E & P Global Holdings Ltd (Formerly Known As Siberian Mining Group Co) v. Cheung Keng Ching and Others

HCA 706/2010

[2023] HKCFI 1847

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 706 OF 2010

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JUDGMENT

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1.This is a claim for directors’ fraudulent breaches of fiduciary duties or trust owed to the Plaintiff, Siberian Mining Group Company Limited, which is a listed company in Hong Kong.

2.The Plaintiff was listed on the Hong Kong Stock Exchange (“HKSE”) on 8 November 2002. The 1^st to 3^rd Defendants were the only directors of the Plaintiff at the material times.

3.This action was commenced pursuant to the Order of Deputy High Court Judge Burrell dated 18 March 2010 under HCMP 1869/2008 (“DHCJ Burrell’s Order”), which involved a petition by the Securities and Futures Commission (“SFC”) against the Plaintiff and the Defendants under s 214 of the Securities and Futures Ordinance, Cap. 571.

4.The Plaintiff complains that the Defendants were in breach of fiduciary duties owed to the Plaintiff by making wrong investment decisions in the following 3 transactions:

(i)  It was wrong for the Defendants to cause the Plaintiff to acquire 2,200,000 shares of Grandtop International Holdings Limited (“Grandtop”), which was also a limited company listed on HKSE, at the price of HK$6,600,000 (HK$3.00 per share). It is alleged that the actual purchase price was higher than the purchase price set out in the bought and sold notes and the board minutes. The Plaintiff claims that the transaction was fraudulent and was not in the interests of the Plaintiff. Such act of the Defendants constituted misfeasance, misconduct or defalcation in relation to the Plaintiff’s business and affairs, and was a fraudulent breach of trust on the part of the Plaintiff. For easy reference, I will refer this investment as “the Grandtop Investment”.

(ii)  It was wrong for the Defendants to cause the Plaintiff to acquire share option of Macau Asia Investments Limited (“MAIL”) which was a company incorporated in the United States engaging in the information and technology (“IT”) business. It is alleged that the Defendants acted in breach of duties and failed to act in the best interests of the Plaintiff by failing to carry out due diligence exercise, to study the mechanism to sell or realise the value of the shares, to make disclosure in respect of the exercise of its option to acquire 10 million shares, which constituted a fraudulent breach of trust on the part of the Defendants. For easy reference, I will refer this investment as “the MAIL Investment”.

(iii)  It was wrong for the Defendants to cause the Plaintiff to invest in or make a loan to a company incorporated in the Mainland known as “北京吉嘉諾服裝有限公司” (Beijing Kut Ka Lok Fashion Apparels Limited)(“KKL”). It is alleged that the Defendants acted in breach of duties and failed to act in the interests of the Plaintiff by failing to carry out due diligence exercise and to seek recovery of the investment or the loan, which constituted a fraudulent breach of trust on the part of the Plaintiff. For easy reference, I will refer this investment (including the making of the loan) as “the KKL Investment”.

5.It is clear from the Plaintiff’s case as formulated above that the claim is one based on fraudulent or reckless breach of trust, which has been confirmed by Mr Park, counsel for the Plaintiff, at the trial. The allegations made in respect of the Grandtop Investment are based on deliberate and intentional fraud, whereas the allegations in respect of the latter two investments are based on recklessness on the part of the Defendants.

6.Both Mr Park and Mr Lui, counsel for the 1^st and 2^nd Defendants, have signed an agreed list of issues (“the List of Issues”). For the purpose of this Judgment, I do not find it necessary to refer to the exact terms of the List of Issues. As I see it, the main issue in this case is whether the Defendants were fraudulently in breach of trust in conducting the affairs relating to the 3 subject investments.

7.The 3^rd Defendant was absent at the trial. Despite his absence, the Plaintiff is still required to prove its case against him.

EVIDENCE AT THE TRIAL

8.Paragraph 3 of DHCJ Burrell’s Order provides that the parties are, for the purposes of this action, at liberty to rely on or refer to all or any affirmations, statements, records of interview (“ROI”) and other document filed or otherwise disclosed by the parties in HCMP 1869/2008.

