Song Lian Zhong and Others v. Chan Sze Wan and Others
Read the full judgment text of HCA 277/2013 on BabelCite. This High Court CFI judgment was delivered on 23 May 2017.
1. The 1 st plaintiff, Song Lian Zhong (“Song”), is a businessman involved in telecom business and other business in Mainland China.
Cites 2 cases
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HCA 277/2013 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 277 OF 2013 ________________________
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________________________ JUDGMENT ________________________ Introduction 1.The 1st plaintiff, Song Lian Zhong (“Song”), is a businessman involved in telecom business and other business in Mainland China. 2.The 2nd plaintiff, Leung Sin Wai, Samson (“Samson”) is a businessman with experience in property management. He has a long term partner or business relationship with a Japanese businessman, Mr Yasumoto. The 3rd plaintiff, Worldwide Executive Limited (“WEC”), is a holding company of Samson. 3.The 2nd and 3rd defendants are siblings and Chan Chung Fai, Edmond (“Edmond”) holds the shares of the subject matter company on behalf of Chan Kam Fai, Adrian (“Adrian”). The 1st defendant, Chan Sze Wan, Eleanor (“Eleanor”) is a relative of Adrian and Edmond. 4.The 5th defendant, Great River Corporation Limited (“GRC”) is the holding company of the 4th defendant, Tsui Wai Ling Carlye (“Carlye”) and her late husband Anthony Francis Martic Conway (“Conway”). 5.Adrian worked as an insurance agent at the material time. Edmond has a small business unrelated to the matters under consideration here. 6.Eleanor used to work in the public relations business and knew the late Raymond Chung. She is the sole shareholder and director of a company called China Network Security Limited (“CNSL”). The investor of CNSL was the late Raymond Chung. Adrian also helped in the operations of CNSL. It is through CNSL that Raymond Chung, Eleanor, Conway and Carlye had their first business relationship with Song’s telecom business. 7.The subject matter of the dispute relates to the interests in the company China NTG Investments Ltd (中腾环保科技投资有限公司) (“CNTG BVI”) registered in the British Virgin Islands (“BVI”). The CNTG BVI holds the subsidiaries in the business of supplying natural gas in certain provinces and localities in Mainland China (“the Project”). The CNTG BVI did not have a bank account. 8.There is a Hong Kong company set up by the defendants which has the same Chinese name as CNTG BVI and the English name is the same save for the word “Investment” as opposed to “Investments”. This Hong Kong company, in the name of China NTG Investment Ltd (“CNTG HK”), is the company that holds the bank account and receives the investments and make payments. 9.The initial registered shareholding of the CNTG HK and CNTG BVI are the same:
10.The Project arose from Song’s connections to partner with China National Petroleum Corporation (“CNPC”) through its subsidiary CNPC Kunlun Natural Gas Exploitation Company Limited (“CNPC Kunlun”). 11.The Project was embodied in a Framework Agreement dated 14 December 2009 entered into between a company of Song, Beijing Rongxin Diantong Technology Development Company Limited (“Beijing Rongxin”) and CNPC Kunlun. 12.The shareholding of Beijing Rongxin was held by Song’s employee, Yuan Liqing (“Yuan”) on trust for him. 13.To implement the Project, funds need to be raised. The defendants were responsible to raise funds. As events turned out Samson invested RMB 130 million in the Project. No other investments have been secured. 14.The CNTG HK is used by the defendants to, inter alia, operate the finances of the Project. The investment of Samson was paid into the bank account of CNTG HK as directed by Eleanor. Yet, the CNTG HK has no interest or shares in the Project. 15.Song and the defendants first met in relation to a telecom business involving Song’s Shenzhen Vokifone Tech Company Limited (“Shenzhen Vokifone”). In late 2008, when the Shenzhen Vokifone business was being pursued, albeit unsuccessfully in the event, they started to discuss about the Project. 16.Song’s case is that the defendants were to raise funds for the Project and they hold 49% of the shares in the Project company on behalf of Song so as to facilitate their fund raising activities. The business arrangement with the defendants in the Project was to be the same as that for the Vokifone business. In essence, Song contends he would keep 51% of the shares in the Project company. The defendants would hold 49% of the shares on trust for him. This 49% shareholding would then be transferred to investors in return for their investments. Song would pay the defendants 3% of the amount of the funds raised as remuneration for raising funds for the Project. This is the Agreed Arrangement relied on by Song. 17.The defendants deny the alleged Agreed Arrangement. There is no investment injected in the Project by way of capital by any of the defendants. They contend that the shares were given to them by reason of their personal attributes, connection and skills which was needed for the development of the Project. They were to source sufficient capital and to provide business, finance and technology expertise and connection and new technologies involving gas transmission. In particular, it is pleaded that Carlye had “governance expertise”, Eleanor had “superior technology and industry knowledge and contacts and connection”, Adrian had “strong financial background and connection” both internationally and within PRC. Eleanor contended that it was her involvement in a meeting with CNPC that secured the signing of the Framework Agreement between Beijing Rongxin and CNPC Kunlun. 18.Carlye said she excelled in governance and Song respected her late husband and herself and Song called them “teachers” (“laoshi”) and so Song gave her those shares. 19.Samson was involved in the Project through the introduction of Carlye and Eleanor. He first paid a sum of RMB 30 million in return for 0.5% of the shares of a company which he was given to understand as the Project company. He paid an extra HK$45.7 million and HK$68.5 million and deposited the same into an account as advised by Eleanor, that is the CNTG HK bank account. In return for the RMB130 million investment he was given 3% shares in CNTG BVI. 20.The defendants pleaded that the 3% shares given to Samson in return for his investment was taken from Adrian’s 23% shareholding, and in return Song promised to compensate him from other sources in due course. 21.Song’s allegations of misrepresentations of the defendants are:
22.Samson’s allegations of misrepresentations of the defendants are:
23.The defendants deny all the allegations of misrepresentations. 24.Song alleged that on the basis of the Agreed Arrangement and the representations made by the defendants, he signed the documents that set up the various companies and the Subscription Agreement dated 30 March 2010. Song claims for:
25.Samson alleged that on the basis of the misrepresentations made to him, he invested RMB 130 million. Samson claims for:
26.The board resolution of Beijing Rongxin dated 14 December 2009 prepared by Yuan is relied on by Song to evidence the Agreed Arrangement. The defendants challenged the authenticity of the document contending that it was prepared ex post facto to support Song’s case. 27.During the hearing new documents have been produced. After the cross examination of Yuan, Eleanor produced an immigration exit and entry record of herself. This document was not put to Yuan. I ruled at the time for it to be admitted on a de bene esse basis. 28.On the question of damages claimed, the parties provided further submissions. 29.The plaintiff’s submissions are that Song’s relief is for a declaration that he is the beneficial owner of the 46% shareholding in CNTG BVI. He has applied for damages to be assessed. No evidence relating to such damages has actually been provided at this hearing or any evidence relating to the same. As to Samson’s claim, he asked for a return of the RMB 130 million or its equivalent in Hong Kong dollars or for damages to be assessed. He held 3% of the shares in CNTG BVI. 30.The defendant’s contention is that Song’s relief was taken as one where damages would not be pursued and there is no evidence nor argument proffered during the trial, no order should be made for damages to be assessed in any event. As to Samson’s claim, in gist, the defendants contend that the damages would not be RMB 130 million simply because he is holding 3% shares in CNTG BVI. The value of the 3% shares has yet to be ascertained in, inter alia, the BVI proceeding after the determination as to whether or not Song is the ultimate beneficial owner of the 46% shareholding held by the defendants here. The alleged loss of RMB 130 million does not take into account the value of the company and that Samson has not sought rescission of the Subscription Agreement and CNTG BVI is not a party to these proceedings, credit must be given to the value of the shareholding. The fact that credit should be given for the value of the 3% shareholding of Samson is not really in dispute between the parties. It is not possible for the value of the 3% shareholding to be assessed to be dealt with in this judgment and must be left for another day. 31.In assessing the evidence and to afford it appropriate weight, it is necessary to view the evidence in context. A witness may be truthful in some aspects but not others. A witness who may appear composed and organised does not necessarily mean that he is telling the truth. An emotional witness similarly maybe trying to convey the truth as best he could to the court. The evidence of the witnesses has to be assessed in the context of all the evidence and in particular whether it makes sense, and in this case, also commercial sense. The background of the witnesses is relevant in light of the defence pleaded. The post-event conduct of the people involved, whilst not pivotal, do shed light on the veracity of their recollection of the relevant events. In this particular case, the evidence of an independent witness who has no interest in the outcome of the decision is helpful given the diametrically opposite positions taken by the parties. Demeanour of the witnesses of course is also relevant to assess the weight of the witness evidence. 32.In this case new evidence have been given by the defendants when they came to the box, most of these have not been put to plaintiffs’ witnesses. The plaintiffs did not therefore have a chance to reply to them. Such a practice is not to be encouraged as a matter of due process but it also undermines the weight and reliability of such statements and indeed the credibility of these witnesses. 33.The real issue turns on what arrangement was put in place between the plaintiffs and the defendants in relation to the Project and the shareholding and how that came about. Whether the defendants were given the shares for their attributes as pleaded or whether they were the registered shareholders holding on trust for Song so as to allow funds to be raised is effectively the real contention between the parties in Song’s case. 34.As to Samson’s case, the investment has been made and the issue is whether it was invested by reason of the Senior Official Representation and the Buyback Representation and if so what damages should be awarded. The Agreed Arrangement and the Hong Kong Company Representation 35.Given Song’s case as explained above it is necessarily to start by reviewing the evidence from the Shenzhen Vokifone business so as to give the evidence context. 36.Song started the Shenzhen Vokifone business. Song wanted to list Shenzhen Vokifone and through Mr Lei Bo, he was introduced to Mr Raymond Chung who was an ex-employee of PCCW. Raymond Chung then introduced his ex-boss Conway and his wife, Carlye, and Eleanor to Song. 37.Through Eleanor and Carlye, Song was introduced to Edmond, Adrian and Kelvin Wong, a practising barrister in Hong Kong. 38.In 2008, with a view to start up the Vokifone business in Hong Kong, Eleanor prepared a Framework Cooperation Agreement and a Cooperation Agreement between China Network Security Limited (“CNSL”) and Shenzhen Vokifone which was signed and dated 5 May 2008 and 14 May 2008 respectively. Eleanor was the sole shareholder and director of CNSL. The secretary was Annie Chan. The evidence of Eleanor reveals that Raymond Chung and Edmond invested in CNSL and are the real bosses behind it. 39.Song said that Eleanor offered to help to raise funds for the Shenzhen Vokifone business in Hong Kong and in return he would remunerate her and her partners primarily by way of a commission of 3% of the funds they successfully raised. He was also told that it would be easier to raise funds if Adrian, Edmond, Carlye and herself would be registered as having an interest in the companies to be set up. Song agreed as he was unfamiliar with Hong Kong Company Law. He said he insisted and maintained that he should be the majority shareholder, thinking that, like China, that would enable him to have control. Song described that as the “Hong Kong Vokifone Arrangement” which included: [1]
