CHAN KON FUNG v. GALLOP PIONEER LTD AND OTHERS

HCA 1357/2011

[2024] HKCFI 1766

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1357 OF 2011

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(BY ORIGINAL ACTION)

AND BETWEEN

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(BY COUNTERCLAIM)

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J U D G M E N T

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1.  The complexity of this case cannot be overstated[1]. However, with the encouragement of the Court, the parties have reduced this case to the essential disputes and the real issues which have to be resolved by the Court. Consequently, the length of this trial had been shortened by 3 weeks.

The parties

2.  This action was started as a claim by the Plaintiff (“Chan”)  against the 1^st and 2^nd Defendant (“Gallop”)  and (“L’Sea”)  (collectively, “G/L”)  for outstanding payment under a sale and purchase agreement dated 13 July 2010 (“SPA”)  in respect of the entire shareholding in Parksong Mining and Resource Recycling Ltd (“HKPS”)[2] at the purchase price of HK$1.0865 billion. 

3.  One of the defences of G/L is that a debt said to be owed to Chan and purportedly assigned to Gallop by him under the SPA was in fact owed to Yunnan Tin Group (Holding)  Co Ltd (“PRCYT”), a PRC company.  Subsequently, PRCYT and another company with an interest in the debt, Yunnan Tin Hong Kong (Holding)  Group Co, Ltd (“HKYT”)  were joined by G/L in this action as the 3^rd and 4^th Defendants.

4.  Later, PRCYT brought a counterclaim against Chan, HKPS, HKYT and Gallop (“Counterclaim”).  Hence, HKPS was joined in this action by reason of the Counterclaim.

5.  In this trial, Chan is represented by Mr Ng and Ms So; G/L by Mr Lui SC and Mr Lee; PRCYT by Mr Wong SC, Ms Siu, Ms Kang and Mr Louie; HKPS by Mr Lam; and HKYT by Mr Lau.

Background facts

6.  The essential background facts stated below are not in dispute unless otherwise indicated[3].

7.  The “story” began with some tin mines which are situated in Tasmania, Australia.  Bluestone Mines Tasmania Pty Ltd (“BMT”), a subsidiary of an Australian listed company, owned these mines, including the Renison Mines (“Tin Mines”).  The acquisition of part ownership of the Tin Mines was the commercial transaction which gave rise to, firstly, a joint venture between Chan and PRCYT[4], and then Gallop’s acquisition of Chan’s interests in that venture. After the acquisition of Chan’s interests, Gallop and PRCYT have become joint venture partners.

8.  In 2007, negotiations started between YTC Resources Ltd, a subsidiary of PRCYT, and BMT over the acquisition by the former of part of the interest in the Tin Mines (“Project”).  In the course of these negotiations, discussions also ensued between Chan and PRCTY which later resulted in an agreement to jointly invest in the Project by Chan via HKPS (then solely owned by him)  and PRCYT.  Chan would provide the necessary funding and PRCYT would manage the Tin Mines as well as selling the produce.

9.  By a Heads of Agreement dated 22 July 2009, PRCYT agreed to purchase from BMT 50% of the interest in the Tin Mines (“Asset”). Meanwhile, from July 2009 to mid-July 2010, HKPS and PRCYT signed a number of agreements about their joint investment, the structure of which evolved due to funding issues and business considerations.

10.  The acquisition of the Asset was completed in March 2010.  The Asset was (and is)  held by Yunnan Tin Australia Investment Holding Co Pty Ltd (“Australia Parksong”), which was (and is)  owned by HKYT.  In turn, HKYT was at the time solely owned by Chan.  In simple terms, Chan’s funding for the acquisition of the Asset was injected via two corporate vehicles.  The funds were injected firstly into HKPS which then transmitted the funds to HKYT with which the Asset was paid.

11.  In mid-July 2010, Chan and PRCYT came to a final agreement of their joint venture.  It is relevant to note that at the time, there was an agreement between them (reached in September 2009)  that 45% of HKYT’s shares were held by PRCYT as a nominal shareholder on behalf of Chan. The remaining 55% was held by HKPS. 

12.  It is common ground that the final agreement between Chan and PRCYT (“JV Agreement”)  was embodied in (or evidenced by)  2 documents, namely, a set of Minutes of meeting and a written agreement.  The former was the product of discussions between Chan (representing HKPS)  and representatives of PRCYT in a meeting held on 16 July 2010.  The relevant discussions were duly recorded in a set of Minutes (“Minutes”).  On 18 July 2010, HKPS (via Chan)  and PRCYT signed an agreement (“Agreement”)  in furtherance of the discussions 2 days ago.  It was expressly stated in the Agreement that it should prevail over previous contractual documents signed by the parties.  The terms of both the Minutes and the Agreement will be examined in detail below.  For the present purpose, it should be noted that under these documents HKPS and PRCYT would respectively hold 82% and 18% of the shares (both legal and beneficial interest)  in HKYT (“82% Shares” and “18% Shares”).  

13.  By the time of the 16 July 2017 Meeting, Chan had, via HKPS, fully injected into HKYT the funds needed for the Asset.  Part of the funds, HK$250 million, was a loan obtained by Chan in the name of HKYT (“SHK Loan”).  HKYT and HKPS also borrowed in total US$19.485m from PRCYT (“PRCYT Loan”)  to pay for the Asset.  Full repayment of the PRCYT loan was a condition of the Agreement.  It was indeed repaid later in July 2010. 

14.  Given the full injection of acquisition funds into HKYT by the time when Chan and PRCYT made the Agreement, PRCYT was not required to inject any funds for the 18% Shares.  In simple terms, what was agreed between Chan and PRCYT was that the latter would be responsible for 18% of the funds which HKPS had injected into HKYT for acquiring the Asset, namely, AUD16,340,057.21 (“AUD16.3m”).  In return, PRCYT would be fully entitled to the 18% Shares.

15.  Further, Chan (on behalf of HKPS)  and PRCYT had agreed on how PRCYT would repay HKPS the AUD16.3m.  It is uncontroversial that it was agreed that PRCYT would owe HKPS a debt of that sum, which would be repaid from dividends to be distributed by HKYT to PRCYT in the future.

16.  Given that the acquisition funds injected by HKPS into HKYT originated from Chan, and were booked as shareholder’s loan from him to HKPS, HKPS duly assigned the AUD16.3m debt owed by PRCYT to Chan on 19 July 2010 (“Chan Assignment”).  PRCYT took no issue with the assignment.  Notices of assignment/acknowledgement were issued.  The shareholding structure in HKYT was changed in July 2010, showing the 82%-18% shareholding.

17.  Before Chan and PRCYT made the JV Agreement in July 2010, Chan was already exploring an exit to this investment.  On 13 July 2010, Chan as vendor, Gallop (a subsidiary of L’Sea)  as purchaser and L’Sea as guarantor signed the SPA for the acquisition of Chan’s 82% interest in the Asset.  The transaction was structured as a sale and purchase of HKPS (solely owned by Chan), which held 82% shares in HKYT.  

18.  One of the conditions of completion under the SPA was that all shareholders’ loans due by HKYT and HKPS to Chan would be assigned to Gallop.  With the assignment, HKPS and HKYT would be free from any third party debt after completion.  In this action, G/L claim that Chan, via his assistant, Zhou Weijing (“Zhou”), represented to them that the total amount of loans to be assigned was about HK$590m.

19.  In the course of negotiations, G/L were informed by Chan and Zhou of PRCYT’s interest in the Asset represented by the 18% Shares. Also, G/L were made aware by Chan and Zhou that PRCYT owed a debt of AUD16.3m to HKPS/Chan for the purpose of acquiring the 18% Shares.  G/L say that they were not alive to the details of the JV Agreement.

20.  The completion of the SPA was scheduled to take place on 4 March 2011 (with post-completion obligations).  From 7 July 2010 to 7 June 2011, Chan (via Zhou)  sent to G/L’s representatives by email multiple accounting records in respect of HKYT and HKPS.  Those records consistently showed shareholders’ loans in the total sum of about HK$590m.  Most of the records showed that the loans were due to Chan but some showed that part of the loans were due to PRCYT.  I shall have to examine the details below.

21.  On 6 December 2010, Chan Assignment was amended in respect of the stated consideration.  It was changed from HK$1 to AUD16.3m.

