CHINA ALARM HOLDINGS ACQUISITION LLC AND ANOTHER v. ING ALEXANDER YIM LEUNG AND OTHERS

HCA 503/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 503 of 2012

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J U D G M E N T

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Index

A. INTRODUCTION

1. The Ministry of Security in Beijing has had ambitious plans to turn Beijing into a hi‑tech city with a first class security system fit for the 21^st century. The catalyst was the attack on the World Trade Centre in New York in 2001 and China’s impending hosting of the Olympic Games in Beijing in 2008.  If the project was a success, the idea was to install similar security systems in other cities in the PRC.  The first defendant, Alexander Ing, wanted to be at the forefront of this initiative.  His aim was to provide some of the services which would be required for the implementation of this proposal, and to build up, to use his own words, “a global security alarm company”.  He needed finance for that.  He got it from a number of entities in the US.  They say, though, that they were induced to invest in Mr Ing’s projects by a number of fraudulent misrepresentations which were made to them. Two of those entities now seek to recover damages from Mr Ing to put them into the position in which they would have been if they had not made the investments in the first place.  This is the court’s judgment following the trial of that claim.

2. The two plaintiffs are US companies incorporated in Delaware and Tennessee respectively.  The company which they invested in was China Alarm Holdings Ltd (“CAHL”).  Mr Ing was its CEO and its majority shareholder.  He was also one of its directors, as were Howard Balloch (the second defendant), Samuel Stern (the third defendant) and Prof Steven Kwok (the fourth defendant).  The plaintiffs have discontinued the proceedings against Mr Balloch and Prof Kwok, but on 15 August 2013 they obtained interlocutory judgment against Mr Stern for damages to be assessed.  He was not given notice of the trial, and so the trial was limited to the plaintiffs’ claim against Mr Ing.

3. The plaintiffs’ case is that they were induced to invest in CAHL by a number of representations about CAHL’s operations and the intended use of the capital it was seeking to raise for which Mr Ing was responsible.  Specifically, he had not disclosed that a company controlled by him had entered into an agreement with CAHL to provide consultancy and management services to CAHL for three years for substantial monthly fees, and that those services included bribes to corrupt officials in the PRC.  Nor had he disclosed that another company controlled by him had agreed with CAHL to provide his services to CAHL for three years for substantial remuneration.  The plaintiffs contend that Mr Ing knew that this failure to disclose these facts had made the representations false, or at the very least that he turned a blind eye to the possibility that it might have made them false.  The plaintiffs claim that they relied on those representations in deciding to invest in CAHL, and they subscribed for a total of some US$15.55 million in convertible notes issued by CAHL in 2005 and 2006.  In 2009, CAHL went into insolvent liquidation, and the plaintiffs lost almost the whole of their investment.  The two causes of action pleaded against Mr Ing are fraudulent misrepresentation (the tort of deceit) and conspiracy.  However, Mr Douglas Lam SC for the plaintiffs acknowledged that the cause of action in conspiracy added nothing to the case if the claim for fraudulent misrepresentation succeeded, and would have to be dismissed if the claim for fraudulent misrepresentation failed.  In the circumstances, the plaintiffs did not pursue their claim of conspiracy.

4. There are a number of companies whose names will be cropping up in the course of this judgment.  I have included a corporate structure at the end of this judgment for the convenience of a reader of it.  It was originally one of the appendices to the first witness statement of Cosimo Borrelli, one of CAHL’s liquidators.  There has been no formal agreement that the structure is accurate, but it has not been disputed, and I proceed on the assumption that it is correct.  Moreover, in order to understand why the plaintiffs contend that the various representations relied on were false, and that Mr Ing knew that they were false (or turned a blind eye to the possibility that they might have been), it is necessary to set out the background facts to see the context in which the representations relied on by the plaintiffs were made.  I trust that I will be forgiven for doing that in some detail, but the exercise is a necessary one. Most of those background facts are not in dispute, but where they are I shall explain what my findings are on them.

5. In the course of this judgment, I have referred at various times to being “sure” of something or not being “in any doubt” about something.  That does not mean that I have forgotten that the standard of proof is the normal civil standard of what the probabilities are.  It simply reflects the level of certainty I happen to be in on that particular issue.  Nor have I overlooked that an allegation of fraud is a grave one, and that this “is a circumstance which has to be weighed in the scale in deciding as to the balance of probabilities”: Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 at p 274C-D.

B. THE BACKGROUND

B.1  The original business in the PRC

6. Mr Ing is an electrical engineer by profession.  He has considerable experience in infrastructure projects in the PRC.  One of those projects related to the provision of security services using analog technology to banks and other financial institutions in Beijing in the form of panic alarms and the like.  Those services were provided by Guo‑Tong Security Alarm Engineering Ltd, a company incorporated in the PRC in 1997, and which I shall call Beijing Electronics as that was how Mr Ing referred to it.  It was a joint venture in which Mr Ing’s business partner was Qin Jia Li. Beijing Electronics’ operations were run by Mr Qin.  He was its general manager, and through a company in which he had a controlling interest, Beijing Guo‑Tung Chuang‑an Information Technology Ltd (“Beijing Information Technology”), which was another company incorporated in the PRC, he had a 21.875% shareholding in Beijing Electronics.  The remaining shareholding of 78.125% was held indirectly by two companies incorporated in the British Virgin Islands, in which Mr Ing had a controlling interest.  So to all intents and purposes, Mr Ing “owned” just less than 80% of Beijing Electronics and Mr Qin “owned” just more than 20% of it.  Mr Ing claims that Beijing Electronics’ business proved successful, and that by 2004 it was providing security services to over 1,000 banks and financial institutions in Beijing.  I have no reason to doubt that.

B.2  The Safe City Project

7. The Safe City Project was the name given to the proposal to create in Beijing a sophisticated modern security system.  The Ministry of Security had the Beijing Olympics in 2008 in mind.  The project was a sensitive one.  The successful contractor would be handling documents which included “red header” documents, which were classified documents relating to national security and were issued by the Ministry of Security and the Beijing Police Bureau.  The project involved the development of a security network which would link security systems to a city‑wide emergency alarm network (similar to the 911 emergency response system in the US), a monitoring system using satellite and GPS technology to track government and other public vehicles, an electronic license plate system for identifying vehicles and checking their ownership, and a security alarm system for automatic teller machines and banks.  Beijing Electronics’ expertise in security matters led the Beijing Police Bureau to approach Beijing Electronics in February 2004 in connection with this project.

8. Beijing Electronics did not have the capital or resources to take on a project of this kind, since it involved construction works and the installation of cabling and CCTV on a large scale using digital technology. Accordingly, Mr Ing and Mr Qin decided that a new joint venture should be set up to handle this project.  This new company was Beijing Alarm Networks Ltd (“Beijing Alarm”).  It was incorporated in the PRC.  Mr Qin had a 20% shareholding in it through Beijing Information Technology, and Mr Ing’s interest in Beijing Alarm was held by CAHL, which had an 80% shareholding in Beijing Alarm.

B.3  CAHL’s role

9. CAHL had been incorporated as Novel Idea Holdings Ltd in the British Virgin Islands on 12 December 2003.  Mr Ing became its first director three days later.  By 14 February 2004 a resolution to change its name had been passed, and its name was changed to China Alarm Holdings Ltd on 16 March 2004.  Mr Stern and Prof Kwok joined the board on 18 March 2004, and Mr Balloch on 3 February 2005.  CAHL was responsible for providing Beijing Alarm with the initial capital it needed of US$5 million, and for raising further funds from outside investors.  That appears from an agreement headed “Sino‑Foreign Co‑operative Enterprises Contract” between CAHL and Beijing Information Technology dated 8 April 2004.  CAHL’s other responsibilities were not as clearly identified as they might have been, but Mr Ing claims that they included providing Beijing Alarm with technical, research and development support, training security staff and technicians, and providing Beijing Alarm with financial management, accounting and administrative services.  I shall return later to the agreement under which those services were provided, but for the moment it is sufficient to say that CAHL was controlled by Mr Ing.  He had a personal shareholding of 8.12% in it, but he was also the sole shareholder of Stornaway Enterprises Ltd (“Stornaway”), another company incorporated in the British Virgin Islands, and Stornaway had a shareholding of 64.93% in CAHL.  Mr Ing says that Stornaway was incorporated for the sole purpose of holding his investment in CAHL.  Mr Qin had a 16.23% shareholding in CAHL, and the remaining 10.72% shareholding in CAHL was held by a number of minority shareholders, one of whom was Mr Ing’s wife, who had a 4.06% shareholding in it.

B.4  The search for investors

10. In the meantime, Mr Ing had been looking for investors in CAHL.  He was introduced by a friend of his to John Wang.  Mr Wang was the managing director of the SBI Group, an entity which provided financial and asset management services.  Mr Ing introduced him to Mr Qin, and he was provided with a lot of information about CAHL.  According to Mr Ing, Mr Wang was impressed with what he was told, and began to think of either getting the SBI Group to invest in CAHL itself or referring the possibility of investing in it to one of the SBI Group’s clients.

11. One of the SBI Group’s clients was Pope Asset Management LLC (“PAM”).  PAM advised its clients about investment opportunities.  It was based in Memphis, Tennessee, and its moving force was William Wells who had worked for many years in the Private Wealth Division of Goldman Sachs.  Mr Wang mentioned to Mr Wells that he had a potential investment opportunity in a Chinese security systems company operating in the PRC.  PAM had previously invested in another Chinese security systems company operating in the PRC, and so Mr Wells asked Mr Wang to set up a meeting with his contact.  That contact turned out to be Mr Ing. When Mr Ing was told by Mr Wang of PAM’s possible interest in investing in CAHL, he was concerned that Mr Wang might have disclosed things about CAHL to Mr Wells in breach of a non‑disclosure agreement which the SBI Group had signed with CAHL, but he did not take that any further because he understood from Mr Wang that PAM was interested in investing in CAHL as a co‑investor with the SBI Group.  In fact, Mr Wells was not interested in a co‑investment with the SBI Group, though he thought that the SBI Group might be interested in investing in CAHL in its own right.

12. Mr Wells and Mr Ing met in Beijing towards the end of May 2004.  Mr Qin and Mr Wang were there as well.  Mr Wells claims that Mr Ing promoted CAHL as a business which was significantly further developed than turned out to be the case, and that Mr Ing provided him with very aggressive targets which he expected CAHL to achieve in the short term but which turned out to be unduly optimistic.  Mr Ing denies that, but his case is that whatever was said, it was for Mr Wells to carry out his own due diligence on CAHL.  In any event, since the representations on which the plaintiffs’ action is based relate to CAHL’s expenditure and to what it would use any investment capital for, and do not include any allegations that Mr Ing made inflated claims about the nature of CAHL’s business or inflated forecasts about its future prospects, that is not a topic which I need to address.  What is plain, though, as Mr Wells was himself to admit, is that he never focused on the “specifics” about which operating company did what.  He was aware, of course, that CAHL was providing the funds for the Safe City Project, but he did not pay much attention to which of the two operating companies, Beijing Alarm or Beijing Electronics, was the company which was to handle that project, or which of them was the company which had operated the original business.

13. Mr Wells was aware that other companies were said to be thinking of investing in CAHL.  They included General Electric and AIG.  So on 5 June 2004 Mr Wang sent Mr Ing a term sheet, copying his e‑mail to Mr Wells.  It was not among the documents included in the trial bundle.  If it was, it was not drawn to my attention, but I assume that it set out in broad terms the basis on which Mr Wang and Mr Wells might be prepared to invest in CAHL.  Mr Ing informed Mr Wells on 21 June 2004 that he had got “preliminary agreement” from CAHL’s board to accept Mr Wells’ terms subject, of course, to Mr Wells’ own due diligence, and on 26 June 2004 Mr Wang sent Mr Ing a document headed “Suggested Due Diligence Request List”, identifying the areas on which information was required.  Mr Wells was copied into this e‑mail.  Mr Ing responded on 2 July 2004.  He told Mr Wang that he would be preparing a memorandum which would include all the information on the list.

B.5  The confidential memorandum

14. The confidential memorandum which was prepared on CAHL is an important document because it contained a number of the representations relied on by the plaintiffs.  I shall refer to it from now on as the memorandum.  It was drafted by Artie Ng, a financial analyst with one of the companies in a group of companies known as the Warp Group of Companies, though it was Mr Ing who provided Mr Ng with the information about CAHL which was to be included in the memorandum.  It looks as if the memorandum went through a number of drafts, because the relevant draft for present purposes (the relevant one because it was the one provided to Mr Wells) was headed “Final Draft”.  It was dated 20 July 2004.  It was sent to Mr Wang by Lancy Lee, who I think was Mr Ing’s PA at the time, by letter dated 21 July 2014.  A copy was sent to Mr Wells.  I shall return to this document at some length later in this judgment, but it is important to note that it was intended to have a very limited circulation.  It stated that it had “been prepared … solely for the benefit of a limited number of sophisticated investors …”, and it contemplated that the form which any investment would take would be the subscription for shares in CAHL.

B.6  Due diligence on CAHL

15. Mr Wang and Mr Wells carried out their own due diligence on CAHL.  That is relevant because one of the things advanced by Mr Ing in his defence is that such representations as were made in the memorandum are not material as Mr Wells relied on the due diligence carried out on CAHL when deciding whether to invest in it.  That would have been much more important if the representations on which the plaintiffs’ action is based had included allegations that Mr Ing had made inflated claims about the nature of CAHL’s business or inflated forecasts about its future prospects.  Having said that, one of the things which Mr Wells did was to request Dennis Li of Multivision Intelligence Surveillance Ltd (“Multivision”) to carry out an evaluation of CAHL’s business for him.  When Mr Wells told Mr Ing that, Mr Ing was concerned that Multivision might become a competitor of CAHL in some respects, and he therefore wanted Multivision to sign a non‑disclosure agreement in the way that the SBI Group had.  Mr Li was content for Multivision to do that, and he met Mr Ing towards the end of August 2004.  He then relayed to Mr Wells some of the information which Mr Ing had given him about CAHL.  Ironically, Mr Li told Mr Wells that if Mr Wells wanted to invest in China‑related security companies, Multivision was a much better choice!

16. There is an issue about what Mr Wells was most interested to know about at this stage.  Mr Wang had previously told Mr Ing that of “most concern” to him “was the relationship with current and future customers”, which I take to mean what the order book was like.  Mr Wells’ evidence was that that was important to him, though perhaps not of the most concern.  He did not say what was of most concern to him, and his claim that the state of the order book was not his principal concern does not sit easily with what he said in an e‑mail to Mr Ing on 2 September 2004, which was that the most critical issue for him was “the status of the new orders”. I am sure that that was what was uppermost in Mr Wells’ mind at the time.  As it was, in that e‑mail Mr Wells had asked for information on three particular topics, and Mr Ing sent Mr Wells a detailed response a few days later.  In it he confirmed that CAHL was the only company which had been designated to handle the security network feature of the Safe City Project.

17. By the end of September 2004, Mr Wang had decided not to invest in CAHL, though he was to tell Mr Wells that he believed that Mr Li had been impressed with CAHL’s operations.  That was in line with what Mr Li was telling Mr Wells.  Indeed, on 31 December 2004, Mr Wang told Mr Wells that both he and Mr Li were convinced that what Mr Ing was saying about the contracts which CAHL had with the Beijing Police Bureau was true, and that the risk lay in “execution”, by which he meant, I assume, that the risk was whether CAHL could deliver what it had contractually agreed to do.  Mr Wang thought that if CAHL could raise at least US$40 million that risk would be mitigated.

B.7  The memorandum of understanding

18. By the beginning of 2005, Mr Wells had decided to invest up to US$10 million in CAHL subject to finalizing the terms of the investment and the approval of PAM’s clients.  He and Mr Ing signed a memorandum of understanding to that effect dated 5 January 2005.  It is not clear whether Mr Wells had previously been thinking of investing in CAHL by acquiring shares in it, but by then he had settled on a more cautious approach.  The investment would take the form of convertible notes by which a loan would be made to CAHL with an option to convert the amount of the loan into shares in CAHL at an agreed price.  The summary of terms attached to the memorandum of understanding said that the proceeds of the loan would be used by CAHL “for developing security infrastructure systems and network in Beijing and general working capital purposes”.

B.8  Protection from excessive payments

19. One of the things which Mr Wells wanted was some assurance that CAHL had not entered into unduly onerous arrangements with members of its management.  Accordingly, on 25 January 2005, he e‑mailed Raymond Chui, who was to become CAHL’s Chief Financial Officer, asking for a provision to be added to the final agreement “to protect us from loans or excessive compensation payments to management that would be of such a significant degree to be beyond the normal course of operations”.  Mr Ing was sent a copy of that e‑mail.  As we shall see, two clauses were added to the agreements to meet that concern.

B.9  The first subscription agreement

20. Mr Wells decided that PAM should invest in CAHL through a new company incorporated for that purpose.  That company was the First Plaintiff, China Alarm Holdings Acquisition LLC (“CAHA”), which was incorporated on 1 February 2005.  The subscription agreement was therefore between CAHA and CAHL.  It was dated 8 February 2005.  It was signed by Mr Wells on behalf of CAHA and by Mr Ing on behalf of CAHL.  CAHA agreed to subscribe for convertible notes comprising a principal amount of US$10 million to be issued by CAHL.  On their maturity on 8 February 2008 CAHA would be entitled to the return of its investment plus interest at 2% per annum if it had not in the meantime elected to convert any part of the loan into shares in CAHL.  In clause 4 of the agreement, CAHL gave CAHA a number of undertakings, and schedule 2 to the agreement contained a number of warranties given to CAHA by CAHL.  Appendix 1 to the agreement was a note instrument, clause 10 of which contained a number of covenants which CAHL gave to CAHA.  I shall have to come back to these undertakings, warranties and covenants later in this judgment since they included a number of representations on which Mr Wells claims to have relied.  All that I need say at present is that in clause 10(l) of the note instrument CAHL covenanted to provide to all its noteholders CAHL’s audited annual financial statements within 90 days after the end of each fiscal year of CAHL.  The US$10 million was remitted to CAHL in two tranches over the next few weeks.

B.10 Mr Wells joins CAHL’s board

21. Prior to the completion of the first subscription agreement, Mr Wells had told Mr Ing that he wanted PAM to be represented on CAHL’s board.  He said that he was not expecting to convert the loan into shares until the notes matured in 2008, but he still wanted a presence at board level.  It is relatively unusual for a mere lender to have such a presence, but Mr Ing was content for that to happen, and Mr Wells became a director of CAHL on 1 March 2005.