40.From April 2009, a number of Hong Kong companies were set up to pursue the business but nothing much happened. 41.At around this time, Song had an opportunity to partner with CNPC through collaboration with its subsidiary CNPC Kunlun in the Project. 42.On 14 December 2009, Song’s company Beijing Rongxin entered into a Framework Agreement with CNPC Kunlun for the Project in 14 places in the PRC. [2] 43.This Project required funding and Song secured RMB 6 million for the Project. More funds have to be raised. 44.Eleanor learnt of the Project. According to Song, Eleanor offered to raise funds for the Project and to receive a remuneration package similar to that of the Hong Kong Vokifone Arrangement. 45.The defendants deny this Agreed Arrangment as pleaded by Song. Song also stated that the corporate vehicle to be set up to carry out the Project would be a Hong Kong company (“Hong Kong Company Representation”). This assertion of Song is denied by the defendants. 46.According to Eleanor, the arrangements for the Project with CNPC is this: Song would retain 51% of the holding company that would be set up to run this business and Adrian, Carlye and Eleanor would hold the remaining 49%.[3] Eleanor said that Carlye would contribute her expertise in corporate governance and international relationship in return for a holding of 3% shares of this new company using GRC[4] as the nominee. Eleanor and Adrian would each hold 23%. Eleanor also said that Song was responsible to negotiate with CNPC, Adrian would be responsible to raise funds, and she would “oversee business development, corporate relationship with various levels of the PRC government and international organisations.” [5] Edmond is the nominee of Adrian for his shareholding in the holding company and was not personally involved in the Project. She added that Song would not have been able to secure the Project without the defendants’ involvement as they were able to raise funds. She said that was the reason why their involvement was essential to secure the Project.[6] 47.Eleanor’s evidence is that the financial advisor Miss Annie Chan advised them to set up a company in the BVI so that the companies in Hong Kong would become its subsidiary. The directors of Super Kingdom Global Investments Limited resolved in an undated written resolution resolved to change its name to CNTG BVI was executed by the four directors.[7] The CNTG BVI was formed in September 2009 and CNTG HK in November 2009. 48.Eleanor contends that she had an important role and impact on bringing about the signing of the Framework Agreement. I do not accept that. 49.She was in the business of public relations or corporate communications. She left the PR consultancy firm in 2004/2005 and thereafter she mainly spent her time doing charity work in Mainland China. 50.She came across as a witness who is untruthful and evasive. She would endeavour to present herself to be something beyond her own limitations in order to achieve her own objectives or goals. This is evidenced in the answers she gave when asked about her knowledge in the telecom, network security and the oil and gas business. In the telecom, network security business, after some cross-examination she eventually admitted that the real minds, bosses and investors behind CNSL were Raymond Chung and Adrian. She was no more than a front for the investors. As to the oil and gas field, she admitted that prior to working with Song she had no connections with CNPC, no experience in gas or energy infrastructure projects, nor dealt with any foreign investors with foreign technology in sustainable energy. She boasted about her organisation of some international conferences and meetings involving major players in the field. That does not demonstrate ability and knowledge in “technology” or “industry” but at best conference organiser skills. 51.She may have been asked to go to meetings but I find her role limited. She has no previous experience in oil and gas and has no financial strength to influence the discussion or the decision. I accept Song’s evidence that she had no role in securing the Project. Admittedly she attended some meetings in the Project but they were mostly after the Framework Agreement. Even if she attended meetings before, given her lack of knowledge and contacts in this field, it would not be of any significance. 52.I do not find she has the necessary expertise in the business of supplying natural gas, let alone “superior technology and industry knowledge” as pleaded in the Defence. 53.After the execution of the Framework Agreement with CNPC Kunlun, Beijing Rongxin passed a board resolution which was dated 14 December 2009[8] recording that Beijing Rongxin would transfer the Project for the 14 places in PRC, arising from the Framework Agreement with CNPC Kunlun, to China NG Investment Limited of Hong Kong, 中騰環保科技投資有限公司, that is CNTG HK. The authenticity of this board resolution is disputed although it is not disputed that the director who signed this board resolution was Yuan. The defendants effectively suggested that this document was created ex post facto, first not on 14 December 2009 (a matter that is not disputed by Yuan) but that it was created after the disputes between the parties have arisen. The board resolution was produced in August 2014 in the plaintiff’s 1st List of Documents in this action. 54.The defendants only really challenge item 4 of the board resolution. The whole resolution containing 5 items is set out below:
55.Yuan came forth to give evidence to prove the board resolution. She prepared it, dated it and signed it. None of this was challenged. 56.She used to work for Song and held the shares of Beijign Rongxin on trust for Song. She was responsible for taking notes and minutes, arranging meetings and trips. She left his employment in May 2010 to get married, and is now a housewife with children living in Shanghai. She originally refused to give evidence when asked by Song or his assistants back in 2013, she said “no lawyer asked her” to give evidence at that stage. She was looking after her children and refused until the request was repeated in 2016. This was the reason why her witness statement was produced late pursuant to an order dated 11 July 2016. I find her an honest and truthful witness, doing her best to assist the court in a matter she has no interest. 57.She recalled a November or December 2009 meeting in Shenzhen where Eleanor was present to discuss the proposed Project and the holding of 49% shares on trust for Song. She was present at the meeting and took notes. She recalled there was no objection to the holding of 49% shares on trust for Song at the time. After the Framework Agreement was signed, she took notes of an internal meeting of Beijing Rongxin and prepared the board resolution. She noted only the conclusions of the meetings relating to the matter and put it into one document and then dated it as the date of the Framework Agreement. She said she gave a copy in person to Eleanor in Shenzhen after it was prepared. She could not recall what day specifically she prepared the document but stated that it was in December. She could not remember specifically which day she handed it to Eleanor, but was adamant she did it in person in Shenzhen Nanshan office. She explained that she did not need Eleanor to sign as it was a Beijing Rongxin document and only she had to sign it. She said Eleanor made no objection to it at the time. 58.She was cross-examined about why she dated it on 14 December when it was not prepared that day. She stated that she would use the date of the contract to date the document as that was her practice. This is neither here nor there as the issue is on the disputed content and not the date itself. She frankly admitted that it was a resolution recording a number of decisions made in a number of meetings. 59.As to the date when Yuan gave the board resolution to Eleanor, I admitted on a de bene esse basis the record of movements of Eleanor from the Immigration Department to show that Eleanor was not in Mainland China for a period after 14 December 2009. This document only establishes that Eleanor was not in Shenzhen on those days. Yuan’s evidence was that she could not remember which day in December she prepared the document and which day she gave it to Eleanor. But I accept her evidence that she had given a copy to Eleanor, there being no reason for her to fabricate. 60.If this document has been prepared in December 2009, which I accept, and it is not put to Yuan otherwise, it is a contemporaneous record of the understanding at the time. Even if it were not given to Eleanor, it is contemporaneous documentary corroborative evidence that is consistent with Song’s case. The arrangement set out in item 4 of the board resolution is consistent with the Agreed Arrangement that was relied on by Song. 61.The evidence of the witnesses including Samson, Mr Jahnke Jr, and Mr Yasumoto all indicate that the defendants were telling them that the Project was backed by senior officials in Mainland China and that they were acting as nominee shareholders only. I accept the evidence of Mr Yasumoto and Mr Jahnke that Carlye and Eleanor and Adrian told them so respectively. This evidence is consistent with Song’s case on the Agreed Arrangement. The evidence of these two independent witnesses corroborated the Agreed Arrangement set out in paragraph 4 of the contemporaneous board resolution prepared by Yuan. In other words since late 2009 the arrangement of the defendants holding on trust for Song was understood and agreed and that was what the defendants have been telling potential investors. 62.Adrian’s 3% shares were given to Samson upon full payment of the investment and completion of the 30 March 2010 Subscription Agreement. This, in my view, is also consistent with the Agreed Arrangement. The defendants’ shares were held on trust for Song to be transferred to investors upon investment. The pleaded assertion of Adrian that Song would compensate Adrian for his giving up his 3% shareholding in due course is totally unsubstantiated by evidence and not believable anyway. 63.As to the defendants’ contention that the compensation of 3% of the raised funds was never paid to the defendants and it therefore indicates that the Agreed Arrangement was never in place, I note that in early 2011 Samson became aware of the conflicts between Song and the defendants and the fund raising exercise for RMB 200 million had not been completed. Further, according to item 5 of the board resolution, it would be resolved when the Project was in the actual construction stage. In any event, there is no counter-claim for it here, but I note that Song did admit that such compensation would have to be paid. 64.Carlye and Conway may have had the respect of Song, but I find her evidence unclear about whether Song told her directly that the 3% shares were given to her for her governance experience as she now alleges. She accepted that the information of her getting 3% shareholding was mainly from Eleanor. The 3% shares held by GRC is therefore still part of the package and arrangement that Eleanor was handling. Eleanor was the main player in the communication. 65.In the light of the lack of expertise and knowledge in the field of gas supply and the lack of fund raising experience, it is difficult to find that Song gifted the defendants with 49% shares for nothing. The evidence, namely the board resolution, the oral evidence of the independent witnesses and the other circumstantial evidence all indicate that the defendants represented themselves as holding the shares on trust rather than as beneficial owners themselves. 66.I find that the Agreed Arrangement as pleaded by Song is established, and the defendants were holding the 49% shares on trust for Song. 67.The Hong Kong Company Representation is said to have been made at a time when the Project was at its embryonic stage. CNTG BVI and CNTG HK were set up in September and November 2009, before the Framework Agreement was entered into. Whether the holding company is a BVI or a Hong Kong company does not really impact on the operation of the Project. The only reason given by Song as to why it was to be in Hong Kong was that his daughter was in Hong Kong. He relied entirely on Eleanor at the time. Having had the experience of Hong Kong companies under the Shenzhen Vokifone business, it is reasonable to find that he would expect the holding company to be set up in Hong Kong. The CNTG HK was indeed set up. What has happened was the interests in Project was put into CNTG BVI instead of the CNTG HK contrary to the understanding of Song. Song’s understanding is evidenced in the Beijing Ronxing board resolution. It corroborated Song’s case on the Hong Kong Company Representation. In the premises, I find the Hong Kong Company Representation made out. Samson’s Investment and the other representations 68.Mr Yasumoto and Samson knew each other since 1990 and Samson had been employed by him and had also participated in some business jointly with Yasumoto. Samson met Carlye back in 2006 in her capacity as the CEO of the Hong Kong Institute of Directors. In around January 2009, Carlye and Samson met regarding locating office premises for the Hong Kong Institute of Directors. 69.Towards the end of 2009, Carlye mentioned a business opportunity to participate in the Project to Samson. After the brief introduction, Carlye introduced Eleanor to Samson who told him about the Project. He was told primarily by Eleanor that the Chinese government was behind the Project and that they were holding the shares on trust for senior officials in Mainland China. This attracted him and he decided to invest in the Project. A number of offers were made and discussed as to how Samson would invest in the Project. It is clear to me that the Senior Officials Representation was made and that led Samson to make a decision to invest. 70.Samson consulted Yasumoto who supported his decision to invest. Samson therefore informed Eleanor and Carlye that he would take up the offer and paid a deposit of RMB 30 million and he was given 0.5% of the shares of CNTG Gas Group Hong Kong Limited which he understood to be the Project company. 71.There is no dispute that later on, Carlye and Eleanor offered a 3% shareholding of the company that would run the Project for Samson’s investment of RMB130 million. 72.Eleanor arranged a visit to Beijing in January 2010. Samson was asked to join so that he could meet the senior officials. The evidence reveals that the visit was in fact primarily for another business venture that Eleanor was trying to introduce to Song. Samson was asked to go along with Adrian, Alan and Carlye to Beijing and he was told that he would be “interviewed”. Both Song and Samson said they were told not to communicate with each other and that the channel of communication was to be controlled and through Eleanor as a matter of business ethics as she was the middle-man. They abide by that. 73.The one relevant matter in the Beijing visit is the breakfast meeting at the Jockey Club, which the defendants allege the shareholding was agreed upon. Song denies that. I prefer Song’s evidence. Song and Samson was meeting the first time and there was hardly any communication before they sat down at the alleged breakfast meeting. Samson was told not to mention about the 3% before Song. There could not have been any details about the company structure sensibly discussed over a short breakfast. The visit so far as Song was concerned was mainly about another business. Eleanor would not have allowed Song and Samson to directly communicate about the Project and its investment. Song was made aware of Samson’s investment by Eleanor separately. Eleanor was the go-between, the middle-man in control, and she would not have wanted a face to face meeting to discuss matters for her role would then be undermined. Indeed both Song and Samson stated that they only communicated directly with each other after Song and the defendants have disputes and the financial affairs of the defendants was revealed to Samson. There was then a need to contact each other directly notwithstanding the business ethics of not going past the middle-man. In all, I do not accept the defendants’ case on this alleged breakfast meeting. 74.After the Beijing visit, Samson was told later after returning from Beijing that he had “passed” the “interview”. 75.Furthermore, according to Samson, Eleanor also represented that the senior officials of the PRC Central Government behind the Project would buy back 1.5% of his 3% interest in the Project at RMB 260 million in two years (“Buyback Representation”). He consulted Yasumoto who was then arranged to meet Carlye. 76.Yasumoto gave evidence that supported the evidence of Samson about the Buyback Representation. Samson sought to consult Yasumoto when they were at the airport lounge. After hearing about the Buyback Representation, Yasumoto agreed to make an interest free loan to Samson. Yasumoto gave evidence that he had met with Carlye who had also informed him that the Project had the backing of the Chinese government. Nothing was put to him as to the veracity of the version of events that he had with Carlye and Samson. Doubt was cast as to whether an interest free loan would be made but nothing turns on it and in any event Samson and Yasumoto have a long-standing business relationship. The evidence of Yasumoto reinforced Samson’s evidence and I accept that the Buyback Representation had been made. 77.Yasumoto lent money to Samson and on 5 March 2010, Samson deposited HK$45.7 million into an account as advised by Eleanor which turned out to be the CNTG HK company’s account. 78.A memorandum of understanding dated 5 March 2010 was signed by Eleanor, GRC and WEL[9] setting out the 3% shareholding of WEL. Song and Edmond (on behalf of Adrian) did not sign this memorandum of understanding. 79.On 30 March 2010, the Subscription Agreement and the Shareholders Agreement for the shareholding of CNTG BVI was signed in the office of PC Woo & Co.[10] Song was also present and executed the Agreement. 80.Pursuant to the Subscription Agreement and the Shareholders Agreement, upon completion of payment by Samson, the shareholdings would be as follows:
81.On 15 April 2010, a further HK$ 68.5 million was paid into the bank account as advised by Eleanor, namely that of the CNTG HK. Samson now holds 3% share of CNTG BVI. 82.Eleanor conveyed the investment of Samson to Song around the Beijing visit. This relates to the 49% Representation. 83.According to Eleanor, the arrangement for Samson to have shareholding in the holding company’s level when WEL injected another RMB 100 million more was not accepted by Song initially. It was only after the meeting in Beijing and in particular a breakfast meeting that Song agreed to let WEL to have 3% shareholding in CNTG BVI. This arrangement made at the Beijing visit was then set out in the Subscription Agreement and the Shareholders’ Agreement executed on 30 March 2010. 84.Song however gave another version in his witness statement. He stated that he was told by Eleanor that Samson would agree to invest RMB 130 million for 49% shares interest in the Project and to provide an office space for CNTG HK in Worldwide House. A document evidencing this 49% purchase by Samson would then be arranged. Later, just before the execution of the Agreements, Eleanor told Song that the investment would only be represented by 3% shareholding by reason of the Secret Holding Representation conveyed to him by Eleanor. 85.In his oral evidence in chief, Song said that Eleanor told him that RMB 130 million investment from the investor was for 3% shareholding. He said he was surprised that the investor would only get 3% for RMB 130 million and why would anyone be as foolish as that when the total amount of investment required was about RMB 200 million capital. He asked Eleanor how that could be achieved and she said that she had made a lot of promises including how to expand the company. Song said he did not care provided he held the majority and he was merely concerned with the success of the Project. 86.It is clear that Song was aware of the 3% shareholding would be given to the investor, Samson. The 49% Representation allegation is dismissed. 87.The Documentation Representation and the Secret Holding Representation are premised on the 49% Representation and they are also dismissed. 88.The evidence of Adrian is, so far as is relevant, the same as that of Eleanor and he denies the representations allegedly made to Samson. Adrian has been in the insurance industry all along and was only involved in the telecom business by reason of the introduction of Raymond Chung and Conway. He has no experience in the oil and gas industry and no technological background or skills. He said he had some experience in raising funds but for the reasons set out below, I do not agree. 89.The plaintiff has called Mr Herbert Charles Jahnke Jr to give evidence regarding the raising of funds by Eleanor and Adrian. He was introduced to them through his friends in Beijing and brought with him potential investor from Texas in February 2010 and attended CNTG’s office on the 10th floor of Worldwide House. He described the presentation by Eleanor and Adrian as “a disaster — basically it consisted of a jumbled stack of charts about why natural gas would be important in China in the years to come — which was a ‘given’ to begin with.” As a result of the lack of projections or information on returns on investments, the potential investor was not interested and he said he felt embarrassed by having brought the investor to hear such presentation. Mr Jahnke Jr also pointed out that Eleanor and Adrian had all along represented to him that CNTG was partially owned by CNPC. They distributed namecards bearing the CNPC logo and also the Hong Kong office had the CNPC logo as well. On that basis he had brought three potential investors all of whom were dissatisfied with the information and presentation done by Eleanor and Adrian. Furthermore he said he was not allowed to talk directly to Samson or Song. He was engaged in the form of a consulting agreement which expired in January 2011 and his services was not renewed. When he was engaged, he was given representation by Eleanor that the persons behind the Projects were “leaders in Beijing” and he understood that Eleanor and Adrian were acting as nominee shareholders of the companies. That, he said, accords with his understanding that in China, leaders would have their shareholding held by nominees. He also gave clear and uncontroverted evidence that from his encounters with Adrian, Eleanor, Carlye and Edmond, none of them had any experience in the energy or natural gas business. This understanding of his, based on his encounters with the defendants at the time, is consistent with my finding based on the cross-examination of these defendants. Furthermore, from his evidence, the defendants are not only unfamiliar with the energy and natural gas business, they were also incompetent or unfamiliar with the raising of funds. The defendants did not even provide any proof of any contract with CNPC at these presentations and therefore understandably none of the presentations resulted in investment. 90.Mr Jahnke Jr ’s evidence is important as he has no interest in this case and reveals a fair and objective assessment of the ability of the defendants and what they had represented to him. 91.Adrian has no experience in the energy or gas business. It is pleaded that his “strong financial background and connection” was the reason why Song gave him the 23% shares. I do not accept that. His background is in the insurance, and whilst he tried to explain he was involved in devising a financial product for sale, the evidence is not impressive. He was not carrying out his alleged role without remuneration as he received a handsome consultancy fee as seen in the accounts reviewed by Henry Ha & Co attached to the Supplemental Statement of Samson. This is contradictory to the defence that the 23% shareholding was given in return for his so called attributes. His lack of knowledge and experience in raising funds for the Project is well demonstrated by what actually happened as explained by Mr Jahnke Jr so much so that he felt embarrassed to bring in new potential investors through his connections. 92.As to Edmond, he accepted that he was merely a nominee and had no involvement. He had his own business and therefore does not tender useful or material evidence relating to the issues in this case. 93.Carlye gave evidence that Samson was respectful to Conway and would consult them on and off for advice given their “commercial sense and extensive business experience”. As to Song, she pointed out, and Song confirmed, that Song respected her and called her “老师”. She denied making any of the alleged representations. She produced, at the hearing, a note that she had taken in her own notebook regarding the meeting on 30 March 2010 recording the gist of the discussions. On that basis, she confirmed that the lawyer in PC Woo & Co did explain to Song in Putonghua the contents of 30 March 2010 Agreements. This shows that Song was told about these Agreements contrary to his evidence. This however does not vary the trust arrangement in place. She said she was not involved in capital raising but her late husband, Conway, had introduced potential investors such as Polytec Asset Holdings Limited for the Project. 94.Song fairly accepted that he respected Carlye and Conway but denied that he gifted them the shares. I agree. It makes no commercial sense. In any event, the alleged “gift” arrangement was allegedly conveyed to Carlye by Eleanor, a witness I find not credible at all. 95.The only contribution that Carlye said she made to the Project was to introduce Song to some important people in Hong Kong over a cocktail. It was a mere courtesy greeting and nothing was followed up. It is difficult to call that a contribution to the Project. Carlye admitted she was not involved in capital raising nor the day to day running of the company. Yet the financial documents show that she and her late husband totally received a significant amount per month as salaries. Kelvin Wong’s role and Samson’s affirmation 96.Eleanor met Kelvin Wong back in 2004. His wife or girlfriend is Jasmine Leung whose company Eleanor worked in before 2004. Kelvin’s involvement in this case was first his preparation of an affirmation for Samson in HCMP 1823 of 2011 brought by Song against CNTG HK, which is now used by the defendants to discredit Samson especially in relation to the breakfast meeting in Beijing Jockey Club. He was asked to make the affirmation on behalf of the defendants who were the intended interveners in that case. Samson admitted he was not accurate but as it was drafted by Kelvin Wong and finalised after an internal discussion amongst all the defendants by exchange of emails to approve it, Samson signed off the Affirmation. 97.Kelvin was also involved in the preparation of some meeting minutes to justify the payments made out of the company accounts and Samson was asked to and did sign them. None of these meetings took place nor was there any discussion about those matters before these purported minutes were prepared. The defendants themselves did not give evidence to suggest that those discussions took place nor that the decisions were made by the board. Samson was asked to sign on the basis that the minutes should be done as Eleanor had done a lot of things to protect the company and Kelvin did not want her to be pursued for the money in the light of the disputes between Song and the defendants. Kelvin also told Samson that he needed those minutes to confirm that Eleanor took the money out of the company with approval. Samson did sign but he frankly admitted that it was wrong of him to do so and these were created ex post facto and he was not aware of any of these transactions before the creation of these purported minutes and before he had sight of the financial documentations. The defendants did not, for they could not, dispute that they were created. Edmond’s evidence confirmed this. It was not even recording a conclusion of what was discussed or agreed in the past but a creation of an approval of something not even discussed before. This creation of minutes happened at the time when Song and the defendants began to have disputes. 98.It is unfortunate that such events have occurred. It does cast doubt on the reliability of Samson’s evidence but all in all apart from this, Samson’s evidence and that of the independent witnesses do support the case of the plaintiffs as found above. These events also support the secrecy and unusual way in which the defendants have been managing the finances. They lend weight to my finding of their lack of credibility. 99.The defendant’s case is that the RMB 130 million investment of Samson has all been spent on the capital costs of the Project that are related to the various joint venture companies with CNPC. 100.Samson stated in his witness statement that in early 2011 he sensed there was some tension amongst Song, Eleanor and Adrian. Legal proceedings were commenced against each other. In around mid-2011, Samson started to ask to inspect the financial statements and management accounts of the CNTG HK when he knew for the first time that that had the same name as the CNTG BVI save for the “s” in “Investment”. The request for information made in July 2011 did not yield to prompt response. Ultimately, Samson had sight of the management accounts and realised that his investment of RMB 130 million had been primarily allocated to Eleanor, Adrian and other individuals such as the brother of Eleanor, Jonathan Chan, and Kelvin Wong’s wife or girlfriend. He confronted Eleanor and Adrian in or around July to September 2011 but to no avail. In early 2012, Eleanor and Adrian and their staff suddenly vacated the office premises at the 10th floor Worldwide House and he was not able to reach them nor Annie Chan, the chief financial officer. As a result, he decided to try and contact Song and it was then that the fraudulent scheme, as he called it, was revealed. 101.In February 2012, Song met Samson for the first time and realised that they were given different accounts of the arrangements by the defendants. 102.Around this time when Samson was querying the finances conducted by the defendants, the defendants tried to meet Yasumoto without letting Samson know. In a concert, the defendants arranged for Song’s daughter to be involved by approaching Yasumoto to secretly give him a letter. Yet, given the long-term relationship between Yasumoto and Samson, Yasumoto discussed with Samson who then actually persuaded Yasumoto to meet with Carlye. Yasumoto brought with him a lawyer to the meeting with Carlye but he was asked to leave by Carlye. After the lawyer left, Carlye told Yasumoto that Samson was not to be trusted. Yasumoto was not interested in Carlye’s comments on Samson and focused on the finances. These meetings, probably around three according to Yasumoto, took place after Samson was asking in vain to inspect the management accounts and other financial documents. Yasumoto was aware of the irregularities of the finances concerning one of the projects and asked Carlye about that. 103.Notwithstanding Carlye’s promise to provide financial statements and to follow up on the return for the payments that have been improperly made, no such information was provided and no further communication was made by Carlye to Yasumoto. 104.As to the use of the funds, in the Supplemental Statement of Samson, he provided a report by Henry Ha & Co, a certified public accountant in auditing the figures and identified a number of irregularities. This includes unauthorised payments to companies outside the Group relating to the Project. The expenditure that can be seen from these accounts is in the order of HK$150 million in less than two years. Moneys have been paid to outside companies such as a CNTG Energies Group Limited which is related to Annie Chan. It was apparently controlled by a person known as Law Wai Kuen, a good friend of Adrian according to him. The moneys were paid into the CNTG Energies Group Limited in relation to a Jiangsu project which is a property development project and not the Project under consideration here. Neither Song nor Samson were aware of these at the material time. There are a number of items that have been paid out which would have caused concern and these included salary of $3.1 million to Eleanor, $2.57 million to Annie, $3.04 million to Adrian as consultancy fees, monthly payment of $160,000 to Conway from April to December 2010, salary to Carlye at $40,000 a month from April to December 2010. There were also items of payments that were made but the recipient is not clear. Hence, by early 2012, the investment of the RMB 130 million of Samson had been more or less disbursed according to the financial documentations and the report of Henry Ha & Co. 105.The way the defendants were managing the finances is, to say the least, troubling. 106.The defendants have sought to adduce evidence which are not relevant. Here are some examples. 107.In Eleanor’s statement she referred to a lawyer friend of Samson, Mr Harry Du King & Wood Company as allegedly playing a “pivotal role” to the decision of the investment that was ultimately made and she referred to an email from Mr Du. Mr Du came to give evidence and in my view, this part of the evidence of Eleanor is but a red herring. He clearly and fairly explained the email that was referred to by Eleanor was merely helping Samson to do some translation. King & Wood was not retained and nothing turns on this. 108.The defendants also brought in Song’s daughter and about how much trust she placed on them. It goes nowhere. 109.Much evidence was led also about whether Song spoke Japanese or played table-tennis with Samson in Beijing. It was a waste of the court’s time. 110.The Agreed Arrangement has been established. The defendants’ pleaded defence of their being “gifted” the shareholding is far-fetched and not accepted. On the basis of the Agreed Arrangement and the Hong Kong Company Representation as evidenced in the board resolution of Beijing Rongxin, the defendants held the original 49%, now 46% shareholding on trust for Song. 111.I also find that the misrepresentations of the Senior Official and Buy Back Representations have been established. They led to the investment by Samson. 112.Song is entitled to an order that the defendants do transfer their shares to him. The declaration sought, that he is the rightful owner of the 46% shareholding in CNTG BVI is also granted. 113.Both Song and Samson asked for damages to be assessed. 114.Given that liability in favour of Samson has been established, prima facie, Samson should be entitled to damages. 115.There is no evidence adduced at this trial as to the value of the 3% shareholding nor the value of the business. 116.The defendants argue that causation effectively has not been established because irrespective of the misrepresentation, Samson was willing to pay RMB 30 million for 0.5% shareholding in the Project company. Hence, the defendants contend, irrespective of the Buyback Representation, Samson would have agreed to pay RMB 180 million for 3% shares. 117.It was also pointed out that there is no application on the part of Samson to seek a rescission of the agreement to invest. In other words he would continue to hold the 3% shareholding and therefore on that basis it is inappropriate to order damages in the sum of RMB 130 million to be paid to Samson. The issue is whether an order for damages to be assessed should be given in light of the absence of any evidence at this trial. 118.Based on the evidence and arguments before the court, Samson should not be entitled to the return of the RMB 130 million in its primary prayer for relief. Samson is the beneficial owner of the 3% shareholding in CNTG BVI in return for its RMB 130 million investment. Whilst the misrepresentation may have caused Samson to make such investment, on balance, in the light of his willingness to acquire 0.5% interest at RMB 30 million in the absence of the Buyback Representation and in the absence of evidence to ascertain the value of the 3% shareholding, the relief sought by Samson for damages to be assessed is dismissed. The defendants pointed out that the monetary disputes regarding the use of funds and the value of the business is dealt with in the BVI proceeding. The BVI proceeding is the proper forum for such quantification and valuation exercise to be done. The 2nd plaintiff has failed to establish that an order be granted for damages to be assessed in this action. 119.Costs should follow the event and the defendants are to bear and pay the plaintiffs’ costs, to be taxed if not agreed.
Mr John Litton and Mr Tony Chow, instructed by C L Chow & Macksion Chan, for the 1st to 3rd plaintiffs Mr Bruce Lau and Ms Margaret Chan, instructed by William Sin & So, for the 1st to 5th defendants [1] Witness Statement of Song Lian Zhong, ¶¶12 — 13 [2] Bundle C1, pp 365 – 371. [3] Witness Statement of Chan Sze Wan, ¶11 [4] Great River Corporation Limited was owned by Carlye and Mr Conway. [5] Witness Statement of Chan Sze Wan, ¶¶11-15. [6] Witness Statement of Chan Sze Wan, ¶20 [7] Bundle C3, p 1080, pp 1068 – 1079. [8] Bundle C1, pp 582 – 584. [9] Bundle C1, pp 372-381. [10] Bundle C1, p 382. | |||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under HCA 277/2013