9.All the witness statements of the Plaintiff’s witnesses were admitted at the trial without cross-examination. The Plaintiff’s witnesses were:

(i)  Mr Hong Sang Joon, the Plaintiff’s former director, whose witness statement gives a summary of the SFC investigation in relation to the 3 subject transactions;

(ii)  Madam Leung So Ching, Associate Director of Enforcement Division of the SFC, who carried out an inquiry into the 3 subject transactions and deposed to the 4 affirmations under HCMP 1869/2008;

(iii)  Mr Ngai Cheung Kin David, Senior Director of Enforcement Division of the SFC, who carried out an inquiry into the 3 subject transactions and interviewed, inter alias, the Defendants; and

(iv)  Mr Tjang Huy Gien Andrew, Senior Director of Enforcement Division of the SFC, who carried out an inquiry into the 3 subjections and interviewed the 1^st Defendant.

10.The 1^st Defendant was the only witness who testified on behalf of the case of the 1^st and 2^nd Defendants. The 1^st Defendant provided the backgrounds for the subject transactions and the reasons for making the various investment decisions which are the subjects of complaint by the Plaintiff.

11.The 1^st Defendant had been subject to vigorous cross-examination by Mr Park. As further elaborated in the latter part of this Judgment, there is no sufficient basis for the court to reject his explanations for conducting the affairs relating to the subject investments. It is fair to say that his evidence had remained unshaken after cross-examination.

PROBLEMS WITH THE PLAINTIFF’S CLAIM

12.Before I deal with the 3 subject investments, Mr Lui has referred me to a pleading point.

13.As mentioned in §5 above, the Plaintiff’s claim is one based on fraudulent or reckless breach of duties. The Plaintiff has also confirmed through its counsel that its negligence claims are abandoned, and it will confine its case to fraudulent or reckless breach of fiduciary duties. The Plaintiff might have to adopt such course in order to avoid the limitation issue raised by the Defendants, but that is now the basis of the Plaintiff’s claim.

14.The problem is that the Plaintiff relied on certain “negligence” allegations in the course of the trial with a view to prove fraud. These negligence allegations have never been pleaded in support of the Plaintiff’s fraud claims. Indeed, Issues 4, 9 and 14 of the List of Issues involve the claim on fraud, and specific paragraphs in the Amended Statement of Claim were identified in support of such claim on fraud. As further elaborated in the latter part of this Judgment, most of the allegations now relied on by the Plaintiff are not pleaded or referred to in the List of Issues.

15.Further, I agree with Mr Lui that the court cannot “infer” fraudulent intent or recklessness just because the impugned investments did not turn out to be as profitable as expected. Given the trite proposition that the fact that an investment turns out to be unprofitable is not evidence, by itself, of negligence or lack of proper care and breach of duty[1], it is a fortiori when the allegation is of fraud.

16.The premise of the Plaintiff’s fraud speculation is that so long as there were losses flowing from the impugned investments, such losses must have been intended by the Defendants (or one could presume this to be the case). However, there is no evidence that the Defendants (i) knew the investments would fail, or (ii) desired them to fail, or (iii) knew there were high risks of failure.

17.The question this court has to determine is whether the Defendants honesty believed that the subject investments were made in the Plaintiff’s interests.[2]Indeed, the 1^st and 2^nd Defendants were at all material times the Plaintiff’s majority beneficial shareholders and would suffer the most if the investments failed. There was no reason or incentive for them to cause the Plaintiff to make the investments knowing or not caring whether they would harm the Plaintiff (and indirectly themselves). Mr Park submits that the 1^st Defendant simply treated the Plaintiff as his own company, but the lack of the said incentive would be a very relevant factor for the court in determining the states of mind of the Defendants at the relevant times. As further elaborated in the latter part of this Judgment, there were justifications for the Defendants to cause the Plaintiff to make the subject investments. They genuinely believed that it would be in the interests of the Plaintiff to do so.