B.11 Mr Wang’s advisory role

22. In addition, on 8 April 2005, CAHL agreed to engage Mr Wang for 12 months as a financial adviser.  He was to be paid US$75,000 at once together with warrants to purchase shares in CAHL.  PAM paid half of that, although there had never been any formal agreement for Mr Wang to be paid a “finder’s fee” or commission for introducing CAHL to Mr Wells. I am sure that this agreement was, in part at least, a device to compensate Mr Wang for the time he had spent investigating CAHL, even if he may have been doing that not just for PAM but also for the SBI Group. 

B.12 The financial information provided to Mr Wells in 2005

23. Mr Wells attended his first board meeting of CAHL on 29 March 2005.  A slide presentation to the Board showed that the plan was for an interest in Beijing Electronics equivalent to Mr Ing’s interest in it to be acquired by CAHL for a nominal price.  Indeed, Beijing Electronics had been included as a subsidiary of CAHL in a chart in the memorandum setting out the proposed corporate structure.  Whether the proposal to acquire Beijing Electronics at a nominal price included Mr Qin’s interest in it is not known.  He was not on the Board of CAHL, and therefore was not at this meeting.  The presentation also included a projection which forecast revenue of US$307.2 million in 2006 and US$477 million in 2007.  Since the projection started from a nil base in 2005, these must have been the projected profits for the business of Beijing Alarm alone.  This projection mirrored the figures for 2006 and 2007 in a projection which Mr Ing sent Mr Wells a few days later.  That forecast revenue of US$306.6 million in 2006 and US$475.98 million in 2007.  In addition, this projection forecast revenue of US$82.95 million in 2005, though it did not say whether the figures in it related to the business of Beijing Electronics as well as the business of Beijing Alarm, or just the business of Beijing Alarm.

24. On 21 September 2005, Mr Ing sent Mr Wells the unaudited management accounts for CAHL for the first six months of 2005. The consolidated balance sheet showed a liability of about HK$77 million to “a related company”, which Mr Wells assumed represented the amount due to CAHA under the convertible notes.  Mr Wells was understandably more concerned about whether his assumption was correct than the figure of about HK$6.1 million for CAHL’s general and administrative expenses which the consolidated profit and loss statement revealed.  He noticed that those expenses greatly exceeded the revenue of HK$582,100, but it was the low figure for revenue which he was more concerned about than the high figure for expenses: why was CAHL’s revenue so disappointing compared with the revenue which had been forecast, admittedly for the whole of 2005, earlier in the year?

25. On 20 February 2006, Mr Ing sent Mr Wells the latest financial projections for CAHL.  These projections were more modest for 2006 than the previous one.  They forecast revenue of US$168.91 million in 2006.  However, they were even more optimistic for 2007.  They forecast revenue of US$884.78 million in 2007.  The projections also forecast general operating expenses of US$19.32 million for 2006 and US$42.87 million for 2007.  Mr Wells noticed that the projections for general operating expenses increased year by year, but not at the same rate as the projected revenue.  He took that to mean that the projections were based on higher margins.  He suspected that the projections were neither likely nor realistic, but he hoped that the profits would be large enough to justify the investment. He accepted that he did not specifically ask Mr Ing at any time prior to the early part of 2006 for details of the operating expenses.  His focus at all times was on revenue.  Everything else was secondary.  I have no doubt that this was the case.

B.13 The second subscription agreement

26. Despite his suspicions about the projections, Mr Wells decided that it was worth making an additional investment in CAHL.  He chose to make it through another company incorporated for the purpose of making investments on behalf of PAM’s clients.  That company was the Second Plaintiff, Pope Investments LLC (“PIL”).  This subscription agreement was therefore between PIL and CAHL.  It was dated 3 March 2006.  It too was signed by Mr Wells on behalf of PIL and Mr Ing on behalf of CAHL.  It followed in all material respects the same format as the first subscription agreement, save that (a) the principal amount was US$5,555,561, not US$10 million, (b) the notes matured on 3 March 2009, and (c) the sum for which the notes could be converted into shares was almost twice as much in the second agreement than in the first.  The undertakings, warranties and covenants were all the same.  The sum of US$5,555,561 was remitted to CAHL a week or so later.

B.14 The financial information provided to Mr Wells thereafter

27. On 16 May 2006, Eppie Tseng, CAHL’s new financial controller, sent Mr Wells management accounts for CAHL for the first quarter of 2006.  They showed revenue of RMB11.3 million and general and administrative expenses of RMB1.69 million.  Mr Wells did not pay particular attention to the amount of the expenditure.  He assumed that it related to the operations in Beijing.  But he thought that the figure for revenue was very disappointing, and he asked Mr Ing for the projections for the last three quarters of 2006.  Mr Ing replied that they were still on target to make US$30 million.  He must have been referring to profit rather than revenue, since the Board had been told on 27 February 2006 that CAHL was aiming for a profit of US$29 million in 2006.  In a later e‑mail the same day, Mr Ing told Mr Wells that CAHL still had US$6.5 million in the bank.  That meant, of course, that at least US$9 million of the sums invested by CAHA and PIL had been spent, but again Mr Wells assumed that the money had been spent on the Beijing operations.  At all times, Mr Ing was talking up CAHL, referring to the “huge gain” which Mr Wells’ investors would be making, and the “diamond mine” they had in their hands.  He spoke of the potential of the business for growth as being beyond what they could have imagined a year or so earlier.

28. The e‑mail exchanges between Mr Wells and Mr Ing show that an initial public offering was being contemplated.  In that connection, Mr Wells was telling Mr Ing that audited accounts for CAHL were critical — in addition to management information in the form of monthly sales figures and quarterly results.  Indeed, an exchange of e‑mails later on shows that Mr Wells was under the impression that the Board had resolved that they be prepared.  Mr Ing thought otherwise.  As it was, the management accounts for the first six months of 2006 (which Mr Ing sent to Mr Wells on 27 July 2006) continued to show disappointing results. Revenue was RMB13.6 million, what was described as “cost of main operation” (which I take to mean the operating expenses in Beijing) was RMB9.97 million, general and administrative expenses were RMB10.59 million, and there was a net loss of RMB7.69 million.  The general and administrative expenses were obviously significant, though Mr Wells did not recall asking Mr Ing about them.  As always, his focus was on the revenue.  Having said that, an exchange of e‑mails between Mr Wells and Mr Ing at the beginning of August 2006 shows that Mr Wells even at that stage was not discounting the possibility of investing further in CAHL, subject to an appropriate conversion price being agreed.

B.15 The 2006 shareholders’ report

29. Mr Chui and Ms Tseng prepared CAHL’s shareholders’ report for 2006.  It was dated 14 February 2007.  It included unaudited combined profit and loss accounts for the year ending 31 December 2006. They showed revenue of RMB3.05 million for 2005 and RMB6.24 million for 2006, general and administrative expenses of RMB18.97 million for 2005 and RMB21.19 million for 2006, and a net loss of RMB17.43 million for 2005 and RMB18.53 million for 2006.  When Mr Wells received the report, he made notes on it.  One of them asked his assistant to review the “initial doc[ument]s” (which I take to mean the documents originally sent to Mr Wells, primarily if not exclusively the memorandum, providing him with information about CAHL) and subsequent correspondence “to see if [there was] fraud or [just] over‑optimism (if we can tell yet)”.  It is plain that he wanted to know whether Mr Ing had simply been over‑optimistic in his projections about CAHL’s growth or whether Mr Ing had fraudulently misrepresented what its projections for growth were.

B.16 Audited financial statements

30. The unaudited accounts in the shareholders’ report prompted Mr Wells to bring up again a topic which he had previously raised: the absence of audited accounts for 2005, and now the absence of audited accounts for 2006, even though the subscription agreements had provided for CAHL’s noteholders to be provided with annual financial statements by the following 31 March.  On 18 May 2006 Mr Ing had mentioned one particular firm of accountants, Horvath, who would be working with Ms Tseng on the audit.  No audited accounts had been produced, but Mr Ing told Mr Wells on 3 April 2007 that the accounting year had been changed from the calendar year to the year ending 30 June, and that CAHL was “in the process of engaging” Deloittes to provide audited accounts for the two years ending on 30 June 2007.  Later in the year — on 5 November 2007 — Mr Ing was to tell Mr Wells that Ernst & Young had been engaged “to do the audit from the start of the Company up to 30 June 2007”, and my attention has not been drawn to anything in the evidence which explains why Horvath and Deloittes were replaced.

B.17 Mr Wells’ resignation from the Board

31. On 6 October 2007, Mr Wells resigned from the Board of CAHL with immediate effect.  His principal reason for doing so, I think, was that a very large hedge fund, Citadel Equity Fund Ltd (“Citadel”), was about to make a substantial investment in CAHL, and Mr Wells did not want to run the risk of incurring any personal liability as a director of CAHL.  That accords with what Mr Ing says Mr Wells told him at the time.  Mr Wells was concerned for his own position if it were to transpire that other investors had been induced to invest in CAHL as a result of misrepresentations about its prospects.  That is consistent with his letter of resignation in which he asked for either an advisory role or the same form of observer status as had been negotiated with Citadel, and for such rights as PAM had to nominate someone to the Board to be maintained.

32. Mr Wells was still concerned over what he described as CAHL’s “lack of accountability”.  Ms Tseng had e‑mailed him on 13 October 2007 complaining about the hedge fund’s style of negotiating and bringing Mr Wells up to speed on CAHL’s various projects.  But in his reply of 15 October 2007, Mr Wells reiterated the failure to provide him with audited financial statements and monthly figures for revenue.  He complained that he did not have “the visibility” into CAHL which he would have liked, and did not “fully” understand why CAHL had not become profitable yet despite the very significant injection of investment capital.

B.18 The Citadel and UBS investments

33. On 18 October 2007, Citadel and UBS AG (“UBS”) agreed to subscribe for convertible notes amounting to US$50 million to be issued by CAHL — US$45 million in the case of Citadel, and US$5 million in the case of UBS.  The terms on which Citadel had previously said that it would subscribe for the notes notionally valued CAHL at US$325 million.  However, in July 2008, Citadel asked Mr Ing to redeem its convertible notes early because of the financial crisis in the US at the time.  Mr Ing was reluctant to do that as in that event CAHL would not be able to repay CAHA the sums due under the first subscription agreement on the date when CAHA’s convertible notes matured (which was 30 September 2008, CAHA having extended the maturity date earlier in 2008).  Mr Ing eventually agreed to do so, but only because Mr Wells had said that there was no reason why CAHA would not extend the maturity date if the interest payable by CAHL to CAHA was increased to a reasonable rate.  As a result, CAHL agreed to repay US$30 million to Citadel.  At the same time, UBS assigned to Citadel all its rights in the convertible notes issued to it, and subsequently Citadel assigned to PIL all its remaining rights in the convertible notes issued to it and to UBS amounting to US$20 million at a heavily discounted price of US$3.5 million.  The repayment of the US$30 million meant that about US$35.5 million was still owed by CAHL under the convertible notes excluding interest: the US$10 million to CAHA under the first subscription agreement, the sum of about US$5.5 million to PIL under the second subscription agreement, and the balance of US$20 million to Citadel (though later to PIL) under the convertible notes originally issued to Citadel and UBS.

B.19 The events leading to the appointment of the liquidators

34. During 2008, Mr Wells made occasional attempts to obtain the financial information he wanted about CAHL.  He never got any audited accounts, and he eventually decided that it would not be worth spending more of his time on CAHL.  Instead, he decided to wait for the maturity date for the convertible notes and then call in the loans.  Mr Wells was not prepared to tie up so much capital at so low a rate of interest any longer.

35. By the end of August 2008, Mr Ing was telling Mr Wells that CAHL would not be able to redeem any of the notes, but it is nevertheless suggested that Mr Wells still thought that CAHL had the potential for profitability.  Indeed, a few days after the notes matured, Mr Wells offered to extend the maturity date of the notes and keep Mr Ing on as the CEO of CAHL if PAM got 51% of the equity in CAHL and had control of the Board. For my part, I do not believe that that was because Mr Wells was still confident about CAHL’s future.  Rather it was because he thought that this afforded him a better chance of recouping his investment.  If PAM had control of CAHL, it could decide whether Mr Ing should remain as its CEO.

36. In the event, Mr Ing did not accept the offer, and on 20 October 2008, Mr Wells caused CAHA and PIL to serve default notices on CAHL and to demand repayment of the loans.  (Although the maturity date under the second subscription agreement had not arrived, that agreement had permitted PIL to demand repayment of its loan if CAHL defaulted on its agreement with CAHA.)  CAHL did not satisfy the demand, and on 14 September 2009 CAHL was wound up and Mr Borrelli was appointed one of the two joint liquidators of CAHL.  Following their investigations into the affairs of CAHL, the liquidators accepted that CAHA and PIL were the only creditors of CAHL. The debts which the liquidators found proved were (a) US$11,836,649 due to CAHA representing the outstanding principal and interest under the first subscription agreement, (b) US$6,542,798 due to PIL representing the outstanding principal and interest under the second subscription agreement, and (c) US$21,743,021 due to PIL representing the outstanding principal and interest under the convertible notes issued to Citadel and UBS.

B.20 The restructuring of CAHL and its subsidiaries

37. It will be recalled that Beijing Alarm was the company which was to handle the Safe City Project.  As I have said, Mr Qin had a 20% shareholding in it through Beijing Information Technology, and Mr Ing’s interest in it was held by CAHL, which had an 80% shareholding in it. Following the appointment of the liquidators, Mr Borrelli met Mr Qin. Mr Qin accepted that Beijing Alarm had received about US$20.5 million of the sums invested in CAHL, and the money had been used to develop the business in Beijing, but he claimed not to have known what had happened to the other US$15 million.  The liquidators proceeded on the assumption that Beijing Alarm had only received about US$20.5 million, and decided to restructure CAHL and Beijing Alarm in a way which enabled Mr Qin to continue developing Beijing Alarm’s business.

38. The restructuring involved a complicated series of transactions, but reduced to their minimum, Mr Qin caused a new company to be incorporated in the Cayman Islands.  That was China Alarm International Holdings Ltd (“CAIHL”).  Thereafter on 24 June 2010, the liquidators caused CAHL to transfer its 80% shareholding in Beijing Alarm to CAIHL for US$20.5 million, having undertaken due diligence of Beijing Alarm with Mr Qin’s assistance which confirmed that US$20.5 million was a reasonable valuation of that shareholding.  At the same time, CAIHL issued to CAHL a convertible bond for US$20.5 million, the bond being convertible into a 22.5% shareholding in CAIHL after three years.  Also at the same time, the liquidators transferred that bond to PIL in exchange for the reduction of the claims against CAHL.  The restructuring was completed on 16 July 2010.  Its effect was that (a) Mr Qin through CAIHL became the sole owner of Beijing Alarm, and could run its business on his own, (b) CAIHL became PIL’s debtor in place of CAHL in respect of the US$20.5 which had actually been invested in Beijing Alarm, (c) PIL had the opportunity to share in such success as CAIHL made of Beijing Alarm’s business, and (d) CAHL’s debts were reduced by US$20.5 million.  Mr Ing was left out in the cold since CAHL’s principal asset — its 80% shareholding in Beijing Alarm — had been transferred to CAIHL.

39. In fact, CAHL had another asset.  It owned the entire shareholding in China Alarm (HK) Holdings Ltd (“CAHKL”), a company incorporated in Hong Kong.  Following their appointment, the liquidators discovered that Beijing Alarm had issued proceedings in Beijing seeking the recovery of US$5.5 million allegedly lent to CAHL by Beijing Alarm, a loan which CAHL had allegedly assigned to CAHKL for no apparent consideration. These proceedings were discontinued by the liquidators as part of the restructuring of CAHL and its subsidiaries, and the assets of CAHKL were realised.

C. CAHL’S AGREEMENTS WITH WCL AND STORNAWAY

40. So much for the background, and I now come to the core of the case.  In the course of their investigations, the liquidators discovered the existence of two agreements made between CAHL and companies controlled by Mr Ing — Warp Cybertech Ltd (“WCL”) and Stornaway.  There is an issue whether copies of these agreements were ever sent to Mr Wells and whether he ever knew about them.  I shall return to that later.  For the moment, all I need to say is that Mr Wells claims that he had no idea of their existence until the liquidators told him about them.  I deal with the two agreements in the order in which they were entered into, but the important feature of both of them is that they resulted in very substantial payments being made over the years to companies in which Mr Ing had a controlling interest.  The critical question is whether Mr Ing’s failure to disclose them to Mr Wells (on the assumption, of course, that they were not disclosed) rendered various representations in the memorandum and the two subscription agreements false, and whether Mr Wells was deliberately intending to conceal from Mr Wells the payments which CAHL would be making under them so as to render those representations fraudulent as well.

C.1  The services agreement with WCL

41. The agreement with WCL was dated 12 January 2004.  I shall refer to it as the services agreement from now on.  It was made between CAHL (although CAHL had not yet changed its name from Novel Idea Holdings Ltd) and WCL.  WCL was a company incorporated in Hong Kong and was one of the companies in the Warp Group of Companies.  It was indirectly controlled by Mr Ing through Stornaway and WP Assets Holdings Ltd (“WPL”), a company incorporated in the British Virgin Islands like CAHL.  That is because (a) as noted in [9] above, Mr Ing was the sole shareholder in Stornaway which had a 1% shareholding in WCL, (b) Mr Ing was the majority shareholder in WPL, and (c) WPL owned 99% of the shareholding in WCL.  Indeed, the e‑mail address which Mr Ing used to get in touch with Mr Wells was alexing@warpgroup.com.

42. Under the services agreement, CAHL agreed to engage WCL to provide various services to CAHL for a period of three years from July 2004 to the end of December 2006.  Those services were described in clause 3 of the agreement as:

“… management and consultancy services to support [CAHL’s] business which shall consists [sic] of business development in international and China domestic market; corporate financial including merger and acquisitions and private placement in either equity or debts; and legal and financial supports [sic] to its operations in Beijing or in such other cities of the People’s Republic of China as the circumstances shall permit. The scope will be varied from time to time based on the Company’s actual requirements and the fees will be adjusted accordingly based on any expansion of the scope.”

43. The fees for these services were set out in an appendix to the agreement.  They increased every six months during the currency of the agreement:

(a) HK$300,000 a month for January – June 2004

(b) HK$400,000 a month for July – December 2004

(c) HK$500,000 a month for January – June 2005

(d) HK$550,000 a month for July – December 2005

(e) HK$1,000,000 a month for January – June 2006

(f) HK$1,350,000 a month for July – December 2006

It meant that WCL’s fees would be HK$4.2 million for 2004, HK$6.3 million for 2005 and HK$14.1 million for 2006 — a total of HK$24.6 million for the lifetime of the agreement.  Clause 4 of the agreement provided that in addition CAHL had to pay “for all disbursements incurred in connection with the performance of [WCL’s] services hereunder”, though the appendix to the agreement appeared to limit those disbursements to “any other special disbursement incurred”.

