but not related to this particular issue and similarly he had had many discussions with Mr Kwan around this period. None of these conversations related to the i-Wood issue simply because he would not have been able to contribute very much to such a discussion as he had no involvement in it.

Miscellaneous issues

39. I had to embark on an unexpected enquiry as to the defendant's cash flow situation at the time that this dispute was going on. A question arose as to whether their cash flow and liquidity complied with the relevant rules which I was obliged to look at together with accounts prepared in accordance with those rules. The purpose of this enquiry by Mr Hingorani was to try and demonstrate that there were such cash flow problems and thereby lend credence to what Mr Poon had said in evidence that Mr Chan had told him that they were unable to buy these shares in-house because of this problem. Having looked at the evidence, I am now amply satisfied that no such problem existed and that the defendant was fully compliant with the financial requirements of the industry.

40. The last matter which again appears to have occupied a disproportionate amount of time was the question of how shares are traded on the stock market. This was in relation to the way that the plaintiff purported to sell the shares by means of a manual trade having failed to transact through the Automatic Matching System. The evidence here came from Mr Poon who says that in accordance with his understanding with Mr Leung on the first day of trading the defendant would buy these shares at $0.80 per share. He instructed his dealer to make the trade. When that was not possible because there was no response from the defendant, a manual trade was made on 25 October literally seconds before the market closed. I heard evidence from a Miss Wong about that. The trade could not be rejected because it had been effected so close to the end of the trading day and so the matter had to be protested through the stock market and the entry was reversed the following day. All of this has taken a considerable amount of time to investigate through the witnesses.

My Conclusions

41. As to the initial contact between Mr Chan and Mr Poon, I am satisfied that the evidence of Mr Chan is to be preferred. He was not in a position to discuss the matter in any sort of detail and certainly not in a position to indicate to Mr Poon that he need not to be a Placing underwriter. I am satisfied that the extent of it was that once Mr Poon had indicated a general interest in the project, he was referred to Mr Leung who would deal with it in a more detailed way.

42. As between Mr Leung and Mr Poon at the initial stage, I accept that Mr Leung did not indicate at that stage what sort of underwriter he was expecting Mr Poon to be. He left it on the basis that he would send him a letter of invitation which would contain all those details and that if he was interested he could express his agreement by signing the letter of confirmation.

43. It is impossible to say with any degree of certainty what instructions Mr Poon gave to Miss Yiu particularly in the absence of Miss Yiu. It is very well for Mr Poon to say that he had made it clear that the plaintiff was only to be a Public Offer underwriter but that evidence is completely undermined by what happened in the sense that Miss Yiu who afterall is experienced in such matters felt able to sign the letter of confirmation accepting liability as a Placing underwriter. It is a little difficult to accept that she would have done such a thing in the face of the clearest instructions to the contrary but I am not prepared to reject out of hand what Mr Poon had said as to the instructions that he gave her. In the circumstances I feel unable to come to any safe conclusion about that. I neither accept nor reject his evidence about those instructions. The certain thing is that the plaintiff signed itself up to being a Placing underwriter.

44. This now brings me to the issue that matters which is whether Mr Leung agreed to take the 3 million shares on the first day of trading through the market. On the basis of the evidence as a whole the plaintiff has fallen well short of persuading me on a balance of probabilities that such an agreement was arrived at and in the circumstances the action must fail.

45. My reasons for saying that are as follows. Firstly, I am impressed by the point that there would have been no conceivable rational commercial advantage in the defendant agreeing to this sort of transaction. All the inherent probabilities militate against that. Why would it, in a weak market, voluntarily assume a risk with these shares in numbers far greater than its original commitment? I can discover no reason for that course. Secondly, on the evidence itself, I am left completely unconvinced by the plaintiff's case. It starts in a most unpromising way in the Statement of Claim in its original form which pleads an oral agreement on 17 October relying on the transcript of the conversation between Mr Poon and Mr Leung. That pleading was prepared by the plaintiff's original solicitors no doubt on instructions. But Mr Poon says that they had got it wrong and this is why these solicitors were replaced by those now instructing Mr Hingorani. I remain unconvinced that in the circumstances of this matter, where the telephone conversation of 12 October, which assumes such great importance in the plaintiff's case, supported as it is said to be by the independent evidence of Mr Kwan, would not have made any significant impact on the original solicitors so that it merited no mention in the original pleading. This shift from 17 October to 12 October is very damaging to the overall credibility of the plaintiff's case and I feel bound to take that into account.