18.This case was commenced more than 10 years ago following the investigation of the Plaintiff’s affairs by the SFC. However, it seems that the litigation has lost its steam over the years. Apart from relying on the statements made by the investigating officers and one of the former Plaintiff’s directors, the Plaintiff has not obtained other evidence to prove fraud or recklessness on the part of the Defendants. Apart from the explanations given by the 1^st Defendant relating to the making of the subject investments, there is little rebuttal evidence to contradict the Defendants’ case. All the Plaintiff can do is to raise some dubious features about these investments, and that is not sufficient to substantiate fraud or recklessness on the part of the Defendants.

19.Fraud is a serious allegation. Full particulars should be pleaded in order to give the opposing party a fair opportunity to defend the fraudulent allegations. As I will further elaborate below, the Defendants are not given such opportunity to deal with some new allegations raised by the Plaintiff either in cross-examination or in its submissions. Further, even if the Plaintiff were to be allowed to rely on the negligence allegations (which I disagree in view of the reasons given in the preceding paragraphs), there is no evidence to show that the due diligence works caused to be carried out fell below the acceptable standards.

THE RELEVANCE OF THE PROCEEDINGS IN HCMP 1869/2008

20.It is common ground that the documents in the HCMP 1869/2008 proceedings can be referred to in this case.

21.There was no trial in HCMP 1869/2008. Those proceedings were disposed of by way of the Carecraft procedure against the 3^rd Defendant. For the 1^st and 2^nd Defendants, they did not proceed by way of the same summary procedure but agreed to a disposal of the SFC’s claims on the basis that the facts alleged against them were “not challenged” therein. It may be the case that the 1^st Defendant decided to give more evidence in this action explaining their decision-making in the subject investments, but such factor should not be taken against the Defendants for the 1^st Defendant might have decided not to give further evidence in HCMP 1869/2008 for strategic considerations.

22.In disposing of HCMP 1869/2008, DHCJ Burrell made orders of disqualification against the 1^st to 3^rd Defendants and ordered the Plaintiff to bring this civil action against them. It is important to note that the SFC did not pursue any fraud claims and DHCJ Burrell did not find any fraud on the part of the Defendants. Hence, the “findings” made in HCMP 1869/2008 are of little relevance to the present case where the claim is one based on fraudulent or reckless breach of duties.

23.With these observations in mind, I turn to deal with the 3 subject investments.

THE GRANDTOP INVESTMENT

(i)  The background and the explanations given by the 1^st Defendant

24.The Grandtop Investment had caused a loss to the Plaintiff. The share price of Grandtop dropped gradually from around HK$3.00 per share in June 2003 to around HK$2.00 per share in December 2003 and further to HK$0.16 per share in December 2005. Furthermore, no dividends were declared by Grandtop between March 2003 and March 2005.

25.The explanations given by the 1^st Defendant for making the Grandtop Investment have been succinctly summarised in the closing submissions of Mr Lui and the Amended Defence of the 1^st and 2^nd Defendants (“the Amended Defence”):

(i)  In June 2003, the 1^st Defendant met Mr Edmund Siu (“Edmund Siu”) and his father Mr Garry Siu (“Garry Siu”) who was the then Chairman of Grandtop. The 1^st Defendant was then optimistic about Grandtop’s prospect in its trading of garment products to the United States after relaxation of the quota restrictions. The 1^st Defendant and Garry Siu discussed and intended to develop a long-term and naturally beneficial co-operation between the Rontex Group (of which the Plaintiff was a member) and the Grandtop Group. The business of the Rontex Group up to that point had focused on trading garments to South America (constituting as much as 99% of its turnover for the year ended 31 March 2002, as stated in the prospectus). It was critical to the Rontex Group’s continued profitability that this established trading business be sustained. To meet the strong demand for garment products in the South American markets and to reduce dependence on sourcing its products from third party vendors, the Rontex Group in December 2001 started its own manufacturing operations through Rontex Co. Ltd. (寧波朗迪紡織品有限公司) (wholly foreign-owned enterprise in the Mainland) with a manufacturing facility in Ningbo. However, it still could not produce all the garments which the Rontex Group had required for sale to South America, so it continued to regularly source garments from other manufacturers in the Mainland. The 1^st Defendant thus found Grandtop’s extensive connections with garment manufacturers in the Mainland useful and beneficial to the Rontex Group’s businesses. In addition, the 1^st Defendant took the view that Grandtop’s experience in and knowledge about the United States market (with quota restrictions) would be beneficial to the development of the Rontex Group’s business in terms of future expansion from the South American markets (without quota restrictions) to the United States market, as the Rontex Group was by then not experienced or knowledgeable about the United States market. For the purpose of such expansion, the Rontex Group would have to tap into Grandtop’s connections and knowledge through cooperation. On the other hand, the Rontex Group’s manufacturing facility in Ningbo and its connections with other garment manufacturers in the Mainland and the South American markets were considered beneficial to Grandtop.