C.2  The application to amend

44. In the course of his cross‑examination, Mr Ing was asked many questions about the precise nature of the services WCL provided under this agreement.  One of the things which he referred to were payments to “special consultants” who were used to “open doors” in the PRC in the same way as lobbyists are used in the US.  And when he was asked what proportion of the fees paid under the services agreement had been paid to these special consultants for that purpose, he said “probably more than half”.  That prompted Mr Lam to apply for leave to amend the Statement of Claim to allege that at least one of the main purposes of the services agreement was to channel funds for bribes to be paid to government officials in the PRC through these special consultants, and that Mr Wells would never have invested in CAHL had he known that that was what CAHL was sanctioning.  Ms Roxanne Ismail SC for Mr Ing opposed that application to amend.  I granted it, saying that I would give my reasons for doing so in my judgment.  That I now do.

45. Ms Ismail took three points.  The first was that Mr Ing’s evidence was not entirely new as Ms Tseng had referred in her witness statement to the need to incur substantial entertainment expenses if you are doing business in the PRC.  Indeed, Mr Lam had himself said when cross‑examining Mr Ing that everyone knows what doing business in the PRC involves.  Secondly, the allegation added little to the case because it had already been alleged that the proceeds of the investments had been used for purposes other than those contemplated by the memorandum and the two subscription agreements.  Finally, Ms Ismail reminded me that a critical component in the case would be the impact which this revelation would have had on Mr Wells had he known about it before deciding to invest in CAHL.  So if the amendment were to be allowed, he would have to be recalled to give evidence, with all the inconvenience which that would involve as he lived in the US.

46. I was not persuaded by these arguments. There is a difference between entertaining people with a view to creating the sort of congenial atmosphere which might make them more likely to want to do business with you, and paying them bribes to induce them to conclude agreements with you which they might well not have done otherwise.  The new allegation added significantly to the suggestion that the proceeds of the investments had been used for purposes for which they had not been intended.  And although it would be necessary for a date to be fixed for Mr Wells to give evidence (whether by flying to Hong Kong or via a video link), the inconvenience and expense of doing that was modest in the context of the case as a whole.

C.3  The employment agreement with Stornaway

47. The agreement with Stornaway was dated 1 March 2004.  I shall refer to it as the employment agreement from now on.  It was made between CAHL and Stornaway.  Under the agreement, CAHL agreed to employ Mr Ing as its CEO for three years from 1 March 2004.  A schedule to the agreement required Mr Ing to oversee all aspects of CAHL’s operations, and his duties included responsibility for a variety of topics, including business development and fundraising.  His remuneration consisted of a basic salary of US$300,000 a year, and benefits which included a housing allowance of HK$60,000 a month, executive travel and worldwide medical insurance cover, participation in CAHL’s Mandatory Provident Fund scheme and participation in CAHL’s stock option plan.  He would also be paid a bonus of US$100,000 dependent on his performance and what was described as “meeting the business plan and financial conditions of the Company”.  The agreement did not state the frequency of his entitlement to that bonus, but one can safely assume, I think, that it was intended to be paid annually if the conditions were met.  As it turned out, Mr Ing was not paid his remuneration immediately. He did not start to be paid it until April 2005, but he then received the accrued remuneration he had earned since 1 March 2004.

D. THE REPRESENTATIONS ON WHICH THE PLAINTIFFS RELY

D.1  The representations in the memorandum

48. The memorandum was only a draft, albeit a final draft, but still just a draft.  Not only did that appear on the top of the memorandum, but it was in the body of the memorandum as well when it added that it was “subject to completion, revision and amendment”.  The memorandum was also hedged with disclaimers of one kind or another.  It informed potential investors that “no reliance [could] be placed for any purpose whatsoever on the information contained in [it or] its completeness”, and it was not to be “relied on in connection with … any contract” for the subscription of shares in CAHL. It reminded them that their subscription for such shares had to be based “solely on … the information contained in the final document which may be different from the information contained in this document”.  It cautioned them, in effect, not to assume that the information in the document was complete by telling them that it did “not purport to be all‑inclusive or contain all of the information” which potential investors may need.  And it added that they were expected to conduct their own evaluation of the “investment opportunity” as well as “the data” in the memorandum, although in respect of the latter, it went on to say that potential investors could assume that the information in the memorandum was accurate as at the date of it.

49. I shall return to the effect of these statements later, and I confine myself at present to setting out the two representations in the memorandum on which the plaintiffs rely.  The first is under the heading “Compensation of Director and Chief Officer” and reads:

“Aside from stock ownership and options Alex Ing will receive compensation at a rate of US$300,000 per annum under a management agreement. Compensation under this contract will not be earned until this financing is complete and the Company has shown profits. It is contemplated that each director will receive options in the Company commensurate with accepted industry practices.”

I shall refer to this statement as “the compensation clause”.  This representation was alleged in the Amended Statement of Claim to have been false because (i) Mr Ing’s compensation exceeded US$300,000 a year when his housing allowance of HK$60,000 a month is taken into account, (ii) the compensation clause did not mention the bonus of US$100,000 which Mr Ing was entitled to if the conditions for its payment were met, and (iii) there was no requirement in the employment agreement that Mr Ing’s compensation would not be earned until “the Company”, ie CAHL, had become profitable.

50. The second statement in the memorandum on which the plaintiffs rely is under the heading “Use of Proceeds” and reads:

“The net proceeds from the Offering, after deducting all expenses, are estimated to be approximately US$92,000,000 [sic]. The remainder of the net proceeds will be used for working capital, general corporate purposes, including the expansion of offices and hiring of appropriate staffing, hiring of additional senior management, marketing, production of security network equipment, monitoring center, initial community security network hardware purchase, and other operating expenses.”

I shall refer to this statement as “the use of proceeds clause”.  This representation was alleged in the Amended Statement of Claim to have been false because (i) the services agreement was in reality “a guise [for] the payment of very substantial sums to Mr Ing and/or his corporate vehicle, WCL, purportedly as compensation for services provided by him”, or (ii) at least one of the main purposes of the services agreement was to channel funds for bribes to be paid to corrupt government officials in the PRC through what was euphemistically described by Mr Ing as “special consultants”.  Payments for either of these purposes could not be said to come within any of the uses to which the proceeds of the investments could be put.

51. Three things should be added here.  First, the reference to US$92,000,000 was an error.  Mr Wells was not entirely convinced of that, but I have no doubt that it was.  The statement should have referred to US$9,200,000.  Secondly, there is another statement in the memorandum dealing with the same topic and headed “Use of Proceeds”.  Its language is similar though not identical, and Mr Lam conceded that it added nothing to the use of proceeds clause on which the plaintiffs rely. Thirdly, the representations in the memorandum (and as we shall see the representations in the two subscription agreements) were made by CAHL.  In law, though, a director of a company will be liable for a tort committed by the company if he procures the commission of that tort.  Mr Ing was the moving force behind CAHL, and it has not been suggested that Mr Ing did not procure CAHL to make the representations which it did.

D.2  The representations in the two subscription agreements

52. The two subscription agreements contained a clause similar in effect to the use of proceeds clause in the memorandum.  It is clause 4.1 and reads:

“[CAHL] agrees that the proceeds received in connection with the subscription of the Notes shall be used for the purpose of developing security infrastructure systems and networks in Beijing, People’s Republic of China and for general working capital purposes.”

This representation was alleged in the Amended Statement of Claim to have been false for the same reasons as the use of proceeds clause in the memorandum is alleged to have been false.

53. All the other representations relied on by the plaintiffs are among the warranties in Schedule 2 to each of the agreements.  Four such representations are relied on.  Two of them warranted in different language that CAHL had carried on its business normally and had not incurred any unusual liabilities or made any unusual payments.  They are clauses 8.1(1) and 9.1(9).  They read:

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

“9.1(9) [Neither CAHL nor its subsidiaries] is a party to any agreement, transaction, obligation, commitment, understanding, arrangement or liability which … is in any way otherwise than in the ordinary and proper course of [CAHL’s and its subsidiaries’] business.”

The third representation warranted that CAHL had not entered into any transactions which involved onerous or unusual expenditure.  That is clause 9.1(4).  It reads:

“[Neither CAHL nor its subsidiaries] is a party to any agreement, transaction, obligation, commitment, understanding, arrangement or liability which … involves or is likely to involve obligations, restrictions, expenditure or receipts of an unusual, onerous or exceptional nature …”

These representations were alleged in the Amended Statement of Claim to have been false on the basis that the services agreement was not a transaction in the ordinary or proper course of CAHL’s business and involved expenditure “of an unusual, onerous or exceptional nature”. Three reasons were advanced in the Amended Statement of Claim for those assertions.  First, the services agreements was an agreement with a  company in which Mr Ing had a substantial interest, and it was therefore an agreement of a kind which had had to be disclosed and approved by the shareholders of CAHL.  Secondly, the services agreement provided for very substantial amounts to be paid by CAHL in return for what the Amended Statement of Claim described as “no conceivable benefit to CAHL”.  Thirdly, as had previously been alleged, at least one of the main purposes of the services agreement had been to channel funds for bribes to be paid.

54. Finally, clause 13.1 in the same schedule (confusingly there is no clause 13.2) did two things.  First, it warranted the truth of all the information given to the subscribers.  Secondly, it warranted that there had been full disclosure to them.  It is that latter warranty which is relevant.  Clause 13.1 reads:

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

The representation in this warranty was alleged in the Amended Statement of Claim to have been false because there were facts or matters which had not been disclosed but which should have been. Those facts and matters were the services and employment agreements.  Two allegations were pleaded in the Amended Statement of Claim.  First, the services and employment agreements rendered the representations in clauses 8.1(1), 9.1(4) and 9.1(9) that CAHL had carried on its business normally, had not incurred any unusual liabilities, had not made any unusual payments and had not entered into any transactions which involved onerous or unusual expenditure untrue, inaccurate or misleading.  Secondly, if they had been disclosed, they might reasonably have been expected to have influenced adversely Mr Wells’ decision to cause the plaintiffs to subscribe for the convertible notes under the two subscription agreements.

55. I said earlier that clauses were added to both the subscription agreements to meet Mr Wells’ concern about “loans or excessive compensation payments to management”.  They were in fact added to the note instruments appended to the agreements.  They are clauses 10.1(n) and 10.1(o) under the heading “Negative Covenants” and read:

“So long as any part of the Notes is outstanding, unless with the prior approval of the Majority Noteholders: …

(n) [CAHL] shall not make any loan or advance to [CAHL’s] directors or shareholders without the prior consent of the Majority Noteholders.

(o)  [CAHL] shall not make any excessive compensation or remuneration to the management, which will become unreasonable and beyond the normal course of operation when compared to other international operators in the same industry.”

These covenants are not directly relied on by the plaintiffs — no doubt, because they relate to commitments which CAHL might enter in the future.  Their concern related to whether CAHL had entered into such commitments in the past, and they must have thought that the warranties in clauses 8.1(1), 9.1(4) and 9.1(9) sufficiently protected them against that.  However, they serve to highlight the plaintiffs’ wish only to invest in a companywhich had not incurred unusual liabilities to its management.

E. WERE THE SERVICES AND EMPLOYMENT AGREEMENTS DISCLOSED TO MR WELLS?

56. One of the critical questions in the case is whether the services and employment agreements were disclosed to Mr Wells before the subscription agreements were entered into, or whether Mr Wells only heard about them from the liquidators after their appointment.  If they had been disclosed to Mr Wells at the time, that part of the plaintiffs’ case which depends on them not having been disclosed at the time falls away. It would not, of course, be the end of the case, because there are still the payments to the “special consultants” which emerged for the first time during the cross‑examination of Mr Ing.  Whether the services and employment agreements were disclosed at the time is the issue which I address now.

E.1  How were they disclosed and to whom?

57. It will be recalled that that Mr Wells requested Mr Li to meet Mr Ing in Beijing to discuss CAHL’s business.  When Mr Wang e‑mailed Mr Ing to thank him for seeing Mr Li, he asked Mr Ing to fax to Mr Wells and himself copies of “your contracts for diligence purposes”.  It is apparent from the context that Mr Wang was referring to such contracts as CAHL had secured with the authorities in the PRC.  Mr Ing’s first witness statement said in effect that it was in response to this e‑mail that he faxed “an information package to Mr Wells containing the requested documents”, and that among them were the services and employment agreements.  However, that did not sit easily with Mr Ing’s other claim in his first witness statement that this was in July 2004, since (a) Mr Li met Mr Wang towards the end of August 2004, and (b) Mr Wang’s e‑mail to Mr Ing thanking him for meeting Mr Li was sent on 31 August 2004.  Either Mr Ing got the date when he faxed the information package to Mr Wells wrong, or the information package was not sent in response to Mr Wang’s e‑mail of 31 August 2004 after all.

58. Mr Ing returned to the topic in his fifth supplemental witness statement.  It had not been in response to Mr Wang’s e‑mail of 31 August 2004 that the information package had been provided, he said.  It was in response to Mr Wang’s e‑mail of 26 June 2004 (referred to at [13] above) attaching a list of the topics which needed to be addressed for PAM to carry out due diligence on CAHL.  Those topics included “Use of proceeds for any capital raised”, “Board of Directors packages — last twelve months” and “Detailed assumptions related to operating expenses”.  Moreover, it was no longer being said that the information package containing the services and employment agreements had been faxed to Mr Wells.  Instead, it was said that they had been sent by fax or courier to Mr Wang/Mr Wells, which was itself ambiguous, and could have meant either that they had been sent to Mr Wang and Mr Wells, or that they had been sent to Mr Wang or Mr Wells.

59. Mr Ing later corrected something else, albeit on the assumption that the information package had been sent by fax rather than by courier.  He said that it had not been he who had faxed the information package to Mr Wells.  It had been faxed, he said, by his former secretary, May Liu.  That is hardly surprising.  You would not expect the CEO of a company like CAHL to have done that himself, though it would still have been a little careless for Mr Ing to say that he had faxed it.  He also said that the fax machine on which the information package had been sent had been taken by the liquidators, and they should therefore be able to access it to confirm that a fax had indeed been sent to Mr Wells at about that time.  Mr Ing later had to correct that as well when Mr Borrelli said that the liquidators had not taken the fax machine.  Mr Ing said that this information had come from Lancy Lee, but having spoken to her recently, he said that he had misunderstood what she had been telling him, which had actually been that the fax confirmation slips — which would usually be retained — had been in a box of “fax related materials” (as translated from Cantonese) which the liquidators had taken away.  I am not in the best position to judge whether a misunderstanding of that kind was likely since I am not a Cantonese speaker, and in the circumstances I have proceeded on the basis which is most favourable to Mr Ing, which is that this was an understandable misunderstanding.

60. Mr Lam pointed out that Ms Liu was not called to give evidence that she had faxed the information package to Mr Wells and that it had included the services and employment agreements, nor was Mr Wang called to give evidence that he had received the information package and that it had included the services and employment agreements, nor was Ms Lee called to give evidence that she had told Mr Ing only that a box of “fax related materials” had been taken by the liquidators.  I note that submission, but I do not rely on it.  No evidence was given about why they had not been called to give evidence, and it would be mere speculation on my part if I made any assumptions about what their evidence would have been if they had been called as witnesses, let alone if I assumed that they were not called to give evidence because it was known that they would not support what Mr Ing had said.  However, the changes in Mr Ing’s account mean that I should approach his evidence on the topic with at least a measure of caution, bearing in mind, of course, that just because someone has a less than perfect recollection of the details of something which took place many years ago, that does not begin to mean that everything they say on the topic has to be rejected.

E.2  Miscellaneous points

61. Some of the points made by Mr Lam on this issue I found unpersuasive.  For example, the memorandum included an appendix which incorporated what were described as “supporting documents”, and yet the services and employment agreements were not among therm.  The inference which I am being asked to draw is that they were not included there, either because they had not been brought into existence then, or because Mr Ing wanted to keep them secret.  I cannot draw that inference.  Having looked at the sort of documents which were included, I would not have expected the services or employment agreements to have been among them.  Again, Mr Lam submitted that if it was Mr Ing’s case that the information package had been sent to Mr Wang or Mr Li or both of them, that could not be treated as amounting to disclosure of the documents to Mr Wells as neither Mr Wang nor Mr Li could be treated as having been PAM’s agent in carrying out due diligence on CAHL.  After all, Mr Wang and Mr Li would have wanted the information package themselves because they were thinking of investing in CAHL at the time on behalf of the SBI Group and Multivision.  I cannot go along with that for two reasons.  First, I stand corrected, but I did not understand Mr Ing to be saying that the information package was sent to Mr Li. Secondly, to the extent that Mr Ing’s case was that he sent the information package to Mr Wang, he did not say that he sent it only to Mr Wang.  That is one reading of his fifth supplemental witness statement, but it is not the only reading of it, and there is no basis on which I should read Mr Wang/Mr Wells as meaning Mr Wang or Mr Wells rather than Mr Wang and Mr Wells.

62. Mr Lam argued that the minutes of the first board meeting of CAHL which Mr Wells attended — the one on 29 March 2005 — show that Mr Ing was concealing the existence of the services and employment agreements.  Para 3.5 of the minutes referred to Mr Ing’s statement that the “average monthly burnt rate” (which I take to mean CAHL’s expenditure) “for the operation” was about RMB500,000.  Mr Lam said that that could not be right because by then the monthly fees under the services agreement alone were HK$500,000, and there were all the other expenses associated with CAHL’s operations.  In addition, para 3.6 of the minutes referred to Mr Ing’s statement that the funds received from CAHA would be used “for major equipment and infrastructure networks purchase and installation ie electronic licensing plate monitoring stations surrounding Beijing”.  Mr Lam said that Mr Ing did not disclose that the funds were also to be used to pay his accrued remuneration under the employment agreement (which he had not yet received) or the fees due to WCL under the services agreement.  There is some force in these points, but I am not convinced by them.  I cannot tell whether the reference to “the operation” in para 3.5 is to the original business run by Beijing Electronics or the new business to be run by Beijing Alarm.  Nor can I tell whether Mr Ing’s statement in para 3.6 was intended to identify all the uses to which the funds would be put or just to some of them.

