Hing Yip Holdings (Hong Kong) Ltd (in Compulsory Liquidation) v. Cellmark China Ltd (in Voluntary Liquidation) (Formerly Known As Pechiney Far East Limited) and Another
Read the full judgment text of HCCL 15/2016 on BabelCite. This HCCL judgment was delivered on 17 May 2021.
1. Ocean Grand Holdings Limited (“ OGH ”) was listed on the Stock Exchange of Hong Kong, holding a group of companies (the Ocean Grand Group “ Group ”) which included a wholly-owned subsidiary known as Hing Yip (Hong Kong) Ltd (“ HY ”) and another listed company known as Ocean Grand Chemicals Holdings Limited (“ OGC ”).
Cited by 4 cases · Cites 6 cases
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HCCL 15/2016 [2021] HKCFI 1396 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMMERCIAL ACTION NO 15 OF 2016 ____________
____________ Before: Hon Mimmie Chan J in Court Dates of Hearing: 6-10, 13, 15, 16, 22-24, 27 July 2020 and 4 & 5 August 2020 Date of Judgment: 17 May 2021 _______________ J U D G M E N T _______________ Background 1.Ocean Grand Holdings Limited (“OGH”) was listed on the Stock Exchange of Hong Kong, holding a group of companies (the Ocean Grand Group “Group”) which included a wholly-owned subsidiary known as Hing Yip (Hong Kong) Ltd (“HY”) and another listed company known as Ocean Grand Chemicals Holdings Limited (“OGC”). 2.At the material time, OGH had its principal office in Hong Kong, and was engaged in the manufacturing and trading of aluminium ingots and aluminium extrusion products (“Aluminium Business”), and in the subcontracting, manufacturing and trading in precious metal electroplating chemicals (“Chemicals Business”). The Aluminium Business was wholly owned and controlled by OGH. 3.HY was incorporated in Hong Kong and operated from the headquarters of the Group at Room 2805 Admiralty Centre, Tower 1, Harcourt Road, Hong Kong. It acted as a trader of aluminium ingots, and was the intermediate holding company of other subsidiaries of OGH which were engaged in the manufacturing of aluminium extrusion products on the Mainland and/or which traded in aluminium extrusion products. 4.The directors of HY at the material time included Michael Yip (“Michael”), Christie Yip (“Christie”), Kwan Yan (“Kwan”), and Stanley Yip Wai Lun (“Stanley”). Michael was the chairman of OGH, Christie was Michael’s younger sister, and they both controlled the bank accounts of HY. Stanley was an executive of the Group, and Kwan was involved in managing the factory of the Group on the Mainland. Winson Zhu (“Winson”) was the assistant financial controller of the Group. Michael, Christie, Kwan, Stanley and Winson are referred to as the “OG Executives”. 5.Other staff of the Group included Cindy Wong (“Cindy”) who was the assistant finance manager working in the accounting and finance department, and Brian Lam who was the financial controller of HY. 6.In 2006, the Group collapsed after the auditors discovered various irregularities in the Group’s dealings on the Mainland. Deloitte was appointed by the audit committees of OGH and OGC in July 2006 as an independent investigator. On 24 July 2006, petitions were presented for the winding up of OGH and OGC and Deloitte was appointed as the provisional liquidators. They were also appointed as the provisional liquidators of HY. Following the winding up of the companies, Deloitte was appointed as the liquidators. 7.As a result of the investigations made by Deloitte, massive fraud and serious breach of duties on the part of the OG Executives were discovered, by which (as the Plaintiff claims) credit finance was obtained from the banks of the Group under false pretenses and the funds obtained were misappropriated by the OG Executives through transactions conducted in the name of HY and shell companies controlled by the OG Executives. Criminal proceedings were in fact instituted against Michael, Christie and Stanley, for their conspiracy to defraud a subsidiary of OGH, in respect of transactions which involved the OG Executives dishonestly causing the company to enter into a contract for the purported acquisition of machinery at inflated prices, and apparently through the use of shell companies controlled by the OG Executives. The defendants were all convicted and sentenced to imprisonment. 8.The liquidators also commenced civil proceedings for recovery on behalf of the Group. These proceedings are one of them, to seek recovery for HY of substantial damages and repayment from commodity traders which had entered into transactions with HY between 2001 and 2006, for their trading in aluminium. 9.The 1st Defendant had been established for more than 40 years, having been incorporated in Hong Kong on 14 September 1971. At all material times, 99% of its share capital was owned by a French company, and the 1st Defendant was a member of an international conglomerate operating in the aluminium industry in Hong Kong and worldwide. During the relevant period from 1 November 2001 to 31 March 2006 (“Relevant Period”), the 1st Defendant was known by its former name Pechiney Far East Limited, and later changed to its name to Cellmark China Limited in March 2012. During the Relevant Period, the 1st Defendant was engaged in the business of selling metal products and principally copper. Trading in aluminium and aluminium products comprised approximately 1/10th of its business. 10.For the Relevant Period until 1 November 2004, the only directors of the 1st Defendant who were resident in Hong Kong were Mr Jonathan Chang and Mr Thompson Lee. Chang had been a director of the 1st Defendant since July 1983 and Lee had been a director of the 1st Defendant since 1988. 11.The 1st Defendant was put into voluntary liquidation on 3 May 2018. Its liquidator did not attend trial but the Plaintiff is continuing with its claims against the 1st Defendant. 12.The 2nd Defendant is a company incorporated in Hong Kong in May 2004. It was established for the purpose of a management buyout by Chang, Lee and Mr Wagne Ng of the 1st Defendant’s copper metal trading and brokerage business, which business was transferred from the 1st Defendant to Chang, Lee and Ng under an agreement of 22 October 2004. Thereafter, Chang, Lee and Ng terminated their employment with the 1st Defendant and commenced employment with the 2nd Defendant. 13.Chang, Lee and Ng held approximately 28.3% each in the total issued share capital of the 2nd Defendant, and 15% of such capital was held at the material time (until December 2014) by Barclays Bank PLC. 14.Since its incorporation, the 2nd Defendant had carried on a substantial business in the trading of non-ferrous metals and the provision of associated finance related and finance driven services, including arranging for structural financing of commodities. Its business was mainly in respect of the trading of aluminium, copper and zinc. Substantial sums were involved in its trading transactions, as evidenced by the figures shown in the 2nd Defendant’s audited financial statements for the Relevant Period: with turnover of HK$1,505,114,340 for October to December 2004, HK$15,133,967,097 for 2005, and HK$14,538,187,127 for 2006, the cost of sales for the respective years being HK$1,492,223,805, HK$14,978,165,527, and HK$14,437,978,514, with gross profits of HK$13,290,535, HK$155,801,570 and HK $100,209,607 for the same years respectively. As Counsel for the 2nd Defendant pointed out, aluminium trading is “big-money business” because the value of each cargo is very high. 15.It is not disputed that the trading relationship between HY and the 2nd Defendant was the continuation of a course of dealings between HY and the 1st Defendant, which commenced since 2001, since Lee, Chang and Ng were former executives of the 1st Defendant. The 1st Defendant had carried out buy and sell transactions with HY on a regular basis, since late 2001/early 2002, such that when the 2nd Defendant commenced operations and entered into transactions with HY in late 2004, it was continuing an established line of business with a customer with which there had been ongoing dealings for some 3 years. 16.The claim made against the Defendants is that from November 2001 to January 2005 (for the 1st Defendant) and from January 2005 to March 2006 (for the 2nd Defendant), the OG Executives had caused HY to enter into contracts with the Defendants, pursuant to which HY purported to purchase, and the Defendants purported to supply various quantities of aluminium ingots at prices agreed between the OG Executives and the Defendants, on the understanding that the Defendants would immediately repurchase the same aluminum from shell companies controlled by the OG Executives (and in particular Paterson Limited (“Paterson”), Crown Regent (Hong Kong) Limited (“Crown”) and China Wealth International Industrial Limited (“CW”)), but at a discount of between 1% and 3% of the price paid by HY to the Defendants (“Scheme”). According to the Plaintiff, the purpose of the Scheme was to enable the OG Executives to improperly, and in breach of their duties owed to the Plaintiff, obtain funds from HY’s trade finance facilities on false pretenses, by purporting to engage in aluminium trading, and through payment of a fee to the Defendants, divert these funds from HY to Paterson, CW or Crown. 17.On its pleaded case (paragraph 65 of the Re-amended Statement of Claim (“SOC”) as against the 1st Defendant and paragraph 97 of the SOC as against the 2nd Defendant), the Plaintiff claims that the Scheme operated as follows. One of the OG Executives or staff acting at their direction would contact one of the executives or staff of the Defendants, to arrange the back-to-back trade with HY, and with either Paterson, CW or Crown. Documentation would be prepared to show that HY agreed to purchase aluminium from the 1st or 2nd Defendant, at an agreed price which was at or close to the prevailing market price. Such aluminium would be either the aluminium which the Defendants had already agreed to sell to a genuine customer, which was in transit from the refiner to Mainland China, or aluminium stored in a warehouse. The documentation would specify that payment was to be made by HY by way of letters of credit. Title documents in respect of the aluminium (in the form of either a bill of lading or a warehouse receipt) and other contractual documents would then be presented by the 1st/2nd Defendant to HY’s bank, which bank would pay the funds to the Defendant and release the title documents in respect of the aluminum to HY. The OG Executives would then cause HY to engage, on the Plaintiff’s pleaded case, in a sham transaction, whereby HY purported to on-sell the aluminum ingots at a profit to its customers, which were in reality the shell companies controlled by the OG Executives. The Defendants would then immediately repurchase the same aluminium from Paterson, CW or Crown, at a discount of between 1% and 3% of the original sale price to HY. The purchases were on cash terms, such that the Defendants would pay cash to Paterson/CW/Crown upon delivery of the title documents to the aluminium ingots. The documentation for this repurchase was backdated, with the contracts and invoices in respect of the Defendants’ purchase from Paterson/CW/Crown being dated before the date recorded on the sale contract and invoice from the Defendants to HY, creating the impression that the aluminium sold to HY had in fact been sourced from Paterson/CW/Crown, when this was not the case. The Defendants would then complete the sale of the aluminium acquired from Paterson/CW/Crown to its own legitimate customer, for aluminium which was in transit, and for aluminium which was stored in a warehouse, the Defendants would sell the aluminium at a later stage to a legitimate customer. 18.The Plaintiff claims that at the end of the transactions, HY was indebted to its banks for the funds drawn down on its trade finance facilities and used to pay the Defendants, the Defendants received and retained the margin of 1% to 3% of the value of the aluminium, and Paterson/CW/Crown received the remainder of the funds drawn down by HY on its trade finance facilities. The Plaintiff emphasized that the Defendants were exposed to no risk at all in obtaining the profit or margin of 1% to 3%, did not incur any costs in conducting the back-to-back trade, and could dispose of the aluminum to a customer. 19.The Plaintiff pointed out that the entire and practical effect of the Scheme was to convert HY’s trade finance facilities, which were intended to be used to fund genuine arm’s length trading and manufacturing activity, into cash in the hands of the shell companies controlled by the OG Executives. Such cash was then recirculated back from the shell companies to HY, and misappropriated to a substantial extent for the benefit of the OG Executives. The Plaintiff claims that the Defendants had assisted in the Scheme and were rewarded for the essential role they had played in the Scheme, as evidenced by the fact that the Defendants had received an average “fee” of at least HK$200,000 per week, over the course of almost 5 years, represented by the discount of the original sale price of the aluminium, the Plaintiff highlighting the fact that this was all at no risk or costs to the Defendants. 20.The scale of the Scheme was significant. From November 2001 to January 2005, when the 1st Defendant was involved, over HK$1.5 billion was paid from HY’s trade finance facilities to the 1st Defendant, from which the 1st Defendant kept HK$33 million and paid on the balance to the shell companies. Between December 2004 and March 2006, when the 2nd Defendant was involved in the Scheme, over HK$998 million was paid from HY’s trade finance facilities to the 2nd Defendant, from which the 2nd Defendant kept HK$17 million and paid on the balance to the shell companies. The Plaintiff claims that for the year ended 31 December 2005, the 2nd Defendant’s profits from the Scheme represented 16.3% of its annual profits of HK$86 million. 21.It is the Plaintiff’s case that the Defendants knew that they were providing an illegitimate service, to enable the OG Executives to improperly obtain funds from HY’s trade finance facilities and pay those funds to the shell companies. The Plaintiff claims that this was outside the ordinary course of business for any aluminum trader. Claims made and defences 22.The claims made by the Plaintiff against the Defendants are founded on the OG Executives’ breach of their fiduciary duties to HY. It is claimed that by causing HY to engage in the Scheme, the OG Executives had caused HY to obtain finance from its banks on false pretenses, and had misappropriated the funds obtained by dissipating such funds outside of the Group, to shell companies under their control for no commercial purposes. According to the SOC, sums exceeding HK$286 million had been paid to, or for the benefit of, Michael, Christie, their associates or entities controlled by them. 23.The Plaintiff claims that the executives of the Defendants either knew, or deliberately turned a blind eye to, or were recklessly indifferent to the fact that their involvement was essential to the Scheme and enabled and assisted the breach of fiduciary duties and the fraud of the OG Executives. In paragraphs 71 and 103 of the SOC, the Plaintiff claims that the Defendants’ executives knew that the Scheme was outside the ordinary course of the Defendants’ business, and was also outside the ordinary course of the business of HY and its subsidiaries, which were respectively traders of aluminium ingots and manufacturers and traders of aluminium extrusion products. It is claimed that the executives of the Defendants should have been alert to the prospect of fraud, when they knew that the Scheme involved hundreds of transactions which occurred almost every week, or even more frequently, throughout November 2001 to January 2005 (for the 1st Defendant) and throughout January 2005 to March 2006 (for the 2nd Defendant), and that the Scheme involved HY repeatedly entering into loss-making transactions for which there was no commercial benefit for HY to enter into. 24.In particular, the SOC pleads the following as to the knowledge of the executives of the 2nd Defendant (at paragraph 103.4 of SOC):
25.By virtue of the 2nd Defendant’s alleged knowledge and involvement in the Scheme, the Plaintiff pleads (in paragraph 105.1 to 105.4 of the SOC) that:
26.The same claims of knowledge and involvement in the Scheme are made against the 1st Defendant, in relation to its transactions which occurred almost every week throughout November 2001 to January 2005. The Plaintiff claims that the 1st Defendant had on its part received HK$33,017,153.16 for its involvement in the Scheme, or approximately HK$197,876 per week over the relevant period. 27.The Plaintiff claims that as the OG Executives had acted in breach of their fiduciary duties to HY, they had acted without any actual authority in entering into the Scheme and the transactions with the Defendants, and further, that it was irrational for the Defendants to consider that the transactions under the Scheme were authorized (paragraphs 74 and 106 of the SOC). 28.On the basis that the transactions between HY and the Defendants are void and of no effect for want of authority, the Defendants being dishonest accessories to the OG Executives’ breaches of fiduciary duty, and their knowing receipt of HY’s property, the Plaintiff seeks declarations that the 1st Defendant held the total sum of HK$1,546,878,141.17 and the 2nd Defendant held the total sum of HK$998,572,066.77 as constructive trustees for HY, restitution of all monies received by the Defendants, damages and/or equitable compensation, and accounts. 29.The SOC includes a claim of conspiracy against the Defendants: alleging that the Defendants and the OG Executives had wrongfully and maliciously conspired amongst themselves, to defraud and injure HY by causing the improper and fraudulent payments to be made, to the detriment of HY. However, such claim of conspiracy was not pursued by the Plaintiffs by the time of Closing. 30.The 2nd Defendant’s Defence is that the transactions which were the subject matter of the Plaintiff’s claims against it were all genuine commercial transactions, concluded at arms-length between HY, the 2nd Defendant and Paterson/Crown, in respect of which transactions title in goods had passed and for which valuable consideration had been given and commercial risks undertaken by the 2nd Defendant. The 2nd Defendant claims that these transactions were common and acceptable practices in the commodity industry in Hong Kong and on the Mainland, and that it had carried out, and has continued to carry out, transactions of a similar nature with many major commodity firms and other parties. The 2nd Defendant further claims that it had only dealt with the operating staff of HY and of Paterson/Crown, and had no knowledge of, nor had it dealt with, the OG Executives. Materially, the 2nd Defendant claims that it did not have any knowledge of the dealings between HY and Paterson/Crown, their reasons for entering into the transactions, or the use or whereabouts of the monies paid by the 2nd Defendant to Paterson/Crown. The 2nd Defendant claims that it had no reason to believe that the transactions were not genuine commercial transactions validly entered into by HY and Paterson/Crown, and it had no knowledge at all of any wrongdoing of any director or employee of HY. 31.The 2nd Defendant has highlighted the fact that under the transactions, title in the aluminium ingots had passed in both the buy and sell legs, between the 2nd Defendant and HY, and between Paterson/Crown and the 2nd Defendant. The Plaintiff acknowledges that it is not its case that false bills of lading or any other false documents had been presented to HY’s banks (paragraph 12.1 of the Reply to the Defence of the 1st Defendant). The 2nd Defendant claims that the relevant documents of title had been verified by the Commercial Crimes Bureau (“CCB”) when investigations were made into the 2nd Defendant’s involvement in the transactions, for suspected false accounting and conspiracy to defraud. The 2nd Defendant emphasized that the CCB had carried out investigations into the dealings between HY and the 2nd Defendant in 2007, and that on completion of the investigations in 2011, no charges had been brought against the 2nd Defendant. 32.The investigations which had been made into the 2nd Defendant were entirely different and were unrelated to the criminal proceedings brought against Michael and the other former OG Executives in 2007 and 2008. Those criminal proceedings were not concerned with the transactions between HY and the Defendants, and related to the Chemicals Business conducted by OGH’s listed subsidiary, which was a different line of business of OGH. 33.According to the 2nd Defendant, the transactions with HY, Paterson and Crown all fell within the ordinary course of its normal business. Commodity traders like the Defendants act as intermediaries between metal producers and metal end users, and (according to the Plaintiff’s expert, Mr Tudor) play an important role in the market, of smoothing flows of aluminium through varying the amount of metal inventory they hold. Aluminium ingots in which the Defendants traded are a homogeneous physical commodity which are traded in large volumes globally, in addition to their wide industrial application. The joint experts are in agreement on this. In physical aluminium trading, the price is often linked to the spot market price on or around the date of delivery, or linked to the average daily spot market price during a calendar month. As a result, physical metals market participants can be exposed to price fluctuations in the period between the time when the agreement to buy and sell was made, based on a formulaic but as yet unknown price, and the date or dates when such price becomes known. Futures contracts, under which parties agree to buy and sell an agreed amount of metal at an agreed price for a given future delivery date, are often made to hedge against the risk of price fluctuations. Another option for participants is to enter into over‑the‑counter transactions, which are privately negotiated hedging contracts financially settled against published spot aluminium prices. 34.Because of its homogeneity, its non-perishable quality and accompanying ease of storage, and the availability of liquid markets worldwide such as the London Metals Exchange, traders were quick to realize that gains and economic benefits can be made from deals using the metal. The experts in this case have referred to different forms of activities whereby aluminium cargo and stocks are utilized by commodity traders to maximize their profits, and these include arbitrage trading conducted between different markets which take advantage of the differentials in the market rates, financing deals made with portions of the traders’ aluminium inventory, and financing arrangements which are entered into between commodity traders and their clients. These financing deals can take different form and each may have its unique structure and terms, but such deals as a whole appear from the experts’ evidence to be common in practice. It is the 2nd Defendant’s case that its transactions with HY, Paterson and Crown were a type of the financing deals which were and still are prevalent in the commodities market on the Mainland and in Hong Kong. 35.In the publication known as “Metal Bulletin”, there was an article on copper, published on 9 March 2012, which reported that more than half of all reported and unreported inventories of copper in China at the material time may be the stocks of imported copper that entered the country in deals designed to give the importer cheap financing. This was due to restrictions in place on the Mainland with regard to foreign exchange, bank credit and lending. 