Securities and Futures Commission v. Lau Chi Yuen Joseph and Another
Read the full judgment text of HCMP 239/2019 on BabelCite. This High Court CFI judgment was delivered on 22 May 2023.
1. By a Petition (“ Petition ”) dated 21 February 2019 brought by the Securities and Futures Commission (the “ SFC ”) pursuant to s.214 of the Securities and Futures Ordinance (Cap.517) (“ SFO ”) for disqualification orders and costs orders against Joseph Lau and Eric Chung on the grounds detailed in section III below.
Cited by 1 case · Cites 9 cases
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HCMP 239/2019 [2023] HKCFI 1346 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 239 of 2019 _________________
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_________________ J U D G M E N T _________________ I. THE PETITION 1.By a Petition (“Petition”) dated 21 February 2019 brought by the Securities and Futures Commission (the “SFC”) pursuant to s.214 of the Securities and Futures Ordinance (Cap.517) (“SFO”) for disqualification orders and costs orders against Joseph Lau and Eric Chung on the grounds detailed in section III below. 2.The Respondents to the Petition are Mr. Lau Chi Yuen Joseph (“Joseph Lau”) and Mr. Chung Man Wai (“Eric Chung”). They are both former executive directors of Luxey International (Holdings) Limited (“Luxey”), a company which has been listed on the GEM Board of the Stock Exchange of Hong Kong (“SEHK”) since 17 July 2000. There is no dispute that Luxey remains so listed as at the time of the Petition.[1] 3.The SFC’s Petition is supported by the Affirmation of Li Yuen Pik, which sets out the result of investigations forming the basis of the complaint set out in the Petition, including records of interviews of a number of individuals involved. The SFC also relies on the 2nd Affirmation of Li Yuen Pik dated 2 October 2019 in reply to the Respondents’ first round of affirmations. 4.The Respondents filed the following affirmations in opposition to the Petition
II. FACTUAL BACKGROUND 5.The parties filed an Agreed Chronology of Events, an Agreed List of Issues and a Statement of Agreed Facts pursuant to directions of the court. The following facts are extracted from the Statement of Agreed Facts filed before the substantive hearing of the Petition, and the Recap of Undisputed Factual Background filed by the Commission as Annex 1 of their Closing Submissions. They represent the undisputed factual background of the Petition. Luxey 6.Luxey was incorporated in the Cayman Islands as a limited liability company on 1 September 1999.[2] It was registered in Hong Kong under Part XI of the now repealed Companies Ordinance (Cap 32) as an overseas company on 19 June 2000.[3] 7.On 7 July 2000, Luxey was listed on the GEM Board of the SEHK.[4] 8.Both Joseph Lau and Eric Chung were directors of Luxey. In particular, they held the following key roles within Luxey at the material times:[5]
9.At the material times, Joseph Lau and Eric Chung were the only executive directors of Luxey. Luxey also had a number of other non-executive directors. 10.According to the Luxey’s financial reports, it had cash balances of:[6]
Ratio Knitting Factory 11.The present Petition concerns the Luxey’s attempt to acquire Ratio Knitting Factory Limited (“Ratio”), which initially did not proceed in 2010 as it was originally intended, and subsequently proceeded a few months later in 2011 in the form of Luxey acquiring the entire shareholding of Ratio through owning another entity. 12.Ratio Knitting Factory Limited (“Ratio”) was incorporated in Hong Kong as a limited company under the new repealed Companies Ordinance (Cap. 32) on 24 September 1982.[7] At all material times, Ratio was engaged in the business of manufacturing and selling swimwear.[8] 13.At all material times, the issued share capital of Ratio consisted of 500,000 shares.[9] Luxey’s Initial Attempt to Acquire Ratio 14.In or around May 2010, the shareholders of Ratio, namely Chan Sum, Lee Kwan Yee, Chan Yuen Ling (“Cora Chan”), Chan Chi Choi and Chan Yuen Ping (collectively, “Original Shareholders”) entered into negotiations with the representatives of Luxey for the acquisition of their shares in Ratio.[10] 15.Cora Chan and Ms. Ng Suk Fun (“Fanny Ng”), a manager of Ratio at the time, represented the Original Shareholders in the said negotiations, while Luxey was represented by Joseph Lau and Eric Chung.[11] 16.The Original Shareholders were legally represented in the negotiations by F. Zimmern & Co.’s Ms. Choy Ka Ling Priscilla (“Priscilla Choy”) was the handling partner.[12] She was assisted by two associates, namely Ms. Ho Wing Chi (“Charlotte Ho”) and Ms. Lau Wai Wai Vivian (“Vivian Lau”).[13] Luxey was legally represented by Tang Tso & Lau, with Mr. Ronald Lau (“Ronald Lau”) as the handling partner.[14] 17.As initially proposed in May 2010, the total consideration for the acquisition of the entire issued share capital in Ratio was to be HK$25 million with a proposed two-month lead time for completion.[15] The negotiations proceeded on that basis. By 10 June 2010, the vendors have been advised that closing the deal within 2 months from the end of May 2010 would not be realistic, and recommended end of August 2010. The minutes of meeting of 10 June 2010 reflected that the end of August would be the long-stop date “(or otherwise as mutually agreed)”. The parties also appeared to have preliminarily agreed for the final instalment of HK$8 million of the purchase price not to be payable until March 2011, to align with the end of the financial year for the purpose of implementing the profit guarantee. [16] 18.The contemporaneous documents show that such negotiations continued and progressed into mid-July 2010. In particular:
The Emergence of a Big Good as a New Purchaser 19.On 30 July 2010, the last day of the exclusive period, another party, not Luxey, was named on a first draft of a sale and purchase agreement provided by Ronald Lau to F. Zimmern acting for the Original Purchasers. The implications of the insertion into the draft document of a different party as the intended purchaser and the reasons for the change are disputed. It is the SFC’s case that this is part of a scheme by Joseph Lau, whilst the Respondents claim that the negotiations fell through due to Cora Chan expecting a quick completion but Luxey did not have the necessary cash ready for the targeted completion date. The disputed issue would be further addressed below. 20.On 30 July 2010, one Mr. Ronald Lau (of Messrs. Tang Tso & Lau, who at the time was known to be acting for Luxey in the transaction) emailed Ms. Vivian Lau of Messrs. F. Zimmern & Co. (“F. Zimmern”) and attached the first draft of the sale and purchase agreement (“July 2010 Draft SPA”).[20] However, the name of the purchaser in this document was identified as Big Good Management Limited (“Big Good”).[21] 21.Big Good is a US$1 company incorporated in the British Virgin Islands. Its sole shareholder and director was at the material time an individual known as Ma Cheuk Hoi (“Frankie Ma”).[22] It is common ground that Frankie Ma has never been a director or shareholder of Luxey or its subsidiaries.[23] It is also not in dispute that Frankie Ma is a long-term friend and business partner of Joseph Lau.[24] 22.The documentary evidence shows that Luxey had previously entered into 3 consultancy agreements with Frankie Ma on 1 June 2008, 1 January 2009 and 1 January 2010 (the latter two being signed by Eric Chung on Luxey’s behalf), under which Frankie Ma agreed to look for and recommend potential investment projects in mainland China to Luxey in return for a monthly consultancy fee of HK$4,000, and two options to purchase 67,060,000 (i.e. a total of 134,120,000 shares) in Luxey.[25] 23.Notwithstanding the change in the identity of the purchaser, Ronald Lau was silent in the covering email on the change of identity of the purchasing party. Ronald Lau’s email on 30 July 2010 was not copied to Frankie Ma. Instead, it was copied to Eric Chung and Ms. Carol Chan (“Carol Chan”), another employee of Luxey.[26] 24.There is no documentary evidence showing that Ronald Lau informed Vivian Lau that Big Good was not a subsidiary of Luxey or explain the reasons for the change in the identity of the purchaser, or of the change in the client he was representing. The body of his email merely stated that the July 2010 Draft SPA was “subject to further comments from our client”.[27] 25.On 27 August 2010, there was a meeting between the potential purchaser of Ratio and the representatives of the Original Shareholders. As per the minutes of meeting prepared by F. Zimmern:[28]
26.On 31 August 2010, Fanny Ng sent an email to Eric Chung, Joseph Lau and Ronald Lau requesting Eric Chung to “[p]lease T/T the deposit to Zimmern details as attached”.[29] It was not in dispute that this was a request to Eric Chung to transfer the deposit payment to be made by the intended purchaser of Ratio to the Original Shareholders’ legal representatives, F. Zimmern. 27.On 2 September 2010, there was another meeting between the intended purchaser of Ratio and the representatives of the Original Shareholders. The minutes of meeting prepared by F. Zimmern record that:[30]
28.Ronald Lau of Messrs. Tang Tso & Lau continued to act for the intended purchaser after the identity of the intended purchaser was changed to Big Good.[31] Joseph Lau and Eric Chung continued to be representatives and/or contact person in the negotiations leading to Big Good’s purchase of Ratio, despite the two of them played no formal role in Big Good.[32] 29.In contrast to the continued active roles played by Joseph Lau and Eric Chung after July 2010 in the acquisition of Ratio, Frankie Ma had taken only a back-seat role in the negotiation since the identification of Big Good as the intended purchaser on 30 July 2010. From the documentary evidence available, he was only present at the last meeting with Eric Chung as representatives of Big Good on 2 September 2020, which lasted one hour.[33] Frankie Ma was not called upon to provide any sworn testimony or oral evidence in these proceedings. Big Good as Purchaser in the September 2010 SPA 30.On 8 September 2010, Big Good (instead of Luxey) entered into a sale and purchase agreement with the Original Shareholders for the sale and purchase of the entire share capital of Ratio (the “September 2010 SPA”).[34] The total consideration under the purchase (after adjustments) was HK$32.6 million[35], with HK$6.5 million (subject to downward adjustment) payable by 15 June 2011.[36] On 15 September 2010, the Original Shareholders and Big Good agreed to adjust the consideration upwards by HK$17,478,423.58 to take account of the value of the inventory held by Ratio. This meant the total consideration payable by Big Good under the September 2010 SPA was HK$50,083,113.23.[37] 31.The payment of the purchase price of Ratio was effected by the following transfers -
32.The uncontroverted evidence shows that but for the two transfers made by Joseph Lau to Big Good, Big Good would not have been able to fund the HK$42,604,689.65 payment, as the other cash standing to the credit of the Big Good BSI Account was only approximately HK$16 million.[41] 33.On 15 September 2010, Cora Chan sent an email to (inter alios) Eric Chung enclosing reports regarding Ratio’s finances “for [his] kind studying”. [42] 34.On 16 September 2010, the following share transfers took place:[43]
Luxey’s Purchase of Ratio from Big Good 35.Despite the deficiency in cash back in July 2010 Luxey did not drop out of the picture after Big Good took over the deal. Instead, Luxey began negotiations with Big Good to acquire control of Ratio through the latter’s subsidiary Easy Time as early as September 2010, when the ink on the September 2010 SPA was hardly dry. In October 2010, shortly after shares were transferred to Big Good and Frankie Ma respectively, Luxey took a number of steps towards purchasing Ratio’s equity from Big Good, but at a price nearly eight times of the price Big Good paid. The following events are agreed to have taken place or are reflected from documentary evidence in the period leading up to the Luxey’s acquisition of Ratio’s shareholding from Big Good -
36.Eventually, on 3 January 2011, a draft sale and purchase agreement between Luxey and Big Good was prepared. The consideration was stated in square brackets as HK$390 million.[48] 37.In a matter of 3 days, on 6 January 2011, Luxey and Big Good proceeded to enter into a sale and purchase agreement (the “January 2011 SPA”), under which Luxey agreed to purchase the entire issued capital of a subsidiary of Big Good, Easy Time Trading Limited (“Easy Time”), which in turn held the 495,000 shares in Ratio.[49] 38.The consideration under the January 2011 SPA was stated as HK$390 million, payable as follows:[50]
39.The January 2011 SPA was approved by Joseph Lau and Eric Chung at Luxey’s directors’ meeting on the same day of the execution of the January 2011 SPA.[52] Events following the January 2011 SPA 40.Luxey issued an announcement regarding a very substantial acquisition (“VSA Announcement”) on the same day as the signing of the January 2011 SPA, 6 January 2011, after trading hours at around 10:05pm [53], containing the following statements (“the Relevant Statements”):
41.It was only after the January 2011 SPA had been executed and the VSA Announcement made, on 16 February 2011, that Luxey engaged Ample Appraisal Ltd (“Ample”) to provide an “independent opinion” on the fair market value of Easy Time[54], said to be “for the purposes of internal corporate planning” [55] rather than for the purpose of disclosure to shareholders. 42.On 11 March 2011, Luxey issued a circular in respect of the acquisition of Easy Time (“VSA Circular”), which likewise contained the Relevant Statements.[56] 43.Both the VSA Announcement and the VSA Circular were approved by Joseph Lau and Eric Chung. 44.On 31 March 2011, Luxey completed and publicly announced its acquisition of Easy Time.[57] 45.Between December 2011 and March 2017, Ratio transferred a total sum of HK$1.966 million to Frankie Ma, purportedly as fees for consultancy services which Frankie Ma provided to Ratio.[58] 46.On 30 November 2012, Frankie Ma transferred the remaining 5,000 shares in his own name to Easy Time, making Easy Time the sole shareholder of Ratio.[59] In effect, therefore, Luxey had become the sole shareholder of Ratio through owning Easy Time. Disposal of Convertible Preference Shares by Big Good 47.Following the resale of the Ratio and Luxey, Big Good transferred away a substantial portion of the convertible preference shares it received as purchase price from Luxey on 15 April 2011 (involving 380 million convertible preference shares to five different parties) and on 19 July 2011 (involving 160 million convertible preference shares to four different parties). The transferees of the April 2011 transfers converted the shares into ordinary shares all on 18 April 2011. In the case of the transferees involved in the July 2011 transfers, they all converted their shares into ordinary shares on 19 and 24 April 2012 respectively, and held them on behalf of the same person, one Mak Chi Shing Stephen (“Stephen Mak”), at the time the director and consultant of Heaven Consultant Limited.[60] 48.On 20 December 2012, Frankie Ma caused Big Good to transfer 40 million convertible shares to Yau Yik Ming Leao (“Leao Yau”). The Respondents dispute who has caused the transfer and the purpose of the transfer. III. THE SFC’S COMPLAINTS & THE RESPONDENTS’ CONTENTIONS 49.Against the above backdrop of facts, the SFC’s case rested upon the transactions for the purchase of Ratio’s shareholding being a scheme (“Scheme”) by Joseph Lau. Under the Scheme [61]-
50.In particular, SFC points out that although the VSA Circular and the VSA Announcement disclosed the fact that Big Good acquired Ratio for HK$50.1 million in September 2010,[62] neither document disclosed or contain any reference to material facts such as -
51.The VSA Circular of 11 March 2011 also made no reference to the valuation report prepared by Ample, which was issued on the same day.[63] 52.The SFC’s case is based on the fact that as executive directors, Joseph Lau and Eric Chung each owed fiduciary duties to Luxey, including –
53.The SFC also alleges that they both owe a duty of care at common law (“Reasonable Care Duty”) to exercise the level of reasonable care, skill and diligence which would be exercised by a reasonably diligent person with -
54.The SFC specifically makes 3 complaints:
55.The SFC relies on the undisputed facts, circumstances and contemporaneous documents as set out in paragraph 56 of the Petition as giving rise to the inference of the existence of the Scheme. 56.Joseph Lau and Eric Chung, on the other hand, disputed the existence of the Scheme. According to the Respondents -
IV. APPLICABLE PRINCIPLES
57.Section 214(1) of the SFO provides that:
58.On the face of the section, three conditions have to be satisfied in order for SFO s. 214(1) to be invoked:
59.It is not in dispute that the first two conditions are satisfied in the present case. Luxey was at the material times a listed corporation on the GEM Board, and the affairs complained of by the SFC are affairs of Luxey. 60.The key question, which is hotly disputed by the parties, is whether the third (and last) condition is met. 61.Here, the SFC rests its case upon the following bases:
See SFC v Yeung Chung Lung HCMP 204/2013 (Unreported, 17 February 2017) at §§78-85 (re s.214(1)(b) and (d)), Re China Best Group Holding Ltd HCMP 745/2013 (Unreported, 29 October 2015) at §§94, 101 (re s.214(1)(c)). 62.The SFC’s formulation of the law on s. 214 was not seriously disputed by the Respondents. I accept that the formulation put forward by the SFC as correctly reflecting the state of the law. 63.I also note that a finding of dishonesty is not a necessary prerequisite for s. 214 of the SFO to be engaged: see SFC v. Yeung Chung Lung HCMP 204/2013 (Unreported, 17 February 2017) at §§78-82. Of course, this may be a relevant factor when it comes to the relevant disqualification period to be imposed. However, at the liability stage, I do not consider dishonesty to be a necessary ingredient to the complaint.
64.Closely related to the SFC’s complaint under s. 214 is the assertion that Joseph Lau and Eric Chung had acted in breach of their director’s duties. Whilst a breach of duty, per se, does not meet the test under s. 214, it is closely related to whether there has been “misfeasance”, “other misconduct” or “unfair prejudice” within the meaning of s. 214 of the SFO. 65.In this relation, it is trite law that directors are fiduciaries of the company. Directors are to act in good faith and the best interest of the company. They are not allowed to place themselves in a position of conflict and/or to use their positions for personal profits. The distinguishing feature is one of loyalty. 66.For the present purposes, the relevant facets of directors’ duties are as follows:
67.Generally speaking, in assessing credibility, the Court would take into account the following factors:
See Lee Fu Wing & Anor v. Yan Paul Po Ting & Anor [2009] 5 HKLRD 519 at §53. 68.As with the general approach in civil cases, this Court would not lightly come to a conclusion based on the witness’s demeanour alone. Instead, reliance is to be placed on the contemporaneous documents and inherent probabilities. However, the assessment of credibility remains to be a multi-faceted exercise and the Court would be sensitive to each and every indicia on credibility. 69.The Court further bears in mind the principles set out in various cases cited by the parties, including SFC v Yin Yingneng Richard & Ors Unreported (HCMP 2502/2012, 16 January 2015) and Re China Best Group Holdings Ltd HCMP 745/2013 (Unreported, 29 October 2015) at §§50-52. Without the need of reciting and/or repeated all of the established observations, I note the following:
70.One peculiar feature in the present case is that Frankie Ma (who was the key person being involved in Big Good and hence the two transactions involving Ratio) has not been called to give any evidence. As the Respondents’ case relies heavily on evidence that Frankie Ma could have given in support, the SFC urged upon this Court to draw an adverse inference for Joseph Lau and Eric Chung’s failure to call Frankie Ma to give evidence. 71.The court also notes that in the course of cross-examination, Joseph Lau asserted that Steven Poon, the middleman in the potential transaction between the Original Shareholders and Luxey, had been told of Luxey’s inability to proceed with the purchase unless non-cash consideration was accepted.[64] The Respondents invite the court to assume that Steven Poon would have relayed Luxey’s position to the Original Purchasers.[65] For this purpose, the court should also take into account the fact that Steven Poon was not called to give evidence in support of Joseph Lau’s evidence, and consider whether it is appropriate to draw any adverse inference. 72.In Ip Man Shan Henry & Another v. Ching Hing Construction Co. Ltd & Ors (No. 2) [2003] 1 HKC 256, DHCJ Lam (as Lam PJ then was) held at §115 that “If a prima facie case is made out, and there is evidence available to the party against whom the case is established which could displace the prima facie case, and he omits to call such evidence, an inference could be drawn”. 73.It is also open to a tribunal of fact, upon the drawing of such inference, to take it into account in respect of a matter the person not called as a witness could have spoken on (i) in deciding whether to accept any particular evidence which has in fact been given either for or against that party, and also (ii) in deciding whether to draw inference of fact, which are open to them upon evidence which has been given. 74.In Wisniewski v. Central Manchester Health Authority [1998] PIQR 325, Brooke LJ emphasized that there is a need for some evidence, however weak, to be adduced before the Court is entitled to draw the desired inference. 75.In other words, there must first be a case to answer on an issue before the Court can draw an adverse inference. Having said that, I do not understand that this is a very high threshold to meet. 76.An invitation to draw adverse inference can, however, be refused on the ground that there was a plausible explanation for not calling the witness. As to whether there are such plausible grounds explaining the absence of Frankie Ma on the facts of this case, the Court would provide its further analysis below. V. ISSUES FOR DETERMINATION 77.Establishing the First Complaint against Joseph Lau requires the court making findings on whether Joseph Lau had breached his duties as director of Luxey by planning and executing the Scheme with regard to acquiring the shareholding of Ratio, with Frankie Ma/Big Good as his nominees.[66] 78.The Second Complaint against Eric Chung[67] involves the court making findings on whether he discharged his duties with reasonable care, skill and diligence commensurate with his experience and position, in particular, whether -
79.The Third Complaint against Joseph Lau and Eric Lau[68] involves the court making findings that the VSA Announcement and VSA Circular published with their approval –
80.If the court were to find against the SFC on the existence of the Scheme, in that Big Good and Frankie Ma were not found to be nominees but independent third parties, and that the Respondents merely facilitated Big Good’s acquisition of Ratio and resale to Luxey at a profit as “favours” for Frankie Ma, the court is called upon to decide on SFC’s alternative case, namely, whether the Respondents would still be in breach of s.214(1), in that -
VI. DISCUSSION AND FINDINGS
81.I shall first make some general observations on the parties’ respective witnesses. 82.The SFC called four factual witnesses to give oral evidence. The first witness was Ms. Li Yuen Pik, Senior Manager of SFC’s Enforcement Division, who made two affirmations exhibiting the results of investigation and responded to the Respondent’s Affirmatios. Her evidence was not challenged in any material respect. Her credibility is not in issue, indeed could hardly be put in doubt given her position as a regulator. 83.The SFC called two solicitor witnesses who were at the material time part of the team in F. Zimmern acting for the Original Shareholders. Ms Vivian Lau, who was an associate in 2010. She was only involved in commenting on a draft memorandum of understanding (“MOU”)[69] between the Original Shareholders of Ratio and Luxey. Her evidence was not challenged in any material respect. 84.The other solicitor called to give evidence was Ms Charlotte Ho, who gave a statement to the SFC on 16 June 2017. She took over the conduct of the matter from Vivian Lau, and was working under a partner of the firm, Ms Priscilla Choy. Ms Choy declined to give evidence on account of her having emigrated from Hong Kong. In §5(a) of Ms Ho’s Statemen, she stated that the team at F. Zimmern had believed that Big Good was a subsidiary or connected party of Luxey when it was first named in substitution of Luxey in the July 2010 Draft SPA provided by the solicitors acting for Luxey. Ms Ho’s evidence was not challenged. 85.Partner of the firm, Ms Priscilla Choy, who had conduct of the sale transaction on behalf of the Original Shareholders, also provided a statement to the SFC. Ms Choy declined to return to Hong Kong to give evidence on account of her having emigrated from Hong Kong. The SFC relies on her statement against the objection of the Respondents. As there exists a credible explanation for her failure to return to give oral evidence in the proceedings, I am entitled to take that into account in deciding what weight, if any, should be attached to her evidence. 86.The material aspects of Ms Choy’s evidence are the role played by Joseph Lau, particularly before and after Big Good stepped in as the purchaser, including the circumstances of the proposed inclusion of Joseph Lau as guarantor in the transaction, the subsequent abandonment of the proposal, and the role played by Frankie Ma, if any. In this regard, it will be seen that her evidence in the statement given to SFC is largely in line with the oral evidence of Charlotte Ho. I find that I am able to accord her evidence some weight despite Ms Choy was not available for cross-examination. Her belief that Joseph Lau, rather than Frankie Ma was the person who was making decisions on the purchase even though the purchaser was switched to Big Good is corroborated by a strong body of evidence as analysed below. 87.Last but not least, Ms Cora Chan gave evidence on behalf of the SFC. She was one of the shareholders representing the Original Shareholders who was involved in the negotiation. She was interviewed by the SFC on 31 August 2016 and the interview was recorded and its transcript adduced as evidence. She also gave a statement to the SFC on 27 April 2017. Her evidence is relevant in respect of the degree of involvement of Joseph Lau and Frankie Ma respectively she was able to observe in the negotiations leading to the sale of Ratio to Big Good. 88.Cora Chan appeared to be nervous as a witness. She spoke of her poor health in the 5 years preceding the hearing and even concerns of personal safety when giving evidence. I would take that evidence into account when assessing evidence on which her recollection appeared to be affected by a lack of clear recollection. However, I observe that when she was challenged as to her knowledge and understanding of certain facts and circumstances, or the accuracy of her recollection, she tried her best to answer the questions, and gave convincing evidence to the best of her ability. When she was not sure either because of paucity of knowledge or understanding, or the lapse of time, she would say so. When she was sure about a certain view or recollection she had deposed to, she was able to explain why she was able to remember the incident in the way she did, or formed the view she expressed. She came across as a truthful witness both in her statement to the SFC and in court in the aspects where her recollection withstood testing in cross-examination or was otherwise uncontroverted. Where her recollection of certain events was admittedly blurred, her evidence will not be relied on by the court. 89.According to the evidence, Cora Chan was a second-generation operator of a successful family business involved in manufacturing swimwear for export. She did not appear to be very sophisticated in financial matters or in negotiating the sale of an entire business, but was hoping to sell the family’s business as soon as practicable. While Cora Chan was a party to sale of the shareholding to Big Good, she was not a party interested in the outcome of these proceedings. She did not come across in any way to bear any grudge, nor was there evidence that she had any axe to grind, against the Respondents. 90.On the other hand, the Respondents call no witnesses other than themselves. Mr Joseph Lau was interviewed by the SFC, and has filed two affirmations in these proceedings. Eric Chung was likewise interviewed by the SFC, and filed one affirmation in these proceedings. The credibility of their evidence is dealt with in the discussion and analysis section. 91.Frankie Ma had been interviewed by the SFC and had been questioned extensively. He gave answers that tended to support the Respondents’ case that he was acting in his own right in acquiring Ratio, then selling it on to Luxey. The inference arising from his evidence when viewed in the context of other evidence before the court will be dealt with below. If Joseph Lau’s assertion were true, Frankie Ma could have corroborated his account and shed light on the decisions he had allegedly made to proceed with the two transactions, and on what prompted the transfer of the 40 million convertible preference shares to Leao Yau. 92.However, given the position that Frankie Ma took, it is significant that there remains no explanation why the Respondents did not call him to give evidence in support of various important aspects of their case, despite Joseph Lau testified to having remained friends with him even after the commencement of these proceedings.[70] Mr Ma remained contactable for the SFC’s two interviews, and there is no evidence that he became uncontactable thereafter. 93.In the absence of any credible explanation on why Mr Ma was not called upon to testify, the court finds it appropriate in the circumstances of this case to draw adverse inferences against the Respondents based on the well-established legal principles set out in Pacific Electric Wir[71]e and Wisniewski v Central Manchester Health Authority[72]. In my view, the fact that Frankie Ma was not called as a Respondents’ witness goes to support the SFC’s case based on the contemporaneous documents and on other testimony on the role of Frankie Ma as a nominee of Joseph Lau.