E.3  No mention of the employment agreement

63. Having said that, quite apart from Mr Wells’ denial that the services and employment agreements were disclosed to him, there are four reasons which, taken together, convince me that they were not.  First, although the memorandum referred in the compensation clause to a “management agreement” under which Mr Ing was to be paid US$300,000 a year, the memorandum did not mention that an employment agreement had already been concluded with Mr Ing.  The language of the compensation clause was sufficiently ambiguous to lead potential investors to think that an agreement relating to Mr Ing’s remuneration had not yet been concluded, and that it would be entered into at some time in the future, but only when sufficient funds had been raised for CAHL’s business to get off the ground and CAHL had begun to be profitable.  To be fair, that was not quite how Mr Wells understood it.  He was not so much concerned with whether an agreement had yet been concluded with Mr Ing.  He just thought that Mr Ing’s entitlement to his remuneration would be postponed until the financing of CAHL was complete and it had begun to make a profit.  I am sure that Mr Ing was trying to get across at least that message to potential investors. By disclosing the existence of the employment agreement and its terms, he would be contradicting the message he was trying to send, as there was in fact nothing in the agreement which said that Mr Ing’s entitlement to his remuneration would be postponed until the financing of CAHL was complete and it had begun to make a profit.  The only inference to be drawn from that is that he would not have caused the employment agreement to be sent to Mr Wells.

E.4  No mention of the services agreement

64. Secondly, the services agreement was not mentioned in the memorandum at all.  It was a significant contract on any view.  Very shortly after its incorporation, and even before it had changed its name, CAHL had entered into an agreement for the provision of management and consultancy services which committed CAHL to substantial payments for at least three years and which Mr Ing would benefit from personally as the agreement was with a company in which he had a controlling interest.  I will have something more to say about what are described as the onerous terms of this agreement, but unless Mr Ing wanted to conceal its existence, I would have expected it to have been referred to in the memorandum — not merely to be candid with potential investors, but more particularly to assure them that an agreement for the provision of management and consultancy services was in place.  The only inference to be drawn from the absence of any reference to it in the memorandum is that Mr Ing did not want to disclose its existence, and if he did not want to do that, he would not have caused it to be sent to Mr Wells.

E.5  No confirming e‑mail

65. Thirdly, despite frequently communicating with Mr Wang and Mr Wells by e‑mail in the period during which Mr Ing claims the agreements were sent to one or other or both of them, he did not e‑mail either of them to say that the information package which he claims included the agreements were being, or had been, sent.  If they had been sent to either Mr Wang or Mr Wells or both of them, whether by fax or courier, I would have expected Mr Ing to have sent to one or other or both of them an e‑mail to that effect.

E.6  No other references

66. Fourthly and most important of all, in none of the financial information subsequently provided to Mr Wells was there any reference either to the existence of the services or employment agreements or to payments made by CAHL which would have alerted Mr Wells to the possibility that there were agreements which had not been disclosed to him under which Mr Ing was entitled to remuneration before CAHL had become profitable or a company in which Mr Ing had an interest had been providing management and consultancy services to CAHL.  The only document which referred to payments for management and consultancy services was the unaudited consolidated profit and loss statement for the first six months of 2005 (referred to in [24] above).  Included in the expenses of about HK$6.1 million were (i) management services of about HK$2.07 million and (ii) consultancy services of about HK$2.32 million.  These sums were not particularised, and there is no reason why these entries should have put Mr Wells on notice that they related to remuneration payable to Mr Ing under an employment agreement, or payments made to a company controlled by Mr Ing for management and consultancy services.  It is significant that these services were mentioned only in the first of the documents giving Mr Wells financial information about CAHL, and were never referred to subsequently.  The likelihood, I think, is that Mr Ing realised that to have mentioned them had been a mistake, and that it was not going to happen again.

67. There is another point to be made in this connection. It will be recalled that after CAHL had repaid US$30 million to Citadel, it still owed about US$35.5 million under the convertible notes excluding interest (see [33] above).  Mr Wells was insisting on knowing what that had been spent on.  Eventually Ms Tseng sent him on 3 October 2008 a document headed “Reconciliation of US$35m loan”.  There was no reference in that document to payments for management or consultancy services or directors’ remuneration.  Although it gave a figure of US$4.1 million for operating expenses since January 2004, it described those operating expenses as “including office rental, salary, travelling and other expenses”.  The term “salary” could have included Mr Ing’s remuneration, but to have referred to very modest items like office rental, travelling and other expenses without mentioning the fees for the management and consultancy services payable to WCL speaks volumes.

68. Mr Ing was unable to provide an explanation for this omission when he was cross‑examined on the topic.  Ms Tseng acknowledged that the bulk of the US$4.1 million consisted of the fees paid under the services agreement, but her explanation for not spelling that out in the document was that the expenses to which those fees related consisted of office rental, salaries to staff and travelling and other expenses.  Even if that is correct, it does not explain why Ms Tseng itemised the expenses to which the management and consultancy fees related without making it clear that they came under the rubric of management and consultancy fees.

69. In the light of all this, what is not mentioned in the financial information provided to Mr Wells takes on a greater significance.  No details were given of (i) the general and administrative expenses of RMB1.69 million in CAHL’s management accounts for the first quarter of 2006 (referred to in [27] above), or of (ii) the general and administrative expenses of RMB10.59 million  in CAHL’s management accounts for the first six months of 2006 (referred to in [28] above), or of (iii) the general and administrative expenses of RMB18.97 million for 2005 and RMB21.19 million for 2006 in the combined profit and loss accounts for 2006 (referred to in [29] above).  I accept, of course, that CAHL’s ledgers (which included journal entries and trial balances) itemized the fees paid to WCL under the services agreement, and the sums paid to Stornaway under the employment agreement, but although Mr Wells could have asked to see them, Mr Ing did not say that copies of them were provided to him.  In any event, the ledgers did not say that WCL or Stornaway were companies in which Mr Ing had an interest, and so Mr Wells would not have known that payments were being made by CAHL pursuant to an agreement which related to Mr Ing’s employment or to one which enabled Mr Ing to benefit from management and consultancy services provided to CAHL.

E.7  Disclosure to Citadel and UBS

70. I have not overlooked the evidence which suggests that the services and employment agreements were disclosed to Citadel and UBS during their due diligence on CAHL.  However, that evidence is by no means clear cut.  The fact that Citadel and UBS did their own due diligence does not mean that the agreements were disclosed to them, and the only evidence that they were comes from Ms Tseng.  She said it for the first time in her supplemental witness statement, and it is instructive to see how the evidence emerged.

71. In her first witness statement Ms Tseng said that a Financial Model prepared by Mr Chui had been provided to Citadel and UBS during their due diligence exercise.  That Financial Model did not deal with CAHL’s operating expenses at all.  It focused on the nature of the business and the revenue to be derived from it.  So when Ms Tseng went on to say in her first witness statement that Citadel and UBS had teams of professionals to “examine various agreements and documents covering CAHL and [Beijing Alarm]”, it does not look as if she was referring to the services or employment agreements, but rather to the agreements with the entities in the PRC.  It was only when she was asked to clarify what “agreements and documents” she had been referring to that she said in her supplemental witness statement that they included the services and employment agreements.  It is true that she said in cross‑examination that the services and employment agreements were always provided to potential investors, but that was almost a throwaway remark in response to a completely different question about whether the directors of CAHL knew about the services and employment agreements.  In the circumstances, I am very unsure whether the agreements were disclosed to Citadel and UBS, but even if they were, that does not necessarily mean that they had previously been provided to Mr Wells.

E.8  The knowledge of CAHL’s directors

72. There is admittedly some evidence that the directors of CAHL were aware of the services and employment agreements.  Prof Kwok’s evidence was that he was aware that there was an agreement for the provision of services between CAHL and a company in which Mr Ing had a controlling interest, but significantly he does not recall ever having seen it, and he did not know “the details” — so he would not have known that WCL was being paid HK$24.6 million during the lifetime of the agreement. Prof Kwok does not say that he knew of the employment agreement.  Ms Ismail made the point that Prof Kwok signed the letter extending the employment agreement for a further three years from 1 March 2007.  But that is not quite right.  The letter purporting to extend the employment agreement for a further three years was actually dated some time after the default notices had been served on CAHL.  The letter smacks of a device to get money out of CAHL before it was put into liquidation.

73. For these reasons, neither the possibility that the services and employment agreements were sent to Citadel and UBS nor the possibility that the directors of CAHL knew about them have caused me to doubt my clear conclusion that neither of them was ever disclosed to Mr Wells.

F. THE NATURE OF THE REPRESENTATIONS

F.1  The law

74. For a claim of misrepresentation to be successful, the representation being relied upon has to have been a statement of fact, or “capable of being expressed as” (to use the language of the Divisional Court in Government of the United Arab Emirates v Allen [2012] 1 WLR 3419 at [42]) a statement of fact.  That is to be distinguished from a statement of opinion or a statement of intention or a recommendation.  Moreover, the statement of fact has to have been a statement about the present state of affairs or about something which happened in the past.  A statement which amounts to a statement about something which is going to happen in the future may have effect as a contractual promise, but it is not a representation, unless it carries with it an implied statement about the present intentions of the person making the representation.  In other words, “[a] statement of intention may be looked upon as a misrepresentation of existing fact if, at the time when it was made, the person making the statement did not in fact intend to do what he said or knew that he did not have the ability to put the intention into effect; for the promisor’s state of mind was not what he led the other party to believe it to be” (Chitty on Contracts, 32^nd ed, vol 1, para 7–102).

F.2  What the plaintiffs have to prove

75. The compensation clause was a statement about something which was going to happen in the future.  The use of the word “will” three times shows that.  The plaintiffs’ case therefore has to be that the compensation clause carried with it an implied statement on CAHL’s part about how it was intended that Mr Ing would be compensated.  It has accordingly been necessary for the plaintiffs to prove that on the date on which the memorandum was sent to Mr Wells CAHL intended to compensate Mr Ing otherwise than in the manner described in the compensation clause.  Similarly, both the use of proceeds clause in the memorandum and clause 4.1 in each of the two subscription agreements were statements about what CAHL would be using the investment capital it raised for in the future.  It has therefore been necessary for the plaintiffs to prove that on the date on which the memorandum was sent to Mr Wells, or on the dates of either of the two subscription agreements, CAHL intended to use that capital for purposes other than those described in the clauses.  None of this applies to the other representations relied upon by the plaintiffs.  Ms Ismail accepted that clauses 8.1(1), 9.1(4), 9.1(9) and 13.1 of Schedule 2 to the two subscription agreements were representations about the present state of affairs or things which had happened in the past.

G. THE FALSITY OF THE REPRESENTATIONS

G.1  The law

76. Three particular legal principles are relevant when it comes to deciding whether the representations were false.  They were advanced by Ms Ismail, and not challenged by Mr Lam.  First, it is for the plaintiffs to prove that the representations were false.  It is not for Mr Ing to prove that they were true: see Melbourne Banking Corp Ltd v Brougham (1882) 7 App Cas 307 at pp 314-315. Secondly, when considering whether a representation which is capable of having different meanings was false, you take as its meaning the way it would have been understood by a reasonable person in the position of the person to whom it was made: see Krakowski v Eurolynx Properties Ltd (1995) 130 ALR 1 at p 11.  Thirdly, a representation will not be false simply because it is not entirely correct.  As Christopher Clarke J (as he then was) said in Raiffeisen Zentralbank Osterreich AG v Bank of Scotland PLC [2011] 1 Lloyd’s Rep 123 at [149]:

“It is not necessary for what was said to be entirely correct, provided it is substantially correct, and the difference between what is represented and what is actually correct would not have been likely to induce a reasonable person in the position of the claimant to enter into the contract.”

G.2  The compensation clause

77. Some components of Mr Ing’s remuneration package were specifically referred to in the compensation clause.  They were his salary of US$300,000 a year and his participation in CAHL’s stock option scheme.  The other elements of his remuneration package were not.  It is not surprising that some of those elements were not mentioned.  The compensation clause only purported to give potential investors an idea of Mr Ing’s remuneration, and it did not purport to be an exhaustive list of each and every one of his benefits.  Good examples of that were Mr Ing’s entitlement to executive travel (which I take to mean that when Mr Ing had to travel on CAHL’s business he was entitled to travel in a style appropriate for senior executives) and worldwide medical insurance cover.  It is unsurprising that benefits of that kind were not spelled out in the compensation clause.  Indeed, the plaintiffs do not allege that the compensation clause was false because it did not refer to those entitlements.  The contentious area relates to (i) two of the other components of Mr Ing’s package which were omitted from the compensation clause — the housing allowance and the bonus, and (ii) the statement in the compensation clause that “[c]ompensation under this contract will not be earned until this financing is complete and the Company has shown profits” which was omitted from the employment agreement.  The first page of the memorandum stated that references to “the Company” in the memorandum were references to CAHL.

78. The housing allowance and the bonus were significant benefits.  The housing allowance was worth about 30% of Mr Ing’s basic salary, and the bonus which would have been paid to him if the conditions for its award had been met amounted to one–third of his basic salary.  Despite that, if these were the only things which had not been disclosed to Mr Wells, I might just have been persuaded that the compensation clause was substantially correct, on the basis that Mr Wells could reasonably have assumed that there might be a performance‑related bonus, even if, as a US citizen, he was unfamiliar with the practice in Hong Kong (perhaps more prevalent prior to 2004 when there was a greater number of expatriates in senior positions) of giving senior employees a housing allowance.  But there was also the omission from the employment agreement of that important element in the compensation clause about when Mr Ing could begin to earn his compensation.  That was important to Mr Wells. As he said:

“ … the principle of our investment was that … Alex would not come out ahead unless we came out ahead … [H]e wasn’t going to make money unless we made money … [T]hat’s one of the key components as to why we were willing to invest in the company … [O]ur interests … were aligned.”

Mr Wells went on to say that Mr Ing should not “have an alternative interest where he would come out well even if the business didn’t”, and later on he added that if he had found out in 2006 that Mr Ing “was pulling these type of funds out of the business, we would have had a serious disagreement, if not earlier litigation”.  These answers were given in response to an initial question about both the services and employment agreements.  I have cautioned myself that the initial question which elicited these answers was a leading one, which was unfortunate as I had just told Mr Lam to ask his question in such a way that Ms Ismail could not complain that he was putting words into Mr Wells’ mouth.  The question he went on to ask Mr Wells was whether, if he had known that the fees payable under the services agreement and the remuneration under the employment agreement were being paid to Mr Ing or companies controlled and owned by him, “would that have made any difference as to your reaction when you saw these numbers?”  The question he should have asked was something like “what effect, if any, would that have had on your thinking?”  Although the form of the question devalued Mr Wells’ answer, I still think that it is what he genuinely believed at the time.

79. Mr Ing’s case is that the omission from the employment agreement about when he could begin to earn his compensation did not make the compensation clause false because the intention had always been that he would only receive his compensation when the investment capital had been raised and “the Company”, ie CAHL, had become profitable.  Indeed, he was not paid his salary or his housing allowance until April 2005.  By then the investment capital had been raised: it had been raised by the middle of February when the sum invested under the first subscription agreement was remitted in two tranches to CAHL.  And Mr Ing claims that CAHL had become profitable by the end of March 2005, if not before.  He relied, among other things, on (i) the management accounts of Beijing Electronics up to October 2004 which showed net profits of RMB1.32 million, and (ii) the minutes of the first board meeting of CAHL which Mr Wells attended — the one on 29 March 2005 — which recorded that the revenue from CAHL’s operations in 2004 had been about RMB12.8 million, which would generate an estimated profit of about RMB2 million.  The conditions for the payment of his remuneration having been met, Mr Ing was then paid the remuneration to which he was entitled, namely his salary and housing allowance, not just from then on, but also going back to 1 March 2004 when his employment under the employment agreement began.

80. There are a number of problems with this contention.  First, it was not the case that CAHL had become profitable by the end of March 2005.  Beijing Electronics’ operations may have been profitable, and that was the source of the estimated profits mentioned in the minutes of the board meeting of 29 March 2005.  They did not relate to the new business which Beijing Alarm had been incorporated to pursue.  That is apparent from other passages in the minutes, as para 3.2 of the minutes referred to Beijing Electronics’ operations, whereas paras 3.3 and 3.4 of the minutes referred to Beijing Alarm’s business.  It is not appropriate to treat the reference in the compensation clause to CAHL having to show profits as including the profits of Beijing Electronics, (i) because Beijing Electronics was not, and never became, a subsidiary of CAHL, and (ii) because Mr Wells was investing in the new business to be operated by Beijing Alarm which was to implement the Safe City Project and not the old business operated by Beijing Electronics which had not had the capital or resources to take on such a large project.

81. The fact is that CAHL had not become profitable by the end of March 2005.  The slide presentation to the Board, as noted in [23] above, started from a nil base in 2005 for the projected profits of CAHL, and the unaudited consolidated profit and loss statement for CAHL for the first six months of 2005 (referred to in [24] and [66] above) reported an operating loss of HK$5.72 million.  Indeed, the evidence is that it had not even become profitable by the date of the second subscription agreement.  The management accounts for the first six months of 2006 (referred to in [28] above) showed a net loss of RMB7.69 million.  The profit and loss accounts in the shareholders’ report (referred to in [29] above) showed a net loss of RMB17.43 million in 2005 and a net loss of RMB18.53 million in 2006.  And the profit and loss accounts once CAHL’s accounting year had been changed showed a net loss of RMB20.35 million for the year ending 30 June 2005 and a net loss of RMB21.65 million for the year ending 30 June 2006.  Mr Ing complained that the plaintiffs’ reliance on these figures was unjustified because they did not include the profits of Beijing Electronics, but as Ms Tseng acknowledged, it would have wrong for those profits to have been included while Beijing Electronics was not a subsidiary of CAHL.  Although not relevant to the issues I have to decide, I should record that according to the liquidators the sums paid by CAHL to Stornaway under the employment agreement (ie those payments which were described in CAHL’s ledgers as payments to Stornaway for management fees and housing allowance but which admittedly also included the rent paid by Stornaway for Mr Ing’s apartment in Beijing) between 2005 and 2008 came to about HK$10.6 million (when those payments which had been made in US dollars were converted into HK dollars).

82. Secondly, Mr Ing’s case proceeds on the basis that the compensation clause only provided for the payment of his remuneration to be postponed until the conditions for its payment had been met, so that when those conditions had been met, he could then be paid the remuneration which he would otherwise have received in the intervening period. His remuneration, in other words, would be backdated to when his employment under the employment agreement began.  It is true that in cross‑examination Mr Wells agreed with the proposition that the word “earned” in the compensation clause could have meant either “received” or “accrued”, but he was not then asked how he had in fact read it, and in any event, it is not how Mr Wells understood it that matters.  It is how a reasonable person in his position would have understood it, and I do not believe that a reasonable person in Mr Wells’ position — or Mr Wells himself, for that matter — would have understood it in the way contended for on behalf of Mr Ing.  The compensation clause used the word “earned”, whereas Mr Ing’s approach is to treat the clause as if the word used was “deferred”.  Moreover, I agree with Mr Lam that it would make a mockery of the requirement that CAHL had to be profitable before Mr Ing earned his compensation if his compensation continued to accrue before CAHL had shown any profits, and once it had shown a profit, however small and however many years later, CAHL would then be liable to pay out the entire amount which had accrued.  In my opinion, a reasonable person in Mr Wells’ position would have understood the compensation clause to mean that the time from when compensation would be earned would be from when the financing was in place and CAHL had become profitable, in the sense that Mr Ing would not be entitled to be paid anything for the intervening period.

83. Having said that, the question is not so much whether Mr Ing started to be paid his remuneration under the employment agreement earlier than he was entitled to receive it.  If the condition in the compensation clause about when his compensation was to be paid was either a contractual promise in its own right, or could be said to have been incorporated into the employment agreement, that would have provided the liquidators with a cause of action against Mr Ing for procuring a breach of the employment agreement. What matters in the present claim is whether in July 2004 when Mr Wells was sent the memorandum CAHL intended to compensate Mr Ing otherwise than provided for in the compensation clause.  Since CAHL was really Mr Ing’s alter ego, the question is whether Mr Ing was intending at the time to compensate himself otherwise than in accordance with the compensation clause.  I am satisfied that he was.  Why else would he not have disclosed the employment agreement to Mr Wells at that time?  The only sensible answer is that (a) he knew that the employment agreement entitled him to benefits like the housing allowance and the bonus which Mr Ing thought Mr Wells would have wanted to know about, but (b) more importantly he knew that the employment agreement had not addressed when in the future his entitlement to compensation would accrue (understandably since it had been entered into many months before the memorandum) but feared that Mr Wells might insist on it being varied to reflect what the compensation clause had said.

84. For these reasons, I have concluded that the compensation clause was false in that Mr Ing intended to compensate himself otherwise than in accordance with it.

G.3  The use of proceeds clause and clause 4.1 of each of the two subscription agreements

85. I deal with these clauses together as they are to the same effect.  They do not use quite the same language, but they would have been understood by a reasonable person in Mr Wells’ position to mean that the investment capital which was being raised would be used for CAHL’s business. I shall refer to them compendiously as the use of proceeds clauses. I deal first with the claim that the representations in the use of proceeds clauses were false because some of the investment capital was used for the sums due to WCL under the services agreement when the services agreement was, to use the language of the Amended Statement of Claim, “a guise [for] the payment of very substantial sums to Mr Ing and/or his corporate vehicle, WCL, purportedly as compensation for services provided by him”.

G.3.1 Were any genuine services provided under the services agreement?

86. I had originally read the Amended Statement of Claim as alleging that the services agreement was simply a mechanism by which substantial payments could be made to WCL (and therefore to Mr Ing) by pretending that they were fees payable for genuine services rendered to CAHL by WCL when no such services had been rendered at all.  That is what I took from the words “a guise” and “purportedly as compensation for services provided by him”.  It now looks as if that is not the case currently being advanced by Mr Lam. I say that for two reasons.  First, when he was cross‑examining Mr Ing, Mr Lam put this passage in the Amended Statement of Claim to Mr Ing. Ms Ismail interjected because she thought that Mr Lam might be “backtracking” on something.  That prompted Mr Lam to say that the point he was making in this part of the Amended Statement of Claim was merely that WCL was Mr Ing’s corporate vehicle, and the suggestion he went on to make to Mr Ing was only that payments made to WCL were tantamount to payments made to him.  He did not suggest to Mr Ing that the services purportedly rendered to CAHL by WCL under the service agreement had not been genuine services at all. Secondly, in her written closing submissions, Ms Ismail devoted a lengthy section to her submission that the court should find that genuine services had been provided by WCL to CAHL under the services agreement.  Mr Lam did not engage with that submission in his written closing submissions at all.

87. As it is, the evidence suggests that at least some genuine services were provided by WCL to CAHL.  The number of different projects which CAHL claimed to have undertaken increased significantly over the years, but I cannot tell whether that was attributable to the services provided by WCL.  However, there is evidence that WCL sometimes provided CAHL with marketing, finance and accounting personnel, with administrative services, and with office space and office facilities.  There is documentary evidence which suggests that WCL had a role in the renovation of CAHL’s headquarters in Beijing.  And there is some evidence that WCL assisted CAHL in sourcing technical equipment and did some work in connection with the Robocop surveillance mechanism, a particular feature of the Safe City Project.  Moreover, it would be wrong to say that the payments made to WCL were tantamount to payments made to Mr Ing exclusively since he was not the only shareholder in WCL.  I referred to how he has a controlling interest in WCL at [41] above.

88. It follows that at least some of the fees paid to WCL under the services agreement were for genuine services relating to CAHL’s business, and to the extent that the investment capital was used to pay those fees, it was used for the purpose of CAHL’s business.  Moreover, although the services agreement was made with a company in which Mr Ing had a substantial interest so that he benefitted from the fees paid under the services agreement through his shareholding in the company, that did not make the use of proceeds clauses false.  But what about the rest of the fees paid to WCL?  That leads me on to the claim that they were bribes to be paid to corrupt government officials in the PRC through what was euphemistically described by Mr Ing as “special consultants”, so that the representations in the use of proceeds clauses were false because at least one of the main purposes of the services agreement was to be the conduit through which those bribes were to be paid.

G.3.2 The special consultants

89. It has to be said that we are talking about very large sums here.  Both sides produced schedules of the payments made by CAHL to WCL.  Mr Ing’s schedule went up to 27 September 2007 and listed payments totaling HK$35.26 million, whereas the plaintiffs’ schedule went up to 30 March 2009 and listed payments totaling HK$70.31 million. With the exception of a few entries in those schedules, there was agreement about the amounts paid and the fact that they purported to be the management and consultancy fees due under the services agreement.  Those entries which were disputed relate to:

(a) the sum of US$17,000, which was included in an entry for US$101,000 paid to WCL by CAHL on 10 July 2006 but which was said to be a currency charge;

(b) the sum of HK$470,000 paid to WCL by CAHL on 4 April 2007 which was said to be a loan to WCL;

(c) two sums of US$171,000 paid to WCL by CAHL on 4 January 2008 and 20 February 2008 which were said to be transfers to WCL for issuing letters of credit; and

(d) two sums of US$1 million paid to WCL by CAHL on 15 August 2008 and 28 August 2008 which were described in CAHL’s ledgers as consultancy fees, but which Ms Tseng now thinks were short term loans made by CAHL to WCL which the ledgers show WCL having repaid to CAHL by three sums totalling US$2 million on 20 August 2008, 12 September 2008 and 13 September 2008.

It is not necessary for me to decide where the truth lies in respect of these disputed entries, because even if the case advanced on Mr Ing’s behalf is correct, the sums paid by CAHL to WCL under the services agreement exceed HK$50 million.  Although some of those fees were attributable to the genuine services provided by WCL to CAHL, Mr Ing conceded in cross‑examination, as I noted in [44] above, that “probably more than half” the fees paid to WCL, and therefore a significant part of the proceeds of the capital invested in CAHL, went to the special consultants, though he was subsequently to say that “the truth is I really do not know.  It could be more or less than half.”  The critical question is what the fees paid to the special consultants were for.

90. Mr Ing’s evidence was that he engaged the special consultants himself, and they were remunerated from (or the expenditure they incurred was reimbursed to them out of) the fees paid to WCL.  They were people with substantial experience and connections in those areas of business life which were relevant to CAHL’s business.  Many of them were retired government officials, such as the former Chief of Police in Beijing and the former Mayor of Nanking.  Their assistance was sought to lobby for new business for CAHL and to facilitate the smooth running of projects on which CAHL had already been engaged.  To lobby for new business for CAHL, they would make enquiries about the projects which CAHL wanted to bid for and find out what their “status” was (which I take to mean whether the project was sufficiently advanced for the work to go out to tender, what services contractors were going to be asked to provide and whether contractors had yet been selected).  They would find out which officials in the relevant government departments were responsible for the project.  If CAHL were asked to make a presentation of what it would do, the special consultants would then try to found out how the presentation had gone and what CAHL’s chances of getting the business were, they would keep an eye on how the selection process was going, and they would put a good word in for CAHL if the opportunity arose.  And when it came to facilitating the smooth running of projects on which CAHL had already been engaged, the role of these special consultants included enquiring about the progress of pending applications for approvals, and if there were delays in obtaining them, they would help to speed things up by getting the applications back on track.

91. All this is fine.  Using special consultants to establish and nurture business connections is a legitimate business practice if it is used only to “open doors” (which were Mr Ing’s words when he was cross‑examined) in the limited sense of creating the opportunity for CAHL to pitch for business by enabling CAHL to get access to the people who would be deciding to whom the business should go.  That was the effect of Prof Kwok’s evidence, and I accept it entirely.  But where the practice becomes questionable, even on Mr Ing’s account of what happened, is how the special consultants managed to get the relevant officials on side.  How did they manage to persuade them to consider awarding contracts to CAHL or to get any permits which were needed out of the logjam?  Mr Ing categorically denied that bribes were paid, but he did talk of “entertainment”, sometimes on a lavish scale.  And what form did that “entertainment” take?  Mr Ing referred to banquets for perhaps a dozen people at a time at which the food would be sumptuous and expensive liquor would be plentiful, and the guests would be provided with “goodie bags” containing costly items.  He was not specific about who the recipients of this largesse were.  He only said that they would be the special consultants’ “contacts”, who might, for example, be their “former subordinates or colleagues”, but these contacts must have been the relevant officials who would be awarding the contracts.  If the money was used for this form of “entertainment” — which the plaintiffs say is a very big if indeed — was this entertainment used only to “open doors” in the sense in which Mr Ing said?  Or was this entertainment really meant to get preferential treatment for CAHL, irrespective of whether CAHL deserved to get the business on its own merits or not?

92. The plaintiffs ask me to reject Mr Ing’s evidence that the money was spent on “entertainment”.  Their primary case is that in the absence of a credible explanation for what the fees which were paid to WCL were spent on, the only conclusion which the court should reach is that they went into Mr Ing’s pocket.  Their alternative case is that the fees which were paid to WCL were used by the special consultants to pay bribes in the form of cash or money transfers to government officials in the PRC to secure contracts for CAHL.  They say that Mr Ing gave the game away when he said in the course of his cross‑examination:

“I don’t [get] personally involve[d] with … giving money to other people. We’re using consultants … [to] handle … the direct relationship … And at the time I told those special consultants … I don’t want to know … exactly who you needed to pay or anything like that … as long as you get the job done.”

93. It is instructive to see how the evidence emerged about the use which CAHL made of these special consultants.  Mr Ing was being asked in cross‑examination about the “business development” services which WCL was providing to CAHL.  He replied that, as all businessmen in the private sector knew, you needed to have connections to do business in China. You would use “special consultants” who would incur “entertainment” expenses to enable you “to open the door”.  Later in his cross‑examination Mr Ing was asked about the explanation he had given in his witness statement about why the services which WCL provided could not have been provided by CAHL, namely that CAHL was an offshore company and not permitted to operate a business in Hong Kong.  So Mr Ing was asked why the services which WCL provided could not have been provided by CAHKL.  Mr Ing replied that the plan was for CAHL to be listed in Hong Kong, and that it was “really not in our interest at that time … to have … these development fees, special consultants, entertainment fee … lumped into the company”.  He admitted that even if the services were provided by CAHKL, the fees would have to be “transparent”, and in “the auditing process” they would “show up” in the company’s books.  They were, he said, the “type of fees” which you would not “like to publicise … openly”, and he said that he did not want to publicise them “until [he] had to … tell the truth”.  That explains, for example, why the Reconciliation (referred to in [67] above) did not include the payments to the special consultants in the list of the things which made up CAHL’s operating expenses.

94. These were potentially very damaging admissions because they showed that Mr Ing did not want the payments to the special consultants to get out, and that can only have been because he thought either that they should not have been paid at all, or that people might get the wrong impression about what they were for.  If Mr Ing had been trying to conceal the fact that the money went into his own pocket, or that the money was being used to pay bribes in the form of cash or money transfers, is this the story he would have come out with?  I do not think so.  In the circumstances, I do not reject Mr Ing’s evidence that the money was used to pay special consultants, whether for their own remuneration or to reimburse them for the expenditure they had made on CAHL’s behalf.  The question is what these special consultants were engaged to do.

95. I do not suppose that they worked for nothing, but Mr Ing did not say what fees were paid to them for their services.  He explained the absence of any documentation about their fees on the basis that there were no service agreements with them, as they did not carry on business normally, and communication was with them by phone.  But on the assumption that they were paid for their services, where is the evidence of that — in the form of bank statements, for example, recording the transfer of their fees to them — unless they were paid in cash?  And if this was all above board, why would they have been paid in cash?

96. An important point is why Mr Ing had not mentioned in any of his six previous witness statements that a sizeable amount of the fees paid to WCL went on special consultants and entertaining government officials in the PRC.  Mr Ing gave a number of reasons for that.  One was that he had mentioned it to the solicitors within the firm who were handling his case, but they left the firm, and when their replacements drafted Mr Ing’s witness statements, they did not include in them anything about the special consultants or the entertainment of government officials.  Mr Ing assumed that if they had thought it necessary for that to be included in the witness statements, they would have included them.  I regard that as highly implausible and I do not think that that is the truth.  I make no comment on how Mr Ing’s solicitors came to leave it out of their drafts of Mr Ing’s witness statements.  For all I know, the previous solicitors dealing with the case may have said if called as witnesses that Mr Ing had not told them about it, or the current solicitors dealing with the case may have said if called as witnesses that the previous solicitors had not told them anything about that.  But on the assumption that Mr Ing had told the previous solicitors about it, I do not accept that Mr Ing thought that the current solicitors did not think it necessary for anything to be included about it.  The use of special consultants and entertaining government officials went to the heart of one of the issues in the case: what was the investment capital raised used for?  Mr Ing is too canny not to have realised that.

97. But it was not just the solicitors’ fault.  Mr Ing gave two reasons why he did not want the statements to refer to the special consultants and the entertainment of government officials in the PRC. First, he was concerned that people might misunderstand what the use of special consultants involved.  I note that concern, but Mr Ing should have trusted the courts to have understood what guanxi (關係) was, and to have known that the use of someone else’s connections for the purpose of advancing your business interests is a feature of business life in the PRC.  And there is a big difference, as Mr Ing recognised, between the legitimate use of someone’s connections to give you the opportunity to pitch for business which you might otherwise not have been able to bid for, and the illegitimate use of someone’s connections to secure preferential treatment in the selection process, regardless of whether you deserve to get the business on your own merits.  The simple fact is that this was no justification for concealing what some of the investment capital was really to be used for.  Secondly, Mr Ing said that many of the special consultants were prominent people who had helped CAHL by using their personal connections.  Again, I note that concern, but I am not sure I understand precisely what Mr Ing was concerned about.  Was it that he did not want to name them because he feared that he might not be able to make use of their connections in the future?  Or was it because he thought that by naming them he would be breaching their confidentiality, perhaps because he thought that they would not want it to be known that they had been paid to use their connections to drum up business for CAHL?  Either way, there had been nothing to prevent him from revealing the use he had made of them without revealing who they were.  He might have thought that if he revealed the use he had made of them, he might be required by an order of the court to name them, but that would have been better than his use of them having come out so late in the trial, with the obvious suggestion that he had not disclosed their use earlier because he knew how damning that would be for his case.

98. Having said all that, it was not simply that Mr Ing did not want the payments to the special consultants to get out, or even to be disclosed to the court.  It looks as if they were not known within CAHL. Neither their use nor the payments to them were referred to in any of CAHL’s internal documents which have been disclosed, nor was there anything in any of the minutes of the board meetings to show that they had been disclosed to other members of the Board, let alone discussed.  Prof Kwok did not recall any specific occasion on which the use of special consultants (or advisors as he preferred to call them) was discussed, or any specific occasion on which he was told that CAHL used them.  That could explain why the Reconciliation (referred to in [67] above) did not include the payments to the special consultants in the list of the things which made up CAHL’s operating expenses.  Ms Tseng may not have known about them herself.

99. So I return to the critical question: what were government officials in the PRC being entertained so lavishly for?  The sums involved were very substantial, probably in the region of HK$25 million. That is a lot of maotai.  This was wining and dining on a grand scale.  Mr Ing must have expected real results for expenditure of that kind to be justified. If these had been deductible business expenses, Mr Ing would have wanted the receipts from the restaurants to be kept so that the sums spent on entertaining, which would in the normal course of events be incorporated in CAHL’s (or WCL’s) expenditure on its tax return, could be verified if need be. For the receipts not to have been kept because it was never intended to claim them as deductible business expenses means two things: Mr Ing thought that they were not (or might be regarded as not being) legitimate business expenses, and the benefit to be derived from the contracts which CAHL might not otherwise have been awarded was worth more than the reduction in the amount of tax CAHL or WCL would otherwise have had to pay.

100. All of these considerations have led me to conclude that Mr Ing’s use of special consultants to “entertain” government officials in the PRC was very different from the legitimate practice of using their connections to give CAHL the opportunity to pitch for contracts which they would otherwise not have had — for example, the sort of entertainment referred to in Tim Clissold’s book “Mr China” which Mr Wells had read, and the sort of thing Mr Lam was referring to when, in the course of the cross‑examination of Mr Ing, he said that everyone in the courtroom appreciated the need for connections to open doors in the PRC.  That no documents relating to their use or the expenditure they incurred were retained, or that their use was not revealed until Mr Ing mentioned it in cross‑examination, was very significant indeed in the context of the importance of their use to one of the core issues in the case, namely the use which WCL made of that part of the investment capital which was used to pay its fees. I have concluded — in the end without much difficulty — that the special consultants were used to “entertain” government officials in the PRC in order to persuade them to favour CAHL improperly, and to award CAHL contracts regardless of whether CAHL deserved to be awarded them.  In the circumstances, I am satisfied that when the memorandum was sent to Mr Wells in July 2004, and when the two subscription agreements were entered into on 8 February 2005 and 3 March 2006, Mr Ing intended to use some of the proceeds of the investments to pay for special consultants and the expenditure they incurred in “entertaining” government officials in the PRC to secure preferential treatment for CAHL to which it was not entitled.  Ms Ismail did not dispute that that expenditure could not come within any of the uses to which the proceeds of the investments could be put — presumably because the term “operating expenses” in the use of proceeds clause and the term “general working capital purposes” in clause 4.1 of the subscription agreements carry with them the implication that the operating expenses and the general working capital purposes for which the investment capital would be used would be legitimate operating expenses and legitimate general working capital purposes.  It follows that the use of proceeds clauses were false to that extent.

