Ge Qingfu and Others v. L & A International Holdings Ltd and Others

HCMP 2222/2016

[2018] HKCFI 2742

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2222 OF 2016

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J U D G M E N T

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1.This is the trial of the Re-Amended Originating Summons dated 8 March 2017 (“the OS”). The three plaintiffs (“Ps”) are shareholders of the 1^st defendant (“the Company”) which is a company listed on the Growth Enterprise Market (“GEM”) of the Hong Kong Stock Exchange (“HKSE”) under stock code number 8195.

2.The 2^nd to 7^th defendants (“D2 to D7”) were the directors of the Company at the material time.  The subject matters of these proceedings are (1) the grant of 2 billion share options (“the Disputed Options”) in the Company to 8 grantees (“the Grantees”), ie the 8^th to 15^th defendants (“D8 to D15”); and (2) the allotting of 1.6 billion shares (“the Disputed Shares”) pursuant to the Disputed Options to D8 to D15.

3.In the course of Ps’ opening of their case, Ps entered into settlement with D8 to D15.  Consequently, Ps’ claims against D8 to D15 were withdrawn.  The trial proceeded only in respect of Ps’ claims against the Company and D2 to D7.

BACKGROUND

4.The Company has an authorized share capital of HK$100,000,000 divided into 50,000,000,000 shares with a par value of HK$0.002 each.  This was the result of a subdivision of the shares from one share into 5 shares which became effective on 23 June 2016.

5.On 21 July 2016, the Company announced that it had entered into a placing agreement in respect of 2,869,886,385 shares which would raise HK$59 million for the Company.  Prior to the placement, the Company had issued 21,130,113,615 shares.  At the completion of the placement on 11 August 2016, the Company should have totally issued 24,000,000,000 shares.

6.However, according to the Next Day Disclosure Return submitted by the Company on 23 August 2016, the Company stated that it had 25,600,000,000 issued shares.  It was stated to be the result of an allotment of 1,600,000,000 new shares in the Company “upon exercise of an Allotment Option on 22 August 2016”.  This new allotment of 1,600,000,000 shares represented 6.67% of the existing issued shares, and their issue price represented a 46.67% discount to the closing price of the Company’s shares as at 19 August 2016 (being the immediately preceding business day).  They were the Disputed Options and the Disputed Shares.

7.What actually happened between 21 July 2016 and 22 August 2016 is the focus of this trial.  I will first continue to set out the relevant chronological events which are either undisputed or are substantiated by indisputable documentary evidence.

8.On 22 July 2016, the next day after the Company’s aforesaid announcement of placement, a company named Favourite Number Limited(“FNL”) wrote to the board of directors of the Company notifying them of FNL’s intention to make a voluntary conditional securities exchange and cash offer to acquire all of the issued shares in the Company.  This offer was made on the basis of one share in WLS Holdings Limited (“WLS”) plus HK$0.28 in cash in exchange for every 20 shares of the Company.  WLS is a publicly listed company in Hong Kong under stock code 8021.

9.On 29 July 2016 Messrs Anthony Siu & Co (“ASC”), solicitors for the 1^stplaintiff (“P1”), issued a letter to HKSE and to the Securities and Futures Commission (“SFC”).  The material parts of this letter read:

“ We are instructed that our client is prepared to raise a requisitionto remove all existing directors of the Company and to appointhis nominee(s) in place thereof. While we attempted to engage Caymen Islands counsel to advise our client on the requisition matter at the Caymen Island law perspective, we surprisingly note that a considerable number of law firms in Cayman Islands which have offices in Hong Kong … have been conflicted out on the basis that they have been retained by the Company ….

Although our client concurs that every person has the right to be legally represented and to hire legal counsel on his own will, we are instructed that our client (a) considers that such acts of the Company are to the detriment to the Company and its shareholders as they will inevitably incur unnecessary legal costs on the part of the Company; and (b) believes that the Company may have an ulterior motive and/or extraordinary intention of not acting in good faith by reaching out for different law firms in Caymen Islands so as to prevent others including our client from engaging Caymen Islands counsel ….”

As of that date and since 25 July 2016, P1 held 2,150,448,000 shares in the Company constituting approximately 10.17% of the Company’s issued shares as at 31 July 2016.

10.HKSE replied to ASC’s letter on 5 August 2016.  HKSE requested P1 to provide a consent letter allowing them to disclose the identity of P1 and the contents of his complaint to the Company in the course of their investigation.  P1 provided such a consent letter to HKSE the same day.

11.In the meantime, on the same day of 5 August 2016, the Company made a “put up or shut up” ruling application to SFC pursuant to Rule 31.1(b) of the Takeovers Code and requested a deadline to be set for FNL to announce a firm intention to make the General Offer.

12.In the evening of 5 August 2016 (at 20:31 hours), ASC issued a 2^nd complaint letter to HKSE and SFC on behalf of P1.  P1 complained of the alleged irregularity of the Company’s adjournment of the AGM originally scheduled to take place on 28 July 2016. 

13.On 8 August 2016, ASC sent a 3^rd complaint letter on behalf of P1 to HKSE and SFC.  In this letter, P1 raised several complaints in relation to the Company’s performance during the financial year of 2015/2016 as disclosed in the Company’s 2015 3^rd Quarterly Report and Annual Report 2016.  P1 invited HKEX and SFC to commence investigation into those matters.

14.On 10 August 2016, the Company issued a profit warning announcement.

15.On 11 August 2016, the Company announced the completion of the placement of shares.

16.On 12 August 2016, the Company announced its 2016 1^stQuarterly Results.

17.On 15 August 2016, SFC issued a “put up or shut up ruling” requiring that FNL must, by 5:00 pm on 18 August 2016, either (i) announce a firm intention to make an offer for the Company; or (ii) announce its decision that it does not intend to make an offer for the Company; or (iii) inform the Company of its decision that it does not intend to make an offer for the Company. 

18.On 18 August 2016, FNL and WLS issued an announcement stating, inter alia, that subject to conditions, FNL will offer 57 new shares inWLS plus HK$5.6 in cash in exchange for every 400 shares in the Company and to acquire all the issued shares of the Company (“the General Offer”).

19.On 21 August 2016, purported Notices of Exercise of Option given by the Grantees of the Disputed Options were signed by the Grantees.

20.On 22 August 2016, the Company issued and allotted 1,600,000,000 new shares, the Disputed Shares, purportedly upon the exercise of the Disputed Options, to D8 to D15.

21.On 23 August 2016 at 07:59 hours, the Company issued an Announcement dated 22 August 2016 stating that 2,000,000,000 share options had purportedly been granted on 22 July 2016 to 10 eligible participants who were employees and consultants of the Company.

22.Also on 23 August 2016 at around noon, ASC issued a letter to the Company attaching a notice of requisition for EGM (“the 1^st Requisition”).  This requisition was made by Ps who held in aggregate approximately 10.21% of the 24,000,000,000 issued share capital of the Company.  At the time of this letter, Ps were not aware of the issuance andallotment of the Disputed Shares.  Although the Company’s Announcement dated 22 August 2016 was published in the morning of 23 August 2016, Ps did not come to know of it until late afternoon of 23 August 2016.

23.On 24 August 2016, at 07:57 hours, the Company issued an Announcement dated 23 August 2016 (“the GO Announcement”) stating that the General Offer failed to comply with the Takeovers Codes on, inter alia, the following ground:

“ As at the date of the Offer Announcement, the relevant securities of the Company in issue comprised (i) 24,000,000,000 Shares; and (ii) 1,800,000,000 issued and outstanding share options (‘Share Option’) granted under the share option scheme of the Company (‘Share Option Scheme’) to subscribe up to 1,800,000,000 Shares.

Pursuant to Rule 13.1 and 13.5 of the Takeovers Code, where an offer is made for equity share capital and the offeree company has options outstanding, the offeror must make an appropriate offer or proposal to the holders of the options to ensure that their interests are safeguarded.

On 22 August 2016, the Company announced that it had on 22 July 2016 (‘the Date of Grant’) granted 2,000,000,000 Share Options to ten eligible participants who are employees and consultants of the Company (“the Grantee”) to subscribe for Shares of HK$0.002 each of the Company under the Share Option Scheme subject to acceptance of the Grantees and the payment of HK$1 by each of the Grantees upon acceptance of the Share Options. As at the date of this announcement,1,800,000,000 Share Options granted were accepted by the Grantees, and the remaining 200,000,000 Share Options were not accepted within the required acceptance period under the Share Option Scheme. The number of the Shares to be issued upon exercise of the Share Options granted to each Grantee represent less than 1% of the issued Shares as at the date of this announcement. As the Revised Offer was announced on 18 August 2016, it was not extended to holders of the Share Options, therefore is incompliant with the requirements of Rules 13.1 and 13.5 of the Takeovers Code.

The Board is of the view that the Revised Offer, should also be extended to all the holders of the Share Options and Shares issued as a result of the exercise of the subscription rights by the holder of the Share Options, and financial resources of the Offeror shall be ascertained. ”

24.At 08:04 hours on 24 August 2016, the Company filed a Next Day Disclosure Return dated 23 August 2016 stating that it had allotted and issued 1,600,000,000 new shares on 22 August 2016 upon the exercise of the Disputed Options.

25.Further on the same day, share certificates of the Disputed Shares were collected.  D8 to D15 also deposited all the Disputed Shares with FP Sino-Rich Securities and Futures Ltd (“FP Sino-Rich”) and Emperor Securities Ltd (“Emperor”), and sold all of them through open market.

26.At around 19:00 hours on 25 August 2016, ASC received the latest share register of the Company and was thus able to identify D8 to D15 as the grantees of the Disputed Options.

27.On 26 August 2016, Ps applied ex parte for an urgent interlocutory injunction to restrain the defendants from, inter alia, recognizing or giving effect to the Disputed Options.  Harris J directed that the application be heard inter partes on 31 August 2016.

28.On 27 August 2016, Ps applied ex parte for and obtained an interim injunction restraining FP Sino-Rich and Emperor from, inter alia, disposing the Disputed Shares until the return day on 31 August 2016.

29.At the return day on 31 August 2016, upon the Company and D2 to D7 undertaking (i) not to take any step to implement the exercise of 200,000,000 of the 1,800,000,000 share options referred to in the Company’s announcement dated 22 August 2016 which have been accepted but not yetexercised; and (ii) not to take any step to alter the issued share capital of the Company except with the leave of the Court, Ps’ application was further adjourned to a date to be fixed.  Directions including those for filing of affidavit evidence were given.  The hearing was eventually fixed to be heard on 2 November 2016.

30.On 2 September 2016, FNL and WLS issued a joint announcement stating that the Company’s failure to disclose the Disputed Options not only breached General Principle 6 of the Takeovers Code and rule 23.06A of the GEM Listing Rules, but also prejudiced FNL in that FNL would now be required to put forward additional financial resources and time to proceed with the General Offer.

31.On 5 September 2016, P1 spent HK$18,669,420 in order to buy an additional 414,876,000 shares in the Company.  This was done to ensure that Ps could maintain a “more than 10%” shareholding in the Company (by reason of the issuance of the Disputed Shares thereby increasing the issued share capital of the Company) so as to further their intention to raise requisition for EGM.

32.On 9 September 2016, the Company issued an announcement stating that since Ps held less than 10% of the issued share capital of the Company, no EGM would be convened pursuant to the 1^stRequisition.

33.On 4 October 2016, Ps issued a fresh requisition for EGM (“the 2^nd Requisition”).

34.On 17 October 2016, FNL and WLS announced the withdrawal of the General Offer.

35.On 2 November 2016, Ps’ application was heard inter partes by Ng J.  Upon the Company and D3 to D7 undertaking that they be restrained from taking steps to implement the exercise of 200,000,000 of the 1,800,000,000 share options referred to in the Company’s announcement dated 22 August 2016 which the Company said have been accepted but no shares have yet been issued and that they have lapsed, the Court ordered thatthe Company and D3 to D7 be restrained from taking any steps to alter the issued capital of the Company unless and until the Company has given Ps five working days’ prior written notice of their intention to do so.  Ng J gave further directions for the trial of the Amended Originating Summons.

THE PLAINTIFFS’ CASE

36.In summary, Ps’ case is that the act of D2 to D7 (“the Directors”) in granting the Disputed Options to D8 to D15 (“the Grantees”)and the issuance/allotment of the Disputed Shares are void or voidable and not binding upon the Company in that they were made:

(1)     without proper authority;

(2)     in breach of the Directors’ duty to act in the best interest of the Company;

(3)     for improper purposes, namely to:

(i)     benefit the Grantees;

(ii)     frustrate, obstruct or defeat P1’s 1^st Requisition; and

(iii)     obstruct or defeat the General Offer; and

(4)     in breach of Article 20.2 of the Memorandum and Articles of Association of the Company (“the Articles”) which require 48 hours’ notice being given to directors for convening of a directors’ meeting.

37.Ps contended that:

(1)     On 5 August 2016, the Company filed with HKSE the “Monthly Return of Equity Issuer on Movements in Securities for July 2016” (“July Monthly Return”)[1] confirming, in relation to a share option scheme adopted by the Company on 25 September 2014 (“the Option Scheme”), that during the month of July ending 31 July 2016:

(i)     number of share option “Granted” was “nil”;

(ii)     number of share option “Exercised” was “nil”;

(iii)     number of “new shares issued during the month pursuant thereto” was “nil”;

(iv)     number of “new shares which may be issued pursuant thereto as at close of the month” was “nil”; and

(v)     in respect of “Any other Agreements or Arrangements to issue Shares … including Options (other than under Share Option Schemes)”, the response was marked as “N/A”.

(2)     The Directors’ case is that the Disputed Options were granted on 22 July 2016.  This allegation is thus contradicted by the contents of the July Monthly Return which was prepared by the Company’s company secretary Mr Leung Tze Wai.

(3)     On a close scrutiny of the documents disclosed by the Company and the Directors (which are subject to Notices of Non-admission thereby disputing their authenticity), it is plain that the Disputed Options were only granted by the Directors on 22 August 2016 but back-dated to 22 July 2016.

(4)     That was why the Disputed Options were only announced forthe first time by the Directors in the morning of 23 August 2016[2].

(5)     The Directors and the Grantees put forward different versions as to how the Disputed Options were granted and exercised. The Directors’ case is that the Disputed Options were granted on 22 July 2016.  They say that offer letters (with exercise price left open) were delivered to the Grantees personally at around 11 am on 22 July 2016 who all verbally accepted the offers before noon on the same day[3].  On the other hand, the Grantees’ case is that they were informed that the Company had resolved to grant them share options at the exercise price of HK$0.0256 in the morning of 22 July 2016, and that they accepted the offers on various dates between 24 July 2016 and 3 August 2016 [4].

(6)     Both versions could not be true.  As to the Directors’ version, the offers could not have been verbally accepted when the exercise price was left open.  As to the Grantees’ version:

(i)     the exercise price could not have been determined until the closing price of the Company’s shares on 22 July 2016 was known;

(ii)     on 22 July 2016, trading of the Company’s shares was suspended at 1:14 pm.  Thus, the earliest time the closing price of 22 July 2016 became ascertained was 1:14 pm; and

(iii)     thus it was impossible for the Grantees to be informed about the exercise price “in the morning of 22 July 2016”.

(7)     The Directors produced a purported board minutes dated 22 July 2016 [5] in support of their allegation that the Dispute Options were granted on 22 July 2016.  This document cannot be genuine.

(8)     The proper inference and conclusion to be drawn is that the Disputed Options were only granted on 22 August 2016 but back-dated to 22 July 2016.

THE 2^ND DEFENDANT’S CASE

38.D2 is the settlor and a beneficiary of Yang’s Family Trust.  The trustee of Yang’s Family Trust is Cantrust (Far East) Limited which has a subsidiary Yang’s Holding Capital Limited (“Yang’s Holdings”). As of 30 July 2015, Yang’s Holdings controlled 51.02% of the Company’s shareholding.  As of 30 July 2015, the Company had four executive directors of whom three where Yang family members.

39.On 22 April 2016, Mr Yang Si Kit Kenny (a brother of D2) who was the Chairman of the Company’s board resigned from all his positions at the Company.  D3, who joined the Company since April 2015, took up the various appointments previously held by Mr Kenny Yang.  A week later, further changes were made to the board’s composition.  The only remaining member of the Yang family on the board was D2.  D2 however ceased to be a member of the Nomination Committee of the board.  Towards the end of April 2015, the business of the Company also diversified from the manufacturing and sale of woolen apparels to moneylending.

40.On 11 May 2016, after the enforcement of a share charge, Yang’s Holdings ceased to be a controlling shareholder of the Company.

41.Also in May 2016, D2 was diagnosed with laryngeal nodule in the left vocal cord.  On 16 May 2016, D2 informed the board that he needed to undergo an operation on 23 May 2016 and applied for sick leave with immediate effect until 30 September 2016 [6].  D2’s application for sick leave was approved by the board on 16 May 2016 [7].

42.On 23 May 2016, D2 underwent an operation on his left vocal cord.  After the operation, he was further diagnosed with diabetes and was referred to a specialist.

43.On 1 June 2016, D2 wrote to the board indicating his intentionto resign from the board for health reasons[8].  In that letter, the D2 stated his appreciation that the board might need time to find a suitable replacement and that his official resignation would be deferred until then.  He also apologized for his absents at board meetings.  In fact, from the Attendance Record of board meetings held between 22 April 2016 to 21 August 2016 [9], it can be seen that D2 did not attend or participate at board meeting (eg by phone) except between 22 April 2016 and 29 April 2016.

44.Furthermore, upon medical advice, D2 left Hong Kong for Canada and stayed in Canada to recuperate between 16 June 2016 and 4 August 2016.  This was confirmed by D2’s travel records[10].

45.As at 30 September 2016 which was the expiry date of his original sick leave, D2 was still suffering from Type 2 diabetes, hypertension and hypercholesterolemia.  He applied to extend his sick leave to 31 December 2016 and once again expressed his intention to resign from the board as soon as possible.

46.The Company held an AGM on 28 October 2016.  At the AGM, D2 formally retired from the board and ceased to hold any position at the Company.

47.D2’s case is that he did not participate at all in the granting of the Disputed Option and the issuance/allotment of the Disputed Shares.  In fact, as a result of the issuance of the Disputed Shares, the shareholdingof Yang’s Holdings in the Company was correspondingly diluted to 23.45%.  Then in mid-December 2016, Yang’s Holdings sold most of its shares in the Company through the open market.  Since 16 December 2016, Yang’s Holdings holds only 0.04% of the issued shares in the Company.

THE CASE OF THE 3^RD TO 7^TH DEFENDANTS

48.D3 to D7 explained that in about May 2016, the Company expanded its business by acquiring a substantial stake in a fashion brand called “Labaron” which was founded and spearheaded by the 12^th defendant (“Lee”).  However, due to financial difficulties, the Company could not provide adequate support to Lee for the development of the brand.  Lee became dissatisfied and subsequently tendered her resignation on 21 July 2016.

49.As Lee was indispensable to the Company’s business, on 22 July 2016, D3 (“Ng”) decided to deal with the crisis by granting share options to Lee as well as to other individuals who had contributed and can contribute to the development of the Company “as a matter of fairness”.  A total of eight individuals including Lee became the Grantees and they accepted the Disputed Options in July/early August 2016 and exercised them on 22 August 2016 [11].

50.The case of D3 to D7 is that the Disputed Option were granted on 22 July 2016 in the best interest of the Company and for the proper purpose of maintaining and developing the Company’s business.

51.They maintain that the board did consider and resolve to grant the Disputed Option on 22 July 2016.  They rely on various “contemporaneous documents” the authenticity of which are challenged by Ps.

THE SHARE OPTION SCHEME

52.The Scheme was adopted by the Company on 25 September 2014 [12]. The stated purpose of the Scheme was to enable the Group (defined as the Company as its subsidiaries) to grant options to selected participants as incentives or rewards for their contributions to the Group.  Clause 4 which dealt with “Determination of Eligibility” read:

“ 4.1 The Directors may, at their absolute discretion, invite any person belonging to any of the following classes of Participants, to take up Options to subscribe for Shares:

(a) any employee or proposed employee (whether full-‌time or part-time and including any executive director), consultants or advisors of or to the Company, any of its Subsidiaries or any entity (the ‘Invested Entity’) in which the Group holds an equity interest; …

4.2 The basis of eligibility of any of the above classes of Participants to the grant of any Option shall be determined by the Directors from time to time on the basis of the Participants’contribution to the development and growth of the Group.

4.3 In order for a person to satisfy the Directors that he is qualified to be (or where applicable, continues to be qualified tobe) a Participant, such person shall provide all such information as the Directors may request for the purpose of assessing his eligibility (or continuing eligibility).” (emphasis added)

53.Clause 5 which dealt with “the grant of options” read:

“ 5.2 The Directors shall not make an Offer to any Participantafter inside information has come to their knowledge until suchinside information has been published in accordance with Rule 16.17 to 16.19 of the GEM Listing Rules or in such manner as required under the GEM Listing Rules. In particular, during the period commencing one (1) month immediately preceding the earlier of (i) the date of the meeting of the Directors for the approval of the Company’s results for any year, half-year, quarterly or any other interim period (whether or not required under the GEM Listing Rules); and (ii) the deadline for the Company to publish an announcement of its results for any year or half-year under the GEM Listing Rules), and ending on the date of the result announcement, no Option may be granted ….

5.3 An Offer shall be made to a Participant in writing … specifying the number of Shares and the Option Period in respect of which the Offer is made ….

5.4 An Offer shall state … the following:

(a) the name, address and position, if any, of the Participant;

(b) the number of Shares in respect of which the Offer is made and the Subscription Price for such Shares;

…

(g) a statement requiring the Participant to undertake to hold the Option on the terms on which it is to be granted and to be bound by the provisions of this Scheme including … the conditions specified in Clause 7.1 and Clauses 17.8 to 17.10, inclusive.” (emphasis added)

54.Clause 7 dealt with “exercise of options” read:

“ 7.2 Subject to Clause 17.8, an Option shall be exercisable inwhole or in part … by giving notice in writing to the Company‌…. Each such notice must be accompanied by a payment for the full amount of the Subscription Price for the Shares in respect of which the notice is given. Within 28 days … after receipt of the notice and remittance … the Company shall accordingly allot the relevant number of Shares to the Grantee … credited as fully paid and issue to the Grantee … a share certificate for the Shares so allotted.” (emphasis added)

55.Clause 17.8 is of some relevance as will subsequently be seen.  

It read:

“ A Grantee shall, before accepting an Offer or exercise his Option,obtain all necessary consents that may be required to enable him to accept the Offer or to exercise the Option and the Company to allot and issue to him … the Shares falling to be allotted and issued upon the exercise of his Option ….”

56.Lastly, Clause 17.13 stated that the Scheme shall comply with the GEM Listing Rules and in the event of differences, the GEM Listing Rules shall prevail.

THE HEARING

57.On 27 June 2012, shortly prior to the start of hearing of this Originating Summons, the Company and D3 to D7 applied to adduce furtheraffidavit evidence for use at the hearing before me commencing 12 July 2017.  I order that the Company and D3 to D7 were not permitted to rely at trial on the new affidavit evidence unless certain conditions were met.  I refer to my ex tempore judgment given on 27 June 2017.  Those conditions had not been fully complied with on or before the stipulated time limit.  On 12 July 2017, the first day of the hearing proper for the Originating Summons, the Company and D3 to D7 applied for an extension of time to comply with the conditions I imposed in my earlier order.  I dismissed the application and now give my reasons.  I dismissed the application because I agreed fully with the submissions of Senior Counsel for Ps that:

(1)     the summons is misconceived.  The proper application should be to seek relief from the sanction under my order dated 27 June 2012 which was an unless order;

(2)     the failure was inexcusable;

(3)     the unless order was imposed by this Court in circumstances where there had already been considerable inexcusable delay on the part of the Company and D3 to D7.

(4)     Due indulgence had been given and further granting relief from sanction will be seriously prejudicial to Ps.  Ps would be faced with two new witnesses and two box files of new documents whilst being deprived of their right to seek discovery pertaining to this new evidence.  Ps would also be deprived of their right to prepare affidavit evidence in reply.  

THE ISSUES

58.Ps’ Opening Submissions did not include a list of issues.  Opening Submissions by Counsel for D2 and Counsel for D3 to D7 provided suggested lists of issues basing on which I can see the following broad issues:

(1)     When did the Company’s Board of Directors (“the Board”) resolved to grant the Disputed Options?  In other words, were the Disputed Options granted in the morning of 22 July 2016 (as contended by the Board) or were they granted only subsequently but fraudulently backdated to 22 July 2016 (as contended by Ps)?

(2)     What was the purpose behind the grants of the Disputed Options?  Was that a bona fide exercise of power by the Boardpursuant to the Share Option Scheme?  Or were the grants ofthe Disputed Options done for improper purposes as contended by Ps?

(3)     Were the Disputed Options granted and accepted in accordance with the terms and conditions of the Share Option Scheme?

(4)     Were the grants of the Disputed Options made in contraventionof Article 20.2 of the Articles of the Company, and if so, what is the legal consequence?

(5)     Were the grants of the Disputed Options made in contravention of the GEM Listing Rules, and if so, what is the legal consequence?

(6)     Did the Board have authority to grant the Disputed Options pursuant to the Company’s Article of Association (ie other than under the Share Option Scheme)?

(7)     Did D2 to D7 acted in breach of their fiduciary duties as directors of the Company? 

(8)     Particularly in relation to D2, did he participate at all in the activities of the Board at the material time?  Can D2 be said to have breached his fiduciary duty when he had not so participated?  And in any event, can he be excused under sections 902-903 of the Companies Ordinance having regard to the circumstances of the case?

(9)     Are Ps entitled to the reliefs sought in the OS?

ISSUE (1)

59.On this issue, Ps would naturally not be in a position to adduce positive evidence.  The evidence adduced by Ps are largely undisputed documentary evidence which established the various events in the chronology. Ps further issued a subpoena to Boardroom Share Registrars (HK) Limited (“Boardroom”).  Mr Patrick Fu answered the subpoena on behalf of Boardroom which was the share registrar of the Company.  He produced various documents[13] and gave evidence in relation to those documents.

60.The case of D3 to D7 is based on the affidavit evidence adduced by D3, D4, D6 and Mr Leung Tze Wai (“Leung”).  Leung is the Company Secretary and Chief Financial Officer of the Company.  These four witnesses attended court and were cross-‌examined.

Mr Ng Ka Ho (D3)

61.D3 is the Chairman and Executive Director of the Company.  He gave the following evidence in his affirmations:

(1)     The Company became listed on the GEM board on 10 October 2014.  The Company carries on business as a manufacturer of garments and other apparel products.  In May 2016, the Company completed the sale and purchase of 55.56% of equity interests in Aji On Worldwide Holdings Limited (“Aji On”) which operated a high-end fashion brand “Laboron”.  The Company was also seeking to diversify its business and the first step was to establish a moneylending business.  L & A Solutions Limited was set up 13 January 2016 as a wholly-‌owned subsidiary of the Company for that purpose.  L & A Solutions Limited obtained a moneylending licence on 30 June 2016.

(2)     At the material time, the Board consisted of D2 (who was on sick leave since 16 May 2016); D3 (executive director since 13 July 2015 and chairman since 22 April 2016); D4 (non- executive director since 12 October 2015); D6 (independent non-executive director since 12 October 2015 and a practicinglawyer); D7 (independent non-executive director since 29 April 2016); and D5 (independent non-executive director since 25 September 2014).

(3)     For the year ended 31 March 2016, the Company was operating at a loss of approximately HK$29,302,000.  On 12 August 2016, the Company announced its First Quarterly Report for 2016 stating that it was operating at a loss at approximately HK$14,567,000 for the three months ended 30 June 2016.

(4)     As at the end of June 2016, the Company had an imminent need of funds for its moneylending business and the newly acquired “Laboron” business.  A placement agreement was thus entered into with FP Sino-Rich on 21 July 2016.  As a result of the placement, the Company received proceeds of HK$59,000,000.

(5)     The shareholders of the Company adopted the Share Option Scheme on 25 September 2014, even prior to D3 first joining the Group on 1 April 2015.  Under the Share Option Scheme, the total number of shares to be issued under the scheme shall be limited to 40,000,000 (“Scheme Mandate”).  Since D3 became the Chairman of the Board as from 22 April 2016, he had discussed with Leung about the utilization of the Scheme Mandate.

(6)     It was in 2016 that Mr Choy Gary Sheung Ki (“Gary Choy”) introduced “Laboron” to the Board. “Laboron” was a popularfashion brand amongst the celebrities in PRC and Hong Kong which was founded by Lee who was widely recognized as a talented fashion designer.  Lee was a shareholder and director of Aji On which operated the “Labroron” brand.  It was the intention of the Board that after the acquisition of Aji On, the Company would develop this fashion brand and would set up three retail stores in major cities in the PRC.

(7)     Unfortunately, due to limited cash flow, the Company was unable to provide ample support to Lee.  Lee was discontented and tendered her resignation by an email sent by her at 22:51 hours on 21 July 2016 [14].  D3 thus instructed Cyrus Yuen to notify all directors by email to attend an urgent board meeting on the early morning of 22 July 2016 [15].

(8)     A board meeting was held at 08:30 hours on 22 July 2016 (“the Disputed Board Meeting”) to discuss Lee’s resignation.  The Board realized the difficulty in attracting talented staff and strategic partners and generating their loyalty. Offering meaningful share options both attracts better, more talented employees and helps keeping them to work for the Company on long term basis.  Conversion of share options would also create working capital for the Company.  The Company desperately needed the leadership and designs of Lee to develop “Laboron”.  Lee was an employee of Aji On which the Company owns 55.56%.  Considering the financial position of the Company and the fact that the Scheme Mandate had not be utilized, the Board considered the grant of share options to Lee was commercially justified.

(9)     Apart from Lee, D3 considered that “as a matter of fairness”, it was appropriate to grant share options to the Company’s consultants in order to give them incentive and to maintain good business relationship, as well as to those who had assisted the Company in its development in the past.  D3 proposed to the Board to issue share options to the following persons:

(i)     Mr Budihardjo Wilhelm Soeharsono (“Wilhelm”) who is the Chief Executive Officer and Director of FP Sino-Rich. Wilhelm together with Ms Tracy Tsun (“Tracy”) and Mr Tong King Tim (“Tong”) had provided invaluable financial advice to the Company when it got listed on the GEM Board in 2014.  It was also anticipated that Wilhelm may refer potential moneylending customers and introduce corporate investors to the Company in future.

(ii)     Tracy is a broker employed by FP Sino-Rich.She has excellent client network and may introduce investors to the Company.  She had introduced investors for the subscription of the Company’s shares in the July 2016 placement.

(iii)     Tong is the finance manager employed by FP Sino-Rich.  He specializes in finance and margin financing.  He hadprovided tremendous assistance and invaluable financial advice to the Company during the GEM board listing. The Board hopes to maintain a good relationship with him in the future.  Tong also provides advices on how to credit-‌rate potential customers of the Company’s moneylending business.

(iv)     Gary Choy had been the Company’s “exclusive agent inintroducing potential acquisition opportunities since mid- 2015”.  He has strong connections in Hong Kong and PRC and is familiar with the management of companies owing international fashion brands.  He introduced Desigual to the Company although it did not end up in any concluded business.  He introduced “Laboron” to the Company.  He has made a substantial contribution to the diversification of business development of the Company.  He is considered to be an important consultant to the Company.

(v)     Ms Cheung Pui Lun (“Cheung”) is a fashion designer.  She is the fiancée of Gary Choy.  She gave free design advice to the Company from time to time.  The Board considered it worth to keep a good relationship with her.

(vi)     Mr Lai Jason Wing Yin (“Lai”) is the brother-in-law of Gary Choy.  Lai has his own finance company and is familiar with moneylending business.  Lai was introduced to the Company by Gary Choy in early 2016.  With Lai’s assistance and advice, the Company set up its moneylending business.  The Board will look for clients referral from Lai in future.

(vii)     Ms Pang Ho Man Catalina (“Pang”) is the mother of Lee.  Pang is an experienced businesswoman in the fashion industry in the PRC.  The Company would like to develop its retail market in the PRC.  The Board considered that Pang has excellent marketing network and has experience in organizing fashion shows in Shanghai.

(viii)     Mr Tony Chan (“Tony”) and Mr Chai Yee Choong (“Chai”) are the directors and founders of Frontpage Capital Limited (“Frontpage”). They specialized in acquisition and IPO.  Before establishing Frontpage, they worked for TC Capital International Limited and assisted the Company in the liaison with SFC and SEHK during the GEM Board listing.  After the listing, the Board frequently sought financial advice from them.  They agreed to charge Frontpage’s professional fees at a discounted rate.  They are willing to help out at times even on pro bono basis.

(10)     D3 described these nine proposed grantees (ie except Lee) as “either working partners or advisers of D1, they are either present or former working partners introduced by them” [16]. The Board decided that 200,000,000 share options should be granted to each of the above 10 grantees (including Lee).  The number of shares to be issued to each grantee would be less than 1% of the issued shares as at 22 July 2016.  D3 produced a written Board Minutes for the meeting of 22 July 2016 [17].  D3 further said that the Board Minutes was typed upby Leung in the afternoon of 22 July 2016, ie after the closingprice of D1’s share on 22 July 2016 was known [18].  D3 also said that the documents tabled before the meeting and attendance sheet were missing from the Board Minutes he exhibited in his 1^staffirmation (dated 23 September 2016) due to his inadvertence.  He then exhibited a complete set of the Board Minutes in his 2^ndaffirmation (dated 25 January 2017) [19].

(11)     Considering that Lee’s resignation might produce a chain effect on staff’s morale, D3 wished to settle the matter as soon as possible.  Offer letters [20]were delivered to the grantees or their agents (except Tony and Chai) in the morning of 22 July 2016 in the following manners:

(i)     Mr Cyrus Yuen, the senior accounting manager of the Company, delivered the offer letters personally to Gary Choy and Cheung at their residence shortly before 11 hours on 22 July 2016.  Gary Choy was also authorized by Lai, Lee, and Pang to accept service of the offer letters for them. At around 11:29 hours, Gary Choi confirmed to Cyrus Yuen the acceptance of all these grantees;

(ii)     Shortly after 11:00 hours on 22 July 2016, D3 personally delivered the offer letters to Tracy at the lobby of her office.  Tracy was also authorized by Wilhelm and Tongto accept the offer letters on their behalves.  At around 11:10 hours, Tracy called Cyrus Yuen and confirmed acceptance of the offers on behalf of herself and for Wilhelm and Tong; and

(iii)     Hence at of 12:00 hours on 22 July 2016, an aggregate of 1,600,000,000 share options had been orally accepted by eight grantees (ie, the Grantees).

(12)     Then at 12:49 hours on 22 July 2016, the Company received a fax from FNL (as mentioned in paragraph 8 above) about its intention to make a general offer.  The Company thus suspended trading of its shares.

(13)     On 22 July 2016, in order to record the oral contracts formed on22 July 2016 between the Company and the Grantees, “formaloffer and acceptance letters” were sent to the Grantees for execution.  D3 produced these “formal offer and acceptance letters” [21].

(14)     D3 was informed by Cyrus Yuen, the accounting manager of the Company, and verily believed that the omission of reference to the Disputed Share Options in the Company’s July Monthly Return was a mistake on the part of Cyrus Yuen.  Cyrus Yuen committed the mistake because during that period of time due to the placement; various challenges by different people and parties; and enquiries from SEHK and SFC, the Company was handling a tremendous amount of emails, facsimile materials and phone calls everyday.

(15)     On 21 August 2016, the Grantees exercised the Disputed Options and on 23 and 24 August 2016, they deposited the relevant funds into the Company.  D3 relied on a bundle of Written Notices on Exercise of Share Options[22] and a bundle of bank documents evidencing payments of share subscription price[23]. D3 only came to know from these proceedings that the Grantees sold their shares on 24 August 2016 and the Company had no control over the Grantees.

62.D3 was cross-examined extensively by Senior Counsel for Ps. The followings are the main points that emerged:

(1)     D3 relied heavily on the email sent by Cyrus Yuen to the directors at 23:28 hours on 21 July 2016 [24] to corroborate his case.  That email simply read: “[D3] propose a Board Meeting tomorrow (22 July 2016) 8:30 am to discuss the potential termination of the employment by [Lee], the senior management of the Ajion International Holdings Ltd.”  D3 said in cross-examination that towards the end of June 2016, Lee already indicated her frustration.  D3 had thought about granting Lee share options as early as June 2016.  Then on 21 July 2016, Cyrus Yuen, Leung and D4 returned to Hong Kong after their trip to the PRC where they had met with Lee.  They noticed that Lee was very angry and threatened to resign.  After returning to Hong Kong, Cyrus Yuen, D3 and Leung had a discussion.  They concluded that they must come up with something to retain Lee.  Soon thereafter, Cyrus Yuen told D3 about Lee’s resignation[25].  D3 thought that the matter was serious and thus instructed Cyrus Yuen to convene a board meeting with short notice.  Senior Counsel for Ps pointed out that the meeting was merely convened to discuss about the potential termination of Lee’s employment.  Based on D3’s version, there was no reason why the possibility of granting share options to Lee was not expressly included in the agenda.  More importantly, the agenda for the urgent board meeting was not to discuss about exercising the Scheme Mandate to grant share options under the Share Option Scheme generally.  Neither did it contain any hint that any person other than Lee was possibly contemplated.

(2)     D3 also relied heavily on an email sent by a solicitor Madam Wanda Suen of Messrs Hastings to Leung at 00:19 hours on 22 July 2016.  This email was entitled “Grant of Share Options” and read:

“ Please see attached the following documents for your consideration:

1. Board resolutions approving the grant of options

2. Resolutions of remuneration committee approving the grant of options

3. Letter of grant and acceptance form

4. Option exercise form

5. Option certificate

6. Announcement on grant of option”

On the face, the timing of this email seems to corroborate D3’s version of a contemplated discussion of issuing share options (at least to Lee) at the board meeting scheduled to take place at 08:30 hours on 22 July 2016.  However, reading the chain of emails from Wanda Suen, it becomes apparent that Wanda Suen had been busy preparing a host of other corporate documents for the Company in the evening of 21 July 2016.  For instance, by an email sent out by Miss Suen at 22:22 hours[26], she was providing Leung with a “Board Meeting Notice”.  No such “Board Meeting Notice” was attached to this email. However, it is unlikely to be related to the Board Meeting eventually convened at 08:30 hours on 22 July 2016 because by the time Miss Suen sent out this email, Lee had not yet tendered her resignation email to D3 [27].  The next email sent out by Miss Suen was at 22:38 hours of 21 July 2016 [28].  This email was entitled “Appointment of INED, Establishmentof Investment Committee, Postponement of AGM” and enclosed four sets of documents wholly unrelated to the issue of Lee or grant of share options.  The former email and the attached “Board Meeting Notice” could well be related to these matters.  Then came the email sent by Miss Suen at 00:19 hours on 22 July 2016 as aforesaid.  It should be noted that the defendants had not disclosed documents or emails showing exactly when Miss Suen was instructed to prepare draft documents relating to the grant of share options.  In fact, when asked, D3 declined the invitation of Senior Counsel for Ps to disclose documents in relation to Messrs Hasting’s advice on the grant of share options.  He may well be entitled to uphold the Company’s claim for privilege.  Yet, even on D3’s own evidence, it was on 18 July 2016 that Cyrus Yuen and Leung consulted Messrs Hastings for the first time on matters pertaining to share options.  That means the advice sought was unlikely to be related to the threatened resignation of Lee in the late evening on 21 July 2016.  Furthermore, from attachment 2 [29] to Wanda Suen’s “Grant of Share Options” email, Miss Suen implicitly advised that prior approval by a resolution of the Remuneration Committee was necessary before the directors could grant share options pursuant to the Share Option Scheme.  It would appear that the directors were not aware of this advice and no such steps were taken on22 July 2016.  D3 accepted that the draft templates attached toMiss Suen’s email were not brought to the directors’ attention.  If Miss Suen’s advice re grant of share options was specifically sought on 21 July 2016 arising out of Lee’s threatened resignation, there was no reason why her suggested procedures were not adopted/followed at the Board Meeting held in the morning of 22 July 2016.  I would thus agree with Senior Counsel for Ps that these emails from Wanda Suen did not actually corroborate D3’s version particularly when Miss Suenhas not been called to give clarification.  It is equally plausiblethat D3 had subsequently hijacked the Board Meeting held on08:30 hours on 22 July 2016 (which was scheduled merely to discuss the potential termination of Lee’s employment) as a convenient date to stage a fake board discussion on the grant of share options generally to a host of parties including Lee.

(3)     As for the Board Minutes of the Disputed Board Meeting, a number of versions appeared in the trial bundles:

(i)       The earliest in time appeared as an attachment to a fax from Yu Ming Investment Management Ltd (“Yu Ming”) to the SFC at 11:00 hours on 19 August 2016 [30].  Yu Ming was the financial adviser engaged by the Company to handle its challenge to the General Offer.  In this version, D3 had signed his name as Chairman.  The attendance sheet was attached as Exhibit A bearingthe signatures of five directors (D3, D4, D6, D7 and D5).  D2 was stated to be “absent”.  Paragraph 4.1 referred to a “List” setting out the particulars of the “Grantees” and the proposed number of share options to which each of them might subscribe.  It was further stated in both paragraphs 4.1 and 5.1 that the “List” was tabled before the meeting.  No such “List” was included in this version of the Board Minutes.

(ii)     The second in time appeared as an attachment to an email from Cyrus Yuen to Miss Ada Lai-Fock (“Ada”) of Boardroom at 10:39 hours on 21 August 2016 [31].  In this version, D3 had not signed his name as Chairman.  The attached Exhibit A did not contain any signature of the attending directors.  D2 was not even stated to be “absent”.  There was also no “List” attached.  This was most likely a draft minutes only.

(iii)     The third in time appeared as an attachment to an email from Cyrus Yuen to Julie Chu and Ada, both of Boardroom at 10:38 hours on 22 August 2016 [32]. In this version, D3 had signed as Chairman.  However, there was no Exhibit A and no “List” attached.

(iv)     The fourth in time appeared as “Exhibit NKH-17” of the 1^st affirmation of D3 dated 23 September 2016 [33]. This version contained D3’s signature as Chairman.  It however had no Exhibit A and no “List” attached.

(v)     The fifth in time appeared as “Exhibit NKH-32” of the 2^ndaffirmation of D3 dated 25 January 2017 [34]. This version was signed by D3 as Chairman.  It was also attached with Exhibit A but without the “List”.  Strangely, the signatures of D3 to D7 on this Exhibit A were all visibly different from their signatures appearing in the earliest version even to untrained eyes.

These anomalies were never explained in the evidence of D3 or by counsel and the reliability of this Board Minutes as an accurate record of what transpired on 22 July 2016 is justifiably placed in doubt.  In any event, no “List” was attached to any of the five versions.  According to D3, the 5^thversion which he exhibited in his 2^ndaffirmation was supposed to be a true and complete version of the Board Minutes[35].  It is thus clear that there was never a “List” setting out the particulars of the proposed Grantees.  Paragraphs 4.1 and 5.1 of the Board Minutes simply did not reflect what truly transpired at the Disputed Board Meeting.  Despite so being pointed out in cross-examination, D3 obstinately refused to accept that the Board Minutes was not a correct record of what transpired at the Disputed Board Meeting.

(4)     D3 was then referred to paragraph 4.5 of the Board Minutes which stated: “It was further noted that the closing price of theShares from 15 July 2016 to 22 July 2016…were as follows:” Paragraph 4.5 continued to set out the closing price on 22 July2016 as HK$0.024.  It then stated: “It was reported that…the closing price of the Shares on GEM as stated on the Stock Exchange’s daily quotations on the date of grant of option was HK$0.0240….”  It was pointed out to D3 that since the Disputed Board Meeting was allegedly held at 08:30 hours on 22 July 2016, the board could not have known about the closing price of the shares on 22 July 2016 as trading had not even commenced.  Further, the figure of closing price could not have been “reported to the board” at that alleged meeting.  Neither could the directors have then formed an opinion as to the reasonableness of HK$0.0256 as the subscription price for the option shares.  Despite the obviousness of this point, D3 again obstinately refused to accept that the Board Minutes could not have been a correct record of what transpired at the Disputed Board Meeting.  I am not impressed at all about D3’s credibility. 

(5)     D3’s evidence on what immediately happened after the Disputed Board Meeting was confusing.  He first stated[36]that“Due to time constraint, the offer letters were delivered to the grantees or their agents on the morning of 22 July 2016….”  He then exhibited a set of offer letters[37]. He did not say who prepared these offer letters.  These offer letters were not accompanied with acceptance forms although according to the templates provided by Wanda Suen[38], the offer letter and acceptance form should go hand-in-hand.  In this set of offer letters, the subscription price was not yet fixed.  Only a formula was provided.  It was stated to be “Higher of HK$0.0256 per share (the average closing price of shares as stated in the Stock Exchange’s daily quotation sheet for the five Business Days immediately preceding 22 July 2016) and the closing price of shares as stated in the Stock Exchange’s daily quotation sheet on 22 July 2016”.  Then later[39] D3 said that “On 24 July 2016, to record the contracts formed on 22 July 2016 by oral agreement between D1 and the grantees, formal offer and acceptance letters were sent to the grantees for execution”.  He then exhibited another set of offer letters now accompanied by acceptance forms[40]. In this set, the offer letters stated a fixed subscription price of HK$0.0256.  Firstly, if oral contracts were concluded by noon on 22 July 2016, the subscription price could not have been agreed at HK$0.0256 since the closing price for that day was still not available.  This set of offer letters thus did not properly record the terms of the purported oral contracts.  Secondly, D3 did not explain what was the “time constraint”.  He accepted in cross-examination that the closing price of shares on 22 July 2016 could not have been available in the morning of 22 July 2016.  I fail to see any urgency in compiling and sending out a set of offer letters when the subscription price was not yet ascertained.  If the purpose was to placate Lee, D3 could just inform her of the Board’s decision to grant her share options and that formal documentations would soon follow.  There was definitely no possible urgency in respect of other grantees.  There is no suggestion that these people even knew about the possibility of being considered as potential grantees.  As a result of the settlement, D8 to D15 did not participate further in these proceedings.  Neither did D3 to D7 seek to call themas witnesses.  Their affidavit evidence is not admissible per se.  However, since D3 gave evidence about the circumstances of their alleged acceptance of the offers and relied upon their signed acceptance forms, it is in my view wrong to exclude myself from looking at the affidavits of D8 to D15 on this particular issue.  It is thus relevant to look at the versions given by the grantees as to how they came to accept the offers[41].  It is noteworthy that all grantees (except Pang who said nothing about what happened on 22 July 2016) stated in identical terms:

“ In the morning of 22 July 2016, I was informed that the Company have resolved to grant me share option to purchase 200,000,000 shares of the Company at the exercise price of HK$0.0256 per share …. I received the offer letter from the Company for the option on 22 July 2016 …. I accepted the offer on …………[42].”

First of all, their version was contradictory to that of D3 in that they did not mention having received two sets of offer letters, one on 22 July 2016 and the other on 24 July 2016.  Secondly, their version did not involve “oral agreement having been reached in the morning on 22 July 2016”.  Thirdly, their version was also questionable in that the directors could not have resolved on a fixed subscription price of HK$0.0256 “in the morning of 22 July 2016” as admitted by D3 in cross-examination.  In my view, D3’s evidence about this episode in the morning of 22 July 2016 was contrived and internally irreconcilable.  The crucial point is: FNL communicated its intention to make a general offer to the Company at 12:49 hours on 22 July 2016.  Thereafter at 13:14 hours of the same day, D1 suspended trading of its shares.  It was only after 13:14 hours that the closing price of the shares for 22 July 2016 became ascertained.  In my view, it is inherently more likely that D3 subsequently discovered thatthe set of written offer letters and acceptance forms generatedhad stipulated a fixed subscription price of HK$0.0256 which meant that they could not have been effected prior to FNL’s intimation of its intention to make a general offer.  D3 thus felt necessary to contrive a story about offers having been sent out in the morning on 22 July 2016 and orally accepted between 11 hours and 12 noon. Another set of offer letters would have to be created to fit into this story but the subscription price could only be expressed as a formula.  This inference is consistent with the falsities exposed in relation to the Board Minutes as observed in sub-paragraph (4) above.  It is also important to note that according to D3’s evidence, five of the offer letters (with subscription price stipulated by way of a formula) were delivered by Cyrus Yuen personally toGary Choy and Cheung shortly after 11 hours on 22 July 2016 and such offers were orally accepted by 11:29 hours.  This evidence was mere hearsay.  Cyrus Yuen has not been called as a witness and no explanation has been offered as to why he was not called.  I am not willing to place any weight on this hearsay evidence.

(6)     In respect of the July Monthly Return[43], it relates to the state of affairs of D1 as of 31 July 2016.  It stated that it was submitted by Leung as the Company’s company secretary.  It is the evidence of D3 and Leung that this document was actually prepared by Cyrus Yuen.  The date of submission was 5 August 2016, barely two weeks after the Disputed Board Meeting.  Section III dealt specifically with the Company’s share options scheme.  Under the row entitled “Share OptionScheme adopted on 25/9/2014”, the numbers of share optionsstated to have been “granted; Exercised; Cancelled; and Lapsed” were all stated to be “Nil”.  It also specifically stated that the number of new shares which may be issued as at close of the month was “Nil”.  D3’s evidence that it was a mistake of Cyrus Yuen and that Cyrus Yuen was too occupied by other matters flooding the Company during that period was mere hearsay.  Again, Cyrus Yuen has not been called as a witness for the defendants.  No explanation has been offered for not calling him.  According to D3’s evidence, Cyrus Yuen was personally involved in the grant of the Disputed Options in the following ways:

(i)     he was involved in discussions with D3 and Leung leading to the convening of the Disputed Board Meeting.  In fact, he sent out the emails to directors for convening the said meeting[44];

(ii)     after the Disputed Board Meeting, he allegedly deliveredfive of the offer letters to D10 in the morning of 22 July 2016 [45];

(iii)     he was the person allegedly receiving the communication of oral acceptance by the Grantees; and

(iv)     he procured and handled nine out of the 10 grantees to sign written acceptance forms of the offer letters between 24 July 2016 and 3 August 2016 [46].

In my view, it is thus inconceivable, if D3’s evidence were true, that Cyrus Yuen would have forgotten to mention the grant of the Disputed Options when he complied the July Monthly Return on 5 August 2016 given his heavy involvements up to 3 August 2016.  If Cyrus Yuen were called as a witness, I would need a lot of persuasion before I can accept that the lack of reference to the grant of the Disputed Options was purely a result of inadvertence on his part.  Since Cyrus Yuen has not been called and no credible explanation for such failure has been provided, I cannot and will not place any weight on D3’shearsay evidence that the omission was a matter of innocuous mistake.

(7)     The omission in the July Monthly Return did not stand alone.  The Company also did not issue an announcement for the grant of the Disputed Options on 22 July 2016 or shortly thereafter.  This omission is glaring.  According to the email of Wanda Suen mentioned in sub-paragraph (2) above, she had provided a template for the Announcement on Grant of Option.  That email was addressed to Leung who participated in the Disputed Board Meeting.  If the board of directors did genuinely resolve in that morning to grant the Disputed Options to the 10 grantees as deposed by D3, I am unable to see how the directors could have omitted to approve and then make the necessary announcement.  In cross-examination, D3 was referred to a board meeting held on 20 July 2016 in relation to the Placement and the publication of the related announcement[47].  D3 accepted that it was standard procedure to approve the draft announcement in relation to the Placement at that same board meeting.  There was no explanation as to why such standard procedure was not followed in relation to the grant of the Disputed Options.  D3’s evidence was that it was on 18 August 2016 that Yu Ming reminded the Company that it had failed to make an announcement for the grant of theDisputed Options.  D3 again claimed that it was an unintended omission.  This alleged omission is also glaring in my view.  D3 specially stated that Leung typed up the Board Minutes in the afternoon of 22 July 2016.  It is quite inconceivable that Leung, having been provided by Wanda Suen with a templatedraft announcement in the early hours of that day, would have omitted to deal with the announcement when he allegedly handled the Board Minutes that very same day.  It is not disputed that the granting of the Disputed Options was only announced for the first time in the morning of 23 August 2016, one month after the Disputed Board Meeting.

(8)     D3 was referred to Rules 18.78 and 18.79 of the GEM Listing Rules[48]. D3 agreed that in respect of the financial results for the period ending 30 June 2016, the Listing Rules require them to be published within 45 days such that the deadline for publication fell on 14 August 2016.  D3 also agreed that since 14 August 2016 was a Sunday, the deadline effectively fell on 12 August 2016.  D3 was then referred to the “Blackout Period” under Rule 23.05 which reads:

“ An issuer may not grant any options after inside information has come to its knowledge until it has announced the information. In particular, it may not grant any option during the period commencing one month immediately before the earlier of:

(1) the date of the board meeting…for approving the issuer’sresults for any year, half-year or quarter-year period or any other interim period …; and

(2) the deadline for the issuer to announce its results for any year, half-year or quarter-year period under rule 18.49, 18.78 or 18.79 or any other interim period …,

and ending on the date of the results announcement.”

This same Blackout Period was reflected in Clause 5.2 of D1’s Share Option Scheme[49] which reads:

“ The Directors shall not make an Offer to any Participant after inside information has come to their knowledge until such inside information has been published in accordance with Rules 16.17 to 16.19 of the GEM Listing Rules or in such manner as required under the GEM Listing Rules. In particular, during the period commencing one (1) month immediately preceding the earlier of (i) the date if the meeting of the Directors for the approval of the Company’s results for any year, half year, quarterly or any other interim period (whether or not required under the GEM Listing Rules); and (ii) the deadline for the Company to publish an announcement of its results for any year or half year under the GEM Listing Rules or quarterly or any other interim period (whether or not required under the GEM Listing Rules), and ending on the date of the results announcement, no Option may be granted. The period during which no Option may be granted will cover any period of delay in the publication of a result announcement.”

D3 accepted in cross-examination that the Blackout Period commenced from 12 July 2016.  D3 said the directors shouldhave known about the Blackout Period but they had overlooked it.  This was by far the fourth alleged oversight/mistake if one were to believe in the defence case.

(9)     As to the board meeting relating to the actual allotment of shares to the grantees, it allegedly took place as a telephone meeting on 21 August 2016 which was a Sunday.  D3 was cross-examined as to why there was such an urgent need to hold a board meeting on Sunday.  D3 said that in the beginning of August or mid-August, the Grantees indicated that they wanted to exercise their options.  D3 thus instructed Cyrus Yuen to deal with it and he had no idea why it was done on a Sunday.  In my view, D3’s evidence is odd as one would naturally expect some sort of urgency to justify disturbing the directors on a Sunday morning. Cyrus Yuen was, of course, not called as a witness and hence no credible explanation has been put forward.  A copy of the Board Minutes for this meeting can be found amongst the emails exchanged betweenCyrus Yuen and Boardroom.  Attached to an email from Cyrus Yuen sent at 22:39 hours on 21 August 2016 [50] was a copy of the said Board Minutes. It stated that the meeting was held inthe office of the Company at 09:00 hours on Sunday 21 August2016.  This was not accurate as D3 admitted that the meeting was conducted over phones.  This Board Minutes was not signed by D3 as Chairman.  Nor was it accompanied by an attendance sheet.  Under paragraph 4.1, no actual subscription price was stipulated.  Under paragraph 5.1, it was stated that:

“ There were tabled before the meeting:-

(A) the signed Acceptance from the Option grantees stated in the attached Appendix A; and

(B) the Option certificates for the Option grantees stated in the attached Appendix A.”

(10)     It was put to D3 in cross-examination that Clause 5.1 was again incorrect, D3 disagreed and said that these documents had previously been emailed to the directors and they had read them.  No such emails had been disclosed by the Defendants.  In fact, no “Option Certificates” could be found in the bundles although a template thereof can be found attached to Wanda Suen’s email dated 22 July 2016[51].  D3 has never mentioned about this alleged circulation of documents by emails in his previous affirmations.  In my view, D3 was making up his evidence with a view to avoiding an acknowledgment that this Board Minutes again failed to reflect what truly transpired.

(11)     After Boardroom emailed back and asked for signed copies of the Board Minutes, Cyrus Yuen wrote back at 10:38 hours of 22 August 2016 attaching a signed copy of the Board Minutes[52].  Again, this version, though signed by D3 as Chairman, contained no attendance sheet.  For reasons unknown, this Board Minutes was revised and Cyrus Yuen sent the revised Board Minutes to Boardroom at 11:54 hours on 22 August 2016 [53]. The most significant revision was to paragraph 4.1 which now stated the subscription price as HK$0.0256.  It was put to D3 in cross-examination that the revisions indicated that the Board Minutes was prepared in a rush such that it contained numerous mistakes necessitating revisions.  D3 disagreed and said that Cyrus Yuen frequently made mistakes.  The blame was again on Cyrus Yuen who was of course not called to provide relevant explanations.  I am again not impressed by D3’s evidence.

(12)     D3 also exhibited the Notices on Exercise of Share Options[54]. They were all purportedly signed by the Grantees on Sunday,21 August 2016.  There was again no evidence adduced to explain why and how each grantee came to execute his/her respective Notice on Exercise of Share Options on a Sunday in such a rush.  D3 also exhibited bank deposit slips[55] showing that subscription prices were only received by D1 between 23 and 24 August 2016.  Yet, even prior to the receipt of the subscription money, Cyrus Yuen already started giving instructions to Boardroom to allot shares to the Grantees[56].  His first instruction letter was given at 22:39 hours on 21 August2016 [57].  When cross-examined, D3 said that it was because the Grantees had initially paid by cheques but then later changed to pay by remittances, hence the bank deposit slips showed the dates of the remittances.  D3 however never mentioned about this alleged change of mode of payment in his three affirmations.  In any event, there is no evidence that any of the Grantees had made payment by cheque to Cyrus Yuen on aSunday before he issued his first instruction letter to Boardroom.  Since Cyrus Yuen was not called to give evidence, what D3 said about “payment by cheques” was mere hearsay.  He did not suggest that he personally received the alleged cheques.  I am again unable to place any weight on such evidence as there was no adequate explanation for not calling Cyrus Yuen.  In the end, the evidence as presented suggests that the Company started causing the allotment of shares to the Grantees even prior to receiving the subscription prices.  This was contrary to Clause 7.2 of the Share Option Scheme which reads:

“ Subject to Clause 17.8, an Option shall be exercisable … by giving notice in writing to the Company stating …. Each notice must be accompanied by a payment for the full amount of the Subscription Price for the Shares in respect of which the notice is given. Within 28 days … after receipt of the notice and remittance … the Company shall accordingly allot the relevant number of Shares to the Grantee ….”

(13)     D3 was unable to credibly explain why there was such a rush to cause the allotment of the Disputed Shares to the Grantees. As a result of the Company’s instructions, Boardroom completedallotment of shares to the Grantees by 16:37 hours on Monday,22 August 2016 and the Grantees’ names were updated as shareholders[58]. By an announcement dated 22 August 2016 but only uploaded at 07:59 hours on 23 August 2016, the Company announced that a total of 2,000,000,000 options hadbeen granted to 10 “employees and consultants of the Company” and that up to the date of the announcement, 1,800,000,000 options granted were accepted by the Grantees[59].  It is difficult to see why this announcement was not made as soon as Yu Ming reminded D3 on 18 August 2016 that the Company hadfailed to make the appropriate announcement for the granting of the Disputed Options on 22 July 2016. Instead, one can objectively see actions performed in rush (ie grantees exercising their options; board holding meeting to approve allotment; and giving instructions to Boardroom to effect allotment even prior to receipt of subscription monies) allowing the eight Grantees to become registered shareholders of the Company by close of business on Monday, 22 August 2016 before a proper announcement was made by the Company as to the alleged grant of options one month ago.  The objective effect of the Company’s action was: it was only made known to the public for the first time on 23 August 2016 that the Disputed Options had been granted.  Yet, in the meantime, these Grantees had already been allowed to exercise their options and allotted with shares such that they could immediate sell into the market overt.  No credible explanation has been offered by D3 as to why the Company conducted in this way.

(14)     It is crucial however to note what the Company was facing at the material time around 21 August 2016.  FIH issued an announcement for the making of the General Offer on 18 August 2016.  It is clear that on the same day, Yu Ming had already been using the grant of the Disputed Option as a ground to challenge the propriety of the General Offer[60].  Yu Ming’s fax to the SFC wrote: “We are of the view that … (2) The Revised Offer is not extended to holder of the Company’s share option scheme, under which 2,000,000,000 share options have been granted and outstanding conferring rights to the grantees to subscribe for 2,000,000,000 Shares.”  As mentioned earlier, the grant of the Disputed Options was only announced in the morning of 23 August 2016.  Then by another announcement dated 23 August 2016 [61] (the GO Announcement) the Company formally and publicly used thegrant of the Disputed Options as a ground for challenging thepropriety of the General Offer.  In the GO Announcement, the Company quoted the 1-day-earlier announcement about the grant of the Disputed Options.  Also relevant is to note that as per the GO Announcement, the Company stated that trading of its shares would resume with effect at 09:00 hours on 24 August 2016 [62].  Incidentally, by reason of the rush actions observed above, by close of business on Monday, 22 August 2016, the eight Grantees were allotted the Disputed Shares.  On 24 August 2016, shares certificates of the Disputed Shares were collected by the Company from Boardroom.  All eight Grantees deposited their Disputed Shares with FP Sino-Rich and Emperor and sold them all through open market.  It was put to D3 in cross-examination that the reason for the rush was to make use of the Disputed Options/Shares as a ground for blocking the General Offer and to enable the Grantees to deposit their share certificates to their securities companies on 24 August 2016 which was the day on which trading of the Company’s shares resumed.  D3 of course denied.  However, in my view, the inference is too obvious.  Once the Disputed Shares had been sold to innocent third parties through open market, legal recourse would have become extremely difficultand complicated, even if possible.  I find D3’s denial beguiling and not credible.

(15)     Senior Counsel for Ps suggested to D3 in cross-‌examination that the allotment of shares to the eight Grantees was to defeatthe requisition raised by Ps.  D3 denied.  In fact, D3 stated in his affirmation[63]that it was impossible for the board of directors to have in mind blocking Ps’ requisition for the EGM because allotment of shares to the Grantees was already completed by 22 August 2016, ie prior to ASC notifying the Company about Ps’ requisition on 23 August 2016.  That would appear to be correct.  However, it is to be noted that since around 5 August 2016, the board would have knownabout P1’s complaint to the SFC about the irregularities of theactions of the Company’s directors and P1’s intention to issue requisition for a meeting to remove all existing directors.  Furthermore, the Company did eventually make use of the diluting effect of the allotment of shares to the Grantees as a ground to challenge the locus standi of Ps in requisitioning an EGM[64].  In my view, it is plausible that the grant of the Disputed Options was originally motivated by the desire to block the General Offer.  Subsequently, the Company appreciated that the same course of action could be utilized for blocking Ps’ requisition for an EGM.

(16)     D3 was also cross-examined in relation to the reasons behind granting the Disputed Options to the Grantees:

(i)     As for Wilhelm, Tracy and Tong, D3 said that their “past contribution” was their help in the Company’s listing.  D3 agreed that the listing works were done by FP Sino-‌Rich and they were remunerated by way of commissions charged at 4% of the new capital raised. FP Sino-‌Rich also received 1% commission for successfully locating placees for the Company.  As for future works that may be undertaken by FP Sino-Rich,D3 agreed that the Company would equally have to payFP Sino-Rich commissions.  D3 could not point to anyexisting agreement engaging any of them as “consultants”for the Company.  As for “future contribution”, D3 merely stated that these people have strong network and could introduce clients to the Company.  This is in my view most vague and illusory.  In any event, D3 provided no reason for giving extra rewards by way of share options to individual employees of FP Sino-Rich.

(ii)     As for Gary Choy, D3 said his “past contribution” was successfully introducing Aji On and unsuccessfullyintroducing Desigual.  D3 agreed that Gary Choi wouldearn commission for his successful introduction.  Again, D3 produced no existing agreement engaging Gary Choyas a “consultant” of the Company and he did not even point to any prospective business opportunity that could relate to Gary Choy.

(iii)     As for Lee, D3 agreed that she was remunerated under her service agreement with Aji On.  He also agreed thatunder that service agreement, Lee could not resign in the first three years.  Lee also holds 44% shareholding in Aji On.

(iv)     As for Pang, D3 agreed that originally Pang held 55.6%shareholding in Aji On and after selling the same to theCompany, Pang ceased to have any relationship with the Company. Again, there was no existing agreement engaging Pang as a “consultant”.  In my view, it was inherently more likely that Pang was chosen purely because of her relationship with Lee.

(v)    & As for Cheung, D3 agreed that other than being the fiancée of Gary Choy, Cheung has no relationship with the Company.  D3 agreed that Cheung only operated two retail shops in Tsuen Wan and Shatin.  D3 however maintained his bare assertion that Cheung “rendered us lots of consultation and that she would lead us into high end fashion business”.  In my view, not only was D3’s version extremely vague and unparticularized.  It is also inherently unlikely that an operator of two retail shops in the New Territories could give valuable (let alone meaningful) advice to the Company on the development of high-end fashion business.

(vi)     As for Lai, D3 agreed that D4 is also experienced in moneylending business and could give advice to the Company if it so requires. D3 however said the Company would welcome one more advisor.  D3 said that Lai has strong clientele and could exchange business with the Company.  Again, my view is that D3’s evidence was most vague and unimpressive.  D3 produced no agreement engaging Lai as a “consultant” of the Company.  D3 offered no credible explanation as to why the Company should not reward Lai by commission only after he in fact introduces to a exchanges business with the Company. 

Kwong Lun Kei Victor (D6)

63.D6 has filed one affirmation in which he gave the following evidence:

(1)     He was educated in Australia and admitted to practice as a solicitor in Hong Kong in 2010.  He mainly practises in the areas of corporate finance and Hong Kong IPOs, both in the main board and in the GEM board.  He is an independent non-executive director and was appointed for a term of one year with effect from 19 October 2015.  His duties and responsibilities in the Company include giving advice at board meetings.

(2)     On the night of 21 July 2016, he received an email addressed to all directors that a board meeting would be held at 08:30 hours on 22 July 2016 to discuss the resignation of Lee.  He was aware of the Company’s acquisition of Aji On and the role of Lee in the “Laboron” business.  He was aware of Lee’s high caliber as a fashion designer and the Company’s wish to retain her.

(3)     As for what happened at the Disputed Board Meeting, he basically referred to what D3 described in his 1^st affirmation.  He said D3 had explained the past and current contributions made by the 10 proposed grantees and that it was confirmed in the board meeting that each of the proposed grantees, except Lee, were independent of the Company and had no relationship with all directors of the Company.

(4)     He agreed that the resignation of Lee was likely to have an adverse impact over the operation of the Company.  Having taken into account the Company’s operational needs and all the circumstances with care, he took the view that the grant would not cause an imminent cashflow problem and that D3’s proposal was reasonable, sensible and commercially viable.

(5)     It was resolved that 2,000,000,000 options were to be granted and that the exercise price would be at least the higher of: (a) the closing price of the securities as stated in the Exchange’s daily quotation sheet on the date of grant; and (b) the average closing price of the securities stated in the Exchange’s daily quotations sheet for the five business days immediately preceding the date of grant.

(6)     The other two INEDs, namely, D5 and D7 also agreed with D3’s proposal.

64.The following are the main points that emerged in the course of his cross-examination by Senior Counsel for Ps:

(1)     He stated that it was almost one month (although he could not recall the exact date) after 22 July 2016 that the Company requested him to “sign the board minutes” of the Disputed Board Meeting. His evidence is to be contrasted with that of D3 who said that Leung typed up the Board Minutes in the afternoon of 22 July 2016.  If what D3 said were true, there was no reason (and none was put forward) why D6 was only presented with the Board Minutes for his signature almost one month later.

(2)     He was familiar with the 45-day time limit for publication of interim and quarterly results.  He agreed that for the results made up to 30 June 2016, the deadline for publication of theseresults effectively fell on 12 August 2016.  He was also familiar with the Blackout Period which would have commenced on 12 July 2016.  When Senior Counsel for Ps suggested to him that the Company could not, during the period between 12 July and 12 August 2016, grant share option to anyone, D6 answered: “This depends on how you interpret the listing rules”. D6 was then referred to Rule 23.05 of the GEM Listing Rules which reads:

“ An issuer may not grant any options after inside information has come to its knowledge until it has announced the information. In particular, it may not grant any option during the period commencing one month immediately before the earlier of:

(1) the date of the board meeting (as such date is first notifiedto the Exchange under rule 17.48) for approving the issuer’sresults for any year, half-year or quarter-year period or any other interim period (whether or not required under the GEM Listing Rules); and

(2) the deadline for the issuer to announce its results for any year, half year or quarter-year period under rule 18.49, 18.78 or 18.79 or any other interim period (whether or not required under the GEM Listing Rules),

and ending on the date of the results announcement.

Note: No option may be granted during any period of delay in publishing a results announcement.”

According to D6, Rule 23.05 used the words “may not” instead of “must not”. He therefore considered that there may be exceptional circumstances allowing a company to grant options even during the Blackout Period.  D6 said that the emphasis should be on “whether the company has any inside information at the time when it grants the option”.  He continued to say that inside information would only materialize as such when the company completes consolidation of its accounting information for a given quarterly period.  Accordingly, even after the commencement of a Blackout Period, if the company has not yet collected management accounts from subsidiaries and has not consolidated its financial information into quarterly accounts, then the company would not be taken to have inside information and there would be no prohibition for granting share options.  D6 was further referred to Clause 5.2 of the Share Option Scheme which used the words “shall not”.  D6 said he appreciated the difference but maintained his evidence that under special circumstances, the directors could still issue share options during the Blackout Period unless the words “must not” are used.  In my view, D6’s evidence was unreasonable and contrived.  The ordinary and natural meaning of the phrase “may not do something” is to express a prohibition.  The word “may” is permissive but the words “may not” is definitely prohibitive.  In my view, “may not” is in this context not materially different from “shall not” or “must not” although one may argue that the prohibitive emphasis is more prominently indicated in the latter expressions.  D6’s argument about “inside information” being the overriding emphasis was also plainly wrong in the light of the opening words of the second sentence in Rule 23.05, namely, “In particular,…”.  It is clear that the Rule stipulates the one-month period prior to the deadline for the announcement of results as a specific period within which a company is prohibited from granting any options.  The reasonis obvious.  During this period, the company would most likely (if not bound to) be engaged in all sorts of preparation for thepublication of its results.  These preparations would invariably involve different kinds of inside information.  It is thus conducive to certainty and ease of monitoring to specify this period as a discrete period of prohibition. Counsel for D3 to D7 referred me to a PowerPoint issued by HKEX which purported to explain the Blackout Period. I do not find that useful because the witness did not suggest that his understanding was based on this material. This material was thus presented through the mere industry of counsel. Furthermore, the material is in my view not an authoritative interpretation of the rules.  It is rather an expression of the exchange’s policy in enforcement. I have reminded myself that I should exercise extra care and demand greater persuasion before rejecting the credibility of a solicitor who is an officer of the court. On this instance however, I am satisfied that D6 did not give his evidence honestly when he attempted such a strained and contrived interpretation of Rule 23.05 with a view to salvaging the obvious breach of Rule 23.05 and Clause 5.2 of the Share Option Scheme if he were to persuade me that the Disputed Options were indeed granted on 22 July 2016.

(3)     D6 accepted that he was not presented with documentary materials either prior to or in the course of the Disputed Board Meeting (which was conducted over telephone).  He agreed that paragraph 5.1 of the Board Minute was incorrect.  No rules of the Share Option Scheme, no “List” and no draft Offer Letter were tabled at the Disputed Board Meeting.  D6 was only appointed an INED over a year after the adoption of the Share Option Scheme by the Company.  He did not suggest in his affirmation or his oral evidence that he had somehow familiarized himself with the rules of the Share Option Scheme at any time prior to the Disputed Board Meeting.  It is thus surprising, in my view, that he had not asked to see the rules ofthe Share Option Scheme particularly in view of his admissionthat it was his duty to advise the board at meetings.  If he had done so, he would have appreciated Clause 4.3 which reads:

“ In order for a person to satisfy the Directors that he is qualified to be (or where applicable, continues to be qualified to be) a Participant, such person shall provide all such information as theDirectors may request for the purpose of assessing his eligibility(or continuing eligibility).”

(4)     When cross-examined on what D3 explained at the Disputed Board Meeting as the contributions made by individual proposed Grantees, D6’s evidence was:

(i)     as for Wilhelm, Tong and Tracy, D3 said that they were staff of FP Sino-Rich.They gave advice in the listing process and helped the Company in securing placees;

(ii)     as for Gary Choi, D3 said he had recommended investment opportunities to the Company and the Aji On acquisition was through Gary Choi’s introduction;

(iii)     as for Lee, D3 said Lee was the designer of “Labaron”, the brand of Aji On and that it depends on Lee’s designs and operation;

(iv)     as for Pang, D3 said she was the mother of Lee and thatshe had good network in the PRC.She was experiencedin holding fashion shows and she could supply opinion about Aji On’s operation;

(v)     as for Cheung, D3 said she had given fashion advice to Aji On;

(vi)     as for Lai, D3 said he had experience in moneylending and he assisted the Company in securing a moneylending licence; and

(vii)     as for Tony and Chai, D3 said they were employees of TC Capital, the sponsor at the listing of the Company.  D3 said they assisted in the successful listing of the Company.

(5)     On the issue of “eligibility or continuing eligibility” of the individual Grantees, D6 seemed to have exercised very little (if at all) judgment independent of the management, ie D3. Apart from Lee whom D6 had some personal knowledge of herinvolvement in and importance to the business of the Company,D6 was simply prepared to accept what D3 orally represented en masse.  Despite the apparent briefness of D3’s so-called explanations and the lack of material substantiation, he never raised any query as one would naturally expect from an INED faithfully exercising his independent role in the board.  He never asked for additional information to be provided pursuant to Clause 4.3 before making his decision.  Apart from the case of Lee which might arguably gave rise to some urgency oftreatment, D6 never queried why the Disputed Board Meetingwas urgently staged within short notice (and hence with paucity of information and supporting materials) to discuss on the grant of share options to a host of persons whose situations objectively presented no urgency.  This is glaring particularly in the light of his knowledge about the listing rules and the Blackout Period.  Neither did he questioned D3 on why, even if there be sufficient justification for granting share options to Lee, similar amount of share options should be granted to the other nine persons allegedly “out of fairness”. He never questioned D3 as to whether there were existing agreements orcommitments whereby these nine persons could be regarded as “consultants” of the Company.  He never questioned D3 on why, despite remunerations for past services rendered having been adequately provided to FP Sino-Rich/TC Capital in relation to the Listing and Placement, additional reward shouldbe given in form of Share Options to certain of their employees.  Similarly, he did not ask D3 whether Gary Choy had already been adequately remunerated by way of commission for his past service of introducing the Aji On acquisition and why heshould be rewarded further.  The same criticism would apply to the case of Lai.  He never asked whether the “fashion advice” allegedly given by Cheung (Gary Choy’s fiancée) to Aji On were merely casual as opposed to substantial.  He never queried why Lee, who is so well-known and experiencedin high-end fashion business such as “Laboron” would require “fashion advice” from someone who merely operates two retail shops in Tsuen Wan and Shatin.  He never queried the vague assertion that Pang (Lee’s mother) “could supply opinion for the operation of Aji On”. 

(6)     Similarly, if D6 had asked to be provided with the rules of the Share Option Scheme, he would have appreciated Clause 5.4 which set out the detail requirements of what an Offer Letter should contain. It was suggested to D6 that since no draft Offer Letter was tabled at the meeting, the directors would not be in a position to approve the grant of option.  D6 said the directors could approve the grant first and then take care of the procedures later.  However, that was not what the Board Minutes recorded.  Paragraph 7(ii) of the Board Minutes stated that the directors resolved “that the form and substance of the Offer Letters to the Grantees and the same are hereby approved and that any one Director be and he is hereby authorized to sign the same on behalf of the Company”.  D6 never offered any explanation as to why he was willing to signto confirm this Board Minutes which, according to his evidence, must have been false in this regard.

(7)     D6 was also cross-examined on the Company’s omission to make an announcement for the grant of the Disputed Option. D6 maintained that the Board did make the resolution on 22 July 2016 and said that the Company had breached the listing rule in this regard.  D6 however did not offer any explanation as to why, with his legal knowledge and experience in this field, he could have failed to advise the Board that an announcement had to be made as soon as practicable.

Leung Tze Wai Brian (“Leung”)

65.Leung had made two affirmations which contained the following evidence:

(1)     He is the company secretary and the chief financial officer of the Company.  He first joined the Company as an account manager in March 2015.  He was promoted to the current positions on 16 May 2016.

(2)     On the night of 21 July 2016, D3 received Lee’s resignation via email.  The Company could not afford to lose her, hence an urgent board meeting was called at 08:30 hours on 22 July 2016 to discuss the matter.

(3)     It was resolved that the Share Option Scheme could be used to pacify and hopefully retain Lee.  The Board was of the view that the Company “could use this opportunity and grant the share options to our consultants in one go” [65].

(4)     As for the respective contribution of the 10 proposed Grantees, Leung referred to the affirmation of D3 and adopted his evidence.  Leung said that the board resolved on three matters:

(i)     the 10 proposed Grantees were eligible under the Share Option Scheme;

(ii)     2,000,000,000 options were to be granted;

(iii)     the exercise price must be at least the higher of:

(a)     the closing price of the securities as stated in the Exchange’s daily quotations sheet on the date of the grant; and

(b)     the average closing price of the securities as stated in the Exchange’s daily quotations sheets for the five business days immediately preceding the date of grant.

(5)     Offers letters were passed to 8 of the 10 proposed Grantees or their agents by Cyrus Yuen and D3 in the same morning, who communicated their acceptance forthwith.

(6)     After the board resolved that share options be granted to the 10 grantees, the closing price of the Company share was not yet known.  As he typed up the Board minutes later on that day, he inserted the relevant closing price into the board minutes “by mistake”.

(7)     As for the omission to mention the grant of share options to the 10 Grantees in the July Monthly Return, Leung said that it was within his scope of duty to file the monthly returns.  However, he was busy dealing with various complaints and corporate matters, both internal and external since mid-July 2016.  Hence, he delegated the task of completing the July Monthly Return to Cyrus Yuen.  He and Cyrus Yuen both made the mistake inadvertently.

(8)     In respect of the omission to make an announcement for the grant of options, Leung again explained that it was not intended.  He said that “on 11 August 2016, our focus was on the placement exercise which was subject to challenge….” [66]  What he did not explain however was why an announcement was not made as soon as or shortly after 22 July 2016.

66.The following are the main points that emerged in the course of his cross-examination by Senior Counsel for Ps:

(1)     Leung said that he first consulted Messrs Hasting in relation togrant of share option on 19 July 2016 and that he was provided with certain general templates from Wanda Suen attached to her email at 00:19 hours on 22 July 2016.  Despite the fact that Wanda Suen did provide a template for an approval from the Remuneration Committee, Leung denied that Messrs Hasting had advised on the need for such approval.  Leung however accepted that Messrs Hasting had advised on the need to make announcement for the grant of share options.  He also agreed that Messrs Hasting had advised that Rules of the Share Option Scheme; a List of proposed grantees showing information about each respective grantee; and a draft offer letter should be tabled at the board meeting.  It is difficult to understand why Leung denied having been advised by Messrs Hasting on the need to seek approval from the Remuneration Committee.  Such advice is apparent from the templates that Wanda Suen subsequently provided in the same way as she had provided templates which incorporated her other advices that Leung admittedly received.

(2)     In an attempt to explain why he omitted to issue an announcement about the grant of share options, Leung explained that the Company encountered intimation of a general offer that very same day.  He said he had to attend to many mattersincluding looking for financial advisers and answering HKSEand SFC queries.  He then said that in the morning of 22 July 2016, “something happened at home” and so he generally delegated the follow-up work (ie following the resolutions made at the Disputed Board Meeting) to other colleagues.  It was suggested to Leung that he made this up as nothing of thesort had been mentioned in his two affirmations.  Leung denied.  I agree with Senior Counsel for Ps that it is more likely to be a recent fabrication by Leung.

(3)     As for the Board Minutes of the Disputed Board Meeting, Leung said he typed it out later on that day and passed it to Cyrus Yuen by email.  It was pointed out to Leung that no such email has ever been disclosed by the Company.  Leung again could not offer explanation as to why, if his version be true, the Board Minutes were only sent to attending directors for their signatures until almost one month later.

(4)     In respect of the July Monthly Return, Leung said that it was prepared by Cyrus Yuen and was reviewed by him.  Hence, the alleged mistake was actually made by Cyrus Yuen and he failed to spot the mistake when he submitted it to SEHK.  He said he was still very busy as of 5 August 2016 dealing with matters arising out of the general offer and he was occupied by other daily matters.  It was put to Leung that this excuse was not mentioned in his affirmation.  The suggestion that Cyrus Yuen had made a mistake is in the nature of hearsay evidence on which I have refused to place weight.  I have to assess the inherent probability of Leung’s allegation of a “coincidental compounded oversight”.

(5)     Leung was referred to Note 11 of the Company’s quarterly report published on 12 August 2016 [67] which dealt with “Events after the reporting period”, ie after 30 June 2016.  Under this note, there was specific reference to an event on 21 July 2016, ie the Company entered into the Placing Agreement.  Note 11 however made no reference to the grantof the Disputed Options which allegedly happened on just the next day.  Leung could not provide any credible explanation other than asserting again his carelessness.  In other words, this was the “third coincidental compounded oversight”.

(6)     Leung was then cross-examined in relation to the Blackout Period.  He said that his understanding of Rule 23.05 of the GEM Listing Rules was: “it is only after inside information coming to knowledge…. Put simply, it is about whether there was inside information prior to the grant of share options”. He then agreed that on 22 July 2016, he and the directors forgot that it was within the Blackout Period.  He then mentioned his recollection that one of the INED, whom he could not now remember, asked him at the Disputed Board Meeting about the progress of the quarterly report.  He answered by saying that he had just begun to collect information but had not commenced working on it.  Firstly, this episode was never mentioned in his affirmation nor could one see any trace of such discussion in the Board Minutes.  Secondly, it rendered his evidence rather incomprehensible.  On the one hand, he accepted that 22 July 2016 was within the Blackout Period and that he and the directors forgot about it.  On the other hand he seemed to suggest, coupling with his own interpretation of Rule 23.05, that there was no prohibition since he had not started collating the Company’s financial information.  Thirdly, he apparently came to the same strained and contrived interpretation of Rule 23.05 despite avowing that he had not discuss it with anyone, in particular D6.  I find Leung’s evidence not credible.  Similar to what I have observed aboutthe evidence of D6 on this issue, I am of the view that it was acontrived attempt to salvage the obvious breach of Rule 23.05 and Clause 5.2 of the Share Option Scheme if he were to persuade me that the Disputed Options were indeed granted on 22 July 2016.

(7)     In relation to the Board Minutes, Leung was cross-examined in relation to paragraph 4.5 which mentioned the closing price of D1’s shares for 22 July 2016.  He agreed that it did not correctly reflect what happened at the Disputed Board Meeting.  When cross-examined in relation to paragraph 5.1, Leung admitted that no such documents had been circulated amongst the directors prior to or at the meeting.  Leung effectively admitted that paragraph 5.1 did not reflect what actually happened at the meeting.  Similarly, the resolution set out in paragraph 7.1(ii) could not have been true.

(8)     As for the alleged sending out of the offer letters and their acceptance by eight Grantees in the morning of 22 July 2016, Leung confirmed that his evidence was based on what Cyrus Yuen told him.  His evidence was again hearsay.  Since Cyrus Yuen was not called to give evidence and no explanation has been offered, I have decided to place no weight on such hearsay evidence.

(9)     In relation to the allotment of shares to the Grantees, Leung was first referred to his email to Boardroom at 22:39 hours on 21 August 2016 sending them the Company’s instruction letter for the allotment of shares to the eight Grantees[68]. It was pointed out to Leung that by the time of this email, the Company had not received any of the subscription monies from the eight Grantees. Leung was thus questioned as to the basis on which he could instruct Boardroom to allot shares even prior to receipt of subscription monies.  Leung replied:

“ On 22 August 2016, we had not yet delivered share certificatesto the Grantees, so if they failed to pay the subscription monies, we could have cancelled them …. If unfortunately monies are not received, it would be a minimal loss suffered by D1. All we had to do is to give instruction to Boardroom to cancel.”

Leung was then referred to the resolution set out in paragraph 7.1(iv) of the Board Minutes which stated:

“ that upon receipt of any notice given by any Grantees for exercising any Options together with the relevant remittance … the Company … will instruct [Boardroom] to allot and issue an appropriate number of the Option shares ….”

Leung then eventually agreed that based on the above resolution, he had no basis to instruct Boardroom to effect the allotment.  He however maintained that the Company would only give share certificates to the eight Grantees after receipt of their subscription monies.  What Leung failed to explain, in my view, is why there was such a rush to give instructions to Boardroom in the evening of 22 August 2016.

(10)     As for the actual payment of subscription monies by the eight Grantees, Leung accepted that the monies had not been received into the Company’s bank account as of 22 August 2016.  In fact according to bank documents disclosed by D3 [69], remittances were only received by the Company from the eight Grantees between 23 and 24 August 2016.  Leung’s purported explanation was again largely based on hearsay evidence.  He said he was told by Cyrus Yuen in the morning of 22 August 2016 that cheques had been received from the eight Grantees.  Leung said he asked Cyrus Yuen to take careof the cheques.  He personally did not know whether cheques had in fact been deposited.  Then subsequently, he was told by Cyrus Yuen that the eight Grantees requested a change of payment method.  He was not sure whether it was on the night of 22 August 2016 or on 23 August 2016 that the eight Grantees requested for the change of payment method.  Hence, the alleged receipt of cheques and the alleged change of payment methods are all based on hearsay evidence of Cyrus Yuen.  For similar reasons explained above, I am not prepared to give them any weight.  The objective evidence is that Leung started to give Boardroom instructions to allot shares to the eight Grantees in the evening of 21 August 2016 even prior to the Company receiving subscription monies from the eight Grantees.  This was a clear contravention of the Rules of the Share Option Scheme.  In my view, no adequate and credible explanation had been given by Leung as to why the Company behaved in such way.

Wong Chiu Po (D4)

67.D4 had made only one affirmation[70] which contained the following evidence:

(1)     He has been a non-executive director of the Company since 12 October 2015.  He also works in a private investment company responsible for reviewing, reporting and managing investment projects.

(2)     He learnt from an email issued by Cyrus Yuen in the night of 21 July 2016 that Lee had tendered her resignation to D3.  An urgent board meeting was called at 08:30 hours on 22 July 2016 during which the Board discussed the options available to retain Lee.  The Board also discussed the appropriateness of offering share options to Lee pursuant to the Share Option Scheme.

(3)     He then referred to the 1^st and 2^nd affirmations filed by D3 and adopted D3’s evidence in relation to D3’s description of the Company’s corporate affairs, the contribution of the 10 proposed grantees identified, how and why the share options were resolved to be offered to the 10 proposed grantees.

68.The following are the main points that emerged in the course of his cross-examination by Senior Counsel for Ps:

(1)     D4 was asked about his personal knowledge regarding the 10 proposed grantees.  D4 was aware that five of them were employees of FP Sino-Rich and TC Capital.  He was aware that FP Sino-Rich and TC Capital had been duly remunerated for their services to the Company.  He was aware that none of the five Grantees has entered into consultancy contract with the Company.  D4 could not provide reasons for further remunerating individual employees of FP Sino-Rich and TC Capital.  At least in relation to Lai and Cheung, he had no personal knowledge about their alleged contributions and he simply relied on what D3 said.  In relation to Gary Choy, D4 seemed to know that he had introduced the acquisition of Aji On and that he had been remunerated.  D4 mentioned that Gary Choy had also introduced other business opportunities to the Company even though they did not materialize.  As for Pang, D4 said he remembered that Pang had hosted fashion shows for Aji On. His evidence in this regard was different from that of D3 and D6.

(2)     It was suggested to D4 that he did not make any attempt to verify whether any of the proposed grantees was eligible underthe Share Option Scheme.  D4 disagreed.  When further asked, it became apparent that the so-called verification was illusory.  The Board merely asked D3 whether it was legitimate to grantoptions to the proposed grantees.  The Board simply acted on D3’s recommendation without any real scrutiny.

(3)     D4 was referred to the Board Minutes of the Disputed Board Meeting.  He effectively agreed that paragraphs 4, 5.1 and 7.1(ii) did not reflect what actually happened.  D4 also confirmed that he first saw the Board Minutes almost one month after 22 July 2016.

(4)     D4 also confirmed that what he said in his affirmation about the delivery of offer letters and their acceptance by the eight Grantees in the morning of 22 July 2016 was based on what he was told by Cyrus Yuen.

Discussion and findings on Issue (1)

69.In my judgment, it has been demonstrated in cross-‌examinations of the defence witnesses that the Board Minutes of the Disputed Board Meeting is not a reliable record of what actually transpired at that meeting.  Contemporaneous emails do establish that a board meeting was held in the morning of 22 July 2016.  Yet, as to what was actually discussed and resolved at that meeting, it would depend on my assessment of the credibility of the defence witnesses.

70.I have already identified in paragraphs 62 to 68 above the various unsatisfactory and unconvincing aspects of their evidence as revealed in cross-examinations.  These matters adversely affected my assessment of their credibility.  Moreover, I have assessed the inherent probabilities of the defence case with reference to objective and undisputedcontemporaneous documents and events.  In a nutshell, if one were to accept the defence case, one would have to accept that the Company (through its staff and directors) had innocently committed multiple oversights or breaches of the GEM Listing Rules and the Rules of the Share Option Scheme which were compounded by the coincidental failure of all the participants to spot out and correct them at various stages.  Many of the alleged mistakes or oversights were sought to be established by hearsay evidence on which I have declined to place any weight.  It would also involve accepting that Leung had committed glaring mistakes in preparing the Board Minutes of the Disputed Board Meeting and the coincidental failure of D3, D4 and D6 to spot out and correct them before they appended their signatures.  Instead I find it inherently more likely that the defence case is nothing but an example of the classical saying: “what a tangled web one weaved when one first practised deceit”. 

71.In my judgment, it is inherently more probable that some time in August 2016, in an attempt to find ways to challenge the General Offer, a scheme was devised to present a false case that the board of directors of the Company had already resolved to grant the Disputed Options to the Grantees prior to the Company receiving intimation of FNL’s intention to make a general offer at around 12:49 hours on 22 July 2016.  The board meeting which was held in the morning of 22 July 2016 to discuss on Lee’sresignation was thus conveniently highjacked as a stage for this faked drama.  Consequently, a host of disingenuous documentations were prepared and back-dated.  They include the Board Minutes of the Disputed Board Meeting and a set of Offer Letters with accompanying acceptance forms (stipulating the fixed subscription price of HK$0.0256 per share) issued to the Grantees who were all connected to or friendly with the management and who were willing to collaborate with the management.  That was probably why the Board Minutes of the Disputed Board Meeting was only shown to D4 and D6 almost one month after 22 July 2016.  That was probably why the said Board Minutes first saw daylight around 19 August 2016 when Yu Ming was asked by the SFC to provide substantiation of thegrant of the Disputed Options.  However, the clock could not be unwound.  Hence no announcement was made at any time soon after the grant of the Disputed Options.  Similarly, there was no mention about the grant of the Disputed Options in the July Monthly Return and Note 11 of the 1^stQuarterly Report.  The fake excuse of multiple oversights or mistakes were put forward with the view to filling the lacuna.  As FNL pushed further in its General Offer on 18 August 2016, the directors rushed towards allotting the Disputed Shares to the Grantees so that they could sell them in market overt on 24 August 2016, the anticipated date of resumption of trading of the Company’s shares.  Hence, the awkwardness of holding another board meeting on 21 August 2016, a Sunday, and the rush to give instructions to Boardroom for allotment even prior to receiving subscription prices from the Grantees.  Eventually, in the course of the proceedings, someone must have spotted the obvious flaw in the Board Minutes of the Disputed Board Minutes and the set of Offer Letter with acceptance form attached in that they should not have stipulated a fixed subscription price of HK$0.0256.  Accordingly, another set of Offer Letter which merely stipulated a formula for the derivation of a subscription price was posthumously prepared together with an awkward story of D3 and Cyrus Yuen delivering them to various grantees or their agents at 11:00 hours on 22 July 2016 which were orally accepted and communicated to Cyrus Yuen before the FNL intimation of General Offer.  Having been made so much of a scapegoat, Cyrus Yuen could not be called as a witness lest that further flaws in the plot could be exposed under cross-examination.

72.In conclusion, I do not find D3, D4, D6 and Leung to be honestand reliable witnesses.  On Issue (1), I find that the Disputed Options were not granted in the morning of 22 July 2016.  Neither were offers made and accepted by the Grantees in the morning of 22 July 2016.  I find that Board Minutes of the Disputed Board Meeting and other documentations pertaining to the purported grant of the Disputed Options to the Grantees were fraudulently backdated to 22 July 2016.  I further find that D3 to D7 [71] decided to effect the grant of the Disputed Options to the Grantees some times between early to mid-August 2016.

ISSUE (2)

73.Similarly, for the reasons explained in paragraphs 62 to 68, I find that D3, D4, D6 and Leung had not given truthful evidence as to thereal reason behind the grant of the Disputed Options.  In my judgment, it isobvious that the Grantees were all proximately connected to the management, especially D3.  They were either susceptible to D3’s manipulation or were prepared to collaborate with D3.  With the exception of Lee who was at material time an employee of a subsidiary of the Company, all other Grantees were not involved in any existing formal consultancy engagementwith the Company.  In my judgment, D3’s evidence about the alleged pastand future contributions from these Grantees was contrived and not credible.  D4 and D6’s adoption of D3’s evidence was equally disingenuous.  I rejecttheir evidence entirely.  I infer that the real purpose of effecting the grant ofthe Disputed Options to these Grantees was attempting to block or obstruct the FNL General Offer.  That must be an improper purpose according to the dictum of Lord Wilberforce in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, at 837D – 838A and the dictum of Lam J (as he then was) in Wong Kam San v Yeung Wing Keung [2007] 2 HKLRD 267 at §76.  I therefore find that it was not a bona fide exercise of power by the Board pursuant to the terms of the Share Option Scheme.

ISSUE (3)

74.Flowing from the above findings, I further find that the Disputed Options were not granted in accordance with the terms and conditions of the Share Option Scheme.  It is clear from Clause 4.1 of the Rules of the Share Option Scheme that a proposed grant of share option should only be made to eligible persons who are genuinely employees, proposed employees, consultants or advisors of the Company or its subsidiaries.  I have already rejected the evidence of D3, D4 and D6.  Apart from Lee, I find that all the other Grantees were not eligible persons under the scheme.  In relation to Lee, although she was strictly speaking an employee and potentially an eligible person, I have found that the real purpose of the effecting the grant of the Disputed Options to all the Grantees was to block or obstruct the FNL General Offer.  The grant of share options to Lee was thus entangled with the predominant improper purpose.  In my view, I should not distinguish the case of Lee from those of the other Grantees.  In any event, counsel for D3 to D7 has not argued that I should treat the case of Lee differently from those of the other Grantees.

75.Furthermore for reasons explained earlier, I also find that D3’sevidence about the delivery of Offer Letters and their oral acceptance by noon 22 July 2016 was contrived and incredible.  I have also refused to place any weight on D3’s hearsay evidence of the delivery of Offer Letters by Cyrus Yuen to some of the Grantees who communicated their oral acceptance to Cyrus Yuen. None of the Grantees have been called to give evidence about their alleged oral acceptance of the set of Offer Letters (with the subscription price stipulated by way of a formula).  Neither have they been called to give evidence about the Acceptance Forms which they allegedly executed between 24 July 2016 and 3 August 2016.  These Acceptance Forms are subjects of a Notice of Challenge to Authenticity.  Since I have rejected the credibility of D3, there is thus no reliable evidence that these Acceptance Forms were authentic documents executed by the Grantees on their respective dates.  In the premises, I further find that the Disputed Options had not been duly accepted in accordance with the terms and conditions of the Share Option Scheme.

ISSUE (4)

76.Given my findings on Issue (1), it is unnecessary for me to deal further with Issue (4). As I have observed in paragraph 62 above, the emails sent by Cyrus Yuen to the directors do establish the fact that a board meeting did take place in the morning on 22 July 2016.  The emails from the directors in reply consented to short notices.  I find however that the said board meeting was merely convened to discuss about the resignation of Lee.  I reject the defence case that the Board had resolved to grant the Disputed Options to the Grantees at this board meeting.  I find that this board meeting was later highjacked by the participating directors as a stage to fake the granting of the Disputed Options on 22 July 2016.

ISSUE (5)

77.I have set out my interpretation of Rule 23.05 of the GEM Listing Rules in paragraph 64 above relating to the Blackout Period.  It is thus clear and I so find that the grant of the Disputed Options, if they were actually made on 22 July 2016, would fall within the Blackout Period and that would contravene Rule 23.05 of the Gem Listing Rules.  That would equally amount to a breach of Clause 5.2 of the Share Option Scheme.  Yet, as a matter of fact finding, I have found that D1 did not in fact make the grant of the Disputed Options on 22 July 2016.  I have found it to be more likely that the Disputed Options were granted some times between early or mid-August 2016.  There is no evidence upon which I can find a specific date on which the Disputed Options were actually granted.  If theDisputed Options were actually granted prior to 12 August 2016, they wouldhave fallen foul of Rule 23.05 of the GEM Listing Rules and Clause 5.2 of the Share Option Scheme.  In the end, Issue (5) does not really impact on the ultimate legal conclusion from my findings.  Whether the grant of the Disputed Options constituted a breach of the GEM Listing Rule or the ShareOption Scheme relates to whether the directors had breached their fiduciaryduties.  Since I have found that the participating directors faked a story about having granted the Disputed Options on 22 July 2016 with theimproper purpose of blocking the FNL General Offer, that finding by itself is a finding of breach of fiduciary duties on the part of the participating directors.

ISSUE (6)

78.This issue has also become redundant given my findings on Issues (1) and (2).

ISSUE (7)

79.Given my findings on Issues (1) and (2), my answer to this question is obviously “yes” in relation to D3 to D7.

ISSUE (8)

80.This relates to the evidence of D2 who has filed three affirmations and stood for cross-examination.  He also subpoenaed a witness from Boardroom, namely Madam Ada Lai Fock, in the course of the hearing.

Evidence of Yang Si Hang (D2)

81.D2 stated that he was appointed as a director of the Company on 5 June 2014.  He was re-designated as an Executive Director and appointed as the Chief Executive Officer since 25 September 2014.  He wasalso a director of Yang’s Holdings, which was a majority shareholder of D1.

82.In about mid-May 2016, D2 was diagnosed with laryngeal nodule in the left vocal cord.  He was also diagnosed with diabetes.  On 16 May 2016, he orally informed the Company that his operation was scheduled to take place on 23 May 2016.  He applied for sick leave until 30 September 2016.  He produced his medical records, sick leave certificate and the Board Minutes of the Company dated 16 May 2016 approving his sick leave application[72]. After the operation, D2 went to Canada for the purpose of recuperation.  He stayed there between 19 June 2016 and 4 August 2016 as confirmed by his travel records[73].

83.On 1 June 2016, D2 wrote to the Board of Directors of the Company [74] expressing his intention to resign as Executive Director for health reasons.  He however appreciated that the Company might need some time to find a suitable person to replace him and thus was prepared to defer his official resignation until then. D2 also produced the Company’s records of Directors’ attendance at board meetings[75].  It can be seen that he did not attend (whether in person or by phone) any of the board meetings held between 10 May 2016 and 21 August 2016.

84.By another letter dated 30 September 2016 to the Board of Directors, D2 applied for an extension of his sick leave until 31 December 2016 [76].  He also reiterated his intention to resign and urged the Company to look for replacement as soon as possible.

85.In his 3^rd affirmation[77], D2 stated that he had stopped attending to all affairs of the Company since his sick leave until he was formally removed from the board on 28 October 2016. His travel recordsalso showed that he regularly left Hong Kong between June and August 2016.  He further stated that although some board minutes had been sent to him either by post, fax or email, he did not read them due to his health conditions.  He was totally alienated from the affairs of the Company at the material times in question.

86.In cross-examination, D2 confirmed that prior to his sick leave, the Company had not granted any option to any person under the Share Option Scheme.  When asked about the standard procedures for granting options to consultants and advisors of the Company, D2 said he could not provide meaningful answer because he never partook in granting share options. 

87.It was put to D2 that prior to the announcement of his formal removal from the board on 28 October 2016, his name continued to appear in the Company’s announcements as one of the directors.  D2 accepted that but his counsel pointed out that there are no GEM Listing Rules requiring the announcement of sick leave granted in respect of a director or chief executive officer.

88.It was put to D2 that despite his sick leave he continued to receive emails from the Company.  D2 agreed but maintained that due to his health conditions, he did not read these emails.  It was suggested to D2that during the time he stayed in Hong Kong, he attended to the affairs of the Company.  D2 denied.  Senior Counsel for Ps then confronted D2 with photocopies of shares certificates issue to the eight Grantees on 22 August 2016[78] bearing D2’s signature as one of the two directors signing on the certificates next to the common seal of the company.  It was thus put to D2 that he signed the certificates and was thus involved in the issuance of the Disputed Shares.  D2 answered: “I was a signing officer”.  When further pressed, D2 said: “when all the certificates were brought to me, the board would already have approved, how could I not sign?”.  He further said he could not remember who brought the certificates for him to sign.  He said he was given a pile of documents including cheques for him to sign.  On this basis, it was suggested that D2 signed those shares certificates because he also agreed to the allotment of the Disputed Shares to the Grantees.

89.Then, counsel for D2 discovered, after asking Miss Ada Lai Fock of Boardroom, that the signatures of D2 on shares certificates of the Company were not physically appended by D2.  Instead, the signatures of D2 were electronically pasted on the digital template of share certificates kept by Boardroom.  Counsel for D2 thus applied for Miss Ada Lai Fock to be subpoenaed to give evidence on this issue.  Despite objection from Senior Counsel for Ps, I allowed Miss Ada Lai Fock to be subpoenaed.

90.Miss Ada Lai Fock answered to the subpoena and produced the documents in Bundle H.  She produced Exhibit D1[79] which was a specimen share certificate of the Company bearing the signatures of two directors, one of which was D2.  The pdf file of this specimen was sent toa security printer to print a specified number of copies of share certificate[80]. Miss Ada Lai Fock was shown F/3/108 and she compared it with Exhibit D1.  She confirmed that D2’s signature appearing on the share certificates were printed on the share certificates based on the Exhibit D1 specimen and would not involve the physical signing by D2 on the share certificates.

91.In the circumstances, I am satisfied that D2 was probably misled, by the way in which he was cross-examined, in believing that he had signed on the share certificates issued to the eight Grantees.  The evidence of D2 was generally substantiated by contemporaneous documents.  I find D2 to be an honest witness and accept his evidence that he played no part in the grant of the Disputed Options to the Grantees or in the subsequent allotment of the Disputed Shares to the Grantees.  In so far as his admission that he had been asked to sign documents or cheques of the Company during his sick leave, there is no indication that those documents or cheques were in any way related to the grant of the Disputed Options or the allotment of the Disputed Shares.  It is not unlikely that being a signatory to bank accounts of the Company, D2 was asked to sign documents or cheques even when he was on sick leave and not participating in the daily affairs of the Company.  I therefore find that D2 did not participate in the acts constituting the breach of fiduciary duties which I have found D3 to D7 to have committed.

92.Senior Counsel for Ps submitted that the present case is analogous with the situation in Bishopsgate Investment Management Ltd (in liq) v Maxwell (No 2) [1994] 1 All ER 261.  In that case, the company’sassets were transferred away for improper purposes.  The defendant director made no inquiry about the transactions by signed the transfer documents.  He claimed that he only did so because he trusted his co-director who also approved the transfers.  Hoffmann LJ rejected this argument and said (at 263j):

“ Mr Ian Maxwell’s evidence was that he knew that the company’s business consisted principally, if not exclusively, of managing the assets of the pension funds. He knew that he was a director. Nevertheless, he took no interest whatever in the management of the company. He attended few meetings and paid little attention to business when he did. He said he trusted and relied upon the other directors.”

and at 265d, after referring to the judgment of the trial judge emphasizing the fact that Mr Maxwell had signed the transferred documents and in so doing was exercising a fiduciary power conferred by the articles, Hoffmann LJ continued to say:

“ … If a director chooses to participate in the management of the company and exercises powers on its behalf, he owes a duty to act bona fide in the interests of the company. He must exercise the power solely for the purpose for which it was conferred. To exercise the power for another purpose is a breach of his fiduciary duty. It is no answer that he was under no duty to act in the first place. Nor can Mr Ian Maxwell be excused on the ground that he blindly followed the lead of his brother Kevin.” (emphasis added)

93.Counsel for D2 submitted that Bishopsgate is distinguishable because D2 did not participate in the impugning act at all.  He was entitled to be absent from D1’s affairs during his sick leave.  Counsel for D2 further referred me to Re Lands Allotment Company [1894] 1 Ch 616 and the dictum of Lindley LJ (at 634 – 635):

“ I now come to the second transaction, which is a different matter altogether. It appears that in July, 1889, a further sum of £5,200 was invested. It really was this time invested in the purchase of shares of this Building Securities Company. There were 1040 shares of £5 each which were applied for and taken. They were not paid for in cash at the time. They were paid for by three bills at various dates. At the meeting of the 1st ofJuly 1889, neither Mr. Brock nor Mr. Theobald, who are sought to be made liable for this improper investment, were present. On the 9th of October, after two of the bills which had been givenhad become due and had been paid, and whilst the third bill was running, and before it became due, the minutes of the meeting of the 1st of July 1889, were confirmed. At that confirmation meeting on the 9th of October, 1889, Mr. Theobald and Mr. Brock were present, and it is because Mr. Theobald was present at thatmeeting that it is sought to charge him with liabilities in respect of this sum. Now, it is quite certain upon the evidence that [director Theobald] had nothing to do with the transaction originally. He was away on the sea, and had nothing to do with this at all, and the case against him is simply that he was party to the confirmation, and it is put in this way—that he thereby adopted or ratified it, and that he, at all events, might have taken legal proceedings, or induced the company to take legal proceedings, to set aside the transaction. Now, I am not aware of any authority which goes the length of saying that a director who is not a party to any misapplication of a company’sfunds is liable for not taking legal proceedings to upset the transaction after the thing is done, and I do not think it would be in accordance with the principles applicable to these cases if we were now first to make a precedent of that kind. I am satisfied from Mr. Theobald’s affidavit that he knew nothing at all about the matter, and when he did come back, and found out what was done, it was too late to stop it, the matter was over,and past praying for, so far as he was concerned. It appears to me, that Mr. Justice Wright was quite right in exonerating Mr. Theobald from all liability in respect of that sum.”

(emphasis added)

94.I agree with the submission of Counsel for D2 that the facts involving Mr Theobald in Re Lands Allotment Co are more appropriate comparisons to those surrounding D2 in the present case and that Re Lands Allotment Co is the relevant authority to apply.  I therefore find that D2 is not responsible for the breach of fiduciary duties committed by D3 to D7.

ISSUE (9)

95.In the course of the plaintiffs’ opening address, Senior Counselfor Ps clarified that she was relying on two causes of actions for Ps’ claims for relief against D3 to D7:

(i)     under sections 728 to 730 of the Companies Ordinance (Cap 622); and

(ii)     a common law personal claim of a shareholder against directors for breach of constitution of the company.

In particular, Senior Counsel for Ps assured that she is not relying on the right of a shareholder to bring derivative actions.

96.Senior Counsel for Ps further clarified that she would only be seeking the following relief:

(1)     a declaration that the granting of the Disputed Options is void and of no legal effect or, alternatively, voidable;

(2)     a declaration that any allotment of shares made pursuant to the exercise of any of the Disputed Options is void and of no legal effect or, alternatively, voidable;

(3)     further or alternatively, the Company and/or D2 to D7 do restore the shareholding structure of the Company by returning and cancelling 1,600,000,000 issued shares to the Company including:

(i)     D2 to D7 do within the 14 days of the order to be madeherein acquire 1,600,000,000 shares in the Company andreturn them to the Company for cancellation, whereupon the Company shall within the next 7 days cancel those shares and pay the amount received by the Company from the issue of 1,600,000,000 shares in the Company pursuant to the Disputed Options to D2 to D7; and

(ii)     the Company do restore its shareholding structure as if the Disputed Options had never been granted or implemented and the Disputed Shares have not been issued.

(4)     further or alternatively, against D2 to D7, damages payable to the plaintiffs for losses suffered by the plaintiffs personally as a result of the Directors’ breaches of duties as directors of the Company and/or breaches of the Company’s articles in procuring or causing the Company to grant the Disputed Options and to issue the Disputed Shares to the Grantees;

(5)     interest, costs and further and/or other relief.

97.I will set out the relevant provisions of sections 728 – 730 of Cap 622 in full:

“ 728. Application of section 729

(1) Section 729 applies if, in relation to a company—

(a) a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute—

(i) a contravention of this Ordinance;

(ii) a default relating to a contravention of this Ordinance; or

(iii) a breach specified in subsection (4); or

(b) a person has refused or failed, is refusing or failing,or is proposing to refuse or fail, to do an act or thing that the person is required by this Ordinance to do.

(2) Section 729 also applies if, in relation to a company—

(a) a person had engaged, was engaging or was proposing to engage, before the commencement date of this section, in—

(i) conduct that constituted or would constitute a contravention of the predecessor Ordinance andthat would also constitute a contravention of this Ordinance;

(ii) conduct that constituted or would constitute a default relating to a contravention of the predecessor Ordinance and that would also constitute the same default relating to a contravention of this Ordinance; or

(iii) conduct that constituted or would constitute a breach specified in subsection (4); and

(b) the engagement or proposal still subsists.

(3) Section 729 also applies if, in relation to a company—

(a) a person had refused or failed, was refusing or failing, or was proposing to refuse or fail, before the commencement date of this section, to do an act or thing that the person was required by the predecessor Ordinance to do;

(b) the person is also required by this Ordinance to do the act or thing; and

(c) the refusal, failure or proposal still subsists.

(4) The breach specified for the purposes of subsection (1)(a)(iii) or (2)(a)(iii) is—

(a) a breach of the person’s fiduciary duties owed to the company in any capacity other than as a director of the company;

(b) a breach of the person’s fiduciary or other duties as a director of the company owed to the company; or

(c) a breach of the company’s articles.

(5) In this section, a reference to a default relating to a contravention of this Ordinance or the predecessor Ordinance is a reference to—

(a) an attempt to contravene the Ordinance;

(b) aiding, abetting, counselling or procuring another person to contravene the Ordinance;

(c) inducing or attempting to induce, whether by threats,promises or otherwise, another person to contravene the Ordinance;

(d) being in any way, directly or indirectly, knowingly concerned in, or a party to, a contravention of the Ordinance by another person; or

(e) conspiring with others to contravene the Ordinance.

729.    Court may order remedies

(1)     The Court may, on application by a member or creditor of the company whose interests have been, are or would be affected by the conduct or by the refusal or failure, do any or all of the following—

(a)     grant an injunction, on the terms that the Court thinks fit—

(i)   in the case of section 728(1)(a) or (2), restraining the person from engaging in the conduct or requiring the person to do any act or thing; or

(ii)   in the case of section 728(1)(b) or (3), requiring the person to do any act or thing;

(b)     order the person to pay damages to any other person;

(c)     declare any contract to be void or voidable to the extent specified in the order.

(2)     The Court may, on application by the Financial Secretaryunder section 879(4) or (5), do any or all of the following—

(a)     grant an injunction, on the terms that the Court thinks fit—

(i)   in the case of section 728(1)(a) or (2), restraining the person from engaging in the conduct or requiring the person to do any act or thing; or

(ii)   in the case of section 728(1)(b) or (3), requiring the person to do any act or thing;

(b)     order the person to pay damages to any other person;

(c)     declare any contract to be void or voidable to the extent specified in the order.

(3)     The Court may grant an injunction under subsection (1)(a)(i) or (2)(a)(i) restraining a person from engaging in a conduct—

(a)     whether or not it appears to the Court that the person intends to engage again, or to continue to engage, in the conduct;

(b)     whether or not the person has previously engaged in the conduct; and

(c)     whether or not there is an imminent danger of substantial damage to any other person if the person engages in the conduct.

(4)     The Court may grant an injunction under subsection (1)(a) or (2)(a) requiring a person to do an act or thing—

(a)     whether or not it appears to the Court that the personintends to refuse or fail again, or to continue to refuse or fail, to do the act or thing;

(b)     whether or not the person has previously refused or failed to do the act or thing; and

(c)     whether or not there is an imminent danger of substantial damage to any other person if the person refuses or fails to do the act or thing.

(5)     To avoid doubt, a person is not entitled to recover, by wayof damages under subsection (1)(b) or (2)(b), any loss that solely reflects the loss suffered by the company that only the company is entitled to recover under the common law.

730.    Provisions supplementary to section 729

(1)     The Court may grant an interim injunction or interim damages, or both, on the terms and conditions that it thinks fit pending the determination of an application under section 729(1) or (2).

(2)     The Court may discharge or vary an injunction granted under subsection (1) or section 729(1) or (2).”

98.When a director is found to have breached his fiduciary duties as a director of the company owed to the company, such breach falls within section 728(4) and constitutes a “breach for the purposes of section 728(1)(a)(iii)”.  Under that circumstances, section 729 is invoked.   

99.Under section 729(1), a member whose interests have been affected by the conduct (meaning the breach of the director’s fiduciary duties towards the company) may apply to the Court for and the Court may:

(a)     grant an injunction on terms that the Court thinks fit;

(b)     order “the person” (meaning the director who had committed the breach of fiduciary duties towards the company) to pay damages “to any other person”; or

(c)     declare any contract to be void or voidable to the extent specified in the order.

100.Senior Counsel for Ps submitted that this Court is empoweredby section 729(1)(c) to grant the declarations sought under relief (1) and (2) above.  Counsel for D3 to D7 opposed the grant of declaratory relief on the following grounds:

(1)     In exercising its discretion as to whether or not to grant declaratory relief, the court will consider whether any useful purpose would be served.

(2)     In the present case, the fact is that the Disputed Options had already been granted and exercised.  The Disputed Shares had already been allotted by D1 to the Grantees.  The Grantees had already sold those shares to third party purchasers in open market.

(3)     In the circumstances, even if granted, such declaratory orders would not be able to unwind the transactions.  Ps would not be able to trace back the Disputed Shares from the third party purchasers or other subsequent purchasers.

(4)     Furthermore, granting declaratory relief on such terms would inevitably impact on the rights of the third party purchasers or other subsequent purchasers of the Disputed Shares.  These third party purchasers or other subsequent purchasers have not been joined in these proceedings and their legal rights should not be jeopardized.

101.In reply, Senior Counsel for Ps submitted:

(1)     The declarations serve the purpose of pronouncing the invalidity of the Disputed Options.

(2)     The declarations may provide a basis for D2 to seek contribution from D3 to D7 should he so wish;

(3)     Relying on the dictum of Buckley J in Gibson v Union of Shop,Distributive and Allied Workers [1968] 1 WLR 1187 at 1189D–F, a declaration will still be granted even though such relief has been rendered virtually unnecessary by the lapse of time for the action to come on for trial, if at the time when the action was brought, it raised substantial legal issues, for in such case the question is not purely academic.  In this case, declaratory reliefwas necessary when the Originating Summons was first issuedon 26 August 2016, not knowing that the Grantees had already sold the Disputed Shares in open market.

(4)     D3 to D7 were instrumental in allowing the Grantees to be able to sell the Disputed Shares in open market on 24 August 2016.  It lies ill in their mouth to complain that the third party purchasers or other subsequent purchasers have not been joined in these proceedings.

102.In my judgment, Ps’ reply points are not good answers to the submissions of Counsel for D3 to D7.  Firstly, this judgment serves as a clear pronouncement that D3 to D7 acted in breach of their fiduciary duties toward the Company when they caused the Disputed Options to be granted to the Grantees.  Secondly, based on my findings vis-à-vis D2, there is no question of contribution.  Thirdly, by the end of 24 August 2016, the Disputed Options had already been converted into the Disputed Shares which had further been sold to innocent purchasers through open market.  If this court now declares the Disputed Options and the Disputed Shares to be void ab initio or voidable, clearly the legal estate of these innocent purchasers will be adversely affected.  These innocent purchasers have not been joined as parties and have not been afforded an opportunity to make appropriate submissions in protection of their legal rights.  It is an important point that I have to take into account in the exercise of my discretion.  Refusal to grant declaratory relief does not meaning allowing D3 to D7 to benefit from their own wrongs.  I will certainly consider and grant appropriate relief to Ps arising out of D3 to D7’s misdeeds.  However, this court should not grant orders adversely affecting innocent parties without even affording them an opportunity to be heard.  In a way, Ps’ prayer for mandatory injunction requiring D3 to D7 to go into the market to buy back 1,600,000,000 and to return them to the Company for cancellation is a tacit acknowledgement that innocent purchasers of the Dispute Shares should not be disturbed.  Fourthly, by reason of my decisionhereinbelow on Ps’ claim for damages, the grant of declaratory relief is not necessary for the effective protection of Ps’ rights.  In the circumstances, I exercise my discretion not to grant the declaratory relief sought.

103.Relief (3) requires D3 to D7 to buy back 1,600,000,000 shares from the market and return them to the Company for cancellation. It is undoubtedly in the nature of a mandatory injunction.  Senior Counsel for Ps relied on section 729(1)(a) as jurisdictional basis.  She submitted that this Court has a broad power to grant mandatory injunction and in particular, this Court may take into account the interests of “anybody”when considering whether or not to make such order.  She relies on section 729(4)(c) which reads:

“ The Court may grant an injunction … requiring a person to do an act or thing … whether or not there is an imminent danger of substantial damage to any other person if the person refuses or fails to do the act or thing.” (emphasis added)

Senior Counsel for Ps submitted that unless the shareholding of the Company is unwound and reconstituted as per the mandatory injunction prayed, the shareholding of all other independent shareholders of the Company will continue to be diluted.  The mandatory injunction is thus the only way to redress the dilution.

104.Counsel for D3 to D7 opposed the grant of mandatory injunction.  He reminded me of the dictum of Megarry J in Shepherd Homes Ltd v Sandham [1971] Ch 340 at 351A–D:

“ Charrington v. Simons & Co. Ltd. [1970] 1 W.L.R. 725 was a decision of Buckley J. on the trial of the action, and not on motion. He said, at p. 730:

‘… Where a mandatory order is sought the court must consider whether in the circumstances as they exist after thebreach a mandatory order, and if so, what kind of mandatory order, will produce a fair result. In this connection the court must, in my judgment, take into consideration amongst other relevant circumstances the benefit which theorder will confer on the plaintiff and the detriment which itwill cause the defendant. A plaintiff should not, of course, be deprived of relief to which he is justly entitled merely because it would be disadvantageous to the defendant. On the other hand, he should not be permitted to insist on a form of relief which will confer no appreciable benefit on himself and will be materially detrimental to the defendant.’

That passage is valuable, if I may say so, both in its statement of the concept of a ‘fair result’ as the criterion, and also as necessarily indicating, I think, that the enforcement of a negative covenant at trial by a mandatory injunction is far more a matter of judicial discretion and not of right than in the case of a prohibitory injunction.”

He then submitted that in any event, Ps had gone into the market and boughtmore shares of the Company so as to maintain their collective voting rights to be above 10% (based on the enlarged issued share capital by reason of the allotment of the Disputed Shares) for the purpose of substantiating their entitlement to issue requisition for an EGM. Counsel for D3 to D7 did not say so in such words but effectively, he was submitting that Ps could be adequately compensated by way of damages, ie the amount of money they spent on purchasing the additional shares of the Company from market. In essence, he submitted that the grant of mandatory injunction in the termssought by the plaintiffs was unnecessary and unwarranted for the protection of Ps’ rights.

105.I prefer the submission of Counsel for D3 to D7.  Firstly, although I accept that section 729(1)(a) gives this Court wide powers, it nonetheless states that the grant of injunction would be “on the terms that the Court thinks fit”.  This requires the Court to take into consideration all factors, including whether Ps’ legal rights can adequately be redressed without resort to such mandatory order.  Secondly, this Court should not lose sight of the fact that these proceedings are not “derivative actions” taken out by Ps on behalf of all shareholders of the Company.  This Court is thus primarily concerned with the question of what relief should be granted to Ps to redress the harm that had been done to their personal legal rights.  I do not accept the submission of Senior Counsel for Ps that this Court should grant the mandatory injunction to undo the dilution caused to “other independent shareholders” by the allotment of the Disputed Shares. In my judgment, the language of section 729(4)(c) does not require this Court to grant injunctive relief on the basis of protecting the purported rights of other persons not parties to these proceedings.  If damages is an adequate remedy to compensate Ps for the infringement of their legal rights,I cannot see why this Court should go any further.  Thirdly, by reason of my decision hereinbelow on Ps’ claim for damages, the grant of mandatory order in the terms sought is not necessary for the effective protection of Ps’ rights.  In the circumstances, I exercise my discretion not to grant the mandatory sought.

106.In respect of relief (4), ie damages, I should first recount the evidence in support of Ps’ case.P2 filed three affirmations and gave oral evidence at the hearing.  He also adopted the contents of an affirmation filed by P1 in these proceedings.  According to a letter dated 23 August 2016 (ie shortly prior to the allotment of the Disputed Shares), Ps held as of that date a total of 2,450,448,000 shares in the Company, constituting 10.21% of the original share capital of the Company [81].  Ps’ shareholding as of 23 August 2016 can be confirmed by the Company’s share register [82].  Ps were thus entitled to issue the 1^stNotice of Requisition for EGM on 23 August 2016.  Then on 9 September 2016, the Company issued an announcement stating that since Ps held less than 10% of the issued sharesof the Company, Ps were not entitled to requisition for an EGM.  This was because the Company used the diluted share capital (ie the share capital altered as a result of the allotment of the Disputed Shares) to calculate Ps’ percentage shareholding.  P2 stated that the announcement confirmed Ps’ complaint that the directors of the Company intended to use the Disputed Options to frustrate the Notice of Requisition for EGM issued by Ps.  In the light of the directors’ refusal to convene the EGM and to avoid any further delay in convening an EGM, on 8 and 9 September 2016, P1 purchased 414,876,000 shares in the Company.  Consequently, Ps becameholders 11.19% of the diluted share capital (or 11.94% of the original share capital prior to the allotment of the Disputed Shares).  As Ps became holders of more than 10% of the diluted share capital of the Company, they were clearly entitled to requisition for an EGM.  Ps therefore instructed their solicitors to issue a fresh notice of requisition of EGM on 4 October 2016.  P2 stated that D3 to D7 were liable to pay damages to Ps for the losses suffered by Ps personally as a result of D3 to D7’s breach of duties.  Such losses included the money spent by P1 on 8 and 9 September 2016 when he purchased 414,876,000 shares in the Company in order to restore his shareholding which had been diluted by the allotment of the Disputed Shares.  Had it not been for the said wrongful breach, P1 would not have suffered such loss[83].

107.In cross-examination by Counsel for D3 to D7, P2 was asked whether he had personal knowledge as to how much P1 paid for his purchase of the 414.876,000 shares in the Company.  P2 said he did not have personal knowledge. Counsel for D3 to D7 submitted that there was no evidence to prove that P1 did pay HK$18,669,420 for the shares. I do not agree.  The relevant bought and sold notes had been adduced evidencing the fact that P1 paid a total of HK$18,669,420 for the purchaseof the 414,876,000 shares in the Company [84].  D3 to D7 had not challenged the authenticity of these bought and sold notes. These bought and sold notes were duly stamped with duties paid.  According to Ps’ fresh requisition for EGM issued on 4 October 2016 [85], it was stated that P1 wasa holder of 2,565,324,000 shares in the Company as of that date.  D3 to D7 never suggested that to be an incorrect statement.  It is fanciful to suggest that P1 did not pay substantial amount of money for acquiring the additional414.876,000 shares in the Company.  This Court can rely on the contents of these bought and sold notes as satisfactory proof.  In closing submission, Counsel for D3 to D7 also pointed out that the bought and sold notes were dated 5 September 2016 instead of 8 or 9 September 2016.  With respect, I find that to be immaterial.

108.Counsel for D3 to D7 submitted that in order to bring Ps’ percentage shareholding to the same 10.21%, P1 only needed to purchase another 163,312,000 shares.  He therefore submitted that Ps are only entitled to claim for damages in respect of the purchase of 163,312,000 shares instead of 414,876,000 shares.  Senior Counsel for Ps submitted that causation is established because P2 was not challenged in cross-examinationas to his evidence that P1 purchased the 414,876,000 shares “in the light of the directors’ refusal to convene the EGM”.  I agree with her submission that this piece of unchallenged evidence has provided sufficient causative nexus on balance of probabilities.  I therefore find that P1 suffered a loss of HK$18,669,420 which was caused by the breach of fiduciary duties by D3 to D7 in causing the grant of the Disputed Options; causing the subsequent allotment of the Disputed Shares; and using the diluted share capital as a basis for rejecting Ps’ entitlement to requisition for an EGM. 

109.Senior Counsel for Ps also referred me to the fact that in the course of pursuing these proceedings and pursuant to an Order of Harris J [86], Ps were obliged to pay on an indemnity basis the costs of FP Sino-‌Rich for complying with a disclosure order[87] made on 27 August 2016 and that of attending the hearing of an ex parte application on 31 August 2016 [88].  No figure has however been provided by Senior Counsel for Ps in relation to these costs.  The exact amount will no doubt be ascertained after the process of taxation.

110.The real opposition by Counsel for D3 to D7 was based on a jurisdictional argument.  I will summarize his arguments as follow:

(1)     Ps are not entitled under sections 728 – 729 of Cap 622 to make a standalone claim for damages when there is no prospect that an injunction would be granted.

(2)     The predecessor of sections 728 – 730 of Cap 622 is section 350B of the former Companies Ordinance.  In turn, section 350B was derived from section 1324 of the Corporations Act 2001 in Australia.

(3)     Section 350B was introduced upon the recommendation of theStanding Committee on Company Law Reform in 2001.  The purpose of such a provision was explained in a Consultation Paper by the Standing Committee on Company Law Reform (July 2001) which stated at §§19.02 – 19.03:

“ The SCCLR proposes that the court should have a general power, on application by an affected person or a relevant authority, to grant an injunction against any contravention of the Companies Ordinance or any breach of fiduciary duties. This should extend to any attempt to contravene such provisions or attemptedbreach of any of the directors’ duties …. The court should either in addition to or in substitution for the grant of the injunction, also have the power to order that person to pay damages to any other person ….” (emphasis added)

(4)     When the new sections 728 – 730 were introduced, the New Companies Ordinance, Brief Notes on Part 14 (January 2013) §3 described the exercise as “restates the existing provisions with improved drafting”.  Therefore, even though there has been some changes in the wording of section 729, it is clear that the legislative intent behind these sections has remained unchanged.  In Able Success Asia Ltd v China Packaging Group Limited (unreported, HCMP 1091/2014, 15 May 2014), G Lam J (at §3) acknowledged that sections 728 – 729 are “substantially the same” as section 350B.

(5)     There is a line of Australian authorities concerning the interpretation of section 1324 of the Corporations Act 2001 (or similar provisions in local state legislation) establishing the proposition that this section cannot be relied upon to claim damages in circumstances where there was no prospect that an injunction would be granted[89].

(6)     In the present case, there is no prospect that the Court would grant an injunction, given that the Shares were already sold in open market on 24 – 25 August 2016.  Accordingly, Ps’ claim for damages cannot be entertained by this Court as a matter of jurisdiction.

111.Senior Counsel for Ps made the following submissions in reply:

(1)     There is nothing in the language of sections 728 – 729 to support the proposition that a claimant who seeks damages must personally have a cause of action against the payor.  On the contrary, sections 728 – 729 empower the court to order “the person to pay damages to any other person” if that personhas breached his fiduciary duties or the articles of the company.

(2)     The only limitation on the Court’s power to award damages isstated in section 729(5) which disallows any claim for reflective loss.  Ps are not seeking to recover any reflective loss.

(3)     There is no need to show a viable claim for injunction in order to claim for damages under section 729:

(i)     Section 1324(10) of the Corporations Act 2001 and section 350B(7) both used the following language:

“ … the court may, either in addition to or in substitution for the grant of the injunction … order that person to pay damages to any other person.”

(ii)     By contrast, no such wordings have been adopted in the new section 729.

(iii)     Both section 1324 of the Corporations Act 2001 and the old section 350B were entitled “Injunctions” whereas sections 729 is entitled “Court may order remedies”.

(iv)     The legislative intent is clear from the wordings of sections 728 to 730: the Court may now award damages irrespective of any claim for injunctive relief.

(v)     In so far as D3 to D7 seek to rely on any extrinsic materials to construe sections 728 – 730, it bears emphasis that notwithstanding the Court’s readiness to consider the context and purpose of the legislation in an interpretative exercise, its task is still to ascertain the intention of the legislature as expressed in the language of the statute, and not the legislative intent on its own (see Ho Kwok Tai v Collector of Stamp Revenue [2016] 5 HKLRD 713 at §§20 – 26).

(vi)     Extrinsic materials may only be used to ascertain the meaning of statutory language if:

(a)     the legislation is ambiguous or obscure or leads to an absurdity; 

(b)     the material relied upon consists of one or more statements by a minister or other promotor of the Bill together with such other Parliamentary material as is necessary to understand such statements and their effect; and

(c)     the statements relied upon are clear.

(see Pepper v Hart [1993] AC 593 at 640C; and Registrar of Births and Deaths v Syed Haider Yahya Hussain (2001) 4 HKCFAR 429 at §55)

(vii)     Hence, no weight should be given to §3 of the Brief Notes.  Sections 728 – 730 are wider than the old section 350B in at least two material respects:

(a)     they can be triggered by a breach of the company’sarticles; and

(b)     they empower the Court to grant declarations. 

The suggestion that sections 728 – 730 merely “restates the existing provisions with improved drafting”is obviously wrong.

Discussion

112.Section 1324 of the Corporations Act 2001 reads:

“ 1324 Injunctions

(1) Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:

(a) a contravention of this Act; or

(b) attempting to contravene this Act; or

(c) aiding, abetting, counselling or procuring a person to contravene this Act; or

(d) inducing or attempting to induce, whether by threats,promises or otherwise, a person to contravene this Act;or

(e) being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or

(f) conspiring with others to contravene this Act;

the Court may, on the application of ASIC, or of a personwhose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned personfrom engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.

(1A) For the purpose of subsection (1):

(a) a contravention of this Act affects the interests of a creditor or member of a company if the insolvency of the company is an element of the contravention; and

(b) a company’s contravention of:

(i) paragraph 257A(1)(a) (share buy-back not to prejudice ability to pay creditors); or

(ia) paragraph 256B(1)(b) (share capital reduction not to prejudice ability to pay creditors); or

(ii) paragraph 260A(1)(a) (financial assistance for share acquisition not to prejudice company or shareholders or ability to pay creditors);

affects the interests of a creditor or member of the company; and

(c) a company’s contravention of paragraph 256B(1)(a)(fair and reasonable test for share capital reduction) affects the interests of a member of the company.

This subsection does not limit subsection (1) in any way.

(1B) If the ground relied on in an application for an injunction is conduct or proposed conduct of a company or other person that it is alleged constitutes, or would constitute:

(a) a contravention of paragraph 256B(1)(a) or (b), section 257A or paragraph 260A(1)(a); or

(b) a contravention of a provision of this Act involving the insolvency of the company because of:

(i) the company making a reduction of its share capital to which Division 1 of Part 2J.1 applies;or

(ii) the company buying back its shares; or

(iii) the company giving financial assistance to which Part 2J.3 applies;

the Court must assume that the conduct constitutes,or would constitute, a contravention of that paragraph,section or provision unless the company or person proves otherwise.

(2) Where a person has refused or failed, is refusing or failing,or is proposing to refuse or fail, to do an act or thing that the person is required by this Act to do, the Court may, on the application of:

(a) ASIC; or

(b) any person whose interest have been, are or would beaffected by the refusal or failure to do that act or thing;

grant an injunction, on such terms as the Court thinks appropriate, requiring the first-mentioned person to do that act or thing.

(3) Where an application for an injunction under subsection (1) or (2) has been made, the Court may, if the Court determines it to be appropriate, grant an injunction by consent of all the parties to the proceedings, whether or not the Court is satisfied that that subsection applies.

(4) Where in the opinion of the Court it is desirable to do so, the Court may grant an interim injunction pending determination of an application under subsection (1).

(5) The Court may discharge or vary an injunction granted under subsection (1), (2) or (4).

(6) The power of the Court to grant an injunction restraining a person from engaging in conduct may be exercised:

(a) whether or not it appears to the Court that the person intends to engage again, or to continue to engage, in conduct of that kind; and

(b) whether or not the person has previously engaged in conduct of that kind; and

(c) whether or not there is an imminent danger of substantial damage to any person if the first-‌mentioned person engages in conduct of that kind.

(7) The power of the Court to grant an injunction requiring a person to do an act or thing may be exercised:

(a) whether or not it appears to the Court that the personintends to refuse or fail again, or to continue to refuse or fail, to do that act or thing; and

(b) whether or not the person has previously refused or failed to do that act or thing; and

(c) whether or not there is an imminent danger of substantial damage to any person if the first- mentioned person refuses or fails to do that act or thing.

(8) Where ASIC applies to the Court for the grant of an injunction under this section, the Court must not require the applicant or any other person, as a condition of granting an interim injunction, to give an undertaking as to damages.

(9) In proceedings under this section against a person the Court may make an order under section 1323 in respect of the person.

(10) Where the Court has power under this section to grant aninjunction restraining a person from engaging in particularconduct, or requiring a person to do a particular act or thing,the Court may, either in addition to or in substitution for the grant of the injunction, order that person to pay damages to any other person.

113.Section 350B of the old Companies Ordinance reads:

“ 350B. Injunctions

(1) Where a person (‘the first-mentioned person’) has, in relation to a specified corporation, engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute—

(a) a contravention of this Ordinance;

(b) an attempt to contravene this Ordinance;

(c) aiding, abetting, counselling or procuring another person to contravene this Ordinance;

(d) inducing or attempting to induce, whether by threats,promises or otherwise, another person to contravene this Ordinance;

(e) his being in any way, directly or indirectly, knowingly concerned in or a party to, a contravention of this Ordinance by another person;

(f) conspiring with others to contravene this Ordinance;

(g) a breach of his fiduciary duties owed to the specified corporation in any capacity other than as a director of the specified corporation; or

(h) a breach of his fiduciary or other duties as a director of the specified corporation owed to the specified corporation,

the court may, on the application of the Financial Secretary, or of a member or creditor of the specified corporation whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the court considers appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the court it is desirable to do so, requiring the first-‌mentioned person to do any act or thing.

(2) The power of the court to grant an injunction restraining the first-mentioned person referred to in subsection (1) from engaging in the conduct mentioned in that subsection may be exercised—

(a) whether or not it appears to the court that he intends to engage again, or to continue to engage, in that conduct;

(b) whether or not he has previously engaged in that conduct; and

(c) whether or not there is an imminent danger of substantial damage to any other person if he engages in that conduct.

(3) Where a person (‘the first-mentioned person’) has, in relation to a specified corporation, refused or failed, is refusing or failing, or is proposing to refuse or fail, to do an act or thing that the first-mentioned person is requiredby this Ordinance to do, the court may, on the application of the Financial Secretary, or of a member or creditor of the specified corporation whose interests have been, are or would be affected by the refusal or failure to do that act or thing, grant an injunction, on such terms as the court considers appropriate, requiring the first-mentioned person to do that act or thing.

(4) The power of the court to grant an injunction requiring the first-mentioned person referred to in subsection (1) or (3) to do an act or thing may be exercised—

(a) whether or not it appears to the court that he intendsto refuse or fail again, or to continue to refuse or fail, to do that act or thing;

(b) whether or not he has previously refused or failed to do that act or thing; and

(c) whether or not there is an imminent danger of substantial damage to any other person if he refuses or fails to do that act or thing.

(5) Where the court considers appropriate, it may grant an interim injunction on such terms and conditions as it thinks fit pending determination of an application under subsection (1) or (3).

(6) The court may discharge or vary an injunction granted under subsection (1), (3) or (5).

(7) The court may, either in addition to or in substitution for the grant of the injunction under subsection (1) or (3), order the first-mentioned person referred to in subsection (1) or (3) to pay damages to any other person.

(8)     For the avoidance of doubt, the damages that may be ordered by the court under subsection (7) does not entitle a person to recover by way of damages any loss that is solely reflective of the loss suffered by a specified corporation which only the specified corporation is entitled to recover under the common law.”

114.The title of both section 1324 and section 350 referred to “Injunctions”. The wordings of the two statutory provisions are very similar.  Sub-section 1 of both provisions referred to “the Court may, on the application of …, grant an injunction ….”  Section 1324(2) again used the same expression “the Court may, on the application of …, grant an injunction ….”  Sections 1324(3) to (5) are all related to the grant of an injunction by the Court.  Sections 1324(6) and (7) then set out under what circumstances the power of the Court to grant an injunction may be exercised.  They are identical to our old section 350B(2) and (4).  Section 1324(10) begins with a premise: “Where the Court has power under this section to grant an injunction ….”  It then continues to state that [under that situation], “the Court may, either in addition to or in substitution for the grant of the injunction, order that person to pay damages to any other person.” (my emphasis underlined).  It is thus clear that the statutory power to award damages is parasitic to the Court having power to grant an injunction under the section.  Further, “damages” would just be in addition to or in substitution for the grant of an injunction.  There is obviously no independent power to award damages.  The same framework is found in our old section 350B(7).

115.Our new section 729 is however worded very differently.  Section 729(1) set out three distinct powers the Court has upon any application by a member or creditor under this section: the powers to grant an injunction; to award damages; and to make declaratory orders.  Section 729(1) used the words “any or all”.  The Court’s power to award damages is not “either in addition to or in substitution for the grant of the injunction”.  In my judgment, the change of legislative framework and the removal of these words unmistakably show that section 729 is a new piece of legislation not to be shackled by its predecessors or forerunners.  I find that the Australian authorities are not applicable to the interpretation and application of our new section 729. I also disagree with the author of the Brief Notes.  My interpretation is consistent with the fact that the title for Division 3 (ie sections 728 to 730) is “Remedies for others’ Conduct in relation to Companies etc” and the title for section 729 is “Court may order remedies”.  The Court’s power to grant relief under Division 3 is not confined or parasitic to the Court’s power of granting injunction.  In my judgment, the wordings of section 729 are unambiguous and there is no need, and in fact it will be wrong, to resort to extrinsic evidence to establish legislative intention. 

116.I accept the submissions of Senior Counsel for Ps and conclude that this Court has both the jurisdiction and power to award damages in accordance with the terms of that section irrespective of whether the Court would have been prepared to grant any injunction.  In my judgment, damages could be awarded when:

(1)     an application is made by a member or a creditor to the Court pursuant to section 729;

(2)     it is established by evidence that the interest of this member or creditor are or have been affected by the relevant conduct identified in section 728(1), (4) and/or (5); and

(3)     the circumstances are such that the Court finds it just and proper to exercise its power under section 729(1)(b) to order the person (who committed the relevant conduct) to pay damages to “any other person”.  These circumstances could include those justifying the award of damages in addition to or in substitution for a grant of injunction.

117.Furthermore, in my judgment, the person to be awarded damages is not even confined to that “member or creditor” making the application.  However, no amount of damages should be awarded in favourof any person unless it can be established that he has suffered pecuniary loss by reason of the commission of the relevant conduct.  There is no reason why the usual principles governing causation should not apply.

DISPOSITION

118.Flowing from my findings as set out in paragraphs 108 and 116 above, it is unnecessary for me to express any view on Ps’ alternative claim based on “common law personal claim of a shareholder”. In so far as necessary, I will agree with the submissions of Counsel for D3 to D7[90] that Ps only sought to run their case on this basis on the 2^nd day of the trial and it is too late and unfair to the defendants. In conclusion, I will make an award that D3 to D7 do pay damages to P1 in the sum of HK$18,669,420 with interest at commercial rate from 9 September 2016 to the date of Judgment and thereafter at judgment rate until payment. 

119.I will also order D3 to D7 to pay damages to P1 to P3 in sums that would become ascertained upon taxation of the costs order made by Harris J as mentioned in paragraph 109 above. Interest at judgment rate shall also become payable by D3 to D7 from the date of the allocatur to the date of payment.

120.Ps’ claims against D2 are dismissed.

121.I will also make costs orders nisi as follows:

(1)     P1 to P3 do pay to D2 the costs of these proceedings to be taxed, if not agreed, on party-and-party basis; and

(2)     D3 to D7 do pay to P1 to P3 the costs of these proceedings to be taxed, if not agreed, on party-and-party basis.

The above costs orders nisi shall become absolute if no application for variation is made by any party within 14 days from the date hereof.

122.Lastly, I shall thank counsel for their valuable assistance.

Ms Linda Chan SC, leading Mr Thomas K H Wong, instructed by Anthony Siu & Co, for the 1^st to 3^rd plaintiffs

Mr Justin Y M Lam and Mr Jonathan Y H Chan, instructed by S H Chou & Co, for the 1^st, 3^rd to 7^th defendants

Ms Frances M Y Lok, instructed by Lam & Co, for the 2^nd defendant

Mr Joshua S S Choy, instructed by Fongs, for the 8^th to 15^th defendants