22.  It is the case of G/L that acting on the accounting records furnished by Chan via Zhou and Messrs Jimmy Cheung & Co (“JC&C”)  (the accountants Chan used for his companies, including HKPS and HKYT)  and the confirmation by Deloitte (the auditors under the SPA)  on the total amount of shareholders’ loans to be assigned, which Zhou knew and never objected to, L’Sea (a Hong Kong listed company)  issued a circular on 30 December 2010 stating that upon completion, Gallop would be assigned shareholder’s loans due to Chan of about HK$596,546,000 (as of 30 November 2010).

23.  On completion of the SPA (4 March 2011), assignments were executed in favour of Gallop of all loans owed by HKPS and HKYT to Chan, the exact amount of which would be audited.  It is not in dispute that the audited amount of such loans totalled about HK$590m.

24.  After completion of the SPA, in July and August 2011, there were meeting between the officers of G/L and PRCYT.  After having been shown the Auditor’s Report of HKYT dated 22 June 2011(“AR”)  and its accounting records, PRCYT’s officers complained that the documents did not record PRCYT’s contribution towards the acquisition of the Asset.  In simple terms, whilst HKPS’s 82% contribution was recorded in HKYT’s accounts as its shareholder’s loan to HKYT, there was no equivalent booking of PRCYT’s 18% contribution.  Without knowing the dealings between Chan and PRCYT, G/L did not commit to a view.

25.  Subsequently, PRCYT confronted Chan, who agreed that HKYT’s records (including the AR)  were incorrect.  Chan’s case is that by reason of inadvertent mistakes PRCYT’s contribution was wrongly booked in HKYT’s accounts as shareholder’s loan owed to him.  G/L were cooperative in discussion with PRCYT on how to resolve the issue.  However, this action was brought by Chan on 11 August 2011.  G/L then decided to reserve their position on the correctness of HKYT’s accounts pending the outcome of this action.

26.  On 26 September 2012, Chan assigned the debt under Chan Assignment to two persons in the Mainland.  They subsequently brought legal proceedings in the Mainland against PRCYT for recovery of the AUD16.3m (“Mainland Proceedings”)  and succeeded.  The money was eventually paid to those assignees by PRCYT with interest in August 2015.

Issues

27.  There are two main areas of dispute arising from (i)  PRCYT’s “missing contribution” in that its contribution to the funds used to acquire the Asset, namely, the AUD16.3m, is not in any way reflected in HKYT’s books; and (ii)  contractual disputes between Chan and G/L under the SPA, which include Chan’s case of outstanding “Receivables” due to him and G/L’s case of set-off against the same.  A major component of the set-off is based on Gallop’s complaint that Chan purported to assign to it HK$590m of shareholder’s loans when the amount should be deducted by AUD16.3m which was owed to PRCYT. 

“Missing contribution”

28.  In respect of the “missing contribution”, the parameters of this dispute have been subjected to much refinement.  Helpfully, Mr Wong had reformulated the issues into 5 questions in his written opening. Since then, the issues have narrowed further after taking into consideration the openings of the other parties.  Finally, the issues have been crystallised in the final submissions of the parties.  To understand them, I shall first set out the 5 questions with appropriate modifications as follows :

(1)  Is it a term of [the JV Agreement] that HKPS would, on behalf of PRCYT, pay HKYT (“墊資”)  AUD16.3m as PRCYT’s 18% share in the funds for the acquisition of the Asset?

(2)  If the answer to (1)  is in favour of PRCYT, did HKPS discharge such term by paying HKYT the HKD equivalent of AUD16.3m on behalf of PRCYT?

(3)  If the answer to (2)  is in favour of PRCYT, how should such contribution on behalf of PRCYT be booked by HKYT?  Should it be booked in parity with the 82% contribution as alleged by PRCYT or should it be booked as part of HKYT’s share capital representing PRCYT’s capital investment as alleged by Chan?

(4)  How should the accounts of HKYT as at 4 March 2011 be rectified in light of the dealings between Chan, HKPS, PRCYT, HKYT and Gallop?

(5)  In light of the answers to the preceding questions, what are the rights and liabilities of the parties inter se?

29.  In the course of his opening, Mr Wong helpfully produced a table setting out the parties’ positions on questions (1)  to (4). No disagreement was raised with the accuracy of the table.  In short :

(1)  There is no issue over Questions (1)  and (2). Chan, G/L and HKPS agree that 18% of the funds used to acquire the Asset, which was originally injected by Chan through HKPS into HKYT, was regarded as attributable to PRCYT and/or paid on behalf of PRCYT. 

(2)  In respect of Question (3)  (“Categorisation Issue”), the dispute is one between PRCYT and Chan, with G/L taking the side of the former due to their set-off against Chan’s claim (see para 27 above):

(a)  PRCYT’s stance is that the HKD equivalent of AUD16.3m contributed by HKPS on its behalf into HKYT should be afforded parity of treatment vis-à-vis HKPS’s 82% contribution.  Insofar as the 82% contribution was booked as amounts due to Gallop/HKPS as at 4 March 2011, PRCYT had accepted and asserts that its 18% contribution had likewise been so booked and should continue to be so booked – unless there be wholesale rebooking of all contributions on a parity basis with the consent of Gallop and HKPS[5]. 

(b)  Chan’s position is that PRCYT had and always intended and understood that its investment in HKYT was not and could not have been a “shareholder’s loan” (which would be repaid).  It must have been “capital investment” (which would not be recalled and repaid)[6].  It should be noted that Chan’s pleaded case is that PRCYT’s investment was “share capital”.

(c)  G/L’s position is that on the evidence the only possible form that PRCYT’s investment could (in 2010)  and can now assume was/is that of a shareholder’s loan.  Parity of treatment for HKPS’s 82% financial contribution and PRCYT’s 18% financial contribution to the acquisition of the Asset (“Parity Treatment”)  is admitted[7].

(d)  HKPS agrees with Parity Treatment[8].

(e)  HKYT assumes a neutral stance[9].

(3)  On Question (4), again the dispute is really between PRCYT (with G/L’s support)  and Chan.  The rectification is important to Chan because it would have an important impact on the dispute between him and G/L.  However, HKYT is also concerned about this issue because its accounts may have to be rectified.  The respective positions are as follows:

(a)  PRCYT agrees with the suggestion of G/L that HKYT’s accounts as of 4 March 2011 (completion of the SPA)  should be rectified to show:

(i)  a sum of HK$118,990,000[10] due to PRCYT;

(ii)  a sum of HK$375,344,717.47 due to HKPS; and

(iii)  a sum of HK$98,747,225.88 due to Gallop[11].

(b)  Chan’s position is that the relevant accounts ought to be rectified to properly reflect the reduced amount due to him[12]. However, he maintains that the rectification should be confined to PRCYT’s 18% contribution.  On the other hand, Chan has not really advanced any case on how HKYT’s accounts should be rectified until Mr Ng’s final submissions.  

(c)  In his final submissions, Mr Ng proposed that, to reflect the fact that PRCYT’s contribution was share capital, “HKYT should increase its registered share capital and allot shares (perhaps with PRCYT’s shares being paid up to the amount of AUD16.3m, and HKPS’s shares not)”[13].  The suggestion that HKPS’s shares need not be paid up is to maintain the 82%-18% ratio.

(d)  Neither HKPS nor HKYT has advanced any positive case on how HKYT’s accounts are to be rectified.  However, both of them suggested that an appropriate declaration by the Court may be made in place of rectification. 

30.  Question (5)  is no longer a live issue. 

31.  In the course of his final submissions, Mr Wong had further refined the Categorisation Issue as a competition between the respective case of Chan and PRCTY.  In essence, Chan claims that there was a separate treatment of the 18% contribution of PRCYT (share capital), regardless of the treatment afforded to HKPS’s 82% contribution.  On the other hand, PRCYT’s case is that on a proper construction of the agreement between HKPS and PRCYT and it was their true intention to afford the 18% contribution the pre-existing treatment that was in place for the 100% from which the 18% was carved out[14].

32.  Obtaining the relief of rectification represents the primary goal of PRCYT in this action.  However, there remain some live causes of action advanced in the Counterclaim against Chan, HKPS and HKYT the purpose of which, in light of the refinement of the issues, may be said to be costs related.  These causes of action are :

(a)  Whether HKPS had breached the JV Agreement?

(b)  Whether HKPS owed fiduciary duties to PRCYT in terms of booking and maintaining PRCYT’s contribution in parity with the 82% contribution?

(c)  If so, whether HKPS breached such fiduciary duties?

(d)  Whether HKYT owed fiduciary duties to PRCYT in terms of booking and maintaining PRCYT’s contribution in parity with the 82% contribution?

(e)  If so, whether HKYT breached such fiduciary duties?

(f)  Whether Chan dishonestly assisted HKPS’s and/or HKYT’s breaches of fiduciary duties?