(ii)  The 1^st Defendant was told by Garry Siu that Grandtop already held over HK$10 million shares in the Plaintiff; and he would introduce some shareholders of Grandtop who would want to sell their shares off the market to the Rontex Group. The 1^st Defendant agreed to acquire shares in Grandtop since he thought it was a good chance for the Rontex Group to build a long-term relationship with Grandtop. After discussion, the 1^st Defendant, through the making of an agreement in June 2003 (“the June 2003 Agreement”), agreed to purchase 2.2 million shares in Grandtop at HK$2.90 per share.

(iii)  In June 2003, the market price of the Grandtop shares fluctuated but was around HK$3.00 per share and not HK$2.00 per share. In order to establish a long-term operational synergy considered to be mutually beneficial to each other, the Plaintiff agreed to acquire Grandtop’s shares at HK$2.90 per share.

(iv)  The 1^st Defendant told the 3^rd Defendant about the June 2003 Agreement and asked him to follow up, including to analyse and investigate the performance of Grandtop, study its annual reports and gather other relevant information. The 3^rd Defendant orally reported to the 1^st Defendant that Grandtop’s profitability and rate of return were not bad. This report is supported by objective evidence: Grandtop’s Annual Results as at 31 March 2003 and 31 March 2004 show that its turnover and net profit had been on the rise up to that point in time.

(v)  Pursuant to the June 2003 Agreement, the Plaintiff through Keen Choice Technology Limited (one of the wholly-owned subsidiaries of the Plaintiff within the Group)(“Keen Choice”) acquired 1,400,000 shares in Grandtop from one Madam Chan Jenny Chun Nei (“Chan”) and 800,000 shares in Grandtop from one Mr Lau Pak Lun (“Lau”); and paid HK$6,380,000 (at HK$2.9 per share). The share transfers were done via Ever-Long Securities Company Limited (“Ever-Long”). The evidence suggests that though the purchases were from Chan and Lau, Lau was indeed merely a nominee lending his securities account for Chan’s use.

(vi)  The 3^rd Defendant was the person designated with the administrative task of implementing the Grandtop Investment. Chan and Lau were introduced to the 3^rd Defendant by Edmund Siu, and neither the 1^st nor 2^nd Defendant had any past relationship with Chan or Lau.

(vii)  The 2^nd Defendant relied on the 1^st and 3^rd Defendants in regard to the June 2003 Agreement and its execution, and was not herself involved in those matters. As the 1^st and 2^nd Defendants delegated the execution of the June 2003 Agreement to the 3^rd Defendant, they did not know the details of the execution of the Grandtop transaction. The 1^st and 2^nd Defendants signed the relevant board minutes of Keen Choice dated 22 December 2003, whereas the 3^rd Defendant signed the relevant bought and sold notes (“the Bought and Sold Notes”).

(viii)  In January 2004, the 1^st Defendant decided and delegated the task to the 3^rd Defendant to procure the Plaintiff to further acquire 1,170,000 shares and 250,000 shares in Grandtop. With these purchases intended to be from the market, the 1^st Defendant simply gave a price range to the 3^rd Defendant and left it to the 3^rd Defendant to procure the further purchases. Neither the SFC in HCMP 1869/2008 nor the Plaintiff in this action has alleged that these further purchases were not in the Plaintiff’s interests.