36.The Plaintiff and its expert, Mr Tudor, claim that the Defendants’ involvement in the Scheme was not consistent with normal aluminium trading practices. Mr Tudor claims that a reputable aluminium trader would have considered the transactions which were the subject of the Scheme “not just unusual, but inappropriate”, the purpose of which was to extract cash from HY’s trade finance facilities, and that because the purpose of trade finance facilities is to facilitate transactions with a genuine commercial purpose, Mr Tudor considered that it was highly unlikely that the issuing banks intended the trade finance instruments to be used in the way it was by HY. 37.On the Plaintiff’s case, the Defendants’ conduct in facilitating HY’s transactions was improper, and there was no honest purpose for the transactions. The Plaintiff maintains that the Defendants through their officers had actual knowledge of all the relevant elements of the transactions which constitute knowledge of impropriety. 38.The 1st Defendant’s Defence is largely similar to that of the 2nd Defendant. It admitted that it was involved in transactions with Paterson and CW between November 2001 and January 2005. It denied that it was involved in the alleged Scheme, and further denied that any fees were paid by HY to the 1st Defendant to enable funds to be obtained from HY’s trade finance facilities on false pretenses and to enable such funds to be diverted to CW/Paterson. On its pleaded case, the 1st Defendant entered into contracts to supply to HY quantities of aluminium ingots at prices agreed after negotiations conducted with HY, and then entered into resale agreements, whereby the 1st Defendant engaged in financial driven transactions utilizing the stock in hand (including stock earmarked for end‑buyers pursuant to concluded contracts, as well as stock in which no end-buyer had yet been identified) in order to generate revenue for itself, and also enabled HY to obtain short-term financing. The 1st Defendant referred to these as Resale Agreements. Under the Resale Agreements, it was agreed between the 1st Defendant and HY, or an entity related to HY, that the same cargo of aluminium ingots sold by the 1st Defendant to HY, at reference prices listed on LME, would be resold by HY, with a discount of around 0.5% to 1.5%. The 1st Defendant claims (in paragraph 27 of the Defence) that these transactions were common in the aluminium trading industry, and were genuine commercial transactions involving physical trading of aluminium ingots and the presentation and verification of the necessary title and contractual documents to the satisfaction of the relevant parties. 39.The 1st Defendant claims that it had only dealt with HY’s employees, had no contact with any of the OG Executives, and was unaware of any fraudulent acts or conduct, or any alleged breach of fiduciary duties, on the part of the OG Executives. It claims that it had no knowledge of any alleged sham transactions between HY and the shell companies said to be controlled by the OG Executives. The 1st Defendant denies any knowledge of the Scheme, or that it had turned a blind eye to or was recklessly indifferent to any alleged involvement in the Scheme. It claims that it had no knowledge that the transactions were outside HY’s business or that of its subsidiaries, no knowledge and was not recklessly indifferent to the fact that CW and Paterson were not companies within the Group but were controlled by the OG Executives, and denies that it was or should have been alerted to any prospect of fraud. Issues for trial 40.The focus of the trial was on whether there was breach of fiduciary duties on the part of the OG Executives and, in relation to the claims of dishonest assistance and knowing receipt, the extent of the Defendants’ knowledge of the facts underlying and relating to the transactions, whether such knowledge rendered it unconscionable for the Defendants to retain the benefit of its receipt, and whether there was dishonest assistance by the Defendants of any wrongdoing on the part of the relevant OG Executives. 41.On behalf of the Plaintiff, Mr Manzoni SC in Closing aptly summarized the essential and key questions which call for determination by the Court in these proceedings to be: whether there was a misuse of the trade finance facilities of HY, whether the Defendants knew of such misuse, and whether the Defendants were dishonest in assisting such misuse. There was expert evidence and much debate on the nature of the transactions entered into between the Defendants and HY, Paterson, Crown and CW, whether they were comparable to other transactions entered into by the Defendants with or involving Mainland entities, which were described as resale agreements, and whether such transactions were common in the aluminum trading industry in Hong Kong or on the Mainland at the relevant time. At the end of the day, the question remains to be whether or not the Defendants knew, or should have been alerted to, misappropriation by the OG Executives or other possible impropriety on the part of the OG Executives in causing the transactions to be made with the Defendants, and the expert evidence is only relevant to that extent. 42.The pleadings raise a further issue of limitation. It is not disputed that save for one transaction, all of HY’s claims against the Defendants accrued more than 6 years before the issue of the Writ, and are time-barred unless it can be shown that the limitation periods can be extended by virtue of sections 22 and 26 of the Limitation Ordinance (“LO”). This involves determination of the issues of whether HY’s claims are all based on fraud, whether the Defendants’ involvement in the Scheme was deliberately concealed from HY, whether and when HY discovered or could with reasonable diligence have discovered the fraud or concealment, and whether HY can be said to have been subject to a disability within the meaning of s 22 of LO because it was subject to the control of the OG Executives. 43.Detailed and lengthy submissions have been made by Counsel for both parties on all the issues raised. It is not the intention of the Court, in this Judgment, to set out the detailed submissions and arguments made. Nor is the Judgment a record of the evidence adduced. The aim of the Judgment is to set out the determination on the relevant issues raised and argued by the parties, and the reasons therefor, for the parties’ understanding. Overview of the claims and the evidence 44.As supported by the criminal convictions in the District Court proceedings, OGH and HY were found to have been defrauded by 3 of the OG Executives, namely, Michael, Christie and Stanley, who were convicted of having conspired together and with Winson, to enter into sham contracts for the acquisition of machinery. It has to be borne in mind, however, that the claims made by the Plaintiff in these proceedings are not made against the OG Executives for their fraud, misappropriation or breach of their fiduciary duties owed to HY. Nor are the claims herein made by any of HY’s banks, for any breach of the contracts made between the banks and HY, whether for the grant of trade finance facilities, or for advances made to HY. The Plaintiff’s claims in these proceedings are made against HY’s trading partners, or counterparties to contracts made by HY for its trade in the products sold or purchased in its business. For these claims to succeed, it must be shown that the named Defendants had knowledge of the breach of fiduciary duties/misappropriation by the OG Executives, had dishonestly assisted in such breach, or were knowing recipients of benefits such that it would be unconscionable to permit the Defendants to retain the benefits received. These claims must be established to the requisite standard of proof, commensurate with the seriousness of the allegations and claims made. 45.These proceedings were instituted by the liquidators of HY, after investigations were made into irregularities detected by the auditors. It is appreciated that there are always difficulties encountered by liquidators, who have the onerous and time-consuming task of gathering the books and records of the companies involved, interviewing whatever witnesses and employees of the companies who can be traced and who are able and willing to assist in the liquidators’ investigations, examining the historical records to obtain an understanding of the dealings and activities of the companies, and the role played by former executives and employees, often with limited resources in terms of manpower and funds. Nevertheless, as Counsel for the Defendants in this case have highlighted, the liquidators do have wide powers open to them under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (“Cap 32”), which include powers to demand production of books and papers from any person, and to require such persons to provide information and be examined on matters concerning the promotion, formation, trade, dealings, affairs or property of the company concerned. They have the power to compel former staff of HY to cooperate, to furnish information and assistance, and to be examined on the affairs of the company. 46.The fact that the plaintiffs in an action are liquidators does not per se exempt them from their burden of proof of the claims made, or lower their standard of proof. It is in each case for the liquidators and those advising them to review the case and to decide whether claims can be substantiated by the necessary and available evidence, and whether an action can be responsibly pursued, bearing in mind the risks of adverse costs orders which may be made against them, if the claims are ultimately dismissed by the Court. 47.In this case, Leading Counsel for the 2nd Defendant has criticized the claims which have been made against the Defendants, and the nature of the evidence presented, or lack of evidence, in this case. Counsel emphasized the fact that by virtue of the wide powers conferred on the liquidators under Cap 32, they in fact have the ability to gather information and evidence beyond that of normal litigants like the 2nd Defendant. Although the liquidators have had access to various former employees of HY who were involved in or might have relevant information concerning the transactions with the Defendants and which are the subject matter of these proceedings, the liquidators had either made no inquiries of them, or when the former employees were unresponsive, the liquidators had failed to invoke their powers under Cap 32 to compel the production of documents or to obtain information or to examine such employees. According to the documents produced in the proceedings which evidence the dealings between HY and the Defendants, various individuals were clearly shown to have been involved. These include: Cindy Wong who represented HY in handling the transactions with the Defendants, Olivia Chan the former company secretary who supervised Cindy, Daniel Tam and other former financial controllers who had supervised Cindy, Henry Wong a former financial controller who supervised the accounting work in relation to the Aluminium Business, and Agnes Lam an accounting assistant who was supervised by Daniel Tam. As apparent from the judgment of the District Court in the criminal proceedings (“District Court Judgment”), most if not all of these individuals of HY had given evidence in the criminal proceedings, and Cindy was seen from the evidence to have been centrally involved in conducting the transactions involving the Defendants in this action. Daniel Tam and Olivia Chan were specifically identified in the pleadings as persons who had supervised Cindy and who would have knowledge of the transactions. 48.Glen Ho, who gave evidence on behalf of the liquidators of HY, accepted that the liquidators had never asked any questions of Cindy or Daniel Tam. I agree with Counsel for the 2nd Defendant, that it is not an answer, or not a complete answer, that Cindy had only replied “I do not know; I do not recall” when the liquidators’ staff had contacted her by telephone, and that Cindy had hung up after that. There is no good reason why the liquidators had failed to follow up with an inquiry or an application for examination under the relevant provisions of Cap 32. If they failed to do so, then any gaps in the evidence in this case, in relation to the transactions between HY and the Defendants, should not be bridged by the Court drawing inferences, when the liquidators had not taken all reasonable steps to obtain the evidence from those likely to have the relevant information. 49.As for Glen Ho, I also accept the criticisms made by Counsel, that Ho had apparently based his evidence on the documents available to the liquidators and on the District Court Judgment, and that in relation to the investigations which were claimed to have been made by the liquidators, Ho’s evidence revealed that he only had limited knowledge of the details. Examples given by Counsel, as to details which could not be furnished by Ho, included the information which was obtained from Cindy on the transactions, and the whereabouts of the cash which had been returned to HY by Paterson, CW and Crown during the 120-day tenor of the Trust Receipt (“TR”) loans. Further, there was no evidence from the liquidators as to how the funds obtained by HY under the TR loans were utilized during the 120-day tenor of the TR loans, when the essential claim made by the liquidators is that the transactions allegedly had no genuine commercial purpose. Nor was there any evidence at all to support the claim that the Defendants had knowledge of the misappropriation of funds by the OG Executives. 50.In particular, I find the evidence on misappropriation which is relied upon in this case to be most unhelpful. This will be amplified in the section below on misappropriation, but the liquidators have produced scarcely any evidence on what they claim to be misappropriation of HY’s funds. The evidence relied upon, and to which the Court was referred, is Annexure 17 of Glen Ho’s witness statement, which is stated to be a list of the recipients of “stolen funds”, representing amounts paid out from the shell companies, Paterson, CW and Crown, to parties outside the Group. On Glen Ho’s testimony, the recipients and the payments were included in Annexure 17 simply on the basis that they were payments made to outside the Group, and that the recipients were suspected to be conduits or nominees of the OG Executives, without any investigation having been made as to whether the payments could have been made for any genuine or bona fide purposes or transactions of HY. References in Annexure 17 were made to the District Court Judgment, but only in the context of showing the identity of the recipient or his/her relationship with the OG Executives. The criminal proceedings in the District Court related, of course, to entirely different transactions and dealings, and there were no findings made as to the recipients named in Annexure 17 having received sums which had been misappropriated from HY, nor findings that they were mere conduits of Michael, Christie or Stanley. 51.In short, whilst I acknowledge the difficulties under which liquidators generally work, the Defendants have made very valid criticisms as to the overall nature of the evidence presented and relied upon in this case. The Defendants in fact claimed that due to the paucity of the Plaintiff’s evidence, the Plaintiff has had to backtrack from its “overshot”, made obvious from the Plaintiff’s abandonment of its claims on conspiracy and reliance on misappropriation as breach of fiduciary duties. The 2nd Defendant emphasized that it is in fact clear that there has been no evidence at all in this case, of any contact between the Defendants’ directors and the miscreant OG Executives, and no evidence of the Defendants’ knowledge of the OG Executives’ misappropriation. Breach of fiduciary duties 52.The Plaintiff’s causes of action of dishonest assistance, knowing receipt and want of authority are pinned to its primary claim of the breach of fiduciary duties on the part of the OG Executives. In gist, the Plaintiff alleges that in their misuse of HY’s trade finances by improperly converting them into cash by false trading, the OG Executives had breached their fiduciary duties to act in the best interests of HY and not for any improper purpose. This rendered the transactions to be unauthorized for want of proper authority, and since the Defendants had knowingly assisted the breach of duties and misuse of trade finances, they are dishonest and alternatively, it would be unconscionable for the Defendants to be permitted to retain the benefit of the moneys they received from the transactions by virtue of their knowledge of the improper dealings. 53.Details of the Plaintiff’s pleaded case on fiduciary duties are found in paragraphs 69 and 70 of the SOC as against the 1st Defendant, and paragraphs 101 and 102 of the SOC as against the 2nd Defendant. The Plaintiff claims that the OG Executives (defined to mean Michael, Christie, Stanley, Kwan and Winson) had breached their fiduciary duties to HY, and had defrauded HY and HY’s banks, by causing HY to engage in the Scheme. The pleading in paragraphs 69 and 102 is that the funds drawn on HY’s trade finance facilities that were used to pay the Defendants were “obtained on false pretenses”, in that the banks believed that they were advancing funds to HY to finance the purchase of aluminium ingots by HY for use in legitimate trading activity and/or industrial production by HY or other companies in the Group. It is claimed that “HY’s banks were not aware of (the Scheme), the effect of which was to enable the OG Executives to obtain and misappropriate cash from HY’s trade finance facilities”. It is then pleaded that the funds so obtained from the improper and fraudulent use of HY’s trade finance facilities were misappropriated, by virtue of being paid to Paterson or Crown or CW for no commercial purposes, and instead paid to or for the benefit of Michael, Christie, their associates or entities controlled by them. 54.The Plaintiff alleges, at paragraphs 70 and 102 of the SOC, that the OG Executives breached their fiduciary duties by (1) failing to act bona fide in the best interests of HY and for HY’s purpose; (2) in circumstances where HY was insolvent or near insolvent, incurring substantial debts for the purpose of paying cash to shell companies controlled by the OG Executives, which was contrary to the interests of HY’s general creditors; (3) misappropriating HY’s funds; (4) having a personal interest in the payments by virtue of the diversion of funds to the benefit of Michael and Christie; (5) “causing or procuring false sales to be created and false entries to be made in HY’s accounting records to conceal the existence of the Scheme”; and (6) acting without actual authority by acting in breach of fiduciary duties. 55.I accept the submissions made on behalf of the Defendants, that the other arguments advanced by the Plaintiff: of HY acting or the OG Executives’ procuring HY to act in breach of contracts with its banks, their artificially inflating HY’s revenue and profits, and using a circular flow of funds/merry-go-round of finance by utilizing cash obtained from the later transactions to settle outstanding indebtedness to banks arising from earlier transactions, are all unpleaded in the SOC. 56.On 3 August 2020, after Day 12 and the completion of the evidence of the trial, and just before Closing submissions were to be made on 4 August 2020, the Plaintiff issued a summons for leave to further amend the SOC. This includes amendments to paragraphs 70 and 102 of the SOC, to add the plea that the OG Executives breached their fiduciary duties by failing to act bona fide in the best interests of HY and for HY’s purpose, in that they: (a) misused HY’s trade finance facilities by improperly converting trade finance into cash; and (b) used part of the cash so obtained to pay off HY’s indebtedness to banks from earlier transactions in (the Scheme). The Plaintiff also sought leave to amend paragraphs 71 and 103 of the SOC, which deals with the Defendants’ knowledge. The amendments sought to include claims that the Defendants’ executives knew that the cash obtained from the improper conversion of trade finance facilities was being used in part to repay indebtedness to banks arising from earlier transactions in the Scheme, and that they knew that the transactions in the Scheme artificially inflated the turnover and profits of both HY and the Defendants. 57.In my view, there is no good explanation as to why these amendments should be permitted to be made at the late stage of trial. It is of course pertinent that these proceedings were issued in 2016, and that the trial of the action had initially been fixed for September and October 2018. Pleadings had been finalized and closed long before then, and when the original trial dates were vacated in September 2018, on the eve of the commencement of trial, and new dates for trial before this Court were fixed, no applications for either amendment of pleadings or for the filing of further witness statements were made. Even at the PTR in April 2020, there was no indication that any amendment of pleadings would be necessary. In short, the Plaintiff had more than ample time to prepare and finalize its pleadings in preparation for the trial in July 2020. 58.It is trite, that pleadings define the issues in trial and guide and dictate the admissible evidence, and as the Court of Appeal emphasized in Sinoearn International Ltd v Hyunadai-CCECC Joint Venture (2013) 16 HKCFAR 232, these are important principles which must be adhered to:
It is not acceptable for unpleaded issues to be raised out of the evidence which has been adduced, and the Court of Appeal set out such an important reminder in Wing Hang Bank Ltd v Crystal Jet International Limited [2005] 2 HKC 638:
59.The proposed amendment to include the plea of breach of fiduciary duties by the general “misuse” of HY’s trade finance facilities by improper conversion of the trade finance facilities into cash is, firstly, wider than the original plea made in paragraphs 69.1 and 101.1 of the SOC, and further, raise questions as to how HY had used the cash generated from the trade facilities, a matter for which no discovery had been made by HY and no evidence had been adduced before trial. 60.I do not agree with Mr Manzoni, that the improper conversion into cash and the misuse of trade finances are already clearly expressed in paragraphs 95, 101.1 and 102.2.5 of the SOC (as against the 2nd Defendant). Paragraph 101.1 refers to the funds drawn on the facilities as being “obtained on false pretenses”, which was explained to be the banks’ belief that they were advancing funds to HY to finance the purchase of aluminum ingots by HY for use in legitimate trading activity and/or industrial production (“Legitimate/Genuine Trading Use”), when in fact (as paragraph 101.1 pleads) the banks were not aware of the Scheme, the effect of which was “to enable the OG Executives to obtain and misappropriate cash from HY’s trade finance facilities.” The pleaded breach is obtaining trade finance facilities on false pretenses. There were no particulars as to the “false pretenses” by which the facilities were obtained, and which induced the banks’ belief. The plea made in the second part of paragraph 101.1 is that the banks were not aware that the effect of the Scheme was to enable the OG Executives to obtain and misappropriate cash, and if that is relied upon as the effect of the Scheme or as to how the facilities were obtained by false pretenses, then the pleading is that the OG Executives had used the Scheme to obtain and misappropriate cash from the facilities, and not any other kind of misuse. 61.The amendment sought, to include claims of the Defendants’ knowledge, that the cash obtained from the conversion of the trade finance facilities was being used to repay indebtedness to banks arising from earlier transactions, and that the turnover and profits of both HY and the Defendants were inflated, likewise raise factual matters as to whether HY had indeed used the cash generated from the facilities to repay HY’s earlier indebtedness to the banks, and how the transactions were recorded in the books and accounts of HY and the Defendants. These are matters on which the Defendants had not been given the opportunity to seek discovery and particulars before trial. As the Defendants emphasized, serious claims of dishonesty are made against them in these proceedings on the basis of what the Defendants are alleged to have known, or knowledge which they ought to have had if they had asked questions, and it would be seriously prejudicial to the Defendants, if the amendments were allowed at the late stage in which they were introduced, depriving the Defendants of proper forewarning of the exact case which they have to meet at trial, as well as the full opportunity to seek particulars of the pleading and to apply for discovery, all of which are matters of the Defendants’ entitlement, to properly prepare for the evidence to be adduced and for cross-examination of witnesses at trial. 62.In view of the unexplainable delay in the application for amendments, and the prejudice to the Defendants, I refuse to grant leave to amend, and the claims will be confined to those pleaded - that the OG Executives had breached their fiduciary duties to HY and had defrauded HY and its banks, by causing HY to engage in the Scheme when the funds drawn on HY’s trade finance facilities were obtained on false pretenses, and when the funds obtained from the use of the trade finance facilities were misappropriated and paid to CW, Paterson and Crown for no commercial purposes, and paid to Michael, Christie, their associates or entities controlled by them instead. The claims against the Defendants are based on their knowledge of and assistance in such breach of fiduciary duties on the part of the OG Executives. Obtaining trade finance facilities by false pretences/“misuse of trade finance facilities” 63.I accept the submissions made for the Defendants, that there is in fact no evidence from any of the witnesses to show what representations had been made by HY, or any of its representatives, to the banks in order to obtain trade finance facilities for HY. In the absence of any evidence as to the representations made, there is no basis for the Court to make any finding that the facilities and the funds drawn on the facilities were obtained by HY “on false pretenses”. To the extent that paragraph 101.1 of the SOC pleads that the banks believed that they were advancing funds to HY to finance the purchase of aluminum ingots by HY, for use in legitimate trading activity and/or industrial production (the Legitimate/Genuine Trading Use claim), there is no pleading as to how the banks were led so to believe, and no particulars of the representations which had been made to cause the banks so to believe. 64.The Plaintiff’s case on false pretences, as pleaded, is therefore built on the claim that the trade finance facilities were obtained by HY on the basis that they were to finance the purchase of aluminium for Legitimate/Genuine Trading Use, and that HY’s transactions with the Defendants do not form part of such Legitimate/Genuine Trading. Mr Glen Ho for the liquidators argued that HY’s trade finance facilities were provided on terms that goods purchased using the facilities should be used or sold in the ordinary course of business, or be sold to bona fide purchasers for full market price on normal terms, and not for the round‑robin/circular trades of HY and the Defendants, which were not genuine and did not involve any permanent transfer of title to the goods. On the Plaintiff’s case, the bank facilities had been “improperly used”, because looking at the 2 legs of the transactions together: namely, the Defendants’ sale of aluminium to HY and the resale back of the aluminium to the Defendants, on the same day or immediately thereafter, by the shell companies, and at a discount (of between 1% and 3%) of the price paid by HY to the Defendants, there was simply no legitimate commercial purpose to the transactions, other than to convert the trade finance facilities into cash for payment out of the Group. The Plaintiff’s further pleaded case (paragraphs 65.4 and 97.4 of the SOC) is that the purported sale by HY of the aluminium to the shell companies was a sham. 65.The Plaintiff’s commodity trading expert, Mr Tudor, was of the clear view that there was simply no transparent economic purpose to the transactions entered into by the Defendants and HY, as the aluminium “goes and comes back”. He further explained:
66.It is also the evidence of Mr Philip Ng, HY’s account manager at Bangkok Bank, that it was “abnormal” for HY, as the bank’s customer of the trust receipt facilities, to resell the goods purchased under the Trust Receipt facilities, making a loss on each occasion of resale, as it was not normal business. He acknowledged however that the customer may be able to take advantage of the period of the Trust Receipt loan despite having sold the goods. It is also Mr Ng’s evidence that the terms of the Trust Receipt facilities (“TR Terms”) of the Bangkok Bank only permitted the funds to be used for HY’s trading or manufacturing purposes, and not for other investments or short term financing. 67.Mr Tudor agreed that the use of trade finance facilities to obtain short-term financing was not an appropriate use of the facilities. 68.The Plaintiff also sought to place emphasis on the fact that the bank’s TR Terms require HY to hold the goods as trustee for the bank, and if the goods were sold, the proceeds of sale were likewise to be held as trustee for the bank, to be returned immediately to the bank. In the absence of a plea of the OG Executives procuring or causing HY to act in breach of its contracts with the banks, or the Defendants so doing or assisting the OG Executives in that respect, any alleged breach of the terms of HY’s contracts with its banks is not allowed to be pursued. 69.As to whether HY’s alleged breach of the TR Terms can constitute evidence of obtaining trade finance facilities on false pretences, or improper use of the facilities in breach of contract (which the Plaintiff says constitutes breach of the OG Executives’ fiduciary duties not to act for improper purposes), Mr Alan Lee (“AL”), the 2nd Defendant’s expert, takes a view different to those of Glen Ho and Mr Tudor. 70.AL was formerly a banker who had worked in the commercial banking and trade finance field in Hong Kong for 28 years, and had specialized in commodities finance. In that capacity, he had acted for both the buyer and seller in financing deals. According to AL, to use letters of credit and trade finance to convert them into cash, and thereafter to deploy such cash for working capital, is commonplace amongst commodity traders in Hong Kong and the Mainland. It was commonplace because it was difficult at the material time for companies to obtain long-term funds or loans on the Mainland, and during the period of rapid expansion on the Mainland in the past few decades, the demand for working capital was considerable but banking facilities were not easily available. Financing deals were accordingly prevalent in Hong Kong and the Mainland, the supply being generated from the Mainland, and financing were made available from the banks in Hong Kong for mainland Chinese companies with trading arms in Hong Kong, or Hong Kong companies with manufacturing and operational facilities on the Mainland. 71.AL appreciated that under the trust receipt facility, the bank releases the bill of lading to the customer in exchange for the trust receipt, under which the customer undertakes to hold the documents of title and the goods represented by the documents, together with the net proceeds thereof, as trustee for the bank. In his provisional expert report, AL pointed out the following (at paragraph 128):
72.In cross-examination, AL was asked whether banks were indeed comfortable with trade lines being converted into cash for short-term capital purposes, and AL’s evidence was that if the bank was willing to grant the Trust Receipt facility, the actual power of control over the goods would have been passed to the client, and the bank would not be able to control the client delivering the goods to the Mainland, or being sold to another company. The bank would only rely on its right to claim payment from the customer under the Trust Receipt facility, but AL explained that in approving the Trust Receipt facility, the bank would have known the risks involved, assessed the risks on the basis of the financial position of the customer, and decided whether to assume and take the risk. AL accepted that the bank would have to trust its client, not to use the trade finance in this way. 73.AL did not consider that it was an inappropriate use of the Trust Receipt facilities for a company to obtain cash for financing its operations. His evidence was that the bank would “allow the client to have a space in order to get funds”, and to use the cash from the facility for other purposes such as paying rent, paying taxes and salaries, or as cash flow until the TR loan becomes due, when the bank would then look to the customer for repayment. In fact, AL’s evidence is that although the TR Terms would provide that the bank customer was to hold the goods, documents of title and proceeds of sale on trust for the bank:
74.In other words, AL’s evidence is that banks generally do not monitor the TR Terms, or enforce the client’s compliance with such terms, and would instead condone and permit the use of the facilities for financing capital and other requirements, at least during the tenor of the TR loan. As Leading Counsel for the Defendants highlighted throughout, there is no evidence of any restriction contained in the bank facility letters, as to how the aluminium ingots purchased under letter of credit facilities were to be used after HY’s purchase, or how the funds generated from the sale of the ingots were to be used. 75.Mr Philip Ng of the Bangkok Bank also accepted that there was no condition in the facility letters of the Bangkok Bank as to how the ingots purchased by HY were to be used, and no restriction or requirement as to such use. 76.Although Mr Ng claimed in his witness statement that he had understood HY to be a manufacturer which required raw materials of aluminum for the Group’s aluminum manufacturing activities on the Mainland, and that he did not recall that there had been any discussion on the Group’s “trading” of unfinished products or raw material, he accepted in the course of cross-examination that it was clear from the audited financial statements of the Group and HY (with which the Bangkok Bank had been provided in its usual due diligence on customers) that the principal activities of HY were stated to be “trading of aluminium products and aluminium ingots and investment holding”. Despite claiming initially that he had been told, by either Michael or his colleague, at the time when the facilities were applied for by HY, that the facilities from the bank would be used “mainly” for their manufacturing, Mr Ng later accepted that this was only his own belief, rather than what he had actually been told. 77.Mr Ng maintained that HY had to comply with the TR Terms and conditions, under which HY undertook to hold the goods purchased with the facilities on trust for the bank, and upon sale of the goods purchased, to hold the proceeds on trust and to repay to the bank. He also maintained his evidence that the goods purchased with the finance facilities should be used in the ordinary course of HY’s business. In his words, the goods purchased had to be used properly to generate income and profit so that the loan can be repaid to the bank. Mr Ng’s evidence is that HY could use the bank facilities to do normal trading and business, but if HY resells at a loss every time, that would not be normal business. 78.Mr Ng appeared to agree that the bank would not monitor or police its customers’ business activities, to check whether such activities would or would not be within what the bank considered to be the ordinary course of business, and that the bank’s main concern would be whether the loan under the facilities granted was repaid within the time allowed. As Counsel put to Mr Ng, by granting a 120-day credit period to the customer, the bank fully expected the customer to be able to realize the goods and to use the proceeds of the realization for whatever purposes the company may apply, as long as the repayment is made on Day 120. For the Defendants, Counsel contend that even if the customer had sold the goods on Day 1 of a 120-day TR loan, as long as the loan is repaid on Day 120, the bank would not regard the customer to be in breach of the banking contract, nor be concerned to police or enforce the TR Terms. 79.As the Defendants have highlighted, the loans under the Trust Receipt facilities and the letters of credit for the transactions between HY and the Defendants were all repaid in full to the banks before expiry of the term of the loans, and there has been no claim made by any bank for payment or recourse in respect of any breach of the letters of credit, Trust Receipt or other trade finance facilities granted to HY. 80.On the issue of whether it was a breach of the TR Terms for HY to resell the goods purchased, rather than to use the aluminium for manufacturing, and how the bank would treat any breach, Mr Ng’s evidence was that it might be acceptable for HY to pass the goods to a subsidiary of the Group, but that this would first have to be arranged with the Bank in advance. 81.This highlights the fact that there is no evidence before the Court as to whether HY had made any prior arrangement with its banks in relation to how it used the TR and bank facilities, and whether the banks had consented to or condoned the manner in which the trade finance facilities were used. There is simply the general allegation that there was breach and misuse of such facilities by HY, and no other evidence from the many banks which had granted the facilities, apart from Mr Ng of the Bangkok Bank. 82.Finally, in relation to the alleged misuse or improper use of the trade finance facilities, it is the pleaded case of the Defendants (paragraph 43 of the Amended Defence of the 2nd Defendant and paragraph 26 (ii) of the Amended Defence of the 1st Defendant), and it appears to be common ground, that the purpose of the transactions, for the Defendants’ customers such as HY, was to enable the use of the aluminium to carry out legitimate and commercial aims “including obtaining short‑term financing and undertaking arbitrage trading”. For the Defendants themselves, they claim that the purpose of the transactions was to use their stock or undelivered cargo to generate a source of income in the form of market price difference. Both practices are said to be common in the industry. The Defendants’ case has always been that the transactions did have a commercial purpose, and they were not sham transactions, or for no purpose at all. 83.On behalf of the Plaintiff, Counsel argued that in causing HY to participate in the Scheme, the only reasonable inference from the nature and structure of the Scheme is that the OG Executives had breached their fiduciary duties to HY. One of the matters said to give rise to such inference is that it was clearly not in the best interests of HY to use its finance facilities to obtain cash on false pretenses, thereby incurring substantial liabilities to banks for no legitimate commercial purpose. In this respect, standing back and looking at the matter as a whole, as Counsel for the Plaintiff urged the Court to do, I am not persuaded that the Scheme and the manner in which HY’s finance facilities had been used was of no commercial benefit to HY, and that the OG Executives had necessarily acted in breach of their duties to act in the best interests of HY. 84.It is the Plaintiff’s case, and it is in fact not disputed by the Defendants, that the net effect of the transactions entered into by HY was to allow HY to draw down on its trade finance facilities, and obtain an advance of cash during the tenor of the TR loan, which on the evidence was between 90 and 180 days. During this period, HY would be in a position to use the borrowed funds for a variety of different commercial purposes, such as financing the operations of the Group and of HY on the Mainland, taking advantage of the difference between interest rates on the Mainland and in Hong Kong to earn profits, conducting currency arbitrage to take advantage of the RMB rate of appreciation against the US dollar and Hong Kong dollar to earn profits, and making other investments on the Mainland. These are illustrations of the situation then existing, according to the Mental Bulletin published on 9 March 2012 and the Goldman Sachs article published on 18 March 2014, as well as the evidence of Mr Thomson Lee. 85.On behalf of the Defendants, it was argued that the duty imposed on the OG Executives was to act bona fide in the best interests of HY, and the test of whether there was breach of such a duty is subjective: namely, whether the director honestly believed that his act, or omission, was in the interests of the company (Regentcrest plc v Cohen [2001] BCC 494). A director may be acting bona fide in the best interests of the company, even if the director causes the company to engage in a course of action which involves a reasonable risk of liability such as breach of contract (Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; Antuzis v DJ Houghton Catching Services Ltd [2019] Bus LR 1532). In reliance on Regentcrest and Maxwell, Counsel submitted that in deciding whether a director had complied with his duty, it is necessary to balance the potential benefits and the risks to the company, and if the potential benefit to the company is not disproportionate to the level of risk involved, the Court should be slow to conclude that the director in question did not honestly believe the course of action to be in the best interests of the company. 86.Mr Manzoni argued that it is not the Defendants’ pleaded case, that the funds obtained from the finance facilities had been put to use during the period of the loan, or that there was benefit to HY. Whilst it is not necessary to plead matters of law as to what constitute breach of a director’s duty, or that there should be a risk and benefit analysis, it is necessary for the Plaintiff to prove that there was breach of fiduciary duties and it is open to the Defendants to point to deficiencies in the evidence adduced by the Plaintiff. The Defendants sufficiently pleaded, in paragraph 26 (a) (ii) of the 1st Defendant’s Defence, and paragraph 43 (2) of the 2nd Defendant’s Defence, that the purpose of the sale and repurchase transactions was to enable HY to obtain short-term financing – or as the liquidators and Mr Manzoni understood it and correctly summarized, to “monetize” the finance. 87.As Counsel for the Defendants had been quick to point out, there has been no evidence adduced by the liquidators as to how the funds drawn down or derived from the TR facilities were used by HY during the 120-day tenor of the facilities, nor has there been evidence as to the inquiries which the liquidators had made with the former staff of HY in these respects. The liquidators were content to commence these proceedings on the assertion that there was a lack of genuine commercial purpose in the use of the funds and the finance facilities in the way alleged, and to ask the Court to draw the inference that these were improper, that the OG Executives had acted in breach of their duties, and further, that the Defendants had knowledge of such breach. 88.Glen Ho accepted in cross-examination that the majority of the funds drawn down from the bank facilities (approximately 85%) found its way back to HY, after having been paid to the shell companies. On Glen Ho’s evidence, the investigations made by the liquidators at the different stages of their involvement had focused on checking and tracing payments which had been made by HY to entities outside the Group, of above $1 million for each payment, to ascertain whether these payments were out of the ordinary course of business of HY, to warrant further investigation. By this exercise, the liquidators had identified a list of payments made to third parties outside the Group, but from Glen Ho’s evidence and as highlighted by Counsel for the Defendants, the investigations had not been aimed at finding out how the funds drawn down from the facilities had been used within the Group, during the 120-day tenor of the bank’s TR loans. The Court cannot assume from Gen Ho’s evidence that there were NO funds which had been used by HY for its own business purposes, or transferred to companies within the Group for their business purposes. Based on Ho’s evidence as to the nature of the investigations which were made, I agree that the Court simply cannot conclude that HY and the Group had not obtained any commercial benefit by the use of the funds during the credit period. 89.Glen Ho stressed in his evidence that the liquidators’ investigations revealed that, like a Ponzi scheme, HY had been using the funds raised from the trade finance facilities to pay the bank on old loans or other expenses. There is, however, no reliable evidence to establish this claim, as to how HY had actually used the funds received from later transactions, to repay its earlier loans under its bank facilities. In any event, even if Ho’s claim was true and can be substantiated on the evidence, I cannot accept that this is, inherently, not acceptable or improper, at least not on the limited evidence there is in this case. In the real commercial world, businesses frequently procure loans from banks to refinance their debts, and commonly use funds from completed transactions to settle loans past due. If HY had been able to pay off part of its indebtedness to the banks from the money drawn down from the transactions with the Defendants, I would be prepared to accept that it had derived commercial benefit from the use of the trade finance facilities and the transactions with the Defendants. Misappropriation 90.In his Closing, Mr Manzoni summarized the case on breach of fiduciary duties as being constituted by the OG Executives’ misuse of HY’s trade finance, which was improper use and misappropriation of HY’s corporate assets. The pleaded case in paragraphs 69.2, 101.2, and 101.3 of SOC is that HY’s Funds were misappropriated, by being paid to Paterson, Crown or CW for no commercial purpose, or to Michael, Christie and their associates. 91.On HY’s evidence, the 1st Defendant had received $1,546,878,141 from its transactions with HY, and the 2nd Defendant had received $998,572,066 from its transactions. At least $797,008,864 of the $1,546,878,141, and at least $648 million of the $998 million, which was paid to Paterson, CW and Crown were paid back into HY, and the reports of both experts show that the net effect of the flow of funds back to HY was to enable HY to use the funding obtained from its trade facilities for purposes such as supplementation of working capital, interest rate arbitrage and currency arbitrage. In most of these cases of payments to Paterson, Crown and CW, they resulted in a benefit to HY and do not by themselves constitute clear evidence of breach of the OG Executives’ fiduciary duties. 92.The liquidators have identified a list of recipients of the money received (said to be “stolen”) from the Defendants (Annexure 17 to Ho’s witness statement), as evidence of the misappropriation of HY’s funds. However, there is only very limited documentary evidence disclosed as to these payments, and no evidence of the investigations conducted by the liquidators as to the purpose of and the circumstances surrounding the payments. 93.In cross-examination, Glen Ho accepted that Annexure 17 was prepared on the basis that the payments had been made by the shell companies of the OG Executives (which included Paterson, Crown and CW) to entities outside the Group, shortly after the amounts were received from the Defendants. There had been no investigation at all as to whether the payment out was made for the bona fide purposes of HY. Glen Ho’s only justification was that if there was money “spin off” from the Group, went to the shell company and was not returned, the money would not be for the operation of the company as it was outside the Group. 94.The problem with the said list of recipients in Annexure 17lies in the fact that for some of them, the relationship between the recipient and HY is stated to be “unknown”. These are 遠大(香港)有限公司 (“YD”), Chan Yuk Shan, Lau Pui Wing, 廣州倫帕理維科技有限公司 (“GZLP”) and a recipient who was not even identified (“Unknown Transactions”). For these as well as for all the other recipients identified in Annexure 17, there is no evidence from the Plaintiff as to the details of the investigations carried out, nor sufficient facts as to the payments made, apart from the amounts of the payment. Without the necessary facts, the Court cannot have sufficient basis to infer or conclude that there was no bona fide transaction between HY and the recipients of the Unknown Transactions. It is possible that supporting documents had once existed in relation to the Unknown Transactions, but they were not located by the liquidators. It is possible that supporting documents had once existed, but had been lost. It is also possible that the supporting documents in respect of the Unknown Transactions were not in the possession or custody of HY, and hence were not traced by the liquidators. 95.In my view, the claims of misappropriation in respect of the Unknown Transactions have not been established on the balance of probabilities. 96.Apart from the Unknown Transactions, there are other recipients whose transactions with HY cannot be clearly identified. Annexure 17 identifies one recipient of $420,000 (Choy Tak Ho) who is said to be an independent non-executive director of OGH. As Counsel for the 2nd Defendant pointed out, the amount paid to him might have been his director’s fees. Another recipient of a total sum of approximately $8,530,000 is a firm of solicitors said to have been used by OGH. There is no explanation as to whether the payment could have been for work done by the solicitors, or paid to the solicitors for purposes of transactions handled by the solicitors for HY. A third recipient is the financial controller of OGH (Daniel Tam) who is stated to be the provider of shell companies to executives of OGH, and he received a sum of $45,370. This might well have been the cost or fees of the nominee companies provided. It is impossible to say whether, on a balance of probabilities, these payments were in respect of transactions which had a bona fide purpose. 97.The sums paid to other recipients included in Annexure 17 are apparently sought on the basis that the recipients were companies associated with Michael or Christie or other executives of OGH, or were friends of Michael, and that the liquidators had found no other connection between the payments and HY, nor evidence of business dealings between them. Even for the companies which are stated to be controlled by Michael or Christie (Nanyang Alloy‑Sheet (Hong Kong) Co Ltd, and Nanyang Galvanized Aluminum Sheet (Hong Kong) Co Ltd), on the limited evidence available in this case, it cannot be said that on a balance of probabilities, there could have been no bona fide and genuine transactions between those companies and HY, for which bona fide payments could have been made. In respect of the 2 companies said to be controlled by Michael and Christie and which held business interests on the Mainland, Glen Ho was only able to say in his evidence that no inquiries could be made because the companies had ceased operation. That is not an adequate explanation and it is possible that there might have been business dealings between these companies and HY, despite the fact that Michael and Christie had interests in the companies. 98.The burden of proof of misappropriation lies on the Plaintiff. The Court is asked to infer, merely on the basis of the absence of documents, that the payments made to the recipients identified in Annexure 17 were not for any genuine transactions. I find it difficult to leap to such a conclusion for all the recipients, on a balance of probabilities. 99.At most, the Court may infer from the fact that the recipients identified in Annexure 17 as Michael’s bodyguard, the accounts clerk of Winson (the former financial controller of the Group), the office assistant of OGH, Michael’s friend, the technical officer employed by OGC, and Grand Prosperous Co Ltd controlled by Christie and her mother, all of whom had received significant sums (of $8.68 million, $438,000, $7.15 million, $8.2 million, $500,000, and $4.4 million respectively) that these recipients must have been conduits of Michael, Christie and Winson for payments. Annexure 17 also lists Michael as the recipient of $22.6 million. The further inference to be made is that it is more probable than not that the significant sums paid to Michael and these conduits were for no good consideration, and did not have any bona fide purpose, when there were no documents located to record any business dealings with these individuals. 100.To that extent, I am prepared to find that there is evidence of the OG Executives’ breach of their fiduciary duties in their misappropriation of the sums paid to and received by themselves or their conduits. Apart from that, I consider that the pleaded breaches of fiduciary duties have not been established on the evidence. 101.The more material question in this case is whether the Defendants had the requisite knowledge of the alleged misappropriation and breach of fiduciary duties on the part of the OG Executives. Knowledge: applicable legal principles 102.The authorities are clear, that for the purpose of deciding whether the Defendants were dishonest to be liable for dishonest assistance, it is necessary for the Court to ascertain the actual state of the Defendants’ subjective knowledge or belief as to the facts. Only upon ascertaining the Defendants’ actual state of mind as to knowledge or belief as to facts can the Court decide whether the Defendants were dishonest by the objective standards of ordinary and decent people (Ivey v Genting Casinos (UK) Ltd [2018] AC 391, Group Seven Ltd v Nasir [2020] Ch 129. There is no requirement that the defendant must appreciate that what he has done is, by those objective standards, dishonest. 103.As to what can constitute actual knowledge, the Court in Group Seven explained (at paragraph 59 of the judgment):
104.The Court continued in the judgment to make it clear (at paragraph 61) that a person’s beliefs may include suspicions which he harbors, but which in and of themselves fall short of constituting blind-eye knowledge, and the existence of such suspicions, and the weight (if any) to be attributed to them, are matters to be taken into account at the objective second stage of the test of dishonesty. 105.It is also useful to bear in mind the observations made by the Court at paragraph 104:
106.Counsel for the Plaintiff relies on the judgment of Snowden J in Bita (UK) v NatWest Markets and Mercuria [2020] EWHC 546 (Ch), where His Lordship explained (at paragraph 236) that for a finding of dishonesty to be made, it is not necessary to show that the defendant knows, or has a suspicion of all of the detailed facts or aspects of the breach of trust or breach of duty. As held in Barlow Clowes International v Eurotrust International Ltd [2006] 1 WLR 1476, it would be sufficient if the defendant entertained a “clear suspicion” that monies were being misappropriated from the company, and then made a decision not to ask questions about the transactions he was assisting. If the defendant suspected that the relevant individuals had no right to use the company’s money for their own purposes, yet chose not to inquire, that would be sufficient. It did not matter that the defendant did not know that the monies being paid away were held on trust, or that he did not know the precise involvement of the fraudsters. Someone can know, and can certainly suspect, that he is assisting in a misappropriation of money without knowing that the money is held on trust, or even what a trust means (Twinsectra [2002] 2 AC 164). 107.However, as the Court in both Manifest Shipping and Bilta made it clear, suspicion must be firmly grounded, targeted on specific facts, or based on some identifiable matters, that what was being done was part of or connected with either fraud, or breach of trust or duty. 108.There are helpful reminders set out in the judgment of the Court in Bilta (UK) v NatWest Markets and Mercuria (at para 240 of the judgment). First, when determining the subjective state of mind of a defendant, unless there is some external evidence in which the person expresses what he knows or thinks, it will inevitably be necessary for inferences to be drawn, from what the person knew, said and did, both then and later, including what he said in evidence (Barlow Clowes). The reasonableness of an alleged belief or state of mind may often be determinative of whether the Court will infer that a person held the stated belief (Ivey). Finally, care should be taken to avoid the use of hindsight when assessing what a defendant might have suspected. What the Defendants knew 109.In this case, the Plaintiff submits that the Defendants and their executives had actual knowledge of the impropriety of the transactions of sale to HY, and repurchase from Paterson, CW and Crown. The Plaintiff claims that the Defendants had knowledge that the transactions were entered into by HY in significant volumes, and frequently – one trade every week for four and a half years for the 2nd Defendant. On the Plaintiff’s pleaded case, the Defendants received commissions or fees averaging approximately HK$200,000 and HK$265,000 per week respectively, in respect of the transactions. The Plaintiff claims that the Defendants also knew that their transactions with HY did not involve genuine trading of aluminum or any genuine and permanent transfer of risks in the metal, but were instead circular trades for the purpose of converting HY’s trade finance into cash. They knew that each transaction was pre-arranged, in that the two legs and the price was agreed at the same time, with a very short timeframe between each leg of the transaction. They knew that the cash was being paid to an associated company, rather than to HY itself, and that there was a significant profit being made by the Defendants with little or no risk, but that HY made a significant loss on each transaction. The fees were not negotiated for each transaction, but remained constant throughout the entire 4.5 years of their relationship. The Plaintiff’s case is that these transactions were not common in the industry as the Defendants claimed. 110.The Plaintiff further claims that the Defendants had actual knowledge of the fact that there was a circular flow of funds, with cash obtained in each transaction being used by HY to repay its earlier TR loans, and that the Defendants also knew that the improper trades were inflating the turnover of HY as well as of the Defendants. The Plaintiff places reliance on the fact that the Defendants had concealed the true nature of the transactions from their own accounting staff, and had backdated contracts and invoices for their transactions with HY, which concealment is “a badge of fraud” and is evidence that the Defendants had knowledge of the impropriety of the transactions. 111.Mr Thompson Lee was the Chief Financial Officer of the 2nd Defendant, and had also been a director of the 1st Defendant with responsibilities for the Finance Department before the 2nd Defendant was set up in about 2004. Mr Lee pointed out at the forefront that it was common for companies trading in commodities to engage in financial driven transactions, utilizing its stock at hand, which included stock earmarked for end-buyers under concluded contracts but pending physical delivery, as well as stock for which no buyer had yet been identified. This is not surprising, due to the highly liquid and homogeneous nature of metals, and the existence of centralized markets such as the London Metal Exchange (“LME”), and centralized trading prices which facilitate finance driven transactions. Mr Lee explained that trading in metals typically involve substantial amounts of cash being tied up by reason of the high value of the cargo and the transactions, and a time lag between the time of contract and the time for delivery, which can be significant in some cases, and these provide incentives for traders to use their stock in hand to conduct financial driven transactions, in order to generate more cash flow and increase their revenue. 112.Daily fluctuations in the price of aluminum ingots can be large, and Mr Lee agreed with Mr Manzoni’s suggestion, that a reasonable part of the Defendants’ business is conducted on the basis that metal is purchased speculatively on the premise that the market price will improve. The metal purchased is transferred to reserve and stored, and then sold when the market price rises and a reasonable price is offered by a purchaser. Mr Lee pointed out that the price of aluminium is always linked with the LME, with an additional premium representing interest, costs of delivery (such as freight), and profit. To protect themselves against market risks, traders generally hedge their position with exchange markets like the LME. 113.AL, the Defendants’ expert, explained that the LME provides futures and options for participants to manage their position on market risk. AL also explained that globally, aluminium and copper are often utilized as tools to achieve economic benefits. Aluminium may be used to hedge against market uncertainty or US dollar volatility, such as depreciation of the US dollar (metal prices usually appreciating when the US dollar depreciates). It may be used to yield enhancement from different arbitrage activities: between physical and futures markets; price differential in physical markets between different regions; and price differentials between different futures markets. Arbitrage or financial arrangements are possible due to the availability of storage, the liquid market and the available hedging tools available from the LME and other exchanges. 114.According to Mr Lee, the 2nd Defendant’s average fees or profit from the HY transactions, of HK$265,000 a week as the Plaintiff sought to highlight, was not of significance, as the profit range of 1.5% was considered to be normal in the business. Mr Lee’s evidence is that the 2nd Defendant’s profit depended on the market situation, and that the 2nd Defendant sometimes made more profit from plain vanilla trades, than under the resale arrangements. AL’s unchallenged evidence is also that the 2nd Defendant’s profit margin under the transactions with HY is similar to that under plain vanilla trades. 115.It is not apparently disputed that aluminium trading was “big money business”, where the value of each shipment involved hundreds of thousands if not millions of US dollars. As the Defendants pointed out, the substantial amounts involved in the transactions with HY were nothing remarkable. It follows from such evidence that Mr Lee’s or the Defendants’ knowledge of the substantial amounts involved was nothing extraordinary or noteworthy, let alone suspicious or raising alerts for the need to ask questions of the counterparty. 116.The Plaintiff referred to the Defendants’ “fixed fee of US$30/MT” for each transaction. On the evidence, the fee was fixed by reference to the LME price and premium, and there was some fluctuation for the US$30 during the first part of the relevant period, before January 2005. Mr Lee’s evidence was that the profit margin was decided by the sales department and he had no knowledge as to how it was calculated or decided upon. 117.As to whether the transactions with HY were at no cost to the Defendants, the Defendants pointed out that in entering into the resale arrangements, they had to keep stock for a longer period, and accordingly had to bear additional expenses such as storage fees and insurance premiums. It is also Mr Lee’s evidence that part of the stock for the transactions with HY had to be taken specifically for doing the resale arrangements, and that not all of the stock was from the Defendants’ existing inventory. 118.According to Mr Lee, it was not true that the transactions involved no risk to the Defendants. Mr Lee explained that at the time of the transactions, there was risk in the event that Paterson/Crown/CW might default in their agreement to sell the aluminum ingots back to the Defendants. In that event, the Defendants would have to purchase the same quantity of ingots on the market, possibly at a higher price, to comply with any pre-existing obligations to sell to ultimate purchasers. There was also the risk of having to hold the aluminium ingots, the spot price of which can fluctuate significantly within a short period of time, and in such circumstances, default risk could not have been dismissed as insubstantial. Counsel for the Defendants highlighted the fact that the likelihood of an adverse scenario occurring and the magnitude of loss which would be caused if the scenario should occur have to be considered together. Even if the likelihood of default might be considered to be low, as the Plaintiff argued, the value of the cargo was high and the spot price of aluminium can fluctuate significantly, so that if there should be default, substantial damage would result, and this should be considered when “risks” are assessed. 119.Mr Wayne Ng (“WN”), the Chief Operative Officer and director of the 2nd Defendant responsible for the management of the 2nd Defendants’ copper trading, also referred to risks associated with keeping stock. According to WN, the key risks were that the premium could change and the hedging positions for the stock could cause the Defendants to incur heavy losses should the market change into one of backwardation (when metal for delivery on a near date is priced higher than metal to be delivered on the future date). To conduct resale agreements like those with HY, the Defendants had to hold off selling cargo to an end purchaser until after the resale agreement had been completed, or the Defendants had to negotiate with its pre-existing end buyers to secure a longer transaction timetable. In the interim, there might be movements in the premium and the Defendants might lose the opportunity to sell the aluminium to an end purchaser at a higher price. 120.As the Plaintiff contended, the Defendants would normally hedge their position to avoid risks in the movement of prices. However, even with hedging, it can be envisaged that there might be losses, for example if the market should change into one of backwardation, and changes in the spot price would not necessarily be offset by an opposite change in the value of the futures contract (as Mr Lee pointed out in his testimony). 121.On the question of risks, I accept the evidence of Mr Lee and WN, and the submissions made by Counsel for the Defendants. The fact that no actual risk materialized in a particular transaction or series of transactions is a matter which only became apparent after the event. In view of the volume and value of the transactions traded, the Defendants’ perception of the risks involved at the time of the transactions cannot be dismissed as unreasonable, or rejected as being unreal. 122.Mr Lee’s evidence is that he was not in fact aware at the time of the transactions that the Defendants were doing about one transaction per week with HY, nor that they were doing hundreds of millions dollars’ worth of transactions per year. He only knew that the Defendants were doing big business with HY and that the turnover involved was large. Nor was he aware of any promise given by HY to the Defendants, that HY would continue to do the business with the Defendants. For the 2nd Defendant, it had continued the transactions which the 1st Defendant had regularly been doing with HY as a known customer since 2001. I do not find Mr Lee’s evidence to be incredible. 123.As to whether HY was continuously incurring a significant cost and losing money under the transactions, Mr Lee’s evidence is that he was aware that the transactions involved a cost to HY, but he did not agree that HY was necessarily incurring significant losses as a result. Mr Lee maintained in his evidence that he did not actually know HY’s reason for the resale transactions as HY never told the Defendants, but he accepted in cross-examination that the Defendants could guess and did believe at the time that the purpose of HY’s resale agreements was to enable HY to obtain short-term financing from its use of the TR and credit facilities from the bank. According to Mr Lee, HY could use the financing raised to do other investments and possibly could have made significant profits. However, Mr Lee maintained that at the relevant time of the transactions, he did not apply his mind to the question, and did not know, how HY was actually using the short-term financing. Nor did it ever occur to him that he had to ask how the Defendants’ counterparties were making use of the money they obtained from their own banks. 124.Significantly, it is not disputed that at the material time, the Defendants knew HY to be a company with a substantial operation. OGH was listed in 1998, and the Group was perceived to be a successful, profitable, substantial and expanding group of companies. It was a significant market player in the business of the manufacture and sale of aluminum extrusion products. HY and the Group had operations on the Mainland, and the Group was perceived by the banks and by outsiders to be in a very strong financial and cash rich position in early 2006. 125.The pleaded case of the Defendants, and Mr Lee’s evidence, is that the Defendants had not liaised, communicated or dealt with any of the OG Executives, and the staff on the Defendants’ sales team (Kenie Wong or Raymond To) had only dealt with Cindy of HY in relation to the transactions. On Mr Lee’s evidence, he had never met or had contact with anyone from HY or OGC. Glen Ho for the liquidators confirmed in his evidence that he was not aware of any evidence that the OG Executives had any communication or understanding with anyone of the management of the Defendants, or with Kenie Wong, in relation to the transactions with HY. 126.The Defendants had knowledge and had agreed to deal with Paterson, Crown and CW in the repurchase leg of the transactions, but the Defendants had no knowledge of the fact that these companies were not part of the Group. According to Mr Lee, he and the Defendant’s staff had believed that they were all associated companies, because firstly, HY, Crown and CW were all represented by the same person, Cindy; secondly, Cindy had informed the Defendants’ staff in the sales and marketing department that Paterson, Crown and CW were associated companies of and related to HY; and thirdly, Paterson, Crown and CW had all been able to obtain from HY the relevant documents of title for the aluminum ingots for each of the subject transactions. In his statement to the police in 2007, Mr Lee stated that he had been informed by Kenie Wong that HY had proposed to sell back the aluminium to the Defendants “in the name of Paterson or Crown”, and that Mr Lee had believed that they were all in the same Group, using the financing arrangement. 127.In relation to the claim that HY misused its trade finance by converting same into cash and using such money for short-term financing, and even if the Plaintiff’s pleaded case in paragraph 102.1 of the SOC should be read to include such claim, there is no evidence at all, that the Defendants were at any time aware of the terms of the facility letters or the trade finance agreements between HY and its banks, or that there were restrictions in such terms on the use of the money obtained or the goods purchased. Nor is there any evidence that the Defendants knew that HY was in breach of its agreements with the banks in these respects. Even if it can be said that Mr Lee must have had knowledge of the common terms of a Trust Receipt agreement, it cannot follow from that that he must have had knowledge that HY was in breach of such terms and that the trust receipt facilities had been “misused”. As Mr Ng of the Bangkok Bank acknowledged, HY could have made separate arrangements with its banks, or otherwise obtained the consent or acquiescence of the banks as to how the facilities were to be used. In any event, Mr Lee’s evidence is that he was not familiar with TR loans as the 2nd Defendant did not have such a facility, and all he understood was that trust receipt was an import loan. He did not know at the time that HY had a 120-day tenor under its Trust Receipt facilities, but in any event, he did not address his mind at all as to what was the tenor of HY’s TR loan, and did not know that HY was using the Trust Receipt facilities in the “round robin” way alleged by the liquidators. Mr Lee accepted that he guessed that one of the purposes of the resale arrangements was for HY to obtain short-term financing, but Mr Lee maintained that the Defendants did not know, and he did not address his mind as to how the money was used by HY, and that the Defendants had no knowledge that the conversion of the trade finance facilities into cash was a breach of the terms of the TR loans. 128.As referred to in the earlier parts of this Judgment, there is no evidence at all as to how HY had used the money drawn from the later transactions to repay the earlier TR loans, but Mr Lee’s evidence was that he had no knowledge and did not even suspect whether HY had used the money this way. Mr Lee did not know that using trade finance to pay off earlier finance loans was not an authorized or proper use of the facility. 129.I accept Mr Lee’s evidence. In my view, he gave evidence in a direct and forthright manner. There is no independent evidence to refute or contradict Mr Lee’s claims, or to suggest that Mr Lee’s testimony should be rejected. The Defendants had no actual knowledge of HY’s misuse of its trade finance, and no actual knowledge of HY’s breach of its contracts with the banks. According to Mr Lee, he did not suspect at all that there was fraud involved in the manner in which HY had entered into and procured the transactions. On the basis of what he said he knew of the matters referred to in the preceding paragraphs, which I accept, I agree that there was no cause for the Defendants’ to make further enquiries. The Defendants had understood that the transactions with HY were no different to the other transactions they had executed with other counterparties, that there were plausible commercial purposes for HY’s resale agreements, and that HY and the Group could benefit from their drawing of funds from the financing facilities and the use of the cash drawn, for their Mainland operations. As Mr Lee sought to explain, there could be multifarious reasons for a counterparty to a commercial deal to enter into a transaction in the way it did, which reasons may be commercially sensitive, and he did not expect any counterparty to disclose to the Defendants the reason for the transaction. Materially, according to Mr Lee, HY was a known and reputable customer, and there was no basis for the Defendants to suspect any wrongdoing at the time, or to notice any “red flags”, to the effect that HY may not have the right to use the money drawn from the trade finance. Usual course of normal business? 130.Perhaps the most controversial aspect of the evidence in this case is whether or not the transactions made between the Defendants, HY and Paterson/Crown/CW were common and usual in the trading in aluminum, as the Defendants claim, or whether they were abnormal, for no transparent economic purpose and hence highly suspicious, such that the Defendants should have been alerted to the improprieties, and a reasonable person would have made further enquiries instead of turning a blind eye, as the Plaintiff claims. The parties had sought and obtained leave of the Court to adduce expert evidence on the questions they framed: what were the usual commercial standards, practices and customs in the aluminium trading industry in Hong Kong between 2001 and 2006 in respect of resale agreements, and whether the transactions between the Plaintiff and the Defendants were consistent with such standards, practices and customs. 131.I agree with Counsel for the Plaintiffs, that commonality of a practice does not afford a complete defence if the practice is illegal or improper. However, the commonality or otherwise of a practice is relevant when the Court assesses the credibility of the witnesses in this case when they assert their beliefs or knowledge as to various facts or when they sought to explain their action or inaction in this case. As Counsel submit and I accept, after the Defendants’ subjective or actual state of mind as to knowledge or belief of facts is established, the honesty or dishonesty of the Defendants is then to be determined by applying the objective standards of ordinary decent people. Even if by the Defendants’ own standards, their dealings with HY were commonplace and proper, if by ordinary standards, the Defendants’ mental state would be characterized as dishonest, and ordinary decent people would not have participated in the dealings because they considered it dishonest to do so, the Defendants would be liable for dishonest assistance. 132.According to the Defendants, the sale and re-purchase transactions were conducted not just with HY, but with a multitude of other customers including well-known names in the industry. Such “resale agreements” involved Mainland entities, Hong Kong entities and overseas entities, in different combinations, and in similar frequency as the transactions with HY. The transactions and resale arrangements with HY, on which the Plaintiff focused, were not unusual at all, according to Mr Lee. 133.The 2nd Defendant produced samples of transactions which they had entered into, with parties other than HY, Paterson/Crown/CW, to demonstrate that these were all financial-driven transactions, substantially in the same form as those entered into with HY et al, and executed in the normal course of the Defendants’ usual trading business. On behalf of the Plaintiff, Mr Manzoni pointed out that these “sample” trades relied upon by the Defendants were different to the HY transactions, because the Defendants’ transactions with HY on the first leg, and with Paterson/Crown/CW on the second leg, only involved Hong Kong companies, using Hong Kong dollars, whereas the resale arrangements or financial deals produced as “samples” of the Defendants’ common transactions involved at least one Mainland entity, and renmenbi used in one of the legs, raising the relevance of foreign exchange arbitrage, or interest arbitrage, or the use of cash, or different forms of payment as opposed to the use of Trust Receipt loans or letters of credit in the transactions with HY. Mr Manzoni for the Plaintiff highlighted that there were only a few samples of Hong Kong as opposed to Mainland transactions. 134.Mr Lee accepted in cross-examination that these finance driven resale transactions were more common on the Mainland at the relevant time in 2002 to 2006, but he maintained that they were still normal and common in Hong Kong, and that despite the differences highlighted by Mr Manzoni, the essence of the resale transactions remained the same: with the Defendant selling the commodity and then buying it back, the purpose of which was to enable the counterparty to obtain short-term cash financing or to profit from foreign exchange or interest rate arbitrage. 135.The evidence of Mr Lee is that financial driven transactions, such as and including arbitrage, repurchase agreements with banks (called “repos”) and resale agreements (as described in paragraph 39 of the 2nd Defendant’s Defence and in his witness statement), were common in the trade. According to the Defendants, their transactions with HY/Paterson/Crown/CW were resale agreements. 136.There is no defined or special meaning to the terms “financing deals” and “resale agreements” as used by the Defendants. Even having considered the expert evidence in this case, and the initial debate as to whether the transactions between HY and the Defendants were “repo transactions”, financing deals or repurchase agreements, it does not appear that the trade recognizes or adopts a particular or restrictive meaning to the term “resale agreements”, and in my judgment, it is not necessary to attribute to them any technical connotation. “Financing deals” are simply a general term for arrangements to obtain one form of financing or another. It can take different form, be subject to different terms, all depending on the needs of the parties and the nature of the transaction, and are aimed to obtain financing. 137.AL (the 2nd Defendant’s expert) pointed out, at paragraph 90 of his Provisional Report of 15 December 2017 (“Provisional Report”), that while “financing deals” is a common term which can refer to various forms and arrangements of financing deals, the common denominator of all the various kinds of financing deals is the use of commodities, mainly metals, as a means to obtain cheaper financing from banks. 138.In AL’s Provisional Report, he explained (at paragraph 44) that commodities traders in non-ferrous metals conduct financing deals with corporations which are usually industrial manufacturers. He explained that in a financing deal, non-ferrous metal, usually copper and aluminum, is sold to and bought back from corporations in order to allow the corporations to utilize trade finance facilities to supplement their working capital requirements. He explained the deals in detail from paragraphs 78 to 99 of his Provisional Report. 139.I accept the evidence of Mr Lee, that from the Defendants’ perspective, the transactions with HY, Paterson et al were financing deals in the form of resale arrangements, whereby the Defendants agreed to purchase back from Paterson/Crown/CW the aluminum the Defendants had sold to HY, and that they were similar in nature to the other resale arrangements which the Defendants had made with others of their customers, in the ordinary course of their business, where the Defendants’ counterparts bought and then sold back the aluminum. The Defendants themselves, on Mr Lee’s evidence, made no distinction between resale arrangements with a Hong Kong entity and those with a Mainland entity. Mr Lee himself believed that the transactions were entered into by HY in order to obtain and use short-term financing from its banks, and on his evidence, resale arrangements produced commercial benefits for their customers such as HY, which have operations on the Mainland. The reason was that the arrangements gave these customers an additional means to obtain short-term financing from banks and other financial institutions, to use such financing for a number of beneficial commercial purposes including use for their factories or production lines, or for interest rate and currency arbitrage. This, as drawn out by the expert evidence of AL, was a significant benefit at the material time because of the overall shortage of credit available on the Mainland, and trade finance facilities were the cheapest type of bank financing available. 140.It is the evidence of Mr Tudor, the Plaintiff’s expert, that the transactions were not common in the period between 2002 and 2006. The only objective evidence of their existence and prevalence is the article published by Goldman Sachs on 18 March 2014 (“GS Article”) and the Metal Bulletin dated 9 March 2012. The latter spoke of copper financing deals becoming “much more widespread in 2011”, after bank credit in China and the US dollar was tied to low interest rates. The GS Article referred to the “recent” sell off in copper and iron ore prices reflecting the market’s ongoing concerns regarding the impact of a potential unwind of Chinese commodity financing deals. The GS Article referred to graphs and tables showing Chinese commodity financing deals from January 2010 to January 2014, and the rise from January 2010 of such deals. 141.The evidence of Mr Tudor is that whilst he was working in Europe, he had not come across the financing deals or resale arrangements of the type executed by the Defendants and HY. Mr Tudor had heard of financing deals/resale arrangements in Mainland China at the time, but his understanding and his opinion was from his investigations in this case and based on his reading of the GS Article and the documents disclosed in these proceedings. On behalf of the Defendants, Counsel highlighted the fact that during the relevant period of the Defendants’ trades with HY, Mr Tudor was in fact working in London. Counsel submitted that Mr Tudor’s understanding of these resale arrangements in Hong Kong and on the Mainland was minimal, and that AL’s expert evidence should be preferred, when he had worked in commercial banking and trade finance in Hong Kong for 28 years and had specialized in commodities finance. 142.In his evidence, AL explained that he had acted as a commercial banker for both buyers and sellers in financing deals and resale arrangements, sometimes for the trader to which a letter of credit was issued, and sometimes for a Chinese party seeking the issue of a letter of credit with a Trust Receipt facility, the Chinese party often being a manufacturer with a factory or a production line on the Mainland. According to AL, financing deals in general, which term includes the HY style of transactions as well as other types of financing deals, were common in Hong Kong and on the Mainland. He had been engaged in such financing matters and his evidence, based on his experience as a banker working in cooperation with commodities traders, was that traders were involved in these financing deals and that such financing deals were common in the commodities market in Hong Kong and the Mainland. 143.AL explained (from paragraph 79 of his Provisional Report) that the resale agreements referred to in the 2nd Defendant’s Defence was a type of “financing deal”, pointing out:
144.AL explained that the incentive of these financing deals for commodity traders is that the deals produce profit and economic benefits, by using the stock at hand. According to AL’s testimony in Court, the banks that he had worked for treated these financing deals as normal and regular commercial trades, and that they were certainly not unusual. The resale arrangements executed by HY and the Defendants were considered by AL to be typical financing deals, which most active commodities traders in the region carried out during 2001 to 2006. AL stated in the Provisional Report that financing deals were carried out in markets like Singapore and Europe, but were far more prevalent in the Hong Kong and China region. He explained this in paragraph 93 of the Provisional Report:
145.AL referred in his report to his portfolio of managing financial deals in Hong Kong and China for large commodity traders which used copper and aluminium as the medium for their financing deals. To his knowledge, financing deals are still ongoing in Hong Kong to supplement the working capital needs of companies in China, and/or to lower the financing costs of Mainland companies by tapping into the lower funding costs in Hong Kong. 146.The GS Article dated 18 March 2014 stated that Chinese commodity financing deals had “become increasingly prevalent” owing to the combination of the relatively high level of Chinese interest rates and the existence of Chinese capital controls. It explained that financing deals use commodities and other goods as a tool to unblock the interest rate differential. It is true that the GS Article, published in 2014, exhibited charts which show the rise of Chinese commodity financing deals for the period from January 2010 to January 2014. The fact that the rise was shown from January 2010 in the GS Article is not, in my view, conclusive of the fact that there were no Chinese commodity financing deals before January 2010. 147.The Metals Bulletin dated 9 March 2012 analyzed the attractiveness of copper financing deals. It talked of China’s import of copper, whether conventional channels of credit would be relaxed, and whether copper financing deals might be less attractive by virtue of policy changes. The Bulletin estimated that more than half of all reported or unreported inventories in China may be “the stocks of imported copper which entered the country in deals designed to give the importer cheap financing”. From the Bulletin, it can be seen that copper financing deals was already very common by 2012. It stated that the phenomenon of using copper for financing “had been around for a long time”, and that “the practice became much more widespread in 2011, after bank credit tightened in China, the US dollar was tied to low interest rates, and more traders realized the gains to be made from deals using copper”. The article went on to state that according to one trader interviewed, copper financing deals “first emerged over 10 years ago and will stay forever, albeit with volumes varying”. 148.I accept that from the tenor of the Bulletin, financing deals, for copper at least, had first emerged before 2002. In his reports, AL had made no distinction between copper and aluminium in terms of how they were used, as nonferrous metal, by commodity traders to make money and for financing. It is therefore likely that financing deals for aluminium had also existed by or before 2002. 149.On the totality of the expert evidence of AL, as to his actual experience in Hong Kong in the financing of commodities trading, and the evidence of Mr Lee, I cannot and do not dismiss their evidence as unbelievable or unreliable. AL’s evidence as to the commonality of the resale agreements is convincing. Even if they were not as popular and widespread in 2001 to 2006, as they were reported to be so in 2011 and 2012, and even if there were (on Mr Lee’s evidence) more of such arrangements on the Mainland and involving Mainland companies when compared to Hong Kong, I accept the Defendants’ case that their transactions with HY were, from the Defendants’ perspective, usual transactions in the normal course of their business. 150.The feature distinguishing the Defendants’ transactions with HY/Paterson/Crown/CW from the other sample transactions relied upon by the Defendants, according to Mr Tudor, is that there was no cross-border element when no Mainland entity was involved in either of the 2 legs of the transactions. There was no question of foreign exchange or interest arbitrage for these transactions. Mr Tudor’s evidence is that seeking low‑cost financing in Hong Kong, as opposed to China, is not arbitrage but just obtaining cheap funding. In his opinion, where the money subsequently went, is a separate matter. 151.As Mr Lee pointed out in his evidence, he had believed the purpose of HY’s transactions to be for HY to obtain financing and cash from its bank facilities, and that he thought that it was possible that the money would be transferred to the Mainland, and be used there for HY’s production line or for its investments on the Mainland. If that was the way in which the funds obtained by HY were used, considerations of interest rates arbitrage, the restrictions in currency control on the Mainland and the difficulty of obtaining financing on the Mainland were still relevant and applicable as being the possible and valid reasons for HY’s financing deals and the resale agreements. As the Defendants have highlighted throughout, they had understood Paterson, Crown and CW to be associated companies of HY and had no knowledge that these were companies outside the Group, or that they were the OG Executives’ shells. 152.On the question of ascertaining the Defendant’s knowledge, of whether the HY transactions with the Defendants were common, I accept the submissions of the Defendants that it is their subjective view and perception of the transactions which matters. The evidence of Mr Lee is that from the Defendants’ perception, there was no material difference between their transactions with HY and those which they entered into with other parties including those on the Mainland, which they regarded generally as resale agreements and a type of financing deal. At the material time in 2001 to 2006, they might not have been as widespread as they were in or after 2011, and there might have been fewer of these transactions involving Hong Kong parties, but according to the Defendants, they were still common and largely similar to the other transactions which they entered into in the usual course of their normal business of commodities trading. I consider that AL’s evidence supports that of Mr Lee. The B&M Memo which is dealt with below also supports the Defendants’ case, that resale agreements had been conducted, and were common and part of their regular business by 2002. 153.The purpose of the transactions between HY and the Defendants, those involving Mainland entities, and those described in the GM Article and the Bulletin have the one common feature - of raising funds, or getting cheap US dollars credit finance. 154.How the money was used, in Hong Kong or on the Mainland, whether there was evidence of such use, and whether the facilities were used “appropriately”, which was the question to which Mr Tudor was addressing his mind (as evident from his exchanges with Counsel in cross‑examination and the answer he gave at page 52 of the transcript of Day 9 of the trial), are indeed separate questions, as Mr Tudor himself recognized, to be ascertained from the factual witnesses and ultimately determined by the Court. At this stage, it should be highlighted that there is no evidence that the Defendants had knowledge of how the funds obtained by HY under the facilities were actually used, apart from Mr Lee’s guess and belief that it was possible that the money was to be used for HY’s investments on the Mainland. Nor is there evidence that the Defendants had knowledge of the terms of HY’s facilities with its banks, or that there was any breach of such terms. “Backdating” in the Defendants’ accounts 155.With regard to the Defendants’ knowledge, it is the Plaintiff’s pleaded case (in paragraphs 71.9 and 103.9 of the SOC) that the Defendants’ executives had deliberately backdated the invoices in respect of the purchases from Paterson/Crown/CW, to create the misleading and incorrect appearance that these transactions predated the Defendants’ sales to HY. The Plaintiff’s claim therefore is that the Defendants had actual knowledge of the backdating and of the misleading appearance created by the backdating of the invoices. The Plaintiff also contended that dishonesty can be inferred from the Defendants’ backdating, and their concealment from their own accounting department, of the true nature of the Hing Yip transactions. 156.On the question of knowledge, it is indisputable that the Defendants’ executives knew that there were 2 legs of the transactions, comprising the Defendants’ sale to HY, and the resale by HY’s associated companies to the Defendants. 157.The backdating has to be considered against the background of the Defendants’ “Pairing Practice” in their accounting system. 158.Mr Lee explained in his witness statement that the Defendants’ transactions were entered in their accounts system in pairs of buy/sell. In relation to the resale agreements, if the Defendants’ purchase of aluminum from its supplier was paired with the Defendants’ sale to a customer in the position of HY, and HY or its associate’s resale was paired with the Defendants re-purchase, there would be undue fluctuation in the profits and loss accounts. Mr Lee explained that this was because there would generally be hedging involved in the Defendants’ purchase from its supplier and its ultimate sale to an end buyer after the Defendants’ transactions with HY, but no hedging was involved for the Defendants’ sale to HY and the Defendants’ repurchase from HY or its associate. Hence, Mr Lee explained, to avoid the fluctuation or distortion of the Defendants’ actual profit and loss, the Defendants decided to adopt the accounting practice of pairing the Defendants’ purchase from its supplier with the Defendants’ ultimate sale to the end customer, and pairing the Defendants’ sale to HY with the Defendants’ repurchase from HY/its associate (“Pairing Practice”). The Defendants’ sale to HY would be booked in the Defendants’ accounts as “sales of goods” in “turnover”, and the Defendants’ purchase from HY/its associate would be booked under “cost of sales”, with the price differential between the two reflected in “gross profit”. Because of the Pairing Practice, the Defendants’ sale to HY would be reflected as taking place before the Defendants’ purchase from HY/its associate. 159.On the evidence, some time in late 2002, there was an internal meeting of the 1st Defendant, attended by (inter alia) Mr Lee and Ms Vero Wong Yin Ang (“Ms Wong”). Ms Wong had joined the 1st Defendant in December 2002 as an accountant, and later took up the position of Accounting Manager with the 2nd Defendant. Ms Wong’s evidence is that shortly after joining the accounts department of the 1st Defendant, where she had worked under the Finance Manager (Wendy Ho), and had to review transaction documents, she noticed that in some cases, the contracts of the Defendants’ sales predated those for transactions in which the Defendants purchased the cargo. She thought that it was strange, because she considered that as a trading company, the purchase of cargo would normally take place before the sale. Ms Wong’s evidence is that she had raised this query with Mr Lee, who said that she should ask the traders in the sales department to explain. Thereafter, a meeting was held and Ms Wong recalled that she raised her query at the meeting, on the basis of the documents which she had reviewed. The explanation given to her by someone at the meeting was that from the point of view of the 1st Defendant, the delivery date of the cargo was the most important, to ensure that at the date scheduled for the 1st Defendant’s delivery to its purchaser, it would have obtained delivery of the cargo from its supplier. The contract date was not as important to the Defendants and the traders did not pay much attention to the contract date. 160.Ms Wong’s evidence is that after that internal meeting, she had noticed that the transaction documents submitted to the accounts department in pairs were chronological, in that all the buy contracts would take place prior to the sale contracts. This is the “backdating” on which the Plaintiff relies. According to Ms Wong, it was only after the present litigation that she became aware that the sales department of the Defendants had asked the counterparties to date the contracts before the Defendants’ sales to HY, in order to address the anomaly Ms Wong had raised, as the traders did not consider the contract dates to be of significance. 161.In Mr Lee’s witness statement, he explained that when the alleged backdating was drawn to his attention after these legal proceedings were threatened against the Defendants, he had investigated the matter and from the documents compiled, he formed the belief that after the internal meeting in 2002, the sales and marketing department of the 1st Defendant began to ask the counterparty to date the sale contracts in such a way that the date of the 1st Defendant’s sale would come after the date of the paired contract in which the 1st Defendant repurchased the cargo resold by the counterparty. According to Mr Lee, such decision might have been made by Kenie Wong of the sales department or by the traders, and it was likely that the practice was adopted by the sales and marketing department because they did not regard the contract to be of significance, and they considered that it would be a simple way to address the accounting anomaly identified by Ms Wong at the meeting. 162.Mr Lee suggested in his testimony that he had left it to the sales department and the traders to decide on the dates of the contracts and that he was not involved in any decision making on the alleged backdating. Mr Manzoni pointed out that this is inconsistent with his statement to the police in August 2007, when Mr Lee claimed that it was he who had decided to change the invoice dates according to the arrangement of “purchase first and sell afterwards”, and that it is unlikely that Mr Lee would have been prepared to take responsibility when he was interviewed by the police, unless he was confident at the time that it was indeed his decision. Mr Manzoni submits that the police statement should be accepted as the more accurate account of events. 163.Mr Lee’s explanation was that at the time when he made his statement to the police, he could not remember who had made the decision concerning the dating of the contracts and invoices, and he had assumed or speculated that since he was the most senior person at the 2002 meeting, he must have made the decision then. It was only after the Defendants had investigated and discussed the case and documents after the present litigation, that Ms Wong reminded Mr Lee that no one had in fact made any decision at the meeting as to the dating of invoices and contracts. 164.On behalf of the Plaintiff, Counsel argued that not only should Mr Lee’s evidence in the police statement be preferred, but that his decision to backdate the contracts shows that Mr Lee knew that the transactions with HY were improper, and that he and the Defendants had been dishonest in concealing the true dates and nature of the transactions. Mr Manzoni submitted on such evidence that the Defendants’ executives and staff had colluded with HY, in backdating the invoices and effectively changing the records of the financial position of both HY and the Defendants, and that this was all done with the clear knowledge that it was entirely improper to do so. Such concealment, Mr Manzoni highlighted, is a badge of fraud and clear evidence of dishonesty. 165.Inevitably, it has to be borne in mind that in a case where allegations of dishonesty, fraud and serious misconduct are made, the plaintiff must prove its claims to a standard commensurate with the seriousness of the allegations made. There should be cogent evidence to prove the facts. Inferences of fraud or serious misconduct are not to be reached by conjecture nor on a mere balance of probabilities, but must be plainly established as a matter of inference from proved facts (Ming Shu Chung & Ors v Ming Shu Sum & ors (2006) 9 HKCFAR 334). 166.On the evidence, it is clear that the “backdating” of the invoices or contracts was not unique nor tailored specifically for the Defendants’ transactions with HY. From November 2004 to March 2006, the 2nd Defendant had entered into numerous copper and aluminium transactions with third parties, in which the same dating arrangement was applied with regard to their invoices or contracts for sales and purchases. There is no evidence which can clearly show that the executives of the Defendants had devised and adopted either the Pairing Practice or the backdating for the purpose of assisting the OG Executives, whether generally or in their misappropriation, fraud or breach of duties against HY, or to conceal any nefarious dealings with HY. The fact that it was a general practice of the Defendants, applied across the board, is also clear from Ms Wong’s evidence. 167.According to Ms Wong, her work in the accounts department of the 1st Defendant was to handle and maintain records of transactions for the copper division. The records of the transactions in the aluminum division were handled by her colleague, Ms Rity Cheung, but Ms Wong was aware of how the aluminum records were handled since she worked closely with Ms Cheung, and they had to discuss the accounting treatment of transactions in the aluminum and copper divisions, to ensure consistency. When she first joined the 1st Defendant in 2002, she had no prior experience in the metal trading industry. She had therefore found it strange when she noticed, in her review of the transaction documents, that in some cases, the contracts for the 1st Defendant’s sales would predate those for transactions of the 1st Defendant’s purchase. According to Ms Wong’s evidence, she had raised her query at the internal meeting after she had met with Mr Lee, but no specific counterparties were mentioned at that meeting. She also explained that because she was responsible for copper transactions, the query she had raised would have been based on the copper transaction documents which she had read, rather than any transactions on aluminum. After the meeting, she then noticed that the transaction documents she reviewed were in chronology to show that the 1st Defendant’s buy contracts took place prior to its sale contracts. 168.Ms Wong’s evidence shows that the backdating was apparent from the documents she had reviewed, which related to the transactions in the copper division for which she was responsible. Her query was not directed to the 1st Defendant’s aluminum transactions with HY, Paterson, Crown or CW. 169.There is also support in the evidence contained in Mr Lee’s witness statement. There, Mr Lee explained that after the commencement of the litigation, when reviewing the resale transactions, he had asked WN (who was in charge of the copper division of the Defendants’ business) about the fluctuation of monthly profits of the aluminium division and the Pairing Practice to deal with that issue, and WN had told Mr Lee that the copper division had all along adopted the Pairing Practice to eliminate the potential impact on the performance of the business, due to the fluctuation in the monthly profits and losses in the management accounts. This was confirmed in WN’s witness statement. The evidence produced at trial also shows that the dating arrangement was used in the copper transactions conducted between November 2004 to March 2006. 170.It was argued on behalf of the Plaintiff that, if it was true that the Defendants’ resale agreements with HY were common, and were conducted in the usual course of the Defendants’ business, it is incredible that Mr Lee and the other sales staff had not simply explained to Ms Wong, when she raised the query in 2002, that the Pairing Practice and the dating of the transactions were the usual resale agreements. In her testimony, Ms Wong pointed out that she had indeed heard the term “resale” being used when she was working at the 1st Defendant, as being one type of the transactions which the 1st Defendant had, but she did not know how “resale” actually operated in practice. She claimed that when she first started working at the 1st Defendant, she had many questions as she was new to the metal trading industry, but that she had gradually learnt the business on the job. 171.On the evidence, it cannot be clearly seen that the true nature of the resale arrangement with HY had been concealed from Ms Wong. She had pointed out in her witness statement that there were 2 legs or pairs of the transaction with HY. She knew that there were contracts for the Defendants’ purchase from the original purchaser. She also made it clear in her testimony that the Pairing Practice and the reference to backdating did not in fact hide the transactions, because the accounts department would consider the delivery date and the title transfer date when they recorded the transactions. According to Ms Wong, there was no misrepresentation of the Defendants’ true position, as the Plaintiff suggested, because the accounts department would not just look at the dates of the invoices. The transactions were entered into the accounting system based on the dates of the invoices, as the records of the delivery dates were kept by the sales department, but the accounts department would check the transactions based on the actual dates of payments in and payments out, to verify that the cargo was actually received and then delivered. 172.Ms Wong also pointed out that the auditors of the Defendants would similarly check with the accounts department as to how the transactions were controlled, and the accounts staff would explain to the auditors that they did so by the payment dates and delivery dates. According to Ms Wong, the Defendants’ auditors would not just look at the dates of the invoices, but would review the payments and delivery dates of the transactions from all the documents, as they had done. 173.The purported relevance and significance of the allegation of backdating is that it demonstrates concealment, which in turn suggests fraud and dishonesty. On the Defendants’ case, Mr Lee (and the traders in the sales department) had deliberately concealed the true nature of the Defendants’ transactions with HY from Ms Wong and the rest of the accounts department of the Defendants. The Plaintiff also argued that the backdating incident shows that the transactions with HY were not the usual resale agreements of the Defendants, or else Mr Lee could simply have so explained when Ms Wong had asked about the dating. 174.Although paragraphs 71.9 and 103.9 of the SOC pleads that the backdating of the Defendants’ invoices was “to create the misleading and incorrect appearance” that the purchase transactions predated the Defendants’ sales to HY, Counsel for the 2nd Defendant pointed out that “concealment” from the Defendants’ own staff and their auditors was not pleaded, and objected to the Plaintiff’s reliance on such claim. As there was no express pleading of concealment from the Defendants’ own staff, there are no particulars of how the transactions were actually concealed, what matters were concealed, and from whom were such matters concealed. 175.In any event, as Mr Lee explained in his testimony, the dating of the contracts and of the invoices between the Defendants and Paterson/Crown/CW were only disclosed internally within the Defendants, and would not be disclosed to third parties. Ms Wong also confirmed in her testimony that the Defendants’ accounts staff would look at all the documents including the dates of delivery and transfer of title, the dates of payment for and receipt of the cargo when they recorded the transactions into the system, and that the process would be explained to the Defendants’ auditors when they reviewed the documents. The parties to the transactions themselves - the Defendants, HY and the associated/shell companies, all knew the true nature and order of the transactions and were not misled in any way by the backdating. 176.Moreover, Mr Lee’s statement only referred to the fluctuation in the month-end profits and losses which were reflected in the management accounts for the aluminium division, which may be caused by the pairing of transactions. There is no evidence adduced that at the end of the day, the true and overall profit and loss sustained by the Defendants from the hedged and unhedged transactions were not in fact reflected in the final accounts of the Defendants, and that the true profit and/or loss had been concealed from anyone. 177.Apart from the fact that there were gaps in Ms Wong’s knowledge as to how the Defendants’ resale agreements with HY operated, there is no other evidence that anyone else in the accounts department of the Defendants had been misled, or excluded from the knowledge of all the material facts of the transactions with HY et al. 178.Having considered the entirety of the evidence, including the respective position and the different responsibilities of Mr Lee and Ms Wong, and what Ms Wong claims she knew of the transactions at the relevant time, I consider that there is no clear and proved facts from which this Court can infer or find that the Defendants’ transactions with HY were not the Defendants’ usual resale agreements, and that Mr Lee had deliberately concealed from Ms Wong the true and improper purpose and nature of the transactions, and was dishonest. Mr Lee’s explanation as to the inconsistencies in his testimony in these proceedings and the contents of his statement to the police is also reasonable, and does not show him as an unreliable or dishonest witness. As opposed to inferring a deceitful state of mind as suggested by the Plaintiff, it was in my view reasonable and inherently credible that when Mr Lee was asked about the sequence of the sale and purchase trades, he told Ms Wong to ask the traders for a full explanation of their dealing practice. They were the ones who made the deals, and who were most familiar with the details. Conclusion on knowledge 179.From the foregoing, my conclusions on the evidence are that at the material time of the transactions with HY, the Defendants knew and believed that the transactions were common, and were in the usual course of their normal business. They knew that the transactions generated profits for the Defendants, and at a cost to HY, but that they bore the usual and inherent risks of rise in premium costs, default risks, hedging risks, and risks if they had to hold on to the cargo of significant value. They made no significant distinction between the profits derived from the resale agreements with those derived from other plain vanilla trades. The Defendants had no knowledge of the fact that Paterson, Crown and CW were not part of the OG Group, and believed (on the basis of what their employees had been told by Cindy of HY) that they were all associated companies of HY. The Defendants knew HY to be engaged in manufacturing aluminium products and that the Group had significant operations on the Mainland. They knew or could “guess” that the resale agreements were for the purpose of obtaining short-term finance for HY. They had no knowledge of how HY would make use of the funds obtained from the financing, and Mr Lee’s evidence was that he did not apply his mind to this at all. In cross-examination, Mr Lee said he believed that it was possible that HY could profit and benefit from the funds obtained being used by HY or the Group in their Mainland operations. 180.The Defendants had no knowledge of the terms on which HY had obtained their facilities from the banks, and did not know that using the funds obtained from the bank facilities to finance HY’s operations, and other than for the purchase of aluminium, was a breach of HY’s contracts with their banks. The Defendants had no knowledge and never suspected that HY was using the financing to repay debts due to the banks under earlier transactions, and they did not know that this would have been an improper use of the trade finance. I consider and accept that the Defendants had no way of knowing the exact dealings between HY and its banks, and what understanding HY might have had with the banks as to the manner of use of their banking facilities. Mr Lee did not know that HY had a TR loan tenor of 120 days, and his evidence is that he had never applied his mind to such a question. 181.There is no evidence, and I accept that the Defendants did not know any facts which suggested, nor did they suspect, that the OG Executives were misappropriating HY’s funds, or using such funds drawn from the facilities for the OG Executives’ own purposes. Mr Lee and the Defendants were entitled to expect that there would be systems of controls on or within HY which is part of a listed company, and on how HY and its executives could be using its funds. 182.For the record, and although I disallowed reliance on the unpleaded claims, there is no evidence at all that HY’s revenue and profits had been inflated as a result of any allegedly fictitious sales from HY to the shell companies, and no evidence as to how the transactions were entered into HY’s books and accounts. Nor is there any clear evidence to show that HY had used the funds received to repay its earlier TR loans, in the alleged merry‑go-round scheme. The Defendants’ knowledge of such matters need not be considered. 183.On the basis of the facts known to the Defendants, and what they regarded as the commercial purpose of the resale agreements, I accept that they had no cause to be suspicious of the reasons behind HY’s resale of the aluminium to the Defendants, or to ask questions about their clients’ dealings and relationship with their banks. As Counsel have highlighted, HY and the Group were at the material time substantial companies and one of the major players in the business, in Hong Kong and on the Mainland. There was no reason for the Defendants to suspect that HY and the Group did not then have the support of their banks, or that the facilities were being used by HY in a manner which was otherwise than with the consent of its banks. It was, according to the Defendants’ subjective belief, what others were doing in the industry, on the Mainland in particular, and in Hong Kong. B&M Memo 184.On the question of what the Defendants and in particular Mr Lee knew at the material time of the HY transactions, and whether dishonesty can be inferred from what they knew and suspected, the Plaintiff placed much emphasis on the advice obtained by the 1st Defendant from its lawyers Baker & McKenzie (“Baker”), in a memorandum dated 21 May 2002 (“B&M Memo”). The Plaintiff argued that this shows that the Defendants knew that the resale agreements with HY were unlawful, and that there was at least a risk that PRC law might be contravened, and yet the Defendants had continued to engage in the resale agreements, without even asking questions of their counterparties, thus demonstrating the Defendants’ “brazen approach to business and defiance of legal risks”, and that it was more probable that they acted dishonestly in relation to the transactions with HY. 185.The B&M Memo has to be considered properly and in its proper context. On the face of the Memo, the 1st Defendant was seeking advice on a specific transaction between the 1st Defendant and two PRC companies, as to whether the 1st Defendant’s purchase and sale of copper from and to these entities were in breach of any PRC laws and regulations. The 1st Defendant agreed to sell copper to the PRC Purchaser, for delivery ex Shanghai warehouse. Payment of the price (“Purchase Price”) was to be by letters of credit issued by a Mainland bank. The 1st Defendant also agreed to purchase the same quantity of copper from the PRC Seller at a lower price (“Selling Price”), for delivery ex Shanghai warehouse, and payment of the Selling Price was to be made by telegraphic transfer. The 1st Defendant discounted the letter of credit with a bank in Hong Kong, and received payment of the Purchase Price from the PRC Purchaser. The 1st Defendant then paid the Selling Price, but on the instructions of the PRC Seller, the Selling Price was paid to a bank account in Hong Kong in favour of a third party entity (“3rd Party”), and not the PRC Seller. The 1st Defendant received the difference between the Purchase Price and the Selling Price. 186.The B&M Memo recorded that the PRC Seller and PRC Purchaser belonged to the same corporate group. It further recorded that the 1st Defendant was informed by the PRC Seller and Purchaser that commercial banks on the Mainland would not issue letters of credit for domestic sale and purchase transactions, and in order for the PRC Purchaser to apply for a letter of credit from the domestic bank and thus enable the PRC Seller to receive short-term financing by discounting the letter of credit, the goods in question had to be sold overseas first. The 1st Defendant’s transactions with the PRC Purchaser and PRC Purchaser were said to be for the purpose of enabling the PRC Seller to obtain short-term financing through the discounting of the letter of credit by the 1st Defendant. 187.On these facts, Baker advised, firstly, that the reason put forward by the PRC Seller and Purchaser did not appear to be a valid reason for the arrangement. The lawyers referred to PRC law, under which commercial banks on the Mainland may issue letters of credit for sale and purchase between domestic enterprises, and further, that domestic letters of credit may be discounted to obtain short-term financing upon various conditions. The lawyers advised that domestic letters of credit may be issued and discounted under PRC law, but noted their understanding that the issuance of domestic letters of credit had not been a common practice on the Mainland. 188.Baker further advised that the 1st Defendant’s sale and purchase did not breach any PRC law and regulations. Being a contracting party, the 1st Defendant was under no statutory obligation to ascertain the reasons for the sale and the subsequent purchase of the goods by members of the same group. 189.The B&M Memo referred to the foreign exchange control legislation on the Mainland and pointed out that the purpose of the sale and purchase of the copper through the 1st Defendant appeared to be for the conversion of the Selling Price into foreign exchange, which would otherwise be in renminbi if the goods had been sold directly by the PRC Seller to the PRC Purchaser, for deposit of the foreign exchange offshore. If the foreign exchange was maintained offshore, the PRC Seller and probably the PRC Purchaser would be in violation of the Foreign Exchange Regulations and Settlement Regulations on the Mainland, and the PRC Seller might be in violation of PRC laws governing the reporting and payment of PRC tax. Since the repatriation of foreign exchange received by the PRC Seller into the Mainland was an obligation of the Seller, Baker advised that by making payment to a bank account in Hong Kong, the 1st Defendant would not be directly violating the PRC Regulations, but might be considered to be aiding and abetting the violation of the law by the PRC Seller. Baker pointed out that if the 1st Defendant had representative offices on the Mainland, it would be at risk of having its Mainland establishment being subjected to sanctions by the relevant Mainland authorities. However, Baker also pointed out that they were not aware of any incident where a foreign company had been sanctioned by the Mainland authorities for remitting foreign exchange payments due to a Mainland entity to an offshore account. Baker’s conclusion was that although there was a technical risk, the practical risk of the 1st Defendant being sanctioned should be fairly remote. 190.It was pointed out in the B&M Memo that in terms of Hong Kong law, the 1st Defendant’s transactions as described did not constitute any breach of Hong Kong regulations. 191.It is clear from the B&M Memo that the transaction addressed was totally different to the Defendants’ transactions with HY, Paterson, Crown and CW - which were Hong Kong based for both legs of the transaction, and did not involve any payment to a third party of the contracts. The breach of PRC law and foreign exchange control by the counterparty of the transactions, and referred to in the B&M Memo, did not apply at all to the Defendants’ transactions with HY et al, and no question of possible aiding and abetting arose. The B&M Memo made it clear that there was no contravention of any Hong Kong law. It also made clear that the 1st Defendant’s purchase and sale of goods from the PRC Purchaser and PRC Seller did not by themselves breach any provision of PRC law. 192.The advice contained in the B&M Memo, of there being a possible technical breach of PRC law by the 1st Defendant, does not apply to the Defendants’ transactions with HY at all. 193.As for the reason stated in the B&M Memo to have been given by the PRC parties to the 1st Defendant, to explain the payment in Hong Kong to the 3rd Party, Baker pointed out that it did not appear to be a valid reason because domestic letters of credit were possible under PRC law. However, as Counsel for the Defendants pointed out, the B&M Memo itself contained an inherent inconsistency, as Baker themselves acknowledged that from their experience, the issuance of domestic letters of credit on the Mainland was not at the time of their advice a common practice at all. Hence, the suggestion given by the Mainland entity, for the use of a foreign letter of credit, could not be regarded as a totally invalid reason. 194.Mr Lee’s evidence on the B&M Memo is that from his own experience, he had never come across a domestic letter of credit issued by a Mainland bank in his 30 years’ of experience. The legal possibility of such domestic letters of credit being issued and the practical reality appeared to be different, and this lends credibility to Mr Lee’s evidence that he had not agreed with the conclusion given by Baker, that the reason given by the PRC Purchaser and PRC Seller for the payment to the 3rd party in Hong Kong was not a valid one. 195.So far as the issue of Mr Lee’s knowledge in 2002 is concerned, there is nothing in the B&M Memo to demonstrate that he had knowledge that the Defendant’s resale agreements with HY et al were illegal, either under PRC or Hong Kong law. The validity or otherwise of the purported reason, that domestic letters of credit could not be issued on the Mainland, does not apply and is not relevant to either leg of the Defendants’ transactions with HY. 196.Whether dishonesty can be inferred from the Defendants’ continuation of their transactions with HY after the B&M Memo will be considered below, in conjunction with the other matters found to have been known or suspected by the Defendants. Dishonesty 197.Whereas actual knowledge and suspicion or belief are judged subjectively, in this case from the perspective of traders in a business operated for profit, and the counterparty is expected to look after its own interests, whether liability for dishonest assistance can be established is determined by the objective standards of honest and ordinary bystanders. 198.In the Court’s determination of whether the Defendants were honest or dishonest according to the objective standards of ordinary decent people (Group Seven Ltd v Nasir [2020] Ch 129), even gross negligence on the part of the Defendants is not sufficient to establish dishonesty for the claim of dishonest assistance (Ivey v Genting Casinos (UK) Ltd [2018] AC 391, at para 62). A dishonest state of mind may involve knowledge that the transaction is one in which one cannot honestly participate, or it may involve suspicion that certain facts may exist, combined with a conscious decision not to make inquiries which might result in actual knowledge of those facts (Barlow Clowes International v Eurotrust International Ltd [2006] 1 WLR 1476). The latter constitutes blind-eye knowledge, but that suspicion, subjectively determined by reference to the person’s belief, must be firmly grounded and targeted on specific facts, and there must be a deliberate decision to avoid obtaining confirmation of facts the existence of which the person has good reason to believe. A vague feeling of unease, holding general concerns, or having unanswered questions about the transaction are not sufficient to give rise to blind-eye knowledge (Bilta (UK) Ltd v Natwest Markets plc [2020] EWHC 546). 199.Based on my findings on what the Defendants knew and suspected, they regarded the transactions as having a commercial purpose and benefits for HY, and they had no knowledge or suspicion of the OG Executives’ fraud, misappropriation or misuse of the facilities from the banks. Would an honest person in the Defendants’ position, knowing the facts which they did, have either asked questions or made further enquiries into the resale agreements with HY, or have concluded that the transactions were improper and should not have been entered into? 200.The ordinary decent person would have considered that as HY was part of the listed OGH, with significant operations on the Mainland, use of the facilities for the Group’s operations on the Mainland would be expected, and normal, and that such use should be known to and accepted by HY’s banks. The ordinary decent person would have understood that the listed company would have independent non-executive directors overseeing HY’s activities and revenue and the Group’s use of its revenue, and that there would also be independent auditors scrutinizing the accounts of the listed company and its subsidiaries including HY. There is no evidence that anyone had reason to doubt the integrity of the management of HY and of the Group at the time, and I am not satisfied that the ordinary decent person in the position of the Defendants would have reason to question the propriety of the transactions. Knowing or believing that the resale agreement was for the conversion of the trade credit facilities into cash, the ordinary decent person would have thought that even if this might be a breach of HY’s contracts with its banks, it might not be misappropriation or improper use, if the use was considered by the directors to be in the best commercial interests of HY. As a counterparty to the trade, the Defendants did not have any duty to HY, and the honest ordinary person would understand and agree that the Defendant was entitled to assume that HY was entering into the transactions in good faith and for a commercial purpose. 201.There was no recognized duty of due diligence in respect of the sale and purchase transactions between the Defendants and HY. When the 1st Defendant first dealt with HY, it was aware of the market status of HY as a significant market player and a subsidiary of a Hong Kong listed company. It had conducted background checks, including meeting HY’s personnel in charge, visiting HY’s aluminium extrusion plant, and making cross checks with other market players on the credibility of HY to understand its business profile. The 1st Defendant commenced trading with HY in about 2001, and as the 1st Defendant had encountered no problems in its dealings with HY, when the 2nd Defendant inherited the business in about 2004, it continuing the trading relationship with HY, which was still a significant player in the market at the time. 202.According to Mr Lee, it was sometime in 2002/2003 that the 1st Defendant was approached by HY’s staff to enter into a contract for the 1st Defendant to buy back the aluminium sold to HY. That was a one-off case when the 1st Defendant was told that HY had encountered some problem with the import permit, and it needed to sell the aluminum. Mr Lee approved the deal, if there was no problem with the title of the goods being repurchased. In 2004, Mr Lee was informed that HY wanted to use Paterson to sell back the goods to the 2nd Defendant. Mr Lee considered that since the 2nd Defendant would be making a profit under the arrangement, and he had been advised that there was no contravention of the law, he approved the buyback, on the condition that the procedures should be followed on each occasion, to ensure that the title of the goods was in order, and the actual documents of title would be checked. He agreed to the use of companies other than HY, as he believed and was told that all the companies used were in the same Group. 203.The Defendants might have been negligent, in simply relying on what Cindy had told the Defendants and failing to conduct proper company searches against the companies used in the resale agreements, which would have revealed that the registered directors or its shareholders were not companies known to be within the Group, and this might have alerted the Defendants to make more inquiries with HY as to the status of Paterson, Crown and CW, and their exact relationship with HY. However, as the authorities held, even gross negligence is not sufficient to establish dishonesty (Ivey, Group Seven and Royal Brunei Airlines). 204.As I have concluded, the advice obtained in the B&M Memo was that the Defendants’ sale and repurchase did not contravene any Hong Kong law. That does not in my view constitute any matter which should have raised queries in Mr Lee’s mind as to whether the Defendants’ transactions with HY were improper. 205.The Plaintiff has referred to the proceedings on the Mainland which led to a judgment against WN, whereby he was found guilty of the offence of financial note fraud/financial bills by deceit, under PRC law, on the basis of there being no genuine underlying trades. The transactions which were examined by the Mainland Court and which constituted evidence leading to WN’s conviction were also resale agreements made by the 2nd Defendant with Mainland entities. On behalf of the Plaintiff, it was contended that this is all part of the evidence of the Defendants’ brazen approach to business and their propensity to engage in transactions which may violate the law, from which it can be inferred that the Defendants were dishonest. 206.I accept the submissions made for the Defendants on the lack of relevance of the Mainland judgment to the question of the Defendants’ knowledge and dishonesty. Leaving aside the arguments made as to whether the findings made by the Mainland court in relation to the transactions which were the subject matter of the Mainland proceedings, and the involvement of the 2nd Defendant/WN thereunder, are relevant to this Court’s determination of the issues raised in these proceedings, the investigations made by the Mainland authorities into the relevant transactions took place only in around April 2006. The transaction which was the subject matter of the charge against WN took place in 2005. WN was only detained by the Mainland authorities in April 2006, and was arrested in May 2006, and the earliest time when WN and Mr Lee learnt of the investigations into the 2nd Defendant’s transactions was April 2006. By then, the 2nd Defendant had already terminated its dealings with HY, for reasons unconnected with the Mainland investigations which did not involve HY at all. The last of the transactions between the 2nd Defendant and HY was in March 2006. I therefore accept the submissions made on behalf of the 2nd Defendant, that at the time of the Defendants’ dealings with HY between November 2001 and March 2006, the Mainland investigations into transactions made with parties other than HY, and the findings made by the Mainland Court on those transactions, would not have entered into the minds of any of the Defendants’ executives, to have been relevant to their state of mind concerning their dealings with HY, and their honesty. 207.My conclusion is that the evidence does not establish that the Defendants were dishonest, in effecting their trades and entering to the resale agreements with HY. I am not satisfied on a balance of probabilities that they knew of facts which an honest and decent person would conclude that participation in the resale agreements would be dishonest. Nor am I satisfied that Mr Lee or any other of the Defendants’ executives had held any firmly grounded suspicions that the use of the credit facilities would be improper. Dishonest receipt 208.For knowing receipt, the Plaintiff has to establish that property subject to a trust had been transferred to the Defendants, the transfer was a breach of trust, the property or its proceeds had been received by the Defendants for their own benefit, and that the property had been received by the defendants with the requisite knowledge. 209.In the context of knowledge for knowing receipt, the legal test of liability is whether the recipient’s state of knowledge is such that it would be unconscionable for it to retain the benefit of the receipt (BCCI v Akindele [2001] Ch 437). The actions of the defendant and its knowledge are to be examined in the context of the commercial relationship of the parties as a whole (Criterion Properties Plc v Stratford UK Properties LLC [2003] 1 WL 2108). When the test is applied in a commercial context, it must be shown that the defendant had actual knowledge of the facts which render it unconscionable for the defendant to retain the benefit of the receipt, and constructive knowledge is insufficient (Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (2010) 13 HKCFAR 479). I accept this to be the principle by which this Court is bound. 210.Apart from knowledge and unconscionability, the further issues in dispute between the Plaintiff and the Defendants are, first, whether the Defendants had received any property held on trust when the money had been paid to the Defendants by the banks under the letters of credit issued on HY’s application. It was argued for the 2nd Defendant that the payments made by a bank under letters of credit should not be treated as payment of funds beneficially owned by HY, but as property of the bank (Re Group Josi [1995] 1 WL R1017), and there was no property held on trust for HY. Further, it was argued that where there is a valid contract between the recipient and the principal, entered into with authority, there is no claim for knowing receipt (Criterion Properties plc v Stratford UK Properties LLC [2004] 1 WLR 1846). The second issue will be considered under the cause of action of want of authority. 211.For the Plaintiff, Counsel pointed out that what is required to be established for a claim of knowing receipt is that the Defendants received property which is traceable as representing the assets of HY (El Ajou v Dollar Land Holdings [1994] BCC 143), and that in this case, the monies received by the Defendants are the traceable proceeds of a diminution of the assets of HY, by virtue of HY incurring a liability to repay its banks for the payments made to the Defendants under the letters of credit. 212.Mr Manzoni submitted that the Court should look at the substance, rather than the form, of the transactions between the Defendants, HY and its associates (Paterson, Crown and CW), and the banks involved in effecting payment of the price for the goods sold by the Defendants to HY under the letters of credit (Federal Republic of Brazil v Durant [2016] AC 297; Agricultural Credit Corp of Saskatchewan v Pettyjohn (1991) 79 DLR (4th) 22). In Durant, which was a case on tracing, the Privy Council held that the court should not allow a camouflage of interconnected transactions to obscure its vision of their true overall purpose and effect, particularly given the development of increasingly sophisticated and elaborate methods of money laundering, often involving a web of credits and debits between intermediaries. If the court is satisfied that the various steps had been part of a coordinated scheme, it should not matter that, either as a deliberate part of the choreography or possibly because of the incidents of the banking system, a debit appeared in the bank account of an intermediary before a reciprocal credit entry. A plaintiff is only required to establish a coordination between the depletion of the trust fund and the acquisition of the assets which was the subject of the tracing claim, by looking at the whole transaction, so as to warrant the court attributing the value of the interest acquired to the misuse of the trust fund. 213.On behalf of the Plaintiff, it was argued that looking at the transactions between HY and the Defendants as a whole, the bank’s debiting of HY’s TR loan account on its due date and HY’s repayment of the amount debited from HY’s account were traceable to the Defendants’ receipt of the purchase price of the goods from the bank. Counsel pointed out that the bank issuing the letter of credit only undertook payment to the Defendants or their banks, after receiving settlement instructions from HY as to how it would reimburse the bank for its payment to the Defendants. 214.In the case of Relfo Ltd (in liquidation) v Varsani [2015] 1 BCLC 14 which is relied upon by the Plaintiff, the Court observed that when funds are transmitted through the banking system, “what matters is that there has been an exchange of the value of the claimant’s property into the next product for which it is substituted and so on down the chain of substitutions”. Arden LJ accepted that monies held on trust can be traced into other assets even if those other assets are passed on before the trust monies are paid to the person transferring them, provided that the person acted on the basis that he would receive reimbursement for the monies transferred out of the trust funds, and that to trace money into substitutes, it is not necessary that the payments should occur in any particular order, let alone chronological order. 215.On behalf of the Defendants, Mr Yu highlighted that the essential requirement of a claim of knowing receipt is that the defendant must be dealing with trust property. In this case, the money which the Defendants received were received from the banks on a letter of credit, and it is trite, that the letter of credit constituted an independent and autonomous contract between the bank issuing the letter of credit on the one hand, and the Defendant as the beneficiary on the other. Although the letter of credit was opened by the issuing bank on the instructions of HY as the buyer, the undertaking to pay upon presentation of the specified documents was given by the issuing bank as principal, and HY was a stranger to the contract (Goode on Commercial Law (5th ed) para 35.58). The letter of credit is autonomous in the sense that the bank is not concerned in any way with the merits or demerits of the underlying transaction (Gutteridge & Megraph’s Law of Bankers’ Commercial Credits (8th ed) para 1.25). Payments made by a bank under a letter of credit are not treated as payment of funds beneficially owned by the buyer applying for the issue of the letter of credit, but as property of the bank (Re Group Josi [1995] 1 WLR 1017). Counsel also pointed out that the commission and interests paid by HY to its banks are likewise not trust property or assets of HY, but were paid in exchange for the services of the banks (Chambers, ‘Tracing and Unjust Enrichment’ in Neyers, McInnes and Pitel, Understanding Unjust Enrichment (Hart, 2004), at p 298). 216.Mr Yu submitted that when funds are used to discharge a debt, there is no right to trace into assets which the borrowed money was used to acquire. The funds are effectively dissipated when they are used to discharge the debt, meaning that there are no assets into which the claimant can trace (CY Foundation Group v Cheng Chee Tock [2012] 1 HKLRD 532, Re Goldcorp Exchange Ltd [1995] 1 AC 74; Re BA Peters plc [2008] EWCA Civ 1604). 217.The authorities to which Mr Manzoni referred in answer do not deal with the question of the special features of letters of credit, and their being autonomous and independent contracts. The analysis and findings of fact made in Relfo, as to whether various payments could be traced to funds dissipated from the company, did not deal with the requirements of knowing receipt and whether the money was impressed with trust, and more materially, the case did not concern any imposition of a letter of credit being the source of money received by the defendant. Nor did the Court in Durant (which accepted backwards tracing of money to an earlier payment) have to deal with this question. I agree with Mr Yu, that the issue of whether the money paid by a bank under its autonomous obligations to the Defendants can be impressed with trust is not a question of form, but of substance. 218.In Group Josi, the Court held that where monies were paid by banks pursuant to obligations undertaken under letters of credit, there is no basis on which a proprietary interest in the monies can be asserted for a remedial constructive trust. Group Josi was a case in which the plaintiffs applied for an interlocutory injunction to restrain the defendants from drawing on letters of credit, on the basis of their claims that their reinsurance contracts had been avoided for fraudulent misrepresentation, and the plaintiffs had a claim to a proprietary interest in the proceeds of the letters of credit. At p 1036 of the reported judgment, the Court observed:
219.On the authorities cited, I find that the money paid under the letters of credit to the Defendants were not subject to a trust in favour of HY. 220.I highlight the fact that in Closing, Counsel for the Plaintiff relied on the fact that the Plaintiff’s cause of action of knowing receipt is that the fiduciary duties owed to HY were breached by HY drawing down on the trade finance facilities in the transactions with the Defendants, and repaying the loans drawn down sometime later, the causal connection being that it was the breach of fiduciary duty for Michael, Christie and Stanley which caused HY to access its trade finance facilities for improper purposes and to incur liability to its banks by so doing. In this regard, I have found that I am not satisfied that the money received by the Defendants was paid in breach of the alleged misuse of the trade finance facilities. 221.If I am wrong on the question of whether the Defendants had received money paid in breach of fiduciary duties and impressed with a trust, and unconscionability has to be considered, Counsel for the Plaintiff submitted that this is a lower standard than dishonesty. Even bearing that in mind, on the basis of the matters which I have considered and found, as to what the Defendants knew, there is no factor which would in my judgment render it unconscionable for the Defendants to retain the benefit of what they had received under the transactions with HY. As elaborated below under want of authority, the Defendants were not dishonest or irrational when they relied on Cindy’s apparent authority when they entered into the transactions with HY. The lack of unconscionability is also supported on that basis (Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479). Want of authority 222.The Plaintiff seeks to set aside the first leg of the transactions under which HY purchased aluminium from the Defendants, for want of authority. For this cause of action, the Plaintiff accepts that it must be demonstrated that the agent who caused HY to be bound by the first leg of its transactions with the Defendants did not have authority to do so, and further, that it is not open to the Defendants to rely on any apparent authority of the person who caused HY to be bound. 223.The Plaintiff’s case is that since HY’s resale transactions were not in the interests of HY and the use of HY’s bank facilities were for an improper purpose, the OG Executives were in breach of their fiduciary duties when they caused or permitted HY to enter into these transactions. The Plaintiff argued that whether the persons responsible for authorizing or causing the transactions to be entered into were the OG Executives and in particular Michael, Christie and Stanley, or were other junior employees such as Cindy or Brian Lam, it did not matter as the transactions were clearly improper and could not have been properly authorized by HY. 224.The Plaintiff claims that the OG Executives were centrally involved in the transactions, and that it is inherently improbable that a low‑level employee such as Cindy (who was the Assistant Finance Manager employed in the accounts department of HY) or Brian Lam would have been acting on their own accord, in causing HY to enter into its transactions with the Defendants. According to Glen Ho, the documents which he had reviewed showed that the letters of credit applied for by HY were signed by Michael and Christie. In any event, it was contended on behalf of the Plaintiff that Michael, Christie, Stanley, Cindy and Brian Lam were all acting outside the scope of their authority when they caused HY to enter into the transactions against the interests of HY and for improper purposes. The Plaintiff further contended that the Defendants were dishonest or irrational in believing that the agents of HY were acting with authority when the transactions were made. 225.I have found that it has not been established that the transactions were not in the interests and not for the proper business purposes of HY. Even if I should be wrong and the transactions were entered into in breach of the fiduciary duties of the OG Executives, I am not satisfied that the Defendants were dishonest, or irrational, to have relied on Cindy’s apparent authority. Dishonest or irrational reliance on the alleged agent’s authority is the test for liability, as explained in the judgment of Lord Neuberger NPJ in Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479 (at paras 134-137 of the judgment):
226.As highlighted for the Defendants, HY had permitted Cindy to represent HY in carrying out 110 transactions with the 2nd Defendant over a period of just over one year. Prior to that, HY had also permitted Cindy to carry out a large number of transactions with the 1st Defendant between 2002 and 2005. HY had performed each and every one of these transactions. Letters of credit had been opened for these transactions, and payments had been duly made to the Defendants, without any default over the years. No claim had ever been raised, that any of the transactions entered into by Cindy for and on behalf of HY were unauthorized. However junior Cindy might have been in the hierarchy within HY, she had been permitted and held out by HY to represent HY in the negotiation and conclusion of the transactions with the Defendants over the years from 2002 to 2006, with no indication, suggestion or complaint that her authority was in any way qualified. 227.In my judgment, far from being irrational, in all the circumstances of this case, it was reasonable for the Defendants to have relied on Cindy’s apparent authority. 228.The conclusion that the transactions between HY and the Defendants were valid and authorized is a further ground to reject the Plaintiff’s claim for knowing receipt, as explained by Lord Nicholls in Criterion Properties plc v Stratford UK Properties LLC [2004] 1 WLR 1846, at para 4 of his judgment:
229.Whether or not the Criterion principle so-called can be said to represent an additional requirement for knowing receipt to be established, its application produces the same result in this case for the causes of action of knowing receipt and want of authority. Limitation 230.I have found that the Defendants are not liable for either dishonest assistance, knowing receipt or want of authority. As such, it is not necessary to address the question of whether the claims made against them are time barred, and I will only deal with this issue very briefly. 231.If the issue had arisen, I would have found that the claims against the 2nd Defendant under its transactions with HY, apart from transaction B105, accrued more than 6 years before the issue of the Writ in February 2012 and are time barred, since the Plaintiff cannot establish that section 26 (1) of LO applies. 232.For section 26 (1) to apply, the Plaintiff has to establish either that the action is based upon the fraud of the Defendants, or any fact relevant to the Plaintiff’s right of action had been deliberately concealed from the Plaintiff by the Defendants, in which case limitation shall not begin to run until the Plaintiff had discovered the fraud or concealment, or could with reasonable diligence have discovered it. 233.Whilst the Defendants accept that dishonest assistance is based upon fraud (to fall within section 26 (1) (a)), they do not accept fraud to be a necessary allegation to constitute knowing receipt and want of authority. Knowing receipt requires unconscionability on the basis of the defendant’s knowledge (BCCI v Akindele; Williams v Central Bank of Nigeria [2014] AC 1189) but as Counsel submitted in the context of the Plaintiff’s claim in knowing receipt, unconscionability requires a lower standard than dishonesty (Akai). The Plaintiff relies on Williams v Central Bank of Nigeria [2014] AC 1189 to contend that knowing receipt is accepted as activating section 26 (1) (a) of LO. In that case, Lord Neuberger observed at para 119 of his judgment:
234.The above only states that in some cases, the six-year limitation may be postponed either in cases which are based on fraud, or where the defendant has deliberately concealed relevant facts. It is not, on its face, a broad and general statement that all cases of knowing receipt are based on fraud as a necessary element of the cause of action. 235.The Defendants rely on Brent Borough Council v Davies [2018] EWHC 2214 (Ch), which contains a more thorough analysis. There, the Court explained its basis for finding that knowing receipt is not based on fraud, and I agree with that finding:
236.The necessary elements required for setting aside the transactions on the basis of want of authority are lack of actual and apparent authority, and do not include fraud. 237.Further, I am not satisfied that any fact relevant to the Plaintiff’s right of action has been deliberately concealed from the Plaintiff by the Defendants. The relevant facts were that HY had entered into resale agreements with the Defendants, which on the Plaintiff’s case were either sham and for no genuine commercial purpose, or were obtained by false pretenses and were not for HY’s Legitimate/Genuine Trading Use, and that the Defendants received funds from HY’s banks under the transactions. There is no evidence that the Defendants had concealed from HY either their transactions with HY, or the fact that they had received funds under the letters of credit issued by the banks for the transactions. The alleged backdating or the order of the dates of the contracts and invoices were matters agreed with and hence known to HY. In respect of the claim of misappropriation, there is no evidence and it is not suggested that the Defendants had knowledge of the misappropriation of HY’s funds and had participated in the misappropriation but had somehow concealed it. Nor is there evidence that the Defendants had knowledge that there was misuse of HY’s trade finance facilities, and took steps to conceal it. The only claim pursued was that the Defendants had suspected that the OG Executives were misappropriating funds, but had failed to make further inquiries. There was no “deliberate commission of a breach of duty” for section 26 (3) of LO to apply. 238.If it was necessary to make a finding, I consider that the Plaintiff would and could, with reasonable diligence, have discovered any fraud or concealment during or shortly after the time of the transactions in November 2001 to March 2006. The Plaintiff argued that the knowledge of the miscreant OG Executives and of Cindy should not be attributable to HY. The Plaintiff claimed that Cindy was only an accounts clerk, not a decision maker with respect to the transactions, as she had only handled the paperwork on the instructions from the OG Executives. However, other directors and senior employees of HY, against whom no fraud has been alleged, could with reasonable diligence have discovered the transactions to be either sham or having no commercial purpose as alleged. According to the Defendants, and as pleaded in paragraph 4 of the Rejoinder, Cindy had worked under and was supervised by other persons in the accounts department, which persons included Daniel Tam (the Financial Controller of OGH), Olivia Chan (the company secretary of OGH), Brian Lam and Zhu, who were all aware of the dealings between HY and the Defendants. Apart from Zhu, the other employees were not directors and did not owe any fiduciary duties to HY, and no claims have been made against them for breach of duties, or in respect of their assistance or participation in the allegedly fraudulent scheme. 239.If the transactions with the Defendants were circular, or were making repeated and continuous losses, as is alleged, and if HY’s funds had been diverted to entities outside the Group, without any supporting documents evidencing bona fide and genuine transactions, as is alleged, then they must have been readily apparent to the accountants of HY, by the exercise of reasonable diligence. In any event, the transactions between the Defendants and HY, and the payments made to the Defendants were all patent from the books and accounts of HY, were known to the accountants and auditors of HY, and could with reasonable diligence have been discovered by any “innocent” director or person in the management of HY, throughout the time the transactions were made. 240.In relation to the 1st Defendant, the Plaintiff relies on a Tolling Agreement made between HY and the 1st Defendant on 20 February 2002, whereby the 1st Defendant agreed not to rely upon any limitation defence accruing after 20 February 2012, provided that HY issued proceedings within 10 working days of 9 May 2014. The Plaintiff claims therefore that under and by virtue of the Tolling Agreement, the Writ against the 1st Defendant was issued in time, on 19 May 2014, and no limitation defence can be relied upon by the 1st Defendant. Application to amend Rejoinder 241.On 4 August 2020 (Day 13of the trial), in the course of making Closing submissions, the 2nd Defendant applied for leave to amend its Rejoinder, to plead (out of an abundance of caution, as Leading Counsel explained) to the claim in the Reply, that HY is entitled to an extended limitation period, in circumstances where the earliest time that HY could with reasonable diligence have discovered the 2nd Defendant’s fraud or concealment was up on the appointment of the provisional liquidators on 25 July 2006. The 2nd Defendant claims that the amendment arose as a result of the evidence revealed in the cross-examination of Glen Ho, that proceedings had been issued by the liquidators on behalf of HY against the former auditors of HY, and that the claim had since been settled. By the proposed amendment, the 2nd Defendant sought to plead in its Rejoinder that:
242.On behalf of the 2nd Defendant, Mr Yu argued that the original paragraph 4 of the Rejoinder already denies that HY was entitled to rely on any extension of the limitation period, and further pleads (inter alia) that Cindy had been supervised by persons in the accounts department of HY and/or OGH (including Daniel Tam and Olivia Chan), that such individuals were aware of the dealings between HY, Paterson and Crown with the 2nd Defendant, that their knowledge should be imputed to HY, and that if there was any fraud or deliberate concealment, HY had knowledge and/or could with reasonable diligence have discovered the same, no later than 6 years before the commencement of the action. Mr Yu argued that the burden is on the Plaintiff to prove its entitlement to rely on section 26 of LO. 243.Mr Yu pointed out that the Plaintiff should have disclosed in these proceedings that the Plaintiff had started, and settled, an action against the former auditors of HY, and that the claims against the auditors were that if they had been exercised diligence and reasonable care, the allegedly unauthorized transactions between HY and the Defendants, and the misuse and misappropriation of HY’s assets, would have been discovered and HY’s losses avoided. These matters were only revealed in the cross-examination of Glen Ho, which necessitated the late application for amendment. 244.Mr Manzoni opposed the belated amendment to the Rejoinder, pointing out that the amendments were unduly wide, and not confined to the involvement of MRM and the proceedings against MRM, which were the matters revealed in Glen Ho’s cross-examination. If the 2nd Defendant should be allowed at this late stage to make such claim, that HY should have engaged professional services who with reasonable diligence would have uncovered any fraud against HY, HY would be prejudiced and deprived of the opportunity to adduce expert evidence, as to what HY and/or its auditors could or would have been able to do or discover. Mr Manzoni further contended that the claims made with regard to MRM were misconceived, as auditors are not agents of the company and there is no basis to suggest that any knowledge of an auditor is attributable to the company. It was further argued that if the 2nd Defendant had intended to claim that the fraud and concealment against HY could, with reasonable diligence, have been discovered by the auditors of HY/OGH, they could and should have made such a plea in the Rejoinder even if they had not known that the liquidators of HY had commenced proceedings against the auditors and then settled such proceedings. The fact that they had not made such a plea, and only tried to do so in Closing, meant that the Plaintiff was deprived of the opportunity to adduce evidence relevant to the issues of the former auditors’ knowledge and lack of reasonable diligence, and the application for leave to amend should not be allowed. 245.There are merits in the objections made by Mr Manzoni on the basis of the unjustifiable delay in the 2nd Defendant’s application for amendment. Even on the 2nd Defendant’s case, the amendments to the Rejoinder were not strictly necessary as it was argued that the original Rejoinder is sufficient to raise the question of whether the alleged fraud or concealment could have been discovered with reasonable diligence. 246.In all the circumstances, I will not make any order on the 2nd Defendant’s summons. Disposition 247.The Plaintiff’s action and claims against the Defendants are dismissed, with costs to be paid to the Defendants, in the case of the 2nd Defendant with certificate for 2 counsel. The costs of the unsuccessful summonses for leave to amend are to be paid by the respective applicant.
Mr Charles Manzoni SC and Mr Jason Karas (Solicitor Advocate), instructed by Lipman Karas, for the plaintiff Mr Benjamin Yu SC, Ms Eva Sit SC and Mr Joshua Chan, instructed by Dentons Hong Kong LLP, for the 2nd defendant | |||||||||||||||||||||
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