46. Whilst I have had regard to the material evidence as a whole, it is instructive to perhaps start from the transcript of the conversation of 17 October because if Mr Poon is right, the plaintiff and the defendant already had a firm agreement based on what had been agreed on 12 October that these shares would be taken by the defendant on the first day of trading. If that was so the conversation (as transcribed) on 17 October would not have taken that form. It is quite clear, when one reads it as a whole, that there was simply no meeting of minds between these two men. They were speaking in parallel lines. Whilst Mr Poon was no doubt very anxious that the defendant, through Mr Leung, should pick up these shares on the first day of trading through the market, there is simply no indication there that Mr Leung was assenting to such a proposal. He was merely telling Mr Poon that he should sell on the market. That, of course, is a very long way removed from the proposition that the defendant would purchase those shares. This conversation, in my judgment, serves to undermine everything that Mr Poon has had to say about the events of 12 October. There is nothing in the transcript to suggest that they already had an agreement. If anything it shows the contrary.

47. As to that speaker phone conversation, I have no doubt at all that Mr Poon, having discovered a mistake as to the nature of the plaintiff's underwriting commitment, was doing his level best to unscramble what had occurred and no doubt he was trying to persuade the defendant to relieve him of his shares. I am convinced that Mr Leung made no such commitment for the reasons that Mr Leung has already advanced. The share was not attractive to him. He had no legal responsibility to do such a thing. If a mistake have been made, it was entirely one of the plaintiff's making and in any event, a commitment of this sort could not have been made on the telephone and it would need to be approved by a board resolution. In coming to this view of the evidence I have not overlooked what Mr Kwan has had to say. I have formed the view that he is a fundamentally honest witness, but not a witness whose evidence I am prepared to accept against the background of all the other evidence in the case. It is important to remember that this was not a matter that directly concerned Mr Kwan and although he says he understood everything that was going on, he was a disinterested party and so perhaps his level of concentration would not be that of someone in the position of Mr Leung or of Mr Chan. It is not surprising that in the course of his evidence he rather lost his way on two occasions, evidenced by notable pauses. He was a witness who was struggling with his recollection and that is something that I am bound to have regard to. It was relatively simple for him to get the wrong end of the stick, as a disinterested listener, not aware of the complete background or context of the conversation and now two years on he was having difficulties in recollecting it in a way that I could feel able to be comfortable with. Accordingly, as between him and Mr Leung and Mr Chan and having regard to all the evidence of the case, I prefer the evidence of the other two. Having said that I acquit Mr Kwan of any suggestion that he was wilfully trying to mislead the court. I do not, for one moment, I think that was the case.

48. As to the manual trade itself, I am satisfied that this was an act of desperation by Mr Poon. He got caught with these shares and hoping against hope, he pushed them off to the defendant by means of a manual trade in the hope that they would not be bounce back at him, but the defendant once the trade was executed took immediate steps to reverse the transaction. An immediate complaint was made to the Stock Exchange and I think it is significant that the plaintiff did not make a counter complaint to the stock market authorities but felt able to just leave it to the litigation that has followed. I believe that if they really were satisfied that an agreement had been made and that their trade was being unjustifiably rejected by the counter party and that party having made a complaint they would have immediately set out their own position in writing to the stock exchange.

49. Therefore, in all the circumstances I am unable to say that the plaintiff has demonstrated a binding agreement made on behalf of the defendant by Mr Leung to purchase these shares. In fact the contrary is true. I am satisfied on a preponderance of probabilities that in fact no such agreement was entered into. Accordingly for these reasons the claim must stand dismissed with the inevitable order that the plaintiff will pay the defendant its costs of the action on a party and party basis, to be taxed if not agreed. In the usual way this order for costs will be an order nisi.

50. I should not leave this matter without expressing my appreciation to both counsel for the immense application which they have shown in presenting their respective cases, not least, their very detailed note which has formed the basis of their final speeches which I have found of particular assistance.

Remarks: