Eternal Billion Industrial Ltd v. Rcl Semiconductors Ltd
Read the full judgment text of HCA 1459/2012 on BabelCite. This High Court CFI judgment was delivered on 13 July 2018.
1. RCL Semiconductors Limited (“ RCL ”) and Legend Merit Limited (“ LML ”) were related companies in the electronic components industry. Green Planet Group Limited (“ Green ”), Primebase Investment Limited (“ Primebase ”) with subsequent name change to GR8 Industries Limited (“ GR8 ”), Newlink Technologies Limited (“ Newlink ”) and Powtek Electronics Industries Limited (“ Powtek ”) (collectively, “ Four Shareholders ”) were the major shareholders of RCL since early 2008 and all shareholders of L
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HCA 1459/2012 & [2018] HKCFI 1611 HCA 1459/2012 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE HIGH COURT ACTION NO 1459 OF 2012 ________________________
________________________ and HCA692/2013 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE HIGH COURT ACTION NO 692 OF 2013 ____________
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________________________ JUDGMENT ________________________ I. INTRODUCTION 1.RCL Semiconductors Limited (“RCL”) and Legend Merit Limited (“LML”) were related companies in the electronic components industry. Green Planet Group Limited (“Green”), Primebase Investment Limited (“Primebase”) with subsequent name change to GR8 Industries Limited (“GR8”), Newlink Technologies Limited (“Newlink”) and Powtek Electronics Industries Limited (“Powtek”) (collectively, “Four Shareholders”) were the major shareholders of RCL since early 2008 and all shareholders of LML since late 2008. For convenience, RCL, LML, Green, Newlink and Primbase/GR8 are referred to as “Ps” below, and Lai Kam Yin Danny (“Danny”) and Powtek are referred to as “Ds” below. “Bx/xx” in this Judgment refers to the volume/pagination of the trial bundles. Unless otherwise stated, monetary sums below are rounded to exclude cents. 2.RCL RCL was established in/about 1979 with a factory in Tai Po (“Factory”). RCL’s issued share capital was 236,827,000 shares with 235,077,000 shares held by the Four Shareholders (“RCL Share Pie”). Primebase’s/GR8’s shareholders were Marcus Lee (“Marcus”) and GR8 Global Ventures Limited (“GVL”), and its financial affairs were supervised by group financial controller Nam Yiu Hung Patrick (“Patrick”). Powtek was established in 2006 to hold interests in RCL. Danny was Powtek’s director and 12.5% shareholder (B8/1528). 3.RCL’s board of directors (“RCL Board”) included Tony Chang (representing Green, “Tony”), Marcus (representing Primebase/GR8), Li Shaowu (representing Newlink, “Shaowu”), Danny (representing Powtek) and Chan Kwan Shing Philip (RCL’s managing director (“MD”), “Philip”), and Marcus was the chairman. Danny was a director of RCL and LML until 24 April 2012 (according to Philip) or 2 May 2012 (according to Danny). Since August 2007 Danny was the sales/marketing director (“Marketing Director”) in charge of the sales/ marketing department (“Marketing Department”) that served RCL and later LML and 利芯華深圳貿易有限公司 (“LSW”). Danny held such position until 2 April 2012 (according to Ps) or 22 February 2012 (according to Ds), but I accept he was practically relieved of his duties at the latter date (B8/1523). On 9 May 2008 GVL seconded Philip to RCL, and he was appointed as RCL’s MD and director at the end of June 2008. In/about November 2011, Philip resigned as RCL’s and LML’s director and was replaced by Patrick. Philip remained as RCL’s MD until about end of December 2011 and continued as consultant until mid-May 2012. 4.LML LML was acquired in November 2008 to hold fixed assets and loan liabilities from RCL. Marcus thought it had little practical operation, but the monthly reports on invoiced/delivered sales (“Actual Sales”) of self-manufactured products (“SMP”) and trade/outsource products (“TOP”) by RCL, LML and LSW (B4/1419.01-1419.07, “Actual Sales Reports”) from June to December 2011 prepared by Leung Shuk Fan (sales coordinator of the Marketing Department, “Fan”) showed LML had some sales. LML’s issued share capital was 10,000 shares (“LML Share Pie”), and the Four Shareholders held LML shares in the same proportion as their shareholdings in RCL. LML’s board of directors (“LML Board”) included Marcus, Tony, Shaowu, Danny and Philip (later Patrick) with Marcus as the chairman. 5.LSW LSW was LML’s 100% owned subsidiary company in Shenzhen, Mainland China with Danny as its “法人” (replaced by Shaowu in late November 2011 – B8/1589). LSW was probably set up in 2009 to carry on trading business in Mainland China. 6.Danny Danny read electrical engineering in Taiwan. From 1982 to 1987, he was employed by Philips Electronics Hong Kong Limited (“Philips”) in production management. From 1987 until 2007 Danny had his own trading business in electronic components in Hong Kong and Mainland China. He had over 30 years’ experience in such industry. 7.Eternal Billion Industrial Limited (“EB”) EB’s directors and shareholders were Danny’s brother Lai Kam Kwan (“Brother”) and his wife (B8/1507). Powtek shared EB’s registered office through Danny’s facilitation, but these 2 companies had little business dealings with each other. II. HCA692/2013 8.Ps’ claim RCL’s and LML’s business was in a bad way with discussion of closing down manufacturing operations. In/about April 2011, Danny gave an oral undertaking (“Undertaking”) to persuade (i) RCL and LML to continue their business and (ii) Green, Newlink and Primebase to continue their financial support:
For convenience, Danny’s personal liability to pay (a) the Combined Shortfall under the Undertaking and/or 25/5/11 Agreement (collectively, “Danny’s Undertaking”) and/or (b) the Shortfall (paragraph 10(b) below) under the Varied Undertaking (paragraph 11 below) is referred to as “Sales Commitment” below. 9.Relying on the Undertaking, RCL and LML continued their business, and Green, Newlink and Primebase continued their financial support. The Undertaking was embodied in an agreement in writing dated 25 May 2011 by Green, Newlink, Powtek, Primebase, RCL, LML and Danny (B3/387-395, “25/5/11 Agreement”), and clause 3 thereof (“Clause 3”) provided as follows:
10.Ps claimed in/about early June 2011 Philip (representing Ps) and Danny (representing Ds) orally and by conduct agreed as follows:
11.The Combined Actual Sales Value exceeded the Combined Minimum Value for each month of March, April and May 2011, but Ps claimed the Actual Sales Value was less than the Minimum Value for each month from June to December 2011:
So Danny had to personally pay the Shortfall (US$3,032,872.00/ HK$23,595,744.00) under Danny’s Undertaking varied by the Variations (“Varied Undertaking”). On 25 April 2013, Ps commenced HCA692/2013 against Danny to claim such Shortfall payable to RCL and LML, or the reduced Shortfall (US$2,865,634.00 or HK$22,294,634.00) should RCL succeed in resisting EB’s claim for HK$1,301,110.00 in HCA1459/2012. 12.Ds’ defence RCL’s and LML’s business was unsatisfactory. Danny claimed he asked the RCL/LML Boards and Four Shareholders to (a) overhaul RCL’s and LML’s management, (b) inject sufficient capital to support a reform/sales plan and (c) implement a sales incentive programme for sales staff, which were conditions or conditions precedent of the 25/5/11 Agreement (“Preconditions”). Ds averred Ps failed to fulfil the Preconditions, and an internal audit in July to September 2011 (“Audit”) caused substantial disruption to RCL’s and LML’s production/ sales activities. 13.Danny gave RCL and LML the guarantee provided in the 25/5/11 Agreement, but the “Combined Sales” in Clause 3 and/or 25/5/11 Sales Plan concerned the value of customer purchase orders (“POs”) (“PO Value”) for SMP/TOP (“Combined PO Value”) for each month during the Commitment Period. Ds claimed there were implied terms, conditions or conditions precedent to such guarantee that RCL and LML had to (a) produce/deliver sufficient quantity of SMP with sufficient quality to meet the Combined Minimum Value (“Quality Condition”) and/or (b) properly entertain complaints over delivered SMP to retain customers and encourage them to continually take delivery of SMP as ordered (“Complaint Condition”) (collectively, “Implied Conditions”). 14.Ds claimed the Combined PO Value of solicited/secured POs was more than the Combined Minimum Value, but RCL’s and LML’s SMP failed to satisfy such POs. Even if Actual Sales (assuming they were the relevant criterion) had declined from June to December 2011 as Ps alleged, it was due to RCL’s and LML’s breach of the Implied Conditions, so customers stopped/withheld delivery of ordered SMP and/or cancelled their POs and/or refused to take further delivery of SMP they had ordered. 15.Ds denied the Variations, and averred RCL’s and LML’s inability to maintain/increase TOP sales was due to RCL’s failure to settle supplier’s invoices that caused product supplies to dry up and Ps to unilaterally withdraw their claim for variance/shortfall for TOP sales. But even if the Variations did exist (which Ds denied), SMP sales decreased because of RCL’s and LML’s inability to finance their production. 16.In summary, Ds claimed the Preconditions had not been met (so the 25/5/11 Agreement was not binding on them) and/or Ps were in breach of the Implied Conditions or in repudiation of the 25/5/11 Agreement or Clause 3, so the Sales Commitment was released/discharged as at the date of the alleged Variations or of Ps’ failure to finance trade activities envisaged in the 25/5/11 Sales Plan. 17.P’s reply Ps averred:
Ps denied (i) existence of the Implied Conditions, (ii) breach or repudiation of the 25/5/11 Agreement and/or (iii) repudiation of Danny’s Undertaking due to the Variations, so Danny was still bound by the Sales Commitment and/or Varied Undertaking. 18.Miscellaneous contentions Ds raised various miscellaneous defences (which Ps denied) as follows:
III. HCA1459/2012 19.AUK Corporation (“AUK”) was a Korean supplier of TOP that RCL resold to its customers. By May 2011 RCL owed AUK trade debt of US$335,772.50 (HK$2,612,310.00, “AUK Debt”). EB claimed RCL requested EB to settle the AUK Debt on its behalf, and by an oral agreement made on/about 20 May 2011 between Danny (for EB and Powtek) and Philip (for RCL and LML) and evidenced by a written “Agreement” dated 20 May 2011 (“20/5/11 Document”), it was agreed EB would pay the AUK Debt to AUK on behalf of RCL, and out of such payment HK$1,000,000.00 would be treated as shareholder’s loan by Powtek to RCL and/or LML (terms to be worked out between EB and Powtek) and RCL would repay HK$1,612,310.00 to EB (repayment schedule to be worked out between RCL and EB). 20.On/about 23 May 2011, EB caused US$335,772.50 to be paid to AUK for RCL (“AUK Payment”). It was said (a) HK$1,000,000.00 of such sum was treated as shareholder’s loan by Powtek to RCL and/or LML, (b) Danny (for EB and Powtek) and Philip (for RCL and LML) signed the 20/5/11 Document in July 2011, and (c) RCL made partial payment of US$40,000.00 (HK$311,200.00), so HK$1,612,310.00 – HK$311,200.00 = HK$1,301,110.00 (“AUK Balance”) was still outstanding despite demands. On 17 August 2012, EB commenced HCA1459/2012 against RCL to claim for payment of the AUK Balance. 21.But RCL denied it (a) requested EB to pay the AUK Debt, (b) was indebted to EB for HK$1,612,310.00 or at all and/or (c) entered into any legally binding agreement with EB. RCL alleged that Danny without authority from or notice to RCL procured the AUK Payment on 23 May 2011, or alternatively the AUK Payment in May 2011 was past (and hence not valid) consideration for the 20/5/11 Document in July 2011, which did not create any legally binding obligation on RCL to pay EB, or further alternatively Clause 3 was merely an agreement to agree (ie RCL and EB were to “work out a repayment schedule later on”) (which RCL denied), so it was not legally binding or too vague to be enforced. 22.RCL claimed (but EB denied) at/about the end of May 2011 it took the benefit of the AUK Payment so it agreed with Danny that (a) HK$ equivalent for the AUK Payment was HK$2,612,310.00, (b) HK$1,000,000.00 out of such sum would be treated as Danny’s Loan to be booked as an interest-free loan from Powtek to RCL or LML with no fixed repayment date, and (c) RCL and Danny would continue to discuss repayment of the outstanding HK$1,612,310.00. On/about 7 June 2011, RCL gave Danny a cheque for HK$311,200.00 that named EB as payee at Danny’s request, so the AUK Balance due to Danny was HK$1,301,110.00. RCL claimed (but EB denied) Danny subsequently agreed with RCL and LML for the AUK Balance to be set-off against his personal liability under the Sales Commitment and/or Varied Undertaking. RCL counterclaimed for declarations that (i) the 20/5/11 Document was not legally binding and (ii) it was not indebted to EB for US$335,772.50 or other sum arising out of the AUK Payment. IV. WITNESSES 23.Ps called Philip, Marcus and Ngan Lit Ngai (“Ngan”) as witnesses. Ds and EB called Danny, Kwok Chi Hoi Simon (also known as “郭浦宜”, “Simon”) and Cheng Kam (“Kam”) as witnesses. 24.Ps’ witnesses presented themselves as being straightforward and open, and the key witnesses Philip and Marcus came across as fair-handed executives giving direct/consistent answers that were largely borne out by contemporaneous evidence:
25.The same could not be said of the witnesses called by Ds and EB. Danny’s evidence left much to be desired, and the evidence of Simon and Kam who were called to corroborate Ds’ case was also unsatisfactory. I find it unsafe to rely on their evidence unless supported by other evidence that I find reliable. 26.Danny was an experienced businessman but not a credible witness. His evidence was a tangled web of half-truths, mistaken recollections, inconsistencies, evasion, dissembling and concoction. The incredible nature of some of Danny’s evidence and the fact it was replete with embellishments and attempts to downplay significant matters were obvious, especially in face of contemporaneous documents. This led to unhappy denial of obvious matters that did not accord with Ds’ and/or EB’s case often with rambling and evasive explanations to trivialise difficult points. 27.Simon was a sales manager for various companies dealing in electronic components, professional equipment and IT products, but he was doing part-time work when Danny asked him to join RCL on 9 June 2011 as Danny’s assistant (rather than manager as he had no experience in production matters). Simon claimed Marcus offered him (but he declined) the position of Marketing Director 3 times, and he tendered his resignation to Danny on 30 September 2011 and left RCL on 17 October 2011 after working under Danny’s supervision for about 4 months. Much of Simon’s evidence sought to put an unrealistic spin on simple facts coloured by subjective suspicion of intrigue. He was inexperienced in RCL’s SMP and claimed to have learned about RCL’s production/operations through brief liaison with other staff, but his evidence was patently partial with obvious eagerness to support Ds’ case by blaming Philip and others, and by backtracking from his previous criticisms of the Marketing Department. Marcus never gave him any authority to take over management (“接替管理”) to effect changes (“開始整頓”) as Kam alleged. On balance, I do not believe Simon was ever offered the position of Marketing Director. I find his evidence generally unreliable. 28.Kam was a coordinator at the Shenzhen office, and was employed by RCL from 27 September 2007 to 30 June 2010 and by LSW from 1 July 2010 to May 2012. Her work was not customer-facing, and did not concern production/technical matters. Upon receipt of a PO, she would check for available inventory in Shenzhen before passing it to “對口部門” in Hong Kong. Upon receipt of customer complaint, she would register the complaint and pass it to Hong Kong for technical investigation and follow up. Kam was essentially an administrative conduit, but in partial attempts to support Ds’ attack against RCL’s manufacturing operations (a) she exaggerated her duties to include preliminary investigation of complaints by, say, visual checking of complaint samples allegedly for reducing investigation effort/time, and (b) she made bold interpretation of technical analysis/findings to support alleged reasonableness and seriousness of customer complaints. Kam claimed Danny gave her documents from which she made selections to attach to her witness statement, but much of her evidence in this respect was essentially arguing Ds’ case, which gave a distinct aura of partiality that reflected her desire to help Ds avoid liability. I find Kam’s evidence generally unreliable. V. BACKGROUND OF RCL 29.RCL mainly produced integrated circuits for, say, calculators, clocks/watches and “melodies”. Danny (jointly with other investors) was interested in acquiring shares in RCL, and Powtek was formed in/about 2006 for such purpose. But over the years RCL with its out-of-date equipment and techniques gradually lost competitiveness in terms of quality and price, and it was in such a bad way it almost had to close down in 2007. To help RCL “轉營”, Powtek began to invest in RCL by supplying equipment, arranging production of more popular products, and introducing new product lines. In 2008 RCL found a new shareholder in Primebase, and the Four Shareholders together acquired majority shareholding in RCL. In 2008 RCL started to develop transistors and T596,[1] but having no experience in this area RCL was unable to bulk manufacture with stable quality even though they could produce “合格” transistors and T596. VI. OVERVIEW OF RCL’S AND LML’S CAPITAL STRUCTURE 30.The Four Shareholders had to advance shareholders’ loans to finance RCL’s (and later LML’s) operations, but one or some of them might not be able to pay in full or in part its/their portions of such loans that were proportionate to its/their shareholdings in RCL (and LML) (“Proportionate Portion(s)”). Consequently, the shareholding(s) of such shareholder(s) (“Defaulting Shareholder(s)”) were diluted by transfer of some of its/their RCL (and LML) shares to shareholder(s) who paid such Proportionate Portion(s) or part thereof on its/their behalf (“Paying Shareholder(s)”) pursuant to the Formula, and the Paying and Defaulting Shareholder(s) ended up having shareholdings in RCL (and LML) proportionate to their aggregate shareholders’ loans. This arrangement enabled the Paying Shareholder(s) to gain larger interest/control in RCL (and LML) by making more loan advances, which made business sense in view of the risky nature of such extra investment in RCL (and LML) that were not doing well at all, and which commercial rationale was explained in the 30/3/09 Agreement (see Part X below) and implemented by various supplemental shareholders’ agreements over the years. 31.Danny suggested RCL’s and LML’s existing share capital structure might be incorrect due to invalidity of various shareholders’ agreements, but Ds agreed that over the years RCL, LML and the Four Shareholders had proceeded on the basis RCL’s and LML’s existing share capital structure was effective. I refer to the discussion below, but suffice to say here I disagree the Formula did not work or Ds did not know how it worked. Rather, Danny for himself and Powtek knew how the Formula adopted in the shareholders’ agreements worked. 32.I accept Philip circulated each shareholders’ agreement to the Four Shareholders for their review, and explained to them how the Formula worked. As Marcus said, each RCL director who represented the Four Shareholders should understand the terms/figures in each such agreement and how the Formula worked because each of the Four Shareholders had to decide whether to advance its Proportionate Portion of each additional shareholders’ loan. By operation of the Formula in such agreements, there were to Ds’ knowledge successive dilutions of inter alia Powtek’s shareholdings in RCL and LML. I disagree (a) Powtek declined to advance its Proportionate Portions because it did not understand such arrangements which had been agreed and acted upon time and again and/or (b) there was any mistake of fact and/or uncertainty as set out in paragraph 18(b) above. 33.Philip prepared an excel schedule of shareholders’ loans to RCL and LML (and, where appropriate, RCL’s share capital structure) up to the 2nd “6th Additional Fund” (B2/281.01, “Schedule 1”). Philip’s email to Marcus, Tony and Danny dated 29 October 2011 (B13/2576-2577.01) attached a similar schedule up to the “5th Additional Fund” with (a) breakdown of advances for various shareholders’ loans (“Breakdown”)[2] and (b) projected shareholder’s loan by Powtek to RCL and LML also titled “5th Additional Fund” that had not happened. The particulars up to the “5th Additional Fund” (not the projected “5th Additional Fund”) in Schedules 1-2 were the same, so I shall refer to them by column numbers in Schedule 1 (“column xx”). VII. 20/2/08 SHAREHOLDERS’ AGREEMENT 34.According to the agreement dated 20 February 2008 (B3/317-332) by Green, Newlink, Powtek, Primebase and RCL, Green held the entire RCL Share Pie of 235,077,000 RCL shares[3] whilst others held the remaining 1,750,000 RCL shares (column 1). Green agreed to transfer 42,313,860, 23,507,700 and 94,030,800 RCL shares to Newlink, Powtek and Primebase respectively (clause 2.1 at B3/319-320), and upon such transfer Primbase, Green, Newlink, Powtek and others respectively held 94,030,800 (39.70%), 75,224,640 (31.76%), 42,313,860 (17.87%), 23,507,700 (9.93%) and 1,750,000 (0.74%) RCL shares.[4] Putting aside the 0.74% minority shareholders, Primebase, Green, Newlink and Powtek respectively held 40%, 32%, 18% and 10% of the RCL Share Pie of 235,077,000 RCL shares.[5] Newlink, Powtek and Primebase respectively agreed to advance HK$2,000,000.00, HK$2,000,000.00 and HK$20,000,000.00 to RCL (clause 3.1 at B3/320). Upon Green’s transfer of its RCL shares to Primebase, Newlink and Powtek under such agreement, and on the basis of (a) the Four Shareholders advancing their Proportionate Portions and (b) Primebase advancing HK$20,000,000.00 (40%) to RCL, Green, Newlink and Powtek must have made respective aggregate advances[6] of HK$16,000,000.00 (32%), HK$9,000,000.00 (18%) and HK$5,000,000.00 (10%) to RCL (column 4). VIII. 1/8/08 SHAREHOLDERS’ AGREEMENT 35.In June 2008, Philip became RCL’s MD and recruited Amy Pak (“Amy”) as accounting manager. By a supplemental shareholders’ agreement dated 1 August 2008 by Green, Newlink, Powtek, Primebase and RCL (B3/333-339), the Four Shareholders agreed to advance additional shareholders’ loan of HK$70,000,000.00 to RCL in their Proportionate Portions with (a) HK$35,000,000.00 to be advanced in 2 weeks (“1st Additional Fund”) and (b) HK$35,000,000.00 to be advanced in 2 weeks from RCL’s written notice (clause 1.1 at B3/335). Green, Newlink and Powtek were unable to advance their Proportionate Portions, but Primebase agreed to advance on their behalf, so Green, Newlink, Powtek and Primebase respectively agreed to advance HK$5,080,000.00, nil, HK$1,400,000.00 and HK$28,520,000.00 to RCL by way of shareholders’ loans (clause 1.2 at B/335 and column 6). 36.By clause 1.3 of such agreement (B3/335-336), Primebase would make advance on behalf of Green, Newlink and Powtek to make up their Proportionate Portions provided they would sell/transfer to Primebase such numbers of RCL shares as determined by the formula of A/C x B – D (“Formula”) at a nominal price of HK$1.00 with A, B, C and D defined as follows:
The Breakdown showed Primebase, Green and Powtek advanced the 1st Additional Fund to RCL between July 2008 and March 2009. Thus, the aggregate shareholders’ loans by Primebase, Green, Newlink and Powtek to RCL were HK$48,520,000.00 (57.082%), HK$21,080,000.00 (24.800%), HK$9,000,000.00 (10.588%) and HK$6,400,000.00 (7.592%) respectively, totalling HK$85,000,000.00 (columns 7-8). IX. 8/12/08 SHAREHOLDERS’ AGREEMENT 37.By a supplemental shareholders’ agreement dated 8 December 2008 by Green, Newlink, Powtek, Primebase and RCL (B3/340-345), the Four Shareholders agreed to advance the 2nd tranche shareholders’ loan of HK$35,000,000.00 to RCL by 3 sub-tranches of HK$12,000,000.00, HK$10,000,000.00 and HK$13,000,000.00 each according to their Proportionate Portions (clause 1.1 at B3/341-342). But Newlink and Powtek were unable to do so, and Primebase agreed to advance on their behalf. Thus, Green, Newlink, Powtek and Primebase agreed to respectively advance HK$2,920,000.00, nil, HK$730,000.00 and HK$8,350,000.00 for the 1st sub-tranche loan of HK$12,000,000.00 (“2nd Additional Fund (1)”) (clause 1.2 at B3/342 and column 8). By clause 1.3 of such agreement (B3/342-343), Primebase would advance the 2nd Additional Fund (1) to RCL on behalf of Newlink and Powtek provided they would sell/transfer to Primebase such number of RCL shares as determined by the Formula at a nominal price of HK$1.00. The Breakdown showed Primebase, Green and Powtek advanced the 2nd Additional Fund (1) to RCL between December 2008 and March 2009. Thus, the aggregate shareholders’ loans by Primebase, Green, Newlink and Powtek to RCL were HK$56,870,000.00 (58.629%), HK$24,000,000.00 (24.742%), HK$9,000,000.00 (9.278%) and HK$7,130,000.00 (7.351%) respectively, totalling HK$97,000,000.00 (columns 10-11). 38.The Breakdown also showed that on 11 March 2009 Primebase advanced a further sum of HK$5,000,000.00 to RCL, so the aggregate shareholders’ loans advanced to RCL by Green, Newlink, Powtek and Primebase as at 31 March 2009 were respectively HK$24,000,000.00, HK$9,000,000.00, HK$7,132,583.50.00 (rounded to HK$7,130,000.00 in column 10) and HK61,870,000.00.[7] X. SETTING UP LML AND 31/3/09 SHAREHOLDERS’ AGREEMENT AND ASSIGNMENT 39.By this time Philip became concerned over a proposal for the Four Shareholders to give some RCL shares to Continental Device India Limited (“CDIL”) in exchange for their technical input (“CDIL Deal”), so Philip suggested setting up LML as “firewall” and transferring to LML the Total Loans then advanced to RCL and certain fixed assets of RCL, and by having LML focus on trading whilst RCL focus on manufacturing. But the CDIL Deal fell through, so it no longer mattered which company carried out which sales function. 40.Pursuant to a shareholders’ agreement dated 31 March 2009 by Green, Newlink, Powtek, Primebase, RCL and LML (“31/3/09 Agreement” – B3/346-351), the Total Loans already advanced to RCL would be assigned to LML so RCL would become indebted to LML for a sum equal to the Total Loans (Recital (C) at B3/347-348 and assignment dated 31 March 2009 by Powtek, RCL and LML (“31/3/09 Assignment”)), and the Four Shareholders would take up LML shares in the same proportion as their RCL shareholdings (clause 1.1 at B3/348) and would make advances in their Proportionate Portions to LML who would in turn advance loan to fund RCL’s requirements, failing which the Paying Shareholder(s) could advance on behalf of the Defaulting Shareholder(s):
41.Plainly, Danny on behalf of Powtek knew and agreed that if a Defaulting Shareholder would not advance its Proportionate Portion and a Paying Shareholder was willing to make up the default/shortfall, the Defaulting Shareholder’s shareholding in RCL and LML would be diluted and the Paying Shareholder’s shareholding would be increased to reflect the advance by the Paying Shareholder for the Defaulting Shareholder, and to have the Four Shareholders’ shareholdings proportional to their aggregate shareholders’ loans to LML for RCL. Since no new RCL and LML shares were issued/allotted, the RCL and LML Share Pies remained the same, and the only way for making the aforesaid adjustment would be by transfer of existing RCL and LML shares (within the RCL and LML Share Pies which would not grow or diminish) between the Paying and Defaulting Shareholders as provided in the 30/3/09 Agreement, so it was impossible to have insufficient RCL and LML shares for such transfer. In my view, the 30/3/09 Agreement was significant as it showed the Four Shareholders understood and accepted the commercial rationale and contractual methodology for advancing shareholders’ loans with corresponding shareholding adjustments. By the 31/3/09 Assignment, Powtek assigned to LML the aggregate shareholders’ loan advanced to RCL, ie HK$7,132,583.50 as at 31 March 2009 (paragraph 38 above). There were similar assignments by Primebase, Green and Newlink. XI. 10/6/09 SHAREHOLDERS’ AGREEMENT 42.As seen in the shareholders’ agreement dated 8 December 2008, the Four Shareholders should have contributed to the 2nd sub-tranche loan of HK$10,000,000.00 and the 3rd sub-tranche loan of HK$13,000,000.00 (totalling HK$23,000,000.00) for the 2nd tranche shareholders’ loan (paragraph 37 above) in their Proportionate Portions (clause 1.1 at B3/341-342). According to a shareholders’ agreement dated 10 June 2009 by Green, Newlink, Powtek, Primebase and RCL (B3/352-357), the Total Loans committed to be advanced to RCL up to 30 May 2009 by Green, Newlink, Powtek and Primebase were respectively HK$24,000,000.00 (21.053%), HK$9,000,000.00 (7.895%), HK$9,130,000.00 (8.009%) and HK$71,870,000.00 (63.044%) (clause 1 at B3/353-354 and columns 13-14). There was no change to the aggregate shareholders’ loans by Green and Newlink, so Powtek and Primebase must have committed to respectively advance HK$2,000,000.00[8] and HK$15,000,000.00[9] in the total sum of HK$17,000,000.00 rather than HK$23,000.000.00 (“2nd Additional Fund (2)” – columns 12-13). 43.The Breakdown showed Primebase advanced a total sum of HK$15,000,000.00 to RCL by paying HK$5,000,000.00 each on 11 March, 9 April and 15 May 2009. For its committed shareholder’s loan of HK$2,000,000.00, the Breakdown showed Powtek advanced HK$300,000.00, HK$250,000.00 and HK$100,000.00 respectively on 1 June, 3 July and 31 August 2009 totalling HK$650,000.00 and leaving HK$1,350,000.00 still unpaid. 44.By the supplemental shareholders’ agreement dated 10 June 2009, Primebase agreed to advance HK$25,000,000.00 by way of shareholder’s loan (“2nd Additional Fund (3)” – column 15) provided Green, Newlink and Powtek would sell/transfer such number of RCL shares to Primebase as determined by the Formula at a nominal price of HK$1.00 (clause 2.1 at B3/354) with A, B, C and D defined as follows:
45.The Breakdown showed Primebase advanced the 2nd Additional Fund (3) between 16 June and early November 2009, so the aggregate shareholders’ loans advanced by Green, Newlink, Powtek and Primebase were respectively HK$24,000,000.00 (17.266%), HK$9,000,000.00 (6.475%), HK$9,130,000.00 (6.568%) and HK$96,870,000.00 (69.691%) totalling HK$139,000,000.00 (100%),[10] and represented the shareholdings in LML and RCL below:[11]
XII. 10/11/09 SHAREHOLDERS’ AGREEMENT (PRIVATE DEAL) 46.By the supplemental shareholders’ agreement dated 10 November 2009 by Green, Newlink, Powtek, Primebase, RCL and LML (B3/358-364), the Four Shareholders agreed inter alia as follows:
47.The Breakdown and column 18 showed Primebase advanced the 3rd Additional Fund to RCL and LML between December 2009 to March 2010 (with excess payment of HK$500,000.00 transferred to become part of the 4th Additional Fund in paragraph 52 below). Thereafter, the aggregate shareholders’ loans by Primebase, Green, Newlink and Powtek respectively became HK$116,870,000.00 (76.464%), HK$24,000,000.00 (13.408%), HK$9,000,000.00 (5.028%) and HK$9,130,000.00 (5.101%) totalling HK$159,000,000.00 (100%) (see columns 19-20). 48.But for calculating the new shareholdings, Primebase’s 3rd Additional Fund was weighted at 2:1, thus increasing Primebase’s weighted aggregate shareholder’s loan to HK$136,870,000.00 and the weighted Total Loans to HK$179,000,000.00 (bottom part of columns 19-20). So the new shareholdings of the Four Shareholders in RCL were as follows:[12]
XIII. 10/12/09 SHAREHOLDERS’ AGREEMENT (PRIVATE DEAL) 49.For paragraph 46(a) above, by a supplemental shareholders’ agreement dated 19 December 2009 by Powtek, Primebase, RCL and LML, Powtek and Primebase (a) confirmed their respective aggregate loans and shareholdings in RCL and LML as at 7 November 2009 were as set out in paragraph 45 above, eg Powtek held 15,440,669 RCL shares (clause 1 at B3/366-367), and (b) agreed Primebase would advance HK$1,350,000.00 by way of shareholder’s loan on behalf of Powtek provided Powtek would sell/transfer 1,350,000 / 9,230,000 x 2.5 x 15,440,669 RCL shares (5,707,805 RCL shares) and 1,350,000 / 9,130,000 x 2.5 x 657 LML shares (243 LML shares) to Primebase at a nominal price of HK$1.00 (“Private Deal”).[14] 50.The Breakdown showed Primebase advanced HK$1,350,000.00 to RCL and LML on 16 December 2010, so the aggregate shareholders’ loans advanced by the Four Shareholders before and after the Private Deal were as follows (columns 21 and 25):
51.Taking into account the RCL shares held by each of the Four Shareholders after the 3rd Additional Fund in clause 1 of the shareholders’ agreement dated 8 April 2010 (B3/371) and the transfer of 5,707,805 RCL shares from Powtek to Primebase under the Private Deal, the total shareholdings of the Four Shareholders before and after the Private Deal were as follows (columns 22-25):
Using the same arrangements, Green, Newlink, Powtek and Primebase respectively held 1,341, 503, 267 and 7,889 LML shares (totalling 10,000 LML shares being the LML Share Pie) after the 3rd Additional Fund and Private Deal.[20] XIV. 8/4/10 SHAREHOLDERS’ AGREEMENT 52.By a shareholders’ agreement dated 8 April 2010 by Green, Newlink, Powtek, Primebase, RCL and LML (B3/369-375), the Four Shareholders agreed to advance to RCL and LML by way of shareholders’ loan a further sum of HK$20,000,000.00 (“4th Additional Fund”) in their Proportionate Portions (clause 2.1 at B3/371-372) by 2 tranches of HK$10,000,000.00 each. Green and Newlink were unable to contribute their Proportionate Portions of the 1st tranche loan, so Primebase agreed to advance on their behalf (clause 2.2 at B3/372). The Four Shareholders would decide before 1 August 2010 whether they would be able to advance the 2nd tranche loan in their Proportionate Portions (clause 2.3 at B3/372). 53.Under clause 2.4 (B3/372-373), the Four Shareholders agreed the 4th Additional Fund would be weighted at 2:1 to the first HK$139,000,000.00 out of the Total Loans of HK$159,000,000.00 as at 31 March 2010 (paragraphs 45 and 47 above) for calculating the new shareholdings in RCL and LML, and for the 1st tranche loan of HK$10,000,000.00 each of Green and Newlink would sell/transfer such number of shares to Primebase as determined by the Formula at a nominal price of HK$1.00 with A, B, C and D defined as follows:
It was also agreed (a) the number of RCL and LML shares to be transferred to Primebase and Powtek would be adjusted as per the Private Deal, which would only affect the shareholdings of Primebase and Powtek in RCL and LML, and (b) for the 2nd tranche loan of HK$10,000,000.00 the same Formula as above would be adopted for transfer of RCL and LML shares from the Defaulting Shareholder(s) to the Paying Shareholder(s). XV. 2/8/10 SHAREHOLDERS’ AGREEMENT 54.By a shareholders’ agreement dated 2 August 2010 by Green, Newlink, Powtek, Primebase, RCL and LML (B3/376-380), the Four Shareholders agreed the 4th Additional Fund would be increased to HK$25,000,000.00 to be paid in 2 tranches of HK$10,000,000.00 and HK$15,000,000.00. The Breakdown and column 26 showed Primebase advanced HK$24,732,700.00 for both tranches between April and October 2010 and Powtek advanced HK$267,300.00 on 6 August 2010 totalling HK$25,000,000.00, so the aggregate shareholders’ loans advanced by the Four Shareholders before and after the 4th Additional Fund were as follows:
55.But for calculating the new shareholdings, Primebase’s and Powtek’s advances for the 4th Additional Fund of HK$24,732,700.00 and HK$267,300.00 were weighted at 2:1, thus increasing the weighted aggregate shareholders’ loans by Primebase and Powtek to HK$186,335,400.00 (81.369%)[23] and HK$9,664,600.00 (4.220%)[24] respectively which together with the aggregate shareholders’ loans of HK$24,000,000.00 (10.480%) and HK$9,000,000.00 (3.930%) already advanced by Green and Newlink respectively would result in weighted Total Loans of HK$229,000,000.00 (100%) (see bottom part of columns 26-27) for use under the Formula. 56.The total number of RCL shares held by each of the Four Shareholders before and after the 4th Additional Fund (but before taking into account the Private Deal) was as follows:
57.But the total shareholdings of the Four Shareholders after taking into account the Private Deal (ie transfer of 5,707,805 RCL shares from Powtek to Primebase) and the 4th Additional Fund were as follows (columns 28-31):
Using the same arrangements, Green, Newlink, Powtek and Primebase held 1,048, 393, 179 and 8,380 LML shares (totalling 10,000 LML shares being the LML Share Pie) after the 4th Additional Fund and Private Deal.[31] XVI. 6/1/11 SHAREHOLDERS’ AGREEMENT 58.“Funding Requirement Nov 10 to Sept 11” presented for the RCL Board meeting on 11 November 2010 showed a net requirement of HK$22,881,690.00 in funds for RCL and LML (B3/409). This was addressed by the shareholders’ agreement dated 6 January 2011 by Green, Newlink, Powtek, Primebase, RCL and LML (B3/381-386). Under such agreement, the Four Shareholders agreed to advance to RCL and LML by way of shareholders’ loan a further sum of HK$20,000,000.00 (“4th Additional Fund (1)”) in their Proportionate Portions (clause 2.1 at B3/383). Green, Newlink and Powtek were unable to pay their Proportionate Portions, so Primebase agreed to advance on their behalf (clause 2.2 at B3/383-384). Under clause 2.3 (B3/384), the Four Shareholders agreed the 4th Additional Fund (1) be weighted at 2:1 to the first HK$139,000,000.00 out of the Total Loans of HK$184,000,000.00 as at 1 November 2010 (paragraphs 45 and 54 above) for calculating the new shareholdings in RCL and LML, and each of Green, Newlink and Powtek would sell/transfer such number of RCL shares to Primebase as determined by the Formula at a nominal price of HK$1.00 with A, B, C and D defined as follows:
It was also agreed that the number of shares to be transferred to Primebase and Powtek would be adjusted as per the Private Deal, but this would only affect the shareholdings of Primebase and Powtek in RCL and LML. 59.The Breakdown and column 32 showed Primebase advanced the 4th Additional Fund (1) between November 2010 and May 2011, so the aggregate shareholders’ loans advanced by the Four Shareholders before and after the advance of the 4th Additional Fund (1) were as follows:
60.But for calculating the new shareholdings, Primebase’s 4th Additional Fund (1) was weighted at 2:1, thus increasing its weighted aggregate shareholder’s loan to HK$226,335,400.00 (84.140%)[35] which together with the weighted aggregate shareholders’ loans of HK$24,000,000.00 (8.922%), HK$9,000,000.00 (3.346%) and HK$9,664,600.00 (3.593%) already advanced by Green, Newlink and Powtek respectively would result in weighted Total Loans of HK$269,000,000.00 (100%) (bottom part of columns 32-33). 61.The total number of RCL shares held by each of the Four Shareholders before and after the 4th Additional Fund (1) (but before taking into account the Private Deal) were as follows:
62.But the total shareholdings of the Four Shareholders after the Private Deal (ie transfer of 5,707,805 RCL shares from Powtek to Primebase) and 4th Additional Fund (1) were as follows (columns 34-37):
Using the same arrangements, Green, Newlink, Powtek and Primebase held 892, 335, 116 and 8,657 LML shares (totalling 10,000 LML shares being the LML Share Pie) after the 4th Additional Fund (1) and Private Deal (clause 1 of the 25/5/11 Agreement at B3/389). XVII. LATE 2010 AND EARLY 2011 63.Poor business situation Danny claimed (so he knew) RCL’s technology/workers were behind the times, RCL’s SMP were outdated, their quality/yield were not up to standard, and the quality of bulk production SMP was unstable with low yield.[42] Danny knew (and P accepted) RCL manufactured low-end products[43] and had problems in fabricating high-end/bulk products such as T596.[44] By late 2010, RCL and LML had used up Primebase’s advance of HK$3,000,000.00 intended for developing trading business with no success. I find that since November 2010 RCL (to Danny’s knowledge) began to owe AUK trade debt,[45] and by late 2010 Philip as MD and RCL’s other directors (including Danny) knew the situation was quite dire in terms of production, business, cashflow and finance. Planned funding could not support RCL’s and LML’s business operations, and their overall performance was quite poor. 64.RCL’s monthly loss Danny downplayed his knowledge by claiming he did not know the extent of RCL’s monthly loss and by suggesting RCL started to suffer loss only in 2011. When pressed, Danny admitted Philip did mention RCL’s monthly overheads, RCL’s monthly loss was discussed at RCL Board meetings, and financial information was given to the RCL Board whether he read it or not. In fact, funding requirements,[46] actual/projected profit and loss accounts[47] and other sales/ costs documents were provided to RCL’s directors as agenda documents for RCL Board meeting in late 2010 (B8/1420-1464), and they showed RCL’s serious cashflow problem and monthly loss of about HK$2,000,000.00-HK$3,000,000.00,[48] so I disagree RCL only started to suffer loss in 2011 and/or Danny had no idea of the extent of RCL’s monthly loss. Danny then changed tack to dispute the reported amount of RCL’s monthly loss, but he did not protest when RCL’s monthly loss of about HK$3,000,000.00 was mentioned at the 4th 2011 RCL Board meeting held on 22 November 2011. He even said on 17 March 2011 he, Marcus and Philip “discussed about the fact that RCL had been suffering from great loss” (Part XIX below). Indeed, even Ngan knew RCL had been suffering loss for a long time. 65.Closing down manufacturing operations By late 2010 and early 2011, Philip as MD and RCL’s directors representing Primebase, Green and Newlink were seriously considering to cease manufacturing operations, which option was discussed at RCL’s senior management level:[49]
Even Ngan who had heard such rumour felt there might be some truth in it since usual replenishment of materials and business plans requiring substantial investment[52] were withheld. I reject Danny’s suggestion that Philip wanted to continue manufacturing operations,[53] which Danny eventually conceded was not the case and it was only Ds who wanted to continue. 66.Danny was keen to continue manufacturing operations as what he saw to be a last bastion of Hong Kong’s manufacturing industry, and expressed confidence in better future sales/prospects with profits to be made as he thought (a) various RCL products had been “qualified” by customers who regarded RCL as their foundry/manufacturer and who would place more POs in the years ahead, and (b) the market void left by Japanese foundry competitors hard hit by the March 2011 earthquake would likely be filled by PRC competitors leaving potential opportunity for RCL to sell low-end products[54] as well as zener and switching diodes.[55] In March 2011, Danny even thought about (“一路盤算緊”) subcontracting (“承包”) RCL’s manufacturing business.[56] XVIII. DANNY’S LOAN AND SALES COMMITMENT 67.In my view, Danny made an informed/considered commercial decision in asking RCL and LML to continue manufacturing operations and in having Green, Newlink and Primebase continue funding for such purpose, and in “sweetening” such request with proposals (i) to invest HK$1,000,000.00-HK$2,000,000.00 in RCL’s and LML’s business and (ii) to be liable if sales fell below a guaranteed level. Ps and Philip were impressed by Danny’s expressed confidence, and agreed to continue manufacturing operations (with continued financial support), which in my view would be on the then “as is” condition (as I reject the Preconditions/or Implied Conditions as explained below). This was borne out by Philip’s 2 emails dated 11 March 2011 to Marcus with one copied to Danny (B8/1465 and B13/2510-2511, “11/3/11 Email”) stating that:
68.On 14 March 2011, Danny countersigned the 11/3/11 Email, and marked in manuscript the payment in (i) above would be made before end of April 2011. In/about March/April 2011 it was agreed a loan of HK$1,000,000.00 would be made to RCL. Danny tried to say the lender was Powtek, but it was clear from the 11/3/11 Email (and I find) it was Danny’s Loan. As for (ii) above, by 14 March 2011 Danny had a 1-page sales plan setting out the minimum value of SMP/TOP sales he was prepared to guarantee for each month from March to August 2011 (B8/1466, “14/3/11 Sales Plan”), which he countersigned at Philip’s request. Philip was clearly impressing upon Danny the serious/binding nature of his commitment, which I find Danny understood when he signed. 69.On 14 March 2011, Philip emailed to Marcus the 14/3/11 Sales Plan and reported to him Danny had signed his commitment (B13/2512-2513). I find by such date Danny had agreed in principle to give the Undertaking by (a) advancing Danny’s Loan to RCL and LML by the end of April 2011 (to be treated as shareholder’s loan by Powtek to RCL and LML when advanced), and (b) being liable for the monthly variance/shortfall if sales fell below the guaranteed level set out in his sales plan, and Green, Newlink and Primebase also agreed in principle to continue (and financially support) manufacturing operations. But Danny did not annotate the 11/3/11 Email and 14/3/11 Sales Plan with any Preconditions and/or Implied Conditions when he signed them. XIX. 17 MARCH 2011 70.Danny, Marcus and Philip had dinner on/about 17 March 2011. They had a post-dinner exchange of ideas for RCL’s and LML’s long-term business improvement, which I find to be a casual discussion since they knew from industry experience it would have taken years (at least not less than 12 months) to bring about any meaningful business improvement. I disagree the discussion resulted in any agreed Preconditions and/or Implied Conditions. 71.But Danny claimed at such dinner meeting he opposed Philip’s proposal to close down RCL’s manufacturing operations by telling Marcus and Philip (1) several big customers had approved RCL as their designated foundry/manufacturer and “would begin” to place POs with RCL with more expected in the years ahead, (2) tabled the sales plan he gave to Philip/Marcus “a few days ago” that set out expected SMP/TOP sales for the coming 10 months, and (3) demanded reform of RCL to meet such sales plan, and he urged Philip/Marcus to implement the following Preconditions for him to meet such sales plan:
Danny alleged Marcus/Philip on behalf of RCL agreed to the Preconditions, so the following morning Philip asked him to countersign the 2-page sales plan (B8/1467-1468, “18/3/11 Sales Plan”). 72.I reject Danny’s account:
73.I find Marcus, Philip and Danny as senior management naturally exchanged ideas on possible improvement measures given the poor situation of RCL and LML. If Danny had in mind the Preconditions (which I disagree), he did not explain why he failed to annotate them on the 11/3/11 Email and 14/3/11 Sales Plan which he countersigned or on the 18/3/11 Sales Plan which he countersigned after Philip/Marcus agreed to the Preconditions the night before. Such Preconditions did not feature in the 25/5/11 Agreement or in the minutes/transcript of the 2011 RCL Board meetings when the RCL directors discussed the Sales Commitment at such meetings. The silence was deafening, and I find the Preconditions quite unbelievable. 74.At that time, the majority shareholders except Powtek were anxious to cut loss given the serious financial risk in continuing/supporting manufacturing operations. Continuation even on the then “as is” condition required RML and LML to risk further losses and to incur liability for additional shareholders’ loans (which the Four Shareholders had to advance), and Danny’s optimism over future sales might not come true. So it made commercial sense for Danny to put money where his mouth is by promising to advance Danny’s Loan to RCL and LML and to pay the Combined Shortfall to persuade RML and LML to continue manufacturing operations. In my view, if the Sales Commitment was subject to the Preconditions that required significant monies/efforts over and above continuing manufacturing operations on the then “as is” condition (which of itself was no small financial matter), it would have been commercially more sensible to simply cut loss and cease manufacturing operations. 75.Moreover, the Reform Precondition was improbable when Danny, Philip, other RCL directors and Ngan all knew (a) RCL and LML had difficulty in staying on par or ahead of their competitors despite efforts and investments, (b) high-end semiconductor production required high-end technological expertise that RCL and LML had yet to master, (c) it would have taken years (according to Danny)[57] or at least 9 months to a year (according to Ngan) with significant investment to launch and/or “qualify” a new product, and (d) even upgrading a particular production process might take 6 months.[58] I find Danny knew it would have taken years before RCL and LML could see any improvement in product quality and/or technical standard, and the 10-month Sales Commitment could not have been subject to any requirement for quality improvement. The Reform Precondition was also quite vague (eg overhauling production management, improving product yield, etc) with no certain yardstick for measuring compliance, and I am unconvinced Ps (represented by experienced businessmen) would have adopted or agreed to a Precondition in such terms. 76.As for the Funding Precondition, Primebase did satisfy the Funding Requirements dated 11 November 2010 and 7 April 2011 by advancing the 4th Additional Fund and HK$16,000,000.00 pursuant to the 25/5/11 Agreement (paragraph 114 below), but there was no mention of any Preconditions. Strangely, even though the Sales Commitment only covered 10 months, the Funding Precondition did not set any clear timetable for further fund injections into RCL and LML. On balance, I reject any Funding Precondition. As for the Incentive Precondition, I am unable to see how an incentive plan that had yet to be proposed and/or approved by RCL (if at all) could amount to any binding Precondition. It also flied against the 11/3/11 Email that reported it was for Danny to come up with suggestions for improving the sales team. XX. 18 MARCH 2011 77.18/3/11 Sales Plan I find on 18 March 2011 Danny came up with the 18/3/11 Sales Plan that set out the monthly Combined Minimum Value he was prepared to commit/guarantee for the Commitment Period. Philip asked him to confirm and countersign such sales plan which Danny did. Danny argued the 18/3/11 Sales Plan was just a sales forecast subject to the Preconditions, and he never expected it would be attached to the 25/5/11 Agreement to make him liable to compensate RCL for its inability to earn sales revenue up to the Combined Minimum Value, which compensation would be an unfair windfall gain for RCL who had done nothing (ie without having to pay even the underlying production cost). 78.I disagree. First, Danny was all along interested in acquiring RCL shares, and he became an investor in RCL via Powtek. He was enthusiastic about keeping RCL’s manufacturing operations, and in March 2011 had pondered about subcontracting RCL’s manufacturing business, which interest he maintained even in October 2011.[59] In my view, Danny must have some notion as to future business prospects, and he plainly gave his personal Sales Commitment based on such notion, which underlined the commercial character of the contractual transaction between Danny and RCL / LML. It was a far cry from sales forecast by sales director to company management. 79.Secondly, Danny did not give the Sales Commitment and/or Undertaking in haste, and he made a considered commercial decision. I am satisfied that by 18 March 2011 Danny agreed to give the Undertaking as set out in paragraph 8 above without any Preconditions. Philip would not have asked Danny to confirm and countersign the 18/3/11 Sales Plan if it were mere non-binding sales forecast, which contention also contradicted Clause 3 that expressly provided the Combined Minimum Value for the Sales Commitment was set out in the 25/5/11 Sales Plan without mention of any Preconditions. Danny did not ask for detachment of the 25/5/11 Sales Plan before he on behalf of Ds signed the 25/5/11 Agreement. It was only when he was pressed to honour the Sales Commitment and/or Varied Undertaking that he raised the Preconditions, which I find to be an unreliable afterthought. 80.Thirdly, there was no windfall gain by RCL and LML. RCL and LML had to incur additional shareholders’ loan and probably further loss just to keep manufacturing operations going when they could have cut loss. This was simply a commercial deal by which Danny was to pay Danny’s Loan and Combined Shortfall in consideration of RCL and LML agreeing to continue manufacturing operations and thereby incurring further financial exposure. Besides, Powtek would have benefited if future sales prospered or if Danny had to pay the Combined Shortfall (which together with Danny’s Loan would be treated as shareholder’s loans made by and repayable to Powtek with transfer of RCL and LML shares to Powtek on enhanced weighting ratio under the Formula). 81.Danny’s Loan It was common ground that RCL required further funding of HK$16,000,000.00. Danny claimed he told Philip/Marcus on 17 March 2011 he/Powtek did not want to make further funding contribution, but his statement evidence said on 18 March 2011 Philip came around to his office to tell him Marcus for Primebase had committed HK$16,000,000.00 in shareholder’s loan to RCL and to ask him to show sincerity/support by advancing HK$3,000,000.00 (eventually reduced to HK$1,000,000.00) to RCL. But Danny also gave evidence that before the 2nd 2011 RCL Board meeting held on 7 April 2011 Philip persuaded him on behalf of Powtek to advance shareholder’s loan of HK$1,000,000.00 to RCL (a) to show confidence in the Sales Commitment as per the 18/3/11 Sales Plan and (b) to enable Philip to persuade Primebase to advance further shareholder’s loan of HK$16,000,000.00. I reject Danny’s above accounts which did not hang well together, and which contradicted the annotation on the 11/3/11 Email that he would pay “his” loan to RCL before the end of April 2011. XXI. AFTER 18 MARCH 2011 82.I find that after Danny gave the Undertaking RCL and LML took reasonable steps vis-à-vis manufacturing operations in the ordinary course of business. After the 2nd 2011 RCL Executive Committee (“RCL Exco”) meeting held on 24 March 2011, RCL made investments and all departments “全力配合新計劃”:
83.As to paragraph 82(c) above, Danny complained RCL failed to appoint senior executive manager with engineering background for improving production yield:
84.Senior level recruitment had always been part of the business goal as evident from Philip’s email to Danny on 22 November 2011 (paragraph 65(d) above), and there were email communications between Philip and Marcus as early as 6-7 April 2011 for recruiting a general manager for “this semiconductor fty”, searching for a “R&D Mgr” (B13/2514) and shortlisting candidates (B13/2515-2516). RCL had even considered suitable replacement for Philip (B9/1837-1838). Danny must have known of such efforts as this was discussed at the 2nd 2011 RCL Board meeting held on 7 April 2011 that he attended.[60] I find RCL could not be faulted for not recruiting Mr Siu in late 2010 when it was contemplating to close down manufacturing operations, and there was no evidence Mr Siu was thereafter willing and available to join RCL prior to May 2012. I see nothing wrong for Philip as MD and not Danny as Marketing Director to interview Cheung Peng, especially when Danny himself had not met her (B13/2508). In fact, RCL did make offers to hire “燕東那個楊師父” experienced in T596 and “原來華潤的張平” who was experienced in quality control, but they declined to join RCL.[61] Peng’s transfer to the LED Factory was not put to Ps’ witnesses in cross-examination. But Ngan who had 34 years’ experience took care of production with “高興方” (testing section) and “陳振藩” (production section) working under him. RCL also made other efforts during the Commitment Period to recruit technical/engineering staff to help release staff for customer support (paragraph 82(e) above),[62] but without particular success.[63] In September 2011, RCL also interviewed candidates with a view to recruit a sales manager (B13/2564-2566 and 2572). In my view, even without the Preconditions, RCL and LML took reasonable steps to implement changes even though there were no quick results.[64] Even Danny conceded under cross-examination RCL did make efforts to better its business. 85.Danny next complained Marcus/Philip failed to set up and approve a sales incentive programme for sales staff. But at the 2nd 2011 RCL Exco meeting held on 24 March 2011 (attended by inter alia Danny), Philip said “…… 惟考慮[RCL]長遠發展, 以及鼓勵員工積極執行擬定之營運計劇, 將計劃於6個月後作第2次薪酬檢討, 並按當時公司營運計劃表現作出薪酬考慮”, and “…… 指示各部門主管就以上計劃提交其部門表現獎勵計劃方案予管理層參考” (B8/1567-1569). Between 13 and 23 April 2011 (B13/2517-2522), Philip chased Danny and Arion Lo (senior sales manager of the Marketing Department, “Arion”) for the Marketing Department’s performance appraisal and department goal for the aforesaid company-wide salary adjustment review, and after involving Dong Bo Donny (sales staff who was stationed at RCL’s Shenzhen office but who would come to Hong Kong twice a week for meetings, “Donny”) and with some delay Arion came up with the “KPI and performance appraisal report” (B3/615-619), which in my view was the Marketing Department’s response to the company-wide “表現獎勵計劃方案”, but was not Danny’s version of the alleged dedicated sales incentive programme for sales staff under the Incentive Precondition. Actually such report had not been updated/finalised, and Iris Lee of the human resources department informed Philip in February-March 2012 that Arion had not submitted any revised version as he previously promised (B13/2592-2595). In the end, this company-wide scheme was not pursued. 86.In my view, there was no Incentive Precondition. I have found Arion’s report was not the dedicated sales incentive programme for sales staff under the alleged Incentive Precondition. Danny did not credibly explain why he did not raise this with Philip at the RCL Exco meeting or separately by email and/or chase Philip/RCL for the same. Mr Kwok, counsel for Ds and EB, tried to suggest Marcus referred to such dedicated sales incentive programme for sales staff when he mentioned “一種 change 就係之前你 [Philip] 同阿 Danny 大家 (Philip:係) discuss 嗰個change” at the 3rd 2011 RCL Board meeting held on 11 October 2011 (item 247 at B10/1864), but actually Philip was making observations of problems at the Marketing Department.[65] Rather, Marcus made clear there was no Incentive Precondition, and Philip said staff incentive scheme was discussed as the RCL Exco meeting (paragraph 85 above).[66] 87.Philip also followed up on necessary funds for continued manufacturing operations. On 26 April 2011, Philip asked for Primebase to transfer HK$2,250,000.00 on or before 4 May 2011 (B13/2523). Marcus would arrange to pay HK$2,000,000.00 (B13/2524).[67] The Breakdown showed Primebase advanced aggregate shareholder’s loan of HK$10,000,000.00 to RCL and LML between 2 March and 4 May 2011 as part of the 4th Additional Fund and HK$1,050,000.00 on 4 and 20 May 2011 as part of the 5th Additional Fund (paragraph 112 below). Primebase clearly made significant advances during these 3 months. But when Philip chased Danny on 5 May 2011 for Danny’s Loan “within this week”[68] (which showed Philip’s contemporaneous understanding such loan was to be advanced by Danny and not Powtek), there was no payment or reply (or even objection by reason of non-fulfilment of the Preconditions and Implied Conditions and/or the lender was Powtek and not Danny). 88.I find RCL, LML and the other shareholders acted in a commercially helpful/sensible way in the ordinary course of business, but this would not alter the fact Danny gave the Undertaking with full understanding and acknowledgment of RCL’s then “as is” condition without any Preconditions and/or Implied Conditions. XXII. 2ND 2011 RCL BOARD MEETING ON 7 APRIL 2011 89.The Sales Commitment and Undertaking were discussed at the 2nd 2011 RCL Board meeting held on 7 April 2011 with no mention of any Preconditions for Danny’s personal liability to pay RCL and LML if “actual sales” were short of the sales on the sales plan, and Danny agreed to sign a contract to record his commitments in writing. This was borne out by the minutes of such RCL Board meeting signed by Marcus as chairman (B7/1341), which showed Danny had given the Undertaking even before the 25/5/11 Agreement. Danny feebly suggested it was only sometimes that the draft/finalised board minutes were circulated to RCL directors and he was always out of office so he was unsure whether he received the minutes of this RCL Board meeting, but this could not help him because (a) he personally attended this RCL Board meeting, (b) there was no credible evidence the relevant minutes were inaccurate, and (c) such minutes were circulated to all directors including Danny and later signed by Marcus as accurate record.[69] 90.Such RCL Board meeting considered Funding Requirement for the Commitment Period. An agenda paper (B8/1469) showed projected required funds were about HK$16,000,000.00 which included “Funding from Danny” of HK$1,000,000.00, ie Danny’s Loan from Danny and not Powtek. The minutes also noted (B7/1341):
91.Philip in meeting also highlighted some operational problems (eg issues over Ag bump electroplating by CDIL for “zener” product) which were minuted as follows:[70]
92.I note RCL’s transistor and zener production/sales were not particularly bright in April 2011, and there was force in the concern expressed by Tony at the 2nd 2011 RCL Board meeting held on 7 April 2011 over steep growth in sales and bold Combined Minimum Value in the 18/3/11 Sales Plan.[72] 93.In fact, transistor production was affected by high gold cost and low-yield such that “如果我哋係要咁樣做嘅話呢，其實我哋係做一片蝕一片，就唔應該做嘅 ……”, “…… 而家呢，其實我哋個量愈大呢，我哋蝕得愈緊要”. The new evaporator was to be delivered the following week, and “…… 我哋有一個月去將個process 去調出嚟 ……”[73] But such envisaged timeframe was merely an estimate pending actual test trials. As it turned out, even with the new evaporator, multi-layer back-metalling process (“多層背金”) was not mastered even by August 2011,[74] which, in my view, was a commercial risk Danny took when he gave the Sales Commitment and Undertaking, and which did not give rise to any Preconditions and/or Implied Conditions. 94.For zener products, pick up on such sales was delayed in April 2011, but the 25/5/11 Sales Plan was premised on steep growth in transistor and zener sales, especially in the later months of the Commitment Period. At the 2nd 2011 RCL Board meeting held on 7 April 2011, Danny said he would strongly push zener sales but recognised “…… 你話「Zener」咁, 得, 行唔行得通呢？喂, 要去做先知行唔行得通㗎嘛 …… 所以我就係用呢啲態度㗎咋, 但係我唔知得唔得㗎, …… 既然間, 我要commit 公司嘅, 我要博㗎喇, 係咪先, 我就好強硬㗎喇, 就係咁簡單”.[75] But even though Danny was unsure whether aggressive growth of zener sales could be achieved, he was quite prepared to sign the 25/5/11 Agreement to give the Sales Commitment. By August 2011 Danny’s rosy view of zener sales did not materialise, and he reported to the 4th 2011 RCL Exco meeting held on 11 August 2011 that “礙於市場需求收窄” progress of testing for “zener / switching diode” was slower than expected, and sales of these products would not meet target in August 2011.[76] Clearly, Danny took a commercial risk when he gave the Sales Commitment and/or Undertaking that eventual sales might not meet expectation, so he must bear the contractual consequences of having to pay the Shortfall if any. 95.Nevertheless, RCL’s product quality and production techniques did improve (as recognised by some customers and sales staff – paragraph 122(b) below) although the pace did not match increasing market/customer demand. Ngan explained that for bulk production “無論中檔率的數量和質量都比過去穩定”, and even though in 2010-2011 the Marketing Department “提高產品分檔標準及收緊參數合格範圍”, “中檔率” in 2011 was more stable and better than in 2010. I find at the very least, it was not worse than before (ie the then “as is” situation). 96.Returning to 30 April 2011, Philip emailed Marcus, Tony, Shaowu and Danny that he would prepare the shareholders agreement with the following points (B13/2525):
From (b) above, it was clear the 18/3/11 Sales Plan could not have been mere sales forecast, and Actual Sales was the relevant criterion for comparison/calculation of the Combined Shortfall. There was no evidence that Danny protested against these matters, which went a long way to show (i) the Undertaking was Danny’s personal commitment with no Preconditions and/or Implied Conditions, and (ii) he knew/agreed the Sales Commitment turned on comparison between the Combined Actual Sales Value and Combined Value (which was also premised on Actual Sales). XXIII. AUK PAYMENT 97.AUK Debt and cessation of supplies Since November 2010 RCL was unable to settle trade debts due to AUK which grew US$335,772.50 (HK$2,612,310.00) by mid-May 2011. Danny tried to distance himself by suggesting (a) AUK’s accounts department would chase RCL’s accounts department (“Accounts Department”) and not him for payment, (b) he only learned from Paul Hung (Korean trade sales consultant whom Danny introduced to RCL and LML, “Paul”) AUK had pressed RCL for payment, (c) after he took the telephone call by AUK’s lawyers to Paul (with threat of litigation) in April/May 2011 he asked Philip to settle the AUK Debt, and (d) he left the matter alone because Philip told him Primebase would soon advance shareholder’s loan of HK$16,000,000.00. 98.I do not accept Danny’s above account. He was familiar with AUK’s senior management and was the one who introduced AUK (who became a major TOP supplier) to RCL (who became 1 of AUK’s 2 agents in Mainland China). I find it more likely that AUK liaised with Danny (senior contact person at RCL) rather than Paul (who handled PO-related matters) given the seriousness of the AUK Debt and imminence of litigation. Anyway, Danny as Marketing Director would have known AUK ceased TOP supplies to RCL in/about March/April 2011 due to the AUK Debt, which must have been a concern given his sales function. I find he was anxious to liaise with AUK’s management to see what could be done to ameliorate/resolve the problem. In light of these matters, I disagree at that time Danny estimated sales related to AUK could be well over HK$1,000,000.00/month with profit margin of about 23%-25%. 99.Ds’/EB’s case It was common ground Danny did cause the AUK Payment to settle the AUK Debt. Danny claimed that on 20 May 2011 Philip telephoned to ask him to urgently settle the AUK Debt for RCL, and he replied he would arrange for EB to do so against a written contract to be drawn up between EB and RCL with the following repayment terms:
Danny said he then received Amy’s email with AUK’s remittance details,[77] and he told Philip he would arrange to effect the AUK Payment on 23 May 2011. 100.Danny claimed he asked the Brother for help, and the Brother said “「都可以嘅」, 我阿哥就話「因為我哋賬上冇咁多錢, 咁我哋有個貿易夥伴」, 咁我阿哥就話「我叫佢先畀咗先喇」咁樣”. The Brother raised the matter of interest but did not insist as Danny (via Powtek) was a shareholder of RCL. On 23 May 2011, Danny caused EB to have US$335,772.50 remitted by telegraphic transfer to AUK’s bank account in Korea (B7/1329), which remittance was actually made by EB’s trade debtor Kao Zhan Ai Hua (“Kao”). EB forwarded the remittance advice (B8/1474, “Fund Transfer Form”) to Danny who emailed it to Amy on/about 24-25 May 2011. Danny claimed (a) he telephoned to tell Amy the AUK Payment was arranged by EB and “咁就要求佢同MD [Philip] …… 做番一份借款嘅協議”, (b) he expected Philip to tell Amy about the terms in paragraph above, and (c) Philip knew from their telephone conversation on 20 May 2011 no interest would be payable on the AUK Payment. 101.RCL’s case The essential difference between EB’s and RCL’s case was the identity of the contracting parties. RCL claimed (a) Danny procured the AUK Payment without its authority, (b) it had to account to Danny for the benefit of the AUK Payment that it enjoyed, and (c) the deal was with Danny and not EB, so EB had no right to sue RCL for reimbursement of any part of the AUK Payment. But EB claimed the agreement was between Danny (on behalf of EB and Powtek) and Philip (on behalf of RCL and LML). 102.Danny or EB? I do not accept Danny’s account. First, Danny claimed Philip told him in early May 2011 Primebase would soon advance HK$16,000,000.00 to RCL. He could not explain why he did not ask Philip about Primebase’s advance when on 20 May 2011 Philip asked him to urgently settle the AUK Debt for RCL. Secondly, Danny claimed that in the telephone conversation on 20 May 2011 he did not talk to Philip about repayment in any detail except Philip said RCL would repay EB on/about 24-25 May 2011, “佢就同我講話, 幾日之後應該解決㗎喇, 咁嘅情況”, so he expected RCL to make reimbursement on 25 May 2011 and told EB repayment would be made in a few days. But if that were the case, it would be pointless to ask RCL to prepare a written contract that would have become redundant even before it was even drafted/signed, and Danny had no credible answer. Thirdly, the contemporaneous emails/ correspondence and the recitals of the 20/5/11 Document did not refer to any oral agreement between inter alia RCL and EB. I find Danny had no actual authority from RCL to procure EB to make the AUK Payment, and there was no evidence from EB (as distinct from the alleged agent Danny who was not any shareholder, director or employee of EB) that it relied on Danny’s ostensible authority to act for RCL. 103.In my view, EB dealt with Danny personally with no oral agreement between EB and RCL. By March 2011, AUK had stopped TOP supplies and threatened to sue RCL, and Primebase had not yet advanced its additional shareholder’s loan in full pending the 25/5/11 Agreement (but the Breakdown showed it had already paid about HK$2,000,000.00). Danny as Marketing Director was anxious to have the AUK Debt settled so as to revive TOP supplies. Also, Philip had chased him for Danny’s Loan that should have been advanced before end of April 2011. I find it was against such contextual background that RCL (with no ready monies) had not decided when and/or how to settle the AUK Debt. I further find RCL had not solicited the AUK Payment and/or authorised Danny, EB and/or Kao to settle the AUK Debt on its behalf. 104.I find it was Danny who took the initiative to arrange the AUK Payment as borne out by his own words at the 3rd 2011 RCL Board meeting held on 11 October 2011 when he said he arranged for AUK Payment straightaway without request for any contract:
In my view, Danny then mobolised the Brother’s company EB (with whom RCL and LML had no discussion/liaison) to arrange the AUK Payment for him (not RCL although such payment ultimately benefited RCL). I accept Danny did not give prior notice of the AUK Payment to RCL, but on 23 May 2011 he informed Philip/RCL he had procured such payment. It was true that on 20 May 2011 Amy emailed to Danny a previous telegraphic transfer form to give AUK’s bank details (B13/2528-2529), but I infer and find Amy did so at Danny’s request given his desire to effect the AUK Payment. 105.I find RCL then decided to take benefit of such fait accompli, so it had to account to and reimburse Danny (not EB or Kao with whom it had no dealings) for procuring the AUK Payment as borne out by Philip’s and Danny’s subsequent conduct. RCL had no need to know (and it did not know until discovery in the present litigation) who the actual payor was since the copy Fund Transfer Form it received did not show the name. 106.Partial account by Danny’s Loan I find Danny asked for HK$1,000,000.00 out of the AUK Payment to be treated as Danny’s Loan which was to be booked as shareholder’s loan by Powtek to RCL and LML.[78] So on 23 May 2011 Philip by email asked the Accounts Department to follow up with AUK for a receipt in relation to the settlement of the AUK Debt, and to record HK$1,000,000.00 as shareholder’s loan by Powtek[79] to LML and HK$1,612,310.00 as normal loan from Danny to be repaid from company revenue (B13/2531). Such email was illuminating as it reflected Philip’s contemporaneous understanding that RCL dealt with Danny (and not EB) on reimbursement of the AUK Payment.[80] This was echoed by RCL’s journal entry on 23 May 2011 for HK$2,619,025.50 as a loan by Danny to RCL for “settlement for AUK Corp by Danny Lai” (B8/1514),[81] and by LML’s journal entry on 23 May 2011 for receipt of shareholder’s loan of HK$1,000,000.00 from Powtek which it then lent to RCL as per invoice to RML (B8/1475-1476). 107.Danny’s case was further undermined by his evidence that EB (being financially tight) pressed for reimbursement of the AUK Payment. He could not explain why then he asked for HK$1,000,000.00 out of the AUK Payment to be booked as shareholder’s loan by Powtek to facilitate Powtek (in which EB had no interest) to receive more RCL and LML shares pursuant to the Formula under the 25/5/11 Agreement but provided no monetary return to EB. In my view, the reality was RCL dealt with Danny personally who was free to decide how reimbursement was to be made to his order, and it was up to him to deal with those from whom he procured the AUK Payment. 108.AUK’s receipt RCL prudently wished for a receipt from AUK to confirm settlement of the AUK Debt when it did not even know who the actual payor was (even though it was told such payment was arranged by EB), and it was in such context that AUK’s email dated 24 May 2011 raised for the first time a need for a “contract”, and draft “contracts” were then prepared with a view to get a formal receipt from AUK rather than to make/record an agreement between contracting parties. 109.On 23 May 2011, Fan emailed Arion and Danny asking for a receipt from AUK (B13/2530), and Arion emailed AUK’s Youngsu Kim (“Kim”) for the same (B13/2534). On the following day, Kim replied on the matter of a receipt for the AUK Payment, “但是一定要提供貨款轉讓合同書, 合同書上要有蓋章EB和RCL的公司章” (B13/2532). So by this time, AUK and RCL came to know (presumably from Danny) it was EB who arranged the AUK Payment. Arion asked Amy for the document requested by AUK (B13/2533), and asked Kim for a receipt (B13/2534). On 25 May 2011, Amy emailed Philip and Danny with copy to Arion (B13/2535-2536) saying AUK refused to issue official receipt “unless RCL provide the agreement/contract for such remittance arrangement by a third party, ie [EB]. (both parties have to sign on the contract as per AUK’s email as below)”, and she had prepared a draft for such purpose. On 26 May 2011, Philip told Amy he would re-write the draft (B13/2537) which he did, and asked Amy to use his draft (B13/2538-2539). On the same day, Philip (pursuant to discussion with Danny) emailed Amy and Arion with copy to Danny asking Arion to tell AUK how they were paid was not important so long as the AUK Debt was settled (B13/2540). 110.In my view, Amy/Philip prepared the draft “contracts” merely to satisfy AUK’s requirement of “貨款轉讓合同書” for issuing an official receipt without any contractual intention. This explained why after having revised the draft “contract” Philip still wanted Arion to impress upon AUK the irrelevance of the actual payor’s identity, which if accepted by AUK would have obviated the need for “貨款轉讓合同書”. AUK was so persuaded, and emailed Danny with copy to Paul to acknowledge EB on behalf of RCL settled the AUK Debt on 24 May 2011 (B13/2541). Thus, the draft “contracts” prepared by Amy/Philip were not signed or sent out. So by the end of May 2011, the AUK Debt was closed as between AUK and RCL. 111.I find Danny and RCL agreed for (a) HK$1,000,000.00 out of the AUK Payment being Danny’s Loan to be booked as interest-free loan by Powtek to LML for RCL with no fixed repayment date, and (b) RCL having taken benefit of the AUK Payment had yet to account to Danny for the balance thereof in the sum of HK$1,612,310.00. XXIV. 25/5/11 AGREEMENT 112.By the 25/5/11 Agreement by Green, Newlink, Powtek, Primebase, RCL, LML and Danny (B3/387-395), the Four Shareholders agreed to advance to RCL and LML by way of shareholders’ loan a further sum of HK$17,000,000.00 (“5th Additional Fund”) in their Proportionate Portions (clause 2.1 at B3/389). Green and Newlink were unable to pay their Proportionate Portions, and Primebase and Powtek agreed to advance on their behalf (clause 2.2 at B3/389). 113.Under clause 2.3 (B3/389-390), the Four Shareholders agreed the 5th Additional Fund would be weighted at 3:1 and the other HK$65,000,000.00 would be weighted at 2:1 to the first HK$139,000,000.00 of the Total Loans of HK$204,000,000.00 as at 30 April 2011 (paragraphs 45 and 59 above) for the purpose of calculating the new shareholdings in RCL and LML, and each of Green and Newlink would sell/transfer such number of shares to Primebase or Powtek as determined by the Formula at a nominal price of HK$1.00 with A, B, C and D defined as follows:
It was also agreed the number of shares to be transferred to Primebase and Powtek would be adjusted as per the Private Deal, but this would only affect the shareholdings of Primebase and Powtek in RCL and LML. 114.The Breakdown and column 38 showed Primebase advanced HK$16,000,000.00 of the 5th Additional Fund between May and October 2011, and Powtek was treated as having advanced HK$1,000,000.00 of the 5th Additional Fund on 23 May 2011 (ie Danny’s Loan out of the AUK Payment that was booked as shareholder’s loan by Powtek pursuant to the Undertaking). So the aggregate shareholders’ loans advanced by the Four Shareholders before and after the 5th Additional Fund were as follows:
115.But for the purpose of calculating the new shareholdings, Primebase’s and Powtek’s 5th Additional Fund of HK$17,000,000.00 was weighted at 3:1, thus increasing their respective weighted aggregate shareholders’ loans to HK$274,335,400.00 (85.730%)[85] and HK$12,664,600.00 (3.958%),[86] which together with aggregate shareholders’ loans of HK$24,000,000.00 (7.500%) and HK$9,000,000.00 (2.813%) already advanced by Green and Newlink respectively would result in weighted Total Loans of HK$320,000,000.00 (100%) (see bottom part of columns 38-39). 116.The total number of RCL shares held by each of the Four Shareholders before and after the 5th Additional Fund (but before taking into account the Private Deal) was as follows:
117.But the total shareholdings of the Four Shareholders after the Private Deal (ie transfer of 5,707,805 RCL shares from Powtek to Primebase) and the 5th Additional Fund were as follows (columns 40-43 and 46-49):
Upon the same arrangements, Green, Newlink, Powtek and Primebase held 750, 281, 153 and 8,816 LML shares (totalling 10,000 LML shares being the LML Share Pie) after the Private Deal and the 5th Additional Fund.[93] 118.Although columns 44-49 suggested Green, Newlink and Powtek had not yet transferred their RCL and LML shares to Primebase, in fact this had been done on 19 July 2011 (B8/1549). Danny helpfully particularised the progressive transfers of RCL shares from Powtek to Primebase pursuant to successive shareholders’ agreements over the years that resulted in gradual dilution of Powtek’s shareholding in RCL, which I set out in the table below with further information extracted from RCL’s annual return dated 27 April 2012:
119.Further, the Sales Commitment and/or Undertaking were confirmed in Clause 3 which terms clearly set out Danny’s personal obligation under the Sales Commitment and clearly reflected his commitment even in late May 2011 to meet the Combined Minimum Value each month during the Commitment Period. I reject Mr Kwok’s submission that “for some cause” the 25/5/11 Sales Plan somehow became annexed to the 25/5/11 Agreement which “made some sort of guarantee …… on Danny to fulfil”. Clause 3 together with the 25/5/11 Sales Plan were consistent with the Undertaking given upon due consideration and negotiations. Danny personally signed the 25/5/11 Agreement which specifically referred to the 25/5/11 Plan in clause 3.1 thereof, and he was bound by his contractual obligations. XXV. IMPLIED CONDITIONS 120.In my view, there was no viable basis for Ds to argue the 25/5/11 Agreement had any Implied Conditions as alleged. The onus was on Ds to justify why the Implied Conditions should be implied in the Undertaking and/or 25/5/11 Agreement. As a starting point, Danny did not credibly explain why he did not (a) annotate the Implied Conditions on the 11/3/11 Email and 14/3/11 and 18/3/11 Sales Plans when he countersigned them on 14 and 18 May 2011, (b) raise the Implied Conditions at the 2nd 2011 RCL Board meeting held on 7 April 2011 and/or by separate email, and/or (c) ask for the Implied Conditions to be included the 25/5/11 Agreement or refuse to sign such agreement without their inclusion. The fact Ds only raised the Implied Conditions when Danny was pressed for payment went a long way to show they were mere afterthought. 121.Mr Lo, counsel for Ps, submitted Ds’ pleadings failed to plead why the Implied Conditions came to be part of the 25/5/11 Agreement, and Ds failed to establish how they could be implied at law. I agree. In my view, the Implied Conditions were not necessary (in contra-distinction to being reasonable or otherwise) to give business efficacy to the Undertaking and/or 25/5/11 Agreement.[94] The latter was a carefully crafted written contract with clear and workable terms as a whole and/or in Clause 3 that were consistent with the Undertaking without any need for the Implied Conditions. Further, the Implied Conditions were vague and imprecise, and could not be usefully measured to assess compliance, so it would be futile to imply them to Danny’s Undertaking. 122.The Quality Condition was quite vague, especially when Ds did not say what quality would be “sufficient”. Mr Lo fairly agreed it was desirable for any business to improve the quality of its products, but such sentiment could not assist here unless the requisite “quality” was spelled out with sufficient certainty for measuring compliance, especially when different customers had different standards, eg:
I am not persuaded the Quality Condition could be implied in the Undertaking and/or 25/5/11 Agreement. In any event, I have found Danny well knew the Quality Level of RCL’s SMP in March 2011 when he gave the Undertaking, and he made the Sales Commitment on the basis of the Quality Level without requiring quality improvements. 123.The Complaint Condition also suffered from similar defect of imprecision. No business (particularly RCL and LML with their technological handicaps as known to Ds) could be complaint-free, but Ds did not spell out what would amount to sufficient customer service for handling complaints. I bear in mind Kam’s witness statement annexed a large bundle of complaint documents that showed investigation and analysis by RCL’s “品質管理部”, “測試應用部” and “工程部” (B3/495-612), and Danny confirmed sales staff would liaise and follow up with customers to resolve complaints and they were largely successful with few cancellations. Ngan also said “余海波” and “黎元龍” were designated to give technical assistance to the Marketing Department to deal with customer complaints (paragraph 82(e) above). Yet it was unclear whether these steps met the Complaint Condition or not. On balance, I reject the Implied Conditions. XXVI. ENFORCEMENT ISSUE 124.Mr Kwok submitted this court ought not grant any relief of specific performance in favour of RCL and LML:
Mr Kwok submitted that at law (1) there was no plea of any claim for damages, (2) the Combined Shortfall could not represent damages as “there would be underlying costs for making back the deficit of sale”, and (3) since it was Powtek and not Danny who would receive eventual repayment of the shareholder’s loan from RCL and LML, a term directing Danny to advance money for Powtek without reciprocal right to ask for repayment was a penalty that was not enforceable in law or equity. 125.The above arguments are misconceived. The true nature of the Undertaking, 25/5/11 Agreement and/or Clause 3 was not a mere shareholder’s loan from Powtek, but a contract between Danny who promised to pay Danny’s Loan and who gave the Sales Commitment in consideration of RCL and LML agreeing to continue manufacturing operations on terms as agreed, so there was clear mutuality of performance. Thus, under clauses 3.2 and 3.3(b) of the 25/5/11 Agreement, once there existed a Combined Shortfall for any month within the Commitment Period, “[Danny] shall pay [RCL and LML] the [Combined Shortfall] on a 1:1 basis” within 1 month. Indeed, an illustrative example was given in clause 3.2 of the 25/5/11 Agreement, ie “if actual weighted Combined Sales is HK$10,000 lower than the Guaranteed Sales, [Danny] shall pay [RCL and LML] HK$10,000”. This was a clear contractual obligation on the part of Danny to pay the Combined Shortfall which was a debt due and owing to RCL and LML that was recoverable at law without need to resort to equitable remedies such as specific performance. There was nothing in clause 3.2 of the 25/5/11 Agreement to suggest RCL and LML could call upon a stranger to pay the Combined Shortfall. 126.Clause 3.3(c) of the 25/5/11 Agreement provided that if Danny needed to pay RCL and LML as stated in clause 3.2, “this payment” would be treated as additional shareholder’s loan Powtek “advanced” to RCL and LML. So it was only after Danny had actually “advanced” the Combined Shortfall pursuant clause 3.2 that it would be booked as shareholder’s loan by Powtek, who would then be able to receive RCL and LML shares pursuant to the Formula and to eventually recoup such payment from RCL and LML. But this did not alter Danny’s anterior contractual obligation to pay the Combined Shortfall to RCL and LML. Further, it could not be said RCL and LML would not suffer loss if Danny failed to pay the sales shortfall. But for the Sales Commitment, RCL and LML would have cut loss by closing down manufacturing operations without need to incur additional shareholders’ loans and risk further business loss. 127.In any event, the argument in paragraph 125(c) above about transfer of shares was premature because to date Danny had not complied with his anterior contractual obligation to pay the sales shortfall. There was no present lis between Ps and Powtek that the latter would be deprived of such shares under the Formula after Danny paid up. If and when Danny paid the sales shortfall, then it would be up to him/Powtek to seek legal/ equitable remedies (if suitable) against any party in breach, but they could not do so yet as Danny had not paid the sales shortfall. I will deal with the question of the Formula and transfer of shares from the Defaulting Shareholders to the Paying Shareholder below, but suffice to state here the analysis would not have aided Ds’ case (Part XXXII below). There is no merit to the speculation in paragraph 125(d) above when to date Danny had not paid the Shortfall. Ps did plead a claim for damages,[99] but in light of my conclusions above I need not discuss such claim. Also on the above analysis, I disagree Clause 3 amounted to a loan agreement or a penalty. XXVII. LEAD UP TO 20/5/11 DOCUMENT 128.Repayment schedule Danny claimed when he was about to sign the draft “contract” for the AUK Payment (paragraph 109 above) on 27 May 2011 Philip told him it was still pending approval by other RCL directors, so on the same day he emailed Philip with copy to Amy (B13/2542) to record the principal terms of the agreement made on 20 May 2011 and to propose a repayment schedule for RCL. I disagree. 129.I have rejected Danny’s account of what happened on 20 May 2011, and his email dated 27 May 2011 in fact contradicted Ds’/EB’s case. In such email, Danny inter alia instructed Philip to account for or reimburse the AUK Payment by (a) HK$1,000,000.00 as “Danny’s fund injection”, and (b) HK$612,319.00, HK$500,000.00 and HK$500,000.00 to be repaid to Danny on 20 May, 15 June and 30 June 2011 respectively, which was inconsistent with any oral agreement on 20 May 2011 as Danny alleged. The references to “Danny’s fund injection” and “pay me [ie Danny] back” showed Danny knew the agreement was between him and RCL, thus leaving him to deal with EB on his own. 130.Danny tried to explain this away by saying when Philip told him on 25 May 2011 RCL could not make repayment in the following few days, he discussed with the Brother who requested repayment in the 3 instalments set out in his email. But there was no evidence from EB to support/confirm Danny’s bare assertion (which on balance I reject) that he represented EB when he gave the repayment schedule, which assertion was inconsistent with the express contents of his email as I have explained. I accept Philip and Danny had some discussion about repayment, but it was between RCL and Danny personally. On 30 May 2011, Philip emailed Danny inter alia that “as discussed” the repayment plan was for HK$1,000,000.00 “[treated] as injection” and for HK$617,000.00 and HK$995,000.00 to be repaid in June and July 2011 (B13/2543). Again, there was no mention about repayment to EB or Kao in such email. 131.Resumption of AUK supplies Danny’s email dated 27 May 2011 advised he just got information that AUK would cancel RCL’s sales agency, so on 31 May 2011 Amy emailed Kim to inquire whether AUK would continue to supply TOP to RCL and keep RCL as its sales agent (B13/2544) to which Kim replied AUK would not decline to keep RCL as its sales agent if there were no problem with price payment (B13/2545). Philip and Danny both agreed RCL remained as AUK’s sales agent and AUK resumed TOP supplies to RCL. Marcus remembered AUK resumed TOP supply to RCL after Danny suddenly arranged to settle the AUK Debt. I disagree RCL only started to order TOP from AUK in/about September 2011 so that TOP sales in March to October 2011 were lost. The purpose of the AUK Payment was to have AUK resume TOP supplies, and Kim emailed Arion on 24 May 2011 (ie the day after the AUK Payment) to ask about deliveries required from AUK for May 2011 (B13/2532). I prefer Philip’s evidence that RCL proceeded to place POs with AUK to the value of about US$100,000.00-US$200,000.00 per month right after May 2011 for shipment to be made over several months. As discussed below, the collapse of trading business was due to Arion’s integrity/conflict problems that caused reluctance on the part of infrared and other TOP customers to place POs with RCL and LML rather than with any issue over funding for and/or resumption of TOP supplies from AUK. 132.Reasons for 20/5/11 Document On 4 June 2011, Danny emailed Philip with copy to Amy asking for a “receipt of funds in the injection of 1M” (B13/2547). Philip asked Amy to handle this with reminder that such sum was to be regarded as shareholder’s loan by Powtek (B13/2548). Philip followed up on 4 and 7 July 2011 with suggestion to Amy that a simple letter for confirmation by EB would suffice (B13/2549-2551). On 18 July 2011 Amy asked Philip for help (B13/2553-2554), so Philip prepared the 20/5/11 Document and emailed Danny for relevant particulars (B13/ 2555). Clearly, the 20/5/11 Document came about in July 2011 (but back-dated to 20 May 2011) because of Danny’s request for receipt/record of Danny’s Loan that was booked as shareholder’s loan by Powtek to RCL and LML (and as a corollary it appeared useful to have some document to show EB had arranged the AUK Payment that would match AUK’s emailed receipt dated 26 May 2011 for audit purpose – B13/2550). In my view, the 20/5/11 Document was not for creating or recording legal relationship between RCL and EB. There was simply no contractual intention. XXVIII. PARTIAL REPAYMENT OF AUK PAYMENT 133.RCL could not meet its own repayment schedule, so Philip informed Danny by email on 31 May 2011 that the earliest he could give a cheque for US$40,000.00 (HK$311,200.00) would be “next Wed” (B13/2546). On/about 7 June 2011, RCL gave Danny a cheque for HK$311,200.00 payable to EB at Danny’s request (B8/1477-1478). Since such payment was to Danny’s order, the amount due to Danny in respect of the AUK Payment was reduced to the AUK Balance, ie HK$2,612,310.00 – HK$1,000,000.00 (Danny’s Loan) – HK$311,200.00 (cheque payment) = HK$1,301,110.00, which matched RCL’s journal entry on 7 June 2011 that RCL refunded HK$311,200.00 to Danny for “AUK CORP SETTLEMENT” (B2/147). XXIX. VARIATIONS 134.I find that in/about June 2011 Danny told Philip it was unfair to include Actual Sales of TOP in calculating any sales variance/shortfall under the Sales Commitment and/or Danny’s Undertaking since AUK ceased TOP supplies to RCL for several months. Philip reported to Marcus, and agreed to exclude TOP as Danny requested. Next, Danny admitted that on an occasion in June 2011 Philip suggested and he agreed (as there was a minor Shortfall that month) that starting from June 2011 “就三個月去計”, ie sales variance/shortfall under the Sales Commitment and/or Danny’s Undertaking would be calculated on quarterly (instead of monthly) basis. I accept that in/about June 2011 the Sales Commitment and/or Danny’s Undertaking were varied as per the Variations, which were considered to be fair to Danny. 135.The Variations were corroborated by Philip’s email in August 2011 (B13/2556) reminding Danny of his Sales Commitment for “quarter end review in this month (Mar – May, June – Aug)”, and Philip’s further email dated 5 September 2011 to Danny (B13/2557) referring to the Sales Commitment in the “2nd 3-month” and “the above figures are taken out the trade no”. By referring to the Actual Sales Value of SMP for June-August 2011 to calculate the Shortfall, and by accounting to Danny the AUK Balance that was set-off against the Shortfall for the 2nd quarter up to August 2011 (“2Q Shortfall”) calculated on such basis, Philip’s email supported the Variations, especially when Danny studied the contents of such email but raised no query/protest over the restriction to SMP sales for the Sales Commitment or non-fulfilment of any Preconditions and/or Implied Conditions. I disagree these emails were mere routine communications “between staff of the same company” about sales matters and/or the Quarter Variation was for mere convenience in “gauging performance of the sales team”. 136.Mr Kwok suggested the Variations were RCL’s/Philip’s unilateral attempts to vary the 25/5/11 Agreement without the concurrence of all parties to the original agreement,[100] so they amounted to anticipatory repudiation and Danny was discharged from his obligations:
Mr Kwok submitted it was just Philip’s wish to be fair to Danny, but both of them laboured under misconception or mistake as to fact that the Sales Commitment and/or Danny’s Undertaking were still binding on Danny after collapse of RCL’s and LML’s trading business. 137.I disagree. Marcus clarified in evidence he could not be sure of any variation after so many years, but recalled being briefed about the TOP Variation when he was shown the transcript of the 3rd 2011 RCL Board meeting held on 10 October 2011[101] where Philip explained Actual Sales for TOP were excluded because it was not easy for Danny to achieve the Combined Minimum Value when TOP business “冧咗”.[102] Marcus had wide responsibilities within the GR8 group, and he was not involved in RCL’s daily management (or in negotiating any variation with Danny). I accept the Variations had been reported to him, and he must have agreed on behalf of Primebase. It was also telling that when the Variations were raised at the 3rd 2011 RCL Board meeting, there was no surprise or objection from Tony, Shaowu and/or Danny (who just queried whether the TOP Variation was fair to him), which showed they must have known and agreed to the Variations. The fact Danny now sought to resile from the very Variations he requested or made in fairness to him spoke of the desperation and unreliability of his complaint. 138.I disagree the Sales Commitment and/or Danny’s Undertaking were abandoned/discharged because RCL’s trading business collapsed. When Danny gave the Undertaking and/or signed the 25/5/11 Agreement, he knew AUK had ceased TOP supplies because of the AUK Debt, but he made a considered commercial decision as to the Sales Commitment, and could not now cite these known matters to resile from liability. Anyway, I have found TOP supplies resumed shortly after the AUK Payment in May 2011, but there was no pick up in TOP sales. I find the collapse of trading business was due to Arion (who was under Danny’s supervision) setting up a competing business to solicit custom from RCL’s TOP customers. I could not see how RCL and LML could be faulted for this. Danny protested against being deprived of TOP sales to make up the Shortfall at the 3rd 2011 RCL Board meeting held on 11 October 2011, but as a result of Arion’s problems the level of TOP sales (with half weighting as compared with SMP sales) was nothing to smile about, and in my view this was just a convenient excuse to blame RCL and LML when Danny was pressed to pay up under the Sales Commitment. I find the Variations were agreed, and disagree there was any misconception or mistake as to fact, or any breach or repudiation as a result of exclusion of TOP sales in calculating any Shortfall. XXX. LML 139.Mr Kwok submitted LML no longer had any cause of action based on SMP manufactured by RCL only when the Variations excluded TOP sales. This argument is misconceived. The Sales Commitment, Clause 3 and Varied Undertaking were not about which company manufactured SMP, but about consideration moving from Danny for continuation of manufacturing operations, ie Danny’s Loan and Shortfall payable by Danny to RCL and LML, so LML was a necessary contracting party who together with RCL had right and locus to demand Danny for payment of the Shortfall. XXXI. 20/5/11 DOCUMENT 140.The 20/5/11 Document (B8/1472) was made/signed on/about 18 July 2011, but since it concerned the AUK Payment made on 23 May 2011, the parties inserted 20 May 2011 as its date. Danny saw the 20/5/11 Document for the first time in Philip’s office when he was asked to sign it, but he read the contents before he did so. The preamble of the 20/5/11 Document provided RCL owed the AUK Debt and EB would settle it on behalf of “Party A” (not defined), and Powtek, EB, RCL and LML agreed inter alia as follows (but failed to take into account RCL’s partial repayment by cheque in the sum of HK$311,200.00):
None of the parties spotted the errors identified above. 141.In my view, the parties to the 20/5/11 Document and Danny had no intention of creating legal relation between RCL and EB for RCL to pay monies to EB. The contract was between RCL and Danny, ie for RCL to take benefit of the AUK Payment and to reimburse Danny for having procured the same, and it was concluded in May 2011. Danny (not EB) orchestrated part performance by having HK$1,000,000.00 treated as Danny’s Loan and HK$311,200.00 made to Danny’s order. In my view, the 20/5/11 Document was mere paperwork created to satisfy (a) Danny’s request for confirmation that HK$1,000,000.00 out of the AUK Payment was booked as Powtek’s injection (when no monies came from Powtek) and (b) possible curiosity of RCL’s auditors as to the AUK Payment. In my view, EB had no locus or right to sue RCL, and its recourse would be against Danny. 142.Further, even though Clause 3 mentioned RCL and EB would work out a repayment schedule later on, there was already a repayment schedule in Philip’s email to Danny dated 30 May 2011 for HK$617,000.00 to be repaid in June 2011 and HK$995,000.00 to be repaid in July 2011, which lent weight to the view that the 20/5/11 Document was just paperwork to satisfy curiosity rather than a true contract. Anyway, Danny’s evidence that he studied the 20/5/11 Document before he signed did not sit with the unnoticed errors, which suggested no one was really bothered as it was just non-binding paperwork. 143.Danny’s email to Philip dated 21 November 2011 (B13/2582) baldly stated “…… in May when I have to pay the US$330K to RCL ……” (ie AUK Payment) without suggestion that EB contracted with RCL. Also, the letter dated 23 April 2012 by Danny’s former solicitors to RCL’s solicitors (B3/459) clearly asserted “your client [ie RCL] (as promised in May 2011) should repay the long outstanding [AUK Balance] to our client [ie Danny]”. No director/shareholder of EB came forth and no board minutes or accounting entries of EB were produced to show EB contracted with RCL. I have no doubt the 20/5/11 Document was not a legal contract binding between RCL / LML and EB/Powtek. XXXII. FORMULA 144.Understanding the Formula RCL, LML and the Four Shareholders adopted the Formula in various shareholders’ agreements to effect share transfers. The 25/5/11 Agreement was important for Primebase who had to advance over 90% of the 5th Additional Fund, so Marcus would not have signed without thorough understanding of the Formula and calculations. Philip went through them with Marcus who understood/ approved them. Philip then passed the draft 25/5/11 Agreement to representatives of Green, Newlink and Powtek, and also went through the Formula and calculations with them. 145.Marcus knew (a) the Defaulting Shareholder had to transfer RCL and LML shares to the Paying Shareholder and the number of shares to be transferred was prescribed by the Formula, and (b) the shareholdings of the Four Shareholders would be adjusted under the Formula to match the percentage proportion of their weighted aggregate shareholders’ loans. In my view, Marcus was not under any misunderstanding or mistake when he signed the 25/5/11 Agreement. It was neither here nor there that he could not recall at trial the details of the Formula without going through the calculations again. After all, after he approved the 25/5/11 Agreement, he largely left it to Philip to deal with other shareholders. 146.Like Marcus vis-à-vis Primbase, Danny was answerable to Powtek’s other shareholders, so he would have read, understood and agreed with the contents of the 25/5/11 Agreement before he signed for Ds. Indeed, he said “[Philip]就同我講過,但係我就冇用計數機去篤過個數出嚟係結果係點樣, 係, formula係知道嘅, 唔”. I find Danny knew the Formula would result in migration of RCL and LML shares from the Defaulting Shareholder to the Paying Shareholder with consequent dilution of the former’s shareholding (“如果借得多啲嘅, 佢就會係多啲股權; 如果佢借得少啲嘅, 佢就係少啲股權嘅”), which purpose I find was for the Four Shareholders’ shareholdings to match the percentage proportion of their weighted aggregate shareholders’ loans. Danny also knew if he were to pay any Shortfall, it would be regarded as additional shareholder’s loan by Powtek to RCL and LML whereupon each of Green, Newlink and Primebase would have to sell/transfer RCL and LML shares to Powtek according to the Formula. In my view, Ds knew the Formula was workable and also knew how it worked. 147.The Four Shareholders signed the 25/5/11 Agreement without query/objection, which tended to suggest the Formula was understood and workable. The Formula as understood by Marcus and Danny sat well with the agreed rationale in the 30/3/09 Agreement (paragraphs 40-41 above), and it made commercial sense for the Paying Shareholder who paid the most (and thus bore the greatest financial risk) to have the largest interest/control in RCL and LML. 148.But Danny in re-examination tried to put forward another understanding of the Formula, ie if a Paying Shareholder advanced the Defaulting Shareholder’s Proportionate Portion to RCL and LML, the former’s shareholding would not change but its aggregate shareholder’s loan would increase by such extra advance which RCL and LML would eventually have to repay to the Paying Shareholder. Such assertion (which was not pleaded) contradicted Danny’s evidence in paragraph 146 above and Mr Kwok’s submission in the paragraph below that such extra advance would be treated as the Defaulting Shareholder’s advance. Danny’s contention would also render the Formula quite useless. This clearly exposed the inherent unreliability of Danny’s evidence, and showed he was prepared to say whatever came to mind to resile from liability. 149.Loan and Shareholdings Issues I now turn to the “Loans Issue” and “Shareholdings Issue” that Mr Kwok raised in his closing submissions. He submitted that where a Paying Shareholder paid a Defaulting Shareholder’s Proportionate Portion “on its behalf”, such extra advance would be treated as shareholder’s loan by the Defaulting Shareholder, so the aggregate shareholders’ loans set out in the various supplemental shareholders’ agreements that treated such extra advances to be from the Paying Shareholder were all mistaken. Primebase was the largest Paying Shareholder, but the extra advances it made “on behalf of” Green, Newlink and Powtek should not be attributable to Primebase who therefore received more RCL and LML shares than it should, which error was exacerbated with each additional shareholders’ loan. Mr Kwok argued such mistaken position with the Paying Shareholder receiving transfer of shares as well as eventual repayment of the extra advances was an affront to common sense. 150.Mr Kwok submitted no one would have been so “silly” to agree to this, so it must be either carelessness or mistake, but Primebase would not have been careless with Marcus’ careful understanding, so the Four Shareholders must have been mistaken over the calculation of their shareholdings in RCL and LML as stated in the shareholders’ agreements, which view, Mr Kwok submitted, sat well with Ds’ stance that they did not understand the calculations and Ds’ complaint against dilution of Powtek’s shareholdings. Mr Kwok therefore argued the Four Shareholders, RCL and LML entered into the shareholders’ agreements under common mistake as to fact, so such agreements were void and of no effect. But even if the Four Shareholders accepted such mistakes and the Formula was to be “swept under the carpet, ignored and not applied in calculating the share transfer” by signing succeeding supplemental shareholder’s agreements, Mr Kwok contended it would not have aided the 25/5/11 Agreement as there was no succeeding agreement to acknowledge any mistake. It was said this court could not rectify the 25/5/11 Agreement to give way to any new mechanism that Mr Kwok dubbed as the “Pie Method” (paragraph 162 below) not found in clear/unambiguous words,[103] especially when Ps did not seek rectification to use (and there was no common intention to adopt) such method. 151.I make 2 initial observations. First, Mr Kwok’s arguments in paragraphs 149-150 above made its debut in closing submissions, and I was hard put to discern them in Ds’ pleadings. Secondly, commercial contracts made by commercial men should be read/interpreted in a way that makes commercial common sense if the contractual wording admits of such interpretation, and it is important to read the contract as a whole. 152.I find the blinkered focus on “on behalf of” flied against commercial common sense and express terms of the 25/5/11 Agreement, and it did not sit with Danny’s own evidence in paragraph 148 above. If any extra advance by the Paying Shareholder “on behalf of” the Defaulting Shareholder were treated as advance by the latter, then (a) the Formula would become meaningless because the Defaulting Shareholder would have been treated as if it had advanced its Proportionate Portion in which case it would not have to transfer any shares to the Paying Shareholder,[104] and (b) the Paying Shareholder would not receive any repayment from RCL and LML for the extra advance “on behalf of” the Defaulting Shareholder as it would be booked as advance by the Defaulting Shareholder. This logical conclusion of Mr Kwok’s argument affronted commercial common sense for the Paying Shareholder who forked out more monies than others would not get any transfer of shares or any repayment (in the absence of any side agreement for the Defaulting Shareholder to repay the Paying Shareholder of which there was none here except for the Private Deal). The Paying Shareholder would not have been so “silly” to subsidise the Defaulting Shareholder. Such argument also made the weighting of advances by the Paying Shareholder and the Formula for calculating transfer of shares redundant. It must be rejected. 153.The purpose in having the Paying Shareholder advance the Defaulting Shareholder’s Proportionate Portion or part thereof was to ensure RCL (and LML) would have the entire additional shareholder’s loan to meet needed funding requirement. But the shareholders’ agreements expressly provided for such extra advance by the Paying Shareholder to be part of its aggregate shareholder’s loan to RCL (and LML), eg extra advances in clause 1.2 of the shareholders’ agreement dated 1 August 2008 (paragraph 35 above) and in clause 1.3 of the shareholders’ agreement dated 8 December 2008 (paragraph 37 above) were attributable to the Paying Shareholder. The very existence of the Formula and consequent dilution of the Defaulting Shareholder’s shareholding upon transfer of RCL (and LML) shares to the Paying Shareholder, which clause 1.2 of the 30/3/09 Agreement (paragraph 40 above) explained was to “reflect the total amount of contribution and/or advances that had been made by the shareholders on behalf of the Defaulting Shareholders”, spoke against Mr Kwok’s contentions. But this consequence could be avoided if a shareholder paid its Proportionate Portion, so the Formula could not be said to be commercially unfair. There was no error or mistake of fact and hence no need for any succeeding shareholders’ agreement to confirm the loans and shareholdings in the 25/5/11 Agreement, but in any event the Four Shareholders by the 22/11/11 Agreement (paragraph 228 below) confirmed such calculations. I will deal with Mr Kwok’s criticisms of the Pie Method in paragraph 162 below. 154.Negative shares Mr Kwok next submitted that on occasions the Formula could result in negative number of RCL and LML shares to be transferred (eg Green and/or Newlink would not have enough shares to sell/transfer to Primebase under the Formula because each of them had to transfer the same number of shares to Primebase) which made no sense at all, so the 25/5/11 Agreement and/or Sales Commitment was void and of no legal effect. Mr Lo submitted such argument twisted the ordinary meaning of the Formula and ignored its overall objective and structural context. In my view, Mr Kwok’s interpretation was contrary to a fair reading of the 25/5/11 Agreement as a whole and in particular clause 2.3(b), definitions of “A” and “D” in the Formula and clause 3.3(e), which expressly provided for the Defaulting Shareholders (each with different Proportionate Portion and different proportionate shareholding) to sell/transfer different number of RCL and LML shares as per the Formula as illustrated in paragraphs 157-158 below. 155.Mr Kwok’s interpretation would mean a Defaulting Shareholder who failed to pay a small Proportionate Portion of an additional shareholder’s loan and who held very few RCL and LML shares would have to transfer the same large number of RCL and LML shares to the Paying Shareholder as another Defaulting Shareholder who failed to pay a large Proportionate Portion and who held a large number of RCL and LML shares because transfer of shares would only hinge on the Paying Shareholder’s aggregate shareholder’s loan and shareholding at the time. Mr Kwok gave other interesting illustrations in his written closing submissions (which I have carefully considered but need not repeat here). On such basis, Mr Kwok submitted the Formula was implicitly uncertain in the number of RCL and LML shares to be transferred, and it would not result in proportional shareholdings and proportional weighted aggregate shareholders’ loans as stated in the various supplemental shareholders’ agreements, so the Four Shareholders suffered from common mistake as to fact as to the operation of the Formula and its effect. 156.I start with the terms of the 31/3/09 Agreement (paragraph 40 above) and other shareholders’ agreements (including the 25/5/11 Agreement) that adopted the Formula, which the Four Shareholders had accepted and acted upon over the years. In my view, such Formula plainly provided for proportional adjustment of shareholdings based on the weighted aggregate shareholder’s loan granted by the Paying Shareholder who made extra advance for the Defaulting Shareholder such that the former would acquire such number of shares from the latter so that it would end up having the same percentage proportion of loan and shareholding. On such basis, it would have been impossible to have insufficient shares to transfer under the Formula. Each shareholders’ agreement recorded the weighted aggregate shareholders’ loans and shareholdings immediately before the additional loan to be advanced, and by signing such agreements Ps and Powtek (and also Danny for the 25/5/11 Agreement) acknowledged such loans and shareholdings. It was wrong and far too late for Ds to now say the Formula did not work for the reasons put forward. 157.The fallacy of Mr Kwok’s submissions in paragraph 154 above stemmed from misunderstanding of the Formula. This is perhaps best illustrated by actual operation of the Formula under the 25/5/11 Agreement. Using such Formula, the RCL shares to be transferred to Powtek were HK$12,664,600.00 (A) ÷ HK$320,000,000.00 (C) x 235,077,000 RCL shares (B) – 8,445,818 RCL shares (D) = 857,795 RCL shares, which RCL shares had been transferred from Green to Powtek on 19 July 2017 (paragraph 118 above):
158.Using the Formula in the 25/5/11 Agreement, the RCL shares to be transferred to Primebase were HK$274,335,400.00 (A) ÷ HK$320,000,000.00 (C) x 235,077,000 RCL shares (B) – 197,792,739 RCL shares (D) = 3,738,332 RCL shares, which 2,484,843 RCL shares and 1,253,489 RCL shares had been transferred from Green and Newlink respectively to Primebase on 19 July 2017 (paragraph 118 above):
159.Mr Kwok’s calculations ended up with negative number of RCL shares to be transferred to Primebase as a result of adopting HK$210,952,700.00 as “A” and 203,500,544 RCL shares as “D”. As a factor in “A”, Mr Kwok adopted HK$162,952,700.00 as “loans previously advanced” before the 5th Additional Fund,[105] but this was not the weighted aggregate shareholder’s loan advanced by Primebase before the 5th Additional Fund which should be HK$226,335,400.00 (paragraph 60 above). For “D”, Mr Kwok adopted 203,500,554 RCL shares as shares held by Primebase before the 5th Additional Fund, but this was after taking into account the Private Deal (paragraph 62 above). Clause 2.3(c) of the 25/5/11 Agreement (B3/390) made clear that transfer of RCL shares should first be calculated under the Formula and then adjusted as between Primebase and Powtek only by the Private Deal, so the Private Deal should be ignored for the purpose of the Formula, and the RCL shares held by Primebase before the 5th Additional Fund and before taking into account the Private Deal were 197,792,739 shares (paragraph 61 above). I reject Mr Kwok’s calculations and disagree the Formula as applied to Primebase would result in negative number of shares. 160.Further, there was nothing in the 25/5/11 Agreement to say Powtek would receive the same number of 857,795 RCL shares from Green and Newlink and/or Primebase would receive the same number of 3,738,332 RCL shares from Green and Newlink. Although clause 2.3(b) of the 25/5/11 Agreement referred to “each of Green and Newlink shall sell such number of shares of [RCL and LML] to Primebase or Powtek as determined by [the Formula] ……”, it did not mean Green and Newlink would each transfer the same number of RCL shares to Primebase or to Powtek. Primebase and Powtek were only concerned to receive 3,738,332 and 857,795 RCL shares respectively, but it was necessary to provide “each of Green and Newlink shall sell such number of shares ……” so that between them (a) they would come up with the total number of RCL shares to be transferred to Primebase and Powtek, and (b) they would have to divide their contribution of RCL shares to ensure their residue shareholdings would reflect the percentage proportion of their weighted aggregate shareholders’ loans as explained in the 30/3/09 Agreement and paragraphs 40-41 above. In my view, there was no merit in Ds’ challenge to the Formula and the calculations thereunder. 161.Dilution of shareholding Mr Kwok complained Newlink’s aggregate shareholder’s loan remained the same at HK$9,000,000.00 up to the 5th Additional Fund, but its shareholding was diluted from 18% (column 3) to 2.813% (column 43). In my view, this was a necessary result of (a) Primebase’s extra advances for the Defaulting Shareholders under successive additional shareholder’s loans over the years up to the 5th Additional Fund, (b) increased weighting of such extra advances for the purpose of calculations under the Formula, and (c) the Private Deal between Primebase and Powtek. Consequently, as Primebase made more extra advances for successive additional shareholders’ loans its percentage share of the Total Loans increased comparatively over time with corresponding decrease in Newlink’s percentage share as it did not pay its Proportionate Portions. Since shareholdings in RCL and LML were proportional to the weighted aggregate shareholders’ loans, inevitably Newlink’s shareholdings would be diluted. I reject such complaint. 162.“Pie Method” At the trial, the operation of the Formula as explained above was referred to pictorially as the Four Shareholders sharing 4 slivers of the RCL or LML Share Pie, and the size of each sliver would expand or contract according to the Formula whenever a Paying Shareholder made extra advance on behalf of a Defaulting Shareholder. I cannot see how an illustrative pictorial description of the Formula could amount to a new “Pie Method” as Mr Kwok suggested, or why Ps’ claim must fail because they had not applied to rectify the 25/5/11 Agreement to incorporate the same. The pictorial description merely provided visual analogy to aid understanding of share adjustments pursuant to the Formula. 163.Summary To accede to Ds’ arguments would give the Formula an absurd and uncommercial interpretation that ran against the clear provisions and true nature of the 25/5/11 Agreement as a commercial contract made by commercial men. The Formula was workable and Powtek made share adjustments in the manner explained above. I reject Ds’ suggestion there were “mistakes” in the shareholders’ agreements and/or previous transfers of shares were done by “mistake”. XXXIII. PO VALUE VS ACTUAL SALES VALUE 164.Sales forecast? As explained in paragraphs 77-78 above, the 25/5/11 Sales Plan could not have been mere sales target that required the Marketing Department to use best endeavours to meet, especially in light of express provisions for Danny’s “guarantee” in clause 3.1 of the 25/5/11 Agreement and his obligation under clause 3.2 to pay the variance/shortfall upon failure to meet the “targets” in the 25/5/11 Sales Plan. 165.“Guarantee” Mr Kwok submitted the word “guarantees” in clause 3.1 of the 25/5/11 Agreement only meant contractual “promise” or “warranty” that “may” be limited to warranting target sales but not paying variance/shortfall in clause 3.2, which was a stand-alone provision that did not come within the “guarantee”. I disagree. The 25/5/11 Agreement and particularly Clause 3 must be read as a whole, ie clause 3.1 set out Danny’s “guarantee” that the weighted “Combined Sales” would be higher than the “Guaranteed Sales” during the Commitment Period, and clause 3.2 set out the contractual consequence if Danny failed to meet such “guarantee”. 166.“Guaranteed Sales” equal PO Value? Mr Kwok next submitted “Guaranteed Sales” (and also “Combined Sales”) in Clause 3 referred to the PO Value, and Danny’s obligation was fulfilled once the Marketing Department secured sufficient PO Value to meet such target, which meant product delivery/invoicing that turned on RCL’s production/ delivery capability outside Danny’s responsibility were quite irrelevant. Mr Kwok submitted Danny would not be liable for non-delivery or short delivery caused by RCL and LML other than by its Marketing Department. 167.Philip claimed the Marketing Department was also responsible for arranging deliveries to customers, so it was answerable for delivery issues. But it is fair to say that Actual Sales involved at least the Production (manufacture), Marketing (sales) and Accounts (invoices) Departments.[106] However, in the absence of the Preconditions and Implied Conditions which I have rejected, Danny (as I have found) well knew (a) the Quality Level of RCL’s SMP and the then “as is” standard of RCL’s manufacturing operations with their inherent limitations and (b) the Marketing Department was to sell RCL’s SMP of the Quality Level, and had to bear the contractual consequences of not meeting the Minimum Value for such SMP sales. He could not blame RCL’s other departments for the then “as is” situation that he knew when he made the Sales Commitment. It was not, as Mr Kwok suggested, a matter of foisting production and quality issues on Danny. 168.Mr Kwok submitted “sales” in Clause 3 could not have meant “invoiced sales” as a matter of construction or implication[107] as there was no need to imply “invoiced” to the word “sales” for the provision was effective by simply using POs as the basis for “sales”. But the logical conclusion of such submission would be that the Implied Conditions (which Ds advocated to be part of the 25/5/11 Agreement) would be quite irrelevant, so Mr Kwok hastened to submit if “Guaranteed Sales” and “Combined Sales” in Clause 3 referred to the PO Value, there would be no need to imply the Implied Conditions. But this did not accord with Ds’ pleadings that averred as their primary case both (a) the “Guaranteed Sales” in Clause 3 meant POs solicited for RCL and LML and (b) the Implied Conditions applied to Clause 3, there being no alternative plea that the Implied Conditions were only applicable if Clause 3 referred to Actual Sales. Anyway, there was no need to imply “invoiced” to “sales” under Clause 3. I find the contracting parties (including Danny) were ad idem over the meaning of “sales” in Clause 3 and the Sales Commitment as they knew and understood it meant Actual Sales being common usage within RCL and LML, which also accorded with business common sense in the present context (paragraph 170 below).[108] 169.Relevant evidence I reject Danny’s allegation that in March 2011 he told Philip the Combined Minimum Value was based on the PO Value, and that “但佢話如果咁樣計，每個月好難做，…… 如果凈係有啲貨交唔到，當當個月吖，還是下個月呢咁，其實跟住我都冇去--再去所謂叫做挑戰喇，咁我話最好就按照番PO，因為我做銷售係純粹接PO”, which conversation did not feature in his statement evidence. On such basis, Danny did not explain why (given his and Philip’s different views as early as in March 2011) he did not have this clarified before he signed the 25/5/11 Agreement and/or at the 2nd 2011 RCL Board meeting held on 7 April 2011. He attended such RCL Board meeting which minutes showed it was mentioned in meeting he was obliged to “personally compensate” RCL if “actual sales” fell short of the sales on the 25/5/11 Sales Plan, but there was no evidence he raised protest over reliance on Actual Sales. At such RCL Board meeting, when Tony expressed concern over steep growth of the Combined Minimum Value in the sales plan, Danny replied inter alia:[109]
Interestingly, Danny did not mention the PO Value and could not credibly explain why he (who gave the Sales Commitment in contra-distinction to his role as Marketing Director, and who replied to Tony’s specific query as to the Sales Commitment) would need to chase other departments on production matters or refer to products “咪始終要ship出去囉係咪先, …… 成萬幾鈫美金㗎咁, …… 呢啲係銷售嚟㗎嘛” if the relevant criterion was the PO Value and not Actual Sales Value. 170.It was no answer for Danny to say the Marketing Department prepared monthly PO Report (by Arion/Simon – see paragraph 174 below) and Actual Sales Report (by Fan) for Philip’s financial review. Since RCL and LML were then suffering monthly loss, the Actual Sales Reports rather than PO Reports offered better insight of incoming revenue, especially when POs might not translate into immediate delivery/invoice and might even be cancelled. This coincided with Philip’s explanation that the PO Value had no financial meaning within RCL and LML because all within RCL and LML (including Danny) knew “sales” in internal communications (including for RCL Exco/Board meetings) referred to Actual Sales. 171.As for the 25/5/11 Agreement, Danny feebly suggested “我係諗過嘅[ie to include express provision for PO Value in the 25/5/11 Agreement]。…… 因為由於我本身就經常係出外，咁我記得當日Philip Chan畀我，好短時間畀我睇個內容，而且係應該通過有個叫做[Nicole]畀我簽嘅 ……” On such basis, Danny claimed he did not read the 25/5/11 Agreement clearly, which contradicted his other evidence that he did so and understood the contents before he signed. But even if he had not read the 25/5/11 Agreement before he signed, it was strange he never reviewed the signed copy that was given to him when (according to him) he knew he and Philip had different views over the meaning of “sales” (paragraph 169 above). In my view, this was just Danny’s poor attempt to shy away from liability. 172.The 25/5/11 Sales Plan gave inter alia the Minimum Value for SMP for each month of the Commitment Period. Danny said when he signed the 25/5/11 Agreement he had in mind the amounts in “每個月都有個銷售報表, ……, 亦交畀--响exco meeting裡面傾，亦會响呢個董事會裡面檢討㗎嘛” for comparison with the Combined Minimum Value. He explained “銷售報表” was in fact the Actual Sales Report, ie “銷售報表就按照每個月嘅銷售之後，出咗貨，然後做一個報表”, prepared by Fan from delivery orders (“DOs”) and invoices. Danny agreed he would review and comment on such reports before despatch to Philip and submission for RCL Exco/Board meetings. This showed that when Danny gave the Undertaking and/or 25/5/11 Agreement he knew the Combined Actual Sales Value would be used to compare with the Combined Minimum Value (which referred to Actual Sales) to ascertain the Combined Shortfall if any. Indeed, although Danny claimed “我冇每個月畀個figure公司對, 公司亦好似冇要求過每個月畀個figure”, he agreed Philip “佢就話「Base on你哋每個月嘅銷售報告喇」咁” (ie the monthly Actual Sales Report). 173.In all, I disagree the Sales Commitment was measured by the PO Value, which assertion ignored clause 2 of the 25/5/11 Agreement that expressly referred to “actual weighted combined sales” (my emphasis) that Danny agreed to mean “出貨量” and “其實我講係送貨”. I find Danny knew the Sales Commitment and/or Varied Undertaking referred to the Actual Sales Value and not the PO Value. 174.Comparison exercise Danny claimed the Marketing Department would liaise with the Accounts Department every fortnight for the number/value of copy POs in their possession to cross-check against the Marketing Department’s records partly to see whether the Combined Minimum Value was met (and Danny gave copy 25/5/11 Sales Plan to Arion for such purpose) and partly for general sales/marketing operations. Danny said up to July 2011 Arion would report the following by hard copy to him and soft copy to the Accounts and Marketing Departments at the end of each month: (a) a list of all POs for SMP/TOP for that month with breakdown for different types of products (“會有啲試驗批, 即係其他型號嘅試驗批, 即係未必係响個表裡面嗰啲, ……”), their delivery status (other than small quantity “試驗批”) and their PO Value (“PO Report”), and (b) any variance/shortfall upon comparison of such PO Value with the Combined Minimum Value. Danny claimed Arion told him the PO Value exceeded the Combined Minimum Value for June 2011 but “應該印象爭少少嘅” for July 2011, but Danny just waited for Philip to notify him how to deal with such variance/shortfall, “同埋我要計番係咪offset咗咁多數, 咁我先清楚㗎嘛, 係”. 175.Danny claimed after Arion left RCL in August 2011, the situation was confusing and no one reported to him on the comparison result for August 2011, but Simon carried out the comparison exercise for September 2011 as Arion did previously and reported to him “除咗個PO總數之外呢, 就有啲outstanding邊啲未交貨” and “隱約記得係爭少少嘅”. Later Simon left and no one did such exercise for Danny from October to December 2011 as Fan was unfamiliar with such task. Danny claimed the situation was confusing since “…… 公司有開董事會都--意圖或者--有意或者無意都係叫做架空我或者--都好似意思話唔需要我handle喇, 咁嘅意思, 係”. 176.I reject Danny’s suggestion that he asked Arion/Simon to carry out the aforesaid comparison exercise to work out any variance/ shortfall under the Sales Commitment. First, I prefer Philip’s/Ngan’s evidence that (a) only the Marketing Department kept POs except the Production Department had “加工單” and POs for the customer Detection Technology (“DT”) (paragraph 252 below), and (b) only the Marketing Department knew whether/when to deliver and in what quantity. I find it strange for Arion or Simon to check with the Accounts Department for the number/value of the POs when (even according to Danny) copy POs with the Accounts Department all came from the Marketing Department. Anyway, such alleged exercise appeared unnecessary for just working the PO Value in contra-distinction to Actual Sales Value of delivered/invoiced products. More importantly, Simon gave evidence he was never asked to compare the PO Value with the Combined Minimum Value in the 25/5/11 Sales Plan, which directly contradicted Danny’s evidence. 177.Secondly, Danny claimed he gave the 25/5/11 Sales Plan but not the 25/5/11 Agreement to Arion/Simon for them to carry out the aforesaid comparison exercise to work out any sales variance/shortfall. But without the 25/5/11 Agreement, Arion/Simon would not have known the weighting ratio between SMP and TOP, and I do not believe Arion/Simon reported to Danny such sales variance/shortfall as he alleged. Thirdly, the contemporaneous emails and/or minutes of the RCL Board/Exco meetings did not refer to the PO Reports at all, but instead referred to Actual Sales, and Danny was unable to offer credible explanation. 178.Fourthly, Danny mentioned potential set-off but did not say such set-off was against what. In my view, the only possible set-off for the value of any sales variance/shortfall under the Sales Commitment was the AUK Balance payable by RCL to Danny. Further, Danny’s obligation to pay such variance/shortfall was not dependent on notification or demand by Philip/RCL, but on such variance/shortfall being ascertained at month’s end. I reject Danny’s limp answer that it was for Philip to tell him the amount of such variance/shortfall. 179.Fifthly, whilst there were human resource issues arising from Arion’s integrity/conflict problems (paragraph 207(b)(i) below) in July/ August 2011, there was no confusion over the Sales Commitment which all (including Danny) clearly understood. Also, as discussed in paragraphs 212-214 below, I am unconvinced Danny was relieved of his duties before expiry of the Commitment Period. 180.POs I now turn to Ds’ case on the treatment of POs which, in my view, showed how improbable it was to use the PO Value to ascertain the Shortfall:
181.Ds did not credibly explain the alternatives in (b)-(d) above when their primary contention was the PO Value had nothing to do with delivery/invoicing. For (e) above, Ds did not explain how the imprecise exercise of investigation into the reason for cancellation of a PO or balance thereof would assist, eg who would decide and what criteria would be used to decide the reasonableness of the cancellation. What if there was partial delivery before the balance of the order was cancelled? What if the customer declined to give any reason for cancellation? In any event, as Danny did not say he had told Arion/Simon his methodology in paragraph 180(a)-(e) above, it is difficult to see how they could have calculated the variance/shortfall for June, July and September 2011. On balance, I consider use of the PO Value for working out the Shortfall imprecise and unworkable, and experienced commercial men familiar with business/sales operations such as Danny, Philip and other RCL directors would not have agreed to the same. 182.Danny must have recognised the aforesaid difficulties, so he claimed it was rare for customers to cancel POs even when the Production Department failed to meet requisite HFE standard, “因為我哋會就番個客戶, 就將update番嗰個HFE去畀客戶再試, 試咗之後, 基本上佢都會滿意再做番, 呢啲係我哋嘅銷售嘅service, 所以唔會有 …… 甚至呢啲問題存在。…… 即係話個情況大部分時間都可以補救番嘅”. But this did not sit well with Ds’ case that the Shortfall from June to December 2011 was due to cancellation of POs as a result of RCL’s poor manufacturing operations and breach of the Quality/Complaint Conditions. 183.I find the Marketing Department compiled monthly Actual Sales Report that recorded Actual Sales for Danny’s review/comments before they were emailed to Philip, and the monthly Actual Sales Value of SMP sales in such reports would be cross-matched to the monthly Minimum Value in the 25/5/11 Sales Plan to ascertain whether there was any Shortfall for June to December 2011. 184.Types of products Mr Kwok in his opening submissions suggested the Sales Commitment was limited to (a) the types of products itemised in the 25/5/11 Sales Plan and not any other products and (b) the itemised products with the unit price specified in the 25/5/11 Sales Plan, so even if RCL and LML earned revenue from sales of non-itemised products and/or itemised products with different (eg higher) unit price, such revenue or Actual Sales Value would not be included for calculation and comparison under the Sales Commitment. But this had not been pleaded nor canvassed in the statement evidence of Ds’ witnesses, and in my view Ds should not be allowed to run such non-pleaded contention. In any event, I find all parties understood, knew and agreed the total Minimum Value and total Actual Sales Value would be used to comparison and calculation to work out the Shortfall. XXXIV. AUGUST 2011 185.Simon’s review After Simon joined RCL on 9 June 2011, he felt the Marketing Department (like other departments in RCL) had room for improvement. He suspected Arion conspired with sales staff in Mainland China to harm RCL by setting up a competing business to poach RCL’s customers, and he further suspected Philip was involved because Philip supported Arion at meetings despite countervailing views expressed by Danny and Simon. As explained in paragraph 329 below, Simon also suspected Philip of receiving bribes in relation to back-metalling process. 186.On/about 17 August 2011, Simon told Marcus RCL had serious problems, and Philip was not doing his work as MD to deploy appropriate development, production and marketing strategies. Marcus asked Simon to identify and report on areas for review (mainly in respect of sales function) but not to carry out investigation, so Simon went around to gather information to prepare his report for Marcus (B3/641-687, “Simon’s Report”). Simon confessed Simon’s Report was prepared in 2 weeks’ time and he was not familiar with all the issues in RCL (B3/656). I find it did not really investigate pre-existing problems, but made forward-looking proposals, eg it was proposed to continue or even push production to use up raw materials and then cease production from December 2011 to February 2012 to effect sales from excess production up to November 2011 and from “[existing] stock [that] is good for sales for 4~6 months (Oct/Nov/Dec/Jan/Feb/Mar)”. But in the end, Marcus did not find Simon’s Report impressive or useful. 187.Shortfall Danny claimed he checked the PO Report at the end of August 2011 and found there was no variance/shortfall because the PO Value exceeded the Combined Minimum Value, but he also gave evidence of an impression that Philip told him at the end of August 2011 there was a shortfall under his Sales Commitment. Actually, Philip emailed Danny on 24 August 2011 to alert him about the Sales Commitment as “[the] quarter end review is this mth (Mar – May, June – Aug)” (my emphasis), and to ask him to “try [his] best to catch up the difference”. Danny replied by email on the same day with copy to Simon to say he would “try his best to catch up sales difference within next couple of days” (B13/2556). Danny claimed “…… 去到24號, 咁... 好多嘢我處理唔到喇, 包括出貨各方面, 我見到[Philip]掟呢個電郵, 我就回--好正常咁回覆番佢喇, 我會盡量, 叫番我哋嗰個sales assistant [ie Fan] 就盡量睇下倉裡面邊啲貨可以出嘅, 出晒佢, 送晒啲貨出去咁樣”. 188.But if, as Danny claimed, the PO Value for August 2011 exceeded the threshold by a wide margin and the Shortfall in June/July 2011 was minor, it was strange that he did not query Philip’s assertion of “the difference” for his Sales Commitment and instead assured Philip he would try his best to catch up. I find both Philip and Danny knew and expected there would be a variance/shortfall by end of August 2011 which was why Danny would need to catch up. There were some other obvious conclusions from the above communications. First, the “sales difference” was the anticipated quarterly Shortfall by the end of August 2011 under the Sales Commitment, which clearly concerned delivered Actual Sales (and not the PO Value) as Danny had to catch up such difference by product deliveries to customers from the warehouse. Secondly, Danny did not protest against “quarter end review”, which meant he must have agreed to the Quarter Variation. Thirdly, Danny’s email/evidence were inconsistent with any Preconditions and/or Implied Conditions which he did not cite when pressed on catching up with the quarterly “difference” under the Sales Commitment. 189.When the Actual Sales Reports confirmed the Actual Sales Value failed to beat the Minimum Value for June, July and August 2011, Philip emailed Danny on 5 September 2011 stating that a comparison of the Minimum Value for the 2nd quarter[110] and the “actual reported by [the Marketing Department]”[111] that had “taken out the trade no” produced the 2Q Shortfall of US$541,609.00 (HK$4,213,718.00) payable by Danny, but taking into account the AUK Payment of US$335,772.50 x 7.78 = HK$2,612,310.00 and partial repayments of HK$1,000,000.00 (treated as shareholder’s loan by Powtek) and HK$311,200.00 (US$40,000.00) (being RCL’s cheque repayment to Danny’s order) that left the AUK Balance of HK$2,612,310.00 – HK$1,000,000.00 – HK$311,200.00 = HK$1,301.110.00 payable by RCL to Danny, and upon setting-off such AUK Balance against the 2Q Shortfall (HK$4,213,718.00) (“Set-off”), Danny still had to pay HK$2,912,608.00 (sometimes rounded down to HK$2,900,000.00 or rounded up to HK$3,000,000.00) to RCL and LML within September 2011 (B13/2557). 190.Philip said (and I accept) after Danny received such email Danny came to him to complain it was unfair to make him personally liable for the 2Q Shortfall, and he wanted to see Marcus. Plainly it was only when Danny was pressed for payment that he raised the Preconditions as noted in Philip’s contemporaneous report of such discussion with Danny to Marcus by email dated 7 September 2011 (paragraph 200 below). I note there was no protest about not using the PO Value when, according to Danny, by the end of August 2011 he checked that the PO Value exceeded the Combined Minimum Value by a wide margin. 191.But even though Danny admitted he understood from Philip’s email that TOP was excluded (ie Philip’s use of the Actual Sales Value for SMP sales drawn from the Actual Sales Reports), he actually made purported payment by cheque in the sum of HK$800,000.00 in October 2011 (B13/2569) and asked for time to raise funds to so pay in November 2011 (B12/2557 and 2582). In my view, Philip’s email clearly set out the calculations for the 2Q Shortfall, account for the AUK Payment, and ultimate indebtedness due to RCL and LML after the Set-off, and on such basis the entire AUK Payment had been accounted for. Philip’s email was not about general sales for the purpose of RCL’s and LML’s business operations as Mr Kwok suggested. XXXV. AUDIT 192.In late August or September 2011, Patrick carried out the Audit concerning management issues arising from staff integrity/conflict problems with focus on the Marketing Department, RCL’s receivables and Philip (due to Simon’s complaint against him) rather than the Factory generally. As Marcus said, it was not unusual to carry out unplanned audits of group subsidiary companies, so the auditor would know how to minimise effect on business operations. I find the Audit took about 2 weeks and did not affect production or sales. Although Philip said a lot of things were put on hold around that time, he made clear it was due to the Marketing Department which I will turn to below. I disagree the Audit was a wide-ranging review of all departments such that most of production, sales and deliveries were withheld until October 2011. XXXVI. SHORTFALL FOR JUNE TO AUGUST 2011 193.Danny incurred no personal liability for March, April and May 2011 for the Combined Minimum Value was achieved or exceeded. But despite Philip’s email of 5September 2011 and his statement evidence that confirmed the Actual Sales Value was less than the Minimum Value for each month from June to December 2011 as set out in paragraph 11 above, Mr Kwok complained Ps failed to produce all invoices for the Commitment Period. But the Shortfall in fact was derived from a comparison of the Actual Sales Value drawn from the Actual Sales Reports for June to December 2011 (with Excel Summaries (paragraph 249 below) of itemised Actual Sales of SMP attached thereto) prepared the Marketing Department then under Danny’s supervision, which were reviewed by Danny before they were emailed to Philip, and the Minimum Value as stated in the 25/5/11 Sales Plan as known to Danny. In my view, Danny was well aware of such Shortfall being his exposure under the Sales Commitment. Anyway, Danny agreed he had carefully studied Philip’s email dated 5 September 2011 by checking the amounts stated therein against the Actual Sales Reports. I find he did so because he knew such email concerned (a) his own personal exposure under the Sales Commitment and (b) RCL’s account to him for the AUK Payment. Danny confirmed the amounts in such email conformed with the Actual Sales Value of SMP sales in the Actual Sales Reports, and although Danny disputed the Set-off, he agreed the arithmetical calculation of the 2Q Shortfall of US$541,609.00 and/or the net 2Q Shortfall of HK$2,912,608.00 after the Set-off was correct. There is no merit to the complaint about the quantum of the Shortfall. 194.Further, I am not persuaded there was omission of some Actual Sales Value of SMP sales in the Actual Sales Reports, which were routine reports prepared by the Marketing Department to cover sales by RCL, LML and LSW based on its own records which Danny had reviewed before they were emailed to Philip and submitted for RCL Board/Exco meetings. If there were missing Actual Sales after checking at the time when the Actual Sales Reports were prepared or upon receipt of Philip’s email dated 5 September 2011, Danny would have raised them with Philip which he never did. Further, maintenance of the paper trail depended on the diligence of the Marketing Department then under Danny’s supervision/control. 195.I find Danny knew the monthly Actual Sales Value for SMP sales drawn from the monthly Actual Sales Reports would be used for comparison with the Minimum Value, and I accept the 2Q Shortfall was HK$4,213,718.00 and the Shortfall for the whole Commitment Period was US$3,032,872.00 (or HK$23,595,744.00). Thus, subject to analysis of Ds’ other defence contentions discussed below, Danny was liable to RCL and LML for the latter sum (to be reduced by the AUK Balance if RCL succeeded in its defence in HCA1459/2012). 196.Ds next raised an unpleaded argument that all obligations under the Sales Commitment (if any) should fall on Powtek and not Danny. I cannot see how it could be said to have been obliquely pleaded in paragraphs 23(c) and 24 of the Re-Amended Defence. Danny in his personal capacity was a party to the 25/5/11 Agreement, which would have been unnecessary if he was not personally liable to RCL and LML for the Sales Commitment under Clause 3. In any event, Ds’ contentions flied against the clear terms of the 25/5/11 Agreement, and were contrary to discussions at the 2nd 2011 RCL Board meeting held on 7 April 2011 which emphasised Danny’s own personal liability.[112] XXXVII. IF DANNY HAD PAID THE 2Q SHORTFALL 197.As seen in clause 2 of the shareholders’ agreement of December 2011 signed by Ps but not Danny and Powtek (see B8/1515-1522 and Part XLII below), if the full amount of the 2Q Shortfall of HK$4,213,718.00 (2nd “5th Additional Fund” in Schedule 2) were received from Danny (which did not happen) and became shareholder’s loan by Powtek, the loans and shareholdings of the Four Shareholders would have been as follows:
198.Mr Kwok submitted that as the 2Q Shortfall would be treated as shareholder’s loan by Powtek to RCL and LML, the transfer of RCL and LML shares from GR8, Green and Newlink to Powtek under the Formula would have been an integral part of the Sales Commitment and/or Varied Undertaking, so if the Formula would not work because Green and Newlink would not have sufficient number of RCL and LML shares to transfer to Powtek, it would have been a common mistake of fact in respect of the Formula that would vitiate the 25/5/11 Agreement, the Sales Commitment and/or Varied Undertaking (including transfer of shares under the Formula). But I have found the Formula was workable and did work, and there would not have been insufficient shares for transfer under the Formula. In any event, there was no present lis by Powtek that it would be deprived of sufficient RCL and LML shares since Danny had not yet paid the 2Q Shortfall. Anyway, the calculations in the paragraph below showed the Formula would have worked with sufficient shares for transfer had Danny paid the 2Q Shortfall. 199.Using the Formula, the RCL shares that would have been transferred to Powtek upon payment of the 2Q Shortfall (which had not happened) would have been HK$25,305,754.00 (A) ÷ HK$332,641,154.00 (C) x 235,077,000 shares (B) – 9,303,613 RCL shares (D) = 8,579,925 RCL shares, which RCL shares would have been transferred from GR8, Green and Newlink:
Since Primebase, Green and Newlink together held 201,532,071 + 17,630,775 + 6,611,542 = 225,774,388 RCL shares, I am quite unable to see why there would be any risk of insufficient RCL shares for transfer. XXXVIII. SEPTEMBER 2011 200.Philip’s email report dated 7 September 2011 to Marcus (B13/2558-2559) recorded Danny’s request for a meeting and his other complaints:
In such email, Philip pointed out (and I accept) as follows:
Plainly, Danny did not cite any Preconditions and/or Implied Conditions until he was pressed for payment of the net 2Q Shortfall after the Set-off. 201.On 9 September 2011, Philip emailed Danny (B13/2560) to tell him Marcus could only meet him the following week. But Marcus asked Danny to help pay the electricity bill first, presumably because Danny was liable to pay the net 2Q Shortfall after the Set-off. At the meeting with Marcus, it was made clear to Danny the Sales Commitment was not subject to any Preconditions, but it was agreed to place his “complaints” of unfairness before the RCL Board. XXXIX. OCTOBER 2011 202.Purported cheque payment In October 2011, Danny drew a cheque dated 8 October 2011 and payable to RCL for HK$800,000.00 as purported partial discharge of his personal liability under the Sales Commitment (B7/1339). But on 10 October 2011, Danny asked Philip not to present such cheque “[as] the funds have not reached my account” (B13/2569). Philip told Danny money was badly needed to pay the electricity bill (B13/2570), and he chased Danny again on 13 October 2007 (B13/2571). Ds could not credibly explain why Danny would need to issue such cheque if he was not liable for any Shortfall and RCL still owed him the AUK Balance. 203.Set-off Danny claimed he never agreed to set-off the AUK Balance (payable to EB) against the 2Q Shortfall (allegedly due from him), but his complaint of lack of mutuality of debts fell away given my finding that RCL dealt with him and not EB in respect of the AUK Payment. As seen below, Danny did agree to such Set-off. 204.Papers for 3rd 2011 RCL Board meeting I start with the agenda items in the notice for the 3rd 2011 RCL Board meeting that Danny admittedly received (“Agenda”) for inter alia “[actual] sales performance vs plan for the period from March to September 2011”, report on the issues with the Marketing Department since the beginning of the year, and “[review the Marketing Director’s] sales commitment”. The meeting papers provided to the RCL Directors (including Danny) (B8/1485-1487) included inter alia a table titled “Committed Sales vs Actual (in US$)” (B8/1486, “Sales Table”) setting out the Minimum Value, “Actual Preliminary” sales figures for March to September 2011 already set out in Philip’s email dated 5 September 2011 (paragraph 189 above), and the monthly/quarterly variance calculations from March to September 2011. Such monthly variance for June to September 2011 can be seen in paragraph 11 above, and the 2Q Shortfall of US$541,609.00 was seen in Philip’s email dated 5 September 2011 (paragraph 189 above). The Sales Table contained 2 remarks as follows:
205.So Danny must have known from the Agenda and/or Sales Table that (a) Actual Sales Value for SMP sales (drawn from the Actual Sales Reports and adopted in Philip’s email dated 5 September 2011) was used for comparison with the Minimum Value (drawn from the 25/5/11 Sales Plan) to work out the Shortfall for each month from March to September 2011, (b) how the net 2Q Shortfall after the Set-off was calculated, and (c) the “Committed” sales in the Sales Table referred to SMP and not TOP sales. But Danny never gave written notice to Nicole to correct these matters in the Agenda, which went a long way to support the Variations and Set-off, and to show the Actual Sales Value was the relevant criterion for calculating any Shortfall. 206.3rd 2011 RCL Board meeting As Marcus said (and I accept), by October 2011 it was obvious to all Danny would be unable to generate sales to beat the Minimum Value, and the other shareholders grumbled over the decline in business. This was discussed at the 3rd 2011 RCL Board meeting held on 11 October 2011 as recorded in the corresponding minutes (which Danny claimed he had not read as he was often on away on business trip) and also in the 3rd (continued) 2011 RCL Board meeting held on 13 and 29 October 2011 as recorded in the corresponding minutes (which Danny claimed he had not read “因為嗰陣時候你已經架空咗我喇”). But I find Danny did read these minutes dated 29 November 2011 because paragraph 2 of the minutes of the 4th 2011 RCL Board meeting held on 22 November 2011 (which Danny also attended) showed the minutes of last meeting would be circulated by email for directors’ perusal and comment on/before 29 November 2011. Danny was sending/receiving emails during that period (B/2582-2584). I find the minutes of the 3rd 2011 RCL Board meeting held on 11, 13 and 29 October 2011 as signed by Marcus to be a correct record. 207.The minutes of the 3rd 2011 RCL Board Meeting held on 11 October 2011 (and Danny’s evidence in relation thereto) were interesting:
208.The minutes of the 3rd (continued) RCL Board meeting held on 13 and 29 October 2011 (B7/1344-1347) recorded the decision to close down manufacturing operations by the end of December 2011 with need for extra funding of HK$15,000,000.00 for such purpose, but customer DT asked RCL “to continue their production at least up to CNY 2012 rather than Dec 2011 ……”. It was minuted that the extra funding should be by way of “shareholders’ loan according to their shareholdings % in [RCL] once the sales commitment (HK$2.9M) injected by Danny with the following details:
The minutes further recorded “Danny agreed to confirm the payment schedule of his balanced sales commitment up to Aug, 2011 (HK$2.9M) on 1 November 2011, which should be paid in several partial payments and have everything fully paid on or before Nov 15, 2011”. It was also noted that Danny proposed to have the production lines subcontracted to him, and the RCL Board also resolved to accept Philip’s resignation as director with immediate effect. 209.Plainly, the 3rd 2011 RCL Board meeting discussed inter alia the net 2Q Shortfall after the Set-Off that was rounded to HK$2,900,000.00 (adopted in Philip’s email dated 5 September 2011 – paragraph 189 above), but Danny did not raise objection about (a) exclusion of TOP for working out the 2Q Shortfall, and (b) calculation of the 2Q Shortfall that was not based on the PO Value. It was also significant Danny agreed to such net 2Q Shortfall and only needed time for fund- raising,[129] which showed Danny not only accepted the accuracy of such amount but also agreed to and acknowledged the Set-off. 210.Danny reminded he did protest against the unfairness to him,[130] and further alleged the other RCL directors placed strong pressure/ blame on him, but there was no specific complaint against non-fulfilment of the Preconditions and Implied Conditions. In my view, he was merely grumbling and finding excuses to stall and/or escape liability. As seen above, the RCL Board eventually decided Danny should honour his Sales Commitment to pay the net 2Q Shortfall after the Set-off of HK$2,912,608.00, but as a gesture of goodwill it proposed to waive payment of any Shortfall for November and December 2011 if Danny honoured his Sales Commitment and paid the Shortfall up to October 2011. Marcus, Shaowu and Tony came to consensus on such proposal (B10/1890-1897, 1899-1908, 1909-1916 and 1919-1921) during internal discussions when Danny and Philip left the meeting,[131] and Marcus put such proposal to Danny when Philip and Danny returned to the meeting (B10/1929-1930):
211.I reject any suggestion that the Sales Commitment for November and December 2011 was waived in any event. There was no plea that the Sales Commitment under the 25/5/11 Agreement came to an early end by 31 October 2011 with waiver of the Shortfall for November and December 2011. Danny’s evidence was “印象模糊, 記唔到”, and any such suggestion was clearly a misreading of the proposal put forward by Marcus during the RCL Board meeting. I find Danny eventually agreed to the proposal, but whether he agreed or not he was still bound by the Sales Commitment and/or Varied Undertaking until December 2011 because he did not pay the Shortfall for June to October 2011. 212.Relieved of duties? Danny next argued the situation since August 2011 was confusing and he was relieved of his authority/duties as Marketing Director towards end of November 2011 when RCL appointed Patrick as executive director and appointed Shaowu “to direct the production outsource and trading business of RCL” (B8/1589), and since then the sales staff reported directly to Philip who often overrode Danny’s sales decisions, hence his liability (if any) under the Sales Commitment ceased upon RCL outsourcing production to outside manufacturers. 213.I do not accept Danny’s assertion. In my view, Patrick as group financial controller could not have taken over the sales function. I accept Marcus’ evidence that Shaowu did not replace Danny in November/December 2011. The fact he was appointed to direct production outsourcing and act as legal representative of LSW did not mean he took over the sales function since November 2011. Further, there was nothing in the minutes of the 3rd 2011 RCL Board meeting in October 2011 to suggest Danny was replaced. Although Marcus recalled discussion at such RCL Board meeting about change of personnel,[132] it was not about Danny. Mr Kwok submitted some discussions among Tony, Shaowu and Marcus when Danny and Philip left the meeting suggested otherwise,[133] but those matters debated in private were not raised with Danny.[134] I accept Marcus’ evidence that (a) no one was sent to replace Danny (at least before 22 February 2012), and (b) Danny as Marketing Director continued to be in charge of the Marketing Department and responsible for sales/marketing operations. 214.It was also plain from subsequent events that Danny as Marketing Director remained in charge of sales/marketing operations. In late September 2011, Danny was still instructing his sales staff to ensure there were proper/signed POs before requesting the Production Department to start production (B6/1309). He attended the 3rd 2011 RCL Board meeting held on 11 October 2011 to report on sales performance of the Marketing Department. In November 2011 Ngan was still chasing Danny for back-metalling instructions (B13/2581), and in November/December 2011 Danny was still liaising with customers such as “翔芯” (B3/4830). 215.Supplemental agreement On the same day right after conclusion of the 3rd (continued) 2011 RCL Board meeting held on 29 October 2011, Philip prepared/signed the supplemental agreement that Marcus referred to (paragraph 210 above) on behalf of RCL:
Such contemporaneous document was clearly consistent with Ps’ case. Danny was not proactive about this (B13/2575), and he ultimately did not sign. But it was neither here nor there as he failed to pay the Shortfall up to 31 October 2011 and the proposed waiver lapsed. 216.Share capital structure Also right after the 3rd (continued) 2011 RCL Board meeting held on 29 October 2011, Philip emailed Marcus, Tony, Shaowu and Danny about “Revised Share Capital” by enclosing Schedule 2 and stating as follows (see B13/2576-2577):
As explained in paragraph 33 above, Schedule 2 gave calculations of the 2nd “5th Additional Fund” which was in fact the 2Q Shortfall of HK$4,213,718.00 (US$541,609.00) for Danny’s information even when it had not yet happened. Also the Shortfall for September and October 2011 had not been included in Schedule 2. But all such calculations were consistent with Ps’ case, and reflected Ps’ insistence that Danny had to pay the Shortfall up to October 2011 before the proposed waiver would take effect. There was no email reply in protest from Danny. XL. CHASING DANNY FOR SHORTFALL PAYMENT 217.As explained in paragraph 202 above, RCL expected payment of HK$800,000.00 from Danny as partial payment of the 2Q Shortfall to settle RCL’s electricity bill, so Philip emailed to remind Danny about this on 24 October 2011 (B13/2574-2575). Further, as Danny promised to arrange payment of the net 2Q Shortfall after the Set-off before 15 November 2011, Philip emailed him on 12 November 2011 with copy to Marcus to remind him of his promise (B13/2578). There was no reply or protest from Danny. So RCL presented Danny’s cheque payment on 18 November 2011, and it was dishonoured (B8/1538-1539). That elicited email reply from Danny on 21 November 2011 complaining that he was still fund-raising:
Philip replied on 22 November 2011 as set out in paragraph 65(d) above (see B13/2583). 218.I disagree Danny had no idea about “the difference between lost sales” that he promised to pay and/or he gave the cheque merely “因為當時公司就比較困難 ……” The email communications showed he knew how the net 2Q Shortfall after the Set-off (HK$2,912,608.00) was made up, and in any event he could have easily calculated the 2Q Shortfall by comparing the Minimum Value in the 25/5/11 Sales Plan and Actual Sales Value for SMP sales in the Actual Sales Reports. Danny was fund-raising because he was well aware of his personal obligation to pay the Shortfall under the Sales Commitment. More importantly, Danny’s email did not argue any non-fulfilled Preconditions and/or Implied Conditions or any breach on the part of RCL that would absolve him from such liability despite his complaints of unfairness at the 3rd 2011 RCL Board meeting. LVI. NOVEMBER 2011 219.4th 2011 RCL Board meeting Danny attended the 4th 2011 RCL Board meeting held on 22 November 2011, and Patrick as new RCL director and Philip as RCL’s MD were also present (B8/1587-1590). At that time, the RCL Board was still hopeful that Danny would pay the net 2Q Shortfall after the Set-off (HK$2,912,608.00 rounded to HK$3,000,000.00),[135] and upon Marcus’ enquiry[136] Danny said he needed time to fund-raise.[137] But Marcus required a payment timetable,[138] so Danny replied as follows:[139]
In my view, Danny clearly acknowledged (without any assertion of non-fulfilment of the Preconditions and/or Implied Conditions or breach on the part of RCL) his obligation to pay the net 2Q Shortfall. 220.Shareholding situation sheet Danny discovered/disclosed in this litigation a typed sheet with italicised parts below in his own handwriting (“Shareholding Situation Sheet”):
221.Marcus explained in meeting (a) there was need for further funding to wind up the manufacturing operations[140] and (b) GR8 as the major shareholder would advance such loan if the other shareholders “係除咗Danny你” (who had to pay the Shortfall) were unwilling to make contribution at this critical period but suggested a weighting ratio of 1:5 to compensate GR8 for its financial exposure. When Tony queried this weighting ratio,[141] Philip explained it was 1:1 for the first HK$139,000,000.00 of the Total Loans, and later 1:2 and 1:3 were adopted for further shareholders’ loans.[142] Marcus suggested using actual figures to facilitate understanding,[143] so Philip explained that as at 21 November 2011:[144]
Philip repeated again “…… GR8 就八十八點一二五；Ne……Green Planet 就五點八八八；New Link 就二點二零八；Power Tech 就三點七八零”,[145] and stated such calculation included expected payment of the net 2Q Shortfall after the Set-off (“係呀，擺埋嗰二點九落嚟”) by Danny, which would be different if he did not pay.[146] 222.In my view, it was quite obvious that a sheet of figures was before the RCL directors at the 4th 2011 RCL Board meeting when Philip gave his explanation. After all, Danny asked “我上面嗰度呢Powtek 嗰度呢二點六八七呢 ......” (my emphasis),[147] which he tried to explain away by saying “因為我張紙, 我自己寫低有個數, 係, 我話我自己上面嗰個2.67係--因為我坐Philip Chan隔籬嘅, 係”, but this could not explain why Philip referred to “咁就會下面嗰個數” and “就講返下面嗰個數” (my emphasis) when he gave explanation to all directors (not just Danny). When pressed, Danny admitted “…… 有個巴仙，即係有個表”. I infer and find the Shareholding Situation Sheet was before the directors at the 4th RCL Board meeting, and the figures/percentages Philip gave tallied with the figures/percentages therein and those set out in the minutes (paragraph 208 above). This became even more obvious when Philip went on to tell Danny “阿Danny 或者你抄抄嗰個數啦，即係如果一千五百萬假設係全部係GR8 入嚟嘅話，…… GR8 個percentage 會變咗八十八點一二五；Green Planet 呢就五點八八八；咁就New Link 就二點二零八；咁就Power Tech 就三點七八零”,[148]and Danny then asked the percentage for Green to which Philip replied 5.888%, all of which percentages tallied with the manuscript percentages handwritten on the Shareholding Situation Sheet produced by Ds in the present litigation. 223.When Danny asked Philip whether Powtek’s percentage of 2.687% included the shareholder’s loan of HK$1,000,000.00 (ie Danny’s Loan that was treated as shareholder’s loan advanced by Powtek),[149] Philip replied Powtek’s 2.687% shareholding not only included such HK$1,000,000.00 and also took into account HK$1,300,000.00 (ie rounded-off amount of the AUK Balance).[150] Further, as seen above, Philip referred to “咁如果Danny 真係嗰二點九就入晒嚟呢咁就會下面嗰個數, 咁呢個數我諗我之前第一次開會嗰陣時好似subsequently 係出咗個email 俾畀大家㗎[ie Philip’s email dated 29 October 2011 to Marcus, Tony, Shaowu and Danny and the 2nd Schedule in paragraph 216 above]，就講返下面嗰個數”. 224.In my view, Danny was unable to offer any or any credible explanation for not raising protest when all the above calculations on the basis that he complied or he did not comply with his obligation to pay the net 2Q Shortfall after the Set-off of HK$2,912,608.00 were laid out for him. Danny plainly knew he had to pay the net Shortfall after the Set-off against the AUK Balance. Danny tried to wriggle out of this by saying he copied down the percentages orally given by Philip on “draft paper” (草稿紙) containing irrelevant contents that he brought to such RCL Board meeting, and he only wrote down Powtek’s percentage of 2.687%. Even though he asked Philip about Green’s percentage, he claimed he did not copy down the percentages for other shareholders because on another occasion he had raised query with Philip “…… 如果股東借入嚟嘅錢, 個share相對嚟講又大番, 好似唔合理, 因為借入嚟嘅股東嘅錢係suppose係loan嚟嘅, 要還番畀股東, ……” I have already rejected Ds’ argument that advance by the Paying Shareholder would only enlarge its aggregate shareholder’s loan without transfer of RCL and LML shares (paragraph 148 above). But when pressed, Danny gave a wholly different account, ie before the 4th 2011 RCL Board meeting Philip “…… 响個房裡面寫過一條數畀我嘅, 即係開會前嗰張紙”, which became the “draft paper” Danny brought to the RCL Board meeting on which he jotted down the percentages. So Danny had to accept “入去[meeting]我就知道個數字，我就記起番”. In my view, Danny’s differing accounts were not credible, and I reject them. 225.Danny then claimed that immediately after the 4th 2011 RCL Board meeting he went to Philip’s office to request for formal shareholding information, so Philip came to his office on the same day to give him the Shareholding Situation Sheet. “……因為我條數係有喇, …… 開會之後入咗我房, 畀呢張紙, 我就--因為呢度空白㗎嘛, 我再叫MD畀番個數我, 我抄低呢個數”. But Danny could not sensibly explain why Philip would have given him a typed sheet with old figures/percentages, which Philip had already updated at the RCL Board meeting that every day. Danny could not credibly explain why he did not feel any need to jot down the percentage shareholdings of other shareholders at the RCL Board meeting, but changed his mind immediately afterwards. In my view, Danny was plainly making up his evidence as he went along, and he understood and accepted the calculations in the Shareholding Situation Sheet were wholly supportive of Ps’ case and undermined Ds’ case. 226.Net 2Q Shortfall I reject Danny’s criticism of the net 2Q Shortfall after the Set-off of HK$2,912,608.00 that right after the 4th 2011 RCL Board meeting at his office he told Philip “…… 入AUK條數唔係我本人嘅, 係一間叫Eternal Billion嘅, 唔能夠去咁計, …… 佢話2.9 mil., 其實我已經係提出質疑, 應該係四十五萬幾美金乘番7.8港幣嗰條數, 唔係等於2.9 mil，……” There was no evidence apart from Danny’s bare assertions, which I find to be unreliable, that he raised query with Philip in the privacy of his office. Danny agreed his doubts/queries over the calculations (which, contrary to Ds’ case, were based on the Actual Sales Value that excluded TOP) simply turned on whether or not the AUK Balance should be taken into account by the Set-off, but I find he understood “2.9 mil.” referred to the net 2Q Shortfall after the Set-off. Further, Danny did not even mention EB when Philip explained the calculations at the 4th 2011 RCL Board meeting, and I disagree he did not do so because “其實當時呢個股東會議氣氛係好差嘅”. When pressed, he agreed he should have raised shareholding distribution issue with the director representatives of the other shareholders at the 4th 2011 RCL Board meeting rather than with Philip (who was merely RCL’s MD and who had resigned as RCL director) after such meeting. 227.Danny claimed he should not have read the minutes of the 4th 2011 RCL Board meeting “因為嗰段時間係公司都比較混亂，同埋自己就--當時都好似半架空我咁，好似嗰個情緒應該--可能唔會睇㗎喇”. I have found he had not been relieved of his duties at that stage (paragraphs 212-214 above). In any event, he was present at such RCL Board meeting, had the Shareholding Situation Sheet and thereafter signed the 22/11/11 Agreement (paragraph below). 228.22/11/11 Agreement At the 4th 2011 RCL Board meeting held on 22 November 2011, it was resolved (a) the Four Shareholders would sign a contract that set out their agreements reached at such RCL Board meeting (B8/1588), and (b) Philip would then prepare a formal shareholders’ agreement for their further signature. The Four Shareholders did enter into the written agreement in (a) above right after such RCL Board meeting (“22/11/11 Agreement”, B8/1591-1592) which Danny signed for and on behalf of Powtek:
Marcus confirmed the above matters were discussed at the 4th 2011 RCL Board meeting,[151] and the reference to Powtek’s aggregate shareholder’s loan of HK$10,348,410.00 plainly took into account the AUK Balance of HK$1,301,110.00 and confirmed the Set-off.[152] I disagree Danny signed the 22/11/11 Agreement for Powtek merely because “當時嘅氣氛好差, 我係確實冇睇, 而係一開完會就捉住啲股東大家簽, 咁嘅情況, 類似咁嘅情況”. 229.Danny claimed that discussions by director representatives of the Four Shareholders at RCL Board meetings were never intended/ regarded as effective agreement. But here it was not just discussions. Marcus, Tony, Shaowu and Danny on behalf of the Four Shareholders took the further step to sign the 22/11/11 Agreement, which preamble made clear it was intended to be and was binding (“[following] as were agreed and will be incorporated into a detailed supplemental shareholders agreement later” (my emphasis)), and Ds’ refusal to sign the formal shareholders’ agreement in December 2011 did not mean the 22/11/11 Agreement was any less binding. 230.Mr Kwok argued clauses 1-3 of the 22/11/11 Agreement merely concerned conversion of shareholders’ loans into shareholders’ equity, and references to the RCL and LML Boards suggested it was just a minute of the 4th 2011 RCL Board meeting about RCL’s business. I disagree. The reality was the Four Shareholders controlled the RCL and LML Boards, and there would be no impediment for putting into effect what they had agreed at the RCL Board and LML Board meetings. Further, the 22/11/11 Agreement could not have been a minute of such RCL Board Meeting as its terms showed it was a true agreement, and proper minutes were separately prepared. 231.It was said even though Danny signed the 22/11/11 Agreement for Powtek, he did not sign in his own capacity so it could not be said he agreed to the Set-off. Such obtuse stance did not reflect well on Ds’ case, and I find the reality was Danny knew and agreed for the AUK Balance to be taken into account by way of the Set-off in calculating the outstanding amount he owed to RCL and LML. In any event, the Set-off concerned reciprocal claims which were (a) due and payable, (b) liquidated or capable of being ascertained, (c) mutual and (d) unconnected to and independent of each other, so I am unable to see why such legal set-off could not be exercised in the present litigation irrespective of any prior agreement by Danny. 232.Follow up On 28 November 2011, Philip emailed Danny to ask when he would pay “the $2.9M. Need a schedule pls”, and to inquire whether Powtek would make contribution for the further shareholders’ loan of HK$17,000,000.00 (see B13/2584 and paragraph 236 below). On 5 December 2011, Philip sent a follow-up email to Danny on the same subject (see B13/2586) to no avail. XLII. DECEMBER 2011 233.In December 2011, Philip prepared the agreement to be signed by Green, Newlink, Powtek, GR8, RCL, LML and Danny (which was the detailed shareholders’ agreement envisaged at the 4th RCL Board meeting held on 22 November 2011 and in the 22/11/11 Agreement, “12/11 Agreement”) (B8/1515-1522). The 12/11 Agreement was signed by all parties except Ds. In my view, Danny did not sign not because he did not agree to the Set-off but because in breach of contract he refused to pay the Shortfall. 234.Clause 2 of the 12/11 Agreement provided that “[per the 25/5/11 Agreement] and the actual sales up to August 2011, [Danny] need to pay [RCL and LML] HK$4,213,718 for the sales shortfall up to August 2011. As at 31 October 2011, [Danny] had paid [RCL and LML] HK$1,301,110” (B8/1517). 235.Under clause 1 of the 25/5/11 Agreement Powtek’s aggregate shareholder’s loan as at 30 April 2011 (ie after the 4th Additional Fund) was HK$8,047,300.00 (B7/1332 and paragraph 114 above),[153] and after the 5th Additional Fund (which took into account HK$1,000,000.00 being Danny’s Loan treated as shareholder’s loan by Powtek) Powtek’s aggregate shareholder’s loan as at 31 October 2011 was HK$9,047,300.00 (see B8/1517 and paragraph 114 above). Clause 2 of the 12/11 Agreement provided that pursuant to the 25/5/11 Agreement and Actual Sales up to August 2011 Danny was required to pay RCL and LML the 2Q Shortfall of HK$4,213,718.00 which was to be treated as shareholder’s loan by Powtek of which the AUK Balance of HK$1,301,110.00 had been paid by RCL to Danny by the Set-off, so if the 2Q Shortfall was received in full from Danny, the aggregate shareholder’s loan by Powtek would be increased to HK$9,047,300.00 + HK$4,213,718.00 = HK$13,261,018.00 (B8/1517-1518). 236.The 12/11 Agreement provided the Four Shareholders agreed to advance to RCL and LML by way of shareholders’ loan a further sum of HK$15,000,000.00 (“6th Additional Fund”) (see clause 3.1 at B8/1518). Green, Newlink and Powtek were unable to pay their Proportionate Portions, but GR8 agreed to advance on their behalf (clause 3.2 at B8/1518-1519). Under clause 3.3 (B8/1519), it was said if Danny did not pay HK$2,912,608.00 (ie net 2Q Shortfall after the Set-off) under clause 2, the additional shareholder’s loan would be increased to HK$17,912,608.00. 237.Clause 3.4 of the 12/11 Agreement (B8/1519-1520) provided the Four Shareholders agreed that the 6th Additional Fund was to weighted at 5:1 to the first HK$139,000,000.00 out of the Total Loans of HK$221,000,000.00 as at 31 October 2011 and the other sums of HK$17,000,000.00 and HK$65,000,000.00 were weighted at 3:1 and 2:1 respectively for the purpose of calculating the new shareholdings in RCL and LML, and each of Green, Newlink and Powtek who did not advance its Proportionate Portion of the 6th Additional Fund would sell/transfer such number of shares to GR8 as determined by the Formula at a nominal price of HK$1.00 with A, B, C and D defined as follows:
It was also agreed the number of shares to be transferred to GR8 and Powtek would be adjusted as per the Private Deal, but this would only affect the shareholdings of GR8 and Powtek in RCL and LML. 238.Clause 5 provided 80% of the Total Loans (including the additional shareholders’ loan of HK$4,213,718.00 from Powtek (if any) and HK$15,000,000.00 from GR8) would be converted into shareholders’ equity of RCL and LML on the basis that the Four Shareholders would maintain the same percentage of shareholdings (in terms of the total shareholdings held by them) in RCL and LML. 239.GR8 and Newlink respectively advanced HK$14,800,000.00 and HK$200,000.00 of the 6th Additional Fund (column 50). The total shareholders’ loan advanced by the Four Shareholders before and after the 5th Additional Fund were as follows:
240.But for the purpose of calculating the new shareholdings, GR8’s and Newlink’s 6th Additional Fund of HK$15,000,000.00 was weighted at 5:1 thus increasing their weighted aggregate shareholders’ loans to HK$348,335,400.00 (88.186%)[157] and HK$10,000,000.00 (2.532%)[158] respectively, which together with the weighted aggregate shareholder’s loans of HK$24,000,000.00 (6.076%) and HK$12,664,600.00 (3.206%)[159] advanced by Green and Powtek respectively would result in weighted Total Loans of HK$395,000,000.00 (100%) (bottom part of columns 50-51). 241.The total number of RCL shares held by each of the Four Shareholders before and after the 6th Additional Fund (but before taking into account the Private Deal) would be as follows:
242.But the total shareholdings of the Four Shareholders after the Private Deal (ie transfer of 5,707,805 RCL shares from Powtek to GR8) and the 6th Additional Fund were as follows (see columns 43-49 and 52-55):
243.The provisions in the 12/11 Agreement were consistent with the operation of the Formula as explained above. Further, the minutes of the 3rd and 4th 2011 RCL Board meetings showed GR8 and other shareholders (except Powtek) agreed to continue manufacturing operations at least up to end of December 2011. In fact, Factory staff would not be notified until November 2011. Philip confirmed RCL’s production (eg for customer DT) continued until end of February 2012. Indeed, Danny agreed RCL still operated the Factory after 31 December 2011. XLIII. 2012 244.On 4 February 2012, Danny emailed Patrick with copy to Philip and Amy to state inter alia that “RCL owed [EB] HK$1,312,000” and Philip had promised RCL would pay such debt (which was not paid), and he asked for reply as soon as possible (B13/2590). This did not sit well with the letter by Danny’s former solicitors about 2 months later that asserted RCL should pay the AUK Balance to Danny (paragraph 143 above). On 6 February 2012, Philip replied by email to Danny and Patrick with copy to Amy to say inter alia he had never so promised (B13/2591). 245.Danny said in July 2012 Marcus and Philip planned to increase RCL’s nominal share capital. This was unsurprising since the 22/11/11 Agreement provided for conversion of all shareholders’ loan into shareholders’ equity (ie new RCL and LML shares to be issued). This was reflected in the 12/11 Agreement (paragraph 238 above) and in the email dated 20 November 2012 from Philip to Marcus, Tony, Shaowu and Danny with copy to Patrick and Nicole saying that new RCL and LML shares should be issued for conversion of the shareholders’ loan into share capital, but because of the present litigation the 6th Additional Fund had not been reflected by share transfers amongst the Four Shareholders (B13/2596-2600). Powtek remained a shareholder of RCL and LML. XLIV. 2013 246.On 2 January 2013, LML’s auditor sent a Confirmation of Accounts to Powtek stating LML’s books showed HK$9,049,130.50 was due to Powtek, but Powtek did not countersign the same (B8/1554). On the same day, RCL’s auditors sent a Confirmation of Accounts to Danny stating RCL’s books showed HK$1,304,023.26 was due to Danny, but Danny did not countersign the same (B8/1555). RCL’s auditors told Danny HK$1,304,023.26 was derived from HK$1,301,110.00 (ie AUK Balance) with some small sums, which in my view was consistent with Ps’ case. XLV. BREACH BY RCL AND LML? (a) Ds’ case 247.Ds argued there was breach of the 25/5/11 Agreement that would entitle Danny not to pay the Shortfall as there was insufficient delivery of TOP following collapse of trading business due to RCL’s lack of funds to settle trade debts due to suppliers. I reject such argument as the Variations excluded TOP. 248.In light of my findings, I also reject the suggestion that RCL and LML were not entitled to claim for the Shortfall because of breach of the implied obligation to be able to deliver sufficient quantity of SMP with quality sufficiently “acceptable to” or “to the satisfaction of” the customers to satisfy POs secured by the Marketing Department[166] in that (a) for various reasons there was insufficient delivery of SMP (with particular delinquency from June to December 2011), (b) the inventory stock was not saleable, (c) the Factory could not achieve effective yield for bulk production, and (d) poor quality of manufacturing and SMP led customers to cancel POs (even though production yield and quantity was reasonable from March to July 2011 through efforts by Danny and Peng). I have found there were no Implied Conditions. But Mr Kwok submitted since (a)-(d) above showed the Shortfall was attributable to RCL’s and LML’s own fault, Ps could not succeed in their claim when RCL and LML were in breach of their obligations. 249.Mr Kwok submitted that a comparison of the discovered POs (which did not appear to be complete but see discussion in paragraph 252 below) and available excel summaries of itemised invoiced/delivered sales as attached to the Actual Sales Reports (“Excel Summaries”)[167] showed (i) RCL failed to deliver at all for some POs, (ii) there was partial delivery for some POs, and (iii) RCL failed to meet customers’ demands in quality/ quantity. Mr Kwok set out in Appendix V of his written closing submissions a summary of alleged overall delinquency in deliveries drawn from Charts 1-5 compiled from available materials:
(b) Ps’ response 250.Ps denied any breach by RCL and LML. Mr Lo submitted the value of extrapolated conclusions premised on incomplete set of POs for Actual Sales of SMP in March to December 2011 (paragraph 252 below) was minimal, especially when Ds compared dry numbers without putting them to Ps’ witnesses during cross-examination (save for a few sporadic examples), and when Ds sought to bolster such numbers by evidence from Simon and Kam. Mr Lo further submitted the evidence of Philip and Ngan should be preferred. (c) Overview 251.I reiterate that all along Danny was aware RCL and LML were in a difficult position as its finances were tight and there were quality/ yield problems with high-end/bulk SMP production, and he also knew it would have taken a long time for RCL and LML to see any meaningful improvement in product quality and/or production techniques. As Marcus said, the matters Kam raised about the quality of RCL’s SMP were not secret or new, and yet Danny (knowing the Quality Level and the then “as is” condition of RCL and LML) made the Sales Commitment and/or Danny’s/Varied Undertaking without quality, quantity and/or funding conditions. These findings would inform Ds’ allegation of breach on the part of RCL and LML, and I am unconvinced there was failure by RCL and LML to meet the Quality Level and then “as is” threshold. (d) POs 252.I have found the Marketing Department did not provide copy POs to other departments except (a) the Production Department would have “加工” orders and DT’s POs which required Ngan’s signature and endorsement of the completion date, and (b) Philip might be asked to approve a particular PO for a special deal with, say, substantially lower price or significantly longer credit period. Philip confirmed the available POs (for SMP) kept by the Marketing Department (then under Danny’s supervision) and still in Ps’ possession had been discovered in this litigation, and there was insufficient basis to suggest Ps failed to make full discovery irrespective whether there had been other POs (paragraph 194 above). I note the available Excel Summaries prepared by the Marketing Department had certain “***” entries without identifying the PO number, so not every sale (especially those in Mainland China) could be reconstructed with full set of documentation. (e) Actual Sales Reports / Excel Summaries 253.The Actual Sales Reports covered Actual Sales of TOP and SMP to customers (but not intra-company sales among RCL, LML and LSW although intra-company sales to LWS had to be invoiced for customs clearance) and “加工” orders for the customer Sunful. Actual Sales in Hong Kong were effected by RCL and LML, and those in Mainland China by LWS (although RCL sometimes affected sales in Mainland China through informal channels), but it did not matter since “其實我哋三間公司都係一盤貨嚟睇嘅啫, 只不過on paper, on book, 我哋要分開啫”. The disclosed Excel Summaries for invoiced SMP sales (largely based on invoice dates) gave itemised particulars of inter alia invoice number, PO/ DO number, customer name and product type. The aggregate Actual Sales Value for various SMP product types were summarised in corresponding Actual Sales Reports. Other Excel Summaries for, say, Actual Sales of TOP by RCL, LML and LSW were not disclosed, but TOP was irrelevant under the Varied Undertaking. (f) Production planning requests (“PPRs”) 254.The Marketing Department should issue PPR signed by Danny to “生產管理部、硅片生產部、測試生產部、工程管理部、測試應用部、採購部” at the beginning of each month. PPR was a rolling forecast of production output for different types of products for the subject month and the following 2 months based on monthly POs, market condition, sales projection and warehouse inventory. But the Marketing Department was always late in issuing PPRs,[168] and despite demands by the Production Department there was no PPR for September 2011, so there was no production output forecast for November 2011 as at September 2011. 255.PPRs were important within RCL and LML as other departments (eg Procurement and Production Departments) would plan and coordinate their work accordingly. 30 days’ lead time was required to procure materials[169] and further time was needed for the production process.[170] A small buffer quantity would usually be added for production purpose as actual POs could be more or less than the forecast output in PPR, and the buffer quantity would vary with a higher buffer quantity for products with a higher fail rate. “即係話如果市場部做呢一個[PPR]係正確嘅、合理嘅, 咁多數啲order都可以entertain到㗎喇, 但係相反, 如果佢個planning根本係冇咁多嘅, 咁有機會我哋係唔夠貨嘅 ……” Thus, the Marketing Department in accepting POs had to check for available inventory. (g) Other channels of communications 256.At the weekly “生產調度會” chaired by Philip and attended by representatives of all departments, the Production Department would update on production status and the Marketing Department might raise any urgent production request for work coordination but not individual POs. There were also weekly Marketing Department meetings that Philip also attended, and other ad hoc meetings, eg between the Marketing and Production Departments to sort out issues over sales requirements and production support. (h) POs and production 257.Production at the Factory concerned “加工”/“做版” and/or SMP. When the Marketing Department received a PO for SMP, its sales staff should find out whether there was available inventory for such product (and if so its location) to make sure RCL could meet the delivery date. Ngan/Philip explained RCL’s computer system allowed real-time checking of products in the warehouse (成品倉), on the production line, and in the testing and back-metalling areas (where parameter testing, back-metalling processing and quality control checking were carried out, and where the products were kept at “乾燥箱”). The sales staff also had to check records of inventory with subcontractors for processing works. Such exercise was important as other departments would not receive POs. I disagree the Marketing Department would give copy PO to the Accounts Department for review of terms of sale and purchase, which was a sales and not accounts function. I also accept the Production Department would not manufacture products without PPR as it would not know what type of products to manufacture and in what quantity. This was borne out by emails from the Production Department to the Marketing Department chasing for PPR for September 2011 as it was unable to plan procurement/production for November 2011 (paragraph 310-312 below). 258.If an unexpected PO was received outside the PPR forecast and no ready inventory was available, the Marketing and Production Departments would have to work together to prioritise production for the required products if possible (and the PPR for the following month would be updated to include such production output). 259.Upon completion of production and testing (but pending outsource “加工” to be arranged by the Marketing Department and/or back-metalling to be done upon instructions by the Marketing Department – paragraphs 316-329 below), the completed products would be sent to the warehouse for storage. (i) Delivery to customers 260.Danny claimed the accounts manager would notify Fan to check for inventory stock if the PO terms were in order, then Fan would prepare DO for checking by Amy, and if found to be in order Amy would sign the DO and issue an invoice for Fan to pass to the warehouse to arrange delivery of the relevant products, DO and invoice to the local customer (who would return the countersigned DO to the Accounts Department with copy for the Marketing Department) or to the Shenzhen office for onward delivery to customers in Mainland China (and Kam would fax the countersigned DO to Fan with copy to the Accounts Department). But I have found only the Marketing Department and not the Accounts Department would have POs, and it was the Marketing Department that liaised with customers and knew the quantity/time for delivery, so it was for the Marketing Department to issue DOs countersigned by a sales manager or Danny (and failing their availability by Philip) to collect the relevant products from the warehouse, and to forward copy DO with particulars from PO to the Accounts Department for issuing invoice before arranging delivery of products with invoice to the customer. 261.Thus, production was driven by PPRs to maintain sufficient inventory to satisfy actual POs, but at times there might be product shortage (eg more actual demand than in the forecast) or stock build-up (eg excessive production forecast, unsold buffer production or downwards revision of PPR forecast). In the latter situation, inventory should be cleared first and further production deferred.[171] Given that production was driven by PPRs and/or additional requests for particular POs, and deliveries were driven by POs/DOs, all of which were issued by the Marketing Department, warehouse inventory level was under the control of the Marketing Department subject to market forces and customer needs. (j) Quantity issue 262.Ds claimed that due to quality problems RCL had insufficient quantity of products to meet POs causing short delivery or non-delivery. But in my view, it was unclear (a) whether there was actually short delivery or non-delivery for certain POs that was subject of Ds’ complaint, (b) whether any short delivery or non-delivery was attributable to default by RCL, LML and/or LWS or the customer’s own reasons, and (c) whether for (b) above such delivery problem was in excess of the then “as is” condition known to Danny at the time when he made the Sales Commitment. 263.Internal records Danny relied on certain Marketing Department’s records/summaries of outstanding deliveries to highlight what he referred to as quality problems leading to non-delivery and/or delay in delivery (B3/480-486). But such delivery issue in such records/ summaries for May 2011 was known to Danny before he made the 25/5/11 Agreement and was nothing new. I also note from such records/ summaries that the delivery delinquency was reduced by July 2011 as compared with earlier months. This was not any worse than the then “as is” situation when Danny made the Sales Commitment. 264.Reliability of PO Kam selected a PO from “廣州晶源半導體有限公司” dated 21 December 2011 and addressed to her (B5/1249) that specified delivery date of 21 November 2011 (ie a month before the PO date) from documents Danny gave her to support Ds’ case, but I am unable to place weight on such ambiguous PO, which did not reflect well on the reliability of Kam’s selected illustrations. 265.No identifiable POs In Appendix VII of his written closing submissions Mr Kwok identified 3 POs for certain deliveries marked with “***” in the available Excel Summaries, but there were many more “***” deliveries that could not be correlated to corresponding POs, so it was unclear whether full delivery had been made or not (especially when deliveries under a PO could be spread out over a period). Eg, Mr Kwok suggested a contract dated 2 June 2011 (B16/3066-23) corresponded to 3 invoices on 17 and 21 June 2011 to “東昇” for 50 pieces of “9014” and 50 pieces of “9015” (Excel Summary for June 2011 – B14/2613), but there were no deliveries for 100 pieces of “9012” and 100 pieces of “9013” in June 2011. But Philip noted deliveries of 40 pieces of “9013” and 30 pieces of “9014” on 14 and 20 June 2011 (B14/2614) and 50 pieces of “9013” on 1 July 2011 (B14/2619) with DO number. Although it was unclear whether these deliveries were for the above contract, they at least showed that deliveries were not confined to “9014” and “9015”, so the “dry numbers” would not necessarily point to the conclusions Ds wished the court to find. 266.Uncertain delivery dates Kam suggested insufficient ready products and uncertain production cycle caused customers to issue POs without specified delivery date, POs requiring delivery as soon as possible, and POs requesting reply on delivery (B5/1255-1257). But in my view, these descriptions on the POs did not necessarily mean there were production issues, and she eventually she confessed “…… 俱体唔知道”. Further, as discussed below, sometimes POs were not confirmed because they were held up by Simon. But even if it was due to production issues, Kam agreed these problems gradually surfaced in 2010, so they were part of the then “as is” condition known to Danny when he made the Sales Commitment and/or Danny’s Undertaking. 267.Further, uncertainty/omission of delivery dates in POs might be a sales problem, and Danny himself by a series of emails expressed concern that some POs were not properly formalised. Danny emailed sales staff on 23 September 2011 to say he would not arrange back-metalling in future without written POs (B6/1310), which elicited reply from a sales staff that there was no planned delivery for the PO by “廣州晶源” since Simon had not yet confirmed the price (B6/1310). On 24 September 2011, Danny again admonished sales staff to secure proper/signed POs before commitment to avoid accumulation of inventory (B6/1309). On balance, I am not persuaded there was breach on part of RCL and LML. 268.Insufficient inventory of saleable products Kam next suggested POs decreased because of insufficient inventory of saleable products (especially transistors) since customers refrained from placing large-quantity POs unless they were assured of readily available products from the Shenzhen warehouse or by quick delivery from Hong Kong. Kam made reference to “半成品, 成品庫存日報表” and “Store WIP報表” being records of RCL’s old and new inventory systems, but Kam who was stationed at the Shenzhen office only had access to records of the Shenzhen warehouse and not the computerised inventory records in Hong Kong. Philip said such computerised records in fact showed ready products for, say, T3904, T3906, T8050, T8550, T9012, T9013, T9014 and T9015. Ngan (who had computer access to real-time inventory records) also recollected that in 2011 there was inventory for different types of transistors and T596 with “起碼係五位數” at the warehouse, which coincided with Simon’s Report that suggested there was sufficient inventory to support sales for 4-6 months (paragraph 186 above). Philip also said there were occasions when sales staff complained of lack of inventory without carefully checking the inventory records.[172] Actually, at the 3rd 2011 RCL Board meeting, when Danny reported on the problems with the Marketing Department, he said even though Simon told him there were problems with inventory stock in Shenzhen, “但係我唔覺得 …… 有問題喇, 只不過去得慢 ……” (B9/1776-1777). 269.Kam cited the PO by “廣州晶源半導體有限公司” in paragraph 264 above for purchase of inter alia T9014 (177 pieces) to illustrate alleged lack of available inventory, but the “Store WIP” records (B5/1200-1201) showed a variety of T9014 available at the Hong Kong warehouse as at 15 November 2011 and there was also record of 291 pieces for T9014SC/L210A1 at the Shenzhen warehouse at the end of December 2011 (B4/989). Such PO also bought 110 pieces of T9013SS, but “Store WIP” showed 1,918 such items available at the Hong Kong warehouse as at 12 December 2011 (B5/1240), and further inventory record showed 774 such items at the Shenzhen warehouse (B4/931). 270.I am unconvinced it had been shown there was overall lack of inventory even though there might be occasions when there might be shortage of high-end products due to yield issues and/or higher foul-out rate, but this was nothing secret or worse than the Quality Level or the then “as is” situation known to Danny when he made the Sales Commitment. Kam suggested SQ, BKN and DGZ in the records meant “異常情況, 不能正常出貨”, but as discussed in paragraphs 271 and 304-305 below, downgrade items were not necessarily unsaleable as it would be a matter of price and customer requirements/needs. 271.Excessive inventory of unsaleable products Simon referred to excessive unsaleable stock in Simon’s Report, especially foul-out items (especially for T596) stockpiled and stored at the 1st and 4th floors of the Factory that did not meet specified HFE parameters and were not saleable (except as foul-out parts for low price) but recorded as “WIP”. I reject Simon’s suggestion that the Production Department deliberately removed the foul-out items from the records to cover up the low yield rate. Both Philip and Ngan frankly accepted (and Danny knew) RCL manufactured low-end products, and had yield-rate issues with high-end/bulk production (eg for T596). The minutes of various RCL Exco meetings in 2010 and 2011 showed this was a known problem all along, and despite efforts this had not been resolved. Even Simon agreed this problem had some history. Ngan also frankly accepted there were downgrade items put in the warehouse. But this did not mean they were unsaleable, and some customers would take them at a cheaper price so their production capacity could be better utilised at low cost. In my view, there was no default on the part of RCL and LML as this was no different from the “as is” situation known to Danny at the time he made the Sales Commitment. 272.Cancellation of POs The PO for T9014 and T9013 dated 25 June 2011 (B16/3066-25) by “寧波芯光微電子有限公司” was cancelled 3 months later on 17 September 2011 (B16/3066-26), but the reason for cancellation was unknown, especially when there were deliveries of T9013 and T9014 to other customers in June/July 2011. 273.Ceasing production There was complaint that RCL ceased to produce certain products, eg “管理部會議紀錄及跟進報告” dated 7 November 2011 (B3/474) queried “翔芯Metal Gate是否stop”. I accept “翔芯” gradually placed less orders at lower prices, so it was decided at the 3rd 2011 RCL Board meeting held on 11/13 October 2011 not to take custom from “翔芯” and Danny was tasked to inform “翔芯”. But 1-2 weeks later “翔芯” suspended payment of invoices, so in early December 2011 Danny (with Philip’s support) decided not to deliver products to “翔芯” if it did not pay up. On 13 December 2011, “翔芯” wrote inter alia to complainRCL “將於近期關閉鋁柵生產線, 這將導致我公司UG光罩全部報廢” (my emphasis) and to ask for urgent return of “目前未生產的光罩寄[photomask]”. However, pending settlement of invoices by “翔芯”, RCL continued to manufacture metal gate until January/February 2012. 274.Mr Kwok suggested it was unfair for Philip to agree not to deliver products to “翔芯” and then to require Danny to pay for the Shortfall. I disagree. The fact Danny made the Sales Commitment did not alter the fact that he as Marketing Director should continue to carry out his sales function in a commercial way in the ordinary course of business, and I see nothing wrong in Danny’s business decision to cease supply for a customer who would not pay outstanding invoices. Likewise, Philip’s concurrence was usual managerial support by the MD to business decision by the sales director. I am unable to see how this could amount to any breach by RCL or LML. 275.Quality Level The PO dated 25 June 2011 by “遼陽澤華電子產品有限責任公司” for 70 pieces of “8050” transistor normal at RMB470.00/piece (B16/3103) with “要求: 1 HFE測試絛件: 5V/1mA 請注意” was outside normal parameters of RCL’s production, ie in excess of the Quality Level, so it was unsurprising there were no ready products for delivery. Further, the request “請確定發貨日期回傳” in this PO suggested RCL was unable to confirm delivery because of the special requirement. I cannot see any breach. 276.“深圳市中洋田電子技術有限公司” placed PO dated 15 July 2011 for 2N5551 and 2N2219 (B16/3327). Philip frankly accepted there was short delivery “因為我哋呢兩個model, 根本就係未成熟嘅 ……, 即係我哋根本都未做得好, 咁未做得好，呢個客有落單，其實係有一個風險嘅，根本交唔到貨嘅”, which risk was known within RCL as it was discussed at “生產調度會” that “技術未成” and “一路都做得唔好吖嘛”. In my view, such PO was outside the Quality Level, and the fact RCL could not make full delivery was not breach on the part of RCL and LML. 277.Bulk production “深圳市三聯盛半導體有限公司” placed a PO dated 6 July 2011 for “231.000 片” of “9013” transistor normal for RMB115,500.00 to be delivered on 21 July 2011 which was then changed to “7月底之前交第2批” (B16/3328). The Excel Summaries showed delivery of 121 pieces on 19 July 2011 (B16/2620) and 73 pieces on 1 August 2011 (B14/2626). Philip (who as MD was unconcerned with individual orders) could not confirm whether or not there were further deliveries, but even there was none the reason for short delivery was unknown. Further, Danny all along knew there were problems with effective yield on bulk production, and there was nothing to show short delivery was for cause other than this known problem if it were related to RCL. 278.Holding-up by Simon On 15 July 2011, “科威(肇慶)半導體有限公司” placed “原材料2011年7月來貨計劃” for “8050” and “9014” transistors for RMB689,500.00 with notation “註: 9月底前要完成!” (B16/3115-1). Neither the customer nor RCL signed this PO that specified “請貴司確認是否能按此明細供貨，如可請簽字回傳給我司, 如不可請注明能供數量” with notation “→待生產部回覆!” and “25/7/11”. More importantly, this PO expressly provided “以上需求量只屬備貨, 具體來貨請以我司的每周《來貨計劃》為準”. Philip explained (and I accept) “科威(肇慶)半導體有限公司” was the manufacturing factory for “廣州晶源”, and the last delivery on 18 August 2011 was for a test order that resulted in 2 complaints, ie “一個是投訴OS偏高，一個是有效晶片”. Although the customer might have expected deliveries to be made since RCL’s sales staff continued to follow up with test order and price negotiation, there was no evidence to show the order had been confirmed and there was no “每周《來貨計劃》” to show the confirmed quantity to be delivered. Instead, there was evidence that Simon held up bulk production and delivery. In an email dated 16 September 2011 to Philip, the relevant sales staff complained Simon held up delivery despite terms had been negotiated with the customer and “科威生產能力在行業中最強，技術最好的” (B13/2562-2563), which was consistent with the overall picture of Simon holding up delivery, production and production planning in August to October 2011 (paragraph 207(a)-(b) above). 279.Summary I find at times there was no full delivery due to the customer’s own needs/reasons, but at other times it was due to RCL’s and/or LML’s reasons as were within the then “as is” condition that Danny knew at the time he made the Sales Commitment. Philip/Ngan agreed (and I accept) RCL on occasions might run short on gold (for back-metalling process) for 1-2 days due to logistical issues, but it should not affect the overall production timetable. In my view, the matters discussed above did not constitute any breach by RCL and/or LML, and on balance the dry numbers referred to in paragraph 249 above do not demonstrate attributable default on the part of RCL and LML. (k) Quality issue 280.T596 Kam suggested T596 had problems with shift of IDSS parameters that failed to meet customer demand on quality/quantity, so customers gradually stopped placing POs and waited for availability of satisfactory products before doing so, which made it difficult to secure steady sales in the long-term, and which Simon claimed gave rise to customer complaints. It was said these problems had been highlighted to the Production Department during weekly meetings. 281.But RCL was not in the high-end market, and the standard of its T596 was not as good as that of its competitors. Ngan said T596 was a sophisticated product that was difficult to manufacture, and RCL had yet to fully master inter alia “減薄” process. RCL and LML had spent years trying to improve T596, but there was still problem with effective yield-rate on bulk production. In short, as Philip said, “我哋事實上係做得唔好, 不過我哋仍然都有自己客戶群, 不過係低端嘅客戶群”. 282.I reject Simon’s complaint of deliberate absence of online quality control to conceal material wastage, substandard production and low yield. Rather, RCL’s senior management and Ngan as senior manager of the Production Department was quite upfront about RCL’s limitations, and these problems were well documented in the minutes/transcript of the RCL Board/Exco meetings (also attended by Danny). Eg RCL in late 2010 acknowledged there was still problems with transistor quality as RCL lacked on-site engineer to support growth.[173] Master Yeung was hired as consultant,[174] and the minutes of the 2nd 2011 RCL Exco meeting held on 24 March 2011 recorded in relation to “T596 (計劃如何穩定產品質量)” that “王達明將進行工藝測試, 並安排楊博士4月初來公司為顧問, 以便2個月內穩定產品片內均勻性及改善生產周期” (B8/1568). So when Danny signed the 25/5/11 Agreement he well knew the Quality Level of RCL’s T596 was not stable, there were issues with its production cycle, and Master Yeung had yet to fix these problems. Even if T596 continued to have problems including “產品片內均勻性及 …… 生產周期” problems (B8/1568) and “IDSS均勻性及 …… 產品飄移為題” (B8/1572), it was not for lack of trying to improve. I have explained the efforts made by RCL and LML to recruit management and technical staff (paragraph 84 above) even though there were no quick results.[175] But again this was nothing new or beyond the Quality Level and/or the then “as is” condition when Danny made the Sales Commitment. 283.Danny complained of slowness in effecting changes to upgrade the quality of T596.[176] But I find that when he made the Sales Commitment he knew it was impossible to turnaround RCL’s and LML’s problems in a short while.[177] To upgrade the quality of RCL’s transistors and T956 and/or to make improvements to the production / quality control process would have required years of financial investment as well as research and design. This was evident from Danny’s own observations on semiconductor business (and transistors consisted of semiconductor material) at the 3rd 2010 RCL Board meeting held on 19 November 2010 that:[178]
284.In the paper setting out discussion items for the 5th 2011 RCL Exco meeting held on 15 September 2011 (B3/465-466), item 2.3 proposed “加快T596E的工藝試驗, 改善參數飄移問題及提高Idss的均勻性, 儘快以T596E取代T596D作量產”. At the 3rd (continued) 2011 RCL Board meeting held on 13 and 29 October 2011, Danny said there were still problems with T596 with fluctuation in IDSS parameters after back-metalling which he recognised was not “今時今日㗎喇, 好耐㗎喇, 係咪先？”.[179] Kam also recognised the problems with T596 existed long ago as she claimed customers had not placed orders for such product since as early as January 2011. 285.I also note the unit price for T596 delivered to “深圳市冠鑫電子有限公司” ranged from RMB400.00 to RMB930.00 and the unit price for T596 in the PO by “宏寶” was RMB790.00, which showed T596 had different grading/quality with downgrade unit price at RMB400.00. I find that in putting forward unit price of US$102.00 (or about RMB640.00) for T596 in the 18/3/11 and 25/5/11 Sales Plans, Danny was thinking of selling average or downgrade T596 and certainly not expecting RCL to produce high-end T596. There was no merit in Ds’ challenge that RCL failed to meet delivery demand for high-end T596. 286.In my view, RCL’s senior management (including Danny) knew the quality of RCL’s T596 still lagged behind that of other major competitors, which was the Quality Level and the then “as is” position at the time when Danny made his Sales Commitment, and they recognised (a) any endeavour to improve product quality and production method would take a long time, (b) there was shortage of talent to be hired from the market for bringing out change, (c) changes might be futile even upon further investment and effort, and (d) there were uncertainties in short, medium and/or long term. Danny clearly knew not all inventory stock of transistor products (including T596) could meet the quality desired by customers. I find Danny could not now seize upon Kam’s complaints of unsatisfactory quality of transistors and T596 to absolve himself from liability under the Sales Commitment and/or Varied Undertaking. There was no breach by RCL and LML. 287.Interestingly, Danny blamed RCL’s bad management and insisted RCL would not have to improve or upgrade its equipment, facilities or furnace (as T596 fit into RCL’s 5” furnace pipes) or buy new equipment to manufacture good quality T596, and would only “需要有一啲輔助嘅設備, …… 但係有啲設備需要更新啲配件。….. 因為已經係老喇嘛, ……” But such assertion did not sit well with Simon’s evidence that the major reason for the poor yield-rate was due to RCL’s defective furnace with temperature fluctuation outside prescribed parameters. On balance, I reject both conflicting accounts by Danny and Simon who did not have the relevant technical skills. I also note RCL installed a new production line at the end of 2009 and upgraded equipment for old production lines, and a new evaporator was bought for the back-metalling process. 288.“宏寶電子科技有限公司” paid RCL tooling charge of HK$200,000.00 in April 2008 (B3/464) to develop 2SK596, ie “即係T596的5吋晶原片” (but I do not accept “宏寶” place any product order in 2008 as yet), and placed PO dated 10 March 2011 for bulk production of T596 with specified IDSS parameters for 800 pieces/month at RMB790/piece (B3/463) stating “此採購單為我司給予貴司於本年3月至12月的採購量”. In March 2011 Master Yeung had not yet joined RCL to tackle T596’s quality and production cycle problems. I accept Philip’s evidence that RCL delivered several sample pieces to the customer, but “宏寶” (whose standard was too high for RCL) declined to qualify them, so there was no point for the Marketing Department to solicit or take up such PO for committed bulk production and delivery starting from March 2011. It was therefore unsurprising “宏寶” cancelled such PO in July 2011 for the reason “…… 奈何貴司之產品至今均未能質量達標，特別是芯片的IDSS Drain Current飄移及離散性甚高” (B3/462). There was no breach of the Quality Level. 289.Kam complained (a) there were no orders for T596 between January and July 2011 even though “深圳市冠鑫電子有限公司” was prepared to accept T596 of whatever quality, (b) RCL was unable to produce sufficient quantity of T596 of “正常質量”, and (c) it was only in August 2011 (after Simon took over from Arion and “開始整頓”) that customers started to place orders for T596 but there was still insufficient quantity to meet demands. For reasons discussed above, I am unable to see how RCL could be said to be in breach. Master Yeung joined RCL in/about April 2011 with a view to tackle T596’s problems in/about 2 months. The fact that the Marketing Department was able to solicit more sales of T596 (albeit not high-end quality) in August/September 2011 was consistent with such arrangement. Further, for reasons discussed in paragraph 278 above and paragraphs 321-325 below, I do not accept such increased sales were due to Simon’s involvement, and in paragraph 27 above I have rejected Simon “開始整頓” the Marketing Department. 290.Simon complained there was outstanding delivery of 4,000 pieces of T596 for “深圳市冠鑫電子有限公司” in September 2011 (B3/723), but the PO dated 16 September 2011 by “深圳市冠鑫電子有限公司” was for 57 pieces of T596 (B5/1247) and “2011年09月份供貨訂單” issued by the Marketing Department (B6/1306) showed about 235 pieces of T596 were delivered to this customer in the latter half of September 2011. Further, Mr Kwok submitted that when “宏寶” cancelled its PO, “冠鑫” accepted downgrade products and those originally manufactured for “宏寶” leaving only a slight delivery delinquency. I am unconvinced by Kam’s complaints in relation to “深圳市冠鑫電子有限公司”. I also bear in mind that in/about August/September 2011, as seen in paragraphs 321-325 below, Simon held up back-metalling process which was a necessary last step for T596 before sale. 291.Overall, I am unconvinced that during the Commitment Period RCL’s T596 was worse than the Quality Level, and I am not persuaded that RCL and LML were in breach. 292.Zener and switching diodes When Danny made the Sales Commitment, he projected robust sales of zener and switching diodes and expected serious orders from CDIL and foundry customers. It was true there were technical problems with such product even in September 2011 (B3/1465-1466). For the technical issue concerning “玻璃封裝”, RCL did not have electroplating licence for Ag bump process (ie “係後面鍍銀”) which had to be outsourced. But such outsource production problem was not a new matter (footnote 55 above) but part of the then “as is” situation when Danny made the Sales Commitment. Further, in September 2011, RCL carried out “車間環境改造” (B8/1575.02) being the construction referred to in paragraph 82(f) above. In my view, the persistent technical issue was not due to lack of attempts at improvement by RCL and LML. Moreover, “上唔到量” was not a technical issue. The growth in sales that Danny envisaged simply did not happen which contributed significantly to the variance between the Actual Sales Value and Minimum Value. At the 4th 2011 RCL Exco meeting held on 11 August 2011, Danny confessed “礙於市場需求收窄, Zener/Switching Diode測試進度較預期緩慢, 預測8月銷售額只能完成營運計劃80%” (item 2 at B8/1574), and Philip asked Danny to clarify business prospects with foundry customer “翔芯” before end of August 2011 because “礙於配合翔芯生產訂單, 目前車間無論設備以至硅片原材料庫存均處於呆滯狀態” (see item 3 at B8/1574). In my view, RCL and LML were not in breach. 293.Customer complaint Kam said the relevant procedure for handling customer complaint and returned products was as follows: (a) the returned products should be accompanied by “退貨單” for cross-checking, (b) a complaint number would be assigned, (c) sales staff would fill out a complaint report, and (d) the complaint report, information by the customer, “退貨單” and returned samples would be submitted to technical departments in Hong Kong for investigation. 294.Kam’s account of her role in complaint handling was unreliable. At first she said her job was to record customer name, date of complaint and other basic data, and to convey the same to “對口部門” in Hong Kong for investigative analysis. But she went on to embroider her evidence by adding she would carry out preliminary investigation by visual inspection of the complaint samples and ascertaining the nature of the complaint to alleviate the workload of the investigative departments and to shorten investigation time. I do not accept such evidence. Kam’s role was essentially that of an administrative conduit, and I am unconvinced she participated in the preliminary exercise which was probably done by sales staff who would liaise with the customer in order to fill out the complaint report, and in any event “品質管理部” would carry out “表面” “鏡檢” if possible. 295.Simon complained of poor after sales service as most customer complaints were not recorded or attended to, which caused more customers to refuse delivery or put delivery on hold. This allegation flied against the complaint handling system as explained by Kam in paragraph 293 above, and the complaint reports and supporting investigation documents Kam produced (B3/495-612) that showed a responsible approach to technical investigation of complaints. Dedicated technical staff were assigned to support the Marketing Department for complaint handling (paragraph 82(e) above). It was up to sales staff under Danny’s supervision to follow up with the customers, so RCL and LML could hardly be blamed for any omission to do so. In any event, Danny claimed the Marketing Department was able to diffuse most complaints so there were few cancellations of POs. 296.Customer complaint: 深圳市振達電子有限公司 Kam referred to complaint no MRL1107041 in relation to 300,000 pieces of “C9318LA” delivered to this customer on 14 June 2011. The customer returned 179,526 pieces that were gradually replaced by “C9318LB” between July and September 2011 with compensation of 20,000 pieces of “C9318LB” in September 2011. The complaint report (B5/1107) showed the customer provided only 5 “加工” but “未封膠COB” samples. RCL’s “品質管理部” “估計與客戶加工過程有關” (B5/1107). RCL’s “測試應用部” reported defects caused by the customer: “經初步分析及按過往的經驗估計, 有關的膠狀殘留物應是客戶在加工過程中, 使用過量的黏合劑, 部份黏合劑在芯片固定在PCB上時, 段壓反流至芯片表面及壓焊區上, 令壓焊線未能壓焊在鋁壓上, 導致“幫不上線”現象” (B6/1311). RCL’s engineering department “用400X顯微鏡觀察, 沒有發現紅膠, 沒有污跡殘留, 以無法焊錢的PAD位勸察沒有發現其他異常, 在焊接的第一接觸點的表面的鋁層已經脫落” (B5/1109). In face of the aforesaid technical analysis, Kam (who had no technical expertise or complaint handling experience) still insisted the customer’s complaint was more reliable, but I find it reflected a hollow and partisan approach in her evidence. In any event, Danny said the Marketing Department worked with “測試應用部” and the customer, and the matter was actually resolved. The customer returned 153,886 pieces on 15 July 2011 (B6/1313) and 25,640 pieces on 4 August 2011 (B6/1314), which were ultimately sold (B6/1314-1315), which suggested the products were actually functional and still had a market. 297.Kam referred to another complaint no MRL1109068 by the same customer in respect of 100,000 pieces of “C9318LA” out of deliveries of 200,000 pieces on 1 and 10 August 2011. “3個成品板” was provided, and “品質管理部” pointed out “由於客戶退回存成品本, 故品管部無法對芯片表面進行鏡檢 ……” (B5/1113). After investigation, RCL’s “測試應用部” concluded the complaint was due to the customer’s own process (B6/1312):
Kam was unable to give further explanation as to why there was “compensation” of 10,000 pieces of “C9318LB” when the problems were caused by the customer. Indeed, the alleged defective products were not returned (which suggested they were still usable). 298.In the end, Kam had to admit she was not in a position to say whether the delivered products had any quality problem, and she just assumed the above 2 complaints concerned quality problems as RCL gave “compensation” of products of different model and “產品部份批次有質量問題”. I find this to be nothing more than speculation, and I reject them in light of the technical analysis by RCL’s relevant departments. As to Kam’s bare assertions that at that time (a) other customers also had a lot of complaints in respect of “C9138LA”, and (b) she knew there was quality problem because she shared the same office with sales staff and she would attend weekly sales meeting if she had no other work, I find them to be unreliable embellishments to assist Ds’ case. 299.Customer complaint: 東升電子 Kam claimed in October 2011 80 pieces of T9013SC A1 were delivered to this customer (50 of which were said to be returned products from “遼陽澤華” with no details as to why and how they were resold to this customer), and on 2 November 2011 this customer returned 50 “已划片” pieces under complaint no MRL1111082 (B5/5/1115-1118). The investigative analysis showed “對於50#產品划片時發現不料氧化玩[現] 象, 受影響面積小, 不會造成整片產品良率低的情況”, and “導致良率低的原因主要是VFEB和ICBO, VFEB主要是沒有打上線, 造成EB結開路, ICBO分析樣品沒看到PAD受傷情況, 認為划片前邊的影響可能較大一些” (B5/1117-1118). Kam said that from September to November 2011 170 pieces of the same product were delivered to this customer who alleged it suffered loss upon processing such products, but it did not submit quality claim report, and the matter was closed in February 2012 with RCL shouldering 15% responsibility (ie about RMB7,000.00 odd) which equated to 20 pieces of T9014SC A1 as “compensation”. In my view, in the absence of any quality claim report, it was unclear who was at fault (but it appeared the customer bore the bulk of the blame since RCL only took up 15% responsibility). 300.Anyway, as Philip said (which I accept), Danny himself recognised there were other problems arising from communication between this customer and the Marketing Department. Danny’s emails dated 23 September 2011 (copied to Kam) showed PO was withheld because Simon considered the unit price too low, but when Simon hiked the unit price the customer was not prepared to commit, and in the end Danny negotiated and reached agreement on the price with the customer (B6/1316-1317). So Kam must have known this customer had an uneasy relationship with RCL, but she kept silent on this. I am not satisfied RCL and LML were in breach because of the PO for this customer. 301.Customer complaint: 深圳市華之海實業有限公司 Kam said this customer complained of “來料破片、背金裂紋等等”. On 29 July 2011, 200 pieces of different models of T9013SS (of which 37 were stated to be SQ items) were delivered to this customer (B5/1250), but 44 pieces were returned to the Shenzhen office because “背金裂紋” (B6/1251). Kam claimed RCL should not have delivered these products unless the customer was told and agreed/accepted a discount, but the Shenzhen office did not realise substandard and regular products were mixed for delivery. Kam did not say what were the terms/circumstances under which these products were sold. Given the unit price for the 200 delivered pieces were the same, they should be SQ (surface issue items that Kam acknowledged “代表異常情況, 不能正常出貨”) or downgrade items. Further, the 37 SQ items were close in quantity to the returned products. The products sold were therefore known substandard items, but that should not have been a problem if the sales staff (under Danny’s supervision) did as Kam suggested. I cannot see how RCL and LML could have been faulted. 302.Kam next said “手上的灰塵汗水等均會導致產品失效”, and this customer complained about “矽片上有指紋”. She cited the example 174 pieces of “T9014SC A1” delivered to this customer on 24 May 2011 (B5/1252), all of which were returned on 21 June 2011 without “退貨單據”. There was no claim report, and Kam conceded in evidence she could not be sure who caused the finger marks. I am unable to place weight on this complaint. 303.桂林斯壯微電子有限責任公司 Kam complained that because of “嚴重偏檔參數問題” customers might return RCL’s products straightaway if the HFE “數據參數表” “合格率只有80%多或以下”, and later some customers wanted to review “數據參數表” first before delivery, which adversely affected monthly sales. Kam cited the example of 46 pieces of “T9013SA/L210 DGZ” (B5/1253-1254) returned by this customer without even opening the packaging (but without “退貨單據”), and out of 17 pieces (from the aforesaid 46 pieces) only 2 satisfied the customer’s HFE “要求檔位”, so it was said these products should not have been delivered in the first place. But as Philip pointed out, the delivered products were “DGZ”, ie substandard or downgrade products, and Kam confirmed “DGZ” “代表異常情況, 不能正常出貨”. Thus, the sales staff under Danny’s supervision ought to have brought up the substandard nature of the products with the customer and to have obtained its agreement to such standard before delivery. Ds could not now raise these matters and put the blame on RCL and LML. 304.Substandard or downgrade products (“殘次品”) At the 3rd (continued) 2011 RCL Board meeting held on 13 and 29 October 2011, Danny complained of wastage of wafer substrates (“廢片”) of possibly 1,000-2,000 out of 10,000 pieces. This was a bare assertion. In fact, “廢片數目” varied from time to time and was reported at weekly “生產調度會” (which Danny attended) with half-yearly and yearly summaries. This also showed that Simon’s suspicion of deliberate concealment of wastage by the Production Department to be quite illusory. Anyway, although Philip and Ngan fairly acknowledged there was still room for improvement in relation to the yield-rate, both said production yield had gradually improved in 2010-2011 and was more stable than before due to installation of a new production line at the end of 2009 (as known to all within RCL) with equipment upgrade for old production lines. This was also reflected in appreciative email from customer which Donny passed on to Ngan on 10 September 2011 with copy Philip, Simon, Danny and Peng (B13/2561):
It was interesting to note praise came from this customer “高泰” as well as from “翔芯”. It appeared customer relationship was not as complaint-filled as Kam would have this court believe. 305.Kam claimed transistors had common problems of “破片 (一分為二)、刮傷片 (部分面積刮花)、背金裂紋、偏檔, 包括半報廢片等等, 不能正常銷售” which had to be sold at discount, and attracted customer complaints that adversely affected customer demand. Ngan agreed that products with poor yield might be treated as scrap, but it might also be stored at the warehouse and sold as downgrade items for lower price. Ngan recollected there was stock of downgrade items which he urged the Marketing Department to clear at a lower price. I see nothing wrong for a manufacturer endeavouring to sell substandard products at a discount rather than to dispose of them as scrap. As Kam said, the important thing was for sales staff to make honest deals by drawing customers’ attention to the substandard nature of such products and negotiating sales at a lower price or better terms (eg longer credit period). I find this was not unusual in the electronic components industry, eg Kam said “冠鑫” was prepared to take on products of whatever quality, and Kam recognised there were SQ, BKN and DGZ products. Further, these downgrade products existed even before the Sales Commitment, and Danny and his sales team had been selling them. Actually, as Philip said, the situation actually became better in 2010-2011, but progress was handicapped by Simon’s failed low-price strategy (paragraph 207(b)(vi) above). I am unable to see how it could be said to be breach on the part of RCL and LML. I find on balance the quality of products of RCL and LML had not fallen below the Quality Level as known to Danny. (l) Other reasons 306.Customer reasons Some customers might misuse RCL’s and LML’s products and then raise unfair complaint. For example, in early August 2011 a customer complained about T9013SS with set parameters, but it appeared on investigation the customer used such product “來做SOT-23封裝會編高10-20HFE”, so Philip emailed Danny on 16 August 2011 saying the customer was using the product “to do other models and so request something different (from what his earlier email)”, and RCL could not accommodate such customer needs (B6/1318-1319). On the following day, Danny replied by email they had been instructed to clear the user only in accordance with RCL’s specifications to set standards (B6/1318). This showed Danny knew some customer complaints were not attributable to RCL and LML. 307.On 21 July 2011, Yu Hai Bo emailed Arion and the testing section with copy to Philip and Danny about analysis of complaint by “遼陽澤華電子” that “發現產生這次粘片上芯困難忘安是由於划片造成, 由於蓋膜表面的污染造成背面金屬的污染, 最後導致背面共晶不良, 造成黏片後推力不夠或脫芯。由於這次的66PCS均為我司圓片提供給客戶, 划片是客戶自己操作, 因此這次的異常主要是客人自己造成的, 與我們RCL沒有直接關係 ……” But without offering any other plausible reason for the alleged defect, Danny insisted under cross-examination this was just Yu Wai Bo’s say so and the customer was not unreasonable. I reject such complaint given the technical analysis, but in any event nothing arose from this since Danny said the Marketing Department liaised with the customer to have the matter resolved. 308.On 19 September 2011, “冠鑫電子” raised complaint no MRL1109071 that RCL’s C9318LB “功能錯亂”, and returned 12 pieces “未封膠的COB” (B3/545). But the investigation report by RCL’s “測誠應用部” (B3/547) showed the returned samples were C9318LA and not of C9318LB, and all returned samples “均未能通過現行測試程序(按鍵錯誤及功能錯誤), 初步估計有關芯片是在測識後的加工、儲存或在客戶的加工過程中被靜電損壞”. Nevertheless, Danny still declined to say the customer was unreasonable in raising complaint about products different from the returned sample, and tried to make up excuse by saying the customer might have been mistaken. In my view, this was unsupported speculation to embellish Ds’ case. 309.For complaint no MRL1202001 by “廣州維聲電子” dated 13 February 2012 in respect of C9318LB with 12 returned COB (B3/609), “經初部檢查後估計” by RCL’s “測誠應用部” (B3/611) was “有關的殘留物可能是客戶在芯片加工過程中, 固定芯片的PCB上時受壓反流至芯片表面及壓焊區上的黏合劑: 亦有可能是芯片受潮後, 殘留在芯片表面的液體”, but the customer did not provide further information despite liaison via the Marketing Department on 17 February 2012. This at least showed some of the problems relied on by Ds could have other causes. 310.September 2011 PPR The Marketing Department issued PPRs in the months of March to August and October to December 2011 (B2/240-252), but there was no PPR issued in September 2011 despite requests/reminders from other departments. When Ngan pressed for such missing PPR (given his particular concern that there was no production output forecast for November 2011), Simon replied to say he had concerns and would submit the same later (B6/1299), but none was submitted in September 2011. I disagree the omission had no impact on production. In the absence of production output forecast for November 2011, materials and chemicals procurement (which required lead time) could not be made in September 2011, which was made clear to the Marketing Department in the emails discussed below. There would still be some production output for November 2011 because the Production Department might attempt some tentative production with available raw wafers, but overall output would be significantly reduced (B6/1326 showed output for transistors in November 2011 dropped to 2,273 pieces from 4,949 pieces in October 2011). Danny had no answer to these matters except to feebly say he was unclear about the lead time required for procuring materials. 311.In items 2.5-2.6 of the paper setting out discussion items for the 5th 2011 RCL Exco meeting held on 15 September 2011 (B3/465-466), the Production Department advised that employees were concerned about RCL’s prospects given the low production volume, and they were worried that 4th quarter production target was not fixed. On 27 September 2011, the Production Department continued to press for the November 2011 forecast to plan consumption of photoresist. On the following day, Ngan again chased Danny and Simon saying that production lines should not operate below capacity, and worrying over foreseeable lack of output for November 2011 and risk of serious materials shortage. Danny replied he would give forecast the following day (see B6/1300-1311), but none was given. On 3 October 2011, Ngan chased Danny and Simon for PPR for October 2011 with retrospective PPR for September 2011 (B13/2567), and Danny replied he would do so that day (B13/2568). The PPR that was finally issued on 10 October 2011 covered production output forecast for October to December 2011. 312.I find the omission for the September 2011 forecast and the delay in compiling PPR for October 2011 had taken its toll on the production schedule and inventory level, and Danny who was in charge of the Marketing Department could not blame RCL and LML when the Production Department had expressed anxiety to him over the missing PPR. The emails also showed RCL had spare production capacity, so the Marketing Department’s default must have contributed to unsatisfactory inventory/sales/deliveries in late 2011. 313.Back-metalling process “半成品” that had not been back-metalled were stored at the warehouse. Back-metalling process was “後工序” before final re-testing for all transistors, T597, zener/switching diodes although some products required “封裝” and/or “划片” before delivery to customers. But as Philip explained, back-metalling was not done in-house previously, and RCL used to subcontract such process to other factories in Mainland China but quality control/checking were unsatisfactory. Danny also knew “…… 我哋做嗰個工藝就厚咗”. Further, cost of gold had increased. It was not possible to reduce back-metalling costs without new engineering process and new machine.[180] Danny recognised pure gold back-metalling was a loss-making process (“就係會呢一個會蝕本嘅, 咁因為愈做一塊就會蝕一塊, 因為係正如你講話厚咗”), but it still had to be done in order to effect sales to earn cash (“咁就但係仍然要做個量出嚟, 因為係需要要現金, 要有cash flow嘅”). 314.Setting up in-house multi-layer back-metalling or Au4 process (“多層背金”) using “雜金” / “摻金” rather than pure gold (“純金”) would reduce costs, minimise loss and increase RCL’s competitiveness. So in 2010 there was discussion of buying an evaporator to develop multi-layer back-metalling. The minutes of the 3rd 2010 RCL Board meeting held on 11 November to 14 December 2010 recorded “[we] had reviewed the new process which was proved by the customers (currently done by a subcontractor) and the machines will cost around HK$2M. This investment will reduce the cost of back-metal costs from US$22@ to US$2@”.[181] But Philip observed that even if a decision was made to carry out multi-layer back-metalling (“多層背金”), it would take 6 months to yield any result (item 1 at B9/1600). Peng hoped to resolve issues in relation to such process in 2-4 months, and noted (a) “余老師” opined that if RCL had good cooperation with bonding houses, RCL should be able to set up the new multi-layer back-metalling process in 6 months,[182] but (b) RCL had difficulty in hiring engineers (eg Cheung Peng declined to join RCL despite offer – paragraph 84 above). Although Danny claimed his experience at Philips (which was a much larger corporation) indicated that in theory it would take a month to “調試” an evaporator, he conceded 6 months might be right from Peng’s perspective “因為佢本身對晶體管未有一個十分掌握，因為我哋RCL本身係做計算機同埋鐘錶嘅IC”. 315.I find the various RCL Exco meetings from December 2010 to September 2011 showed RCL was making efforts in all respects (and even Danny conceded RCL did made effort to better its business), eg RCL made efforts to recruit engineering staff and Primebase advanced the bulk of the 4th and 5th Additional Funds, but still RCL had not achieved full mastery of the multi-layer back-metalling process.[183] Indeed, the record/follow-up report by the Marketing Department dated 3 August 2011 referred to “T9014背金異常” (which Ngan said related to test-trial for the multi-layer back-metalling process). Plainly, Danny who attended the RCL Exco meetings knew the Quality Level of RCL’s back-metalling process had not yet matured when he gave the Sales Commitment. I am unable to see justifiable grounds of complaint in relation to the quality of the back-metalling process. 316.Back-metalling instructions Danny claimed the Marketing Department did not have to give instructions for the back-metalling process which normally should be done with pure gold (“純金”), but RCL was persistently short on gold so sales staff had to ask customers whether they would agree to have multi-layer back-metalling using “雜金”/“摻金” and come up with a list of customers/products for the Production Department to use the Au4 process. Danny claimed if there was no such list, the Production Department should have assumed the customers did not agree to use Au4 process and “咁正常生產部應該會自動會背純金嘅”. Danny also disagreed there must be actual PO to hand before back-metalling process would be carried out for regular products. 317.Danny accepted there were circumstances when the Marketing Department would give instructions for back-metalling to be done. First, if, say, a long-term or substantial customer gave a 3-month forecast of POs that exceeded the buffer production, the Marketing Department would give instructions to the Production Department (that had no idea of the customer forecast) to carry out back-metalling process even though there was no actual PO to hand as yet. Secondly, Danny said T596 required actual POs before back-metalling was done. Danny emailed sales staff on 23-24 September 2011 to say “我將會安排背金並盡量交貨” for POs they gave to Kam and to emphasise he would not do so in future for written POs without signature/chop or without confirmed payment terms (B6/1309-1310). 318.Simon agreed the Production Department would proceed with back-metalling process for regular products without need for further instructions, and he would not require sales staff to have POs to hand. But he said downgrade products were the exception. There must be actual POs to hand before instructions would be given to the Production Department for back-metalling process. Although Simon claimed he believed Danny would handle the matter in the same way, their approach was somewhat different, and I find their evidence reflected respective unreliable attempts to explain away their previous emails (paragraph 316 above for Danny and paragraphs 322-323 below for Simon). 319.I refer Philip’s and Ngan’s evidence that for the following reasons the Marketing Department (usually by Arion, Simon and/or Fan and usually when there were actual POs to hand) had to give instructions (which could be by email) before the Production Department would carry out back-metalling process for all relevant products and not just downgrade (DZG) items, and without such request the Production Department would not collect gold stored in a safe at the Accounts Department to carry out back-metalling process:
320.Ngan explained (and I accept) every Monday the Production Department would chase the Marketing Department (who would have clear idea from the computerised inventory records as to the available back-metalled products, products undergoing back-metalling process, and products that had not been back-metalled as yet) for list of product types to back-metal for, say, at least 1,000-1,200 pieces as there would be wasted overhead costs if the back-metalling equipment stayed idle. 321.Ngan and Philip fairly accepted there were occasions when due to logistics and payment reasons gold would not be available for 1-2 days, but it would not have affected the production schedule. But there were times when there was delayed or no response from the Marketing Department despite tracers by the Production Department for back-metalling orders, and Philip suggested it was because Simon held up the back-metalling process of T596 (B6/1307-1308). 322.On 18 August 2011, 蔡佳旭 at the Shenzhen office emailed Fan and Arion that “客戶挑過了” T596 with grading that varied from good to downgrade (see B6/1307-1308). Back-metalling had not been done at that stage. Danny claimed that after making the selection the customer used to give oral request for delivery of the selected items without formal PO, so Simon’s instructions that in future formal PO would be required only applied to T596 but not other transistors “因為普通嘅晶體管, 基本上係如果參數okay, 就會背金嘅”. 323.Fan emailed Ngan with copy to 陳碧紅 (clerk at the Production Department) “煩請安排附件藍色部份背金” (B6/1307), and Ngan queried “這些是否已獲Simon同意背金嗎?” (B6/1307). Ngan raised query because Simon previously notified the Production Department (including him) all back-metalling (not just for downgrade items) needed his approval because without actual POs back-metalled products would cause stock build-up in the Hong Kong or Shenzhen warehouse. 324.On balance, I prefer Ngan’s evidence. After all, on either party’s case, the Production Department normally would have proceeded with the back-metalling process upon receipt of Fan’s emailed request. Obviously, Ngan raised query because of Simon’s previous instructions as explained above. Further, it was consistent with Simon’s Report that noted sales of stockpiled inventory could last 4-6 months (and sales of inventory of transistors could last 15 months – B2/267), and he even proposed to temporarily close down manufacturing operations for a few months to clear stockpiled inventory (paragraph 186 above). 325.On the same day, Simon replied by email to Fan with copy to Danny and Philip as follows (B6/1307) which Ngan took as the stance of the Marketing Department:
Simon said his email above merely concerned downgrade items, and Fan must have given him a list of downgrade items that would require actual POs before back-metalling could be done. I disagree, and note Simon in his email stated that “we have no back order for T596, especially some of them are DZG ……” (my emphasis), which indicated the need for “back order” was not limited to downgrade items. 326.On 26 October 2011, “Hung” emailed Fan with copy to inter alia Philip, Peng, Danny and Ngan to say back-metalling process for all production output requested by the Marketing Department in early October 2011 would be completed in the following week and to ask for instructions on what product to back-metal on the basis of production capacity of 2,500 to 3,000 pieces (with prioritised instructions for first 1,000 pieces) (B6/1302). On 29 October 2016, “Hung” again chased Fan and Danny with copy of email to inter alia Philip, Peng and Ngan expressing concern that relevant equipment would soon become idle with no work (B6/1302). In my view, the tenor of such emails was not restricted to T596 or downgrade products. 327.In the discussion and follow-up items for marketing meeting on 7 November 2011 attended by inter alia Danny, Peng, Ngan, Arion, Simon, Donny, representatives of Production Department and back-metalling section, and Philip (see B3/474), it was noted there were actual POs for T9012, T9015, T3904 and T8050 but “背金數量不足”, so there was request for 50 pieces per product and query was raised as to whether Au4 process could be used “因純金量有限” (there was handwritten annotation for “純金” for T9012 and T9015). There was no suggestion that these were downgrade items or T596, but there was clear emphasis on the existence of actual POs. Of course it would be cost-saving to adopt the Au4 process, but whether pure gold or Au4 back-metalling would be used depended on the outcome of discussions between the customer and sales staff. The whole purpose of bringing the Au4 process in-house was to save costs, and I see nothing wrong in canvassing possible use of such process with customers, but it did not mean instructions to back-metal was limited to Au4 process. 328.On 17 November 2011, “Hung” again emailed Fan and Danny to chase for instructions on what product to back-metal for the rest of November 2011 upon production capacity of 3,000 pieces (B6/1303). On 19 November 2011, “Hung” warned the relevant equipment turned idle, and Ngan urged Danny not to waste cost by delaying back-metalling instructions (B6/1303-1304). On 19 December 2011, Ngan emailed Danny with copy to inter alia Philip, Peng and Donny to chase for back-metalling instructions so relevant work up till January 2012 could be arranged, and Philip also emailed Danny to urge for such instructions otherwise it would cost RCL money (B6/1305). I see nothing in these emails that limited the Production Department’s demands to Au4 process, T596 and/or downgrade items. 329.I find all back-metalling process required instructions from the Marketing Department, and I agree with Philip that delay by the Marketing Department in giving back-metalling instructions adversely affected inventory levels in that inventory stock that had not been back-metalled could not be sold. It was not Philip’s duty as MD to place back-metalling requests, but he did raise this with Simon who then complained to Marcus that Philip had integrity problem for receiving bribes over the back-metalling process, which became part of the Audit. Hence, Philip had to recuse himself from dealing with matters directly relevant to Simon (B10/1862), but he still challenged Danny at the 3rd 2011 RCL Board meeting held on 11 October 2011 why back-metalling process was not carried out on available inventory stock for sale and why Simon withheld the back-metalling process,[185] especially when there was continued production pursuant to PPRs to meet sales demand. In my view this spoke of delay problem on the part of the Marketing Department that affected sales. 330.Marketing Department’s internal problems Simon’s “2011年度8月份工作總結及計劃會議市場部8月份工作報告及9月份工作計劃” dated 11 September 2011 made damning criticisms of the Marketing Department under Danny’s supervision (B2/267):
Although Danny claimed to have no impression of having seen this report, the box-mark “報告文件RCL/MK/09/2011 (2011.9.11)” suggested it was prepared for RCL Board/Exco meeting. The 5th 2011 RCL Exco meeting was held 4 days later on 15 September 2011, and items 2-3 and 7 of the minutes of such RCL Exco meeting recorded discussion on matters raised in the above report. I find the above report was made for such RCL Exco meeting, and Danny conceded he would have copies of documents for RCL Exco meetings. Although Danny tried to dissemble as to who made the report, Simon admitted he was the author. Danny confirmed he would review and comment on any document prepared by a subordinate at the Marketing Department (eg Simon, Donny or Fun) for submission for RCL Exco meeting, so Danny must have seen such report. 331.Simon also dissembled under cross-examination. He said in fact the Marketing Department had no problem except for Arion’s integrity issue despite what was stated in the aforesaid report (and Arion had already left RCL by then). He further claimed he wrote the aforesaid report in an oblique way to “含沙射影” against Philip because such report had to be submitted to Philip for review before it could be passed to Marcus. I reject such contention. First, it flied against the clear wording of the report, and no reader (even Marcus) would have understood that such report was an oblique criticism against Philip. Secondly, the report was not meant for Marcus who would not attend RCL Exco meetings. Rather, such meeting was chaired by Philip. Thirdly, the inherent problems stated therein were consistent Philip’s and Ngan’s concerns about stockpiled transistor inventory in the warehouse. Fourthly, as seen in paragraph 186 and 207(b) above, Simon himself adopted a low price strategy to clear stockpiles and he even proposed to halt production from December 2011 to February 2012 to sell stockpiled inventory and melt/extract gold from downgraded or rejected wafers. Plainly, Simon made up the suggestion of oblique criticism against Philip to shy away from damning evidence. 332.The minutes of the 5th 2011 RCL Exco Meeting held on 15 September 2011 (attended by inter alia Philip, Danny and Simon) recorded the reasons given by the Marketing Department for the steep drop in sales for August 2011 as follows: (a) personnel issues within the Marketing Department, Shenzhen Universidad and falling demands in US/European markets, (b) “8月份個別客戶之信貸評估未付合要求, 市場部寧願暫緩供貨, 避免過份催谷銷售額讓司蒙受損失”, and (c) “車間環境改造出現塵粒污染, 導致晶體上量生產受阻, 勻影響銷售表現” (items 2-4 at B8/1575.01-1575.03). No quantity/quality issues were put forward as reasons for the steep drop in sales. Danny did not raise objection to such reasons at the meeting nor to the minutes that I find had been circulated to all attendees (including Danny). Indeed, Danny himself admitted as much in relation to the cause for low sales at the 3rd 2011 RCL Board meeting held on 11 October 2011 (items 14-36 at B9/1752-1777 and paragraph 207 above). It also appeared Simon’s attitude adversely affected relationship with customers by unilaterally changing trading terms with important customers. Danny said Simon alienated CDIL by raising the price by 20% without reference to the market price, which was quite different from Simon’s evidence that he was not concerned with pricing since it was Danny’s duty. Danny agreed that sales for August and September 2011 were disappointing, so in the last week of September 2011 “我自已執番銷售”, but even though he secured some sales that week, the overall sales for September 2011 were still very poor. Danny conceded the low sales in August and September 2011 were mostly due to the aforesaid internal problems of the Marketing Department, and he would not simply blame the general economic condition and sports event. 333.It was clear from the above Arion who was under Danny’s supervision undermined sales, and after he left and Simon joined, Danny delegated the bulk of the sales responsibility to Simon who regrettably failed to perform. I tend to agree with the majority of the RCL Board at the 3rd 2011 RCL Board meeting held on 11 October 2011 that the Marketing Department was to a large extent responsible for the poor sales in August and September 2011, and Danny who was in charge of the Marketing Department had to take major responsibility for such problems (B10/1929). In my view, Danny’s and Kam’s attempts to shift the blame to the quality and quantity of the products were merely poor excuses to avoid liability for the Shortfall under the Sales Commitment and/or Danny’s Undertaking as varied. I am not satisfied there was any breach by RCL and LML. (m) Funding issue 334.Danny and Simon claimed Primebase/GR8 failed to pay the promised shareholder’s loan on time so RCL lacked funds to pay for raw materials such as wafer substrates, chemicals and back-metal gold, which led to severe decline in production volume, and to carry on its business generally. Whilst I accept RCL’s finances were tight (which was already a known fact at the time of the Sales Commitment) and gold was at times short for a day or so, it was not the case there were no monies to buy materials, and plainly the decline in production was attributable largely to the problems with the Marketing Department as outlined above. XLVI. CONCLUSION 335.I therefore dismiss EB’s claim against RCL in HCA1459/2012, and grant judgment in favour of RCL on its counterclaim against EB for (a) a declaration that the 20/5/11 Document was not legally binding on RCL and (b) a declaration that D was not indebted to EB for the sum of US$335,772.50 or part thereof or any other sum arising out of the AUK Payment of US$335,772.50 that was paid to AUK on/about 23 May 2011. There is no reason why costs should not follow event. I also grant a costs order nisi for EB to pay RCL’s costs of HCA1459/2012 (including all reserved costs if any) to be taxed if not agreed. 336.Given RCL’s success in its defence in HCA1459/2012, I grant judgment in favour of RCL and LML against Danny in HCA693/2013 for the sum of US$2,865,634.00 (or HK$22,294,634.00) with interest thereon at 8%pa from the date of the Writ of Summons to the date of judgment and thereafter at judgment rate until payment. There is no reason why costs should not follow event. I also grant a costs order nisi that Ds shall pay Ps’ costs of HCA692/2013 (including all reserved costs if any) to be taxed if not agreed.
Mr Tommy Lo, instructed by Brian Kong & Co for the 1st to 5th plaintiffs in HCA692/2013 and the defendant in HCA1459/2012 Mr Kwok Kam Kwan, instructed by Brian Chan & Associates (up to 15 May 2017) and Wong Poon Chan Law & Co (as from 16 May 2017), for the 1st and 2nd defendants in HCA692/2013 and the plaintiff in HCA1459/2012 [1] eg with tooling charge of HK$200,000.00 from “宏寶電子科技有限公司” in April 2008 (B3/464) [2] the headings of “Marcus”, “Tony” and “Danny” in the Breakdown stood for Primebase, Green and Powtek [3] being 99.26106% of RCL’s issued share capital of 236,827,000 shares (see Recital (B) at B3/317) [4] see clause 2.1 at B3/319-320, columns 1-2, and paragraph 9 of Danny’s witness statement dated 26 March 2014 in HCA692/2013 [5] see columns 1 and 3, and paragraph 10 of Danny’s witness statement dated 26 March 2014 in HCA692/2013 [6] I note (a) Green was already a substantial shareholder in RCL before Primebase joined in February 2008, (b) Powtek was already involved in RCL before Primebase joined in February 2008 (paragraph 29 above), (c) Danny was RCL’s Marketing Director since August 2007 (paragraph 3 above), and (d) Powtek was formed in 2006 (ie about 2 years before the shareholders’ agreement dated 20 February 2008) for the purpose of gradually acquiring shares in RCL, so I infer/find that by February 2008 Powtek had granted to RCL aggregate loan of HK$5,000,000.00 being 10% of the Total Loans of HK$50,000,000.00 as compared to Primebase’s advance of HK$20,000,000.00 being 40% of the Total Loans (see column 4) [7] see Recital (B) of the shareholders’ agreement dated 31 March 2009 in the Part X below (B3/347) [8] HK$9,130,000.00 in clause 1 of the supplemental shareholders’ agreement dated 10 June 2009 less HK$7,132,583.50 in Recital (B) of the supplemental shareholders’ agreement dated 31 March 2009 (rounded to HK$7,130,000.00) (paragraph 38 above) [9] HK$71,870,000.00 in clause 1 of the supplemental shareholders’ agreement dated 10 June 2009 less HK$56,870,000.00 in paragraph 37 above [10] see clause 1 of the supplemental shareholders’ agreement dated 10 November 2009 at B3/360 and columns 16-17 [11] see clause 1 of the supplemental shareholders’ agreement dated 10 November 2009 at B3/360 [12] the same arrangement for transfer of LML shares by the Formula applied to the LML Share Pie [13] 235,077,000 RCL shares x 5.101% = 11,991,278 RCL shares (rounded as 11,990,240 RCL shares) [14] see clause 2 at B3/367 and bottom part of columns 21-25 [15] see paragraphs 47-48 above [16] see clause 1 of the shareholders’ agreement dated 8 April 2010 (B3/371) [17] see paragraph 49 above and column 23 [18] see clause 1 of the supplemental shareholders’ agreement dated 8 April 2010 (B3/371) and columns 24-25 [19] Powtek’s shareholding in RCL was diluted from 15,440,669 RCL shares to 11,990,240 RCL shares after the 3rd Additional Fund (see paragraphs 45 and 48 above) [20] see clause 1 of the supplemental shareholders’ agreement dated 8 April 2010 (B3/371) [21] see paragraph 50 above and column 21 [22] see clause 1 of the supplemental shareholders’ agreement dated 6 January 2011 (B3/383) and column 27 [23] HK$24,732,700.00 x 2 + $136,870,000.00 (weighted advance by Primebase after the 3rd Additional Fund – see paragraph 48 above and bottom part of column 19) [24] HK$267,300.00 x 2 + HK$9,130,000.00 (weighted advance by Powtek after the 3rd Additional Fund – see paragraph 48 above and bottom part of column 19) [25] see paragraph 51 above [26] see paragraph 55 above [27] see column 28 [28] see paragraph 56 above and column 28 [29] see paragraph 49 above and column 29 [30] see clause 1 of the supplemental shareholders’ agreement dated 6 January 2011 (B3/383) and columns 30-31 [31] see clause 1 of the supplemental shareholders’ agreement dated 6 January 2011 (B3/383) [32] see paragraph 54 above and column 27 [33] see column 32 and paragraph 58 above [34] see clause 1 of the 25/5/11 Agreement (B3/389) and column 33 [35] HK$20,000,000.00 x 2 + HK$186,335,400.00 (weighted advance by Primebase after the 4th Additional Fund – see paragraph 55 above) [36] ie the shareholdings of the Four Shareholders after 4th Additional Fund but without taking into account the Private Deal (see paragraph 56 above and column 28) [37] see paragraph 60 above [38] see column 34 [39] see paragraph 61 above and column 34 [40] see paragraph 49 above and column 35 [41] see clause 1 of the 25/5/11 Agreement (B3/389) and columns 36-37 [42] see transcript of the 3rd 2010 RCL Board meeting held on 19 November 2010 (“3rd/2010 19/11/10 Transcript”) at item 2 (B7/1353-1354) and item 47 (B7/1376-1377), and Ngan’s acceptance that RCL’s production was “相對落後” and its SMP quality could not match increasing market demand [43] see transcript of the 2nd 2011 RCL Board meeting held on 7 April 2011 (“2nd/2011 7/4/11 Transcript”) at item 78 (B1708-1711) [44] see 3rd/2010 19/11/10 Transcript at item 32 (B7/1371-1375) and transcript of the 3rd 2011 RCL Board meeting held on 11 October 2011 (“3rd/2011 11/10/11 Transcript”) at item 189 (B7/1348) [45] see transcript of the 3rd (continued) 2011 RCL Board meeting held on 13 and 29 October 2011 (“3rd/2011 13&29/10/11 Transcript”) at items 334-343 and 335 (B11/2201-2203) [46] eg B8/1420-1421, 1434-1435 and 1455-1460 [47] eg B8/1422-1427 and 1438-1442 [48] consistent with observations by Tony, Marcus and Philip at the 4th 2011 RCL Board meeting held on 22 November 2011 that RCL’s monthly loss was about HK$3,000,000.00 (see transcript of such RCL Board meeting (“4th 2011 22/11/11 Transcript”) at items 318-329 and 335 (B12/2490-2492 and 2493)) [49] see transcript of the 3rd (continued) 2010 RCL Board meeting held on 25 November 2010 (“3rd/2010 25/11/10 Transcript”) at item 1 (B9/1656-1657) [50] see paragraph 39 of Danny’s witness statement dated 26 March 2014 in HCA692/2013 [51] see 2nd 2011 7/4/11 Transcript at items 1706-1707 (B9/1706-1707) [52] eg purchase of the evaporator, acquisition of technical input on multi-layer back-metalling or Au4 process (“多層背金”), and recruitment of technical staff [53] ie Danny alleged Philip “…… 私底下成日同[Danny]講就話「其實你係咪想做吖？」”, and Philip proposed to work together with Danny to persuade Marcus to continue manufacturing operations [54] see 2nd/2011 7/4/11 Transcript at items 78-82 (B7/1708-1712), but Philip in meeting warned that other suppliers to RCL might also try to seize such opportunity [55] see 2nd/2011 7/4/11 Transcript at item 50 (B9/1700-1701), but the paper dated 11 November 2010 titled “Zener and Switching Diode schedule and sales readiness” at B8/1433 presented to the RCL Board showed that notwithstanding the test trial in August 2010 there was still problem with mask design and “to develop and qualify the Ag bump process will take 5 ~ 6 months” [56] see 3rd/2011 13&29/10/11 Transcript at items 771-778 (B11/2282-2283) [57] see the 3rd/2010 19/11/10 Transcript at item 2 (B9/1601-1604) where Danny agreed it would take time to bring in new products and processes, and even with CDIL’s technical input it would still have taken at least 3 months to produce enough products for customers to “qualify”, a further 1-2 months to build up sales, and at least 6 or 8-9 months for sales to pick up, and at item 18 (B9/1616-1624) where Danny recognised 6 years would be required for any meaningful improvement so investors should not expect radical improvement in several months or 1-2 years [58] see the 3rd/2010 19/11/10 Transcript at item 1 (B7/1350), and also a paper titled “晶圓背面多層金化工藝轉讓協議(草稿)” at B8/1436 presented to the RCL Board that revealed technological aspects of such process had not been mastered (and see footnote 55 above on the Ag bump process for zener and switching diodes) [59] see 3rd/2011 13&29/10/11 Transcript at items 568, 585-592 and 604-633 (B11/2242-2243, 2247-2248 and 2250-2258), and Danny even asked Philip to keep some machines pending his final decision on subcontracting RCL’s manufacturing business (see 3rd/2011 13&29/10/11 Transcript at items 637-673 (B11/2259-2264)) [60] see clause 4 of the minutes of the 2nd 2011 RCL Board meeting held on 7 April 2011 referred to in paragraph 91 below [61] see 3rd/2010 19/11/10 Transcript at items 1 and 11 (B9/1634-1635 and 1637-1639) [62] see 3rd/2011 11/10/11 Transcript at items 183-189 (B9/1837-1840) [63] B13/2601-2603 showed that apart from Yu Hai Bo who came for interview on 17 September 2010 and reported on duty on 14 March 2011, 3 candidates were not suitable, 4 declined RCL’s offers, and 3 others recruited in July to September 2011 either resigned or were laid off [64] see 3rd/2011 11/10/11 Transcript at items 199-220 (B9/1841 and B10/1842-1847) [65] eg “…… 點解我哋做咗出嚟啲嘢擺喺度，唔背金唔去賣，譬如596，我一背金就可以賣，背金就可以賣。…… 有咩嘢原因唔去賣，呢個我係會challenge 佢……” and “點解啲嘢擺咗喺倉唔去做，你有咩嘢理由擺低喺個倉，我一路喺度駛緊錢、駛緊錢，冇一個原因，冇一個合適嘅原因嚟擺喺度唔做” (see item 244 at B10/1858-1864) [66] see 3rd/2011 11/10/11 Transcript at items 152-171 (B9/1830-1835) [67] Breakdown showed that on 4 May 2011 Primebase injected 2 sums of HK$1,200,000.00 and HK$800,000.00 [68] Danny promised to advance such loan by end of April 2011 (see paragraph 68 above) [69] as confirmed in the minutes of the 3rd 2011 RCL Board meeting held on 11 October 2011 at item 1 (B8/1584) [70] see 2nd/2011 7/4/11 Transcript at item 14 (B9/1674-1683) [71] Ngan explained CDIL was a big customer of RCL, but RCL had never been able to deliver products designed by CDIL (eg transistors, zener and switching diodes) in bulk quantity to CDIL even though it was able to deliver small quantities (and the sales agreements with CDIL allowed RCL to sell CDIL products to third parties on payment of commission to CDIL) [72] see 2nd/2011 7/4/11 Transcript at item 33 (B9/1687) [73] see 2nd/2011 7/4/11 Transcript at item 39 (B9/1690-1695) [74] see minutes of the 4th 2011 RCL Exco meeting held on 11 August 2011 at items 6-7 at B8/1574 noting the need to “跟進多層背金工藝進度及如何加快進行” [75] see 2nd/2011 7/4/11 Transcript at items 38 (B9/1687-1690) and 50 (B9/1700-1701) [76] see minutes of the 4th 2011 RCL Exco meeting held on 11 August 2011 at item 2 (B8/1574) [77] ie copy remittance advice in respect of a previous telegraphic transfer to AUK [78] this explained why HK$1,000,000.00 was recorded as shareholder’s loan by Powtek on 23 May 2011 in the Breakdown with remark “Payment to AUK” [79] although Philip noted Danny might in due course change his mind and treat this as shareholder’s loan from him (see paragraph 90(c) above), there was no evidence of any such change of mind [80] Philip’s email dated 23 May 2011 referred to “Danny have arranged to pay Korea US$335,772.50 today from his personal account” [81] Philip explained slight difference between HK$2,619,025.50 and HK$2,612,310.00 was due to currency conversion [82] see paragraph 59 above and column 33 [83] see column 38 and paragraph 112 above [84] see clause 1 of the supplemental shareholders’ agreement in December 2011 (not signed by Powtek and Danny) at B8/1517 which stated such position remained the same up to 31 October 2011, and column 39 [85]HK$16,000,000.00 x 3 + HK$226,335,400.00 (weighted advance by Primebase after 5th Additional Fund – see paragraph 60 above) [86]HK$1,000,000.00 x 3 + HK$9,664,600.00 (weighted advance by Powtek after the 5th Additional Fund – see paragraph 60 above) [87]ie the shareholdings of the Four Shareholders after 4th Additional Fund but without taking into account the Private Deal (see paragraph 62 above and column 34) [88]see paragraph 115 above [89]see column 40 [90]see paragraph 116 above and columns 40 and 46 [91]see paragraph 49 above and columns 41 and 47 [92]see clause 1 of the supplemental shareholders’ agreement of December 2011 that was not signed by Powtek and Danny (B8/1517), and columns 42-43 and 48-49 [93]see clause 1 of the supplemental shareholders’ agreement of December 2011 which was not signed by Powtek and Danny (B8/1517) [94] see Chitty on Contracts 32nd ed Vol 1 para 14-008 at pp 1100-1101, Attorney General of Belize & ors v Belize Telecom Ltd & anor [2009] 1 WLR 1988, 1993-1995, and Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR 1187, 1197 and 1200 [95] see Donny’s email dated 10 September 2011 copied to Philip and others (B6/1325), and Ngan’s evidence that there was improvement in quality and standard of RCL’s SMP in 2011 (see paragraph 95 above) [96] ie the borrower would immediately obtain the loan being the whole advantage of the contract and the lender would have to wait for eventual repayment of principal without equitable process to compel repayment by the borrower (see Spry, The Principles of Equitable Remedies 9th ed at p 95 and J C Williamson Ltd v Lukey and Mulholland (1932) 45 CLR 282, 298) [97]see The Loan Investment Corporation of Australasia Limited v Manus Bonner [1969] UKPC 33 at pp 7-8 [98]see Merchants’ Trading Company v Banner (1871) LR 12 Eq 18, 23 and Ryan v Mutual Tontine Westminster Chambers Association [ 1893] 1 Ch 116, 123 [99]see paragraph 39 and prayer (2) of Ps’ Statement of Claim in HCA692/2013 [100] see Wilken, The Law of Waiver, Variation, and Estoppel, para 2.14 at pp 16-17 [101]see 3rd/2011 11/10/11 Transcript at items 418-437 (B/1924-1927) [102]Philip said “…… 但係我哋呢個計法，即係嗰陣時我都講過，係因為嗰個，或者同你同阿Danny 都有講過，因為嗰陣時嗰個AUK 咁樣唔ship 呢，因為我哋冇俾錢”, and Marcus responded “哦，哦，哦，哦，係” (my emphasis) [103]see Napier Park European Credit Opportunities Fund Limited v Harbourmaster Pro-Rata Clo 2 BV & ors [2014] EWHC 1083 (Ch) paras 37-38 (on appeal [2014] EWCA Civ 984) [104]but clauses 2.2 and 2.3(a)-(b) of the 25/5/11 Agreement expressly provided for transfer of shares from the Defaulting Shareholder to the Paying Shareholder to be calculated under the Formula [105] see clause 1 of the 25/5/11 Agreement and paragraph 59 above [106] see Philip’s email to Marcus dated 7 September 2011 (B13/2558) [107] see Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] 3 WLR 1843 citing BP Refinery (Westernport) Pty Ltd v Shore of Hastings (1977) 180 CLR 266, 282-283 [108] I disagree “invoiced sales” were only suitable for products sold over the counter and not for products that required lead time for production or custom-manufacture as Mr Kwok suggested [109] see 2nd/2011 7/4/11 Transcript at items 33-38 (B9/1687-1690) [110] ie US$656,266.00 (June 2011), US$731,566.00 (July 2011) and US$823,566.00 (August 2011) [111] ie US$656,019.00, US$606,720.00 and US$407,050.00 drawn from the Actual Sales Reports as known to Danny [112] see 2nd/2011 7/4/11 Transcript at items 6, 14, 38, 44-45, 70-72 and 74-76 (B9/1667, 1674-1675, 1690, 1697-1698, 1706 and 1706-1707) [113] see Schedule 2 in relation to 2nd 5th Additional Fund [114]see paragraph 114 above and column 45 [115] see Schedule 2 in relation to the 2nd “5th Additional Fund” [116] see clause 2 of supplemental shareholders’ agreement in December 2011 (not signed by Powtek and Danny) at B8/1515-1522, and Schedule 2 in relation to the 2nd “5th Additional Fund” under the heading “Total Fund After Deal” [117] HK$4,213,718.00 x 3 + HK$12,664,600.00 (weighted advance by Powtek after 5th Additional Fund at the bottom part of column 44) [118] ie shareholdings of the Four Shareholders in relation to “5th Additional Fund (1)” but without taking into account the Private Deal (see paragraph 116 above and column 46) [119] see paragraph 197(b) above [120] see Schedule 2 in relation to the 2nd “5th Additional Fund” under heading “No of Shares Before P/P Adj” [121] see Schedule 2 in relation to the 2nd “5th Additional Fund” under the headings “Primebase Powtek Deal”, “Final” and “Final % of Four” [122] see paragraph 197(c) above [123] see paragraph 49 above [124] see clause 2 of the supplemental shareholders’ agreement of December 2011 that was not signed by Powtek and Danny (B8/1515-1522) [125] see clause 2 of the supplemental shareholders’ agreement of December 2011 which was not signed by Powtek and Danny at B8/1515-1522 [126] Danny at the RCL Board meeting reported that Arion conspired with 2 companies in Mainland China to form a new company to obtain AUK supplies on COD terms and to divert TOP sales to RCL’s largest customer during the time when AUK ceased supplies to RCL, and Arion left in August 2011 [127] Danny at the RCL Board meeting reported Simon suddenly fired several staff of the Shenzhen office without listening to Danny’s suggestion to hire before fire (which caused low morale among the sales team) [128] this was in contrast to Simon’s evidence (a) he merely made suggestions and it was ultimately for Danny to fix the price, and (b) he would follow such instructions but might make small adjustments in dealing with individual customers [129] see minutes of 3rd (continued) 2011 RCL Board meeting held on 13 and 29 October 2011 in paragraph 208 above and 3rd/2011 13&29/10/11 Transcript at items 6-11 (B11/2296-2298) where Danny said “2.9 mil呢，我就已經十五號前呢我最多分三個，誒，partial shipment，啊，partial payment 呢分三次啦好唔好，誒，總之我同你諗掂佢啦，Philip ……” [130]see 3rd/2011 13&29/10/11 Transcript at item 21 (see B11/2301-2305) [131] see 3rd/2011 11/10/11 Transcript at item 260 (see B10/1884) when Marcus and Danny left the meeting at 01:11:25 [132] see 3rd/2011 11/10/11 Transcript at item 206 (B10/1895-1896) where Shaowu canvassed the possibility of recruiting another sales manager to replace Simon [133] see 3rd/2011 11/10/11 Transcript at items 383-385 (B10/1919) [134] Mr Kwok in paragraph 129 of his closing submissions suggested Marcus told Danny at the 3rd 2011 RCL Board meeting held on 11 October 2011 that he would be relieved from his duties to oversee sales as of 1 November 2011, but this was a misreading of the transcript at item 439 (B10/1927-1930) which plainly referred to “stopping” the Sales Commitment for November and December 2011 if Danny paid the Shortfall up to October 2011 and had nothing to do with Danny’s “duty of overseeing sales” [135] see 4th/2011 22/11/11 Transcript at item 129 (see B12/2437) [136] see 4th/2011 22/11/11 Transcript at item 137 (B12/2438) [137] see 4th/2011 22/11/11 Transcript at item 138 (B12/2438-2439) [138] see 4th/2011 22/11/11 Transcript at items 139-143 and 145 (B12/2439-2440 and 2442) [139] see 4th/2011 22/11/11 Transcript at item 148 (see B12/2443) [140] see 4th/2011 22/11/11 Transcript at item 206 (B12/2465-2467) [141] see 4th/2011 22/11/11 Transcript at item 207 (B12/2467) [142]see 4th/2011 22/11/11 Transcript at items 208-213 (B12/2467-2468) [143]see 4th/2011 22/11/11 Transcript at items 215-219 (B12/2468) [144]see 4th/2011 22/11/11 Transcript at item 220 (B12/2470) [145]see 4th/2011 22/11/11 Transcript at item 225 (B12/2471) [146]see 4th/2011 22/11/11 Transcript at items 226-231 (B12/2471-2472) [147] see 4th/2011 22/11/11 Transcript at item 264 (B12/2478-2479) [148]see 4th/2011 22/11/11 Transcript at items 247-249 (B12/2474-2475) [149]see 4th/2011 22/11/11 Transcript at item 264 (B12/2478-2479) [150] see 4th/2011 22/11/11 Transcript at item 265 (B12/2479) [151] see signed minutes of the 4th 2011 RCL Board meeting held on 22 November 2011 (B8/1587-1590) [152] HK$10,348,410.00 (see clause 1 of the 22/11/11 Agreement in paragraph 228 above) – HK$9,047,300.00 being aggregate shareholder’s loan by Powtek after the 5th Additional Fund (see paragraph 114 above) = HK$1,301,110.00 being the AUK Balance [153] there was a variance of HK$2,301,110.00 between HK$8,047,300.00 (after the 4th Additional Fund) and HK$10,348,410.00 (see B8/1503 and paragraph 228 above) being US$335,772.50 (AUK Payment) – US$40,000.00 (partial repayment by RCL by cheque) = US$295,772.50 x 7.78 = HK$2,301,110.00, which was reduced to HK$1,301,110.00 (AUK Balance) after taking into account HK$1,000,000.00 out of the AUK Payment as Danny’s Loan and treated as shareholder’s loan by Powtek [154] see paragraph 114 above and column 45 [155]see column 50 and paragraph 238 above [156] see column 51 [157]HK$14,800,000.00 x 5 + $274,335,400.00 (weighted advance by GR8 after 5th Additional Fund – see paragraph 115 above) [158]HK$200,000.00 x 5 + $9,000,000.00 (weighted advance by Newlink after 5th Additional Fund – see paragraph 115 above) [159]ie Powtek’s weighted aggregate shareholder’s loan after the 5th Additional Fund (see paragraph 115 above) [160] ie shareholdings of the Four Shareholders after 6th Additional Fund but without taking into account the Private Deal (see paragraphs 116-117 above and column 46) [161]see paragraph 240 above [162]see column 52 [163]see paragraph 241 above and column 40 [164]see paragraph 49 above and column 41 [165]see clause 1 of the 12/11 Agreement signed by Powtek and Danny (B2/318) and columns 42-43 and 49-49 [166] see paragraph 111 of Mr Kwok’s written closing submissions which differed somewhat from the Quality Condition as pleaded in paragraph 15 of the Re-Amended Defence in HCA692/2013 [167] disclosed under cover of the letter dated 28 March 2014 by Ps’ solicitors in B14/2609-2650 [168] PPRs for March to August and October 2011 were dated between the 3rd day and 12th day of each such month [169] eg 1 month for raw wafers, but explosive chemicals had to be ordered half year to a year ahead with partial delivery withdrawn from supplier as needed [170] eg normal manufacture of transistors (exclusive of back-metalling and “划片” processes) would require 4-5 weeks [171] eg Philip emailed Danny on 30 June 2011 saying the new estimated 3-month production output was lower than planned, and if stock (which was building up) could not be sold, there would be a huge difference (B2/255) [172] in December 2011 Danny complained there was no stock when many customers looked for C9318, but Philip discovered plenty of C9318 was in stock, and when he pointed this out to Fan she forthwith arranged delivery to the customer (B6/1298) [173] see minutes of the 3rd 2010 RCL Board meeting held between 11 November and 14 December 2010 (B8/1577) [174] see 3rd/2011 11/10/11 Transcript at item 189 (B9/1839-1840) [175] see 3rd/2011 11/10/11 Transcript at items 199-220 (B9/1841 and B10/1842-1847) [176]see 3rd/2011 11/10/11 Transcript at items 190-198 (B9/1840-1841) [177]see 3rd/2011 11/10/11 Transcript at items 221-225 (B10/1847-1848) and also paragraphs 75 above [178]see transcript at item 18 (B9/1616-1624) [179] see 3rd/2011 13&29/10/11 Transcript at item 84 (B11/2143-2147) [180] see minutes of 3rd 2010 RCL Board meeting held between 19 November and 14 December 2010 at item 2.2 (B8/1577) [181] at item 2.2 (B8/1577) [182] see transcript of the 3rd 2010 RCL Board meeting at item 11 (B9/1609-1611) [183] see minutes of the 11th 2010 RCL Exco meeting held on 16 December 2010 at items 3.8-3.16 (B8/15620), minutes of the 1st 2011 RCL Exco meeting held on 25 January 2011 at items 2.14-2.17 (B8/1565), draft minutes of the 2nd 2011 RCL Exco meeting held on 24 March 2011 at items 3.14-3.17 (B8/1568), minutes of the 3rd 2011 RCL Exco meeting held on 7 July 2011 at item 15.1 (B8/1572), and minutes of the 4th 2011 RCL Exco meeting held on 11 August 2011 at items 6-7 (B8/1574) [184] Danny suggested back-metalled products would not oxidise even if stored at “成品倉” for 6-12 months because they were kept in “衡溫櫃/氮氣櫃”, which was the case even for “半製成品倉”, but I prefer Ngan’s evidence that whilst this was the case in the testing area, storage in the warehouse was not in any “衡溫櫃/氮氣櫃” [185] see 3rd/2011 11/10/11 Transcript at item 244 (B10/1858-1863) and footnote 65 above | 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Cases cited in this judgment
Further hearings and rulings under HCA 1459/2012