Disputes between G/L and Chan

33.  These disputes concern outstanding payment obligations arising out of the SPA :

(1)  There are “Receivables” due to Chan pursuant to cl. 5.04 of the SPA in the sum of, as pleaded, around AUD15.14m.  This liability is not disputed by G/L. 

(2)  However, it became clear in Mr Ng’s final submissions that Chan seeks to have the Receivables recalculated (“Recalculation Issue”)  based on (i)  the original currencies in which they were based and the current exchange rate[15]; and (ii)  instead of claiming 82% of the Receivables as pleaded (based on HKPS’s 82% shareholding in HKYT), Chan seeks to have 100% of the Receivables paid to him.  The Recalculation Issue is disputed by both G/L and PRCYT (due to its 18% shareholding in HKYT).

(3)  G/L seek to set off the Receivables against the AUD16.3m.  Under cl. 5.03 of the SPA, the AUD16.3m constituted “Payables” (by Chan)  against which the Receivables owed to Chan can be set-off. 

(4)  If this Court finds (on the Categorisation Issue)  that PRCYT’s contribution was in the nature of shareholder’s loan, Chan will not dispute that the AUD16.3m are Payables and can be set-off against the Receivables subject to the argument that G/L has failed to comply with “Payment Directions” provisions under cl. 5.05(iv)(b)  and therefore the set-off fails[16].

(5)  Assuming a finding of shareholder’s loan, G/L say that there are additional issues of breaches of warranties contained in the SPA.  However, they add nothing to G/L’s claim on the AUD16.3m set-off.  

(6)  In the event that PRCYT’s contribution is found to be capital, G/L rely on breaches of warranties contained in the SPA.  Chan’s case is that there are admitted breaches of warranties in view of the existence of inaccurate entries in the accounts.  Nevertheless, G/L’s case fails due to (i)  lack of notice required under cl. 7.08(c)  and (ii)  absence of loss.

(7)  Irrespective of the outcome on the Categorisation Issue, G/L claim both fraudulent and negligent misrepresentation against Chan in respect of the AUD16.3m.  Chan contends that the misrepresentation case fails because there was no actionable representation, dishonesty, inducement or reliance and/or no loss.

(8)  Helpfully, in his final submissions Mr Lui submitted that it is unnecessary for the Court to deal with the breaches of warranties and the misrepresentation claims in the event that PRCYT’s contribution is held to be in the nature of shareholder’s loan resulting in a set-off against the Receivables (ie, the Payment Directions issue resolved in favour of G/L)[17].

(9)  Finally, there is a “Small Payables Claim” by G/L against Chan in the total sum of AUD3,244,520.24.  The quantum of this claim is agreed.  Chan’s response is that (a)  there was no proper Payment Directions issued and thus no liability arises; and (b)  in any case, it should be subject to set-off with the Receivables due to him. 

Issues between Chan, HKPS and HKYT

34.  There is a Contribution Notice by HKPS against Chan.  In the event that HKPS is found liable to PRCYT for breach of fiduciary duties, HKPS says that Chan must also be liable for breach of director’s duties to HKPS for which it seeks against Chan an indemnity and/or equitable compensation for any loss arising from PRCYT’s claim. 

35.  There is also a counterclaim by HKYT against Chan whereby in the event that HKYT is held liable to PRCYT for breach of fiduciary duties, HKYT counterclaims against Chan for breach of director’s duties pursuant to which Chan should indemnify HKYT’s loss and legal costs.

36.  Very fairly, Mr Ng had accepted that the liability to these claims by HKPS and HKYT cannot be disputed by Chan if PRCYT’s claims for breach of fiduciary duties against them are made out[18].

Witnesses

37.  Except for HKYT, live evidence was called by all the parties.  Chan gave evidence and called Zhou as a witness.  Ms Xie Yue (“Xie”)  was the only witness for HKPS.  PRCYT called 2 witnesses, Ms Fan Xirong (“Fan”)  and Mr Zhang Guoqing (“Zhang”).  Finally, Mr Fu Wing Kwok (“Fu”)  gave evidence for G/L.  In addition, the witness statements of Mr Wong Tak Shing (“Wong”)  (one of G/L’s witnesses)  were admitted as hearsay evidence[19].  I shall state my view on the credibility of the live witnesses generally and refer to their evidence on the issues where necessary.

38.  With the exception of Chan, there is no sufficient reason to doubt the credibility of the live witnesses.  They all gave evidence in a straightforward manner and provided their answers without undue hesitation despite the fact that the events to which they (with the exception of Xie)  spoke about took place nearly 14 years ago. 

39.  In the case of Zhou, he frankly admitted to having caused the mistakes which resulted in PRCYT’s investment being booked as a debt owed to Chan.  He accepted that he was not trained in accounting (he graduated with a degree in electronics).  Working as Chan’s assistant was his first job, and he admitted to being careless in dealing with the accounts.

40.  As for Chan, he is a sophisticated person and an experienced businessman.  He started doing business in 1987.  Evidently, he is successful with his business.  Chan’s evidence is that he paid little attention to the accounts of HKPS and HKYT.  He entrusted those matters to JC&C without giving them any specific instructions on how the accounts are to be done, as well as relied on Zhou.  For instance, Chan was asked about two Audit Confirmations dated 15 April 2011 which both he and Zhou had signed.  The Confirmation in connection with HKPS stated that it was indebted to Chan in the sum of HK$378.33m and the one in respect of HKYT stated that it was indebted to him in the sum of HK$217.68m.  It is Chan’s evidence that the HKYT Confirmation was incorrect because PRCYT’s investment was wrongly included in the sum, and it was signed by him without any checking.

41.  Chan was taxed in cross-examination why he signed the document without checking.  He said that he just asked Zhou if the Confirmation was correct, and he signed it after having been told that it was. Pressed further, Chan said that he never asked about financial matters and figures.  As the boss, he trusted his assistant, who was acting as the safeguard.  He was not concerned with how the figures were arrived at.

42.  It appears to me that such evidence sits poorly with inherent probabilities.  One would have thought that a sophisticated and experienced businessman like Chan would be sensitive or attentive about money.  Secondly, even a brief look at the information would have revealed that the two Confirmations added up to about HK$580m, well about the HK$460m owned to him in respect of his 82% interest in HKPS.  Thirdly, the Confirmations were part of the documents prepared by Deloitte for the completion of the SPA.  They were important documents prepared for a very substantial and no doubt important transaction.  Fourthly, Chan must have been aware of Zhou’s lack of relevant qualification and experience in financial matters.  It is perplexing that Chan would have relied heavily on Zhou on such matters.

43.  On the other hand, Chan’s evidence is consistent with that of Zhou[20], who I believe is a candid witness.  Perhaps more importantly, I can see no motive (and none has been suggested)  why Chan would have deliberately inflated the amount of his shareholder’s loan.  It is G/L’s case that the price under the SPA was not dependent on the amount of loans to be assigned to Gallop[21]. In the premises, the matters identified in the preceding paragraph do not give rise to sufficient reason to doubt Chan’s credibility. 

44.  However, the materials before the Court demonstrate that Chan had in the course of this action changed his case, and the changes were made for advantage.  Those changes were eloquently summarised by Mr Wong in his closing submissions[22].  In short, when this action was started in 2011, Chan’s position on the AUD16.3m was that it was PRCYT’s share capital.  There could be no set-off against the Receivables owned to him by G/L because the share capital was not Payables.  In the course of the Mainland Proceedings, Chan gave evidence in support of his assignees to the effect that the AUD16.3m was the purchase price paid by PRCYT for the 18% Shares (again, not Payables).  Later, Chan applied to amend his case against G/L in this action to the effect that the AUD16.3m was the price paid for the 18% Shares.  The amendment was disallowed.

45.  When Chan was cross-examined on why he attempted to advance a case of price, he answered: “Because my legal team at that time was of the view that further elaborations had to be done from another perspective, and so as to enable the others to understand the truth in a clearer picture. But it was not adopted[23]”.  The explanation is unconvincing.  It is a matter of fact as to what was agreed between Chan acting on behalf of HKPS and PRCYT, not a matter of elaboration.  I have the impression that this unconvincing answer was rehearsed before Chan gave evidence.  I therefore conclude that Chan is not a reliable witness.