G.4  Clauses 8.1(1), 9.1(4) and 9.1(9) of Schedule 2 to the subscription agreements

101. I can address the question whether the warranties in these clauses were false together, because they all relate to the same thing.  Had CAHL carried on business normally?  Had it incurred any unusual liabilities or made any unusual payments?  And had it entered any transactions which involved onerous or unusual expenditure?

102. One feature of the plaintiffs’ case is that both the services and employment agreements were “connected transactions” — in the listed company sense, so Mr Lam told me, which I take to mean as defined by Chapter 14A of the Main Board Listing Rules of the Hong Kong Stock Exchange — and therefore had had to be disclosed to, and approved by, CAHL’s shareholders.  That was because they were both agreements with companies in which Mr Ing had a substantial interest.  That may be so, but the fact that they should have been disclosed (if that is indeed the case) does not necessarily mean that the three warranties were false.  Whether the agreements’ non‑disclosure renders any of the representations relied upon false arises, if anywhere, under clause 13.1 of the subscription agreements.  Whether the three warranties were false because the agreements were connected transactions (if indeed they were) depends on whether the fact that Mr Ing had a substantial interest in the agreements made either of them (a) an agreement which it was not in the ordinary course of CAHL’s business to enter, or (b) an agreement which imposed on CAHL obligations of an unusual, onerous or exceptional nature.  I shall deal at the same time, though, with whether, leaving aside the fact that Mr Ing had a substantial interest in the agreements, the warranties were false because the agreements themselves were ones which (a) it was not in the ordinary course of CAHL’s business to enter, or (b) imposed on CAHL obligations of an unusual, onerous or exceptional nature.

G.4.1 The employment agreement

103. I deal with the employment agreement first.  Most employment agreements are entered into between the employer and the employee.  But it is not uncommon in the case of senior executives for the agreement to be between the employer and a company controlled by the employee. Usually, that will not be a contract of employment (which used to be called a contract of service).  Instead it will usually be a contract of engagement (which used to be called a contract for services).  Not that it matters here whether the contract was one of employment or engagement.  Since it is not uncommon for a company like CAHL to have its contractual arrangements with a senior employee like Mr Ing to be governed by a contract with the senior employee’s company, it cannot be said that the employment agreement was forthat reason one which it was not in the ordinary course of CAHL’s business to enter.  Nor can it be said that the employment agreement imposed on CAHL obligations of an unusual, onerous or exceptional kind, whether because of Mr Ing’s interest in it or for any other reason.  As Mr Wells acknowledged, the basic salary of US$300,000 a year was a reasonable level of remuneration for a full‑time CEO of a company like CAHL.  And a performance‑related bonus limited to US$100,000 a year, as well a housing allowance of HK$60,000 a month, was equally reasonable, even if, as noted in [78] above, Mr Wells was unfamiliar with the practice in Hong Kong of giving senior employees a housing allowance.  This was acknowledged by Mr Lam when he told me that the plaintiffs were no longer relying on the allegations in paras 51(3) and 56(3) of the Amended Statement of Claim.

G.4.2 The services agreement

104. I turn to the services agreement.  It is not uncommon for a company to outsource services which cannot be performed in‑house. That was especially so in the case of an off‑shore company like CAHL incorporated in the British Virgin Islands, as it could not conduct its business operations such as the recruitment of staff or the renting of premises in Hong Kong.  But could it be said that it was in the ordinary course of CAHL’s business to outsource those services to a company in Hong Kong in which Mr Ing had a substantial interest?  I see no reason why not.  True, Mr Ing would benefit significantly from it, but at least he would be in a position to ensure that WCL was providing the services to CAHL which it had agreed to provide.  Nor has it been suggested that, but for Mr Ing’s interest in WCL, WCL was a company to which it would not have appropriate to outsource those services.  And there is some merit in Mr Ing’s point that it was in the interests of CAHL to engage a company he knew all about and could exercise some control over because of the sensitive nature of CAHL’s business and the need for confidentiality when it came to the implementation of the security measures involved in the Safe City Project.

105. That leaves the question whether this particular agreement for the provision of consultancy and management services to CAHL was one which it was not in the ordinary course of CAHL’s business to enter or which involved expenditure of an unusual, onerous or exceptional nature.  There were a number of things which in my opinion made it a very unusual agreement. The first is how early in the life of CAHL it was entered into.  It was concluded only a month after CAHL had been incorporated, and before it had been resolved to change its name to China Alarm Holdings Ltd.  Indeed, it was concluded (a) before Beijing Electronics had been approached by the Beijing Police Bureau in connection with the Safe City Project (which was in February 2004), (b) before anyone had invested in CAHL (the first injection of funds had been made by an agreement dated 31 March 2004 with To Yan Kuen), and (c) before CAHL had concluded its agreement with Beijing Information Technology (referred to in [9] above) for providing Beijing Alarm with its initial capital of US$5 million and for raising further funds (which was dated 8 April 2004).

106. The second feature of the services agreement which made it so unusual were its terms.  They were surprisingly generous to WCL.  WCL became entitled immediately to significant monthly fees.  They were fixed fees, and were therefore payable whatever services were to be provided and irrespective of the number of hours its staff were to work on CAHL’s business.  The fees increased at six monthly intervals, even though it could not have been known, at the time the agreement was concluded, at what stages WCL’s work for CAHL would increase.  And perhaps most unusual of all, the Safe City project was one in which the risk of delays was not inconsiderable.  Apart from anything else, how the project progressed was dependent on CAHL getting the approvals and permits which were needed.  And yet there was no mechanism in the services agreement for its early termination or at the very least for the monthly fees to be reduced if the project was delayed.  Indeed, the services agreement continued beyond its first three years until CAHL went into liquidation.

107. While on the subject of the services agreement’s terms, I should return to the issue of disbursements.  I have already referred (in [43] above) to the tension between the provisions in the agreement to pay all WCL’s disbursements in connection with the performance of its services to CAHL, and the provisions which appeared to limit those disbursements to special disbursements.  The tension was not removed by Mr Ing’s evidence.  Indeed, it was heightened because Mr Ing said in his first witness statement that in addition to being paid its disbursements, WCL would also charge a small administration fee.  However, in a later witness statement, Mr Ing went on to say that in addition to that WCL would charge a “small profit margin of 20% of the total disbursements plus administration fee”.  Mr Ing went back on all of that when he was cross‑examined about these passages in his witness statements.  He said that apart from some travelling and other expenses incurred at an early stage all the disbursements and administration fees were included in the monthly fees provided for in the agreement.  CAHL’s ledgers would have revealed what actually happened, but my attention was not drawn to any particular entries, save for a few relating to some travel expenses in 2006.

108. Mr Ing tried to justify the terms of the services agreement on the basis that the business to be carried on by CAHL and its operating arm, Beijing Alarm, could hardly be described as a start‑up operation.  It was just an extension, albeit a considerable extension, of the business which Beijing Electronics had been carrying on for a number of years.  The Safe City Project was an immensely prestigious one, involving security and surveillance operations on a massive scale, and there was every reason to be confident of its success.  The nature of the project warranted a high level of fees.  Indeed, the fees to be paid to WCL under the services agreement represented only a small proportion of the revenue which CAHL was projected to receive and likewise only a small proportion of the profit it was projected to make.  The percentages you arrive at depend on whether you use the figures in the memorandum, or those in a subsequent draft of the memorandum dated August 2004. The latter figures are less likely to be inaccurate since they relate to what was described as “new business only”, and unlike the memorandum sent to Mr Wells they covered the projected profit as well as the projected revenue.  On those figures, the fees payable to WCL under the services agreement represented 4.98%, 0.36% and 0.52% of CAHL’s projected revenue for 2004, 2005 and 2006 respectively, and 5.28%, 0.92% and 1.30% of CAHL’s projected profit for those three years.

109. I am unimpressed by these arguments.  The Safe City Project was unquestionably highly prestigious, and there was a good deal of optimism about its ultimate success.  And the existence of Beijing Electronics’ business meant that there was already some infrastructure in place.  But none of that justified fees which did not reflect the actual services to be provided by WCL.  And the fact that WCL’s fees represented only a small proportion of CAHL’s projected revenue and profit was a consequence of its projected revenue and profit having been very considerably inflated.  That is apparent, by way of example only, when you compare the projected revenue for 2006 of RMB2,577 million in the later memorandum with the actual revenue for 2006 of RMB6.24 million in the unaudited combined profit and loss accounts in the shareholders’ report for 2006.

110. In these circumstances, had the plaintiffs’ case been put on the basis that the services which CAHL received under the services agreement from WCL did not justify awarding it a contract on these generous terms so early on in the life of CAHL, I might well have been prepared to hold that the representations in the three warranties had been false.  It could persuasively have been argued that by concluding a contract on such generous terms at that stage CAHL had

(a) “entered into [a] material transaction [and] assumed a material liability … which [was] not in the ordinary course of its business” (clause 8.1(1)),

(b) been a party to an agreement which had been “otherwise than in the ordinary and proper course” of its business (clause 9.1(9)), and

(c) been a party to an agreement which involved “expenditure … of an unusual, onerous or exceptional nature” (clause 9.1(4)).

But that was not the basis on which the three warranties were pleaded as having been false.  The allegation in the Statement of Claim was that they had been false because “very substantial amounts were payable by CAHL under the [services agreement] in return for no conceivable benefit”.  It is not correct to say that CAHL got “no conceivable benefit” from the services agreement.  Some of the benefits it got were the services set out in [87] above.

111. Mr Lam sought to counter that by saying that the services agreement was entered into at a time when CAHL was little more than a shelf company with no assets, no contracts and no revenue.  In that sense there was no conceivable benefit for CAHL in entering into the services agreement.  But that amounts to a contention that there was no conceivable benefit for CAHL to have concluded the services agreement at that time, whereas the warranties were given much later.  They were given at a time when at least some services had been provided to CAHL under the services agreement, so that CAHL had derived at least some benefit from it.

112. This may be a highly technical approach, but such an approach is called for in a case in which fraud is alleged.  A defendant facing allegations of fraud is entitled to have the case argued against him at trial in the way it was pleaded against him, and I make no apologies for deciding the case strictly on the basis of the pleaded allegations.

113. But that, of course, is not the end of the matter.  There is the amendment to the Statement of Claim by which it was pleaded that one of the main purposes of the services agreement was to channel funds for bribes to government officials in the PRC through the special consultants. I have already found that Mr Ing intended to use some of the proceeds of the investments to pay for the special consultants and the expenditure they incurred in “entertaining” government officials in the PRC to secure preferential treatment for CAHL to which it was not entitled.  Mr Ing himself acknowledged that the fees to pay for the special consultants and the expenditure they incurred came from WCL, and in view of their size, I am sure that the channeling of those funds to the special consultants for their remuneration and for the reimbursement of their expenditure was one of the main purposes of the services agreement.  Since the services which the special consultants were providing to CAHL via WCL involved seeking improperly to encourage government officials in the PRC to award contracts to CAHL for reasons unconnected with the merits of its bids, CAHL’s agreement to remunerate WCL in these circumstances meant that CAHL had

(a) “entered into [a] material transaction [and] assumed a material liability … which [was] not in the ordinary course of its business” (clause 8.1(1)),

(b) been a party to an agreement which had been “otherwise than in the ordinary and proper course” of its business (clause 9.1(9)), and

(c) been a party to an agreement which involved “expenditure … of an unusual, onerous or exceptional nature” (clause 9.1(4))

thereby rendering the representations in the three warranties false.

G.5  Clause 13.1 of Schedule 2 to the subscription agreements

114. The allegation here is that there were facts and matters which had not been disclosed but which should have been.  The first question is whether the facts and matters which had not been disclosed but which should have been rendered any of the information or documents which the plaintiffs had been given untrue, inaccurate or misleading.  The Amended Statement of Claim (a) limits the facts and matters which were not disclosed but which should have been to the services and employment agreements, and (b) limits the information and documents which had been given to the plaintiffs but which had been rendered untrue, inaccurate or misleading by the services and employment agreements to the three warranties in Schedule 2 to the subscription agreements which I have just considered.  There is therefore no pleaded allegation that the services and employment agreements rendered untrue, inaccurate or misleading anything in the memorandum, or in any other documents supplied to the plaintiffs, or in other clauses in the subscription agreements.  However, I have found that the three warranties were false because the services agreement had involved expenditure of an exceptional nature and had been entered into by CAHL otherwise than in the ordinary and proper course of its business.  It follows that the non‑disclosure of the services agreement rendered the three warranties untrue, inaccurate and misleading, thereby rendering the representation in the warranty in clause 13.1 false as well.

115. The second question is whether there were facts and matters which had not been disclosed but which, if they had been disclosed, might reasonably have been expected to influence adversely the plaintiffs’ decision to invest in CAHL.  Again, the Amended Statement of Claim limits the facts and matters which were not disclosed to the services and employment agreements.  This allegation is unsustainable in respect of the employment agreement. Mr Wells knew from the compensation clause in the memorandum that there was an agreement covering the terms of Mr Ing’s financial package.  It was called a “management” agreement but was in fact the employment agreement.  It told Mr Wells what Mr Ing’s basic remuneration was to be, and that Mr Ing would not be getting the benefit of the package until CAHL had become profitable, but not much else.  Mr Wells accepted that he never thought of asking to see it, but the question is what might someone in his position reasonably be expected to have done if he had seen it.  In my opinion, Mr Wells might reasonably be expected to have looked at it.  He would then have seen, for the reasons given in [103] above, that the terms of Mr Ing’s employment were in line with what might reasonably be expected in an agreement of that kind for the CEO of a company like CAHL.

116. He might also be reasonably expected to have noticed that the agreement did not say that Mr Ing’s financial benefits under it would not be payable until CAHL began to show a profit.  He might reasonably be expected in those circumstances to have asked Mr Ing about that, in which case Mr Ing would have told him that he would not be paid his financial benefits under it until CAHL was profitable.  So it would not have been the disclosure of the employment agreement which might reasonably have been expected to have deterred Mr Wells from investing in CAHL.  It is what Mr Ing is likely to have concealed from Mr Wells when Mr Wells would have asked Mr Ing about it which might have caused Mr Wells to have second thoughts about investing in CAH — namely that when CAHL became profitable Mr Ing’s remuneration would then be paid but backdated to when his employment under the employment agreement began.

117. Similar considerations apply to the services agreement.  If it had been disclosed to Mr Wells, Mr Wells could reasonably be expected to have looked at it.  He would then have seen, for the reasons given in [105] and [106] above, that it had been concluded very soon after CAHL had been incorporated, and that its terms were surprisingly generous to WCL.  He might reasonably be expected in those circumstances to have asked Mr Ing about it, in which case Mr Wells would have told him about the genuine services which WCL would be providing to CAHL.  However, I am sure that Mr Ing would not have told Mr Wells about his own interest in WCL nor about the services of the special consultants which WCL would be paying for.  So again it would not have been the disclosure of the services agreement which might reasonably be expected to have deterred Mr Wells from investing in CAHL. It is what Mr Ing is likely to have concealed from Mr Wells when Mr Wells would have asked Mr Ing about it which might have persuaded Mr Wells not to invest in CAHL.

G.6  An idea floated by Mr Wells

118. Before I come to whether any of the representations which I have found to be false were made fraudulently, I should refer to another topic which I have considered.  That was whether the services and employment agreements ever existed.  I took my cue for that from Mr Wells. He referred to the agreements in his first witness statement as the purported services agreement and the purported employment agreement.  That was because in his oral evidence he said that he did not accept that the employment agreement at least was a genuine agreement.  His point was that he did not know whether it had been signed in 2004 or whether it had been created later on to explain how large sums of money came to be paid out by CAHL.  I mention that here because if that had been the case, it might have affected how the plaintiffs would have had to plead that the representations were false.  In fact, I do not believe that the agreements came into existence later than they purported to.  That would have been inconsistent with the sums paid by CAHL to WCL and Stornaway having all been itemized in CAHL’s ledgers.

H. WERE THE REPRESENTATIONS MADE FRAUDULENTLY?

H.1  The law

119. For a representation to have been made fraudulently, the plaintiff must prove two things.  The first is that the person who made the representation must have intended the person to whom it was made to have acted on it: see Bradford Third Equitable Benefit Building Society v Borders [1941] 2 All ER 205 at p 211C-D. That requires no elaboration.  Mr Ing does not deny that he intended Mr Wells to act upon the various representations made in the memorandum (subject to the various disclaimers in it) and the subscription agreements.  His case is that he believed the representations to be true.  That brings me on to the second thing which the plaintiff must prove, and that is that the person who made the representation did not honestly believe the representation to be true.  That can be established in one of two ways — by showing that the defendant either knew that the representation was false or was reckless as to whether it was true or not.

120. Both knowledge and recklessness require a little explanation.  If you suspect that your representation might be false but deliberately refrain from attempting to find out whether it would be false or not, that amounts to knowing that it is false, just as much as knowing that it is false from your own knowledge of events.  In other words, turning a blind eye to the possibility that it might be false amounts to not believing that it is true: see Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479 at [53]. You are reckless as to whether it is true or not if you do not care whether what you are representing is true or not.  In other words, your indifference to whether what you are representing is true or not also amounts to not believing that it is true.  In either situation, there must be some moral reprehensibility on the part of the person making the representation. After all, the tort is deceit.  That means that you have to have set out to mislead the person to whom the representation was made, not necessarily by deliberately telling a lie, but either by not acting on your suspicion that it might be untrue, or by your complete disregard for whether what you are saying is true or not.

121. One other principle should be mentioned.  I said earlier that when a representation could have more than one meaning, you look at how it would have been understood by a reasonable person in the position of the person to whom it was made when considering whether the representation was false.  When considering whether it was made fraudulently, though, you look at how the person who made the representation intended it to be understood: see Krakowski, op cit, at p 11.  It is the message he intended to convey which is crucial.  So where the person who made the representation honestly believed that it was true as he understood it to mean, the representation will not be fraudulent even if a reasonable person in the position of the person to whom it was made understood it in a way which made the representation false: Angus v Clifford [1891] 2 Ch 449 at p 472.

H.2  The unlikelihood of fraud

122. Two features of the case are said to make it inherently unlikely that Mr Ing would have been dishonest in his dealings with the plaintiffs.  One is that CAHL’s contemporaneous ledgers (the journal entries and the trial balances) showed the payments which had been made under the services and employment agreements, and referred to them as “consultancy” fees paid to WCL and “management” fees paid to Stornaway.  If Mr Ing had intended to conceal the agreements with WCL and Stornaway from Mr Wells, he would have made sure that the payments made under them would either not have been recorded in the ledgers or described in some other way.  Their inclusion in the ledgers, and how the ledgers described them, would have alerted Mr Wells (and any other director of CAHL) to the agreements, as well as CAHL’s auditors when they came to prepare CAHL’s audited accounts.

123. I do not find this compelling.  As I said in [69] above, Mr Ing did not say that copies of the ledgers were provided to Mr Wells.  In any event, the ledgers did not say that WCL or Stornaway were companies in which Mr Ing had an interest, and so Mr Wells would not have known that payments were being made by CAHL pursuant to an agreement which related to Mr Ing’s employment or to one which enabled Mr Ing to benefit from management and consultancy services provided to CAHL.  And when it comes to the auditors, the fact is that audited accounts for CAHL were never prepared.

124. It is said on behalf of Mr Ing that there were good reasons for the delay in preparing CAHL’s audited accounts.  In my opinion, some of those reasons are unpersuasive.  For example, Mr Ing’s evidence was that no audit had been carried out at all in 2005 and 2006 because CAHL was a new company, though it might be said that that was the very reason for complying with clause 10(l) of the note instruments appended to the subscription agreements which required audited accounts to be provided to the plaintiffs within 90 days after the end of each accounting year.  In a similar vein is the reliance on those of Mr Wells’ e‑mails to Mr Ing in 2006 in which he was saying that he did not need “audited numbers”.  Mr Wells was not saying that he did not need CAHL’s accounts to be audited.  He was saying that what he wanted was regular management (ie unaudited) accounts — monthly sales and quarterly financials — so that he could see from month to month and quarter to quarter how actual revenue compared with the projected revenue.  Those figures were not intended to be a substitute for proper audited accounts.

125. Other reasons were advanced for the delay in the preparation of CAHL’s audited accounts by Ernst & Young.  Ernst & Young could not be instructed until the accounts of the operations in Beijing were ready to be audited, and that took what Ms Tseng described as “some time” because those responsible for preparing for the audit were used to the very different requirements for audits in the PRC and had had no experience of an audit which had to comply with international standards.  And when Ernst & Young were eventually instructed, their work, according to Mr Ing and Ms Tseng, was obstructed by Mr Qin who had fallen out with Mr Ing and who refused to give Ernst & Young access to the books and records kept at the Beijing office.  I have no reason to doubt any of that.  It means that it is difficult for the plaintiffs to allege that the lack of audited accounts after the decision to instruct Ernst & Young had been made must have been attributable to Mr Ing’s wish to conceal the payments made under the services and employment agreements.  But there was still the absence of audited accounts before then, and as a matter of historical fact it was the case that audited accounts were never produced.

126. The other reason advanced for saying that it was inherently unlikely that Mr Ing had been dishonest in his dealings with the plaintiffs was that in the build‑up to the first subscription agreement Mr Ing had been patently honest with Mr Wells.  His e‑mails to Mr Wells were said to show that he was content to let Mr Wells inspect documents in CAHL’s office, and he did not object to Mr Wells’ request to be represented on CAHL’s Board.  That is true, but the documents which Mr Ing was talking about were documents showing how things were progressing with the authorities in the PRC, and board representation is meaningless if information is being withheld from the Board.

H.3  The compensation clause

127. I turn from the general to the particular, and to whether the particular representations which I have found to be false were fraudulent as well.  I start with the compensation clause, and what Mr Ing intended to convey by it.  Mr Ing’s explanation for not including in the compensation clause any reference to his bonus or his housing allowance was that the clause was not intended to set out all the terms of his package in detail but only to give an “overview” of his package, in the same way that the memorandum as a whole was intended only to give an overview of CAHL’s business. Otherwise, he said, you would have to have incorporated the whole of the employment agreement into the memorandum.  I accept entirely that the compensation clause was an overview of Mr Ing’s financial package, and it was not intended to be anything like a complete statement of all elements of his package.  But the overview had nevertheless to be an accurate one, and the failure to add just a few words to mention the bonus and the housing allowance gave an inaccurate overview of it.  It is no answer for Mr Ing to say that it was for Mr Wells to do his own due diligence: Mr Wells was not provided with the employment agreement to enable that due diligence to be carried out.  I am sure that the message which Mr Ing intended to convey was that the US$300,000 a year was the only significant benefit in the package.  He would have known that that was untrue.

128. Then there was the sentence in the compensation clause that his compensation would not be “earned” until the investment capital had been raised and “the Company” had shown a profit.  We are here covering ground trodden before, though this time looking at things from Mr Ing’s point of view rather than that of the reasonable person in Mr Wells’ position.  The message which Mr Ing claims he was intending to convey was that the payment of his remuneration was only to be postponed until the conditions for its payment had been met, so that when they were met, he could then be paid retrospectively the remuneration which he would otherwise have received in the intervening period.  For the reasons which I gave in [82] above, I do not accept that part of Mr Ing’s evidence.  I am sure that the message which he was trying to get across was that his compensation would be earned only from when the conditions for its payment had been met in the sense that he would not be entitled to be paid anything for the intervening period.  Mr Ing would have known that that was untrue.

129. In this context, there was also Mr Ing’s evidence that he had intended the words “the Company” in the compensation clause to refer to what he called the China Alarm Group, which included not just CAHL and Beijing Alarm, but Beijing Electronics as well.  That was because he thought of them all as being one company, and intended that one day hewould inject his interest in Beijing Electronics into CAHL at a nominal price.  That intention is said to have been borne out by a number of things — in particular, (a) the slide presentation (referred to in [23] above) which showed the proposal for Mr Ing’s interest in Beijing Electronics to be acquired by CAHL at a nominal price, and (b) Mr Ing’s subsequent willingness to transfer his interest in Beijing Electronics to CAHL’s liquidators.  I am sceptical of this claim.  The fact is that Mr Ing never transferred his interest in Beijing Electronics to CAHL despite the proposal in the slide presentation.  It may well be, as Mr Ing claims, that the only reason why his interest in it was not transferred to CAHL after it had gone into liquidation was because he and Mr Ing had fallen out, and Mr Ing was not prepared to transfer his interest on the terms then available to him, but things had moved on considerably by then, and what Mr Ing might have been prepared to do at that stage does not necessarily throw any light on what he had intended to do before then.

130. The point, though, is that whether or not Mr Ing intended to transfer his interest in Beijing Electronics to CAHL at the time, I do not see how he could have thought that the words “the Company” in the compensation clause included Beijing Electronics.  As I said in [77] above, the first page of the memorandum made it clear that CAHL was to be referred to as “the Company” throughout the memorandum.  I am sure that Mr Ing is only saying that he thought that the reference to “the Company” in the compensation clause was a reference to the China Alarm Group because he always wanted to bring Beijing Electronics’ profits into the assessment, since by including them he intended to say that “the Company” had begun to show a profit.  I am sure that the message which Mr Ing wanted to convey was that he would not be paid anything until that part of CAHL’s business which related to the Safe City Project had begun to show a profit, since that was the business which Mr Wells was investing in.  Mr Ing would have known that that was untrue.  This, and the other features of the compensation clause discussed in the three previous paragraphs, mean that the compensation clause was fraudulent as well.

H.4  The use of proceeds clauses

131. I have already found that the use of proceeds clauses were false because Mr Ing intended to use some of the proceeds of the investments to secure preferential treatment for CAHL to which it was not entitled.  That was not among the uses to which the proceeds of the investments could be put.  I have no doubt that Mr Ing knew that, and he feared that if he disclosed to Mr Wells that that was what some of the proceeds of the investments would be used for, Mr Wells would not invest in CAHL.  That was why he kept that use of the proceeds of the investments to himself until it emerged in his cross‑examination.  It follows that in that respect the use of proceeds clauses were fraudulent as well as false.

H.5  Clauses 8.1(1), 9.1(4) and 9.1(9) of Schedule 2 to the subscription agreements

132. I have already found that the special consultants engaged by Mr Ing and paid for by WCL were not just using their connections to enable CAHL to pitch for contracts which it might not otherwise have had the opportunity to do, but were seeking improperly to encourage government officials in the PRC to award contracts to CAHL for reasons unconnected with the merits of its bids.  It was that which made the representations in these three warranties false.  Mr Ing knew all about that.  Indeed, it was he who sanctioned it.  To that extent, therefore, these representations were fraudulent as well as false.

H.6  Clause 13.1 of Schedule 2 to the subscription agreements

133. I have already found that the services agreement rendered the warranties in clauses 8.1(1), 9.1(4) and 9.1(9) false.  That was because the services agreement involved expenditure of an exceptional nature and because it had been entered into by CAHL otherwise than in the ordinary and proper course of its business.  Mr Ing knew that.  The upshot is that the representation in clause 13.1 was fraudulent as well as false.

I. INDUCEMENT

I.1 The law

134. To succeed in a claim for misrepresentation, the person to whom the representation was made must prove that it was the representation which induced him to act upon it — in this case to conclude the subscription agreements.  When considering whether a representation which is capable of having more than one meaning induced the person to whom it was made to act upon it, you look at how it was understood by that person: see Krakowski, op cit, p 11. He does not have to prove that the representation was the sole reason why he acted upon it.  However, he has to prove that the representation did something more than merely encourage him to act upon it or to confirm that he was right to act upon it.  The representation has to have played a “real and substantial part” in inducing him to act upon it.  In essence, the issue is one of causation.  The misrepresentation had to have been the effective cause of the person to whom the representation was made having acted upon it in the sense that but for the representation, he would not have acted upon it — in this case, by not entering into the subscription agreements — at any rate not on the terms the plaintiffs did.  These principles are taken from the judgment in Raiffeissen, op cit, and I agree with it as a correct distillation of the authorities.

135. The question which then arises is how you decide whether the person to whom the representation was made would not have entered the contract but for the representation.  Do you ask what he would have done if he had been told the truth?  Or do you ask what he would have done if no representation had been made at all?  The answer given in Raffeissen and other authorities is the latter.  But that does not necessarily mean that considering what the person to whom the representation was made would have done if he had been told the truth is completely irrelevant.  The question may be a hypothetical one, but provided that the answer is obvious and not speculative, it may help on what he would have done if the representation had not been made at all.

136. In addition to having to prove that the representation induced him to act upon it, the person to whom the representation was made has to prove that he acted in the way the person who made the representation had intended him to act.  If the person to whom the representation was made acted in a way other than the person who made the representation intended him to act, the representation will be regarded as spent: see Spencer Bower & Handley, Actionable Misrepresentation, 5^th ed, para 6.06 citing Peek v Gurney (1873) LR 6 HL 377.

137. It goes without saying that if the person to whom the representation was made makes his own inquiries about whether the representation is true, he may be held to have relied on his inquiries in deciding to enter the contract rather than on the representation.  Having said that, there is no room for any doctrine akin to contributory negligence to come into play here.  It is therefore not relevant that the person to whom the representation was made negligently failed to make his own inquiries into whether the representation was true.  In that connection, it is for the person who made the representation to prove that the person to whom it was made knew what the true position was, and had not been deceived by it: see Chitty on Contracts, op cit, para 7-036. But apart from that, it is still for the person to whom the representation was made to prove all the elements of his claim, including that it was the representation which induced him to enter the contract.

138. There is one other principle which is relevant here in the light of the disclaimers in the memorandum.  This is a claim for fraudulent misrepresentation.  The saying that “fraud unravels all” applies here.  If you make a representation fraudulently, you cannot rely on an accompanying warning that the person to whom the representation was made was not to rely on what you said.  Such a warning is effective only if you honestly believed your representation to have been accurate when you made it.  That has been the common law since S Pearson & Son Ltd v Lord Mayor of Dublin [1907] AC 351.  Ms Ismail did not dispute this proposition.  It may be that the presence of disclaimers such as those in the memorandum means that anyone reading it was less likely to rely on it, but the disclaimers themselves did not prevent the representations in the memorandum from being relied upon.

I.2 The memorandum

139. Two of the representations which I have found to be both false and fraudulent were in the memorandum: the compensation clause and the use of proceeds clause.  Before considering whether either of them induced Mr Wells to cause the plaintiffs to enter into the subscription agreements, I should deal with some general points about the memorandum.  The first is that the memorandum was trying to get people to invest in CAHL by subscribing for shares in it.  In the event, that was not the form which the plaintiffs’ investment took.  It took the form of convertible notes by which loans were made to CAHL with options to convert the amount of the loans into shares in CAHL at an agreed price.  Because the ultimate investment was in a different form from the one which the memorandum sought, it is said that the plaintiffs acted in a way other than Mr Ing had intended them to act, so that the representations in the memorandum should be regarded as spent.  I do not agree.  The plaintiffs did act in the way in which Mr Ing intended them to act.  They invested in CAHL.  The fact that the form which the investment took was different from what Mr Ing had sought did not affect that.

140. Then there are the disclaimers which appeared in the memorandum and the fact that the memorandum was in draft only.  That did not mean that the memorandum was work in progress.  It was described as a final draft, suggesting that any future changes would not be material.  For my part, I do not think that the disclaimers or the fact that the memorandum was only a draft had much of an effect on Mr Wells.  Although he cannot now recall whether he had picked up at the time that it was just a draft, I think that he would have noticed that it was a draft only, albeit a final draft.  However, I do not think that he read the disclaimers with any care at all.  That was because he thought that they were there to protect those who had issued the memorandum, rather than to warn him that the reliance he could place on its contents was limited.  He did not think the disclaimers absolved CAHL from its responsibility to tell the truth in the memorandum as he regarded the memorandum in the same way as you would treat a prospectus.  It was therefore something which he could rely on.  Any changes which were subsequently made would be minimal, and would not be material to what the memorandum had said about CAHL and its business.

141. Leaving aside, then, the disclaimers which Mr Wells acknowledged he had not read carefully, how carefully did he read the rest of the memorandum?  That, I think, is the critical question here.  I do not think that he read it so carefully as to pick up errors — even obvious errors — in it.  For example, there was the error I referred to in [51] above in the use of proceeds clause that “[t]he net proceeds from the Offering, after deducting all expenses, are estimated to be approximately US$92,000,000”.  It should have said US$9,200,000.  I do not think that Mr Wells picked that up at the time.  But the fact that he did not read the memorandum so carefully as to pick up errors does not mean that he did not read carefully those parts of it in which he was particularly interested.

142. In that connection, it is important to bear in mind what he was reading the memorandum for.  He was reading it to get an idea of whether CAHL was a company which he should invest in.  At that stage he would have wanted to know in broad terms about the nature of its business, how far advanced it was in being awarded the contracts it needed and getting the necessary licences, permits and approvals, what the revenue was likely to be, and what profit it was likely to show.  As I said in [16] above, what was uppermost in Mr Wells’ mind at the time was the state of CAHL’s order book.  Indeed, as we have seen, throughout the whole of his association with CAHL, for him CAHL’s expenditure played second fiddle to its revenue.  I do not think that he would have been particularly interested at that stage in the level of the remuneration of CAHL’s staff in general or of Mr Ing in particular, or what precisely any sums he invested would be used for, so long as they were used in furtherance of CAHL’s business.  Those were the sort of things which Mr Wells thought would be addressed in the course of the due diligence exercise which his staff — together to a limited extent with Mr Wang and Mr Li (as I have found in [15] and [22] above) — were going to carry out.  The bottom line is that at that stage Mr Wells would really have read the memorandum only to get an idea whether this was a business which had the potentiality for profit which would make it a good business for him to invest in.

I.3 The compensation clause

143. Against that background, I turn to the question whether the compensation clause and the use of proceeds clause induced Mr Wells to enter the subscription agreements.  I deal with the compensation clause first in the light of my finding that at that stage Mr Wells would not have been particularly interested in the level of Mr Ing’s remuneration. He did not, for example, ask to be provided with a copy of the “management agreement” referred to in the compensation clause (assuming that he thought that it had already been brought into existence).  It is also true that he did not check how the assurance in the compensation clause that “[c]ompensation under this contract will not be earned until this financing is complete and the Company has shown profits” had been or would be effected, but that does not mean that he was indifferent to that.  There was his evidence about the comfort he got from the fact that Mr Ing’s interests were linked to the profitability of CAHL.  I referred to that in [78] above.  I have no doubt that it was an important consideration for Mr Wells.  Indeed, I think that if he had been told that Mr Ing was not going to receive his remuneration until CAHL showed a profit, but at that stage his remuneration would be backdated to the beginning of his employment, Mr Wells would have insisted that that was not to happen.  Having said that, I also think that if Mr Wells had insisted that that was not to happen, Mr Ing would have agreed to it, so the upshot would still have been that Mr Wells would have invested in CAHL.

144. But the question is not what Mr Wells would have done had he been told the truth, but whether Mr Wells would have concluded the two subscription agreements if the compensation clause had not been in the memorandum at all.  This is where the clauses which were added to the note instruments appended to both of the subscription agreements become important. Mr Wells’ insistence on these clauses in the note instruments shows the level of his concern that excessive remuneration should not be paid to CAHL’s management team.  It could be argued that those clauses were limited to the level of remuneration.  They did not address the question when Mr Ing’s remuneration would be payable to him from.  It could also be argued that those clauses only gave Mr Wells comfort that excessive payments would not be paid in the future to any member of CAHL’s management team.  It could therefore be argued that Mr Wells relied on the compensation clause for the assurances that Mr Ing would only be paid his remuneration when CAHL had become profitable and that he had not already concluded an agreement with CAHL under which he was entitled to excessive remuneration.  But these arguments are very refined, and I do not think that thoughts of that kind crossed Mr Wells’ mind.  In any event I did not understand Mr Lam to be inviting me to make findings along those lines.  The much better view is the simple one, namely that Mr Wells regarded the comfort which those clauses gave him as making it unnecessary for him to rely on the compensation clause when it came to the level of Mr Ing’s remuneration or when he would be paid his remuneration from.  Rightly or wrongly, the compensation clause was of no importance to him once the two additional clauses had been added to the note instruments.  In those circumstances, the answer to the question whether Mr Wells would have concluded the two subscription agreements if the compensation clause had not been in the memorandum is that he would have done.  It follows that the compensation clause did not induce him to cause the plaintiffs to enter into the two subscription agreements.