94.The Respondents contend that the SFC had chosen not to put forward certain evidence, by nature documentary, in respect of several aspects of their case. On this basis, it is submitted that adverse inference should be drawn against the SFC that the documents referred to supported the Respondents’ case.[73] I do not find that the principles referred to the preceding paragraph has the same application on documentary evidence that are allegedly in the possession or accessible to one party, particularly when the documentary evidence is in fact also available to the other party, and it is open to that party to rely on them in support of its own case. In so far as there is an allegation that any relevant evidence is in existence and withheld, that is of course a different matter. However, none of the evidence identified is in that nature. I take the view that there is no merits in the Respondents’ submission.
95.I shall highlight a number of undisputed facts, the related documents and oral evidence which the court finds particularly relevant in assisting the court to form a view on this issue. 96.The Original Shareholders entered into negotiation with Luxey for the prospective sale of its shareholding in May 2010. The Original Shareholders were represented by F. Zimmern, and Luxey was represented by Ronald Lau of Messrs. Tang Tso and Lau. 97.On 10 June 2010 a meeting was held between the Original Shareholders on the one hand and Joseph Lau, Eric Chung, Steven Poon and Ronald Lau for Luxey, where the terms of acquisition of Ratio as a going concern were discussed. Steven Poon was acting in the position of “middleman” in the sale. The purchaser was identified as Luxey, and the consideration was to be between HK$25-27 million, with HK$5 million payable as deposit, and a suggested completion date of 31 August 2010.[74] 98.However, despite Luxey suffering a net cash outflow of nearly HK$14 million in the 6 months ending on 30 June 2010 for its operating and investing activities, on 23 June 2010, Luxey instructed Winship to perform due diligence on Ratio with a view to taking forward the acquisition. By 30 June 2010, Luxey had a cash balance of barely HK$23 million.[75] That however did not stop the Respondents from proceeding towards a transaction in the intended acquisition. 99.Far from withdrawing at that point of time on account of the poor financial circumstances of Luxey, which must have been known to its executive directors by 12 July 2010, Eric Chung on behalf of Luxey signed an MOU on that day with the Original Shareholders. The MOU gave Luxey the benefit of an exclusive period from 12 July to 30 July 2010 to negotiate and enter into a sale and purchase agreement with the Original Shareholders, in consideration of Luxey’s “continuous investment of time and money in relation to the Proposed Transaction”. By that date, Joseph Lau had already understood that the consideration of HK$25-27 million was subject to further upward adjustment after ascertaining the value of the Ratio’s inventory.[76] 100.Even by 20 July 2010, Eric Chung on behalf of Luxey still did not suggest that they would not have the cash needed for the purchase price, or they would rather have the Original Shareholders accept non-cash payment for the consideration. Instead, Luxey asked for a 2-month postponement of the completion date, and communicated a “very sincere” intention to proceed with the deal, citing “unexpected turbulences by our auditors” causing the need for “more time to comply with the Listing Ordinance for this VSA”.[77] Despite a request for formal reply, no reply was received to this email from Ratio or their legal representatives. 101.It is note-worthy that the evidence of Priscilla Choy in her statement to the SFC is consistent with this point: her recollection in 2017 was that Luxey has never raised any suggestion that they might prefer payment for the acquisition other than in cash. Had any alternative suggestions on the mode of payment been mentioned, she would have expected it to be reflected in the attendance note.[78] Indeed, one would expect that the issue on non-cash payment would have been raised and explored at least in written communication through the legal representatives between June and July 2010, when cash balance in Luxey was on the decrease. Yet, there was a conspicuous absence of evidence of any communication on this point, until the abrupt substitution of the name of Big Good as purchaser in the first written communication after the 20 July 2010 email – the draft SPA of July 2017 sent under cover of the email of 30 July 2010. 102.Prior to 20 July 2010, the consideration for the acquisition was being negotiated at the level HK$25 million. The Respondents place heavy reliance on the fact that at the time the proposed consideration was subject to a “downward adjustment”[79] as a reason for Luxey having a legitimate expectation that it would be able to afford the cash price. I do not accept that the proposed term for “downward adjustment” in clause 3 of the draft Memorandum of Understanding sent in May 2010 could have had that effect: the profit guarantee (which also found its way into the July 2010 Draft SPA) merely guaranteed the level of profit at the level of HK$18 million for the financial year ending March 2011, i.e. the following year. It would have had no impact on the cash consideration payable at the completion of the transaction, and in fact allows the withholding of part of the purchase price until the following year, thereby lessening the cashflow burden at completion. In any event the level of adjustment, if any, would at best be uncertain. 103.However, according to the Respondents there was no prospect of Luxey obtaining a bank loan or credit line at the time because it had been “losing money”.[80] On the other hand there is no evidence of Luxey having tried to negotiate for any banking facilities to make the acquisition possible at a time when the price under negotiation was cheaper (HK$25 million in all). Joseph Chung relied on the financial reports showing a lack of available cash balance in Luxey at various points in time, namely, on 13 May (HK$27.7 million), 9 August 2010 (HK$23 million) and November 2010 (around HK$20.5 million). Even if the cash level had been maintained at HK$27.7 million as in May 2010 through to July 2010, the purchase price would still have wiped out nearly all of the company’s cash reserve, with the attendant cost of the transaction still to be paid for, and the chance of an adjustment in the following year uncertain. If the acquisition was an attractive business proposition that would have brought profits, which is evident in the profit guarantee, it is difficult to see reason in the rapid change from the optimism in up to at least 20 July to the fatalistic view held by the Respondents shortly before 30 July 2010. 104.The circumstances throw into serious doubt whether the dwindling level of available cash in Luxey was but a pretext for having Big Good take over as purchaser as planned: if the transaction was somehow seen by Luxey to be commercially viable throughout May, June and July of 2010 with their limited cash, it made no sense for the initial optimism to take an abrupt downturn before 30 July 2010, when the price being negotiated was further adjusted down to HK$23.5 million plus the fair value of saleable inventory to be determined by the purchaser’s accountant.[81] 105.The changes in the level of available cash between May to July therefore did not satisfactorily explain why Luxey had forged ahead with negotiations well into July without any evidence of their having explored alternative modes of payment, but decided to withdraw from the deal only before 30 July 2010 without any evidence of their discussing or informing the Original Shareholders of their decision to withdraw. Joseph Lau in cross-examination alleged that the middleman Steven Poon has been informed, though he would not know if Poon had informed the Original Shareholders their legal representatives. To explain why he had not communicated that important message himself, Joseph Lau explained that Poon was jealously guarding his interest as middleman and would not like him to communicate directly with the Original Shareholders. I have no hesitation in rejecting that explanation as inherently unlikely: as recently as 20 July 2010, Eric Chung acting on behalf of Luxey/ Joseph Lau had been in direct email communication with Cora Chan and Fanny Ng negotiating terms of the intended sale[82], with Joseph Lau and Ronald Lau, but not Steven Poon, copied into the email. Steven Poon’s Record of Interview with SFC also contradicts the above version[83]: he was the seller’s agent, not the buyer’s agent. If Joseph Lau did involve Steven Poon in the middle to inform the seller of the withdrawal of Luxey, I do not see why Steven Poon had any incentive to cover up that fact. 106.There is likewise no evidence that Luxey or Joseph Lau, who was seen as the person in charge of the intended purchase, informed the seller of their having found a buyer to substitute Luxey within a span of 10 days after the 20 July 2010 communication. The emergence of Frankie Ma and Big Good as a substitute purchaser within a short span of 10 days was remarkable and cried out for proper written communication and explanation to the Original Shareholders and their legal representatives. Yet, no evidence of any communication was found in evidence. The absence of such communication, which would more likely than not have existed if there were any, goes a long way towards supporting the inevitable belief on the part of Charlotte Ho and Priscilla Choy apparently held until late August 2010, that Big Good named in the draft SPA was connected with Luxey, and Joseph Lau remained the person making the decisions. On the evidence of Fanny Ng, representative of the Original Shareholders, she only first met Frankie Ma “towards the end” just before execution of the transaction.[84] 107.If the pre-July 2010 events would not of themselves convince this court of the existence of a scheme, the court is nevertheless entitled to take them into account in assessing the events that followed, in holistic manner. 108.The circumstances in which Luxey abruptly withdrew from the transaction and how Big Good seamlessly stepped in ready and willing with available funding, despite the lack of relevant experience or financial means on the part of Frankie Ma, are nothing short of being incredulous unless explained as a scheme. This is discussed further below. 109.It should be remembered that in an email of 2 July 2010 sent by Ronald Lau in reply to the comments by F Zimmern’s Vivian Lau acting for the Original Purchasers on the draft MOU, he said “all your comments are acceptable except that our client’s subsidiary will be the party to the MOU.” On 12 July 2010, the MOU was signed providing for an Exclusive Period in favour of Luxey. At this time, there was no competing potential buyer known to the parties. A little more than two weeks later, Eric Chung on behalf of Luxey had sent the email of 20 July 2010 with proposed terms of proceeding with the acquisition, expressing sincerity in securing the deal and requesting a completion date at the end of October. By 30 July 2010, the first draft of an SPA was provided by Ronald Lau, with the name of the purchaser substituted with Big Good. 110.The Respondents pointed out that SFC had suggested that Joseph Lau could have waited till the end of the Excusive Period for an improved chance that the Original Shareholders might accept terms more favourable to Luxey instead of renewing the effort to find another potential buyer, but the point was never pleaded. The observation of the SFC on the conduct of Joseph Lau in the light of the raison d’etre of the Exclusive Period is a valid observation made on the agreed facts. I do not see any real objection based on pleading arising here. 111.Frankie Ma was a friend and business associate of Joseph Lau. He was engaged by Luxey to source investments, not the other way around.[85] However, when Luxey found itself unable to pay for the acquisition of Ratio, Joseph Lau chose to inform Frankie Ma of the opportunity for him to take it up. Frankie Ma responded immediately. 112.There is no evidence that Joseph Lau had any previous experience of buying or owning any knitting or garment business, or indeed any manufacturing business. Joseph Lau/Luxey then afforded Frankie Ma “friendly simple convenience(s)” for the purposes of the acquisition of Ratio as a going concern, without Frankie Ma even engaging any staff, let alone appointing professional advisers of his own, to advise him on the deal and to prepare for the taking over of the business. The following free services were provided at Ma’s request allegedly to help Ma “save money”[86] –
113.I am unable to accept that the above are by nature and extent the type of services that any chairman of a listed company would reasonably request its full-time employed staff or by himself provide to another party taking over an opportunity that it allegedly could no longer avail itself of on a friendly basis. I have no hesitation in disbelieving the testimony of Joseph Lau and Eric Chung in this regard. I take the view that it is more probable than not that these services were provided to the nominee Frankie Ma/ Big Good as part and parcel of the Scheme, as further discussed below. 114.It is not clear when solicitor Ronald Lau was first briefed on Luxey’s intended withdrawal. If he had been instructed that it was a clean withdrawal by Luxey from the deal it is inconceivable that he would not have told his counterpart at F Zimmern in writing, making clear that he has ceased representing Luxey. This is particularly so when he had previously informed F Zimmern that Luxey intended to acquire Ratio not in its own name but through a subsidiary. He did not do so. On 30 July 2010, when providing the July 2010 Draft SPA for comments by F Zimmern, Ronald Lau, at the time known only to be acting for Luxey and none other, merely substituted Big Good’s name as purchaser without even a few words in writing to explain the change in identity of the purchaser, or the change of identity of his client since the date of the MOU. 115.The July 2010 Draft SPA had been sent by Ronald Lau “subject to further comments from our client”, which could only have been read as a reference to Luxey. Eric Chung and Carol, both with “cpech” email addresses, were copied into this email, but not Frankie Ma. Unsurprisingly, the team at F Zimmern appeared to have proceeded on the basis that Big Good was a subsidiary or a party connected with Luxey, at the end of the Exclusive Period during which only Luxey could have negotiated for the deal.[87] 116.In the content of the July 2010 Draft SPA as amended on behalf of the Vendor and returned to Ronald Lau on 26 August 2010[88], the name of Big Good continued to be placed in square brackets because to the team at F. Zimmern, they remained “not sure whether 8041 would not be the purchaser”[89]. The name of Joseph Lau was inserted as the proposed guarantor by the F Zimmern team to protect the interest of the Original Shareholders against possible default of what would have been seen as a nominee purchaser.[90] Not surprisingly, the June 10 meeting, the MOU and the exchanges between the lawyers prior to 26 August 2010 all left Charlotte Ho and her supervising partner Priscilla Choy believing that Joseph Lau continued to be “in charge”. According to Priscilla Choy: “我印象中雖然買方已改爲Big Good，但在交易中 Joseph Lau 仍然是買方的話事人，並有參與與交易相關的主要會議，所以才加上作爲合同的擔保人” . 117.The fact that the parties later agreed not to make Joseph Lau a guarantor and F Zimmern caused his name to be removed from the draft does not detract from the evidence on how the initial substitution took place. The fact that the Original Shareholders’ legal representatives were left with the impression that Big Good was a connected party with Luxey, and Joseph Lau remained the decision maker in the acquisition even after Big Good came into the picture is strong evidence of what was in fact the substance of the case, when viewed in the absence of written communication to indicate otherwise. 118.The 27 August 2010 meeting attended by Joseph Lau but not Frankie Ma lasted 2 hours 45 minutes. Joseph Lau explained that it had taken so long because he had had to explain why he should not have been joined as a guarantor as proposed in F Zimmern’s comments to the July 2010 Draft SPA. For a start, it made no sense that the meeting, being the “main meeting” (as described by Priscilla Choy) for finalising the terms of the transaction, would have gone on had Frankie Ma been truly the independent purchaser by that time but was unavailable to attend it. While the meeting was allowed to go ahead without Frankie Ma, there is no evidence that he gave any instructions to Joseph Lau on what terms to secure or reject at this main negotiation meeting. Instead, Joseph Lau was left to decide on most of the terms by “representing” Big Good at this important meeting. 119.I find it inherently improbable that Joseph Lau had attended the meeting at the request of Frankie Ma as the real intended purchaser just for Ma’s “convenience”. If the proposed inclusion of Joseph Lau as guarantor in the version of the July 2010 Draft SPA as amended by F Zimmern[91] indeed reflected a misunderstanding on the part of the F Zimmern team of Luxey not having wholly withdrawn from the intended acquisition, it would have taken only a simple email from Ronald Lau to the F. Zimmern team to rectify the misimpression, and to give clear instructions on who he was instead representing. There was no such communication in evidence, whether before or after 26 August 2010. 120.I find it inherently more likely that Joseph Lau’s de facto continued involvement in negotiating the terms of the acquisition reflected the true role: he, not Frankie Ma, was the decision maker on behalf of the named purchaser, Big Good, and they were but his nominees. I have no hesitation in rejecting the self-serving explanation of Joseph Lau that he merely attended the main meeting as a favour to Frankie Ma despite he no longer had any interest in the acquisition of Ratio. It is noteworthy that his modified position came only after he denied all involvement in the acquisition by Big Good/ Frankie Ma when interviewed by the SFC, but was confronted with incontrovertible evidence that he was still involved.[92] It was not until he made his affirmations in opposition to these proceedings that he attempted to explain the further “favours”, i.e. the service of Eric Chung and Carol Chan, to assist Big Good/ Ma in the acquisition in place of Luxey. In the context of the other undisputed or indisputable evidence, I do not accept the Respondents’ case that these were merely favours Lau had offered to assist a friend to take up an opportunity that Luxey could not have used, as a transaction independent of Luxey. I accept the SFC’s case that they were nominees of Joseph Lau in the Scheme. 121.My view of the evidence is further fortified by the payment process. Fanny Ng, who represented the Original Shareholders in their negotiations with the purchasers wrote an email dated 31 August 2010 to Eric Chung, Joseph Lau and Ronald Lau,[93] requesting Eric Chung for payment of the deposit under the SPA and provided details for telegraphic transfer to be made. Joseph Lau claims to have no idea why he was written to, and claimed he “did not request this email”.[94] By the same token, there was no explanation on why Frankie Ma was not asked for payment if it were made clear that Ma, not Lau, was the true purchaser. Nevertheless, despite Frankie Ma having been omitted as a recipient of the payment instructions, the deposit was promptly and duly paid in the name of Big Good on the following day.[95] 122.The last and only meeting attended by Frankie Ma as purchaser prior to signing of the SPA was on 2 September 2010. Joseph Lau did not attend this meeting, but Eric Chung did, allegedly to “assist” Frankie Ma. [96] It lasted one hour in total with 3 specific, relatively minor, points indicated as outstanding.[97] No representative on the Original Shareholders’ side had any recollection of any negotiation or business dealings with Frankie Ma on the terms of the SPA.[98] 123.The September 2010 SPA was executed on 8 September 2010 for a consideration of HK$32.6 million. With the upward adjustment of HK$17.5 million for inventory and stock as agreed, the total consideration came to HK$50.1 million. HK$42.6 million had had to be paid at completion with a retention of HK$6.5 million due only on 15 June 2011. It is not in dispute that the HK$28 million borrowed from Joseph Lau himself was used by Big Good to help pay the purchase price. In my view, while the loan from Joseph Lau is highly relevant on whether the transaction was in fact connected to Joseph Lau and whether the Respondents should have disclosed it to Luxey’s shareholders, the converse does not necessarily operate in favour of the Respondents. Whether or not the balance of HK$22.1 million had come from the personal assets of Frankie Ma/ Big Good, the fact remains that the lion share of the purchase price had come from none other than Joseph Lau, in circumstances that raised serious suspicion of conflict of interest. 124.There was evidence from Cora Chan of the Original Shareholders, that Joseph Lau visited Ratio’s offices in Hong Kong, and introduced himself to the staff as the “new boss”. [99] This was denied by Joseph Lau. I prefer the evidence of Cora Chan, as it was one of things that she remembered that would have stuck on her mind. I reject the assertion of Joseph Lau that as Cora Chan had previously not wanted staff to know about the sale of the business precluded Joseph Lau from visiting the Hong Kong offices of Ratio and introducing himself as the boss. There is evidence that Eric Chung was one of the team of three that took over the management of Ratio at the time. There is however no evidence that it was intended to be a temporary measure pending any steps to be taken by Big Good to hire permanent staff. I can only conclude that no such steps were or were ever meant to be undertaken. As matters transpired, it was not necessary for Big Good to do so, as it had immediately commenced steps to resell the business to Luxey. 125.Frankie Ma, whose evidence could have exonerated the Respondents at least to some degree if it accorded with the Respondents’ versions, was not called by the Respondents. The Respondents however turned this on the head and suggested that the SFC could equally have called him as a witness but did not. I reject this argument as unreasonable. On the SFC’s case, the statements given by Frankie Ma to SFC were unable to support the case of the Respondents in respect of the nature of the acquisition of Ratio and the onward sale of Easy Time to Luxey. It was for the Respondents to call him as their witness if they see fit, not for the SFC to be blamed for not making him available as a witness who did not, and cannot be expected to, support the SFC’s case, or to tender him for cross-examination by the Respondents to enable the Respondents to ask him leading questions. 126.I note that Frankie Ma was unable to give any coherent description of the line of work or businesses. It boiled down to his only owning the company Big Good, which at some point of time prior to September 2010 might have had large amounts of stocks on its account, according to Joseph Lau’s evidence. [100] Frankie Ma’s memory of the negotiation for the acquisition by Big Good was a complete blur, and in any event does not tally with contemporaneous evidence. When interviewed by the SFC, he even misremembered whether the representatives of the Original Shareholders were male or female, or whether the manufacturing facilities of Ratio were located in China or in Hong Kong. He was unable to describe the principal terms negotiated. When asked if he had been assisted by anyone in his negotiation with the Original Shareholders, he gave evasive answers repeatedly saying there was none according to his impression, but refused to commit himself to his own answer.[101] The involvement of Joseph Lau and Eric Chung even on a “friendly” basis was never mentioned. That is directly contrary to the contemporaneous documentary evidence, and the fact that Joseph Lau and Ronald Lau as representatives of the “purchaser” attended the main negotiation meeting on 27 August 2010 that lasted 2 hours 45 minutes.[102] It shows Frankie Ma’s answers to the SFC were inherently unreliable. When questioned about the process of the negotiation for the acquisition of Ratio, he was unable to demonstrate any personal knowledge or involvement apart from the contract sum as the main part of the consideration. He clearly had very limited knowledge of the transaction, and had tried to cover up his ignorance by avoiding to give direct answers. I find that it is more probably than not that he was simply not involved in the negotiation at all, but only showed up by way of window dressing at the last meeting on 2 September 2010 prior to the signing of the September 2010 SPA. 127.Even more remarkably, just in time for the completion of the acquisition, Frankie Ma managed to have obtained timely and apparently interest-free cash funding to the tune of HK$28 million from Joseph Lau, which was then used to help pay for the acquisition of Ratio. When confronted with the bank records of the two cash transfers made to Big Good only days before completion, Joseph Lau explained he was approached by Frankie Ma “in about September” 2010 for a loan of HK$28 million and was told that it was for the purpose of “purchasing shares” without Ma “specifically [telling him] that it was to be used for the acquisition of Ratio”.[103] Despite Frankie Ma having borrowed substantial sums from him a few times over the years, and despite having the money but not having offered any adequate amount to Luxey to make an otherwise lucrative transaction possible, Joseph Lau chose to lend him the money without any security. When pressed under cross-examination, Joseph Lau attempted to justify granting an unsecured loan at the drop of the hat to Frankie Ma by claiming that Ma had once shown him the value of the stocks he held in some account statement worth HK$100 million.[104] 128.According to Joseph Lau, since Ma has been a friend for such a long time, and the sum was “not a significant amount” out of his HK$330 million assets, he agreed. There is not a shred of evidence that any terms or conditions were imposed. There is no loan agreement in evidence, nor any evidence of any arrangement for interest payment. On the evidence, Lau did not even ask Ma if the loan was going to be used for the acquisition of Ratio, despite he would have been well aware of the coincidence of the timing for completion of the acquisition of Ratio. Significantly, no part of the loan was repaid until 2017 after the SFC commenced inquiry on the subject transactions.[105] Lau’s bare assertion that interest was paid before 2017 is rejected as inherently improbable. 129.Even to the most trusting of friends, the flashing of some statement of stock holding could by no means be any reliable evidence of solid financial means. I am unable to believe that Joseph Lau had relied on any such evidence of the worth of Frankie Ma as a reason for lending him HK$28 million. The reference to the stocks account statement appears to me to be but a desperate attempt to justify an otherwise irrational move to solicit Ma as a potential purchaser, and to help him complete the purchase. It does not begin to explain why Joseph Lau would have accepted at face value the purpose of the loan as allegedly put forward by Frankie Ma. The value of the stocks held by Ma on a statement of account is only a snapshot of the state of the account on a particular day could hardly be accepted by any reasonable businessman as worthy evidence of a borrower’s financial strength. I am driven to the conclusion that Joseph Lau had arranged for the HK$28 million to be made available to Frankie Ma/Big Good to facilitate the purchase of Ratio as part of the Scheme. 130.The Respondents’ attempt at explaining how Frankie Ma was acting independently of Joseph Lau/Luxey with Joseph Lau playing no role in the acquisition by Big Good simply beggared belief. The Respondents submit that there was “nothing wrong” in Joseph Lau introducing the business opportunity to Frankie Ma when it became clear that Luxey could not take it, and argued that Joseph Lau as a director of Luxey had no obligation to lend his own money to Luxey in order to assist Luxey to acquire Ratio, as originally intended but for Luxey’s deficient cash pool. But that is no answer to the SFC’s case. The evidence of the circumstances still points strongly towards a scheme perpetrated by Joseph Lau and Frankie Ma/ Big Good, in which Ratio was acquired under his control, with terms negotiated by him, and financed principally by him, through an entity connected with him, for the purpose of the subsequent resale. 131.In respect of the September 2011 purchase of Ratio, having carefully considered all evidence against contemporaneous documents, and the arguments advanced by the parties, I find it far more probable than not that Joseph Lau directed and controlled Big Good’s acquisition of Ratio with Frankie Ma/Big Good as his nominees.
132.Next, I turn to examine the facts and circumstances following Big Good’s acquisition of Ratio. 133.As the facts set out under §§35-39 above show, the sale of Easy Time back to Luxey effectively meant Luxey ended up acquiring Ratio, only a few months after Big Good acquired the business. The timing alone raises the question whether it was not planned as part and parcel of the Scheme. But timing alone is not enough. There are a number of other features that all point to the subsequent sale being the next stage of the Scheme that started with Big Good stepping into the shoes of Luxey in the acquisition. 134.The analysis conducted above shows a lack of any role played by Frankie Ma in the negotiation and the subsequent taking over of the operation of Ratio. He had no prior track record of buying or owning any manufacturing business, less still any brand-name garment manufacturing business. He conducted no due diligence of his own on Ratio. Apart from showing up at a one-hour meeting on 2 September 2010 and at the signing of the SPA, he showed no real interest or understanding of what he was purchasing through Big Good for HK$50.1 million. He had never visited Ratio’s offices or factory after acquiring the business.[106] He appointed no executive, and took no step to recruit or engage any. He was able to rely on the free service of people he knew to be full-time staff employed in a listed company where his friend was Chairman on what would have been seen as important functions to discharge in any company acquisition exercise, as if they were his own staff. In his interview with SFC in 2017, he did not even remember who managed the business at Ratio, which was expected to generate over HK$18 million a year. [107] 135.On the other hand, it is the evidence of Joseph Lau that Frankie Ma had informed him that he would rely on the “then existing management … of Ratio to run the business of Ratio as a long-term investment since Ratio had a very good track record of making profits”.[108] However, as Cora Chan and her mother, assisted by Fanny Ng, have all along been very much involved in running the business of Ratio[109], it was only reasonable to expect that their departure would have had a significant impact on its continued smooth operation. Ratio could not reasonably be expected to be on autopilot with its remaining staff following the exit of the Original Shareholders and Fanny Ng. The court does not accept that Frankie Ma either genuinely held that view, or that such a view was reasonably held so as to justify his not engaging for Big Good any executive with a supervisory or managerial role in Ratio to watch over the newly acquired business on his behalf. The court finds that it is one of the factors that gives significant weight to the proposition that Big Good did not acquire Ratio as a long-term investment with a view to operating its business. 136.The evidence and arguments put forward by the Respondents failed to answer to the strong inference arising from the evidence as outlined above, pointing to Frankie Ma continuing to act as a nominee of Joseph Lau after Big Good acquired Ratio. 137.Almost immediately following the September 2011 acquisition, Frankie Ma reversed his alleged original intention to operate the perceived lucrative business on a long-time basis. Instead, he decided to sell Ratio’s business to “obtain a quick return” allegedly because “he might probably acquire” what is said to be a “designer label of underwear and lingerie originated from South Korea”, as Joseph Lau was told. The registered trade mark he was hoping to license to the next purchaser of Ratio’s business was said to come with a ready distribution network of designer-labelled lingerie in multiple cities in mainland China, all to be assigned to Frankie Ma for the nominal consideration of HK$1. Ratio was expected to manufacture lingerie (on top of swimwear) to achieve “synergy” and make the trademark licence profitable. [110]
138.On the execution of the next step of what the SFC argued was the Scheme, it was the turn of Joseph Lau, on behalf of Luxey, who readily responded to Frankie Ma’s business proposition. Negotiations between him and Joseph Lau, with Ronald Lau involved, started as early as September 2010.[111] He proposed to have Luxey pay the grand sum of HK$390 million to acquire the shares of Easy Time from Frankie Ma, which would give it control and ownership of Ratio. Just how that proposed price was seen fit and who raised it first was in some dispute. In cross-examination, Joseph Lau first said it was “agreed between [him] and Mr. Ma”, and said it was Ma who proposed the figure. Joseph Lau was then confronted with the record of his interview with the SFC which reflected that he admitted to having raised the price range himself by reference to the level of profits that Ma was prepared to guarantee[112], to be multiplied by the prevalent PE ratios of other brand-name retail businesses in mainland China, and having then put forward the HK$390 million figure to Ma[113]. He had had to accept that his recollection at the interview would be more accurate than his recollection in the witness box.[114] 139.Therefore, even if it was Frankie Ma, as Joseph Lau had asserted in cross-examination (which he then had had to withdraw), who suggested a price range of HK$300 million to HK$400 million, the price that he proposed was still at the very high end of the range. There was no attempt to negotiate for a lower price when he stood in a distinctly advantageous position to do so:
140.Before 8 October 2010, Joseph Lau/ Luxey had already been able to instruct Somerly Capital‘s Kenneth Chow on the parties’ agreement on the broad terms of the acquisition, including the subject asset, the price and mode of payment, and explained to Kenneth Chow that it might be a VSA for compliance purposes. Chow was informed that the seller was an independent third party.[115] It is noteworthy that in this transaction, Somerly was never instructed to carry out due diligence enquiries or to carry out valuation of the business.[116] In fact, on the evidence, no due diligence have been conducted on behalf of the purchaser in this acquisition. It was clear from Kenneth Chow’s statements at the interview that the price of HK$390 million was already determined by the time Somerly was instructed, and the issue of profit guarantee only came later. [117] 141.It is not disputed that the only matter that could be perceived to have changed the value of the business of Ratio since its acquisition by Big Good was Ratio’s acquisition of the trademark licence for “Angevil”. However, the only inquiry into the value of the ‘Angelvil’ brand to the business of Ratio was conducted by Joseph Lau in the form of “some research” and some “preliminary due diligence about ‘Angevil’”, which he discussed with Eric Chung.[118] The subsidiary of Easy Time, Yofiel, that was set up to take benefit of the 50-year exclusive licence for HK$1 was not incorporated until 21 October 2010, well after Luxey put forward the HK$390 million price for acquiring Easy Time. Nothing was known of the ability of Yofiel, or indeed Easy Time to continue to exploit the trademark licence and manage the alleged manufacturing and retail business in underwear, online or otherwise, to commercial success. 142.Despite this fortuitous acquisition of a what was said to be valuable licence that had radically changed the value of Ratio and drastically increased the value of the assets of Frankie Ma who had only just acquired it, he could not remember acquiring this brand when interviewed by the SFC.[119] 143.The Respondents contend that the SFC’s attack on the consideration for the sale of Easy Time was misplaced. The precise timing of the acquisition of the mark “Angevil” is said to be irrelevant, because Joseph Lau had already been informed that Frankie “might probably acquire a licence” for the use of the trade mark, and Lau had proceeded to do “further due diligence … before [Joseph Lau] negotiated with Frankie Ma”. [120] That does not answer the case of the SFC. 144.I agree with the SFC that on the evidence there was no serious attempt on the part of the Joseph Lau to conduct due diligence on the alleged use and value of the mark “Angevil”, despite there existed undeniable doubts arising from the nominal value for which the supposedly valuable mark was exclusively licensed by an investment holding company in favour of Frankie Ma purely “by chance”, and an obvious need to assess the commercial value of the mark from a business point of view, and its projected commercial value to Ratio’s business.[121] The evidence of Joseph Lau on his exercising the alleged “preliminary due diligence” comprised mere general descriptions in affirmation, devoid of any detail or substance. It did not withstand cross-examination. I have no hesitation in rejecting it. The alleged existence of photographs of inspection of factory, retail stores and/or any registration records emerged only as bare assertions under cross-examination, which were withdrawn or became uncertain.[122] If the alleged steps were taken, I find that they would not have failed to have been properly recorded and filed in corporate records. If any form of documentary record had been taken by Joseph Lau and had existed, it would have been reasonable to expect them to have been studied and analysed in further documentations. Their unavailability in evidence apart from a few pages of internet searches suggest that no proper inquiry, let alone financial analysis had been conducted in order to arrive at a reasonable price to put forward for the intended purchase. 145.In re-examination, Joseph Lau sought to salvage his position by suggesting that due diligence work was “also done” by Eric Chung and the professionals instructed by Chung on his or Luxey’s behalf[123], but Eric Chung’s evidence was to the contrary. Chung admitted that he understood that ascertaining the value of the trademark was important in the due diligence exercise, but only mainland lawyer was engaged to check the legal aspect of the mark, and none to do any due diligence on the value of the trade mark. Chung was unable to remember that he had ever seen records of Joseph Lau carrying out any of the alleged steps of “preliminary due diligence”. 146.It was only at the later stage for the preparation of the VSA compliance that a valuation report was commissioned.[124] Ample was only engaged to do the “valuation report” on 18 February 2011,[125] when the January 2011 SPA had already been signed on 6 January 2011, with the price negotiation done and dusted at HK$390 million. The Ample report[126] was dated 11 March 2011, with a valuation that matches the pre-set price of HK$390 million by only a margin of HK$5 million on top. Even by then, no internet sales platform had yet been launched.[127] The identity of the “management of Yofiel”, a newly set up company to hold the exclusive licence to the trademark, remains an unknown team with no track record. Significantly, the end of a report contains the following disclaimer:
Despite the statement in the Ample report describing “Angevil” as having been “introduced to the PRC market in 2007 and [were] currently sold in over 10 cities in the PRC” no business figures were referred to in assessing the “business prospects” of the Angevil brand other than a 10-line general description. The financial data analysed remains confined to those of Ratio’s business as it stood prior to the September 2010 sale.[128] 147.I find that both Joseph Lau and Eric Chung have breached their duties of reasonable care, skill and diligence to further Luxey’s interests in negotiating the acquisition of Easy Time/Ratio from Big Good for a consideration of HK$390 million. I find that there no genuine effort on the part of Joseph Lau and Eric Chung for due diligence to be conducted on the use of the “Angevil” mark in the mainland China market or to critically assess its economic value, including on how the alleged “synergy” could occur to the benefit of Ratio, a swimwear manufacturer. In respect of this aspect of the evidence, I accept the case advanced by the SFC and firmly reject the arguments advanced by the Respondents as unsupported by the evidence or inherently improbable, save for the admissions or concessions made by their witnesses as highlighted above. The reliance on SFC and SEHK’s approval of the transaction as defeating any allegation based on s.214 is rejected. The facts and circumstances that ground the allegation of misconduct that the Respondents now face were not what the SFC or HKSE had looked into for the purpose of VSA compliance. None of the arguments advanced by the Respondents on this aspect affect my findings herein. 148.For completeness, I should point out that the case advanced by the SFC in this regard does not depend on a finding that the alleged exclusive licence for the use of “Angevil” acquired by Easy Time “by chance” was a sham.
149.A further aspect of the case in support of the existence of the Scheme relates to the disposition of the profits obtained by Big Good in the sale of Easy Time/Ratio to Luxey. It is not disputed that 40 million of the convertible preference shares Big Good received as part of the consideration of the sale were caused to be transferred to one Leao Yau. The evidence of other transfers made of the convertible preferential shares were inconclusive on the issue of control of the proceeds by Joseph Lau and not relied on in the three Complaints. The value of the 40 million shares came to around HK$6 million[129]. The dispute was on whether it was Joseph Lau who had caused Frankie Ma to make the transfer. The SFC’s case is that in transferring the 40 million shares, Frankie Ma was acting under the direction of Joseph Lau to discharge debts owed by Joseph Lau to Leao Yau. 150.Joseph Lau accepted the existence of a claim by Leao Yau for expenses and disbursement on his work in soliciting deals for Luxey. He explained he was unable to issue payment from Luxey in the absence of board approval of the arrangement, though he impliedly acknowledged that the money ought to be paid. He allegedly suggested Yau to go and ask Frankie Ma, as a major shareholder of Luxey, for payment.[130] Joseph Lau claimed to have no knowledge about the transfer of the 40 million shares by Frankie Ma to Leao Yau, until the SFC relied on the documentary evidence in these proceedings. He claimed to have no control over Yau or Ma, or in the aforesaid transaction. 151.Leao Yau was interviewed by the SFC, when he provided his explanation for the transfer to him of the 40 million convertible preferential shares of Luxey from Frankie Ma/ Big Good.[131] According to him, the shares were transferred on Joseph Lau’s instructions as set-off for business expenses incurred from around 2007 to 2009 for services he rendered when he was asked by Joseph Lau to explore and introduce business opportunities to Luxey. 152.I note that it is not the evidence of Joseph Lau that Leao Yau had continued to chase for the debt after he told Yau to ask Frankie Ma for payment, nor that he had ever inquired with Frankie Ma if Leao Yau did approach and what Ma’s response was. Neither Frankie Ma nor Leao Yau was called to give evidence for the Respondents on this matter. Joseph Lau appeared to have heard nothing further of the debt. There is no evidence of Frankie Ma having protested about having been asked to transfer millions worth of shares to Leao Yau, to whom he did not owe a debt. The undisputed facts point to a high probability that the debt was satisfied, and it was only because Joseph Lau is the person in control of the proceeds directed Frankie Ma to make the transfer, and Ma executed the direction accordingly. I reject the evidence of Joseph Lau as incredulous.
153.I find on a balance of probabilities, based on the aspects of the facts examined above that Frankie Ma and Big Good were acting as nominees of Joseph Lau in the Scheme. As shown above, the remarkable aspects of the facts and circumstances raised an overwhelming case to answer, whereas on the basis of the facts proven or found, the inference of the existence of the Scheme is more probable than not. Indeed, I am prepared to go further and find that when the facts are viewed as a whole, the only reasonable inference to be drawn was that Joseph Lau had directed and controlled Big Good’s acquisition of Ratio, had financed the transaction or a significant part of it, with the intention that Ratio be resold to Luxey in a short span of time, with Big Good netting a very substantial profit, over at least part of which Joseph Lau had effective control.
154.It should be noted that the SFC does not need to prove that any of the shares or cash which Luxey paid to Big Good as part of the consideration for the acquisition of Easy Time actually made its way to Joseph Lau’s securities or bank account in order to establish the Scheme, or a breach of duty.[132] 155.It is argued against the SFC that Luxey and its shareholders did not suffer any loss or prejudice as a result of the alleged scheme. I do not agree with this submission. The prejudice to the shareholders are not only to be reflected from a conduct resulting in, as the Applicant’s counsel has metaphorically put it, a “crash and burn” consequence to the company. The shareholders had a right to know the relationship between Joseph Lau and Frankie Ma. The failure to make the necessary disclosure by itself deprived Luxey’s shareholders of the opportunity to make an informed choice of whether to enter into the transaction with Big Good on the terms proposed, or to press harder for a better bargain in view of the facts and circumstances disclosed. 156.The SFC having established on the evidence that Joseph Lau had utilised at least part of the proceeds of sale received by Big Good but in his control to repay debts that he owed to Leao Yau, breaches of the No-Secret-Profit Duty and No-Conflict Duty are established against Joseph Lau. The court finds that the payment to Frankie Ma of part of the profits from the January 2011 acquisition to Leao Yau amounted to a secret profit or benefit that he made that he had failed in his duty as director to disclose to Luxey. The evidence given by Joseph Lau denying having caused or directed the payment made to Leao Yau in discharge of his debt, but Ma had done it out of his own volition, is rejected as unreliable and improbable. 157.Further, even if Luxey would not have succeeded in proceeding with the acquisition of Ratio in September 2010, it is no answer to the case on breach of the No-Conflict Duty: see Regal Hastings v Gulliver [1967] 2 AC 134 at 144G-145A; Grand Field Group Holdings Ltd v Chu King Fai [2016] 1 HKLRD at §§4.4-4.6. 158.In view of the establishment of a scheme on the evidence before me, Joseph Lau could hardly avoid a finding of breach of the Good Faith Duty and the Proper Purpose Duty, by his using a nominee to acquire Ratio, only to resell it to Luxey at a substantially inflated price without disclosing his personal interest in the transaction. The detriment that Luxey’s shareholders suffered was to have been deprived of the opportunity to negotiate for the acquisition of Ratio at a better price, whether from the Original Shareholders or from Joseph Lau’s nominee, Frankie Ma/Big Good. 159.Joseph Lau on behalf of Luxey could have negotiated from a better position with Big Good after Ratio fell into the hands of Big Good. Proper due diligence work should have been carried out on the value of the alleged business associated with the exclusive licence of the “Angevil” trademark before negotiating for the price. This constitutes a breach of the Reasonable Care Duty by Joseph Lau. 160.The shareholders were deprived of the information on the facts and circumstances in which Big Good had come to substitute Luxey as the purchaser of Ratio, and hence had lost the opportunity to make an informed decision on whether the terms of acquisition were fair or in the best interest of Luxey. Joseph Lau had failed in his Disclosure of Wrongdoings Duty when he would have known that the non-disclosure was not to the best interest of Luxey. 161.Breaches of fiduciary duties would be established by the fact that a director causes the company to enter into a transaction with his nominees, which is already a sufficient personal benefit or profit which, without disclosing the material facts to its shareholders to enable an informed decision to be made. [133] 162.I find that the particulars set out in §57 of the Petition proved on a balance of probabilities.
163.By extension of the findings on breaches of duty, the following breaches of s.214(1) would also be established –
164.Eric Chung was the only other executive director of Luxey, and Luxey’s CEO and Compliance Officer. He was the right-hand man of Joseph Lau, the Chairman, in Luxey. He had substantial professional experience at the relevant time, having been a certified public accountant for over 10 years. 165.I refer to the analysis of the facts and contemporaneous documents under the First Complaint in so far as it relates to Eric Chung. They are relevant on the degree of involvement Eric Chung, hence his knowledge of the Scheme found to have been perpetrated by Joseph Lau via his nominees, Big Good/ Frankie Ma. 166.Eric Chung was involved as the representative of Luxey in negotiations with the Original Shareholders as early as May 2010, and had attended meetings throughout and been included in email chains and signed off email communications with the Original Shareholders and their representatives in his own name on behalf of Luxey throughout June and July 2010. 167.Eric Chung was also the executive director of Luxey who had signed two of the three consultancy agreements between Luxey and with Frankie Ma on 1 January 2009 and 1 January 2010, under which Frankie Ma agreed to look for and recommend potential investment projects in mainland China to Luxey in return for a monthly consultancy fee of HK$4,000, and two options to purchase 67,060,000 (i.e. a total of 134,120,000 shares) in Luxey.[134] There is no dispute that he knew Frankie Ma was a personal friend and business associate of Joseph Lau. 168.Yet, when asked about the investment projects that Frankie Ma had recommended to Luxey in the course of his duties under the consultancy agreements, he gave evasive and vague answers referring to “stacks of documents” having been seen in some the offices of Luxey, but had to admit under cross-examination that he could not remember whether they were presented by Frankie Ma as investment opportunities.[135] 169.On the circumstances in which Big Good was named as the “purchaser” in the first draft of the July 2010 Draft SPA, he was the director of Luxey left to assist Frankie Ma/Big Good at the last negotiation meeting[136] before the signing of the deal on 8 September. He would have known very well it was Joseph Lau who introduced the deal to Frankie Ma, as he was requested by Joseph Lau to assist Frankie Ma in the acquisition on a friendly basis, alongside another professional staff employed by Luxey, certificate accountant Carol Chan. He then sought to name Steven Poon as the person who have communicated to the Original Shareholder of the withdrawal of Luxey. His evidence was however inconsistent with the evidence of Joseph Lau (who said he did not know if Steven Poon did or did not tell the Original Shareholders[137]), and his own sworn evidence (§46.3 of his affirmation), and that of Steven Poon, who said he was left out of the negotiations since introducing Joseph Lau to the Original Shareholders as a possible purchaser. This is supported by contemporaneous documents: as recent as 20 July 2010, the parties were communicating directly by email on the terms of acquisition without even including Steven Poon in the circulation.[138] On the evidence, it was more likely than not that Eric Chung would have known that Luxey had not really withdrawn from the acquisition. In continuing to participate and assist in the acquisition of Ratio by Big Good, it is more probable than not that he knew he was in fact assisting Luxey/Joseph Chung in ultimately acquiring Ratio, through an intervening transaction by the nominees, Frankie Ma/Big Good. 170.According to the Respondents, Eric Chung was requested by Joseph Lau to stay in the negotiation meetings and communication to represent Big Good, therefore to look after the interest of Frankie Ma/Big Good after Luxey allegedly withdrew from the potential transaction on account of a sudden realisation that it had insufficient cash to meet the purchase price then under negotiation. He accompanied Joseph Lau in attending the longest minuted meeting on 27 August 2010 on the terms of acquisition relevant to the subject transaction, as a representative of Big Good.[139] 171.On 15 September 2010, Eric Chung was sent an email by Fanny Ng of the Original Purchasers asking for transfer of HK$5 million payment from Big Good. Eric Chung however felt “not surprised”. He continued to be closely involved in the execution of the acquisition on behalf of Big Good, with Ma not investing in any human resources at all in the process. 172.After Big Good became the purchaser, Eric Chung was instructed to continue to be closely involved in the handover of the business, as the person responsible for the finances of Ratio, and even attended the office of Ratio as representatives of the new owner. Almost immediately thereafter, he found himself instructed by Joseph Lau to commence steps to acquire the very company he has only recently been helping to acquire and operate for a third party not his employer.[140] Even in September, when Kenneth Chow of Somerly was approached by Joseph Lau for discussion, the level of consideration of HK$390 million had already been fixed.[141] Joseph Lau did not seek input from Eric Chung or any of Luxey’s INEDs as to what consideration should be offered to Big Good.[142] Eric Chung would have known that no professional advisers had yet been engaged to advise on the value of Ratio for the purpose of the intended acquisition from Big Good: the engagements only came weeks later, and only for the purpose of satisfying the regulators. 173.By 15 October 2010 he signed a letter to engage Somerly as financial adviser to Luxey, with no responsibility to conduct due diligence. By then according to Kenneth Chow, the price of HK$390 million has already been fixed. Eric Chung would definitely have known about the new purchase price which was nearly 8 times the original value at which a friendly party, Ma/Big Good, had acquired Ratio. He knew that the price was fixed without professional adviser procured to provide an opinion on the fair and reasonable value of Easy Time. 174.He knew that Luxey did not obtain any documents or information as to the value of the Angevil brand, such as business accounts or sales data,[143] even though the Angevil trademark was acquired by Yofiel for HK$1 and in dubious circumstances.[144] Yet, Luxey did not engage any professional advisers to conduct due diligence on the value of the Angevil brand, though he admitted to knowing that the value of the trademark was important for the acquisition.[145] 175.He also signed the engagement letter of RSM as reporting accountant in the proposed acquisition. 176.All the above facts pointed to the fact that Eric Chung was charged with the duty to assist in executing the Scheme and must have been aware of all the material facts surrounding the planning and execution of the Scheme.
177.The need for inquiry into the relationship between Joseph Lau and Ma in the context of the September 2010 SPA, and what immediately followed in the context of the January 2011 acquisition of Ratio was more than obvious. 178.As a director Eric Chung owed duties to ensure that Frankie Ma was a party independent of Luxey in exercising reasonable care, given the impact of the transaction. There were numerous red flags that ought to sprung him into action to fulfil his director’s duties. 179.For a start, in relation to the events after the signing of the MOU leading up to the July 2011 Draft SPA, even Eric Chung agreed that Luxey would not have suffered any prejudice if it had waited till the expiry of the Exclusive Period without seeking any third-party buyer to take over the transaction in its place. 180.Eric Chung found himself unable to disagree with the proposition that it was a “striking coincidence” that the “independent purchaser” who ended up being substituted into the transaction within a mere 10 days from 20 July 2010 was none other than a personal friend and business associate of Joseph Lau. Even so, Chung refused to accept that a reasonable and responsible director would at least have considered the possibility that in fact Big Good was being used in effect to source investment opportunity for Luxey, and not an independent third party. [146] 181.Under cross-examination, Eric Chung told this Court that he had enquired whether Frankie Ma was an independent party “not acting in concert”. He said he asked Joseph Lau over the phone about it, and pointed to his affirmation for what he was told by Mr Lau. §66 of Eric Chung’s Affirmation filed in these proceedings reads as follows –
182.In oral evidence, Eric Chung also mentioned having asked Infosource[147], one of Luxey’s shareholders; and a fund manager of “Senrigan”, although he did not make it clear whether he was saying he personally made the inquiry with these two other parties. Even assuming he had meant to say he did, the evidence did not sit well with the record of his interview by the SFC, where he made no mention of having made any enquiries with shareholders or any fund manager regarding the independence or otherwise of Ma and Luxey/Joseph Lau, and repeated five times that “he did not even remember who did [the inquiry]”[148]. On the other hand, according to Joseph Lau, he himself had made the inquiry orally.[149] There remains no documentary record of any of these enquiries. 183.Against the overwhelming evidence of a string of events that are inexplicable except by the existence of a scheme, the need for a careful and discreet inquiry was obvious. The strong inference is that Joseph Lau’s evidence in this regard was self-serving, and Eric Chung simply did not conduct any independent inquiry. Had Eric Chung exercised an independent mind as Luxey’s executive director and made the necessary enquiry, he would have found out that Frankie Ma had no experience nor qualification including financial means to carry out the acquisition. It would have been apparent to him that in completing the acquisition, Ma was relying solely on senior staff of Luxey to assist him which he could only have mobilised at the request and with the authority of Joseph Lau. The acquisition of Ratio by Big Good was negotiated and executed as if Luxey/ Joseph Lau continued to have direct interest. If that did not raise alarm bells, the almost immediately commencement of planning for an onward sale of the same business to Luxey at nearly 8 times the price, fixed without prior professional assessment or advice, must have raised serious questions to any executive director with knowledge of the aforesaid background. 184.It was submitted on behalf of Eric Chung that no inquiry or investigation was necessary or warranted. A number of reasons were cited on the basis of lack of sufficiently strong evidence pointing to “personal or direct knowledge” on direct instruction given by Joseph Lau to Frankie Ma to acquire Ratio and/or to sell Easy Time to Luxey.[150] But as analysed above, the circumstantial evidence weighed heavily against the Respondents’ submissions. I find that there was more than sufficient to put Eric Chung on an independent inquiry on the relationship between Frankie Ma/Big Good and Joseph Lau/Luxey. I reject the oral evidence of Eric Chung referred to in §§181-182 as unreliable. 185.I agree with the SFC’s submissions that the issuance of a substantial number of convertible preference shares (around 1.7 billion) and ordinary shares (around 530 million) by Luxey had an impact of potentially diluting the shareholding of Luxey’s existing shareholders, and severely impacted Luxey’s ability to engage in further equity financing. In the circumstances, it was incumbent upon Luxey’s directors – particularly its CEO and compliance officer Eric Chung – to ensure that the consideration put forward was fair and reasonable. The facts showed that he did not take reasonable steps to ensure that there was proper due diligence done on the value of the new asset that was perceived to have radically raised the value of Ratio’s within a matter of weeks. 186.Eric Chung did not report any of the suspicious factors to the INEDs of the Board, as was his duty as a director to do. I refer to the above analysis of the facts. I reject any argument that none of the suspicious factors known to him warranted investigation or inquiry. 187.As regards Eric Chung’s failure to take reasonable care prior to agreeing to the price of HK$390 million for acquiring Easy Time by conducting proper inquiry into the value of the Angevil trademark to the business of Easy Time, I have already made my findings above. As a result, he failed to advise Joseph Lau or to cause Luxey to propose a lower price for the acquisition. In this regard, the court does not accept the fact that the price was not payable in cash but in convertible preference shares and promissory notes was an answer. 188.I find that his conduct fell below the standard of what was expected of a reasonably competent director of his professional experience and positions and roles in the company. 189.By these failures, Eric Chung’s conduct fell below the standard expected of a reasonably competent director with his professional experience of over 10 years as a certified public accountant, and his position and roles held in Luxey. I find the pleaded particulars in §61(1), (2) and (3)(a) of the Petition proved to the required standard against Eric Chung. It will follow from the section below dealing with the Third Complaint that the particulars pleaded in §61(3)(b) and (c) are also proven against Eric Chung. 190.With the above findings on breach of the Reasonable Care Duty, it follows that Eric Chung has conducted the business or affairs of Luxey in a manner which involved defalcation, fraud, misfeasance or other misconduct towards it or its members, and was unfairly prejudicial to its members, contrary to s.214 (b) and (d) of the SFO: SFC v Chin Jong Hwa [2019] HKCFI 2735 at §20, 22 and 24; SFC v Yeung Chung Lung (unrep., HCMP 205/2013, 17 February 2017) §85.
191.I refer to the Relevant Statements set out in §40 above. The SFC allege that the Relevant Statements in the VSA Announcement and VSA Circular were false in certain material particulars[151] -
192.The conclusion to be drawn in respect of the Third Complaint follows as night follows day from the court’s findings on the First Complaint and Second Complaint. Both Joseph Lau and Eric Chung voted in approval of the VSA Announcement and the VSA Circular. Joseph Lau had actual knowledge of the Scheme. Eric Chung either knew or ought to have known about the Scheme but took no serious step of inquiry to discover it. As executive directors, neither can escape responsibility for the falsity in the Relevant Statements of the two public announcements.
193.As a further or alternative limb under the Third Complaint, the SFC alleges that in the VSA Announcement and VSA Circular, the following pieces of information with respect to Luxey’s business or affairs was information that Luxey’s shareholders would reasonably expect to be made available to them –
194.As seen in previous findings, Joseph Lau was the mastermind and perpetrator of the Scheme. Eric Chung knew or ought to have known of the Scheme, as he was directly involved in its execution. Both of them would have known that the Relevant Statements were false. In failing to disclose them whether through the VSA Announcement or the VSA Circular, they were in breach of s.214(1)(c) of the SFO. 195.The non-disclosure of the above facts had meant that Luxey or its shareholders were not afforded the opportunity to exercise informed judgment on whether to agree to the acquisition of Easy Time, and if so on what terms. VII. ALTERNATIVE UPLEADED CASE 196.The SFC submits in its Opening Submissions that even if the court were to find that there was no Scheme involving Joseph Lau, Frankie Ma and Big Good in the acquisition and onward sale of Ratio, and that Big Good and Frankie Ma were indeed independent parties and not nominees of Joseph Lau, it would still be open to the SFC to contend that the Respondents were still in breach of s.214 SFO in the following manners –
197.Had it been necessary to make a determination on whether the above facts were matters that a shareholder would reasonably expect to be informed of, I would have had no difficulty in coming to a positive conclusion. Without the above information, a shareholder is deprived of access to all the information that might reasonably be needed to determine whether Joseph Lau was in a position of conflict of interest, or a real sensible possibility of conflict of interest, viewed objectively by a reasonable man.[152] The above proposition is also supported by the GEM Listing Rules 19.63. 198.The Respondents argue that there was no obligation to disclose to Luxey and its members the previous failed attempt at the acquisition of Ratio. I do not agree. It was not the simple fact of a previous failed attempt to acquire Ratio alone that should have been disclosed, but also the other facts surrounding and following the failed acquisition, as set out above, that cried out for the need of disclosure. 199.Furter, as Frankie Ma with whom he had engaged in the dealings that raised suspicion is his friend, the burden fell upon Joseph Lau to demonstrate that that the transaction with Big Good was in the best interest of Luxey.[153] In order to discharge that burden, the shareholders of the company would reasonably have expected to be informed of the above facts relevant to the relationship and the facts surrounding the successive acquisitions. 200.Had it been necessary to fall back on this alternative case in the absence of the finding of a Scheme, I would have gone ahead to find that there was still a breach of duty under s.214(1)(c). In my view, no prejudice would be caused to the Respondents in the SFC’s reliance on this alternative case, as the facts necessary for the findings to support it have all been thoroughly explored and addressed at the evidential hearing and in submissions.[154] VIII. CONCLUSION & DISQUALIFICATION ORDERS 201.On the basis of the findings made above, I conclude that Joseph Lau and Eric Chung conducted Luxey’s business or affairs in a manner which involved defalcation, fraud, misfeasance or other misconduct towards Luxey’s members, (2) resulted in Luxey’s members not having been given all the information with respect to its business or affairs that they might reasonably expect, and (3) was unfairly prejudicial to Luxey’s members. 202.I shall proceed to consider what disqualification orders should be made. The courts have approached this by categorising the severity of the disqualification order at three levels: China Best Group Holding Ltd (unrep., HCMP 745/2013, 30 May 2016) at §3 –
203.In considering the appropriate level of disqualification order to be imposed, the court is guided by the important objectives in the exercise of the jurisdiction to make disqualification orders, as Kwan J (as she then was) has summarised it in SFC v Fung Chiu [2009]2 HKC 19 at §12 –
204.The SFC submits that that the appropriate disqualification orders are (1) 12 years in the case of Joseph Lau, and (2) 6 to 8 years in the case of Eric Chung, which it regards as consistent with those periods imposed in China Best. The SFC postulates that the facts of the present case are similar but the breaches even more severe than that in China Best, bearing in mind the conduct resulted in a such more serious dilution of the share capital of the company, and a nearly 8-times inflation of the purchase price of the same company. 205.The SFC proposes a 12-year disqualification order against Joseph Lau. It was contended that the following factors together justify placing the severity of the breaches of Joseph Lau at the highest level -
206.As for Eric Chung, the SFC proposed a disqualification period of 6 to 8 years, on account of –
207.It was argued on behalf of Joseph Lau that China Best is not a comparable case – the facts of the present case is much less severe than China Best, where HK$305 million in cash was misappropriated as a result of an acquisition (also interposed by a nominee company) which would have been the focus of the culpability of the respondents, rather than dilution of shares by issuing 40% of the share capital. Counsel for the Respondents submitted that in the present case, Luxey had not suffered any identifiable financial loss and the Respondents have not misappropriated any funds belonging to Luxey. Instead, Luxey had arguably obtained a good deal: they did not have to pay out any cash for the purchase price, and had enjoyed profits generated by Ratio.[157] 208.In oral submissions, it was argued on behalf of Joseph Lau that if the court finds there was a Scheme, the later the Scheme was hatched, the lighter the penalty should be. Counsel submitted that the disqualification period against Joseph Lau should be between 5 to 8 years only. As for Eric Chung, if he was only found to have breached the Reasonable Care Duty, the disqualification period should be under 5 years. 209.I agree with Counsel for the Respondents that penalties less severe than that imposed in China Best would be appropriate in this case. Taking into account all the circumstances of the case, the submissions of the respective parties, and comparing the consequences of the conduct as revealed in the aftermath, I consider it appropriate to impose the following disqualification periods against the respective Respondents –
XI. DISPOSITION AND COSTS 210.I make the following orders:
211.It remains only for me to thank counsel on both sides for their able assistance.
Mr Abraham Chan SC and Mr Joshua Chan, instructed by the Securities and Futures Commission, the Petitioner. Mr Edwin Choy SC., Mr Nicholas Oh and Mr Kevin Leung, instructed by ONC Lawyer, for the 1st and 2nd Respondents. [1] Statement of Agreed Facts §3. [2] Statement of Agreed Facts §1 ; [B4/38/4672-4689]. [3] Statement of Agreed Facts §1. [4] Statement of Agreed Facts §3. [5] Statement of Agreed Facts §5. [6] Statement of Agreed Facts §16. [7] Ratio’s Certificate of Incorporation [B4/37/4671]. [8] July 2010 Draft SPA (defined below) Preamble (A) and (B) [CB1/8/32]. [9] July 2010 Draft SPA Preamble (A) [CB1/8/32]. [10] Statement of Agreed Facts §8, Affirmation of Lau Chi Yuen (“Joseph Lau 1st”) §§9-10 [A/6/96]. [11] Joseph Lau 1st §10 [A/6/96], Statement of Cora Chan dated 27 April 2017 §§2-4 [B2/15/3097-3098]. [12] Statement of Priscilla Choy dated 9 August 2017 §3 [B2/17/3725]. [13] Statement of Vivian Lau dated 14 August 2017 §3 [B2/18/4228], Statement of Charlotte Ho dated 16 June 2017 §3 [B2/16/3382]. [14] Statement of Agreed Facts §9. [15] Email of 27 May 2010 with draft MOU [B2/18/4231-4243]. [16] Minutes of meeting of 10 June 2010 [B2/18/4243-4244]. [17] [CB1/5/14]. [18] Winship engagement letter [CB1/3/8], RSM engagement letter [CB1/6/19]. [19] [CB1/7/28]. [20] Statement of Agreed Facts §14. [21] Statement of Agreed Facts §15. [22] Statement of Agreed Facts §15. [23] Statement of Agreed Facts §17. [24] Statement of Agreed Facts §17. [25] See 2009 and 2010 consultancy agreements [CB1/1/1-4]. For 2008 consultancy agreement see Statement of Agreed Facts §18 [26] Joseph Lau 1st §24 [A/6/100] [27] [CB1/8/29]. [28] [CB1/10/128]. [29] [CB1/11/130]. [30] [CB1/10/129]. [31] Statement of Agreed Facts §19. [32] Statement of Agreed Facts §20. [33] [CB1/10/129]. [34] Statement of Agreed Facts §21. [35] Statement of Agreed Facts §21. See Clauses 3.1, 3.4. [36] Ibid. Clause 3.2(c). [37] See the amount of inventory at [CB2/15/305]. See also Statement of Agreed Facts §21. [38] Statement of Agreed Facts §22. [39] Statement of Agreed Facts §23. [40] Statement of Agreed Facts §22. [41] [B4/69/5237]. [42] [CB2/15/303]. [43] Statement of Agreed Facts §24. [44] Statement of Agreed Facts §25. [45] Statement of Agreed Facts §26. [46] 1st Aff. Of Joseph Lau §42(1). [47] Licence Agreement Clause 9.1 [CB3/22/550]. [48] Statement of Agreed Facts §31. [49] Statement of Agreed Facts §32. [50] Statement of Agreed Facts §32. [51] CL.9, January 2011 SPA Core 3/22A/384. [52] Statement of Agreed Facts §35. [53] Statement of Agreed Facts §34. [54] See engagement letter [CB3/24/578]. [55] [CB3/24/578]. [56] Statement of Agreed Facts §37. [57] Statement of Agreed Facts §39. [58] Records of payment [CB5/33/805+]. See also Joseph Lau 1st §§74-75 [A/6/125-126]. [59] Statement of Agreed Facts §42. [60] Petition §48. [61] Petition §55. [62] [CB4/26/613]. [63] [B1/3/362-377] [64] Day 4/24:2-19. [66] Petition §§57-59 [A/1/24-25], Joint List of Issues §§2-4; Annex 1. [67] Petition §§60-61 [A/1/27-28], Joint List of Issues §§7-9. [68] Petition §§63-65 [A/1/28-30]. [69] Annex to email at [B2/18/4231]. [70] 1st Affirmation of Lau §20 [A/6/100]. [71] CACV 90/2012, 17 September 2013 at §§106-107. [72] [1998] PIQR 324 [P#8] at 340 as approved in Pacific Electric Wire & Cable Co Ltd v Texan Management (unrep., CACV 90/2012, 17 September 2013) [P#9] at §§106-107. [73] Rs’ Closing Submissions §4(2). [74] Affirmation of Lau Chi Yuen Joseph (“1st Aff. Lau”) para.13. Minutes of meeting [CB I /2/5-7]. [75] 1st Aff. Lau para. 14-15. [76] 1st Aff of Lau para. 13. [77] [CB1/7/28]. [78] [B2/17/3729]. [79] Email from F Zimmern attaching draft MOU [B2/18/4231-4233]. [80] Rs’ Closing Submissions §21(2). [81] 1st Draft of SPA, 30 July 2010 at [CB1/8/37]. [82] CB1/7/28. [83] [B1/4/457-460] at §§729-732; 757-760; 781-782, 795-800, 833-840. [84] ROI of Fanny Ng: B1/2/143-144. [85] CB/1/1. [86] 1st Joseph Lau §§22, 24 [A/6/100]. [87] Statement of Charlotte Ho para.5(a) [B2/16/3383], although she did not think the naming of Big Good as purchaser had anything to do with the suggestion that Luxey might use a subsidiary to enter into the MOU. [T2/83:6-84:5] When shown the signed version of the SPA, Ms Ho agreed that it was made clear, presumably before the agreement was finalised, that it was Big Good that was the purchaser. [T2/82:10-17]. Reading the cross-examination of Charlotte Ho fairly, it was not until after the meeting of 27 August 2010 meeting that the removal of any reference to Luxey/Joseph Lau from the July 2010 Draft SPA was seen appropriate. [88] [CB/9/72, 73]. [89] [Day 2/77:13 – 78:20]. [90] CB1/9/75, 91-92. [91] [CB1/9/72-127]. [92] Joseph Lau’s 1st ROI §§280-283, 306-309 [B1(7)/9/1519-1520]; Joseph Lau’s 2nd ROI §§332-337, §§350-353, §§364-369 [B1(10)/12/2342-2344]. [93] CB1/11/130. [94] 1st Aff of Lau para. 27. [95] [CB1/12/131]. [96] Minutes of meeting at CB1/10/129. [97] CB1/10/129. [98] Cora Chan’s ROI §§467-478 [B1/1/20-21], Fanny Ng’s ROI §§371-391 [B1//2/143-144], Statement of Charlotte Ho §11 [B2/16/3385], Statement of Priscilla Choy §§12 and 14 [B2/17/3728-3729], Statement of Vivian Lau. [99] Cora Chan’s Statement §§7, 13 [B2/15/3098, 3100], Cora Chan’s ROI §§848-851 [B1/1/35-36]; Day 3/49:17-51:15. [100] Frankie Ma’s ROI §§39-51 [B1/8/1349-1350]. [101] Frankie Ma’s ROI [B1/8/1375-1378]. [102] CB1/10/128. [103] 1st Aff of Lau para. 29. [104] Day 5/41:14-17; Day 5/45:21-46:4. [105] [B3(2)/31/4632-4641]. [106] Fanny Ng’s ROI §§652-679 [B1/2/153-154]. [107] Frankie Ma’s 1st ROI §§1279-1296 [B1/8/1383-1384]. [108] 1st Affirmation of Lau 34 [A/6/104]. [109] [Day 3/8:4-9:10]. [110] 1st Affirmation of Lau §35-41 [A/6/104+]. [111] [Day 5/51:9-22]. [112] According to Joseph Lau at the interview, Ma suggested HK$20 million: B1(7)/1535 at §545. [113] ROI of Joseph Lau at [B1(7)/1533-1535] at §§509,-513, 519, 537-539, 543-545. [114] [Day 6/17:6-18:10]. [115] ROI of Kenneth Chow [B1(3)/551-552, 557] §10.-§109, §§175. [116] ROI of Kenneth Chow [B1(3)/552] §114-§117. [117] POI of Kenneth Chow [B1(3)600] §§780, 782, 784. [118] 1st Affirmation of Lay §§37-39 [A/6/105]. [119] [B1(6)/8/1379-1383] at §§1131-1260. [120] Rs’ Closing Submissions §30, referring to §§37-39 of 1st Affirmation of Joseph Lau. [121] [Day 6/7:6-8:8, 9:2-23]; [Day 7/34:11- 35:11]. [122] [Day 6/11:7-13:4]. [123] [Day 6/47:2-22]. [124] [Day 7/ 35:3-36:19; 43:2-24]. [125] [CB3/25/578-583]. [126] [B7/1713]. [127] [B(7)/1719]: “The management of Yofiel is now working on the launch …”. [128] See Ample Report, §§7.0, 8.0 at [B(7)/1720]. [129] At HK$0.15 per convertible preference share. [130] 1st Affirmation of Lau §68 [A/6/124]. [131] [B1(6)/7/1261] §§74-144, 161-224, 295-342, 392-397, 414-447. [132] Cf. Joseph Lau 1st §§67-70 [A/6/124-125]. [133] see China Best [P#4] at §§33-35, 46, 93-94, Vos v Global Fair Industrial Ltd (unrep., HCA 4200/1995, 1 December 2009) [P#10] at §§90-105, 168-173 [134] See 2009 and 2010 consultancy agreements [CB1/1/1-4]. For 2008 consultancy agreement see Statement of Agreed Facts §18. [135] [Day 6/61:10-66:7]. [136] Lau attended the 2 September 2010 meeting with Ma, the only and last meeting he attended days before the SPA was signed: [CB1/10/129]. [137] [Day 4/23:17-24:12]. [138] [CB1/7/28]. [139] [CB/10/128]. [140] 8 October 2110 Meeting with Somerly [B3/24]4572]; [B1/5/547-548 §50-53]. [141] POI of Kenneth Chow [B1(3)600] §§780, 782, 784. [142] [Day 6/16:25-17:15]. [143] [T7/38(4)-43(18)]. [144] [CB3/22b/550], [CB4/26/613-614]. [145] [T7/31(25)-40(25)]. [146] Day 6/71:4-72:6 [147] “Inforsource” was recorded in the Judge’s own near-verbatim notes of the evidence but did not get recorded in the transcript. [148] Day 7/59:3-22. [149] B1(7)/9/1541 at §§642-657. [150] Rs’ Closing §56. [151] Petition §63 [152] Kao Lee & Yip v Koo Hoi Yan [2003]3 HKLRD 296 §50. [153] Newgate Stud Company & Ors. v. Anthony Penfold and Ano. [2004]EWHC 2994 (Ch) §§242, 244-245. [154] Best Group Holding Ltd (unrep., HCMP 745/2013, 29 October 2015) at §35. [155] VSA Circular [CB3/26/606-607], [T6/56(20)-59(2)]. [156] VSA Circular [CB3/26/606-607], [T6/56(20)-59(2)]. [157] [B7/74] | |||||||||||||||||||||||||||||||||||||||||||||||||
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