46.  However, I do not believe that the resolution of this action depends much on the credibility of witnesses. 

Construction of the JV Agreement

47.  The material terms of the Minutes are as follows :

“一、 [PRCYT] 總經理高文翔通報了 [PRCYT] 辦公會的決定: 一是由 [HKPS] 替 [PRCYT] 墊資做實 [HKYT] … 18%的股權和資產，對應雷尼森項目50%資產中的18%的股權資產和收益權; 二是依據雙方 “墊資協議”, 原 [PRCYT] 替 [HKPS] 墊資的 [USD19.485m] 由 [HKPS] 將本金及利息全部還給 [PRCYT]; 三是要綜合以前簽訂的相關協議、備忘錄與 [HKPS] 簽訂一個雙方協議。

二、  [HKPS] 總經理 [Chan] 同意了 [PRCYT] 作出的決定。

三、  會談會還研究了這次收購雷尼森項目50%資產成本開支情況, 總成本為 77,350,699.00澳元及 2,000,000.00港元。2,000,000.00港元中, [PRCYT] 認可其中18%部分, 合計50,000.00澳元。匯率差按1.17計算, 做實18%股權需要的成本為 77,350,699.00 x 1.17 x 18% + 50,000.00 = [AUD16.3m]。 …

…

五、  [PRCYT] 同意實際出資承擔 [HKPS] 通過 [HKYT] 收購藍石公司雷尼森項目50%資產的18%的款項, 雙方確認 [PRCYT] 據此需承擔的金額為 [AUD16.3m] 。該款項由 [PRCYT] 以其在雷尼森項目的收益分紅優先抵還, 直至抵還完畢; 同時, [PRCYT] 享有收購藍石公司雷尼森項目50%資產的18%的資產和收益權, 以及享有 [HKYT] 18%實際股權和分紅權, [HKYT] 其餘82%股權及分紅權歸 [HKPS] 所有。

六、  雙方共同辦理 [HKYT] 的股權變更手續, 即 [HKPS] 股權比例登記為82%, [PRCYT] 股權比例登記為18%。雙方之前約定的股權代持協議終止執行。”

48.  The material terms of the Agreement are as follows :

“二、 [PRCYT] 同意實際出資承擔 [HKPS] 通過 [HKYT] 收購藍石公司雷尼森項目50%資產的18%的款項, 雙方確認 [PRCYT] 據此需承擔的金額為[AUD16.3m]。該款項由 [PRCYT] 以其在雷尼森項目的收益分紅優先抵還, 直至抵還完畢; 同時, [PRCYT] 享有收購藍石公司雷尼森項目50%資產的18%的資產和收益權, 以及享有 [HKYT] 18%實際股權和分紅權, [HKYT] 其餘82%股權及分紅權歸 [HKPS] 所有。

三、 本協議簽訂後15日內, 雙方共同辦理 [HKYT] 的股權變更手續, 即 [HKPS] 股權比例登記為82%, [PRCYT] 股權比例登記為18%。雙方之前約定的股權代持協議終止執行。[HKPS] 必須確保 [PRCYT] 按照香港公司條例的規定取得 [HKYT] 18%股權比例下的完全的股東權益。

四、 雙方同意 [HKYT] 董事會由5人構成，其中 [HKPS] 指派3人，[PRCYT] 指派2人，董事長可在 [PRCYT] 指派的董事中產生：雙方同意澳洲公司的董事會由7 名董事構成，其中 [HKPS] 指派4人，[PRCYT] 指派2人，澳大利亞公民出任一名董事，董事長可在 [PRCYT] 指派董事中產生。甲乙雙方在按本協議修改 [HKYT] 及/或澳洲公司章程並進行相應公司註冊變更登記時應確保本條約定在該章程中得到一致體現。[HKYT] 和澳州公司召開董事會會議時，必須有甲乙雙方指定的至少一名董事出席方能召開及作出決議。

…

十二、 [PRCYT] [HKPS] 雙方已簽訂的合約性文件中相關約定與本協議的約定不一致的, 以本協議的約定為準, …

十三、甲乙雙方保証：各自具有簽署本協議和履行本協議所規定各項義務的完整的合法資格，其已經或將根據其公司章程及有關規章制度獲得簽署、履行本協議所需的一切有效內部批准：本協議經簽署後對其具有法律約束力，並按誠實信用的原則執行本協議。

十四、本協議適用中華人民共和國法律。甲乙雙方因履行本協議發生爭議不能協商解決時，應將爭議交由深圳巿有管轄權的人民法院裁決。”

49.  The Agreement is governed by PRC law.  There is before the Court a report (“Report”)  by a single joint expert on PRC law, Mr Law.  His evidence is not controversial.  According to the Report, the law of interpretation of contract is not very different to that of Hong Kong. 

50.  In summary, under PRC law, a contract is to be construed objectively, taking account of the words used, contractual terms, contractual objective(s), relevant market practice(s)  and principle of good faith.  Contractual background is relevant.  PRC law permits consideration of post-contract performance in construing contracts.  The last point and the general application of principle of good faith are the only material difference with Hong Kong law. 

51.  The Categorisation Issue is to be resolved by proper construction of the JV Agreement with the application of PRC law.  In my view the answer is quite plain from not only the terms of the Minutes and the Agreement, but also the evidence before the Court. 

52.  First, in respect of the “firming up” (做實)  of PRCYT’s investment (eg, para 1 of the Minutes).  The background was that PRCYT was at the time only a nominal shareholder of HKYT.  As explained by Chan, PRCYT wanted to have an actual interest in the investment and the term “firming up” was used.  Chan’s evidence in this regard is not controversial. 

53.  Second, and critically, what PRCYT was going to acquire was 18% of the shareholding and assets in HKYT (18%的股權和資産), which would be equivalent to 18% of the shares, assets and right to return in the Asset (對應雷尼森項目50%資產中的18%的股權資產和收益權)  (see also the first sentence of para 5 of the Minutes).

54.  Third, the cost of investment in the Asset was calculated and the parties agreed that PRCYT’s 18% investment would amount to AUD16.3m (para 3 of the Minutes).

55.  Fourth, it is uncontroversial that HKPS had already injected the funds and acquired the Asset at the time.  PRCYT was not going to put up the AUD16.3m.  Instead, pursuant to para 1 of the Minutes, the money would be paid (or treated as paid)  by HKPS on behalf of PRCYT (墊資).  According to para 5 of the Minutes, the AUD16.3m would be repaid by PRCYT to HKPS by making use of the profits derived from PRCYT’s investment. 

56.  Importantly, the last sentence of para 5 referred specifically to PRCYT’s 18% entitlement in the Asset in terms of assets, right to return, 18% of the shares in HKYT and right to distribution of profits (同時,[PRCYT] 享有收購藍石公司雷尼森項目50%資產的18%的資產和收益權,以及享有 [HKYT] 18%實際股權和分紅權).  The balance of 82% shares and right to distribution of profits would belong to HKPS ([HKYT] 其餘82%股權及分紅權歸 [HKPS] 所有).

57.  Clause 2 of the Agreement was almost identical in its terms to para 5 of the Minutes.  Plainly, PRCYT was not merely acquiring the 18% shares in HKYT but 18% of the investment in the Asset, which included 18% of the shares in HKYT.  It is uncontroversial that the investment of Chan/HKPS in the Asset was booked as shareholder’s loans to HKYT.

58.  The evidence of both Chan and Fan is that under the JV Agreement PRCYT’s 18% interest in the Asset was to be “carved out” of Chan’s/HKPS’s 100% interest in the same.  Another way to describe the arrangement is that PRCYT would step into the shoes of Chan/HKPS in respect of 18% of the investment which Chan had injected into the Asset via HKPS. 

59.  The “carving out” is therefore common ground between Chan and PRCYT, and no disagreement has been advanced by the other parties.  In my view, the “carving out” is consistent with the terms of the JV Agreement, and is the only proper construction of the terms of the Minutes and the Agreement.  Under the carving out arrangement, PRCYT was entitled to 18% of the shareholder’s loans which represented the investment of Chan/HKPS. 

60.  In respect of the change of shareholding in HKYT referred to in cl. 3 of the Agreement, on the day of the Agreement (18 July 2010)  PRCYT transferred 2,700 shares in HKYT to HKPS thereby reducing its 45% shareholding in HKYT to 18%.  The share transfer was approved by Chan, as the sole director of HKYT, with a written resolution dated 19 July 2010.

61.  Further, a number of other events took place on 19 July 2010 which gave effect to the JV Agreement and the carving out arrangement :

(i)  Chan, in his capacity as the sole director of HKPS, passed a written resolution affirming cl. 2 of the Agreement, and referred to the assignment to him of the AUD16.3m debt owed by PRCYT to HKPS because the money was provided to HKPS by him as shareholder’s loan;

(ii)  By a notice of assignment from HKPS to PRCYT, cl. 2 of the Agreement was acknowledged by the former;

(iii)  By a notice from HKPS to HKYT, HKYT was notified of cl. 2 of Agreement and asked to pay over the profit entitlements of PRCYT to Chan until the AUD16.3m was fully repaid to him.