I.4 The use of proceeds clause

145. I turn to the use of proceeds clause.  The basis on which I have found the use of proceeds clause to have been false is very limited.  Although the services agreement was made with a company in which Mr Ing had a substantial interest so that he benefitted from the fees paid under the services agreement through his shareholding in the company, that did not make the use of proceeds clauses false.  The only thing which made the use of proceeds clause false was that Mr Ing intended to use some of the proceeds of the investments to pay for special consultants and the very considerable expenditure they incurred in lavishly “entertaining” government officials in the PRC to secure preferential treatment for CAHL to which it was not entitled.  Since that expenditure could not come within any of the uses to which the proceeds of the investments could be put, the use of proceeds clause was false to that extent.

146. I have no doubt that if Mr Wells had been told that some of the proceeds would be used for this purpose, he would have not have invested in CAHL unless he was given a guarantee that it would not happen.  He would not have wanted to be associated with something which might be regarded as akin to bribery.  If he had not got a copper‑bottomed guarantee to that effect, he would not, I am sure, have proceeded with the investment.  I judged Mr Wells to be a straightforward and honest man, and to proceed with the investment in those circumstances would, I think, have offended his sense of what was right.  More importantly, though, it would have been a step into the unknown.  I judged Mr Wells to be a relatively cautious man — not someone who would take unnecessary risks.  He would not have known what the repercussions might be if it got out that he had sanctioned the offer of “sweeteners” for CAHL to have a competitive edge by investing in CAHL.

147. I have not overlooked the possibility that Mr Wells may have had an imperfect understanding of what bribery was.  When asked how he would define it, he appeared to be saying that an undeserved advantage was not necessary, and that whether something is a bribe depends largely on its value. On that basis, a valuable gift which he once received from Mr Ing might have constituted a bribe.  But I do not think that Mr Wells had really given the topic much thought, and he was giving an unconsidered answer to a question about an issue which he had never really addressed.  Had he thought about it, I believe that he would have been able to distinguish between the gift he got from Mr Ing, which he would have regarded as a token of Mr Ing’s appreciation for the support Mr Wells had given him, and the sort of “entertaining” for which Mr Ing was using part of the proceeds of the investment in order to secure preferential treatment which may have been undeserved.

148. But the question is not what Mr Wells would have done had he been told the truth about what at least some of the proceeds of the investments would be used for.  The question is what he would have done if the memorandum had not included the use of proceeds clause.  I have already said in [100] above that Ms Ismail must be treated as having agreed that implicit in the use of proceeds clause is that they would be used in furtherance of CAHL’s business in a legitimate way.  However, I very much doubt that it would have occurred to Mr Wells to read the use of proceeds clause in that way unless someone had pointed it out to him, and the issue is therefore how important for him was the assurance in the memorandum that the money he invested would only be used in the furtherance of CAHL’s business.  Would he have concluded the two subscription agreements without it?

149. I think that he would have done.  The memorandum was a very long document.  Leaving aside a schedule and some appendices, it ran to 50 pages in all.  The use of proceeds clause was in the last part of the memorandum in a section headed “Organization”, which itself ran to 15 pages, although the other use of proceeds clause was on page 5 in a section of the memorandum headed “Summary of the Offering” which was itself in an introduction to the memorandum as the table of contents and the chapters to which the table of contents referred came afterwards.  I judged Mr Wells not to be all that comfortable with detail, and I am not convinced that he actually read the use of proceeds clause at the time.  But even if he did, I do not think that he paid much attention to it.  His focus, as I have said, was on whether CAHL was a business which he should invest in, and he would not have been interested in the more technical aspects of the memorandum.  The sections which he would have read with greater care were those which explained CAHL’s business, its business strategy and its prospects for success.  He would have taken for granted the fact that the proceeds of the investment would be used in furtherance of CAHL’s business.  He would not have needed an express assurance to that effect, and he would have been content to enter into the subscription agreements without such an assurance.  Had he been told that some of the proceeds of the investments would not be used in furtherance of CAHL’s business — or even the legitimate furtherance of its business — he would not, of course, have invested in CAHL.  If that had been the appropriate question for the court to address, the plaintiffs’ claim on this part of the case would have succeeded.  But as I have said, that is not the criterion by which the question of inducement has to be decided.  It follows that the use of proceeds clause did not induce Mr Wells to cause the plaintiffs to enter into the two subscription agreements.

I.5 Clause 4.1 of the subscription agreements

150. It is tempting to say that if the use of proceeds clause in the memorandum did not induce Mr Wells to cause the plaintiffs to enter into the two subscription agreements, neither did the use of proceeds clauses in clause 4.1 of the two subscription agreements.  That does not necessarily follow, though in this case I think it does.  Looking at the position at the time of the first subscription agreement, Mr Wells had by then decided to invest in CAHL on the basis of (a) those parts of the memorandum on which he unquestionably relied, and (b) his own due diligence through his staff, and to a lesser extent through Mr Wang and Mr Li. Moreover, the subscription agreement was obviously drafted by lawyers.  I do not think that there was any direct evidence of that, but the language of the agreement makes that conclusion inescapable.  It was very long.  It ran to 7 pages plus a short schedule, and that did not include the schedule which contained the warranties and ran to 7 pages, or the note instrument which ran to 18 pages including schedules.  Provisions are often included by lawyers in agreements, not so much because the parties want them to be included, but because the lawyers think that they should be there.  That is entirely sensible: in the event of a breach of that provision, the innocent party can sue the other party for that breach, whether he was aware of the provision or not.  But here, of course, Mr Wells (a) had to have known of the use of proceeds clause in the first subscription agreement for CAHA’s claim to succeed on the basis of it, and (b) had to have been induced by that clause to cause CAHA to enter into the agreement.  For the reasons I gave when dealing with the use of proceeds clause in the memorandum, I am not convinced that Mr Wells read the use of proceeds clause in the first subscription agreement at the time, but even if he did, I do not think that he paid much attention to it.  He would, as I said then, have taken for granted the fact that the proceeds of the investment would be used in furtherance of CAHL’s business, and he would have been content to enter the first subscription agreement without the assurance which the use of proceeds clause in the agreement would have given him.  It follows that clause 4.1 of the first subscription agreement did not induce Mr Wells to cause CAHA to enter into it.

151. There had been no discernible change of circumstances by the time the second subscription agreement came to be signed. For the same reasons, therefore, I have concluded that clause 4.1 of the second subscription agreement did not induce Mr Wells to cause PIL to enter into it.

I.6 Clauses 8.1(1), 9.1(4) and 9.1(9) of Schedule 2 to the subscription agreements

152. It is invariably the practice for warranties to be given to those who invest in a company.  There is a limit to what even a comprehensive exercise of due diligence will reveal.  Warranties are therefore always sought to cover the investors in case there are skeletons in the cupboard of which they are unaware.  Mr Wells, I am sure, would have expected nothing less.  These three warranties addressed that concern.  Unlike the compensation clause in the memorandum and the various use of proceeds clauses, the three warranties are so standard that it would have been surprising if they had not been included in the two subscription agreements. So whether Mr Wells actually read them does not really matter.  He would have wanted to know that warranties had been included in the subscription agreements to cover the possibility that CAHL had not entered into any transaction which was not in the ordinary course of its business or which involved onerous or unusual expenditure.  Even if he had not read these warranties, I am sure that he would have been told that there were warranties in the subscription agreements which protected the plaintiffs against that possibility.

153. Had Mr Wells known that the warranties were false in the one respect in which I have found them in [113] above to have been false, I am sure that he would not have invested in CAHL.  He would not have wanted to be associated with something which was akin to bribery.  That, of course, is not the relevant question, but in this instance if the right question was posed, namely would he have invested in CAHL if these warranties had not been given, the answer would have been the same.  To proceed with the investment in those circumstances would have been too much of a risk.  He would have been a hostage to fortune if he had gone ahead with the investment without the assurance that CAHL had not entered into any transaction which was not in the ordinary course of its business or which involved onerous or unusual expenditure.  It follows that Mr Wells was induced by clauses 8.1(1), 9.1(4) and 9.1(9) of Schedule 2 to the subscription agreements to cause the plaintiffs to enter into the subscription agreements.

I.7 Clause 13.1 of Schedule 2 to the subscription agreements

154. This analysis also applies to the sole basis on which in [114] above I found clause 13.1 of Schedule 2 to the subscription agreements to be false.  This was a standard clause as well.  The important part of it for present purposes was there to protect the plaintiffs against the non‑disclosure of facts or matters which would render such information as had been given untrue, inaccurate or misleading.  Again, whether Mr Wells actually read clause 13.1 does not really matter.  He would have wanted to know that a warranty had been included in the subscription agreements to cover the possibility that relevant information had not been disclosed, and he would have been told that there had been.  Would he have been prepared to invest in CAHL without that assurance?  I am sure that he would not.  It follows that Mr Wells was induced by clause 13.1 of Schedule 2 to the subscription agreements to cause the plaintiffs to enter the subscription agreements.

J.  LIMITATION

155. The plaintiffs’ action, being founded on tort, could not be brought once six years had elapsed since the date on which their causes of action accrued: see section 4(1) of the Limitation Ordinance (Cap 347).  It had accrued by the latest on 3 March 2006 when the second subscription agreement was concluded.  The plaintiffs’ writ was issued on 27 March 2012, more than six years later.  However, section 26(1) of the Limitation Ordinance provides, so far as is material:

“… where in the case of any action for which a period of limitation is prescribed by this Ordinance, either‑

(a)  the action is based upon the fraud of the defendant; [or]

(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; …

the period of limitation shall not begin to run until the plaintiff has discovered the fraud [or] concealment … (as the case may be) or could with reasonable diligence have discovered it.”

156. Mr Ing’s case on limitation was that while Mr Wells was a director of CAHL, he had attended many of CAHL’s board meetings and had been provided with management accounts which had set out CAHL’s expenditure. It is accepted that this expenditure was not itemised in detail, but it incorporated all the sums paid under the services and employment agreements. This expenditure was substantial, and Mr Wells could have asked what it consisted of.  As Millett LJ (as he then was) said in Paragon Finance Plc v D B Thakerar & Co [1999] 1 All ER 400 at p 418b-c:

“The question is not whether the Plaintiffs should have discovered the fraud sooner; but whether they could with reasonable diligence have done so. The burden of proof is on them. They must establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take.” (Original emphasis)

I am not sure that the measures have to be exceptional, but I agree with the rest of that statement.

157. The only document which could have put Mr Wells on notice about the expenditure prior to 27 March 2006 was the unaudited profit and loss statement for the first six months of 2005 referred to in [24] and [66] above.  Although the figures for management and consultancy services were not insubstantial, I do not think that Mr Wells could reasonably have been expected to ask about them.  As I said then, his understandable concern was whether the large amount due to a related company referred to in the accompanying balance sheet related to his own investment, and why the revenue was so disappointing compared with the projections.

158. In any event, all of this was before Mr Ing had revealed in cross‑examination the use which had been made of the special consultants and the expenditure on their “entertaining”.  Ms Ismail accepted that Mr Wells could not have discovered those facts with reasonable diligence.  It follows that the plaintiffs’ claim is not statute‑barred.

K. THE PLAINTIFFS’ LOSS

159. In a case of fraudulent misrepresentation, a plaintiff is entitled to be put into the position in which he would have been if the false representation had not been made.  It is therefore common ground that the plaintiffs are entitled to recover the sums they invested in CAHL, though they have to give credit for any benefits they received as a result of concluding the subscription agreements.  Accordingly, CAHA and PIL claim the sums they respectively invested, less the value of the convertible notes they subscribed for, together with their costs and expenses incurred in entering and performing the subscription agreements.  There has been no evidence about what those costs and expenses were.  If there is such evidence buried in the many files of documents I was provided with, that evidence has not been drawn to my attention.

160. The plaintiffs accept that on 21 April 2011 they were paid dividends from the sums realised by the liquidators: US$88,504 in the case of CAHA and US$211,496 in the case of PIL.  These sums add up to US$300,000.  It is common ground that the plaintiffs’ damages have to be reduced by those amounts.  The only outstanding issue between the parties relates to the steps which the plaintiffs took to mitigate their loss.  Those steps consisted of the restructuring of CAHL and its subsidiaries following CAHL’s liquidation.  I summarised the broad effect of that restructuring in [38] above: PIL had had transferred to it the convertible bond for US$20.5 million which CAIHL had issued to CAHL (“the CAIHL bond”), and CAHL’s debt was reduced by that amount.  But which of CAHL’s debts did it reduce?  Its debt to PIL under the convertible notes originally issued to Citadel and UBS which had been assigned to PIL, as is argued on behalf of the plaintiffs?  Or its debts to CAHA and PIL under the subscription agreements as well, to be applied pro rata according to the amounts outstanding on each of the notes, as is contended for on behalf of Mr Ing?

161. There is a preliminary point here.  The plaintiffs say that that the CAIHL bond has no value.  That is said to be the effect of Mr Wells’ unchallenged evidence that CAIHL has defaulted on its payment to PIL under the bond.  But that does not mean that the bond is worthless.  As Mr Wells himself said, it only means that the bond has not yet resulted in any financial benefit to PIL.  Crucially, though, the liquidators put a value of US$20.5 million on the bond at the time of its issue.  Otherwise CAHL’s debt would not have been reduced by that amount.  It follows that the only remaining issue relates to which debts were reduced by the bond.  Mr Wells and Mr Borrelli both expressed their own views on what they thought had been intended, but the first port of call has to be the language of the agreements by which the restructuring of CAHL was effected.  One of those agreements was a framework investment agreement (“the framework agreement”) dated 12 November 2009, to which PIL, but significantly not CAHA, was a party.

162. A reminder of what was owed and to whom at this stage under the various convertible notes would be helpful.  Leaving aside interest, US$10 million was owed to CAHA under the first subscription agreement; US$5,555,561 was owed to PIL under the second subscription agreement; and US$20 million was owed to PIL to whom the convertible notes originally issued to Citadel and UBS had by then been assigned.  However, the framework agreement proceeded on the basis that PIL had been responsible for making the investment under the first subscription agreement as well as the second.  That is apparent from recital (C) of the framework agreement, which referred to “the Investor” holding US$15.5 million convertible bonds previously issued by CAHL to “the Investor”.  The reference to “the Investor” was a reference to PIL because when the framework agreement listed the parties to it PIL was described as “the Investor”.  So although it had been CAHA and not PIL which had invested the US$10 million under the first subscription agreement, the framework agreement was either mistaken in attributing that investment to PIL, or it was treating CAHA as having made that investment as agent for PIL.

163. With that in mind, I turn to the important provision in the framework agreement for present purposes, and that is recital (F), though to make sense of it, one needs to know that the framework agreement described the convertible notes originally issued to Citadel and UBS as “the Citadel Bonds”, the convertible notes issued under the two subscription agreements as “the Investor Bonds”, and the convertible bond for US$20.5 million issued by CAIHL to CAHL as “the Convertible Bond”.  Recital (F) reads:

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

The effect of this clause is said by Ms Ismail to be twofold.  First, since “the Existing Convertible Bonds” were defined as consisting of the Citadel Bonds and the Investor Bonds, the claims against CAHL which the framework agreement was seeking to reduce were the claims under both the Citadel Bonds and the Investor Bonds. Secondly, since PIL was treated as having been issued with both the Investor Bonds, the claims against CAHL which the framework agreement was seeking to reduce included the claims under both the Investor Bonds.  Accordingly, it was contended that the effect of the framework agreement was to reduce each of the three claims against CAHL by a total of US$20.5 million.  How should that be apportioned?  The answer, said Ms Ismail, lies in the law relating to mitigation of loss.  That is that where a plaintiff mitigates his loss, the court “may properly look at the whole of the facts and ascertain the result in estimating the quantum of damage”: British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Company of London [1912] AC 673 at p 690.  Looking at all the facts, the fairest way to assess the plaintiffs’ loss in this case is to apportion the reduction in the claim pro rata against the amounts outstanding on all the convertible notes.

164. The flaw in this argument is that recital (F) dealt with the issue of apportionment.  It was for PIL to determine which of its claims against CAHL was to be reduced by the US$20.5 million.  In the absence of such a determination it was for CAHL to decide which of the claims against it was to be reduced by that amount.  That is the effect of the words in Recital (F) “the Investor will surrender to [CAHL] a portion of the Existing Convertible Bonds …”  Which portion was left to PIL to decide, or in the event of PIL not doing so, to CAHL to decide.  I was not referred to any election by PIL, but CAHL’s liquidators decided by a letter to PIL of 13 September 2014 to apply the US$20.5 million to reduce the outstanding amount under the Citadel Bonds only.  That happens to reflect what Mr Wells and Mr Borrelli said the framework agreement had intended to achieve.  Accordingly, the US$20.5 million did not reduce either CAHA’s or PIL’s claims under the two subscription agreements, even if this results in something of a windfall for them.

L. CONCLUSION

165. For these reasons, there must be judgment for CAHA and PIL on their claims against Mr Ing.  CAHA’s damages amount to US$9,911,496 (being US$10 million less US$88,504), and PIL’s damages amount to US$5,344,065 (being US$5,555,561 less US$211,496).  Although interest was claimed in the Amended Statement of Claim, I was not addressed on the basis for that claim or when it should be from or what the rate should be.  In any event, it is important that the plaintiffs do not recover the same sums twice over, and their claims in CAHL’s liquidation include the interest on the convertible notes.  In the circumstances, I leave it to the parties to see if they can agree a suitable order relating to interest.  If such an agreement is not reached within 28 days of the handing down of this judgment, the clerk of court should be notified of that, and I will decide what order for interest, if any, should be made without a hearing on the basis of such written representations as are made.

166. Then there is the question of costs.  At present, I do not think that Mr Ing should be ordered to pay the whole of the plaintiffs’ costs.  Although I have found that all the representations relied on by the plaintiffs were false, and known by Mr Ing to be false when they were made, only some of those representations induced the plaintiffs to conclude the subscription agreements, and even then the plaintiffs only succeeded on that part of their claim to which the amendment to plead the use of the special consultants and the expenditure on their “entertaining” related.  At present, I am inclined to think that Mr Ing should pay 50% of the plaintiffs’ costs of the action, and that is the order nisi relating to costs which I make.

167. Finally, I wish to express my thanks to Mr Lam and Ms Ismail for their exceptional advocacy and the outstanding quality of their oral and written submissions.  They made my task considerably less difficult than it otherwise would have been.  When you couple that with the solicitors’ exemplary preparation of the case for trial, the proceedings have been an advertisement for civil justice in Hong Kong.