FORCE FIELD LTD v. TOP ONE GLOBAL HOLDINGS LTD AND ANOTHER

HCA 2980/2017 and HCA 406/2018
(Heard Together)

[2026] HKCFI 5340

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2980 OF 2017

________________________

BETWEEN

________________________

AND

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 406 OF 2018

________________________

BETWEEN

________________________

(Heard Together)

________________________

JUDGMENT

________________________

A. INTRODUCTION

1.  This is the trial of two related High Court actions which have been ordered to be heard together[1]:-

(1) HCA 2980/2017 (“the 2980 Action”), in which Force Field Limited (力禾有限公司) (“FF”) is the plaintiff, Top One Global Holdings Ltd (“Top One”) is the 1^st defendant and Hon Kwok Lung (韓國龍) (“Hon”) is the 2^nd defendant.

(2) HCA 406/2018 (“the 406 Action”), the leading action[2], in which Top One is the plaintiff, Su Da (蘇大) (“Su”) and FF are the 1^st and 2^nd defendants respectively.

2.  Both actions arose from a Sale and Purchase Agreement dated 29 July 2016 (“the SPA”) whereby:-

(1) Top One agreed to purchase and FF agreed to sell 68,800,000 shares (representing 19.8% of the total shareholding) in Ernest Borel Holdings Limited (“EBHL” or “the Company”), a company listed on the main board of the Hong Kong Stock Exchange (Stock Code: 1856), at a consideration of HK$154,800,000.00.

(2) Su, the sole shareholder of FF and the then executive director and board chairman of EBHL, signed the SPA as the “Vendor Guarantor” to guarantee FF’s performance of its obligations under the SPA. These include the warranties FF and Su have given in respect of the financial position and accounts of EBHL and its subsidiaries.

B. BACKGROUND

B1. The 2980 Action

3.  This action arose from FF’s claim against Hon, the executive director of Citychamp Watch & Jewellery Group Limited (“Citychamp”), for breach of oral warranty and against Top One for breach of an oral collateral agreement, allegedly made by the latter prior to the execution of the SPA regarding the purchase of 3,260,000 EBHL shares owned by FF (“the Collateral Agreement”).

4.  FF claims that this is the balance of the shares which Su and FF did not sell under the SPA. FF’s case is that Hon personally assured Su that Hon (or his associates) would procure the purchase of those remaining 3,260,000 EBHL shares within 12 months, and that Top One, acting through Mr Sit Yau Chiu (薜由釗) (“Sit”), gave a collateral promise to the same effect. FF relied on those assurances in entering into the SPA and suffered loss when the promises were not honoured.

5.  In order to fully appreciate the background of the purchase of those shares by Top One, one must dial the clock back a few months to March 2016 to see how the purchase of the EBHL shares by Hon and his associates had all come together.

B1.1 History of the Purchase of the EBHL Shares

6.  According to FF, Hon first expressed interest in acquiring EBHL in or around March 2016. At that time, EBHL’s shareholding allocation was as follows:-

Person	Role	Shareholding
Mr Lam Wai Wah (林偉華) (“Lam”)	Largest shareholder	99,755,000 shares (28.71% of EBHL)
Su (through FF)	Second largest shareholder and CEO who ran the operation of EBHL	71,960,000 shares (20.74% of EBHL)
Mr Chan Kin Sun (through Surplus Union Investment Ltd) (“Chan”)	Another major shareholder	37,935,000 shares (10.92% of EBHL)
Ms Tang Hua (through Dragon Cloud Holdings Limited)	Another major shareholder	33,720,000 shares (9.71% of EBHL)
Others	Public shareholders	29.92% of EBHL
	TOTAL	100% of EBHL Shares

7.  Judging from the history of the case, it is clear that Hon / Citychamp’s acquisition of EBHL shares was carefully planned and was implemented in 2 stages, namely, firstly by purchasing Lam’s block of shares (who was the largest shareholder at the time); and secondly by acquiring those of other major shareholders’ shares including those owned by Su (through FF).

8.  As the first step, Hon used a company under his control, namely, Sense Control International Limited (“Sense Control”), to acquire Lam’s block of shares on 18 April 2016. FF says that this transaction was facilitated by Su and Hon’s son-in-law Mr Teguh Halim (“Teguh”). The second step was to acquire Su and Chan’s blocks of shares. Su’s block was done through a very last-minute involvement of Top One as purchaser on 29 July 2016 which FF says was acting as Hon’s agent or nominee.

9.  After owning close to 50% shareholding of EBHL, Hon gained control of EBHL through the installation of his own personnel and agents to key management posts.

10.  Then, through a series of corporate maneuvers, including Top One’s sale of EBHL shares to VGB Limited (“VGB”) (which FF says is another entity controlled by Hon), Citychamp officially acquired 58.22% ownership of EBHL in 2018. As of 12 July 2022, Citychamp’s shareholding in EBHL (through VGB) increased to 64.08%.

11.  FF says that judging from 3 different aspects of how the EBHL shares were acquired, it can be seen that Top One was actually acting as an agent nominee of Hon and his associates. They are: (i) the negotiations were all along conducted at “high level” directly with Hon and his associates. They included Tao Li (陶立) (“Tao”), Teguh and Ms Veronica Lam (林黎) (“V Lam”), who is the niece and personal assistant to Hon; (ii) Lam’s block of shares was taken by Sense Control, a company under the control of Hon and his associates; and (iii) Top One was only “parachuted in” on the very last day when the SPA was signed where it acted as the purchaser for the 68,800,000 shares. Top One had not been involved with the negotiations for the purchase of Su/FF’s block of shares prior to that date.

12.  In gist, FF says that both Top One and Sit were never involved in the acquisition process of the shares from the main shareholders of EBHL – from the enquiry stage to the negotiations to the ultimate purchase of the various blocks from them. It was only a corporate vehicle used by Hon and his associates to enable it to purchase the block of Su (held in the name of FF).

13.  Top One says that, FF’s claim is wholly unsubstantiated. Top One was not involved in the dealings between FF and Hon. Its sole connection is the purchase of EBHL’s shares after Hon withdrew from the deal. Because of that, FF dragged Top One into this matter and accused its director of making the Collateral Agreement to purchase additional shares from FF when the SPA expressly negates any collateral agreement.

14.  What is significant to note in the context of this case is that Hon had openly admitted liability for the claim brought by FF against him. On 10 October 2025, he made a sanctioned payment in the sum of HK$3,220,000.00. On 21 November 2025, FF accepted the sanctioned payment made by Hon in settlement of its claim against him.

15.  Despite of that, FF continues to pursue its claim against Top One, based on the Collateral Agreement.

B1.2 FF’s Case

16.  Essentially, FF alleges that the original deal to sell its shares in EBHL was with Hon only.

17.  At the time, Hon (in his name or through his nominee) intended to acquire a total of 72,060,000 shares in EBHL from FF and Su, who was FF’s sole shareholder (“Su’s Shares”), in addition to the 99,755,000 shares in EBHL which he had already acquired from Lam, another major shareholder of EBHL.

18.  However, Hon subsequently indicated that he was experiencing financial difficulties and could not purchase the shares himself. Eventually, Top One, a company wholly owned by Sit became the intended purchaser of Su’s Shares at the last minute.

19.  On 29 July 2016, FF agreed that Top One shall acquire 68,800,000 shares in EBHL from FF (instead of the entirety of Su’s Shares). The SPA was then signed to that effect.

20.  FF claims that, before the SPA was signed:-

(1) Hon had verbally warranted that the balance of 3,260,000 shares in EBHL held by FF would be purchased by him, whether by himself or through his agent, at HK$2.25 per share (ie the same price under the SPA) within 12 months of the SPA (“Hon’s Warranty”); and

(2) Sit had also verbally confirmed that he “acted upon the instructions” of Hon and would “procure [Top One] to purchase” the remaining 3,260,000 EBHL shares within 12 months upon signing of the SPA, ie the Collateral Agreement.

21.  FF further claims that it entered into the SPA relying on Hon’s Warranty and/or the Collateral Agreement. It alleges that Hon had failed to honour Hon’s Warranty and Top One (through Sit) had failed to honour the Collateral Agreement. Accordingly, FF seeks damages for their breach.

B1.3 Top One’s Case

22.  Top One denies FF’s allegations. Top One says that it is an investment holding company incorporated under the laws of the British Virgin Islands, which was incorporated in August 2015. It is wholly owned by Sit, and its directors were Sit, Hon and Wong Fung Yee Mary (王鳳儀) (“Ms Wong”). It claims that it is an independent entity unrelated to the Citychamp and/or Hon.

23.  Top One alleges that, in or around late July 2016, Sit was searching for an investment opportunity. Through Tao, Sit’s acquaintance and the executive director of Citychamp, Sit learnt that Su was keen to sell the shares in EBHL which he and FF held quickly. However, the intended share sale to Citychamp / Hon had fallen through.

24.  Hence, Top One expressed willingness to purchase EBHL shares from FF. Following receipt of financial advice, Sit made clear that Top One was only prepared to purchase 68,800,000 shares of EBHL, being 19.8% of the issued share capital of EBHL. Su agreed. Hence, the SPA was signed on 29 July 2016.

25.  Top One claims that it has no knowledge of the alleged Hon’s Warranty and denies that any collateral agreement was ever made by Sit on behalf of Top One to FF.

26.  Top One says that the existence of the Collateral Agreement is wholly inconsistent with the SPA, which contains, inter alia, an entire agreement clause and a no-oral modification clause.

27.  In any event, Top One says that FF is contractually estopped from denying the matters it acknowledged therein, which includes that FF “is not relying upon and has not relied upon any representation, promise, or statement made by anyone that is not expressly referenced, recited, contained or embodied in this Agreement”.

B2. Under HCA 406/2018

28.  Upon the completion of the SPA, Top One became a minority shareholder of EBHL, holding 19.8% of its shareholding. On 17 August 2016, Sit was appointed as an executive director of EBHL. He subsequently became the chairman of the board on 4 October 2016, and the CEO on 29 March 2017.

29.  Allegedly, it was then that Top One discovered the financial position of EBHL and its subsidiaries had been significantly overstated by Su and FF. Specifically, Top One claims that, contrary to the warranties given by Su and FF in the SPA, that there are substantial Cancelled Sales (as defined in the SPA), Unrecoverable Receivables (as defined in the SPA), undisclosed substantial liability to a contractor, undisclosed labour dispute, undisclosed advertisement fees and missing inventories. Consequently, Top One alleges that the actual Net Assets Value (“NAV”) of the Company fell short of the minimum NAV warranted and guaranteed by Su and FF under the SPA.

30.  Top One therefore commenced the 406 Action against Su and FF for: (1) breach of warranties, seeking to recover the damages pursuant to the terms of the SPA; (2) alternatively, fraudulent and/or negligent misrepresentations as to the liabilities, inventory, revenue and accounts receivables of EBHL.

31.  Both FF and Su denied liability.

C. DISCUSSION

C1. Issues to be determined

32.  In this judgment, I propose to deal with the following issues arising from the two separate actions:-

C1.1 Under the 2980 Action

(1) Whether the Collateral Agreement, as identified and alleged at §20 of the Amended Statement of Claim (“ASOC”)[3], was made between FF (via Su) and Top One (via Sit);

(2) Whether the Collateral Agreement is valid and/or enforceable;

(3) Whether FF is estopped from denying the terms of effect of the Entire Agreement Clause and the state of affairs as recited therein and/or asserting that the SPA did not constitute the entire agreement between FF and Top One in relation to the sales and purchase of EBHL;

(4) Whether FF is entitled to enforce the Collateral Agreement against Top One and whether Top One was in breach of the same for failing to purchase the remaining 3,260,000 shares within 12 months upon signing of the SPA;

(5) Whether FF had failed to mitigate its loss; and

(6) The quantum of damages, after taking into account of Hon’s sanctioned payment of HK$3,220,000.00 in settlement of FF’s claim.

C1.2 Under the 406 Action

(1) Whether Su & FF were in breach of their warranties under the SPA and/or other terms of the SPA as alleged by Top One;

(2) Whether Top One is entitled to recover the alleged loss of RMB 41,819,559.36 of the Cancelled Sales;

(3) Whether Top One is entitled to recover the sum of RMB 7,477,460.51 of the alleged Unrecoverable Receivables;

(4) Whether Top One is entitled to recover the alleged loss of HK$1,101,296.00 on the alleged Uncollected Trade Receivables;

(5) Whether Top One is entitled to recover the loss of HK$15,587,568.75 of the alleged Undisclosed Liability to the contractor Easy Team Engineering Limited (“Easy Team”);

(6) Whether there was adequate disclosure by Su & FF in relation to the labour dispute and back payment to Ms Liu Libing (劉麗冰) (“Ms Liu”) in the Management Accounts or other financial statement of EBHL;

(7) Whether there was adequate disclosure by Su & Fu in relation to the alleged sum of HK$7,454,648.63 advertising fees;

(8) Whether there was any missing inventory in the sum of HK$23,308,751.74 as alleged or at all (“Missing Inventories”);

(9) What is the amount of actual NAV (after taking into account of the alleged breaches) against the Minimum NAV of HK$566,000,000.00 (“Actual NAV”);

(10) Whether Su & Fu are liable for fraudulent and/or negligent misrepresentation as alleged; and

(11) The amount of damages Top One is entitled to, if any.

C2. General Principles on Approach to Assessment of Evidence

33.  The following principles in relation to the approach to the assessment of evidence and witness testimony are trite and not in dispute.

34.  In assessing credibility of a witness, the court takes into account (1) inherent probabilities or plausibility; (2) consistency with contemporaneous documents or evidence; (3) if a witness is found to be untruthful or unreliable on one matter, that may affect his credibility and reliability in other matters; (4) demeanour of the witness; (5) a witness’s motives: see Triunion (HK) Cereal & Oil Co Ltd v APAC Investment Holdings Ltd [2022] HKCFI 3326 at §48 per Recorder Victor Dawes SC; see also Hui Cheung Fai v Daiwa Development (unrep., HCA 1734/2009, 8 April 2014) at §77-82 per DHCJ Eugene Fung SC (as he then was).

35.  Where there are only two competing theories of events before the court, rejection of one may justifiably lead to the acceptance of the other: see Triunion §62 per Recorder Victor Dawes SC.

36.  The more serious the allegation, the more inherently improbable it is regarded, and the more compelling and cogent evidence is required to prove it on a balance of probabilities: see Koo Ming Kown v The Baptist Convention of Hong Kong [2024] HKCFI 2869 at §102 per K Yeung J (as he then was).

37.  It is also trite that giving evidence is not a memory test. The court will have regard to the difficulty of witnesses to recall clearly what happened in relation to events that took place a long time ago: see Triunion at §51 per Recorder Victor Dawes SC.

38.  In assessing one’s credibility and reliability, the court is entitled to take into account not only his demeanour in the witness box, the coincidence of his testimony with other evidence and general plausibility, but also his conduct of the litigation: see Wilkie v Direct Line Insurance Plc [2009] SCLR 853 at §81 per Lord Carloway.

39.  I shall take into account of the above principles when assessing the credibility of the different witnesses who have given evidence at the trial in this case.

C2.1 Adverse inference

40.  The legal principles for drawing adverse inference are set out in China Forestry Holdings Co Ltd v Top Wisdom Overseas Holdings Ltd [2025] HKCFI 2893 at §34:-

“There are authorities in support of drawing adverse inferences from the absence or silence of a witness. Relevantly, such inferences may be drawn from the absence of a witness who might be expected to have material evidence to give on an issue in an action, provided there has been some evidence adduced by the opposing party on the matter or a case to answer on that issue, and there is no satisfactory reason for the absence of the witness: see Wisniewski v Central Manchester Health Authority [1998] PIQR 324 at 340; Pacific Electric Wire & Cable Company Limited v Texan Management Limited (unreported, HCCL 16/2009, 17 September 2013) at [106]; see also Jones v Dunkel (1959) 101 CLR 298 at 312 (approved in Polaroid Far East v Bel Trade Co Ltd [1990] 2 HKLR 447 at 454). P has also fairly drawn this Court’s attention to the recent dicta by Lord Leggatt JSC in Royal Mail Group Ltd v Efobi [2021] UKSC 33 at [41]:

‘[T]here is a risk of making overly legal and technical what really is or ought to be just a matter of ordinary rationality. So far as possible, tribunals should be free to draw, or to decline to draw, inferences from the facts of the case before them using their common sense without the need to consult law books when doing so... Relevant considerations will naturally include such matters as whether the witness was available to give evidence, what relevant evidence it is reasonable to expect that the witness would have been able to give, what other relevant evidence there was bearing on the point(s) on which the witness could potentially have given relevant evidence, and the significance of those points in the context of the case as a whole.’”

41.  Another helpful summary of Wisniewski v Central Manchester Health Authority [1998] PIQR 324 at 340 appeared in Tjang Siu Thu v Profield Construction Engineering Ltd [2015] 5 HKC 22 at §33:-

“The following propositions can be derived from the case law:

(i) the Wisniewski principles do not constitute a presumption; consequently, the mere failure of a party to call a witness does not automatically confer an evidential benefit on the opposing party;

(ii) the Wisniewski principles concern the drawing of inferences and whether any inference is drawn will depend upon the quality of the primary facts on which the inference is based; this is necessarily a fact sensitive matter and will vary from case to case;

(iii) the primary facts must allow of the inference to be drawn in the sense that the inference logically flows from those facts;

(iv) in the circumstances of the case the judge must be persuaded that it is appropriate to draw the inference; and

(v) one circumstance where it will not be appropriate to draw the inference is where there is an explanation for the party’s failure to call the witness.”

42.  I am also aware that, in reference to Phipson on Evidence (20th ed) (at §45-35 (pp. 1747-1748)), courts rarely draw adverse inferences from a party’s failure to call a witness, especially where the opposing party could have summoned them. One cannot confidently infer what the witness would have said.

C2.2 Failure to call material witnesses at trial

43.  Thus, the principles for drawing adverse inferences for failing to adduce evidence can be summarised as follows:-

(1) After a prima facie case on the facts is raised with evidence of sufficient cogency, adverse inferences could be drawn from the failure to adduce contradictory evidence, particularly where a party could be expected to provide such evidence.

(2) If a party against whom a prima facie case is established omits to call an available witness, then unless there is some plausible explanation for the omission, adverse inferences can be drawn against him.

(3) The silence of one party in the face of the other party’s evidence may convert that evidence into proof in relation to matters which are, or are likely to be, within the knowledge of the silent party and about which that party could be expected to give evidence.

(4) Depending on the circumstances, a strong or even overwhelming adverse inferences may be drawn against such party.

(5) Adverse inferences could be used to establish even the most serious matters. The question remains whether all the circumstances of the case, including the quality of the other evidence, justify the drawing of an adverse inference.

See Hua Tyan Development Ltd v Zurich Insurance Co Ltd (2014) 17 HKCFAR 493 at §46 per Ma CJ.

C2.3 Failure to produce contemporaneous documents

44.  The principles on drawing adverse inferences apply equally to the non-disclosure of documents: see Tullett & Tokyo International Securities Ltd v APC Securities Co Ltd [2001] 2 HKLRD 356 at 365C-366D per Le Pichon JA. In particular, it is not only in cases of deliberate suppression of documents that an adverse inference can be drawn. Even in cases where the documents were lost or destroyed, that can be a legitimate basis to draw adverse inferences in favour of the other party: see Infabrics Ltd v Jaytex Ltd (No.2) [1985] FSR 75 at 79-81 per J Jeffs QC (siting as a Deputy Judge).

C3. Witnesses who gave evidence at trial and those who did not

45.  In light of the principles highlighted above, before delving into the different issues in dispute in this case, I consider it is appropriate for me to firstly discuss the evidence given by the various factual witnesses who had attended the trial. It is also appropriate for me to comment on the failure on the part of Top One to call some of the crucial witnesses who could have shed important light on some of the issues in both actions.

46.  At the trial, Top One only called two factual witnesses, namely, Ms Wong and Mr He Wen (何文) (“He”), to give evidence. At best, I think both of these witnesses can be described as middle management personnel from their respective companies only. In the case of Ms Wong, eventhough in name she might be the director of Top One, she held no administrative or executive position at EBHL at the material time of the dispute. More importantly, at the time when Top One acquired FF/Su’s block of shares, she was acting more like a personal assistant/administrative manager to her boss Sit. In the case of He, although he was the former Vice-President of EBHL, he only held that position for a relatively short time from October 2016 to 2019.

47.  Significantly, in the 2980 Action, Top One has failed to call the following material witnesses who could have refuted the claim of FF that Sit had, on behalf of Top One, entered the Collateral Agreement. They included Hon, Sit, Tao, Teguh and V Lam. In the case of Hon, Tao, Teguh and V Lam, Top One offered no explanation why they were not called. In the case of Sit, an earlier explanation by Ms Wong that Sit was reluctant to “travel abroad Hong Kong” to give evidence during the Covid-19 pandemic clearly could no longer be a valid reason by the time of trial. During the trial, Ms Wong confirmed that Sit is now in his early 60s and in good health. While there was some vague suggestion that he might be residing overseas and might have passed some of his management decisions to his son, there is simply no plausible explanation given by Top One to show why he could not had been able to give evidence during the trial. In my view, Sit’s evidence would have a direct bearing as to whether Su’s allegations regarding the last minute “parachuting in” of Top One as purchaser for the 68,800,000 shares was true or not. Further, and more importantly, whether Sit had, on behalf of Top One, agreed that he would purchase the remaining shares of Su within 12 months after the signing of the SPA. All these are legitimate questions which could not be answered by someone like Ms Wong, who only became involved of the purchase of the day of completion and who could not speak to key discussions and undertakings given by her boss Sit. By not calling Sit, Top One effectively has denied FF the opportunity to cross-examine him to test whether its denial that it had not provided such collateral promise was true or not. In my view, it is not good enough to merely rely on Ms Wong’s hearsay evidence that Sit “did not” give such assurance, which was based on nothing more than what Sit had allegedly told her.

48.  In the 406 Action, Top One has failed to call 3 other witnesses who had prepared witness statements for the trial but did not come to court to testify. They were Catherine Shi Yingyu, Zhong Yaohua and Athena Lam Ha (林霞) (“A Lam”). All these are crucial witnesses who gave important and material evidence in their witness statements. Yet, just 2 weeks before the commencement of the trial, Ms Wong filed her 2^nd supplemental witness statement (“Wong’s 2^nd Supp WS”) and stated that all 3 key witnesses had left the employment of EBHL and were “not immediately contactable”. They were allegedly no longer available to give evidence at trial. In my view, such purported explanations are clearly insufficient and unconvincing. For example, Top One failed to provide evidence of what efforts, if any, had been made to secure the attendance of these important witnesses at trial. Given the fact that all 3 witnesses occupied senior positions in the EBHL and/or Citychamp and would be in a position to speak directly to some of the core issues and allegations made against Su/FF in the ASOC, the failure to call them means that large gaps in the documentary evidence produced by the post-acquisition management team remains untested and unanswered.

49.  Last but not the least, Top One has failed to explain why Joshua Gu Yue (顧越) (“Gu”) was not called to testify at the trial. Gu was the CEO installed by Citychamp / Top One as part of the new management team shortly after completion. Judging from many of the documents which came into existence after the acquisition, Gu played a pivotal role in many of the contentious events and/or the allegations made against Su/FF. Yet, Top One has failed to provide any explanation as to why Gu was not or could not be called to testify at the trial.

50.  In my view, the failure on the part of Top One to call the above crucial witnesses who could have given material evidence on the key aspects of the case without any satisfactory explanation would entitle the court to draw adverse inferences against it: see Melody Gain Limited v Persons in Occupation of the Occupied Area & Ors [2025] HKCFI 953 at §§75-80; Lai Sau Keung v Maxcredit Engineering Ltd & Another [2004] 1 HKC 434 at §§28-29. I so draw such inferences against Top One.

51.  In relation to the 2980 Action, in my judgment, the failing to call Sit, Hon and other members of the senior management team at Citychamp to give evidence on the pre-SPA negotiations, the court is deprived the opportunity to hear from them what was the basis for Top One to say that such collateral assurances had never come from Sit (on behalf of Top One). In the circumstances, I consider that the court is entitled to draw an adverse inference that their evidence would not have helped Top One’s case. In my view, it is more likely than not that it would have supported Su’s case that Hon had provided the warranty while Sit had given their assurances under the Collateral Agreement. I so draw such adverse inferences against Top One for failing to call those material witnesses to give evidence at trial.

52.  In the light of the above, it is not difficult to see why the evidence of Ms Wong became rather pale in the wider context of this case. While generally I do not find Ms Wong as a dishonest witness, it is quite clear from her answers to questions asked of her that she knew very little about her boss Sit’s sudden decision in purchasing the shares of FF. She was not involved with the negotiations with Su or FF on the purchase of the shares. She played no role in the post-acquisition matters. She only found out about the possible acquisition of the shares from her boss Sit on the day when the SPA was signed. Basically, she has no personal knowledge on all the critical matters in relation to the purchase by Top One. She certainly would not know if Hon had given the warranty and Sit provided the Collateral Agreement to purchase the remaining shares from FF or Su on the day of signing of the SPA. I therefore find her evidence of very limited value and feel sorry for her that she was being placed in an invidious position by her employer to give evidence on matters that she was unable to speak to.

53.  Equally, I find He’s evidence of very limited value. First, he only became involved with the management of EBHL in June 2019 and was not involved in the pre-acquisition negotiations in 2016. Second, he frankly admitted that he was not in a senior enough position to participate in the discussions about the purchase of the shares from Su/FF. Therefore, he would not know what was being discussed between Hon/Sit and Su/FF. Third, as he was not involved with the management in 2016, he was not able to assist why certain decisions were made by the senior management of the Company during that time. These included why in some cases formal demands or taking enforcement actions against debtors were made while on some other occasions they were not made.

54.  However, the above does not mean that the court will accept everything Su and Ms Liu said in their evidence without checking them against the contemporaneous documents; of whether what they said are inherently probable or not probable; the consistency of their evidence with the undisputed or indisputable evidence, and the internal consistency of their evidence, etc. In other words, I will not judge them simply by how well they performed in the witness box as the demenaour of a witness can be deceptive. It has long been accepted that a witness who appears to be confident or convincing in the witness box may not stand up to scrutiny against the objective facts or documents. Thus, it is more important to weight their evidence against all the other factors mentioned in Hui Cheung Fai, supra.

55.  Fortunately, I think in each of the issues raised by the parties under the two actions, there are plenty of documents (some of them contemporaneous and some of them created after the event; some of them reliable and others rather suspicious) which would help to determine the veracity of the claims. In my judgment, while these two actions cannot be decided by looking at the documents and accounts alone (which is what Mr Yip has repeatedly tried to convince the court to accept), equally they are not cases which can be decided solely by relying on the oral evidence of Su and Ms Liu.

56.  Having said that, on the whole, I find Su and Ms Liu as honest and credible witnesses. They gave their evidence in a straightforward, frank and direct manner. Despite having been cross-examined by Top One’s counsel at length, their evidence remained intact and coherent. Save as otherwise stated in a couple of the specific issues, most of the evidence given by them were in my view inherently probable and consistent with the contemporaneous documents. In areas where Top One could have produced witnesses to contradict their case (but did not), I have no hesitation to accept their evidence, unless their evidence was contradicted by the documentary and/or other objective evidence.

57.  Top One called Mr Alan Lee (“Alan Lee”) as its expert witness in the 406 Action. Su/FF called Mr Charles Li (“Charles Li”) as their expert in that action. I shall comment on the opinions of the two experts when I discuss the different issues as and when they arise under that case.

D1. Issues under HCA 2980 Action

D1.1 Whether the Collateral Agreement, as identified and alleged at §20 of the ASOC, was made between FF (via Su) and Top One (via Sit)

58.  The evidence produced by Su and FF on this issue is quite straightforward. First, it shows that right from the beginning (in particular from April to June 2016), Su was dealing with Hon and his senior executives from Citychamp. Top One was never involved in the negotiation process. These can be seen from a series of WeChat messages from 7 April 2016 to 16 May 2016 between Tao and Su, showing that Tao, who was clearly acting under the instruction of and on behalf of Hon, was actively discussing the acquisition of EBHL with Su. Tao talked about their prospective “cooperation” and “trust”. The messages also show that meetings between Hon and the senior personnel from Citychamp and Su took place between the parties[4]. Further, there were email correspondence from 29 April 2016 to 2 May 2016 between Tao and Su (with Teguh copied showing extensive discussions on the projected performance of EBHL). In the correspondence, specific references were made to Hon and his instruction for Tao to work closely with Su[5]. Lastly, WeChat messages on 3 June 2016 show that Hon and Su met in person and references were made to the terms of acquiring shares within 3 months and the acquisition of Chan’s shares[6].

59.  Second, Lam’s block (as the main shareholder of EBHL at the time) was acquired through Sense Control with Su and Teguh as the facilitators. On 15 April 2016, Lam agreed to sell his shares to person introduced by Su. Lam signed a handwritten note to that effect. On the same day, Teguh agreed to purchase Lam’s block and signed a Purchase Stock Confirmation (「股權交易確認書」), which Teguh revised by manually crossing out Hon’s name and inserting Teguh’s name as purchaser.

60.  The above shows that Sense Control was used as Hon’s vehicle for the first stage of the takeover (with his trusted senior executives Teguh and V Lam as facilitators). Su, on the other hand, acted as the go-between with Lam for the sale of Lam’s block of shares.

61.  Third, for the purchase of Su’s block, from the initial suggestion by Hon through his senior executives in Citychamp to the sudden change of purchaser on the date when the SPA was signed by Top One (and to reduce the number of shares from the originally agreed 72,060,000 shares to 68,800,000 shares), it can be seen that Top One (and Sit) was merely acting as Hon’s nominee or agent and was not the real purchaser:-

(1) Following the acquisition of Lam’s block, Teguh and V Lam proceeded to work on the purchase of the shares owned by Su (through FF) and Chan (through Dragon Cloud Holdings Ltd).

(2) On 27 May 2016, a draft Share Purchase Agreement dated 24 May 2016 was circulated where one “Bison Capital Financial Holdings Limited” would acquire the combined shares from Sense Control, FF, and Dragon Cloud Holdings Ltd. However, this wholesale acquisition fell through.

(3) By 20 July 2016, Su and Hon were working on the sale and purchase of Su’s block separately. The draft agreement for sale and purchase was prepared for FF’s 71,960,000 shares, while the purchasing entity was not yet decided.

(4) Up until 25 July 2016, Hon intended to purchase Su’s and Chan’s block (together with Lam’s block then under Sense Control) under one single entity: ie Fengrong Investment (Hong Kong) Company Limited[7] (“Fengrong”). Under this proposal, Fengrong would own such a shareholding that an announcement of general offer was required: see the draft of Joint Announcement prepared by Hon’s financial advisor CCBI; FF’s shares; Sense Control’s shares; and Chan’s (ie Surplus Union) shares.

(5) On 26 July 2016, V Lam provided another draft agreement with 2 changes: (i) Fengrong was named as purchaser; and (ii) 72,060,000 shares were to be sold, including shares held by Su personally.

(6) On 28 July 2016, V Lam was reminded (by the brokerage firm Yardley Securities) to execute the agreement for sale and purchase of both FF’s and Chan’s shares on 29 July 2016.

(7) At 12:03 pm on 29 July 2016, a draft of the SPA, which refers to 72,060,000 shares still, was received by FF where Top One’s name appeared as the purchaser for the first time.

(8) Later that afternoon / evening, Hon made a call to Su and reduced the number of shares to be purchased to 68,800,000 shares, resulting in the SPA. Sit of Top One and Su of FF signed the SPA for the sale and purchase of FF’s 68,800,000 shares.

62.  I agree with Mr Vincent Lung, counsel for Su and FF, that the abrupt last minute carve-out makes commercial sense only against the backdrop of the assurances made by Hon and Sit to Su, namely, that they have assured Su that the remaining 3,260,000 shares would be taken up by them soon afterwards, and that the SPA limited to the 68,800,000 shares was not the entirety of the bargain but part of a wider, two-stage acquisition of Su’s block.

63.  In my judgment, the above clearly shows that the negotiations for Su’s (and Chan’s) shares were driven by Hon and his team, and not by Top One. The above events also strongly suggest that the Collateral Agreement not only existed but both Hon and Sit had each independently agreed that it would take up the remaining 3,260,000 shares of Su’s within the 12-month period.

64.  My finding above has been reinforced by the evidence given by Su and Ms Wong at the trial.

65.  First and foremost, Ms Wong, the only factual witness in the 2980 Action for Top One, was unable to provide any evidence as to any key events or the decision-process of Top One to refute Su’s claim. It is significant to note that the first time she being personally involved in and became aware of the purchase of the shares of FF was on the day when Sit signed the SPA on behalf of Top One. Prior to that, she had no knowledge of any matters pertaining to the sale and purchase of those shares. The only person who has any direct knowledge of how Top One first decided to acquire such a large block of EBHL shares was her boss Sit who chose not to come to court to give evidence.

66.  From the timeline mentioned in §§58-61 above, I find it beyond any shadow of doubt that Top One only appeared as purchaser at the last minute, stepping into a structure which Hon/Citychamp took months to negotiate and finalize with Su/FF.

67.  In this regard, Ms Wong confirmed this in her evidence. She told the court that she was not aware of any intention on the part of Top One or Sit to purchase EBHL’s shares before receiving V Lam’s email at 11:19 am on 29 July 2016, ie just a few hours before the SPA was signed.

68.  It is not disputed that by July 2016, extensive due diligence on EBHL had already been carried out by Hon and the Citychamp team. Ms Wong confirmed that Sit/Top One themselves had never conducted any due diligence on EBHL. They simply used the existing draft SPA which had been prepared earlier by V Lam and Citychamp’s solicitors Sidley Austin. I find that incredible. For a purchase of shares which worth over HK$154 million, it is incomprehensible that Top One would not carry out its own independent due diligence. Ms Wong was not able to offer any explanation for the lack of due diligence carried out on the part of Top One save to say that her boss Sit usually was “able to work quickly”. I do not accept such explanation at all as I find it inherently improbable that a seasoned businessman like Sit would not carry out his own independent due diligence process on behalf of Top One if it truly was an independent purchaser of Su’s block of shares. Sit could have come to court to provide his explanation but he chose not to do so.

69.  Another clear piece of evidence that shows Top One was simply Hon/Citychamp’s vehicle rather than a genuine independent purchaser can be found in the continuous involvement of Citychamp’s personnel and lawyers up to the signing of the SPA on 29 July 2016.

70.  V Lam was the CEO assistant to Hon. She took charge of the negotiations for the purchase of the shares of EBHL from the word go in this case. This included Sense Control’s purchase of Lam’s block of shares and all the preparation work for the purchase of Su’s block. All the contemporaneous documents, particularly the email exchanges between the parties, show that V Lam was acting on behalf of Hon/Citychamp all along. This happened even after Hon/Citychamp supposed to have “stepped away” from the purchase of Su’s block due to lack of funds when V Lam circulated the draft SPAs amongst the parties and coordinated with Su’s securities broker Yardley. Ms Wong was not able to provide any good explanation for V Lam’s continuous involvement after Hon/Citychamp was supposed to have withdrawn from the deal. I do not accept her explanation that V Lam helped out on Sit’s request as neither Sit or V Lam came to court to verify this. I also do not accept her explanation that V Lam helped out as a friend just because Sit “had a lot of friends”.

71.  Instead, I agree with Mr Lung for Su and FF that if Hon/Citychamp were genuinely out of the picture, it is hard to see why Hon would “lend” his own personal assistant to continue to take such an active role in negotiating, documenting and pushing through a transaction in which he supposed had no further interest. In my judgment, the only plausible explanation is that Top One was Hon’s nominee which was “parachuted in” in the last minute in order to complete the purchase. As Sit and Top One had not been involved in the negotiation and due diligence process, V Lam’s involvement was indispensable.

72.  For the same reason, the lawyers engaged by Hon/Citychamp, namely Sidney Austin, who played an indispensable role, was involved in revising and finetuning of the SPA even after Top One who claimed to be a separate and independent buyer came into the picture.

73.  The evidence shows that Sidley Austin took the lead in drafting the SPA from April 2016 onwards. They continued to be actively involved in the drafting and revising of the drafts throughout. They also sent their partners and associates to attend meetings with the parties. They could be seen actively involved in the shaping of the SPA through the email correspondence between the parties which were either initiated by them or copies were provided to them.

74.  However, Ms Wong in her evidence claimed that Top One used another law firm to examine the draft SPA and to protect Sit/Top One’s interests. That firm was Jun He Law Offices (“Jun He”). But the evidence shows otherwise. For example, after the important decision was made that Top One would purchase fewer shares than originally intended by Hon/Citychamp, the instructions to make the relatively simple amendments to the SPA was done through V Lam to Sidley Austin and not Jun He. Further, Jun He was not asked to join the important meeting at Yardley before the SPA was signed. Ms Wong was not able to provide any good explanation for this save to say that as Sidley Austin was involved because they were the lawyers who drafted the original document. Jun He was there to give legal advice to Sit/Top One only. Besides, Sit/Top One was under time constraints to complete the purchase.

75.  In my view, this does not make sense. If Top One was truly a new and independent purchaser for Su/FF’s block of shares, there is no reason why they should trust the lawyers for the former intended purchaser, ie Hon/Citychamp. One would expect that Top One/Sit would at least ask their own lawyers Jun He to properly examine the terms of the draft SPA rather than simply accept a revised draft from Sidley Austin. Given the huge sum of money involved in the transaction of Su/FF’s shares, one would expect Top One to at least do that. Yet Ms Wong was not able to explain why Top One had failed to do so. As to her speculation that perhaps her boss Sit had asked V Lam to help, we do not have the benefit of Sit or V Lam to come to court to verify this. I would reject her evidence on this.

76.  In my judgment, the irresistible inference must be that Top One was all along acting as Hon/Citychamp’s nominee. The transaction had always been part of Hon’s wider scheme in gaining control of EBHL. This explains why from beginning to end his senior executives and lawyers had been involved in the purchase of the shares, including the critical moment when 3,260,000 of Su/FF’s block was “carved out” from the original 72,060,000 shares intended to be purchased by Hon/Citychamp. I so find that was the case.

77.  My above finding is further reinforced by Hon’s open admission to FF’s liability in the 2980 Action, with quantum to be assessed. In other words, Hon accepted liability in respect of FF’s pleaded case that there was a collateral assurance to take up Su’s remaining 3.26 million shares. What is interesting to note here is that at the time when the admission was made in January 2021[8], both Hon and Top One were represented by the same firm of solicitors, namely, Stevenson, Wong & Co. The irresistible inference must be that Hon and Top One/Sit were closely related, and that Top One was merely Hon’s vehicle in the transaction. In the absence of any explanation from Hon or Sit, I find that must be the case.

78.  Another crucial piece of evidence which is sorely missing in this case is the lack of any documentary proof to show that Top One actually paid for Su/FF’s shares under the revised SPA. It would not be difficult for Top One to produce documents like bank statements or internal ledgers to show that it actually paid for those shares if it wished to do so. Yet it has failed to do so. The absence of such documents lends weight to the argument that it was not a truly independent purchaser as it claims it was.

79.  Further, I agree with Mr Lung’s submission that what happened at the completion meeting at Yardley on 29 July 2015 sheds important light as to whether Hon and Top One made the collateral promises. In her evidence, Ms Wong accepted that there was a time during that meeting where Su, Sit and V Lam had a private discussion from which she was excluded. She frankly admitted that she has no personal knowledge of what was said between the three of them during that private discussion. When it was put to her that Sit on behalf of Top One promised that Top One would buy up the remaining shares within one year, her answer was that she did not know. I believe her when she said that because, as an administrator / personal assistant to her boss Sit, she would not be privy to some of the most important parts of the deal. However, the two other persons who were at that private discussion, ie Sit and V Lam, who could have denied Top One had ever made such Collateral Agreement choose not to give evidence at the trial. This left the court only with Su’s account of what was said during that private discussion. I find his account on this is inherently probable and consistent with his explanation of why he would agree to the last-minute carving out of the 3.26 million shares from his block. It is also consistent of why there was a sudden reduction of the 3.26 million shares from the draft SPA prepared by Hon/Citychamp’s lawyers Sidney Austin. Given this totally unexpected twist of events, which all happened within a very short time, it is in my view not surprising that there was a lack of documentary evidence to support it.

80.  When seen in such light, Ms Wong’s insistence that Sit later told her that there was no Collateral Agreement in my view amounts to no more than hearsay and self-serving evidence.

81.  In my judgment, the only logical explanation why V Lam was involved in the private discussion between her, Sit and Su was because Hon and Citychamp were still heavily involved in the transaction. This is confirmed by the subsequent open admission on liability made by Hon in this action. It is not difficult to imagine that Sit would make a correspondent assurance to Su on behalf of Top One that it would purchase the remaining shares within the specified period.

82.  I further agree with Mr Lung’s submission that the structure of the transaction also points strongly to the existence of the collateral assurances. As is shown by the contemporaneous documentation, all the drafts and transaction documents up to 29 July 2016 were prepared on the basis of the sale of Su’s entire block of shares. It was only at the very last moment that the SPA cut down to 68.8 million shares, leaving 3.26 million of Su’s shares outside the scope of the SPA. I agree with Mr Lung that given the fact that Su had always negotiated on the basis of his entire block would be sold, there is no commercially sensible explanation why he would accept a carve-out deal unless Hon (through V Lam) and Sit (on behalf of Top One) assured him that the remaining shares would be taken up within a specified period and at an agreed price.

83.  In Ms Wong’s witness statement, she stated that Sit was advised that “if Top One acquired more than 20% of the issued share capital, this would lead to unnecessary complications”.[9] However, when she was asked by FF’s counsel during cross-examination of what were the “unnecessary complications” that Sit was advised of, she was not able to say. Significantly, she was not able to contradict Su/FF’s contention that such a concern would only arise if Top One was, in reality, connected with Hon and Sense Control. She kept saying that such matters were “not her area” and that she “could not tell”. In my view, it does not help Top One’s case as the person who could have informed the court what these “unnecessary complications” were, ie Sit, chose not to come to court to give evidence.

Top One’s defence on the 2980 Action

84.  Mr Richard Yip for Top One in his closing submissions stated that FF’s case is fundamentally flawed on its own pleaded case in that the Collateral Agreement imposed obligations on Sit alone, and none on Top One. Mr Yip in particular relies on §20 of the ASOC where it stated that Sit “would further procure [Top One] to purchase the remaining 3,260,000 EBHL shares within 12 months upon signing of the SPA….”.

85.  Top One submits that the pleaded term only required Sit to procure Top One to purchase the remining shares within a year. Hence, the obligation is “plainly and strictly” his personal one. Further, it says that nothing in the pleaded agreement imposes any obligation on Top One to buy the shares, to collaborate in their purchase, or to take steps or execute any documents to effect the acquisition of FF’s block of shares. Since the Collateral Agreement imposed no duty on Top One, Top One could not have breached the agreement. Even if the Collateral Agreement was made, the proper defendant should be Sit, not Top One. Insofar as FF seeks to rely on agency based on Sit’s ostensible or apparent authority, Top One submits that it does not assist FF for 2 reasons:-

(1) The type of agency to be relied on and the facts / particulars supporting it must be specifically pleaded: see K&L Gates v Navin Kumar Aggarwal (Unrep., HCA 349/2012; 20 May 2016) at §18 per Au Yeung J. FF’s ASOC contains no such particulars.

(2) Even if agency had been properly pleaded, it does not cure FF’s difficulty as the Collateral Agreement, on its pleaded terms, imposes no obligation on Top One.

86.  With respect, I disagree with the above submission. §20 of the ASOC pleaded that Sit had “confirmed that he acted upon the instructions of [Hon] to cause [Top One] to purchase the said 6,800,000 shares in EBHL at HK2.25 per share” and would further “procure [Top One] to purchase” the remaining shares. When this is read together with ASOC §17 where it is pleaded that Sit was introduced as “the representative and authorized signatory of [Top One]”, I consider it is sufficiently clear that the promise was made by Top One with Sit being its representative and agent. This is further supported by the fact that Sit in fact had signed the SPA on behalf of Top One on the same day. I agree with FF’s submission that if Sit had authority to bind Top One to the SPA, he must also have authority to bind Top One to the Collateral Agreement to purchase the remaining 3.26 million shares. I agree with Mr Lung that it will be unreal and overly technical for Top One on one hand able to take the benefit of the SPA (on which Top One’s claims in the 406 Action is based on) while on the other hand claims that the collateral promise was made by Sit personally only.

87.  In the circumstances, I find Sit had agreed on behalf of Top One to purchase the remaining shares under the Collateral Agreement.

D1.2 Was the Collateral Agreement inherently improbable?

88.  Mr Yip submits that if Top One was Hon’s nominee as FF/Su claim, then the Collateral Agreement serves no useful purpose as Hon had already provided a warranty to Su/FF that he would purchase the remaining shares, whether personally or through his agent. Top One further claims that the Collateral Agreement is wholly unsubstantiated by any contemporaneous documentary evidence which is fatal to FF’s claim.

89.  With respect, I do not agree.

90.  As said, this event of “carving out” of shares from the original block owned by Su happened very sudden and agreed by the parties within a very short time. It certainly was not the original intention of Su to sell his block of shares in two separate tranches. He was basically being forced into a position where he had to accept a last minute carve-out of the 3.26 million shares by Hon and Sit. In my view, it is only natural for him to insist on having assurances from both Hon and Sit that they would purchase those remaining shares from him/FF within the 12-month period. This is what Su told the court. In the absence of any contrary evidence from Hon or Sit, I would accept his evidence on this.

91.  Top One also criticised the fact that the Collateral Agreement was unsupported by any documentary evidence. While it is true that there was no documentary evidence to show that Su/FF did chase up Hon or Sit or Top One to honour the Collateral Agreement, it did not mean that Su had done nothing at all. In his evidence, Su claimed that he did demand Hon and Sit to purchase FF’s remaining shares in the face-to-face meetings on 27 February 2017 and 13 March 2017 respectively. Su’s evidence was that, at the time, he was overwhelmed by the relentless barrage of allegations and demands coming from Jun He. Su also explained that as the solicitor letters refer to matters in the 406 Action, he did not think of raising the Collateral Agreement (which was the subject matter in the 2980 Action) under those exchanges.

92.  If one looks at the timing when the relationship between the parties started to turn sour, perhaps that would partly explain why there was no documentary evidence to support the Collateral Agreement. Su was first asked by the new management to remain working in EBHL after the signing of the SPA in order to ensure a smooth transition. At first things seemed to be working out smoothly during the first few months. It was not sometime towards the end of February 2017 that the relationship began to turn south[10]. After the meeting between Sit and him on 13 March 2017, he was denied email access on the next day on 14 March 2017. He was dismissed on 17 March 2017.

93.  Given the abrupt termination of his employment with EBHL by the new management; the hostility displayed and serious accusations made against Su in Jun He’s letter dated 23 May 2017, it is perhaps not surprising that no further chasers and demands were made by Su. In any event, I think it is fair to say that the parties’ focus from around March 2017 was very much on the serious accusations made by Citychamp’s team and Top One towards Su and FF in the 406 Action. The Collateral Agreement, particularly the role played by Sit, seems to have fallen by the wayside.

D1.3 Can Top One relies on the Entire Agreement Clause (Clause 10.8)

94.  Top One further submits that the Collateral Agreement stands in direct contradiction to, and is negated by, the entire agreement clause found under Clause 10.8 of the SPA.

95.  Clause 10.8 of the SPA (“the Entire Agreement Clause”) provides as follows:-

“This Agreement constitutes the whole agreement between the Parties and supersedes any previous agreements, understanding or arrangements between them relating to the subject matter hereof and supersedes and extinguishes any other prior drafts, agreements, undertakings, representations, warranties and arrangements of any nature, whether in writing or oral, relating to the same…”

96.  Top One says that such an entire agreement clause would relinquish any collateral agreement between the parties prior to the execution of the SPA.

97.  To that end, Mr Yip cited the case of Glory Gold Ltd v Star Play Development Ltd [2008] 2 HKLRD 416 where the Court of Appeal at §§16-17 held as follows:-

“The clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clauses and not elsewhere and that any promises or assurances made in the course of negotiation (which in the absence of such a clause may have effect as a collateral warranty) shall have no contractual force, save, insofar as they are reflected and given effect in that document…” [emphasis supplied]

98.  Thus, Top One says that the Collateral Agreement, which was made amid negotiation of the SPA, is rendered legally ineffective by the entire agreement clause in the SPA.

99.  Alternatively, Top One submits that FF is contractually estopped from denying the state of affairs acknowledged by it under the Entire Agreement Clause, which, inter alia, provides that:-

“Each Party represents, warrants and agrees that in executing and entering into this Agreement, he or she or it is not relying upon and has not relied upon any representation, promise or statement made by anyone that is not expressly referenced, recited, contained or embodied in this Agreement.”

100.  Top One relies on Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] 2 Lloyd’s Rep 511 where Moore-Bick LJ explained the doctrine in the following way:-

“Where parties express an agreement of that kind in a contractual document, neither can subsequently deny the existence of the facts and matters upon which they have agreed, at least so far as concerned those aspects of their relationship to which the agreement was directed. The contract itself gives rise to an estoppel.”

101.  Therefore, Top One submits that FF is unequivocally barred from asserting reliance on any promise other than those contained within the SPA, including the Collateral Agreement.

102.  In any event, Top One submits that the Collateral Agreement is unsupported by consideration and this unenforceable.

103.  Last but not the least, Top One submits that the sanctioned payment received by FF from Hon covered more that the loss it can claim against Top One.

D1.4 FF’s Answer to the Entire Agreement Clause and Estoppel

104.  While FF does not deny that Clause 10.8 of the SPA is an Entire Agreement Clause, Mr Lung submits that by definition, they only concerned the “subject matter” of the SPA:-

“This Agreement constitutes the whole agreement between the Parties and supersedes any previous agreements, understanding or arrangements between them relating to the subject matter hereof…” (emphasis added)

105.  I agree with Mr Lung’s submission on this. In my judgment, both Hon’s Warranty and Top One’s Collateral Agreement should be viewed as a separate and independent agreement. On a proper construction of Clause 18.1, I am of the view that the purchase of the 3.26 million remaining shares from Su/FF should be treated as a different “subject matter” from the purchase of the 68.8 million shares under the SPA. In MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2019] AC 119, §14 at 129F, Lord Sumption JSC stated that:-

“…The true position is that if the collateral agreement is capable of operating as an independent agreement, and is supported by its own consideration, then most standard forms of entire agreement clause will not prevent its enforcement: see Business Environment Bow Lane Ltd v Deanwater Estates Ltd [2007] L & TR 26, para 43 (CA) and North Eastern Properties Ltd v Coleman [2010] 1 WLR 2715, paras 57 (Briggs J), 82–83 (Longmore LJ)…”

106.  In my view, Hon’s Warranty and Top One’s Collateral Agreement are capable of operating as an independent agreement and are supported by their own consideration. As stated by Su, whose evidence I accept on this issue, the request to “carve out” the 3.26 million shares from the original block of shares held by Su/FF resulted in the sale of 68.8 million shares, which formed the “subject matter” of the SPA. This was based on the Warranty made by Hon and the Collateral Agreement made by Sit on behalf of Top One. Viewed in such a way, the Collateral Agreement was not an attempt to vary or contradict the written terms governing the sale of the 68.8 million shares but a distinct contract dealing with a different block of shares made as a result of the request by Hon and Sit. By adopting the approach endorsed in MWB, I am of the view that the Entire Agreement Clause found in the SPA is not applicable as the carved-out agreement to take up the remaining 3.26 million shares is an independent agreement which is supported by its own consideration.

107.  This is also consistent with what happened on the day when the SPA was signed. It is not disputed that right up to that date, ie 29 July 2016, all drafts assumed that Su’s entire block of 72.06 million shares would be sold to Hon or his associated companies. It was only during the last minute that the number of shares was reduced to 68.8 million, leaving the balance of 3.26 million outside the SPA. I accept FF’s submission that the change was accepted only because of the separate promises / assurances made by Hon and Sit about the 3.26 million shares. In my view, it is artificial, if not unreal, to treat this separate agreement to purchase the remaining shares as part of the “subject matter” of the purchase of 68.8 million shares under the SPA.

D1.5 Whether FF is estopped from denying the terms of effect of the Entire Agreement Clause

108.  In my view, similar considerations as above should apply when deciding whether FF is estopped from denying the terms of the Entire Agreement Clause.

109.  As Mr Lung has submitted, contractual estoppel arises where the parties agree that a specified state of affairs is to be taken as the basis of their contractual relationship, and a party is precluded from asserting the contrary as between themselves: see Chitty on Contracts (36^th Ed.), Vol. 1 at §7-029. It prevents a party to the contract from alleging that the actual facts are inconsistent with the state of affairs as specified in the contract. In my view, on a proper construction of Clause 10.8 of the SPA, the “subject matter” it covered was in relation to the purchase of the 68.8 million shares only. The “carved-out” shares of 3.26 million was deliberately left out of the SPA. It was never mentioned in the SPA. It was the subject matter of the Warranty made by Hon and the Collateral Agreement made by Sit on behalf of Top One.

110.  My view above has been confirmed by the evidence given by the witnesses Su and Ms Wong at the trial. The last-minute carve-out of the shares and the private discussion at Yardley reinforced the conclusion that the parties intended a separate collateral agreement in relation to the 3.26 million shares.

D2. Breach, Mitigation and Quantum

111.  In the aforestated premises, I find that Top One was in breach of the Collateral Agreement and would be liable for any damages resulting from that breach.

112.  The next question which follows is what should be the amount of damages which FF is entitled to recover from Top One, if any.

113.  Under Hon’s Warranty and Top One’s Collateral Agreement, Hon or Top One was supposed to buy the 3.26 million remaining shares from FF at HK$2.25 per share by 28 July 2017. Thus, FF was supposed to receive a total sum of HK$7,335,000.00. It is not disputed that no such purchase was ever made by Hon or Sit.

114.  It is important to bear in mind that Hon had, by the notice of sanctioned payment dated 10 October 2025, already settled his claim with FF by paying HK$3,220,000.00 into court. This sum was accepted by FF. Further, FF by selling part of the 2,104,000 remaining shares in the open market, had received a sum of HK$3,845,727.36. Thus, FF had received a total sum of HK$7,065,727.36 for the carved-out 3.26 million shares prior to the trial.

D2.1 Duty to mitigate

115.  The law on the duty to mitigate is trite. Basically, the “first rule” is that it “…impose on a plaintiff a duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.”. It is not so much as a “duty” to mitigate, but rather a restriction on the damages recoverable, which will be calculated as if the claimant had acted reasonably to minimize their loss. The onus of proof is on the defendant, who must show that the claimant ought, as a reasonable person, to have taken certain steps to mitigate their loss. Any loss which is directly caused by a failure to meet this standard is not recoverable from the defendant: see Chitty on Contracts (36^th Ed) Vol 1 [30-100].

116.  The question as to what was reasonable for a person to do in mitigation of damage is not a question of law but one of fact in the circumstances of each particular case. It has been said also that a business plaintiff is not under any obligation to do anything other than in the ordinary course of business, the standard is not a high one, since the defendant is a wrongdoer: see Chitty on Contracts (36^th Ed) Vol 1 [30-101].

117.  On the other hand, it has been held that a plaintiff cannot recover more than the loss he suffers. In Tang Wing Hong Alan v Capacious Investments Ltd [1996] 1 HKC 401, Lord Nicholls stated the following at §408 B-H:-

“When the remedies are against two different people, he may sue both persons… There are limitations to this freedom… A third limitation is that a plaintiff cannot recover in the aggregate from one or more defendants an amount in excess of his loss…once a plaintiff has fully recouped his loss, of necessity he cannot thereafter pursue any other remedy he might have and which he might have pursued earlier. Having recouped the whole of his loss, any further proceedings would lack a subject matter. This principle of full satisfaction prevents double recovery.”

118.  It is also trite that when a plaintiff pursues claims against two defendants for the same loss, any settlement amount received from one defendant must be deducted from the total recovery against the other defendant : see Leung Yung Chun v Chan Wing Sang [2000] 1 HKLRD 456 at 463F-464C per Cheung J (as he then was).

D2.2 Whether FF was fully compensated for? Or did it discharge its duty to mitigate?

119.  FF’s case is that the compensatory principle means that the court would look to put FF back to the position as if Top One’s Collateral Agreement was performed. As Mr Lung has submitted, the damage / loss would usually be quantified based on the difference between the agreed price (ie HK$2.25) and the prevailing price as at the date of the breach (ie HK$1.62 – as of 29 July 2016). However, FF submits that, due to the low trade volume, to adopt the then prevailing price at HK$1.62 per share without an available open market is unrealistic. Mr Lung further submits that the sale of a significant block of shares in the open market would further suppresses the share price. He urges the court not to adopt what he would call a “rigid application” in terms of quantification of damages.

120.  In FF’s Opening, Mr Lung refers the court to McGregor on Damages (22^nd edition) at §30-006 which refers to situation where there is “no open market for the shareholding and therefore no market value upon which to rely”, the court will not apply the bare market-price rule mechanically but may instead look to valuation evidence (for example, by revenue multiples and discounts for minority holdings, as in Plumbly v BeatthatQuote.com Ltd [2009] EWHC 321 (QB) or to other transaction that, given the thin trading and illiquidity of EBHL shares, a rigid application of the HK$1.62 spot price on 29 July 2017 would be inappropriate.

121.  Insofar as its duty to mitigate is concerned, the burden of proof is on Top One to show that FF ought to have taken certain steps to mitigate its loss, and that FF could thereby have avoided some part of its loss.

122.  Top One alleges that FF failed to mitigate its loss in relation to the remaining shares. Su stated in evidence that after 29 July 2017 when Hon and Top One had failed to take up the 3.26 million remaining shares as promised, FF began to sell the remaining shares in the open market to the extent “reasonably possible, against a backdrop of low price and thin trading.” Despite of that, Su managed to sell a total of 2,104,000 shares between August 2017 and November 2025, ranging from an average price of HK$1.612 to HK$2.6842. Thus, FF managed to “recoup” a total sum of HK$3,845,727.36: see Table under §53 on p18 of Su & Fu’s Opening Submissions.

123.  FF claims that the prevailing price as of 13 March 2026 for the remaining 1,110,000 shares in the open market was at HK$1.85.

124.  Through a summary of the trading price of the shares in the open market for the years between 2018 and 2026, FF tried to demonstrate to the court (in table form) that the average share price for EBHL was substantially less than HK$2.25 during those years: see Table under §55 on pp 19-22 of Su & FF’s Opening Submissions.

125.  Mr Lung submits that FF’s mitigation efforts must be seen in the light of:-

(1) Its mitigation efforts spanned over years (from 2017 to 2026) and it is not realistic to ask FF to monitor the share price movement of EBHL on every single day in order to fetch the “highest” price; and

(2) FF experienced practical difficulties in selling the remaining shares without taking heavy losses. It submitted that in case of low liquidity, a successful trade order not only brings on a depressive effect on share price, but also halt any further trading given the lack of a willing partner.

126.  Thus, FF says that it has fulfilled its duty to mitigate by trying to sell a reasonable price to sell the remaining shares. It is willing to give credit to those shares which it had sold at a profit. It is further willing to give credit to Top One under a “quantification exercise” which it had detailed in its Opening Submissions: see §§58-62 of Su & FF’s Opening.

D2.3 Whether FF failed to mitigate its loss

127.  According to Su’s evidence[11], from October 2021 to June 2022 (save for May 2022), the share price of EBHL was consistently above HK$2.25 and he was able to sell his shares above the $2.25 level (and as high as HK$2.7 per share).

128.  In fact, Hon and Top One’s solicitors Stevenson, Wong & Co. wrote to Su/FF’s solicitors Lennon & Lawyers on 18 December 2020 and brought to their attention that the share price of EBHL had been consistently above HK$2.5 per shares for the last five trading days before that letter and urged them to mitigate their loss and sell the remaining shares in the open market.

129.  It appears that neither Su nor FF had done anything in response to that letter.

130.  I do not accept FF’s case that the trading volume in EBHL was so thin that FF’s remaining shareholding could not be absorbed by the market or that it should be treated as illiquid. The truth of the matter is that FF had not even tried. I further do not accept that it would require Su or FF to constantly monitor the market – at least not on a daily basis – in order to decide whether those shares could be sold or not. In my view, FF could have asked its broker to try to at least sell some of the remaining shares in the open market in order to test if there were buyers for them. The fact that it did not even try to do that in my view strongly suggests to me that FF had failed to mitigate its loss for the remaining shares.

D2.4 Whether FF has already received more than the loss it can claim?

131.  According to FF’s case, the total purchase price under the Collateral Agreement would be at HK$7,335,000.00 (being 3,260,000 shares at HK$2.25 per share). As stated, FF managed to sell off 2,149,000 from those remaining shares amounting to HK$3,845,727.36 prior to the commencement of the trial. Together with the sanctioned payment it had received from Hon in the sum of HK$3,220,000.00, which FF acknowledged must be taken into account against any recovery from Top One, the total amount FF had received was at HK$7,065,727.40 (HK$3,845,727.40 + HK$3,220,000.00). Thus, the outstanding sum which could be claimed by FF is at HK$269,272.60 (HK$7,335,000 - HK$7,065,727.40) only.

132.  As of today, FF still retains 1,110,000 shares in EBHL. In order to recover anything from Top One, FF must prove that the value of the remaining shares in its hands was below HK$0.24 per share. In my view, that is a highly unlikely scenario. Thus, had FF made attempts to sell the remaining shares in the market, it would have suffered no loss at all. Even if it suffered any loss, it could always claim and recover the difference from Top One.

133.  FF attempted to plug this hole in its case by claiming a significant amount of interest on top of the damages claimed. Alternatively, it asks the court to apply a significant “liquidity discount” to the current price of the shares by referring to the English case of Netley v Revenue and Customs Commissioners [2017] SFTD 1044.

134.  I agree with Mr Yip’s submission that FF simply failed to cite any legal authority to show that the court would award interest in circumstances when a party has been shown to have failed in its duty to mitigate its loss as I find FF did in this case.

135.  Further, I find FF has failed to demonstrate by way of evidence that the EBHL shares were so thin that the FF remaining shares could not be absorbed by the market and that the market should be treated as illiquid. I therefore would reject FF’s alternative claim based on applying a significant “liquidity discount” in this case.

136.  In the aforestated circumstances, while I find in favour of FF on liability, I am of the view that it has failed in its duty to mitigate its loss by selling the remaining shares in the open market and therefore suffered no real loss as a result.

137.  Thus, I find FF has failed to establish any loss in its claim against Top One under the 2980 Action.

E. The 406 Action

E1. Top One’s Case against FF and Su

E1.1 Warranties contained in the SPA

138.  Top One’s case is principally based on breaches of warranties. It mainly, if not exclusively, relies on the documents produced at trial to prove its case. Therefore, it is important to set out the relevant express warranties contained in the SPA.

139.  There is no dispute that FF and Su, respectively as the Vendor and Vendor Guarantor, have provided a series of warranties in respect of the Company’s accounts and financial position under Section 5 and the Schedule of the SPA. They included:-

(1) Clause 1 of Section 2 of the Schedule of the SPA, which provides:-

“(A) All information which has been given by the Vendor or the Vendor Guarantor…in the course of the negotiations leading to this [SPA] is…true, accurate and complete in all respects and no information has been omitted which would render the information given misleading in any material aspect…” (emphasis added)

(2) Clause 3 of Section 2 of the Schedule of the SPA, which warrants the accuracy of the Target Accounts of EBHL:-

“(A) …the information given in the Target Accounts prepared by Deloitte Touche Tohmatsu is true, accurate and complete in all respects and no information has been omitted…

(B)The Target Accounts: … (ii) show a true and fair view of the state of affairs of the members of the Target Group or the Target Group at each accounting reference date to which the Target Accounts relate…(iv) include adequate provision for bad and doubtful debts…

(C)At the Target Accounts Date, the members of the Target Group or the Target Group did not have any liability (whether actual, contingent, unqualified or disputed)…which was not adequately disclosed or provided for in the Target Accounts…

(F)There are in place within the Target Group sufficient internal control measures to reasonably assure against material misappropriate of assets or mis-recording or mis-statement of financial information” (emphasis added)

(3) Clause 4 of Section 2 of the Schedule of the SPA, which warrants the accuracy of the Management Accounts of the Target Group:-

“(A) …the information given in the Management Accounts prepared by the Target’s Financial Controller is true, accurate and complete in all respects…

(B)The Management Accounts: ... (iii) show a true and fair view of the state of affairs of the members of the Target Group or the Target Group at each accounting reference date to which the Management Accounts relate;…(ii) include adequate provision for bad and fault debts…

(C)At the Management Accounts Date, the members of the Target Group or the Target Group did not have any liability (whether actual, contingent, unquantified or disputed) or outstanding capital commitment which was not adequately disclosed or provided for in the Management Accounts…” (emphasis added)

(4) Clause 5(G) of Section 2 of the Schedule of the SPA, which pertains to the NAV of EBHL:-

“As of the Completion Date, the Actual NAV shall not be less than the Minimum NAV.”

(5) Clause 11(B) of Section 2 of the Schedule, which warrants that the Target Group did not entered into any unusual contract or arrangement:-

“No member of the Target Group is, or has been, party to any long-term, unusual or onerous contract, commitment or arrangement including but not limited to any…arrangement which …or (v) is made with any shareholder or director of any member of the Target Group…”

(6) Clause 13A of Section 2 of the Schedule, which concerns litigation or circumstances giving rise to legal proceedings:-

“No member of the Target Group is engaged in any litigation or arbitration…that are material and adverse to the business of any member of the Target Group…and no such legal proceedings are pending, threatened or expected and there is no fact or circumstance likely to give rise to any such legal proceedings…”

140.  Clause 5.1 of the SPA, under which FF and Su warrant these terms in the Schedule of the SPA:-

“The Vendor and the Vendor Guarantor hereby jointly and severally represent, warrant and undertake to the Purchaser…in the terms set out in the Schedule.”

141.  Clauses 7.1 and 7.2 of the SPA further impose a continuing guarantee and a primary obligation on Su of the due observance and performance by FF of warranties and obligations of the SPA.

142.  The SPA then makes clear that Top One entered into the SPA relying on the warranties given by FF and/or Su therein:-

(1) Clause 5.1 of the SPA states: “The Vendor and the Vendor Guarantor hereby acknowledges that the Purchaser in entering into this Agreement is relying on the Vendor’s Warranties provided by the Vendor and the Vendor Guarantor”.

(2) Clause 5.4 of the SPA provides: “No information of which the Purchaser already has any knowledge, and no investigation by or on behalf of the Purchaser, shall prejudice any claim made by the Purchaser under any of the Vendor’s Warranties or be deemed a disclosure that operates to reduce any amount recoverable”.

E1.2 Top One’s case on breach of Warranties and/or Misrepresentations

143.  It is Top One’s case that FF and/or Su have breached the above warranties in the SPA.

144.  First, Top One claims that, unbeknownst to them at the time of completion, Ernest Borel (Far East) Company Limited (“EBFE”), a subsidiary of EBHL and a member of the Group, owed Easy Team contract price of HK$15,587,568.75 for Easy Team’s work from September 2015 to June 2016 (“Easy Team Liabilities”). Top One claims that the aforesaid liabilities were not disclosed in the Management Accounts.

145.  Top One relies on, inter alia, documentary evidence such as EBFE’s agreements with Easy Team since 2011, invoices issued by Easy Team to EBFE, as well as evidence of factual and expert witnesses in support of the claim.

146.  Top One says that, in full and final settlement of Easy Team’s legal claim against EBFE for outstanding fees (HCA 2883/2016), EBFE paid 90% of the total unpaid amounts invoiced by Easy Team, and legal expenses of HK$98,100.00: see the demand letter issued by Easy Team; Writ of Summons of HCA 2883/2016, Consent Order and settlement correspondence.

147.  It is Top One’s case that the presence of the Easy Team Liabilities is contrary to, inter alia, Clause 4(C) of Section 2 of the Schedule of the SPA, which requires that “At the Management Accounts Date” (ie 30 June 2016), the Target Group or its member “did not have any liability (whether actual, contingent, unquantified or disputed) or outstanding capital commitment which was not adequately disclosed or provided for in the Management Accounts…”.

148.  Second, Top One discovered that there were advertisement fees of HK$7,454,648.63 (“Advertisement Fees”) incurred prior to the Completion Date, which was not disclosed in the Management Accounts annexed to the SPA.

149.  For this claim, Top One relies on, inter alia, internal records of the Target Group summarised at, supporting documents such as vouchers, payment slips and records, agreements with the advertisement agency, ledgers of EBFE as well as evidence of factual witnesses.

150.  Top One claims that the failure to disclose Advertisement Fees in the Management Accounts constituted a breach of, inter alia, Clause 4(C) of Section 2 of the Schedule.

151.  Third, Top One also allegedly discovered that Ernest Borel (Guangzhou) Trading Company Limited (“EBGZ”), a subsidiary of EBHL and a member of the Group, owed unpaid salaries to Ms Liu, the former director of EBGZ, in the sum of RMB 2,113,000.00 (between 2012 to 2015) and RMB 335,000.00 (between January 2016 to July 2016) (“Ms Liu’s Salary Payments”).

152.  Top One relies on, inter alia, the agreement between Ms Liu and EBGZ deferring payment of her salary dated 16 July 2016 (“Deferral Agreement”), a notice signed by Su and internal records of EBGZ showing payment of Ms Liu’s salary from January 2016 to April 2017.

153.  Ms Liu commenced employment arbitration against EBGZ to recover, amongst other things, unpaid salaries of RMB 2,113,000.00, which resulted in an award against EBGZ.

154.  Top One says that the liabilities to Ms Liu were not disclosed in the Management Accounts annexed to the SPA[12]. Top One says that the undisclosed liabilities to Ms Liu constituted a breach of, inter alia, Clause 4(C) of Section 2 of the Schedule of the SPA.

155.  Further and/or alternatively, Top One claims that the Deferral Agreement amounted to a breach of Clause 11(B) of Section 2, under which FF and Su warrant that no member of the Group is or has been party to “any unusual” arrangement or agreement, which is made with the “director of any member of the Target Group”.

156.  Fourth, there were Cancelled Sales in the value of RMB 41,819,559.36.

157.  In support of its claim, Top One relies on, inter alia, the Company’s internal records summary[13], underlying documents such as invoices, credit notes[14], PRC VAT invoices[15], audit confirmation letters and transaction records with distributors[16]. In addition, Top One also relies on the evidence of its factual witness and expert evidence[17].

158.  Top One says that the presence of Cancelled Sales constituted a breach of Clause 5(F) of Section 2 of the Schedule, which requires that: “None of the goods which are subject to the sales recorded in the Management Accounts shall at any time prior to 30 June 2017 be returned by the relevant buyers or distributors for the same”.

159.  Fifth, Top One also claims that there were Unrecoverable Receivables totaled HK$7,477,460.51.

160.  Top One claims that the presence of Unrecoverable Receivables is contrary to Clause 5(F) of Section 2 of the Schedule[18], which requires that: “As of the date to which the Management Accounts have been made up, no facts or circumstances exist which may or are likely to result in any accounts receivables disclosed in the Management Accounts not being recoverable…”.

161.  Sixth, after completion, Top One allegedly discovered that inventories in the worth of HK$23,308,751.74, which were recorded in the Completion Accounts, had disappeared, ie the Missing Inventories[19]. It claims that the Missing Inventories were either stolen or disappeared for which Su should be responsible.

162.  Seventh, because of the existence of undisclosed liabilities to Easy Team, Ms Liu and advertisement agencies, Cancelled Sales, Unrecoverable Receivables, and Missing Inventories, Top One says that the Actual NAV of the Group is less than the NAV reported in the Completion Accounts (ie HK$569,184,629.00)[20].

163.  After making the necessary adjustments, Top One’s expert Alan Lee assessed the Actual NAV of the Group as at 29 July 2016 at HK$466,113,879.00[21].

164.  Accordingly, according to Top One, there is a NAV shortfall of HK$99,886,121.00 (ie Minimum NAV HK$566,000,000.00 – Actual NAV HK$466,113,879.00).

165.  In other words, the Actual NAV of the Company falls well below the Minimum NAV of the Group warranted under the SPA (ie HK$566,000,000.00), contrary to Clause 5(G) of Section 2 of the Schedule, under which Su and/or FF warrant that: “As of the Completion Date, the Actual NAV shall not be less than the Minimum NAV”.

166.  Further and/or in the alternative, Top One says that FF and/or Su are guilty of mispresenting the Company’s liabilities, value of inventories, revenue and accounts receivables in the SPA.

E2. FF and Su’s case in the 406 Action

167.  First and foremost, Su/FF claims that the 406 Action concerns events which happened after the SPA was signed on 29 July 2016, ie after Hon / Citychamp, through Sit / Top One, took over the control of EBHL.

168.  On 29 July 2016, Su relinquished his control over EBHL by resigning as the executive director and chairman of the Company. In order to ensure a smooth transition to the new management, he was retained as the CEO under a CEO employment agreement. The employment agreement was originally supposed to last for 16 months from 29 July 2016 to 30 November 2017. However, Su was terminated early by EBHL on 17 March 2017 after a quick sequence of events.

169.  The documentary evidence shows that since signing of the SPA, Hon and his associates, including those from Top One, acquired actual control and running of EBHL. They show that the Company was run by senior executives / personnel appointed or sent by Hon or Citychamp from that date onwards. Su as the CEO was in name only and had no actual decision-making or management power. Su was there mainly to help EBHL to collect the outstanding debts from its customers and to ensure a smooth transition.

170.  These senior executives from Citychamp included Gu, A Lam, He, Tao, Betty Zhu (朱瑜), Tao Mingqian (陶明謙), etc. who all used to work in different senior positions in the Citychamp Group or its subsidiaries: see Flowchart attached to Su & FF’s Opening marked as Annex 4.

171.  The following key appointments in the ensuring months in EBHL clearly demonstrate that Sit / Top One was merely a nominee / agent of Hon or Citychamp.

172.  On 8 August 2016, Sit was appointed as the Executive Director and A Lam as the Vice President of EBHL.

173.  On 18 August 2016, Gu was proposed by Sit to be appointed as Vice-President in Sales and Marketing which is an important role in the day- to-day operation of EBHL.

174.  On 25 October 2016, under the instruction of A Lam, He was appointed as the Vice-President of EBGZ in its Guangzhou operation. That appointment was to commence on 31 October 2016 with an annual salary of RMB 1,068,000.

175.  In February 2017, Betty Zhu and Helen (徐佳) joined EBGZ.

176.  In January 2018, Tao joined EBHL as its General Manager.

177.  Thus, Su & FF say that the day to day running and all the management and decision-making powers of EBHL were firmly in the hands of the senior executives appointed by Hon and Citychamp, either through Sit or Top One or directly by the senior management of Citychamp, as one would expect after the acquisition of the majority of the shares of the Company by them. Su had little control over those matters, in particular in relation to the finance and accounting records of the Company. Su/FF submit that it is under such context that the case brought by Top One against them must be judged.

178.  Su/FF also claim that Top One’s case is wholly lacking in terms of evidential support.

179.  Ms Wong was Top One’s main factual witness at trial. However, that was not the original intention. Ms Wong in her main witness statement filed for the 206 Action on 5 May 2022 (“Wong’s WS”) mentioned that she was going to deal with 3 heads of claim in that case only, ie Easy Team Liabilities, Advertisement Fees and Missing Inventories. She specifically stated that she would leave the other 3 main heads of claim, ie Cancelled Sales, Unrecoverable Receivables and Ms Liu’s Salary Payments to the other factual witnesses and expert to deal with[22]. As it turned out, the 3 factual witnesses who had previously filed witness statements did not appear in court to give evidence. That necessitated Top One to file a lengthy supplemental witness statement (which consisted of 65 pages[23]) by Ms Wong 2 years later on 5 March 2024 (“Wong’s Supp WS”). Top One tries to use Wong’s Supp WS to fill this huge evidential gap left by the unavailability of those important factual witnesses.

180.  However, what is clear from reading Wong’s Supp WS is that Ms Wong has no personal knowledge in those 3 important issues. Under cross-examination, she admitted that the 3 other witnesses were more suitable to give evidence on those issues. As she has no personal knowledge on those matters, she could not assist the court on them. This is understandable as Ms Wong had never held any position in EBHL or its related companies. She also has no first-hand knowledge of EBHL’s internal operations or finances as she frankly admitted under cross-examination.

181.  Thus, Su/FF say that Ms Wong’s evidence, in particular what has been belatedly put in under Wong’s Supp WS, is no more than a “paper-based reconstruction of events”. I agree. What is also clear is that Ms Wong has no personal knowledge on those important matters as large parts of her witness statements simply repeated Top One’s pleaded case. The fact that the phrase “I understand” has been used multiple times by Ms Wong in her witness statements indicate that she has no personal knowledge on those matters and she was merely trying to describe what she could be dedicated from those documents. Ms Wong admitted this was the case under cross-examination.

182.  I will now turn to each of the individual claims made by Top One against Su/FF in this action.

E3. Cancelled Sales

183.  As mentioned above, Top One claims a total sum of RMB 41,819,559.36 in terms of Cancelled Sales in this case. Top One relies on a number of documents as referred to in §157 above in order to prove its case.

184.  The main problem I have with those documents is that most of them are unaudited and self-serving. They are also highly selective and do not reflect the true sales situation and practice of the Company at the material time. It is rather obvious that most if not all of those documents are products of a “reverse engineering” exercise conducted by Top One after the event. The aim clearly was to build a case of “Cancelled Sales” against Su and FF and tried to make them liable for the alleged loss. I do not believe they are genuine. Nor do I believe that they fall within the definition of “Cancelled Sales” under the SPA for which Top One must prove in order to make Su/FF liable for them.

E3.1 The SPA framework for “Cancelled Sales”

185.  “Cancelled Sales” has been defined in the SPA as follows:-

“any amount of sales revenue recorded in the Completion Accounts the corresponding goods for which have at any time prior to 30 June 2017 been returned by the relevant buyers or distributors for the same or the recorded amounts of which are prior to 30 June 2017 required for any reason including accounting practice to be provided against or written down or otherwise reduced (to the extent of the amount of the provision or written down or reduction)”

186.  As Mr Lung has pointed out, two sets of warranties are engaged in this context:-

(a) “Fundamental Warranties” which has been defined as “the Vendor’s Warranties” set out in Section 1, the Schedule and paragraphs 5(F) and 5(G) in Section 2, the Schedule”; and

(b) “Vendor’s Warranties” which has been defined as “the representations, warranties and undertakings of the Vendor and the Vendor Guarantor on a joint and several basis and contained or referred to in Clause 5 and the Schedule”.

187.  §5(F) of the Section 2 of the Schedule of the SPA provides that:-

“As of the date to which the Management Accounts have been made up, no facts or circumstances exist which may or are likely to result in any accounts receivables disclosed in the Management Accounts not being recoverable… None of the goods which are subject to the sales recorded in the Management Accounts shall at any time prior to 30 June 2017 be returned by the relevant buyers or distributors for the same.”

188.  “Management Accounts” mentioned above are the accounts as of 30 June 2016 as set out in the Annex of the SPA[24].

189.  Clause 5.7, being one of the “non-Fundamental Warranties”, provides that:-

“Subject to Clause 5.8… the Vendor [ie FF] and the Vendor Guarantor [ie Su] jointly and severally undertake and agree to indemnify, defend and hold harmless the Purchaser, both itself as purchaser and on behalf of and as trustee of reach member of the Target Group…on demand, from and against the entirety of any and all Adverse Consequences that any of them may suffer or incur resulting from, arising out of…a breach of the Vendor’s Warranties…including against every dollar of the NAV Shortfall or the amount of any Unrecoverable Receivable or the amount of any Cancelled Sales if such items materialise.” (emphasis added)

190.  Clause 5.8 of the SPA provides that the liability of FF and/or Su for breach of Fundamental Warranties (such as Clause 5(F) & 5(G) of Section 2 of the Schedule) has no upper limit, whereas their liability to breach of non-Fundamental Warranties (such as Clause 5.7) would be limited to 19.8% (ie percentage of Top One’s shareholding in EBHL) of the claim:-

“The maximum Liability of the Vendor and/or the Vendor Guarantor in respect of any Warranty Claim (other than a claim for breach of any of the Fundamental Warranties) shall not exceed an amount equivalent to 19.80% of the amount of the relevant Warranty Claim. For the avoidance of doubt, the Liability of the Vendor and/or the Vendor Guarantee in respect of any claim for breach of any of the Fundamental Warranties shall not be subject to any upper limit.” (emphasis added)

191.  Clause 5.9 of the SPA stipulates a “5% threshold” for mounting a warranty claim on strength of Clause 5(F) of Section 2 of the Schedule against FF and Su:-

“In respect of any Warranty Claim with respect to the Vendor’s Warranty set out in paragraph 5(F), Section 2, the Schedule, the Vendor and/or the Vendor Guarantor shall not be liable for any Warranty Claim unless the amount of the Unrecoverable Receivables and/or the Cancelled Sales (as the case may be) set out in the interim report of the Target Group to be prepared by Deloitte Touche Tohmatsu for the 6 months ending 30 June 2017 exceeds 5% compared to the figures stated in the Completion Accounts.” (emphasis added)

192.  Lastly, “Completion Accounts” are defined as “the consolidated financial statements of the Company (ie EBHL and its subsidiaries) as at the Completion Date (ie on 29 July 2016).

E3.2 Top One’s claim for Cancelled Sales

193.  In my judgment, Top One’s claim for the Cancelled Sales riddles with insurmountable problems and is highly questionable.

E3.3 Lack of documentary support

194.  First, Top One’s primary case is that certain amounts of sales from EBGZ were cancelled or reduced due to the return of goods. It claims that this is caught either under the Fundamental Warranties under §5(F): (§21 of Re-Amended Statement of Claim (“RASOC”)[25]) or alternatively under the non-Fundamental Warranties under Clauses 5.7 and 5.8: (§24 of RASOC).

195.  However, as noted by Mr Lung, Top One’s case has shifted over time:-

(1) In 2018, Top One first said there were RMB 41.8 million “Cancelled Sales” as pleaded in §20 of RASOC, said to arise solely from EBGZ: Top One’s Answer to Further & Better Particulars dated 28 September 2018 (“FBP”) §1.

(2) By 2021, it expanded the claim by adding individual customers[26] of unspecified amounts: FBP §2 [§1(c)].

(3) By 2024, Top One claimed that a “total” amount of HK$52,100,502.05, now said to include EBGZ, EBFE, and Ernest Borel S.A. (“EBSA”): see Ms Wong’s Supp WS §19, but without incorporating the earlier “individual customers” component.

196.  In the absence of any request for amendments to the pleadings, I shall treat Top One’s claim remains at RMB 41.8 million as pleaded under the RASOC.

197.  I agree with Mr Lung that the repeated shifts in Top One’s case reveals a more fundamental problem, namely, that Top One has never been able to anchor its Cancelled Sales claim on proper documentation which goes to show that: (i) that the underlying sales were recorded before 30 June 2016 / Completion; (ii) that the goods were in fact returned (as contrast to exchanged); and (iii) that any such returns resulted in a real reduction of revenue.

198.  In my view, Top One’s claim for Cancelled Sales fails on multiple fronts, from not passing the requisite contractual threshold to not meeting the basic evidential threshold due to all the inconsistencies and contradictions.

E3.4 Clause 5.9 threshold not met

199.  In order for Top One to succeed against Su/FF for any warranty claim under Clause 5(F), Clause 5.9 requires an interim report to be prepared by EBHL’s auditor Deloitte to verify the amount of Cancelled Sales (and to confirm that the 5% threshold is crossed). It is not disputed that no such report was prepared by Deloitte.

200.  When being cross-examined on this, Ms Wong’s initial response was that Deloitte had refused to prepare the interim report. However, after the email of 9 October 2017 between Jimmy Luk of Deloitte and A Lam was shown to her, Ms Wong accepted that was not the case at all. Deloitte merely stated that “given the company has announced its interim result for the 6 months ending 30 June 2017, it is not appropriate and unusual for us as the auditor of the group to issue the interim report of the same period subsequently.”[27] However, it indicated that it was willing to perform a review for other periods.

201.  Ms Wong accepted that Deloitte could have been asked to prepare a special report on the Cancelled Sales and the Uncollected Receivables but she could not explain why this was never done. In my judgment, the truth of the matter is that she did not know what happened because she was not involved in the decision-making process as she was not senior enough in Top One or EBHL. A Lam who was involved in the process chose not to come to court to give evidence.

202.  Further, WhatsApp messages between Su and Thomson Lau (the CFO of EBHL) on 18 July 2016 confirm that EBHL management knew Deloitte could be engaged to prepare such special reports. Ms Wong also agreed that if EBHL or Top One had wanted such a special report, they could have requested for it.

203.  When asked if she would agree that the “spirit” behind Clause 5.9 is that an independent third party should verify the amount of the Cancelled Sales and to confirm that the 5% threshold is exceeded before action can be taken, Ms Wong agreed. When it was further put to her that Top One has no basis to claim for the Cancelled Sales in the absence of any Deloitte report which complies with Clause 5.9, Ms Wong also agreed.

204.  In my judgment, based on the failure to produce an interim report from Deloitte to verify the amount and to show that the sum claimed had crossed the 5% threshold required under Clause 5.9, Top One’s claim on the Cancelled Sales must fail on this basic requirement alone.

E3.5 “Cancelled Sales” not within the contractual definition

205.  Another major defect in this claim is that there is nothing, as a matter of evidence, to show that the alleged “Cancelled Sales” fall within the contractual definition. In particular, there was nothing to show that the sales allegedly cancelled were initially conducted prior to Completion.

206.  In its pleadings, Top One admits that the relevant sales were made after 1 August 2016. However, in terms of evidence, Top One has failed to provide any documents to show that the relevant sales were pre-completion sales. This would have been a very easy exercise as all Top One had to do was to produce the sales invoices or PRC tax invoices to show the dates of the sales. It is also remarkable that Alan Lee (Top One’s expert) did not ascertain whether all the alleged “Cancelled Sales” concerned sales conducted prior to the Completion.

207.  I would have thought that the above is quite basic and fundamental for Top One to establish the “Cancelled Sales” claim within the definition of the SPA. The fact that it had failed to do so in my view is fatal to its claim.

E3.6 Exchange or genuine return?

208.  Another major problem I find with Top One’s claim for the “Cancelled Sales” is that it fails to make a distinction between the exchange of goods and returns of goods. Su/FF’ case is that only a genuine return of goods would lead to a sales cancellation which would in turn impact the sales receivables. By contrast, an exchange for items of equivalent value does not affect sales revenue and does not fall within the contractual definition of Cancelled Sales.

209.  I accept the following evidence given by Su on this matter which was not challenged or contradicted by Top One’s witnesses:-

(a) Apart from selling watches directly to its customers, EBHL also had consignment arrangements with many different distributors (located in different parts of the Mainland) who would return “unsold” watches. This would constitute most of the “returned watches”;

(b) Some watches were returned due to quality issues. In such case, most of them would be repaired and then shipped back to the distributors;

(c) Others would be returned upon requests due to “unmarketability”, in which case they would be exchanged for other (newer) watches of equal value; and

(d) The “unmarketable” products in one region may still be sold in other regions as some models which are not popular in one region may be popular (and hence “marketable”) in other regions.

210.  As Mr Lung has pointed out, the above distinction is important as (i) most goods returned under consignment did not impact sales, as consigned watches were never counted as “sales” in the first place; (ii) genuine returns (for example due to defects) must be accompanied by the PRC Red Tax Forms; and (iii) it was EBHL’s new management which decided to allow for exchanges due to alleged unmarketability.

211.  It is important to note in this case that all 3 of Top One’s witnesses, including its expert Alan Lee, agreed that an exchange of goods has no impact on the sales revenue.

212.  Further, Ms Wong accepted under cross-examination that where a distributor exchanges goods in the same period for the same value, there is no impact on sales revenue and such transactions do not fall within the contractual definition of Cancelled Sales. Top One’s other witness, He also accepted that so long as the exchange of goods involved goods of equal value, revenue would not be affected.

213.  He tried to salvage Top One’s position on this issue by suggesting that there would be difficulty in reselling the watches returned due to “unmarketability”. I would reject his evidence on this due to the following reasons:-

(a) When compared with Su’s vast experience and long-term involvement with EBHL’s business, He only became the CEO in 2019 and had no or very little knowledge in the watch industry and in particular about the practice of exchange of goods by distributors of EBHL prior to joining the Company. Hence his evidence on the alleged difficulty in reselling of the watches returned during the Pre-Completion period is of very limited value only.

(b) Prior to He becoming the CEO in 2019, it was Gu who had managed the sales in EBHL and it was Gu who had approved the exchange requests. Thus, He was not in a position to comment on why Gu had approved the exchange requests. Again, Gu was not called to give evidence to explain the reasons to the court why the exchanges were accepted.

(c) In any event, as He was only appointed as the CEO of EBHL on 10 June 2019, his knowledge and experience about the alleged difficulty in reselling the watches returned due to unmarketability could only be confined to the post-2019 period. His evidence would have no direct bearing to the relevant period for the Cancelled Sales claimed by Top One, ie in 2016-2017.

(d) As He accepted under cross-examination that even if some products are unpopular in a certain region, it does not necessary mean that they are not popular in another region.

214.  Further, even Top One’s expert Alan Lee agreed that there is no impact on sales revenue if the exchange amounts are of equal value. However, to be fair, he did add the qualification that the “fair value” of the returned goods ought to be considered. Alan Lee admitted that in the calculation of impact to NAV, one ought to take into account the cost of the returned watches, though he did not do so as he did not inspect the watches. Yet at the same time he just assumed that the returned watches were all worthless. That cannot be right as the returned goods could not be said to be without any value at all.

215.  In the light of the above evidence, I am of the view that if there was an exchange of products of equal value, it will have no impact whatsoever on sales revenue and therefore they do not constitute “Cancelled Sales” within the meaning of the SPA.

E3.7 Lack of PRC Red Tax Forms in support

216.  It is common ground that all sales made by EBGZ in the PRC were accompanied and documented by PRC VAT Invoices: see §1(a) of Top One’s Answers to FBP at [A/181].

217.  As Alan Lee has pointed out in his report, these Invoices are “generally issued by the official local government … with stringent issuance and monitoring controls in order to track the domestic economic activities. 「增值稅專用發票」 (ie PRC VAT Invoices and PRC VAT Return Form (Red)) is often considered a reliable source of information and persuasive primary evidence in the account profession”: see Alan Lee’s Report at §19.

218.  Thus, both the PRC VAT Invoices and the PRC VAT Return Forms (commonly called the PRC Red Tax Forms) are crucial documents to show whether the sales or cancelled sales have actually taken place or not. As they are important official documents for the tax authority to collect VAT upon sales (in the case of the VAT Invoices) or for the authority to refund the VAT to the vendors for any genuine cancellation of goods, usually the production of them would be very strong if not conclusive evidence to show whether the relevant activities had taken place or not.

219.  In my judgment, the failure to produce those primary source documents by Top One is fatal to its “Cancelled Sales” claim.

220.  In my view, it cannot be disputed that the exchange of goods is closely related to the PRC Red Tax Forms. If there are genuine cancelled sales like returns of goods due to defects for example, then one would expect that there will be corresponding PRC Red Tax Forms being filled in and lodged by the vendors for the refund of the VAT paid. The fact that there is only a very small number of such forms made available at the trial (amounting to around RMB 1.2 million only) suggests that the actual returned goods with actual impact on the sales revenue is very minimal.

221.  This matter has been acknowledged by both experts. It has also been confirmed by Ms Wong, who with an accounting background, acknowledged that a proper conciliation should show a 1:1 correspondence between the alleged cancelled sales and those official tax records. She frankly admitted that the lack of documentation in this respect was unreasonable. Alan Lee also acknowledged that the extremely small number of available PRC Red Tax Forms was unusual.

222.  In my view, the fact that most of the RMB 41.8 million Cancelled Sales claim is unsupported by the PRC Red Tax Forms strongly suggests to me that the exchange process was never recognized by the distributors nor the tax authorities as a reduction to sales revenue. The logical deduction which follows must be that the basis of Top One’s Cancelled Sales claims is seriously flawed.

E3.8 The seriously flawed Confirmation Letters

223.  In order to establish the “Cancelled Sales” claim, Top One also relies on (i) the large number of “confirmation letters” from its distributors; and (ii) its internal summary and list, to support its RMB 41.8 million Cancelled Sales claim against Su/FF:-

(a) The confirmation letters can be found in almost 250 pages of documents at [C29/22843-23090] from the distributors to EBGZ. It was also summarized in Wong’s Supp WS at §§15-16. They purportedly show there were a total of RMB 40,316,312.10 in terms of cancelled sales; and

(b) A summary of the breakdown from August 2016 to July 2017 purportedly showing the RMB 41.8 million cancelled sales, followed by a breakdown of customers, model units and the sales amount per month. This can be found in Attachment 1 of the FBP at [A/220-364].

224.  In my judgment, the fundamental problem with the above documents is that they are not supported by any primary source documents like the PRC VAT Invoices or sales orders which can directly show that the Cancelled Sales were related to sales made prior to 30 June 2016 or 29 July 2017.

225.  Another serious flaw about these confirmation letters is that nobody from Top One was able to inform the court the true intention behind sending those letters to the distributors in the first place; where did the data come from; why the transactions were considered as cancelled sales; and what documents were used to verify the information. Neither Ms Wong nor He (as the only two factual witnessed called by Top One to testify at the trial) was able to speak to those matters. Without those basic information, the confirmation letters really were of very little evidential value.

226.  Further, the confirmation letters for the RMB 41.8 million show the date of return but not the date of sales. Top One confirmed in its Answers to the 1^st and 2^nd Defendants’ Request For Further & Better Particulars dated 15 September 2021 (“FBP II”)[28] that the Cancelled Sales first arose on the dates stated under the heading 「日期 」(date) on the lefthand column in Attachment 1. They were all dated between August 2016 and June 2017. In other words, these were sales which took place after the SPA and therefore not covered by the warranties. On this alone, these purported Cancelled Sales cannot form part of the claims under the terms of the SPA at all.

227.  A good example of this can be found with a company called 「上海學新鐘表有限公司」 which was only incorporated on 12 August 2016: see Exhibit D1. The returns from them could not have fallen within the contractual definition of Cancelled Sales as it only started having business dealings with EBHL from 1 August 2016 onwards[29]. Yet it was included as one of the parties who had signed the confirmation letters on which the Cancelled Sales claim was made against Su and FF.

228.  The problem with the confirmation letters did not end there as the contents of the confirmation letters were explicitly disputed by many of the distributors who had received them. This severely undermined Top One’s case that the amount of the “returned goods” under the confirmation letters is equal to the amount of the Cancelled Sales. For example, some distributors strongly disagreed with EBHL’s suggested figures (for which the distributors were asked to confirm) and expressly stated that the transactions were for exchanges and not returns[30].

229.  A good example of this can be found with 「蘇州新宇瑞嘉鍾錶」involving one of the largest alleged “returns” of goods of 2406 items worth RMB 21,386,310.00[31]. A rather blunt two-line reply came back from the distributor which stated that they were for “exchanged goods” and settlement had been made according to EBHL’s policy at the time[32].

230.  Similar replies had been made by different distributors: see for example replies at C5/22925 and C5/22961.

231.  Mr Lung has very helpfully summarized the replies from the distributors for the confirmation letters in table form and attached that as Annex 6 in Su/FF’s Closing Submissions. I find that helpful as it shows more than half of the goods (in terms of value of goods, not the number of distributors) were explicitly stated as exchanges rather than returns. There were also substantial discrepancies identified by the distributors in terms of the data provided by EBGZ.

232.  Further, as agreed by Alan Lee, some of the distributors refused to confirm the amount stated in the confirmation letters.

233.  Another problem with the confirmation letters is that the “return” amount was stated to be the “retail” price. They obviously are not the same thing and it is wrong to treat the “return” price as the “retail” price and vice versa. Ms Wong has fairly conceded in cross-examination that this approach is “fundamentally incorrect”.

234.  In the aforesaid circumstances, I find the confirmation letters not only did not support the Cancelled Sales claimed by Top One, but they expose a fundamental weakness in its case, namely, it was desperate in trying to build up a case against Su/FF by producing some self-serving and unreliable documents. I have no hesitation to reject the confirmation letters as proof for the purported Cancelled Sales.

E3.9 The Cancelled Sales are self-induced

235.  I also find the alleged Cancelled Sales was a result of a deliberate policy change for exchange of goods after Gu took over the management of EBHL. Put it bluntly, it was Top One’s own creation. They not only allowed the exchanges but actively encouraged them.

236.  As Su has testified, prior to the SPA, exchanges were rare and strictly controlled. EBGZ previously had an exchange policy of 1:9, ie where upon the return of 1 model by a distributor would require it to purchase 9 new ones. This policy would discourage distributors from exchanging goods rather than to exchange them to do so as they have to buy 9 more products when trying to exchange one old product. This would also help to build up the revenue of the company rather than making them to lose money. As the risk of not able to sell any watches would fall on the distributors once they are sold to them, EBHL was not under any contractual duty to entertain any exchanges. The above evidence is not seriously challenged by Top One and I have no reason not to believe Su’s evidence on this matter.

237.  It is not disputed that Gu had tried to revamp the exchange of goods policy of EBHL since he took up his appointment in EBHL in August 2016. This can be seen from the Exchange Process Flowchart which expressly stated that it was up to the ‘China Sales Director’ (ie Gu) to implement the (new) exchange policy after August 2016[33].

238.  What happened was after Citychamp/Top One took over the management of EBHL, the exchange policy was changed in favour of the distributors. This is evidenced by an email dated 12 December 2016 by a staff of EBHL setting out the new 「換貨政策」 (“Return of Goods Policy”) to be implemented from 2017 onwards as a result of a meeting with Gu[34]. The new policy can be briefly summarized as follows:-

(1) It allowed for the return of the 20-30 specified models which were destinated as obsolete, though these obsolete models could be resold via e-platforms; and

(2) The policy provided that: (i) exchange credit would be given at 100% of the original price paid by the distributor; (ii) the exchange credit would have a 1‑year expiry; and (iii) the exchange credit would be applied to 50% of the new models taken up by the distributors.

239.  Thus, it is obvious that it was Gu who had introduced the change in the exchange policy. It is also obvious that as a result of the implementation of the new policy that it saw a sudden surge in the frequency where the distributors would request for an exchange.

240.  In the circumstances, I find it was Gu who had created the new exchange policy which saw the sudden surge in the requests from the distributors. I find it was a self-induced loss and Su/FF should not be responsible for it.

E3.10 The Prevention Principle

241.  In addition to and alternative to the above, I find that the “Prevention Principle” relied on by Su/FF would apply in the circumstances of this case.

242.  The principle, as explained by Ribeiro PJ in Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381 at §§91 and 96, bars a contractual party who is in breach of an obligation owed to the other party from asserting rights which arise in consequence of its own breach. Two elements must be satisfied: (i) there is a breach of contract by the party in question; and (ii) the contractual right which the relevant party is seeking to assert arises as a direct consequence of that breach.

243.  There are many ways in which the principle may be given effect:-

“97. In many cases, it will be appropriate to implement it as a substantive principle of law that precludes the wrongdoer from taking advantage of his own wrong, whatever the contract may say and however clearly the contract may appear to confer on the wrongdoer an unqualified right to enjoy such advantages.” (emphasis added)

244.  On Su/FF’s case, both elements are clearly met. There is no doubt Top One created and caused these cancellations by way of its own policy and decision-making:-

(1) For limb (i), once Top One assumed control of EBHL/EBGZ after Completion, it was at least subject to an implied duty not to prevent or hinder the proper and due performance of the SPA’s warranties. Top One breached that duty by deliberately instituting a return policy that created exorbitant notional cancellations (ie without real financial impact to revenue and income) in a way which self-manufactured the very “losses” on which it now sues.

(2) For limb (ii), the contractual rights which Top One now seeks to enforce – the Fundamental Warranty claims under Clause 5(F)/(G) and the NAV shortfall indemnity under Clause 5.7 – are said to arise because those post‑completion cancellations, write‑offs and non‑collections supposedly reduced the NAV and triggered the thresholds. Top One is attempting to benefit from the consequences which it itself engineered after completion, and that is precisely the kind of “taking advantage of one’s own wrong” which Kensland held to be impermissible.

245.  Mr Lung also relies on the “assumption of responsibility” doctrine as expanded in The Achilleas [2008] UKHL 48 at §21, where it is said that “a party might not be liable for foreseeable losses where they were not of the type or kind for which he could be treated as having assumed responsibility.”

246.  In my view, whether it is the prevention principle or the assumption of responsibility doctrine, the aim is the same. A party cannot benefit from its own change of policy after a warranty is provided by the other party. Thus, as submitted by Mr Lung, when commercial parties provide warranties as to the accuracy of accounts and NAV as at completion, they can only sensibly be taken to assume responsibility for the diminution in value arising from the then-existing financial position of the target, not for losses generated by the buyer’s own post-completion management decisions.

247.  Thus, I accept Mr Lung’s submission that under both the Fundamental and non-Fundamental Warranties, Su and FF have only assumed the responsibility and risk of genuine cancellations, which were few and far between, in the ordinary course of business, as opposed to exchanges which were actively caused and approved by Top One.

248.  Based on these principles, in my judgment, Top One’s claim for Cancelled Sales must fail also.

E3.11 Conclusion on Top One’s Cancelled Sales Claim

249.  Based on the above analysis, I find Top One has failed in its claim for the Cancelled Sales.

E4. Unrecoverable Receivables

250.  Top One claims a total of HK$7,477,460.51 for Unrecoverable Receivables under 3 subsidiary companies of EBHL. The exact figures can be found in Attachment 2 to FBP provided by Top One[35]. They are:-

(a) EBGZ: HK$4,831,925.74

(b) EBSA: HK$2,440,536.27

(c) EBFE: HK$204,998.50

251.  Top One again relies on Clause 5.7 of the SPA where Su/FF are under an obligation to “indemnify defend and hold harmless [Top One], both itself as purchaser and on behalf of and as trustee for [the Company]…, on demand, from and against every dollar of … the account of any Unrecoverable Receivables” (exact wording of Clause 5.7 can be found at §189 above). Similar to the Cancelled Sales, pursuant to Clause 5.8, the claim for Unrecoverable Receivables is subjected to a ceiling of 19.8% in relation to claims that do not fall under the Fundamental Warranties: (see §190 above).

252.  Similarly, the Unrecoverable Receivables claim is subjected to the 5% threshold under Clause 5.9 which needs to be verified by an independent interim report from Deloitte: (see §191 above).

253.  For the record, Unrecoverable Receivables has been defined under the SPA as “any trade receivable existing as of the Completion Date which is not collected by the relevant member of the Target Group by 30 June 2017”.

E4.1 Fundamental Problems with the Claim

254.  In my judgment, Top One’s claim for Unrecoverable Receivables suffers the same fundamental defects as in its claim on the Cancelled Sales.

255.  First, there is a dire lack of documents to prove that these alleged receivables (i) are truly receivables; and (ii) remain uncollected due to a genuine refusal to pay outside the control of Top One. In particular, there is no verification from Deloitte (or indeed any independent third party) that the claim crosses the 5% threshold.

256.  Second, Top One has failed to show that the claims for those Unrecoverable Receivables had not already been provisioned for or written off.

257.  Third, the documents produced by Top One in support of its Unrecoverable Receivables claim only show the existence of these sales and some internal ledgers. There is no independent supporting materials or verification explaining why the receivables were said to be unrecoverable, save from Top One’s bare assertion. The flip side of the coin is Top One has failed to produce any contemporaneous documents, such as bank statements or company minutes, recording the existence of these alleged receivable and their non-receipt.

258.  Fourth, insofar as Top One relies on the breach of Fundamental Warranties under Clause 5(F) of Schedule 2 is concerned, Top One fails to clear the 5% threshold required to invoke the warranty protection. Insofar as the claim is based on Clause 5.7 for the non-Fundamental Warranties, it can be argued that it is a penalty clause.

259.  Fifth, in terms of evidence, Top One cannot explain why in some cases concessions were granted to its customers while in other cases indulgence were given to the otherwise recoverable receivables. Further, the evidence revealed at the trial shows that some Unrecoverable Receivables debts were in fact recovered while other could likely have been recovered with reasonable efforts but Top One never did.

E4.2 A dire lack of credible documents

260.  First and foremost, I find Top One’s Unrecoverable Receivables claim, like its claim on the Cancelled Sales, is based on internally-generated and self-serving documents. As its own expert Alan Lee has conceded, such documents are susceptible to manipulation. Worse still, nobody from Top One has come to court to give evidence to speak to those documents in order to establish that they are documents which the court can safely rely on to form the basis of the Unrecoverable Receivables claim.

261.  In contrast, Su/FF’s expert Charles Li in his report has identified a number of documents which are expected to be produced by Top One for the “verification of the existence, validity and cut-off of the Unrecoverable Receivables.” They included sales orders, internal approvals of sales, sales invoices, PRC VAT invoices, delivery notes, acknowledgement of receipts of delivered goods, records of follow up by receivable control department of each item; and legal enforcement proofs for each item: see Table 2 under Issue 2.1 on p28 of Charles Li’s Report at [B2/1039]. I agree at least most if not all of these documents are important in order to verify the authenticity of the Unrecoverable Receivables claims. Yet they are sorely missing in this case.

262.  Further, the documents produced by Top One are not verified by any independent third party like an outside auditor, let alone the parties’ appointed auditor Deloitte. As Charles Li has stated in his report, the following supporting reports are expected to be available from Top One to verify its claim. They included (i) verification report prepared by qualified personnel; (ii) audited completion accounts; and (iii) audit trail which links the Unrecoverable Receivables list to the itemized list. The ledgers and sub-ledgers of the Company and the source documents of each item: see §5.2.3 of Charles Li’s Report at [B2/1038]. Again, none of these supporting reports have been made available by Top One. The failure to do so has in my view severely undermined the reliability of the Unrecoverable Receivables claim.

E4.3 The Unrecoverable Receivables claim did not cross the 5% threshold

263.  As Mr Lung has pointed out in Su/FF’s Closing Submissions, even taking Top One’s case to its highest, it still falls short of the 5% contractual threshold.

264.  In the Completion Accounts,[36] trade and other receivables has been stated at HK$89 million. In order to cross the 5% threshold, Top One needs to show that there would be Unrecoverable Receivables close to HK$4.5 million. Even on its expert Alan Lee’s quantification, after deducting the “double-counting” of transactions that were in fact Cancelled Sales, the Unrecoverable Receivables figure only stood at less than HK$3.6 million. In this regard, Alan Lee accepted under cross-examination that Cancelled Sales and Unrecoverable Receivables are “conceptually distinct”, since the former deals with sales that were reversed and so there is nothing to recover in the first place. This is in contrast to Unrecoverable Receivables which presupposes valid sales for which the receivable cannot be collected. I consider that is a perfectly reasonable explanation to distinguish the two different individual items.

265.  Incidentally, the above figure is consistent with the figure worked out by Ms Liu in her report to the new management of EBHL dated 16 March 2017[37] when she stated that the Unrecoverable Receivables at EBGZ as of 15 March 2017 was at RMB 3,530,039.

266.  In my view, the Unrecoverable Receivables figures did not cross the 5% threshold required under of the SPA. Thus, Top One’s claim for the Unrecoverable Receivables must fail on this ground alone.

267.  In any event, the Unrecoverable Receivables was not verified by an interim report by Deloitte as requested under Clause 5.9. As Top One’s main factual witness Ms Wong accepted under cross-examination, in the absence of such report, there is no contractual basis for Top One to make an Unrecoverable Receivables claim under the SPA. Again, this is fatal to Top One’s claim on the Unrecoverable Receivables.

E4.4 Whether the Unrecoverable Receivables had been properly provisioned for

268.  Su/FF submit that Unrecoverable Receivables, as defined in the SPA, can only sensibly concerns receivables which had not already been provisioned for. If EBHL had already made provisions for receivables that were deemed doubtful, it would make no commercial or common sense for Su to give a warranty for those debts again, which effectively making him a guarantor of doubtful debts.

269.  I agree with the above submission based on the following evidence highlighted by Mr Lung in Su/FF’s Closing Submissions:-

(a) Clause 5(F) of Schedule 2 expressly warrants no facts / circumstances existed on 29 July 2016 that would lead to any receivables in the Management Accounts “not being recoverable or having to be provisioned against or written down….” (emphasis added). Hence, if the trade receivables had already been provisioned against or written off in the Management Accounts at the time of the SPA, then they could not be “further” or “again” provisioned against or written down later. They would simply not be covered by this Fundamental Warranty.

(b) Although not explicitly spelt out in the Management Accounts, the “trade and other receivables” (「應收帳款及其他應收款」) of HK$88.6 million should be taken as net of the allowance for doubtful debts. This is supported by the exact same figure of HK$88.6 million for “trade and other receivables” in EBHL’s interim report (which has been reviewed by Deloitte) as at 30 June 2016. It is important to note that in Note 12 of the Management Account, a sum of HK$863,000.00 has been deducted as “allowance for doubtful debts”. This shows that the HK$88.6 million must be a “net” figure after taking into account of the doubtful debts at the time when the Management Accounts were prepared.

270.  In my view, the burden of proof to establish that Su/FF are liable for the Unrecoverable Receivables lies with Top One. This will include evidence to show that the amount now claimed by it have not been provided for in its accounts. In my judgment, prima facie and in the absence of any plausible explanation from the new management of EBHL that the accounts mean what they say, then one must able to assume that the figures for “trade and other receivable” are net figures after taking into account of the “doubtful debts”.

E4.5 Whether some of the Unrecoverable Receivables had been recovered and others could have been recovered with reasonable efforts

271.  Another problem which Top One has with the Unrecoverable Receivables claim is that the evidence revealed at trial shows that some of the Unrecoverable Receivables debts had in fact been recovered while others could likely have been recovered with reasonable efforts. While it is true for Top One to say that there is nothing contained in the SPA which makes the taking of enforcement action as a precondition for receivables to qualify as Unrecoverable Receivables, nor is there any applicable accounting standard imposing such a requirement, the fact that if there is evidence to show that Top One had recovered some of those debts or some of them could have been recoverable with reasonable efforts, then it put the whole reliability of the Unrecoverable Receivables claim into question.

272.  Su/FF used the debt of RMB 1,353,242.70 that had been due from「廣州華輝聯貿易有限公司」(“華輝聯”) to EBGZ up to 31 July 2016 as an example during the trial. A subsequent document shows that this distributor paid up a sum of RMB 1.68 million on 18 January 2019 following legal proceedings brought by EBGZ. As Ms Wong accepted during cross-examination, this example demonstrates that, where EBHL’s new management was willing to take enforcement action, there was a realistic prospect of recovering at least part of the alleged Unrecoverable Receivables. I find the problem with Top One’s case on this is one does not know what efforts, if any, it had put in to pursue any enforcement action for the alleged Unrecoverable Receivables or they were simply created to give a false impression that there was substantial Unrecoverable Receivables after signing of the SPA. Nobody from Top One has come to court to explain this.

273.  In Wong’s Supp WS, Top One responded to this by saying that any subsequent recovery of debt after 30 July 2017 is irrelevant because that is after the cut-off date[38]. With respect, I do not agree with such narrow interpretation. Instead, I agree with Mr Lung that, regardless of the contractual definition of “Unrecoverable Receivables”, Top One would need to suffer a loss or an “Adverse Consequence” arising from a breach of the warranty: see Clause 5.7. I agree with Mr Lung’s submission that if any receivable was outstanding by 30 June 2017 but was subsequently recovered, it necessarily follows that Top One suffers no loss in relation to that specific recovery. Otherwise, there would be a double recovery.

274.  In that case of 華輝聯, it is clear that the new management did not treat these sums as “unrecoverable” as EBGZ entered into a 「代銷協議」 (“Sales Agreement”) on 1 April 2017 extending credit terms with it[39]. This was approved at the senior management level including the newly installed CEO Gu. A subsequent 「還款協議」 (“Repayment Agreement”) allowed the company to repay the outstanding payment by instalments.[40] But that comes with a 「房屋抵押合同」 (“Property Mortgage Agreement”) from the owner of the company to guarantee the repayment.

275.  Thus, it cannot be said that Top One actually suffered any loss resulting from the alleged Unrecoverable Receivables from this particular company.

276.  In the same rein, there are instances where some receivables were uncollected due to the new management’s indulgence towards the distributors. Su/FF relied on the agreement that EBGZ had with a distributor by the name of 「山東亨達利」to demonstrate this. Under the agreement, a credit line of RMB 1.5 million was given to the distributor, thus effectively extending the time for the receivables to be repaid by the company. This figure is just slightly below the RMB 1.77 million odd receivables then allegedly outstanding EBGZ had with the company. It is clear that once the credit line was extended, there was no incentive for the distributor to repay what they owed. Thus, one can say that the receivable was “unrecovered” or “unrecoverable” due to the subsequent indulgence granted by the new management of EBHL. Viewed in such a way, it is not difficult to see why this could easily be manipulated as a self-induced and self-engineered loss. I agree with Mr Lung that the prevention principles would apply under such circumstances.

277.  Another weakness showed up in Top One’s Unrecoverable Receivables claim is that there was hardly any follow-up or enforcement action for the overdue receivables. Ms Wong agreed that it is normal to expect some “chasing up” on the overdue receivables. He stated in his witness statement that there was a Trade Receivables Collection Department with procedures in place at EBGZ to “chase up” the distributors for the outstanding receivables. However, there is a dire lack of evidence from Top One to show that there was any active “chasing up” action for the Unrecoverable Receivables.

278.  In this respect, I accept Charles Li’s opinion that, each company would have its internal procedures in place to launch procedures to recover the outstanding receivables. While the threshold to launch such procedures differed in each company, there should at least be some kind of procedures for the management to follow. In the case of a listed company, good corporate governance would require a company to launch the procedures to recover the trade receivables provided that they are material to the company. He considers that in the context of a listed company, a benchmark of HK$1.2 million should be regarded as “quite sizable” and therefore material. In such situation, some recovery action would be expected rather than simply treated them as bad debt.

279.  What is astounding about Top One’s case on Unrecoverable Receivables is that there is a complete lack of documentary evidence to show that it had issued any demand letters, pre-action correspondence or legal proceedings during the period when Top One was in charge of the management of EBHL or EBGZ. It seems that they were just happy to do nothing and expected Su/FF to pick up the bill under the SPA.

280.  Mr Yip on behalf of Top One submits that there is no evidence whatsoever that any delay in payment was engineered intentionally or in bad faith with a view to causing Su/FF to incur liability. He further submits that there are many other “obvious and commercially commonplace explanations” for allowing distributors to delay repayment, like financial difficulty experienced by the distributors, etc.

281.  With respect, I do not agree. I consider there existed at least sufficient evidence to show that the new management had adopted an indulgence or “not to enforce” policy towards the alleged Unrecoverable Receivables. This at the very least would demand some good explanations from the senior management team from Top One to explain why they did so. In the absence of such explanations, I think the court is entitled to draw an adverse inference against it.

282.  In the circumstances, I find that these receivables remained uncollected due the inaction on the part of Top One rather than any inherent unrecoverability of them.

283.  Given the above, I find Top One has failed to establish its claim under Unrecoverable Receivables in this case.

E5. Easy Team Liabilities

284.  This claim is based on the alleged liabilities owed by EBFE to Easy Team, the sole contractor of the EBHL Group which was responsible for building and installing the display counters and cupboards in all of its major markets and distribution points, including East Asia, Hong Kong and the Mainland. There had been a longstanding working relationship between EBFE and Easy Team which existed for many years before Citychamp/Top One took over the management of EBHL. Given the size of the business and the large number of distributors and sales points which EBHL had at the time of the SPA, it is perhaps not surprising to find that the volume of installation work undertaken by Easy Team was large and the amount involved was very substantial.

285.  Top One’s case is that, at the time of the SPA, the Management Accounts failed to record a liability to Easy Team in the sum of HK$15,587,568.75 for work done during September 2015 to June 2016 (“the $15m Liabilities). This is said to lead to an understatement of the Management Accounts, contrary to Clause 4(C) of Schedule 2 which warrants that all liabilities were “adequately disclosed or provided for in the Management Accounts.”

286.  There is no dispute that as at the date of the SPA, EBFE owed Easy Team the $15m Liabilities, being fees incurred by EBFE for the installation work undertaken by Easy Team.

287.  The sole issue is whether the $15m Liabilities are disclosed in the Management Accounts.

288.  Su/FF contend that it was, claiming that the sum was “included and subsumed” under the item of “Sales Expenses” (「銷售費用」) in the Management Accounts: see §35(b) of Re-Re-Amended Defence of Su/FF at [A/3/97].

289.  With respect, I do not agree with Su/FF’s submission for the following reasons.

290.  First, it is important to note that all the invoices for the $15m Liabilities were issued by Easy Team after the SPA was executed[41]. Prior to the SPA, there was no record of any of the liabilities arising from the work charged by Easy Team under the subject invoices: see Exhibit P-1 and the ledgers for the relevant dates[42].

291.  Thus, logically speaking, the Management Accounts could not have included liabilities that were not recorded in EBFE’s ledgers as at the time they were prepared. This was accepted by Su/FF’s expert Charles Li during cross-examination.

292.  Second, in my judgment, Su/FF’s argument that it had made provision for the $15m Liabilities under “Sales Expenses” in the Management Accounts is not supported by the evidence and is not logical or sound as a matter of accounting principles.

293.  Su/FF’s case is that, even without knowing the exact amount of those invoices, EBHL at the time (and had been) in the position to make provision for this “evidently already-incurred liability”. Su/FF rely on the history of the parties’ working relationship and the previous transactions between them as an “established and reliable basis” for such provisions to be made in the accounts. In particular, they rely on the fact that Easy Team was the sole contractor for installation works since June 2011 for EBFE and there had never been any problem regarding both the installation and payment. They also rely on the 2015 Agreement and 2016 Agreement between Easy Team and EBFE to try to demonstrate that as the pricing and expected yearly revenue were clearly set out in clauses 1.1, 1.2 and 1.3 of those agreements, it would not be difficult for the parties to make estimate for them.

294.  With respect to Su/FF’s expert Charles Li, the argument that the Management Accounts only provided an overview of the Company’s financial status rather than a detailed entry showing Easy Team’s name on it and therefore “it is likely that the contingent liability to these invoices is included/embedded in the generic entry of 「銷售費用」” [43] is not only stretching the meaning and purpose of the Management Accounts a bit far but is not supported by the documentary evidence.

295.  As a matter of evidence, I find there is nothing to indicate that those liabilities were recorded as “Sales Expenses” nor were they properly accounted for by way of provision. EBFE’s ledger certainly contains nothing to suggest that there was any provision for them. Su/FF’s expert Charles Li confirmed this under cross-examination.

296.  Further, the Interim Report of EBHL, which was reviewed by Deloitte and shares the same cut-off date as the Management Accounts, also shows that the $15m Liabilities were not disclosed as “Sales Expenses” in the Management Accounts as alleged by Su/FF.

297.  Third, on this particular issue, I prefer the analysis and opinion of Top One’s expert Alan Lee as stated both in his Export Report and in the oral evidence he gave in court.

298.  In my judgment, Top One’s expert Alan Lee has explained clearly and logically the reasons why he did not think the $15m Liabilities could be “included and subsumed” as part of the “Sales Expenses” in §§72 to 80 of his Report:-

“72. Therefore, it is my conclusion that shortly after the Completion Date, EBFE received the above invoices from Easy Team totalled to HK$15,587,568.75. I checked against the Management Accounts which shows that there is a total amount of ‘銷售費用’ of HK$45,774,421.78, but there is no indication that the above issued invoices have been included in the ‘銷售費用’ as claimed by the defendant. Common accounting treatment would have been treating transaction with Easy Team as a contingent liability and making a provision for expenditure already incurred but not invoiced under IAS 37.

73. EBFE was in a business partnership with the Easy team during 2011, 2014 to 2016. Pursuant to Clause 1 in the 2016 Contract with Easy Team dated 2 December 2015, section 1.3 stated that their annual planned cooperation amount is HK$40 million, but the final settlement and payment will be made according to the actual amount. Clause 4 of the said 2016 Contract indicated an agreement by Easy Team and EBFE for monthly settlement and stated that Easy Team needs to provide ‘櫃檯付款發票’ and ‘櫃檯驗收確認單’ in order to prove the settlement amount. I note that for all of the above decoration services, the relevant ‘櫃檯付款發票’ and ‘櫃檯驗收確認單’were prepared. Furthermore, all issued invoices have been signed and validated by both EBFE and Easy Team and included the invoice date of the original documents. I also note that most of the items on the monthly invoices had relevant ‘櫃檯驗收確認單’, ‘項目資料’ and ‘櫃檯安裝回饋表’ showing dates before 29 June 2016, indicating that the Target Group should be aware of the services already rendered but not yet billed before the Completion Date of the Agreement.

74. I have further reviewed Demand Letter from Easy Team dated 7 October 2016 and the Writ of Summons presented against Easy Team Claim under Action No. HCA 2883/2016) and noted that the total amount of outstanding invoices payable to Easy Team was HK$19,909,172.35. Based on the Consent Order dated 10 February 2017 and the e-mail titled ‘Settlement agreement email letters (Lennon & Lawyers’ Ref.L-8544/16; F.ZIMMERN & Co. s’ Ref. EM/LDE26-1/AY)’, I noted that HK$4,321,603.60 out of HK$19,909,172.35 was related to invoices issued prior to the Completion Date of the Agreement. Hence, the service fees payable to Easy Team arising from invoices received after the Completion Date of the Agreement was in fact HK$15,587,568.75. I noted that the Company paid 89.9% of the total unpaid amounts invoiced by Easy Team, in settlement, amounted to approximately HK$14,028,811 (being 89.9% of HK$15,587,568.75) on 10 February 2017.

75. I have further verified the legal costs verified that the legal expenses’ incurred in certain legal proceedings related to the settlement of the above invoiced amounted to HK$98,100 based on the invoices received and court order.

76. After examining the relevant document, the amount of invoices issued after the Completion Date of the Agreement was HK$14,028,811 and legal fees incurred in relation to these transactions was HK$98,100. Considering the possible breach of the Vendor's warranties concerning claim amounts of 19.8%, I agree that the total amount claim against the alleged substantial liabilities to Easy Team is at HK$2,797,128.38.

77. I understand from Section 2 Clause 3c of the SCHEDULE: VENDOR'S WARRANTIES that ‘At the Target Accounts Date, the members of the Target Group or the Target Group did not have any liability (whether actual, contingent, unquantified or disputed) or outstanding capital commitment which was not adequately disclosed or provided for in the Target Accounts. No member of the Target Group has undertaken any transaction involving any accounting method that classifies material capital expenditures off its balance-sheet as set out in the Target Accounts or that otherwise reduces its debt to equity or other leverage ratio as calculated based on the Target Accounts, including any such arrangements for research and development or operating leases.’ Hence, the contingent liability with Easy Team should be disclosed in accordance with IAS 37 to the buyer by the seller pursuant to the relevant Clause cited.

78. Referring to the Agreement with Management Account, the Completion Accounts and the Interim Report 2016, I noted no related information nor disclosure indicating that the liability to Easy Team has been included in the ‘銷售費用’.

79. Under paragraph 10 of IAS 37, a contingent liability is:

(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or

(b) a present obligation that arises from past events but is not recognised because:

(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or

(ii) the amount of the obligation cannot be measured with sufficient reliability.

80. For reasons already discussed in paragraph 72 hereinabove, it is my view that even if the liability with Easy Team is taken as contingent liability and into account in the Company’s financial statements, there is no indication that the above issued invoices have been included in the ‘銷售費用’ as part of contingent liability. In addition, if it was really the intended case, it would be common practice in accounting reporting to disclose expressly informing the readers that such liability is ‘contingent’, rather than ‘actual’.”

299.  I agree with the approach of Alan Lee as set out above. I find there is no credible evidence to show that the $15m Liabilities have been included in the “Sales Expenses” as part of the contingency / provisional liability.

300.  Alan Lee’s opinion above has been vigorously tested by Mr Lung on behalf of Su/FF under cross-examination. In my view, Top One’s expert has logically explained the basis of his opinion by referring to some basic accounting principles. This part of his opinion has been succinctly summed up by Mr Yip in §150 of Top One’s Closing Submissions. I shall reproduce Mr Yip’s summary of Alan Lee’s evidence given in court here for ease of reference:-

“150.1 Accounting is based on a single, double-entry system. If an expense is recorded, there must be a corresponding entry in a liability or assets account.

150.2 Where a liability has already been paid, there would be a corresponding reduction in the company’s current assets balance, payment reduces the company’s current assets.

150.3 Where a liability remains unpaid, it should be recognized as “accruals”. In the present case, Mr. Alan Lee’s opinion was that the Easy Team Liabilities should properly have been classified as accruals.

150.4 Thus, if the Easy Team Liabilities had been recognized and booked as “Sales Expenses” by the Group, the Interim Report ought to have shown a broadly equivalent amount of accruals, i.e. approximately HK$15 million.

150.5 However, the accruals as at 30 June 2016 as reported in the Interim Report amounted to only HK$9.6 million [C/116/3098]. In other words, Easy Team Liabilities were not so recognized as sales expenses in EBFE’s books and ledgers as at 30 June 2016.

150.6 As such, the Easy Team Liabilities could not have been reflected in the Management Accounts as “Sale Expenses” as alleged by FF/Su.”

301.  I accept Alan Lee’s opinion on this matter as summed up by Mr Yip above.

302.  Fourth, I have no difficulty to dismiss the suggestion made by Su/FF that certain Easy Team projects for EBFE may have spanned periods before and after 30 June 2016, thus need not have been included in the Management Accounts. I do not find any substance in this argument as the projects charged under the subject invoices issued by Easy Team to EBFE disclose no project spanning 30 June 2016. As Mr Yip has summed up in Top One’s Closing Submissions, all projects’ installation were done before 30 June 2016: see table attached to Top One’s Closing Submissions. This in my view seriously undermines the suggestion put to Ms Wong under cross-examination (of which she agreed) that some of the installation works might have spanned across the Completion Date and therefore payments would only be made after invoices had been issued upon completion of works.

303.  Fifth, I also have no difficulty in rejecting Su/FF’s expert Charles Li’s opinion on this issue for the following reasons:-

(a) The expert originally suggested in the Joint Statement that the $15m Liabilities “are capital in nature, and hence there are there are no real damage to [EBHL] or [Top one]”. In cross-examination, he conceded that this position was untenable. Indeed that must be the case as once Su/FF tried to say that the $15m Liabilities were “Sales Expenses”, they could not be treated as assets at the same time.

(b) His opinion that in the absence of a verification report, the validity and dating of the $15m Liabilities could not be verified is equally unconvincing. I do not see why a separate verification report would be required when the relevant invoices and underlying project documents were made available for the experts’ assessment, particularly when those invoices and internal documents are contemporaneous and speak for themselves.

304.  In the aforesaid premises, I am of the view that Top One is entitled to the claim for the Easy Team Liabilities which had not been disclosed in the Management Accounts.

E6. Advertisement Fees

305.  The Advertisement Fees claim was a newly added item when Top One amended its SOC in January 2020, some 2 years after the SOC was first filed in February 2018.

306.  Under the RASOC, Top One claims Su/FF did not include a substantial fees and expenses in the sum of HK$7,454,648.63 that was payable or a liability due to third parties for services relating to advertising and promoting the EBHL brand that had been rendered since about March 2013 to Completion. It has been claimed that the Advertisement Fees were subsequently paid by EBFE after Completion in the period from April to December 2016. Thus, Top One claims that, pursuant to the SPA, Su/FF are bound by the terms of the SPA to pay Top One on demand 19.8% of the consequence of the Easy Team Liabilities in relation to the Advertisement Fees, being HK$1,476,020.42. Further or alternatively, Top One claims that Su/FF was in breach of the representation and/or warranty in relation to the undisclosed Advertisement Fees for which they say they are entitled to recover loss and damage: see §§53B to 53F of the RASOC.

307.  Su/FF’s defence on this claim essentially is that the Advertisement Fees incurred since March 2013 as alleged were only part of the normal expenses of EBHL. There were records, accounts, ledgers kept by EBHL over the years. They are also publicly known information which can be found in its annual reports to show that they had incurred advertising expenses as part of its usual costs. Further, Su/FF aver that due diligence process on EBHL was already carried out on behalf of Top One by members of senior management of Citychamp. All expenses including the Advertisement Fees as alleged by Top One had been made known to the new management of EBHL during the due diligence process. As it is the liability of EBHL to pay for the Advertisement Fees in the ordinary course of its business, so Top One, through EBFE, paid for the Advertisement Fees from April to December 2016 (as admitted by it in §53C of the RASOC). Further, prior to Su leaving EBHL or at any time prior to the filing of the ASOC, Top One had never complained to Su about such advertisement expenses: see 40B & 40C of Re-Re-Amended Defence of Su/FF.

308.  Su/FF’s say that it is (i) unreliable for Top One to rely on its internal documents, which they say are self-serving; and (ii) under the concept of “matching principle”, EBHL/EBFE would have to make provision once these liabilities were incurred. They say that it is inherently likely that this has been done, given that EBHL is a listed company and its financial statements were admitted by a reputable auditor.

309.  One peculiar feature about this claim is that the experts from both sides have not commented on this in their respective expert report and the subsequent Joint Statement. Whether it is due to the belated nature of the claim itself or because it was not contained as part of the order of Master Dick Ho’s list of issues of opinions to be dealt with by the experts is not known. The fact remains that there was no expert opinion the court can rely on regarding this issue.

310.  In my judgment, this item can be looked at in the following manner.

311.  First, there can hardly be any dispute that the alleged Advertisement Fees in the sum of HK$7,454,648.63 had been incurred prior to Completion: see invoices produced by Top One at [C/469/23130+] which has been summarized in table form as Exhibit P-2 by Top One’s counsel. Further, it appears that they were subsequently paid for by the new management of EBHL after Completion but it is by no means clear. As mentioned by Mr Lung, there were records, accounts, ledgers kept by EBHL over the years on such expenses. They are also publicly known information which can be found in its annual reports to show that they had incurred large sums of advertising expenses as part of its usual costs. Further, as due diligence process on EBHL was already carried out on behalf of Top One by members of senior management of Citychamp, it should not be difficult for Top One to find out the Advertisement Fees if they wished to. The claim by Su/FF that all expenses in relation to the Advertisement Fees as alleged by Top One had been made known to the new management of EBHL during the due diligence process was not contradicted by the witnesses from Top One.

312.  Further, nobody from Top One came to court to explain how advertisement fees were usually being treated or accounted for under EBHL’s accounts (whether internal or the audited accounts). For example, how much provision was usually made each year for the advertising fees in the company’s accounts. As testified by Su, as owner of a luxury brand of watches, EBHL spent large sums of money on advertising each year on a recurrent basis. Su estimated that the Company had spent an average of HK$80-90 million a year on advertising fees alone when he was running the Company. As recurring expenses, it is only normal to find that some advertising fees incurred in a certain financial year will be invoiced by the advertising companies/agents either within or outside the financial year and settled by the Company after the end of that particular financial year. Thus, it should not be surprising to find that some of the advertising fees incurred in 2015/16 were not invoiced or settled before Completion. As a matter of logic, these fees could not have been included in the Management Accounts, which pre-dated Completion.

313.  Put in the context of the case, I noticed that the invoices for the Advertisement Fees now claimed by Top One was dated from mid-April 2016 to end of August 2016 for expenses which had been incurred as early as on October 2013 (although most of them were incurred in the first half of 2016 from January to June 2016). The “Payment Date” for those invoices was recorded as from 1 August to early December 2016. Then the “Ledger Date”, which are the dates when those payments were “booked” in the internal accounts of EBHL, were recorded as having token place from 1 August 2016 to 31 December 201: see last column of Exhibit P-2.

314.  There was no explanation from Top One, for example, why a major item of HK$676,374.30 charged by “Modern Media Co Ltd” was “written off” on 31 December 2016 after Completion. There was also no explanation from Top One why 6 different items under the heading of “Items in Light Green in Summary of Advertisement Expenses from 1 Aug 2016 to 31 Dec 2016 [C21/359/6111]” for a watch company in Shenzhen known as 「深圳市恒時達鐘表有限公司」 was treated differently than other items from other companies. Further, 3 of these items had no “Invoice Date” and all 6 items had no “Payment Date”. Yet they were all “booked” under the ledger of the Company between August and December 2016. It is not clear whether they had in fact been paid by EBHL after Completion or not.

315.  Thus, without someone from Top One to explain the above to the court, a substantial part of the claim remains unclear and unsatisfactory.

316.  Su/FF’s case on this is Advertisement Fees was one of the major items of expenses of EBHL/EBFE and they were “normal expenses” of the Company. Under cross-examination, Su stated that because the Advertisement Fees were “recurring expenses”, EBHL/EBFE would have made provision for them in the accounts as budget estimate (「預算開銷」) and an adjustment would be made at the end of the financial year. Top One has not provided any documentary evidence to contradict Su/FF’s case in this regard.

317.  I noted that none of Top One’s witness could say or prove that the Advertisement Fees were not properly accounted for (whether by provision or otherwise). In this regard, Su/FF rely on Ms Wong’s admission under cross-examination that the Advertisement Fees were recurring expenses for EBHL year-on-year and, from the perspective of EBHL’s accountants or auditors, such item should be accurately reflected in the accounts and there was no reason for these to be hidden. Ms Wong also accepted that the Advertisement Fees, like the sums owed to Easy Team, can be provided across a period of time, and that one acceptable accounting method in such circumstances is to make a provision for the expected expense item. In my judgment, that must be right and inherently probable.

318.  In light of the above evidence, I am of the view that Top One has failed to establish that the Advertisement Fees have not been provided for in EBGZ’s account whether under “Budget Estimate” (「預算開銷」) or otherwise. As the burden of proof lies with Top One to establish this claim, on a balance of probabilities, I find that it has failed to do so.

E7. Ms Liu’s Salary Payments

319.  Under this claim, Top One alleges that there were unpaid salaries owed by EBGZ to Ms Liu that were undisclosed in the Management Accounts, viz. (i) RMB 2,113,000 from 2012 to 2015; and (ii) RMB 335,000 from January to July 2016.

320.  Su/FF’s case is that they were fully disclosed and the outstanding salaries could be found in various documents over the years. They claim that Top One’s characterization of an underhanded, back payment to Su’s associate at the expense of Top One / EBHL is simply untrue.

321.  These outstanding amounts originated from an employment contract between EBGZ and Ms Liu dated 30 December 2011 when Ms Liu was appointed as the legal representative and general manager of EBGZ for 5 years, from 1 January 2012 and 30 December 2016, with an annual salary of RMB 700,000, which roughly equals to around RMB 60,000 per month (“the EBGZ Contract”).

322.  It has been claimed by Ms Liu that, due to the cash flow difficulties experienced by EBHL when it was first established in 2012 and its anticipated public listing in 2014, Mr James Wong (黃日楠) (“James Wong”) and Su requested her to accept a partial salary payment arrangement. After some discussions amongst them, she agreed to accept a partial payment of her salary from 2012 to 2015, with the balance to be paid by the Company later. Under the arrangement, she would be paid a monthly salary of RMB 23,800 from January 2012 to March 2013 and a monthly salary of RMB 10,000 from April 2013 to December 2015. She was paid such sums accordingly: see §§14-15 of Ms Liu’s WS.

323.  Su/FF allege that this delayed payment arrangement was acknowledged in the following documents:-

(a) The director agreement between EBHL and Ms Liu dated 1 April 2013 (“the Director Agreement”) where it was stated under Clause 4.3 that Ms Liu would not be further remunerated for her directorships in the subsidiaries, except under the EBGZ Contract[44].

(b) In the minutes of the Remuneration Committee (“RC”) of EBHL dated 30 March 2015, it was recorded that “Ms Liu’s monthly salary payable by [EBGZ] … be maintained at the December 2014 level of RMB 10,000.” According to the record, besides the independent directors, Su and Thomson Lau (in his capacity as the Company Secretary and CFO) were also in attendance at that meeting.

(c) The same acknowledgment was made in the minutes of the RC of EBHL on 30 March 2016.

(d) Less than 2 weeks before Completion on 29 July 2016, the outstanding sum was documented and acknowledged by EBGZ and EBFE under a Salary Payment Agreement dated 16 July 2016 (“the Salary Payment Agreement”).

324.  Mr Lung on behalf of Su/FF submits that these contemporaneous documents would dispel any suggestion that the liability was hidden and provided for. It is also difficult to see how Deloitte or EBHL could have omitted it, given the obvious and repeated acknowledgments and the ease of computing the provision.

325.  I would like to make the following observations regarding Ms Liu’s Salary Payments.

326.  First, it is clear that when Ms Liu was appointed as the executive director of EBHL in April 2013, she was expected to continue to fulfill her role as legal representative and general manager in EBGZ: see Clause 3.5 of the Director Agreement[45]. In other words, her work as an executive director of EBHL is in addition of her duties at EBGZ and not in substitution thereof. Thus, it is natural to assume that she would be receiving some sort of remuneration for her continuous role in EBGZ.

327.  According to a resolution passed by the directors of EBHL on 19 June 2012 (which was well before Top One / Hon came into the picture and had expressed any interest to acquire the Company), it accepted the resignation of Lam (then one of the major shareholders) as a director and appointed Ms Liu as an executive director with immediate effect[46]. Thus, it was recognized by EBHL that her role and duties as an executive director of EBHL were quite distinct from her duties as an employee at EBGZ.

328.  It was also anticipated that she would continue to be remunerated for her role in EBGZ besides the director fee of HK$65,000.00 per month that she would receive for her newly appointed role in EBHL: (see Clause 4.1 of the Director Agreement). What was not clear however is whether she would be paid part of her remuneration under the EBGZ Contract or the full amount.

329.  Second, it is clear by the time when the RC of EBHL met on 30 March 2015, Ms Liu’s monthly salary at EBGZ had already been reduced to the level of RMB 10,000 per month (and had been so at least since December 2014): see RC’s minute dated 30 March 2015[47].

330.  According to the same minute, it has been recorded that “Ms. Liu’s monthly salary payable by [EBGZ], the Company’s subsidiary, be maintained at the December 2014 level of RMB 10,000.[48]” (emphasis added). Similar record was made in the 30 March 2016 RC minute for that year[49].

331.  Mr Yip submits on behalf of Top One that these statements contradict FF’s claim that the unpaid wages were duly reported and recorded. He submits that the phrase “payable by” could only carry one meaning, namely, EBGZ was only legally liable to pay Ms Liu at RMB 10,000 per month.

332.  In my view, this phrase could be read either way. It could mean that there were outstanding salaries which EBGZ had not paid Ms Liu yet and therefore the monthly salary payable by EBGZ was at the reduced level of RMB 10,000 per month. Or it could mean that Ms Liu had accepted a reduced salary for her role at EBGZ to a level of RMB 10,000 since December 2014. The two RC minutes merely confirmed the arrangement that her remuneration under the EBGZ Contract was maintained at a previous agreed level of RMB 10,000 in 2015 and 2016.

333.  Top One submits that Su/FF’s reliance on the 2015 and 2016 RC minutes has been directly contradicted by the same committee’s minutes dated 29 March 2017 which, like its 2015 and 2016 meetings, were chaired by the same outside independent director Mr Lo Chi Chiu. In this minute, the RC expressed surprise that, despite the previous resolution passed by the same committee the year before, Ms Liu’s monthly salary for the year 2016 had been increased from RMB 10,000 to RMB 60,000[50]. It led to a recommendation by the RC to the Board to increase of the salary payable by EBGZ to Ms Liu for the Year 2016 “due to inconsistence of previous meeting discussion and unsatisfactory financial result of 2016”.

334.  Mr Yip submits that if the RC had always known that Ms Liu’s salary was at RMB 60,000 per month rather than RMB 10,000 per month for her continuous role in EBGZ (at least since December 2014 when RC recorded in its 2015 minute that it should be maintained at that level), then it cannot explain why the same RC would express surprise of the sudden increase from RMB 10,000 to RMB 60,000 in her salary in 2016. Least it would prompt them to recommend to the Board for an investigation into the matter.

335.  On the face of the document, I agree with Mr Yip’s observation. Not only this rather unusual salary arrangements would require some plausible explanation from both Su and Ms Liu, I consider that they would also require the support of contemporaneous documentary evidence, especially in EBHL’s audited accounts and the Company’s internal records and accounts.

336.  Su in his evidence tried to explain that by the time when EBHL decided to continue to employ Ms Liu as an executive director of EBHL in June 2015, she was paid a director remuneration fee of HK$67,600.00 per month: see Clause 4.1 of the Director Agreement dated 13 June 2015. Like the 2012 Director Agreement, it has been specifically stated under Clause 4.3 that she would be able to continue to enjoy the remuneration package from EBGZ.

337.  Su said that the salary arrangement continued until around June 2016 when Ms Liu started to chase up EBGZ and EBHL for her outstanding salary payments. Su stated in particular after the annual general meeting held on 17 June 2016, after discussions amongst James Wong, himself and Ms Liu, it was agreed that Su would sign on behalf of EBHL and EBGZ an agreement to acknowledge the outstanding salary payment. That was the Salary Payment Agreement. A subsequent Notice dated 2 August 2016 was issued by Su to the Human Resources Department of EBGZ informing the staff there to pay Ms Liu a monthly salary of RMB 60,000 from 1 August 2016 onwards (“the Notice”)[51].

338.  The above is consistent with the evidence given by Ms Liu where she said that once she knew about the transfer of the shares of EBHL from its major shareholder Lam to Sense Control which was the nominee of Citychamp, she started to chase after her outstanding salary payments. This included communications with James Wong during the board meeting in May/June 2016 where Wong instructed Su to follow up with the matter. Ms Liu also stated that during the shareholders’ meeting on 17 June 2016, she raised the matter with Wong again: see §16 of Ms Liu’s WS at [B1/915].

339.  During cross-examination Ms Liu explained while EBGZ remained the payor of her salary for her work in Guangzhou, she understood that her salary was “booked” on the Hong Kong side. This is consistent with her earlier answer during cross-examination that when she enquired with Thomson Lau in 2014 and 2015 about the deferred salaries, Thomson Lau was able to reply that the salaries had already been taken into account. However, this cannot be verified in any of EBHL or EBFE’s ledger or accounts.

340.  Both Su and Ms Liu gave evidence to the effect that while the books of the company looked healthy (and showing profits) on the surface, in fact the Company was short of cash due to needs to make substantial purchases of clockwork for the Quartz watches. Su testified that such purchases required substantial cash upfront and EBHL would only be able to recoup the investments after the watches were manufactured and sold to the market. Ms Liu separately confirmed that after listing, there were a lot of expenses to be met and the Company faced with cash flow and liquidity issues. Interestingly, both Su and Ms Liu in their evidence confirmed that the figures on the audited accounts at the end of the year did not necessarily reflect the day-to-day operational reality.

341.  I find the above explanations given by Su and Ms Liu difficult to believe, given the fact that EBHL is a public listed company and its accounts have been audited by a reputable auditing firm. If there was any cashflow or liquidity issues which required its director to accept a substantial reduced salary arrangement, I expect at least there would be some contemporaneous documentary proof on it or it would be reflected in the internal accounts of the Company or the audited accounts.

342.  Besides the above highly debatable 2015 and 2016 RC minutes, I find the alleged unpaid salaries to Ms Liu were not supported by other contemporaneous documentary evidence.

343.  For example, Ms Liu accepted during cross-examination that the wages owed to her was not recorded in EBGZ’s ledger. There is no other evidence to suggest that they were.

344.  Further, while Ms Liu and Su stated under cross-examination that the deferred payments of her outstanding salaries with EBGZ was necessary as EBHL/EBFE was facing a lot of cash flow/liquidity problems, both prior to listing and after the company was listed, this do not seem to tally with the audited accounts and EBHL’s Prospectus when it made the Initial Public Offering before it was listed. The summary of the accounts for 2011, 2012 and 2013 show that there was a healthy cash flow and profit situation in those years. It is difficult to understand why an employee like Ms Liu would agree to accept a substantial (of almost 80%) deferral of payment of her monthly salary with EBGZ without as much as a statement or letter from the Company to confirm the arrangement at the time.

345.  I also find Su and Ms Liu’s explanation that cash was needed in order to make substantial purchases of clockwork for quartz watches not convincing. Equally, I find Su and Ms Liu’s explanation that the audited accounts at the end of the year did not necessarily reflect the day-to-day operational reality not true. In my judgment, if they are genuine, there is no reason why they cannot be “booked” on the accounts as money owed to or borrowed from the directors. More importantly, why there was no contemporaneous documents, at least from December 2014 (when the 2015 minute recorded the “payable” income of Ms Liu’s salary from EBGZ was “maintained” at RMB 10,000) onwards to show that there was a deferral arrangement for the difference in her monthly income under EBGZ.

346.  What has been recorded in EBHL’s Prospectus dated 30 June 2014 also lends support to my finding that it is unlikely that such arrangement existed. It recorded that as of 31 December 2013, no sum was owed to Ms Liu. However, the summary of account shows that in the year ending 31 December 2012, Ms Liu had lent a sum of HK$180,000.00 to EBHL. That small sum was fully settled by the Company by 31 December 2013. Thus, had there been any unpaid salary from January 2012 onwards (and up until the date of the issue of the Prospectus in June 2014), it will be surprising that it would escape the attention of Deloitte as well as the lawyers and sponsors in charge of the global offering. I am of the view that the absence of any mention of this matter in the Prospectus is very strong evidence that the liability was never recorded in EBGZ or EBHL’s accounts.

347.  My above finding can be further supported by a series of internal email correspondence where the senior personnel of the new management team made enquires with the staff at EBGZ in early June 2017 of whether the alleged outstanding salaries had been included in EBGZ’s accounts[52]. In an email from A Lam to Catherine Zhi (of EBGZ) dated 8 June 2016, specific enquiry was made as to whether Ms Liu’s alleged outstanding salaries had been included in the financial records of EBGZ. It has been confirmed by Catherine Zhi on the same day that they were not. As the Management Accounts are derived from the ledgers of EBHL and its subsidiaries, if the unpaid salaries were never recorded in the EBGZs leger, it would not have been reflected in the Management Accounts.

348.  Ms Liu tried to get round this hurdle during cross-examination by alleging that although EBGZ remained the payor, she understood that her salaries were booked on the “Hong Kong side”. She relied on an enquiry she made with Thomson Lau in 2014/15 about the matter and the assurance from Thomson Lau that her salaries had already been taken into account. The problem I have with this belated explanation is that Thomson Lau was not called as a witness to confirm this newly added allegation. Nor can it be found anywhere in EBFE/EBHL’s accounts in Hong Kong that they have been “booked” as such.

349.  Insofar as the Salary Payment Agreement is concerned, I consider it is of very little value. In my judgment, it is clearly a self-serving document made between Su and Ms Liu without the knowledge of the new management just before the SPA was signed. Given the fact that it was only signed by Su (on behalf of EBHL) and Ms Liu on 16 July 2016 (with the chop of EBGZ placed but without anybody signing on its behalf), it has all the hallmarks of a document trying to belatedly explain a rather unusual arrangement which was unsupported by any contemporaneous documents at the time. I consider the same observation can be applied to the Notice.

350.  For the above reasons, on a balance of probabilities, I do not accept the alleged deferred salaries payments of Ms Liu with EBGZ was genuine. I further find that they had not been disclosed in the Management Accounts as was required under the SPA.

E8. Missing Inventories

351.  This is a very different matter which Su has been accused of.

352.  The allegation made by Top One is that, after Completion, Top One discovered that inventories in the value of HK$23,308,751.74. Top One’s case, as stated in its Opening, can be briefly summarised as follows.

353.  These inventories were initially stored in a facility in Shanwei in the PRC (“the Warehouse”) and were under the control of Su and his associates. In May 2016, the Warehouse owner issued a notice requiring its vacation. The inventories then had to be relocated. Top One says that all these happened while Su was still the CEO of EBHL.

354.  Following the relocation of inventories from the Warehouse and the departure of Su on 17 March 2017, Top One claims that the Target Group lost control over those inventories and/or was unable to locate them. EBHL had no choice but to write them off from its book.

355.  In order to support its claim, Top One allegedly relies on, inter alia, the evidence of factual witnesses, expert evidence, as well as EBFE’s internal records of the value of inventories stored in Shanwei[53]; notice to vacate the Warehouse dated 19 May 2016[54]; correspondence[55]; EBGZ’s board minutes on 11 May 2017[56]; BDO’s audit report[57]; public announcement of EBHL dated 3 July 2017[58], and the Annual Report of EBHL of 2017[59].

356.  Top One alleges that, contrary to Clause 3(F) of Section 2 of the Schedule, EBGZ lacked “sufficient internal control measures to reasonably assure against material misappropriate of assets or mis-recording or mis-statement of financial information”[60] as evident in the Missing Inventories incident.

357.  Further and/or alternatively, according to Top One’s case, the Missing Inventories ought not to have been recorded in EBHL’s accounts. The accounts were therefore inaccurate and misleading, contrary to Clause 3 and 4 of Section 2 of the Schedule of the SPA.

E8.1 Top One’s Case on Missing Inventories

358.  Basically, Top One’s case is one of fraud. It accused Su either controlling a non-existent warehouse which stored non-existence goods worth some HK$23 million or of inventories which existed but somehow disappeared or were stolen: see §54 of RASOC.

359.  These are extremely serious allegations made against Su which required a very high standard of proof.

360.  However, all Top One was able to show during the trial are some internal documents and email correspondence raising suspicions about the existence of the Warehouse. Both factual witnesses Ms Wong and He were not able to speak directly to this issue as they have no personal knowledge of those matters.

361.  Top One’s expert Alan Lee concluded that it is his belief that the Missing Inventories is likely to be non-existent due to a number of reasons. They included (i) an absence of documentation in support of the existence or ownership over the location where the Missing Inventories was stored; (ii) an absence of primary evidence evidencing the Missing Inventories; (iii) a new auditor appointed by Top One was not able to confirm the existence of the warehouse and the valuation of the inventory balance; (iv) the available evidence which supported the existence of the Missing Inventories was not in any way confirmed by any transaction documents commonly used in arms-length transactions with independent suppliers and customers; and (v) the available evidence used to support the Missing Inventories was mainly internal email correspondence which was often regarded as a less persuasive evidence in the accounting and auditing industry: see §93 of Alan Lee’s Report at [B2/996-997].

E8.2 Top One’s failure to prove its case

362.  In my judgment, Top One has failed to prove this claim against Su/FF by a huge margin for a number of reasons as highlighted by Mr Lung in Su/FF’s Closing Submissions.

363.  First, assuming that the inventories actually existed and somehow then went missing (as is alleged by Ms Wong in Wong’s Supp WS at [B/793/§85]), this necessarily means that it occurred after Completion and by definition has nothing to do with the accuracy of the warranties given by Su/FF. In §7(a) of the FBP at [A/70], Top One stated that the Missing Inventories were reported in (a) the Management Accounts under the Consolidated Statement of Financial Position as a Current Asset item under Inventories; and (b) in the 2015 Annual Report containing a statement of Su as chairman and an executive director of the Company.

364.  I accept Su/FF’s submission that if the inventories existed at the time of the Management Accounts / Completion Accounts, there could be no breach of warranty as the Management Accounts have sufficiently captured them. Thus, the case on disappearance (whether stolen or due to any other reasons) are totally irrelevant to whether the warranties were true at the time of the SPA. It is important to note that Clause 5.2 of the SPA specifies that the warranties are true only up to 29 July 2016. After that date, the new management led by Top One was in charge and Su/FF were not responsible for what happened to the inventories.

365.  I consider the following evidence which has been transpired during the trial would support my view above:-

(a) Both Ms Wong and Alan Lee agreed that Deloitte, as EBHL’s auditors, would have carried out physical stock-take procedures as part of the audit process. I think this perhaps is not surprising given the fact that Deloitte in EBHL’s 2016 Annual Report has identified inventory valuation as a “key audit matter” for them to undertake.

(b) Ms Wong accepted that, if there had been significant missing inventories as at 31 December 2016, one would expect it to be flagged in the annual report. However, no such issue was raised. Further, Ms Wong accepted that she had no basis to say that Su/FF’s warranties as to inventory was incorrect as at Completion, given the fact that by year-end 2016 Deloitte had effectively confirmed the inventories in the audited accounts.

(c) This is confirmed by Alan Lee in his evidence who agreed with the following suggestions put to him by Mr Lung on behalf of Su/FF:-

(i) The then-existing stocks as audited by Deloitte was trustworthy and there is no information pointing otherwise;

(ii) Had there been significant missing inventories, it would be incumbent on EBHL to issue an announcement but there was none;

(iii) EBHL only issued an announcement in 2017 upon the discovery of Missing Inventories; and

(iv) The likely inference is therefore that the inventories first went missing in the first half of 2017.

(d) This is confirmed by Ms Wong at trial. EBHL did not discover the issue of the Missing Inventories until 2017, including the matter being raised at an EBGZ board meeting on 11 May 2017.

366.  It is significant to note that Mr Yip has made no further submissions to this claim in Top One’s Closing Submissions save as to repeat what has been stated in the Opening: see §178 of Top One’s Closing Submissions.

367.  Second, if Top One’s allegation is true and that very significant inventories were stolen or disappeared (whether it took place in 2017 or at any time), the only natural and responsible thing for a listed company to do is to report the matter to the police. Yet it is common ground that the police were never called – whether in the Mainland or in Hong Kong. In my view, this is inherently improbable. If fraud of that magnitude was suspected to be committed by Su, the first thing for the directors of a listed company would do is to report this to the authorities for criminal investigation. The lack of such report to the authorities in my view is strong indication that the claim for Missing Inventories had never been a genuine one.

368.  Third, I agree with Mr Lung that the suggestion that Su could single handedly cause an entirely fictitious HK$23 million inventory figure to be included, without any challenge from the external auditors and internal control, is wholly unrealistic and contrary to common sense. At least Top One was not able to point to any concrete evidence to suggest that Su had.

E8.3 Su/FF’s Case on Missing Inventories

369.  On this matter, I much prefer the evidence given by Su and Ms Liu.

370.  For the existence of the Warehouse, Su in his evidence explained clearly that at all material time the group only had 3 warehouses, one in Switzerland, one at its office in Hong Kong and one at its office in Guangzhou. The co-called Warehouse in Shanwei alleged by Top One was not a warehouse of the group at all. It was a watch repair centre which had been operated on the premises provided by one of the then main shareholders Lam free of charge since 2003. The premises belonged to Lam’s company Truly Semiconductors Ltd (“Truly”). The staff of EBHL/EBGZ worked on the premises to carry out their repair work and other duties. After Lam successfully sold his shares to Sense Control on 16 May 2016, Su received a written notice from Truly on 19 May 2016[61] asking EBHL to move out before 18 November 2016. The contents of the letter clearly stated that EBHL “temporarily borrowed their company’s premises as a work place” (「貴司此前暫用本公司廠房作為工作場所」). Nothing was mentioned about it being used as a warehouse.

371.  Su in his evidence explained to the court that in order to move out from Truly’s premises by 18 November 2016, he had informed Gu to get in touch with the person in charge of the repair centre Mr Chan Hak Yue (陳克鋭). Gu then appointed Mr Kam, a staff from the watch department of Citychamp to be in charge of the move.

372.  According to Su’s understanding, which was gleaned from the staff of EBHL, the move was divided into 3 parts. Some of the goods was moved to the Guangzhou warehouse. Other goods which had serious quality issues for years and of which had been written off in the accounts were disposed of as waste. The remaining parts which were still of good quality were sent to Citychamp’s Shenzhen factory. That process of transferring some of those goods to Citychamp’s Shenzhen factory can be seen in the email correspondence between the staff of Citychamp and the staff of EBGZ who were based at the repair centre: see Su’s WS at §245(iii) at [B1/894].

373.  I noted that Gu did not come to court to dispute the above. Nor did the two factual witnesses Ms Wong and He were in a position to dispute them.

374.  Insofar as Top One tried to imply that the “SU Warehouse” (「SU 倉」) referred to in some of the documents was the same as the Shanwei repair centre, there is no direct evidence to show that it was the case. There is also no evidence produced by Top One to show that the SU Warehouse was used to store finished products rather than parts. As Su explained, the person in charge of the warehouses in EBHL was Mr Kenny Chung (鍾樹榮), whose direct superior included Thomson Lau. Top One could have easily called both of them to give evidence to verify the existence of the Warehouse and that the SU Warehouse referred to in some of the documents was the same as the Shanwei repair centre which Su was talking about.

375.  As to Top One’s reliance on the Completion Accounts dated 29 July 2016 which it claimed was presented “solely on [Su’s] representation”: see §54(c) of RASOC, I agree with Mr Lung that they are self-serving and internally generated documents. They have not been audited by any external independent third party. They are of little evidential value.

376.  Further, it is clear that when Ms Wong discussed the issue of Missing Inventories in her main witness statement, she has no personal knowledge in any of those matters stated by her: see §53-57 of Wong’s WS at [B1/692-695]. That was the reason why in almost every single sub-paragraph of that statement when she tried to deal with the issue, she would use the phrase “I understand” or “To my understand” as a preface. With respect, she was merely trying to reconstruct Top One’s pleaded case on this issue by referring to various self-serving and untested documents for which she could not provide any context or reasons why those documents were made in the first place. I do not find that helpful and have no hesitation to reject her evidence insofar as she is relying on such unreliable source of information to establish Top One’s case on the Missing Inventories.

377.  As Ms Liu has stated in her evidence, during all the years while she was working in EBGZ and EBHL, she had never met Ms Wong or heard of her name.

378.  Of the alleged payroll of the staff of the Warehouse paid by EBGZ mentioned by Ms Wong in §56(4) of Wong’s WS, Ms Liu was able to confirm that 2 of them were sent from EBGZ’s office responsible for arranging the inspection work the watches; 2 other female staff and the rest of the technicians were sent by EBFE to base in the repair centre in order to serve the Hong Kong office. This is a cost saving measure as the wages payable to staff based in the Mainland are considerably lower than those in Hong Kong. Their duties were to arrange the production schedule in Switzerland. As for other workers, Ms Liu found out that they had been transferred to work in Citychamp’s Shenzhen office after Gu took up his role.

379.  Further, Ms Liu pointed out that, after the notice for the moving out of Truly’s premises was issued in November 2016, Gu arranged the parts at the repair centre at Shanwei to be relocated Citychamp’s Shenzhen’s office/warehouse. She relied on a number of internal emails between the staff at Citychamp’s warehouse and the staff of the Shanwei repair centre and records to show such transfers of parts: see documents referred to in §19(ii) of Ms Liu’s Supp WS at [B2/932].

380.  Thus, on the face of those documents, I find the new management of EBHL (which mainly consisted of personnel from Top One/Citychamp) was fully aware of what happened to the alleged stocks / parts stored at the so-called warehouse in Shanwei. Yet they preferred to point fingers at Su rather than asking someone like Gu or Thomson Lau to come to court to explain what actually had been transferred to Citychamp’s Shenzhen office/factory after November 2016.

381.  Another example of how unreliable the evidence Ms Wong was in order to prove Top One’s case on the Missing Inventories is her reliance on the so-called board of directors meeting which allegedly took place on 11 May 2016 when Thomson Lau (the CFO), who initiated the meeting, purportedly reported to the directors of EBHL of the Missing Inventories. She tried to rely on a letter written by Ms Liu to the board of directors urging the Company to report the matter to the police in view of the serious allegation made in regard of the Missing Inventories. That letter was mistakenly mistyped as 11 May 2016 by Ms Liu when in fact the meeting actually took place on 11 May 2017 (which was subsequently accepted by her). Yet, Ms Wong (who was not at the meeting) was quite happy to rely on that as part of the evidence to prove Top One’s case. Again, Top One could have easily called Thomson Lau to give evidence on this important matter. Yet it chose not to do so.

382.  For the above reasons, insofar as inventory is concerned, I find that the Management Accounts accurately reflected the state of affairs then existed. I find that Top One has failed to show that inventory items in the Management Accounts had been overstated as of Completion Date. Top One fails in its claims for Missing Inventories.

E9. Breach of Warranties and the NAV

E9.1 The NAV Reduction

383.  For the measure of damages for breach of warranties, Top One primarily relies on the reduction of NAV under Clause 5.7 of the SPA: (see calculations of damages for breach of warranties at §§191-203 of Top One’s Closing Submissions).

384.  Clauses 5.7 provides a contractual mechanism for the recovery of damages arising from breaches of warranties under the SPA[62]: see Clause 5.7 at §189 above.

385.  “Adverse Consequence” is broadly defined under Clause 1.1 of the SPA[63] as:-

“any Liability, loss, damage (including incidental and consequential damages)…deficiency, diminution of value or expense (including costs of investigation and defence…reasonable legal fees and costs), whether or not involving a third-party claim”

386.  Hence, Top One claims that, pursuant to Clauses 5.7 and 1.1 of the SPA, Su/FF are liable to indemnify Top One for any loss, damages, and diminution of value, including against every dollar of NAV shortfall, arising out of or relating to a breach of contractual warranties — up to the amount of loss suffered by Top One, namely, HK$27,520,000.00, being the difference between the total consideration paid by Top One under the SPA and the price of Top One’s sale EBHL’s shares on 12 September 2018[64].

387.  Alternatively, Top One submits that the Cancelled Sales and Unrecovered Receivables are breaches within Clause 5(F), which is also a Fundamental Warranty. Thus, FF and/or Su are jointly and severally liable to every dollar of the Cancelled Sales and Unrecovered Receivables, up to the amount of loss suffered by Top One, namely, HK$27,520,000.00.

388.  Further or alternatively, Top One submits that if the court takes the view that all or some of the above breaches of warranties are not breach of the Fundamental Warranties, then the amount of damages under each breach of warranty would be subject to a 19.8% cap.

E9.2 Calculation of the Reduction in NAV under Clause 5.7

389.  Top One claims that the non-disclosure of the unpaid wages to Ms Liu, the Easy Team Liabilities and the Advertisement Fees, by itself, drove EBHL’s Actual NAV[65] below the contractually required Minimum NAV (HK$566,000,000.00).

390.  Alan Lee has calculated EBHL’s Actual NAV as at Completion (ie 29 July 2016)[66]. Mr Yip submits that if the court finds that the unpaid wages to Ms Liu, the Easy Team Liabilities and the Advertisement Fees were not disclosed, EBHL’s Actual NAV at Completion would be reduced to HK$543,584,114.00, which is less than the Minimum NAV of HK$566,000,000.00:-

		HK$
NAV in the Completion Accounts		569,184,629
Less:
Undisclosed Liabilities Unpaid salaries to Ms Liu Liabilities to Easy Team Advertisement Fees	(2,558,297) (15,587,569) (7,454,649)	(25,600,515)
Actual NAV		543,584,114

391.  Thus, Top One claims that, this would establish a breach of Clause 5(G), Section 2 of the Schedule to the SPA[67].

392.  Taking into account the Unrecoverable Receivables, Top One submits that the Actual NAV of EBHL would reduce further by HK$7,477,460.53.

393.  Further, Top One would treat the HK$3,879,427.00 of Cancelled Sales with Red Tax Note as Unrecoverable Receivable, and not make such claim under the Cancelled Sales category. Thus, there would be no issue of double counting.

394.  Alternatively, even if the HK$3,879,427.00 were taken out from the Unrecoverable Receivables, Top One says that the amount would be around HK$3.6 million.

395.  Lastly, Top One submits that Clause 5.9 of the SPA has no bearing on Top One’s claim under the reduction of NAV claim. Clause 5.9 is clear. It stipulates conditions specifically “with respect to the Vendor’s Warranty set out in paragraph 5(F), Section 2, the Schedule”[68]. Since the present claim is one based on Clause 5(G) of Section 2 and not Clause 5(F), Top One says that Clause 5.9 has no application.

E9.3 Su/FF’s response to the NAV Claim

396.  Mr Lung in Su/FF’s Closing Submissions stated that Top One’s claim for an NAV shortfall is fundamentally undermined by the concessions made by Alan Lee, Top One’s expert, during cross-examination:-

(a) First, Alan Lee accepted that he had no better alternative than to use the NAV figure reported in the Completion Accounts, even though those figures had never been audited. When it was put to him that he was “happy to use NAV as reported in the completion accounts” only because there was “no better alternative”, he agreed.

(b) Second, as highlighted above, Alan Lee agreed that, as a general proposition, the impact of any genuine Cancelled Sales on NAV cannot be taken dollar‑for‑dollar at the gross sales amount. He accepted that the NAV impact must be confined to the net loss, taking into account costs, tax and the value of any returned stock. He confirmed that some of the returned inventory might still have value and that, in order properly to quantify any NAV reduction, one “need[s] to consider the value of the goods returned”, yet he had not inspected any of the allegedly returned stock and therefore could not say how much it was worth.

(c) Third, regarding the specific calculation of the adjustments, Alan Lee accepted that the “adding back” figure – incorporating Unrecoverable Receivables already accounted for in the Cancelled Sales claim – was incorrect in his report: the number should be HK$3,879,427.00 rather than HK$1,408,517.00[69].

E9.4 The court’s findings on the NAV

397.  I agree with Mr Lung above submission that Top One’s calculations on the NAV figure is fought with difficulties due to the concessions made by its expert at trial as highlighted above. I do not accept that they can be safely relied on to form the basis of working out the damages for breach of warranties in this case.

398.  Further, based on my findings above, at most the only two items which can be taken into account for the calculations of the NAV will be the Easy Team Liabilities and Ms Liu’s Salary Payments.

399.  As those two items fall within the definition of non-Fundamental Warranty, it would lead to the question of whether Clause 5.7 (when read with Clause 5.8 together) should be considered as a penalty clause.

E9.5 Non-Fundamental Warranty and Penalty Clause

400.  As a fallback position, Top One seeks to frame its Cancelled Sales claim under the non‑Fundamental warranty regime, relying on Clause 5.7 (read together with Clause 5.8). It argues that, once a breach is shown, Su/FF must indemnify “every dollar” of the Cancelled Sales and Unrecoverable Receivables (subject only to the 19.8% cap), regardless of any net economic loss actually suffered.

401.  As I found Top One has failed to establish both the Cancelled Sales and Unrecoverable Receivables in this case, there is no need to take into account of the figures for those claims in the calculations of the NAV reduction.

402.  However, I think it is still appropriate to consider whether, if the claims fall within the non-Fundamental warranty definition, whether Clause 5.7 still constitutes to a penalty clause and therefore not enforceable.

403.  It is common ground that the applicable test for penalties is that set out by the Court of Appeal in Law Ting Pong Secondary School v Chen Wai Wah [2021] 3 HKLRD 185. The court must: (i) identify whether the impugned provision is a secondary obligation triggered by breach; and, if so, (ii) determine whether the detriment it imposes on the contract‑breaker is out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The focus is on substance, not labels: a clause which, on breach, requires the contract‑breaker to confer an extravagant benefit on the other party may be penal even if drafted as an “indemnity” or “liquidated damages” provision.

404.  A secondary obligation is one that operates on a breach of contract. I agree with Mr Lung that, properly analysed, Clause 5.7 is a secondary obligation: it becomes operative only in the event of a (primary) breach of Cancelled Sales materializing over the specified threshold (Clause 5(F) and Clause 5.8), and then requires Su/FF to pay a monetary sum in response to that breach.

405.  I further agree with Mr Lung that the detriment of Su/FF is clearly exorbitant, unconscionable and disproportionate in relation to any legitimate interest Top One may claim. Whatever the true amount of genuine Cancelled Sales, the “every dollar” indemnity ignores the costs of goods, the mitigating effects of tax savings and refunds, the value of any returned stock, and any potential resale. It therefore bears no relationship to any real diminution in EBHL’s NAV or Top One’s economic position.

406.  As Mr Lung has demonstrated in Su/FF’s Opening Submissions[70], Top One’s own formulation illustrates the problem. Its pleaded case claims RMB 41.8 million of Cancelled Sales alone (as highlighted above this is further shifted to HK$52,100,502.05 in the evidence); when Unrecoverable Receivables are added, the total claim under this regime is in the region of HK$55 million (or close to HK$60 million on the expanded claim), notwithstanding that Top One’s asserted “loss” on the shares (using its own HK$2.25 vs HK$1.85 per share metric) is only HK$27.52 million. Even taking that HK$27.52 million figure at its highest (which Su/FF dispute), the Clause 5.7 route would double Top One’s already inflated measure of loss. It is therefore, in substance, a penalty clause.

407.  In the Closing Submissions, Su/FF maintain their position that both clauses concerning Fundamental Warranty (full indemnity) and non-Fundamental Warranty (ie a cap at 19.8%) in relation to Cancelled Sales are penalty clauses.

408.  In Clauses 5.8 and 5.9, the legitimate interest of Top One could only be for proper compensation caused by a breach of warranty with reference to the value of its 19.8% EBHL shareholding. However, the contractual mechanism relied on by Top One seeks to extract an amount that bears no correlation to such loss.

409.  As Alan Lee agreed, in considering the impact on Cancelled Sales on NAV, one has to factor in the cost of the returned goods and the amount of tax payable – a cancelled sale only reduces the profit generated by the sale exclusive of cost and tax.

410.  Once it is established that the impact of Cancelled Sales cannot be measured in such gross terms, it follows that the non-Fundamental Warranty, which awards 19.8% of the gross amount of Cancelled Sales, is wholly disproportionate to the protection of Top One’s legitimate interest. A fortiori, the Fundamental Warranty imposes liability that far exceeds the actual economic loss, if any, suffered by Top One.

411.  Based on the above analysis, I agree with Mr Lung’s submissions that Clause 5.7 should be treated as a penalty clause. I consider that Clause 5.7, when read together with Clause 5.8, is in substance a penalty clause rather than simply an indemnity clause. Top One claims that it is merely seeking indemnification from Su/FF up to the amount it suffered and not one cent more in my view is rather superficial as the above example illustrated by Mr Lung has demonstrated.

412.  In the aforestated premises, I consider that Clause 5.7, when read together with Clause 5.8, should be treated as a penalty clause. Thus, I find Top One cannot rely on the reduction of the NAV as a basis to claim against Su/FF.

E10. Misrepresentation

413.  Top One’s claim based on misrepresentation can be found at §§65-79 of the RASOC.

E10.1 Applicable Legal Principles

414.  Mr Yip for Top One has helpfully set out the following established principles on misrepresentation in its Closing Submissions which are not disputed by Mr Lung.

415.  For there to be an actionable misrepresentation, the following elements must be satisfied:-

(a) There is a statement of past or present fact, as distinct from a statement of opinion or intention. It must have the character of one upon which the representee was intended and entitled to rely;

(b) The statement is false;

(c) The representee must have in fact relied on the statement; though this can sometimes be inferred. The representation need not be the only or main cause of the decision to contract. It is generally sufficient that it be a cause; and

(d) The representee suffered damage as a result.

Joytex Development Ltd v Super Homes Ltd [2018] HKCFI 2286 at §77 per DHCJ Alexander Stock SC ; Li Yuhong v oOo Securities (HK) Group Ltd [2025] HKCFI 5270 at §106.

416.  Generally, a contractual warranty, without more, does not constitute an actionable representation. However, where the language of the warranty demonstrates that it was intended to operate also as a representation, the same statement may found a claim in misrepresentation: Silver Achiever Investments Ltd v Frank Joseph Prineppi [2023] HKCFI 2699 at §81 per Harris J.

417.  By operation of section 3(1) of the Misrepresentation Ordinance (Cap. 284) (“MO”), a representer is liable for damages for misrepresentation notwithstanding that the misrepresentation is non-fraudulent in nature:-

“…if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true.” (emphasis added)

418.  In other words, the representee needs only to prove that the statement of fact is false and has induced the contract. Unless the representee establishes that he had reasonable grounds to believe and did believe that the statement was true up to the time the contract was made, he is liable for damages.

419.  Under s. 3(1) of MO, damages are available in respect of a non-fraudulent misrepresentation on the same basis as for the tort of deceit. Damages are awarded so as to put the plaintiff in the position it would have been in, had the representation not been made: Joytex Development Ltd at §143; Long Year Development Ltd v Tse Fuk Man Norman & Ors [1991] 2 HKC 393 per Deputy Judge Andrew Li QC (as the CJ then was) at 407D – 408D.

E10.2 Su/FF’s Representations

420.  In my view, there cannot be any dispute that Su/FF made a number of misrepresentations in the SPA as to the accuracy of the Management Accounts, especially under Clause 4(B) and (C).

421.  Clause 4(B)(ii) of Section 2 of the Schedule of the SPA provides that:-

“The Management Accounts show a true and fair view of the state of affairs of the members of the Target Group or the Target Group at each accounting reference date to which the Management Accounts relate” (emphasis added)

422.  Clause 4(C) of Section 2 of the Schedule further states that:-

“At the Management Account Date, the members of the Target Group or the Target Group did not have any liability (whether actual, contingent, unquantified or disputed) or outstanding capital commitment which was not adequately disclosed or provided for in the Management Accounts….” (emphasis added)

423.  I further agree with Mr Yip that the SPA makes clear that Clause 4(B) and (C) were not just warranties, but representations of Su and FF:-

(a) Clause 5.1 of the SPA provides that:-

“The Vendor [i.e. FF] and the Vendor Guarantor [i.e. Su] hereby jointly and severally represent, warrant and undertake to the Purchaser (i.e. Top One) (to the intent that the provisions of this Clause 5.1 shall continue to have full force and effect notwithstanding Completion) in the terms set out in the Schedule…” (emphasis added)

(b) Clause 5.2 of the SPA further provides that:-

“The Vendor [i.e. FF] and the Vendor Guarantor [i.e. Su] jointly and severally represent, warrant and undertake to the Purchaser that the Vendor’s Warranties are as at the date hereof and shall on each calendar day up to and including the Completion Date be true, accurate and complete and not misleading, in each case with reference to the facts and circumstances then existing.” (emphasis added)

(c) “Vendor’s Warranties” is in turn defined in Clause 1 as:-

“…the representations, warranties and undertakings of the Vendor and the Vendor Guarantor on a joint and several basis contained or referred to in Clause 5 and the Schedule.”

E10.3 Reliance by Top One

424.  There is also no doubt in my mind that Top One relied on Su/FF’s Representations in entering the SPA: see Clause 5.1 of the SPA at §142(1) above.

425.  This is the case even Top One had obtained any information about the state of affairs of EBHL : see Clause 5.4 of the SPA at §142 (2) above.

426.  Given what has been stated in Clause 5.4, I do not think Su/FF could rely on any prior knowledge that Top One had in relation to the Group’s affairs as a defence for breach of warranties/misrepresentation. Thus, any argument based on due diligence will not stand up to scrutiny in light of what have been agreed by the parties under the SPA.

E10.4 Whether there was any misrepresentation?

427.  Given my factual findings above, I consider at least in 2 different areas there had been failure on the part of Su/FF to disclose or make provisions for. They are under: (i) the Easy Team Liabilities; and (ii) Ms Liu’s Salary Payments. Thus, there are at least misrepresentations made by Su/FF in those 2 areas.

E10.5 Su/FF’s Defence on Misrepresentation

428.  First, I do not think Top One is pursuing a fraudulent misrepresentation case as claimed by Mr Lung in Su/FF’s Opening Submissions alleges. In any event, no fraudulent misrepresentation has been pleaded and seriously put forward by Top One during the trial. I do not need to consider this further.

429.  However, I think this is a case of negligent misrepresentation for the above 2 items of claims which are actionable under section 3(1) of the MO where the representee may claim damages in respect of a non-fraudulent misrepresentation which induces a contract, on the same basis for the tort of deceit: see Li Yuhong, supra at §110.

430.  Given my factual findings above under those 2 items of claim, I find there must be sufficient falsity in the Management Accounts which would amount to negligent misrepresentation at least under those 2 issues in the case.

431.  The only question left is what should be the measure of damages resulting from the breach of warranties and/or misrepresentation in this case.

E11. Damages

432.  Top One claims for damages for the alleged breaches of warranties/representations has been set out on two alternative basis, namely, (1) contractual indemnity based on Clause 5.7 of the SPA, or (2) damages under common law for misrepresentation.

E11.1 The Court’s calculations on Damages

433.  I accept the submission made by Mr Lung on behalf of Su/FF that there is no real distinction between damages for an alleged breach of warranty and for misrepresentation in this case. The misrepresentation claim therefore adds nothing of substance:-

(a) The applicable measures for breach of warranty in a share sale is well settled: it is the difference between the value of the shares as warranted and their true value: see Ageas (UK) Ltd v Kwik-Fit (GB) Ltd [2014] BUS LR 1338 at §14.

(b) Top One did not attempt any proper valuation exercise. Its HK$27.52 million figure is simply the difference between the SPA price and the later price it obtained in a relate-party sale, which cannot be treated as a market benchmark for diminution-in-value purposes.

434.  In any event, I am not convinced that the sales of the shares by Top One to VGB was a genuine transaction, given the very close relationship between Sit and Hon, Top One and Citychamp and Hon/Citychamp and VGB. Sit or anybody from the new senior management team did not come to court to explain why Top One was willing to sell at HK$1.85 per share to VGB and at the time when it was sold. In particular, there was no explanation why Top One considered it was a mitigation to its loss when it chose to sell the shares to VGB in September 2018. There was, as Mr Lung has mentioned, no independent valuation that it was a reasonable price to pay.

435.  Second, as stated in McGregor on Damages, supra at §30-004, in the case of an alleged breach of a seller, while the price at which the buyer has agreed to on-sell the shares to a third party may be some evidence of value, it is “generally irrelevant and should not be taken in preference to the market price”. I agree with Mr Lung that Top One’s figure of HK$27.52 million, which is purely based on a related-party sale price agreed with VGB, is inappropriate as a matter of methodology.

436.  Further, if one takes away the claims under the Cancelled Sales, Unrecoverable Receivables, Advertisement Fees and Missing Inventories (which I found to be unreliable and/or self-induced by Top One), it will have a profound effect on the NAV figure under Clause 5(G). It renders the whole basis of Top One’s claim on the NAV extremely doubtful and inherently unsound.

437.  Thus, I am not satisfied that using the price difference between the price Top One purchased the shares from Su/FF and the price it sold them to VGB is a reasonable or appropriate way to measure the damages in this case.

438.  Instead, I consider adopting one of the alternatives pleaded by Top One under §80 of the RASOC may be more appropriate.

439.  As I have found against Top One on its case based on Cancelled Sales, Unrecoverable Receivables, Advertisement Fees, Missing Inventories and the NAV, any alleged losses under those claims will not be taken into account when assessing the damages in this case.

440.  The only 2 items of loss which should be taken into account will be the Easy Team Liabilities and Ms Liu’s Salary Payments. I consider the damages should be assessed at 19.8% of the sum as Top One had purchased that percentage of the shares of the Company. In other words, the amount of damages arising out of the breaches of the warranties and/or misrepresentation for those 2 matters will be at HK$1,982,563.00 [(HK$7,454,649.00 + HK$2,558,297.00) x 19.8%].

441.  Interest will be awarded for the above sum at 1% over prime rate from date of the breaches (from 29 July 2016) until date of judgment and thereafter at judgment rate.

F. CONCLUSION

442.  In conclusion, I find that in the 2980 Action, Top One was in breach of the Collateral Agreement by failing to purchase the remaining shares from Su/FF. Therefore, judgment on liability will be entered against Top One. However, I find that FF has failed to mitigate its loss by selling the shares at the market price during the pre-trial period. Therefore, no damages will be awarded under this action.

443.  For the 406 Action, I find that Top One has failed in its claims for the Cancelled Sales, Unrecoverable Receivables, Advertisement Fees, Missing Inventories and the NAV but succeeded in its claims based on the Easy Team Liabilities and Ms Liu’s Salary Payments. I further find the damages should be calculated based on 19.8% of the loss on those claims only, at a sum of HK$1,982,563.00. Judgment will be entered against Su/FF for such sum together with interest mentioned above.

G. COSTS

444.  Costs should follow the event. I shall make the following costs order on a nisi basis:-

(a) For the 2980 Action, since FF has proved its case on liability against Top One but failed in establishing its claim on damages, I would award 80% of costs in favour of FF under this action as I consider roughly that amount of time during the trial had been spent on the issue of liability and the rest on the issue of quantum.

(b) For the 406 Action, since I found Top One has only succeeded in 2 of the comparatively minor claims (both in terms of value and the time parties spent in arguing those 2 issues), I consider the real/substantial winner of the action are Su/FF. They have successfully defended most of the claims brought by Top One against them (both in terms of issues and value). I consider that they should be entitled to 80% of its costs in defending this action. Again, this roughly represents the time the parties spent in fighting over those claims under this action during the trial.

(c) Given the complexity of the case and the large number of documents involved, I consider a certificate for 2 counsel in each of the two actions is justified and reasonable. I shall grant such certificate for both actions.

(d) Any party who wishes to vary the above costs order should apply by way of summons within 21 days from the date of handing down of the judgment.

445.  Last but not the least, it remains for me to thank counsel on both sides for their very able assistance throughout the trial of these two actions.