62.  The most important act by which the carving out was put into effect was the booking of a loan owned to PRCYT in HKYT’s balance sheet as of 23 July 2010.  It was amongst the many sets of accounts sent by Zhou to Fu from 7 July 2010 to 7 June 2011 (see para 20 above)  as summarised in Exhibit “G/L-1”.  There is no dispute that the document showed a shareholder’s loan owned to PRCYT by HKYT.  On the evidence, this was the first balance sheet in which PRCYT’s investment was recorded (in the sum HK$115.73m being the equivalent of AUD16.3m)  as a shareholder’s loan in HKYT’s books (“First BS”).

63.  Hence, the post-contract performance is consistent with the above construction of the JV Agreement. 

64.  At that point in time, it may be said that the JV Agreement was performed in respect of the carving out, ie, PRCYT had 18% of the shares in HKYT and a shareholder’s loan representing the AUD16.3m which it invested in the Asset.  The First BS was followed by 3 more as of 31 July 2010, 31 August 2010 and 30 September 2010 which consistently showed the shareholder’s loan from PRCYT of HK$115.73m. 

65.  Regrettably, PRCYT’s shareholder’s loan was then re-booked and added to the shareholder’s loan owed to HKPS.  In other words, PRCYT’s loan was transferred to HKPS, and it ended up having nothing recorded in HKYT’s books which reflected its investment.  At the risk of diversion, the reason for the re-booking has to be succinctly explained.

Zhou’s erroneous instructions to JC&C

66.  Zhou gave evidence on how the First BS (amongst other accounting documents)  was prepared by Ms Evelyn Chan (“Ms Chan”)  of JC&C.  Zhou did not know whether she was qualified as an accountant but she was doing the bookkeeping for JC&C.  Zhou said that when Chan came back to Hong Kong after the Agreement was signed, Chan gave him the documents which he then passed to Ms Chan.  He mentioned to her the shareholding change from 55%-45% to 82%-18%, with PRCYT holding the 18%.  He asked Ms Chan to read the documents and if there was any question she could speak to him.  It appears that the First BS was then produced by Ms Chan with the information she was given.  

67.  Zhou later gave instructions to Ms Chan to amend the accounts on 2 occasions.  His evidence was that he understood that the HK$115.73m was PRCYT’s “investment fund” (投資款).  That sum of money had to be repaid to HKPS.  He therefore queried Ms Chan whether in the circumstances the HK$115.73m should be repaid to PRCYT (as a shareholder’s loan).  Ms Chan then followed Zhou’s instructions and PRCYT’s loan was re-booked as owed to HKPS.  Zhou acknowledged: “That’s how, actually, this whole thing went wrong here”[24].

68.  Later, when the completion account for the SPA came to be prepared in March 2011, according to Zhou: “I reviewed all the documents again and I thought – and I said that, oh, if I sell the shares of [HKPS] to Gallop – I mean, the repayment should go back to [Chan]. … My thinking was very straightforward and simple.  I thought that this money should return back to [Chan], because [Chan] lent the money to PRCYT, which PRCYT then invested in the tin mine.  So the right to receive dividend, or repayment, should be – ultimately should be [HKPS] or [Chan]”[25].  This was referred to at the trial as the second instruction by Zhou to Ms Chan. 

69.  It appears that what Ms Chan then did was, firstly, to reverse the re-booking of PRCYT’s loan to HKPS.  It can be seen from the balance sheets of HKYT as of 31 December 2010 and 1 January 2011 that the loan owed to HKPS was reduced resulting in one booked under PRCYT in the sum of HK$118.99m (it is common ground that the variation of the sum was due to the prevailing exchange rate).  Secondly, in the completion account as of 4 March 2011, PRCYT’s loan was re-booked as owed to Chan. 

70.  These admittedly erroneous instructions given by Zhou to Ms Chan had played a primary role in this litigation which has lasted some 13 years and for which no doubt enormous amount of costs have been incurred.

Expert accounting evidence

71.  The 3 accounting experts are in agreement that :

(1)  “the AUD16.3 million contribution from [PRCYT] into [HKYT] should be afforded the same accounting treatment as the other 82% contribution made by [HKPS] into [HKYT] for its 82% investment in the Asset”[26].  Chan’s expert, Mr Tong, agreed that the 18% contribution from [PRCYT] should be booked on the same basis as the 82% contribution[27];

(2)  “all funds contributed into [HKYT] for the investment in the Asset had been and should continue to be afforded the same accounting treatment, all such funds had throughout been booked as a liability (payable)  and there is no evidence to suggest that [PRCYT]’s contribution into [HKYT] should be treated in isolation as capital investment, if and insofar as this is alleged by [Chan]”[28].

Chan’s case on capital investment

72.  The lynchpin of Chan’s case is that PRCYT had never intended that its investment would take the form of a loan.  Instead, its intention was that the AUD16.3m was a capital investment.  Chan relies mainly on :

(1)  The absence of any mention of a loan in the Minutes;

(2)  The internal documents of PRCYT which showed that it was applying for approvals from Mainland authorities of its investment in the Asset in the form of capital;

(3)  PRCYT’s complaints in 2011 after the discovery of its “missing contribution”, by which it maintained the position that its investment was capital. 

73.  In my view, Chan’s case is misconceived.  First, it is common ground that various terms were used by PRCYT’s representatives to describe its investment, eg, 資本金 (capital funds)  and 投資款 (investment funds).  However, there was no discussion between Chan and PRCYT’s representatives about what was meant by those terms.  Critically, there was no discussion on how PRCYT’s 18% investment should be booked in HKYT’s accounts.  Indeed, there was no discussion on whether the 18%, once carved out of the 100%, should be re-booked in the accounts in a way different to the 82%. 

74.  Second, the fact that PRCYT intended that its investment should be a long term investment and not to be withdrawn[29] does not assist Chan’s case.  It is not disputed that a long term investment is often booked as a shareholder’s loan.  The same can be said for capital funds or investment funds.  In this case, the shareholder’s loans on the books of HKPS and HKYT had no repayment terms such as duration of the loans.  

75.  Third, what PRCYT had in mind did not translate into a consensus reached with Chan on behalf of HKPS.  Chan’s evidence is that he did not find out what PRCYT mean by capital funds, nor discussed with it how the 18% was to be booked. 

76.  Fourth, neither Fan nor Zhang was qualified in accounting.  I have the impression that they were not familiar with how an investment carried out via a corporate vehicle could be booked in the accounts of that company.  With one exception, I have no reason to believe that the other representatives of PRCYT who were involved in these matters (but did not give evidence)  was any wiser.  Otherwise, they would not have been surprised by the shareholder’s loan owed to Chan/HKPS by HKYT.  The exception is Mr Chen Yong, who is trained in accountancy, but he only came into the picture in August 2011. 

77.  Importantly, Zhang said during a meeting with Fu and 2 other representatives of Gallop held on 22 August 2011 that PRCYT had 18% in every loan to HKYT[30].  He relied on this answer to meet Mr Ng’s challenge in cross-examination that he did not mention parity of treatment for PRCYT’s 18% investment at the meeting[31].  Further, in answer to cross-examination by Mr Lam, Zhang said that he found the accounts of HKYT as of 31 December 2010 (showing a shareholder’s loan from PRCYT)  reasonable[32]. 

78.  Fifth, there was no discussion of any sort about expanding the share capital of HKYT to reflect the AUD16.3m.  As submitted by Mr Wong, to treat PRCYT’s 18% differently to the 82% contribution would upset the agreed ratio of entitlements to the Asset, produce therefrom and shareholdings of HKYT.  For instance, if PRCYT was entitled to subscribe for 118,990,000 HKYT shares at HK$1 each whilst the 82% investment remained as loan, then PRCYT’s shareholding in HKYT would exceed 18%, which is wholly contrary to the JV Agreement.  See also para 81 below. 

79.  Finally, Chan’s arguments hold no sway over the construction of the JV Agreement based on its clear terms. 

Rectification

80.  I take the view that the rectification agreed between PRCYT and G/L (see para 29(3)(a)  above)  would best reflect the proper performance of the JV Agreement and the justice of this case.

81.  As regards Chan’s proposal at para 29(3)(c)  above, apart from this Court’s reject of his case, I agree with Mr Lau, Mr Wong and Mr Lui that it simply would not work :

(1)  There is neither pleading nor evidence on any common understanding reached between PRCYT and Chan (on behalf of HKPS)  on any increase of HKYT’s authorised share capital.  There is thus no basis for the Court to hold that there was such an agreement. 

(2)  Even if there were a common understanding of share capital increase, by how much should it be increased? 

(3)  Even if the Court finds that there were an agreement to increase the share capital by, say, 200m shares, how many shares should be allotted to PRCYT and how the 82%-18% ratio is to be maintained?

(4)  If HKPS’s shares are not fully paid up, HKYT can call for payment of the unpaid balance of the increased share capital.  How would the 82%-18% ratio be maintained?

(5)  It is not the function of the Court to provide the answers to (2)  to (4)  and construct a bargain for the parties.

Breach of the JV Agreement by HKPS

82.  In light of the above analysis, the issue of breach of the JV Agreement is an open and shut case.  HKPS had simply failed to properly carve out 18% of its investment to PRCYT.  What had properly been booked as PRCYT’s shareholder’s loan in the First BS was subsequently removed with nothing left to reflect PRCYT’s 18% investment.

83.  Where necessary, I would have held that HKPS was in breach if its duty of good faith in carrying out the carving out exercise: see Report, [50] and cl. 13 of the Agreement at para 48 above.

84.  However, PRCYT is not seeking any relief against HKPS in addition to rectification.

Breach of fiduciary duties

85.  The remaining causes of action in the Counterclaim are all based on the existence of fiduciary duties on the part of HKPS and HKYT in relation to the booking and maintaining PRCYT’s investment. Plainly, PRCYT has a weaker case against HKYT because it had no relationship with HKYT, save for one between a shareholder and company.

HKPS

86.  PRCYT’s claim against HKPS on fiduciary duties was set out in the former’s Amended Defence and Counterclaim, Section D, [11] to [15].  In [11(k)-(l)], the terms of the JV Agreement and the allegations of fiduciary duties were set out.  In [12]-[13], the notices relating to Chan Assignment as a consequence of the JV Agreement were pleaded.  [14(a)-(c)] pleaded the alleged legal consequences of the JV Agreement.  [15] stated: “Further, by virtue of the matters aforesaid [HKPS] owed, inter alia, the following duties in favour of [PRCYT]”.  

87.  Insofar as there is any attempt to expand PRCYT’s case beyond Section D by relying on the words “by virtue of the matters aforesaid”, it has no merits.

88.  I agree with Mr Lam that it is clear that, on PRCYT’s pleaded case, it is the JV Agreement which provided the alleged foundation for the imposition of fiduciary duties.  Accordingly, the fiduciary duties are contractual in nature.  It is not be permissible for PRCYT to argue otherwise or to rely on matters extraneous to Section D to support its case of fiduciary duties: see Kwok Chin Wing v 21 Holdings Ltd (2013)  16 HKCFAR 663, [21]-[22].

89.  I also agree with Mr Lam that given that the JV Agreement is governed by PRC law, and it had been made plain in the Report[33] that contractual fiduciary duties do not exist under PRC law, it follows that PRCYT’s allegations of fiduciary duties must fail.  I can see no proper answer to this submission by Mr Wong.

90.  Even under common law, I do not believe that any fiduciary duty on the part of HKPS would have arisen under the JV Agreement.  I need only refer to an authority of the High Court of Australia, Hospital Products Ltd v US Surgical Corp & Ors (1984)  156 CLR 41:

“… the fact that the arrangement between the parties was of a purely commercial kind and that they had dealt at arm’s length and on an equal footing has consistently been regarded by this Court as important, if not decisive, in indicating that no fiduciary duty arose …” (p.70)

“That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.” (p.97)

“Notwithstanding the existence of clear examples, no satisfactory, single test has emerged which will serve to identify a relationship which is fiduciary.  It is usual – perhaps necessary – that in such a relationship one party should repose substantial confidence in another in acting on his behalf or in his interest in some respect.  But it is not in every case where that happens that there is a fiduciary relationship.  If it were, whenever there is “a job to be performed” … and entrusting the job to someone involves reposing substantial trust and confidence in him, equity would impose fiduciary obligations.  Clearly, that is not the case.  Nor does a fiduciary duty arise because the person to whom a job is entrusted acts in his own interest and thereby fails to perform the job properly, however useful it may appear with hindsight that such protection should have been available …” (p.141-142)

“… A fiduciary relationship does not arise where, because one of the parties to a relationship has wrongly assessed the trustworthiness of another, he has reposed confidence in him which he would not have done had he known the true intentions of that other. In ordinary business affairs persons who have dealings with one another frequently have confidence in each other and sometimes that confidence is misplaced. That does not make the relationship a fiduciary one. … A fiduciary relationship exists where one party is in a position of reliance upon the other because of the nature of the relationship and not because of a wrong assessment of character or reliability. That is to say, the relationship must be of a kind which of its nature requires one party to place reliance upon the other; it is not sufficient that he in fact does so in the particular circumstances. …” (p.147)

“Moreover, a fiduciary relationship does not arise where one of the parties to a contract has failed to protect himself adequately by accepting terms which are insufficient to safeguard his interests. Where a relationship is such that by appropriate contractual provisions or other legal means the parties could adequately have protected themselves but have failed to do so, there is no basis without more for the imposition of fiduciary obligations in order to overcome the shortcomings in the arrangement between them.” (p.147)

91.  In this case, there is no reason to doubt that PRCYT and HKPS were on equal footing when their bargain was struck.  There is indeed no suggestion to the contrary. 

92.  Further, as pointed out by Mr Lam, cl. 4 of the Agreement provided that HKYT’s board of directors would consist of 5 directors, with 3 directors to be nominated by HKPS and 2 to be nominated by PRCYT.  No resolution could be passed by HKYT unless there was a quorum consisting of at least 1 of the directors nominated by each side.

93.  In the premises, the parties clearly envisaged at the outset of the joint venture that both of them would exercise control and participate in the affairs of HKYT, which would include, eg, the management of its accounts.  This strongly militates against the suggestion that HKPS was entrusted with a duty to help PRCYT to “ensure” that that its investment was properly booked.

94.  It is no answer for PRCYT to say that, although it had the right to nominate directors under the JV Agreement, its nominated directors were not appointed to the board until much later.  On the evidence, PRCYT’s nomination of its representatives was made on 3 August 2010.  It was open to PRCYT to follow up on its nomination.  Its evidence provided no sufficient explanation for the delay in the appointment of its nominees. 

95.  In any event, under the JV Agreement both HKPS and PRCYT had the responsibility and control over the affairs of HKYT.  I therefore see no sufficient basis for equity to intervene with the imposition of fiduciary duties on the part of HKPS. 

HKYT

96.  PRCYT pleaded two facts in support its case against HKYT in [16] of its Amended Defence and Counterclaim, namely, (a)  HKYT “received” AUD16.3m paid by HKPS on behalf of PRCYT; and (b)  HKYT (presumably through Chan)  knew that the money “should be afforded parity of treatment”, ie, should be treated as shareholder’s loan.

97.  It has already been pointed out that HKYT had no contractual relationship with PRCYT (putting aside the relationship of shareholder and company).  I agree with Mr Lau that these facts did not give rise to any fiduciary duty.  On PRCYT’s case, AUD16.3m was “carved out” and became its loan to HKYT.  Both before and after the carving out, it was HKYT’s money.

98.  As for control over the accounts of HKYT, the above discussions on PRCYT’s entitlement to have its nominees appointed to the board of HKYT apply equally here. 

99.  In the premises, I see no sufficient basis for the imposition of fiduciary duties on HKYT’s part.

Chan

100.  The rejection of PRCYT’s case of fiduciary duties on the part of HKPS and HKYT must result in rejection of its case against Chan.

Contractual claims between Chan and G/L

AUD 16.3m Payables – Payment Directions

101.  As identified in para 33(4)  above, in light of this Court’s finding that the AUD16.3m was in the nature of a shareholder’s loan, Chan takes no issue with it being Payables and can be set-off against the Receivables owed to him by G/L under the SPA, and the only dispute is the fulfilment of the Payment Directions provisions under cl. 5.05(iv)(b). 

102.  The relevant provisions of the SPA are as follows :

Cl. 5.01

“The aggregate purchase price of the Sale Shares shall be … (subject to adjustment as set out in Clauses 5.05(iv)  …”

Cl. 5.03

“[Chan] further guarantees and warrants to [Gallop] that [Chan] will bear all the Payables (which remain unpaid)  made by the Review Group as at the Completion Date.”

Cl. 5.04

“[Gallop] hereby agrees and acknowledges with [Chan] that all the Receivables owing to the Review Group up to and including the Completion Date shall belong to [Chan] absolutely, …”

[emphasis added]

Cl. 5.05(iv)(b)  and (c)

“(iv)  In implementation of the warranties set out in [Cl. 5.03] …, the adjustment to the Consideration shall be made by [Gallop] and [Chan] in the following manner: …

(b)  in the event that there are the Payables, as defined below and as shown in the Completion Accounts, [Chan] shall pay [Gallop] in cash the actual amount of the Payables within 3 Business Days upon receipt of the payment direction(s)  in respect thereof (which shall only be issued by [HKPS] to [Chan] within 7 Business Days prior to the due date)  and in the event that [Gallop] has settled and paid in cash the relevant part of the Payables on behalf of [Chan], [Chan] shall reimburse [Gallop] in cash the full amount of such Payables as have been settled and paid by [Gallop] on behalf of [Chan] as aforesaid within 7 days from the payment by [Gallop] in respect thereof; and

(c)  the sums payable under [Cl. 5.05(iv)(b)] above shall be paid on their respective due dates provided always that such sums shall be adjusted in accordance with the Audited (the Review Group)  Account and [Cl. 5.05(iv)(b)] as if the “Completion Accounts” referred to in [Cl. 5.05(iv)(b)] above is replaced by the “Audited (the Review Group)  Accounts” and [Chan] and [Gallop] shall pay to each other the amount of such adjustment, if any, within 10 days after the issue of the Audited (the Review Group)  Accounts by [HKPS’s] auditors as provided in Clause 5.05(iv)(c)  above but in any event not earlier than the respective due dates as mentioned in [Cl. 5.05(iv)(b)].”

“In the Clauses 5.03 and 5.05:-

(a)  the “Audited (the Review Group)  Accounts” shall mean the Completion Accounts as audited by [HKPS]’s auditors.

(b)  the “Payables” shall mean the total amount of the liabilities incurred up to and including the Completion Date by the Review Group, including, but not limited to, all long term and current liabilities, all long term and current capital commitment, if any, and all account payables, but excluding (i)  all the outstanding shareholder’s loans owing by [HKPS] to [Chan] on the condition that those shareholder’s loans shall be assigned to [Gallop] on the Completion Date; …

(c)  the “Receivables” shall mean the bank balances and cash, the account receivables and other receivables owing to the Review Group (including, for the avoidance of doubt, any receivables arising from the sale of the tin concentrates produced on or before the Completion Date, no matter whether the sale is conducted thereafter)  but excluding derivative financial instruments, deferred tax assets and deposits paid to all the Australian government authorities, if any, up to and including the Completion Date.”

103.  It appears that there was no definition provision for “Review Group”.  Instead, it was indirectly defined under the definition for “Completion Accounts”, which meant: “the unaudited profit and loss account and balance sheet of each of [HKPS], [HKYT], [Australia Parksong] and YT Parksong Australia Management Pty Ltd … (“the Review Group”)  …”.

104.  Mr Ng’s argument is that the liability for Payables has to be triggered by Payment Directions issued under cl. 5.05(iv)(b).  The issue turns on the proper construction of that clause. 

105.  I am inclined to agree with Mr Lui that on proper construction cl.5.05(iv)(b), read as a whole with cls. 5.01, 5.03 and 5.04, provided for the adjustment of purchase price but it constituted no bar to Gallop in seeking payment of the Payables via other means. 

106.  To begin with, cl. 5.01 provided that the purchase price should be “subject to adjustment as set out in Clause 5.05(iv)”.  Cls. 5.03 and 5.04 then stipulated the liability for Payables and Receivables.  Finally, cl. 5.05(iv)  provided that: “In implementation of the warranties set out in Clauses 5.03 and 5.04, the adjustment to the Consideration shall be made … in the following manner: …”.

107.  Under the provisions of cl. 5.05(iv)(b), there were 2 avenues for the issuance of Payment Direction(s)  which might result in price adjustment, namely, (a)  a Payment Direction might be issued within 7 business days prior to the due date of the Payables; and (b)  a Payment Direction might be issued for the Payables settled by Gallop in cash. 

108.  In this case, neither of these avenues could apply.  On the face of the AR, there would be no Payables by reason of shareholder’s loans because all of them belonged to Chan and they would be assigned to Gallop.  Unless the AR was amended or Chan admitted to wrongly assigning PRCYT’s AUD16.3m to Gallop, I fail to see any question of due date for making good the deficiency in the loan assignment by Chan to Gallop or for Chan to pay the AUD16.3m as Payables, nor was there any question of Gallop settling such deficiency.  Mr Ng was unable to provide an answer as to why there was any question of due date or Gallop having settled Chan’s Payables. 

109.  It cannot be seriously suggested that the lack of avenue for price adjustment under cl. 5.05(iv)(b)  would take away Gallop’s right to seek redress for the breach warranties under cl. 5.03.  This strongly fortifies the above construction.  I hold that cl. 5.05(iv)(b)  constitutes no hindrance to G/L’s set-off against the Receivables due to Chan with the AUD16.3m.

110.  It is unnecessary to deal with the other breaches of warranties in light of the above finding because they add nothing to G/L’s case (see para 33(5)  and (8)  above). 

Small Payables

111.  The issues are identified in para 33(9)  above. The above analysis on the construction of cl. 5.05(iv)(b)  applies equally to this claim.  It may be the case that Payment Directions could have been issued in respect of these Payables, but it simply means that G/L cannot have an adjustment of the consideration under the SPA.  I therefore hold that the sum of AUD3,244,520.24 can be set-off against the Receivables owed to Chan.

Recalculation Issue

112.  Both G/L and PRCYT take issue with the lateness of Chan’s endeavour to change his stance, contrary to his pleaded case.  In terms of amount, if allowed, Chan’s claim will increase from AUD15.14m to about AUD27m.  I do not believe that the objection can be brushed aside as technical because, firstly, prior this trial concessions were made by G/L in reducing the scope of their claims against Chan[34].  The concessions were obviously made on the basis of the existing pleaded cases. 

113.  Secondly, PRCYT was entirely taken by surprise by the Recalculation Issue, and it was far too late for PRCYT to properly consider its position and to advance arguments to protect its interests as the 18% shareholder of HKYT. 

114.  In the premises, putting aside objections on other grounds, the Recalculation Issue must be rejected.

115.  For completion, I should mention, firstly, that I agree with Mr Lui that the claim for Receivables was crystallised as of the completion date of the SPA, 4 March 2011.  This is clear from the definition of Receivables.  There is thus no room for arguing the application of current exchange rate.

116.  Secondly, although cl. 5.04 referred to all the Receivables belonging to Chan, there are merits in Mr Lui’s submission that on a proper construction of the SPA, bearing in mind that Chan was only selling (indirectly)  82% of HKYT, his entitlement was limited to 82% as he had previously accepted.  However, the point has not been fully explored by counsel, and it is unnecessary to deal with it[35]. 

Issues between Chan, HKPS and HKYT

117.  These issues were identified in paras 34 to 36 above.  Given the rejection of PRCYT’s case on breach of fiduciary duties on the part of HKPS or HKYT, these issues do not arise. 

Misrepresentation

118.  The issues are identified in para 33(7)  above. Despite Mr Lui’s suggestion that it is unnecessary to deal with them (see para 33(8)), I shall do so succinctly in case I am wrong on the Categorisation Issue. 

119.  In respect of the metal element of fraudulent misrepresentation, both Mr Lui and Mr Ng had referred the Court to Lee Yuk Shing v Dianoor International Ltd (In liq) [2016] 4 HKC 535 at [51] :

“… The representor will be fraudulent if he made the statement ‘recklessly, careless whether it be true or false’ (Derry v Peek at 374). Lord Herschell in Derry v Peek was at pains to emphasise that negligence is not sufficient for deceit, since recklessness involves not caring whether the statement is true: an indifference to the truth (at 361, 369, 373 and 374). The expression ‘not caring’ had nothing to do with not taking care, it meant not caring in one’s own heart and conscience whether the statement is true or false. It is well established that to establish common law deceit, a degree of dishonesty or moral turpitude has to be present. In this context, the moral obliquity consists of an indifference to the truth, a wilful disregard of the importance of the truth …”.

120.  At [52]-[54], the Court of Appeal emphasised that negligence, gross negligence, not taking steps which any [reasonable representor] would have taken, going far beyond the realm of gross negligence and gross want of caution “cannot be stretched to constitute wilful or wicked indifference that is necessary for a fraudulent state of mind”.

121.  Whilst motive is generally irrelevant, ie, a representor cannot escape liability by pleading that he had a good motive for the deception, it can be relevant to the question whether the false statement was fraudulent or whether there was an intention that the representee should act upon it: Mrepresentation, Mistake and Non-disclosure by Cartwright, [5-16].

122.  With these principles in mind, I cannot be satisfied that either Chan or Zhou was acting fraudulently when they represented to Gallop that the amount of shareholder’s loans to be assigned to it was in the region of HK$590m.  I have no doubt that they were grossly negligent.  Zhou had practically admitted that he was. 

123.  As for Chan, I am prepared to give him the benefit of doubt that he had either overlooked that part of the shareholder’s loans would have to be carved out or he simply did not consider the matter with care.  He left the matters of the accounts to Zhou and heavily relied upon him.  I believe that the lack of motive on Chan’s part to inflate the shareholder’s loans (see also 43 above)  militates against the suggestion of dishonesty.  I can see nothing to be gained from the inflation when he was only selling 82% of HKYT and the purchase price under the SPA was not dependent on the amount of shareholder’s loan to be assigned to Gallop.  Further, Chan could easily be caught out for any inflation over the shareholder’s loan. 

124.  As regards negligent misrepresentation, I believe that all the elements constituting this cause of action have been made out.  First, Fu, who was the CFO of Gallop, was tasked to participate in its negotiations with Chan and to follow up on it.  Fu explained that the SPA did not stipulate the precise sum of shareholder’s loan to be assigned to Gallop by Chan because there might be minor changes to be made later.  However, he was quite clear in his evidence that at the time of negotiation he was told by Chan that the shareholder’s loan was about HK$590m, which was consistent with the accounts he saw at the time as well as the accounts subsequently provided to him by Zhou.  Fu also said that he relied on the auditors appointed by Gallop, who later confirmed the information provided to him.

125.  Fu’s evidence about the discussion of the shareholder’s loan is only to be expected in the context of the transaction. Subsequently, multiple accounting documents were sent to him by Zhou, which confirmed the amount of such loan to be in the region of HK$590m. 

126.  In my view, Chan owed Gallop a duty to take reasonable care over the accuracy of the amount of shareholder’s loan.  The information impacted on whether Gallop would be acquiring HKYT free from debt to any party but itself.  Chan had clearly breached that duty.  The information was incorrect and was given due to want of care on his part. 

127.  In the premises, the misrepresentation over the amount of shareholder’s loan is made out.

128.  With respect, it is unrealistic to suggest that the representation was not intended to be relied upon or that Gallop did not rely upon the representation.  If the suggestions were right, I fail to see the purpose of disclosure of information between buyer and seller. 

129.  Fu said under cross-examination that he was not concerned about having been supplied by Zhou with 2 sets of accounts of the same date with different figures, which happened on a number of occasions (see para 20 above)  because the figures would be changed, and he relied upon the later auditing of the accounts.  Further, Fu said that he was “holding onto” Chan’s statement that that on the day of completion he would transfer shareholder’s loan of HK$590m to the buyer.

130.  Fu was further asked if his understanding that HK$590m would be assigned at completion was based on what Chan had said rather than the balance sheets.  Fu answered :

“Incorrect. How come we would have this 590 million? So we have already had a look of the previous accounts and at that time make mental calculations of it. And obviously Mr Chan also said this to me. And I had also gone through the financial statements myself. So both the evidence from both sides, they were consistent.”

131.  For completion, it appears from the evidence that in carrying out its audit work Deloitte had to place some reliance on JC&C as well as Zhou[36].

132.  In light of Fu’s evidence, there is no scope for arguing that Gallop did not rely on the misrepresentation in question.

133.  On loss, Fu explained that it is true that if HKYT’s indebtedness was reduced it would be better for that company.  However, in this case there was a minority shareholder (PRCYT).  Being in control of HKYT by reason of its majority shareholding, Gallop was able to decide on the distribution of profits (if any)  and the repayment of shareholder’s loan.  In the event that HKYT would not be able to repay the loan, Gallop was in a position to have it wound-up and might ultimately obtain the remainder of its shares.  Hence, the shareholder’s loan was important to Gallop.

134.  Further, Fu’s evidence is that G/L intended to have the shareholder’s loan of HK$590m repaid after the acquisition of HKPS with the profits from the Tin Mines[37].  Subsequently, G/L sought to achieve that goal at a board meeting of HKYT’s held on 13 July 2011.  It was, however, prevented from doing so because of PRCYT’s opposition that 18% of the shareholder’s loan belonged to it[38].

135.  On applicable principles, the normal measure of damages is the difference between the price paid for the property and the market value of what has been acquired: McGregor on Damages, 21^st edn, [49-062].  Further, where the duty was to take care to provide accurate information, the recoverable damage in the event of breach is based on the foreseeable consequences of the information being wrong: one compares the loss which the representee has actually suffered with what his position would have been if he had not acted on the assumption that the information was accurate: Misrepresentation, Mistake and Non-Disclosure, supra, [6-59].

136.  In this case, there was a shortfall of HK$118.99m in the sum assigned to Gallop by Chan.  Aside from the evidence referred to in para 133 above, it is common sense that Gallop can have the assigned debt paid off by HKYT, especially when the Tin Mines are profitable.  I therefore accept that, prime facie, the shortfall is the damage suffered by Gallop.  There is no viable reason before the Court to displace that proposition, and I hold accordingly notwithstanding a degree of unease on my part that it may represent a windfall to Gallop, because it is doubtful if the purchase price would have been adjusted, or by how much, if Gallop was told the correct amount of shareholder’s loan.  

Disposition

137.  Firstly, I am persuaded, in light of the reservations expressed by Mr Wong on the potential complications which may arise in rectifying the accounts of HKYT, which was echoed by Mr Lau, that the better course is to grant a declaration. 

138.  I declare that in HKYT’s accounts as of 4 March 2011 the sum of HK$118,990,000 was wrongly booked as part of the shareholder’s loan owed to Chan when in fact it was a shareholder’s loan owed to PRCYT.  The parties should seek to rectify the accounts accordingly in a consensual manner.  I grant liberty to apply with a reminder that any unreasonableness on any party may be visited with costs sanction.

139.  For HKPS’s breach of the JV Agreement, I award nominal damage in favour of PRCYT in the sum of HK$10. 

140.  As between Gallop and Chan, given the former’s success on the Categorisation Issue and the Small Payables, in according with a table submitted to the Court by Mr Lui which was referred to as “Permutation (version 1)”, there is a net balance due to Gallop by Chan in the sum of AUD4,401,097.80. I give judgment in favour of Gallop against Chan in that sum with interest at prime plus 1% from the date of Gallop’s counterclaim until judgment and thereafter at judgment rate(s)  until payment.

Costs

141.  PRCYT and Gallop are the winners with Chan and HKPS the losers in this action.  Although PRCYT has not succeeded in all its causes of action against HKPS, one has to bear in mind the positions adopted by HKPS in the course of this action, which was touched upon by Mr Wong in his viva voce final submissions.  As for HKYT, it was properly joined as a party in this action for obvious reason, although PRCYT’s causes of action against it have not succeeded. 

142.  It is unfortunate that this action has to be fully fought out given Chan’s acceptance that HKYT’s accounts would require rectification when he was confronted by PRCYT about its “missing contribution”.  However, in answer to Mr Lau’s question, Fu explained that the books of HKYT could not be easily changed despite the request of PRCYT.  He said that the audit of the accounts was carried out based on the evidence submitted to Deloitte and an unqualified report was subsequently published.  If the audited accounts were to be reversed, it would have to be based on authoritative evidence such as a court ruling.  If he simply listened to what was said and amend the accounts, further amendment might be required if they were later contradicted by a court ruling.  Secondly, without new evidence, Deloitte would not agree to amend the accounts or they would have to issue a qualified opinion of the accounts which would be of no benefit to a listed company. Notwithstanding Fu’s evidence, it appears that if not for Chan’s litigation against Gallop, the parties might have been able to work out a satisfactory solution amicably[39].

143.  In light of the complexity, I would allow an opportunity to the parties to seek to agree the appropriate costs order. Failing agreement, each of the parties is to lodge and serve its skeleton arguments on costs, limited to 3 pages printed in A4 paper with 1.5 line spacing and normal margins, within 21 days from the date of this Judgment. Unreasonableness may be visited with costs sanction.  The Court will then decide whether the issue should be determined on paper.

144.  Last but not least, I am grateful to all counsel for their assistance.