26.It is true that the Grandtop Investment was not successful resulting in loss to the Plaintiff. However, businessmen may make mistakes in investment decisions, and so bad investment decision per sec is not actionable. Further, as mentioned above, the claim in respect of the Grandtop Investment is one based on intentional or deliberate fraud, and so the Plaintiff needs to prove such fraud to substantiate its claim.

27.The Plaintiff is relying on the following two matters to prove fraud on the part of the Defendants:

(i)  the June 2003 Agreement is a fabrication;

(ii)  the Defendants had concealed the true purchase price for the acquisition of the Grandtop shares.

28.I will deal with each allegation in turn.

(ii)  Allegation that the June 2003 Agreement is a fabrication

29.For the fabrication point, I agree with Mr Lui that the Plaintiff is not entitled to run this argument on the ground that it is not pleaded. As further elaborated below, the raising of this serious allegation only at the trial deprives the Defendants a fair opportunity in preparing a proper defence in answer to the allegation. In particular, the SFC did not pursue any fraud claims and the DHCJ Burrell did not find any fraud on the part of the Defendants in HCMP 1869/2008.

30.In any event, there is no substance to such complaint.

31.Apparently, there is an issue as to when the 1^st Defendant made the agreement to acquire the Grandtop’s shares on behalf of the Plaintiff. As the share price fluctuated from time to time, the timing for the making of such agreement may affect whether the purchase price agreed by the 1^st Defendant was reasonable.

32.According to the testimony of the 1^st Defendant, the agreement was made in June 2003. By that time, the share price of Grandtop was about HK$3.00, and that was why the purchase price was agreed at HK$2.90 per share. However, the Plaintiff attacks the credibility of the 1^st Defendant’s evidence in this regard on the ground that he only mentioned the June 2003 Agreement for the first time in his oral testimony. If such agreement were to exist, he should have mentioned it earlier in the 7 interviews he had with the SFC. But this is not quite correct.

33.First, the 1^st Defendant did say in in his first interview by the SFC on 29 June 2005 that he had met with top management of Grandtop in 2003. In the statement, he referred to a meeting with Edmund Siu in 2003.[3] Whilst he did not specifically refer to the contents of the discussion in that meeting, it is misleading and inaccurate for the Plaintiff to suggest that the 1^st Defendant only mentioned his meeting with those persons in 2003 for the first time in his testimony.

34.Second, there is some indication that the 1^st Defendant was providing the same account about the June 2003 Agreement in HCMP 1869/2008. As shown in §§8-11 of the 2^nd affirmation of Madam Leung So Ching, who was then a SFC’s officer, the SFC’s evidence in reply indicates that the 1^st Defendant already gave the evidence in HCMP 1869/2008 that he had decided to acquire shares in Grandtop at HK$2.90 per share “in or about June 2003”.

35.The Plaintiff has failed to disclose or include in the trial bundles the 1^st Defendant’s affirmation filed in HCMP 1869/2008. Neither the 1^st Defendant nor his solicitors in this action can now locate a copy of that affirmation which, according to the SFC’s evidence filed in reply, should have been filed in opposition on 17 December 2008. This actually highlights the problem of raising a new serious and unpleaded allegation at such a late stage. When being faced with such new allegation first raised in cross-examination, the 1^st Defendant could only admit that he had not taken the interview seriously.

36.In any event and more importantly, as pointed out by Mr Lui, the making of a decision to acquire 2,200,000 shares in Grandtop before December 2003 is clearly substantiated by the contemporaneous records. In fact, those records put it beyond doubt that the acquisition was done and considered to have been done before September 2003, and therefore reported publicly to the Plaintiff’s shareholders in its 2003 Interim Report. In that report, it was recorded that the Plaintiff had “Investments securities” in the sum of HK$7,200,000 as at 30 September 2003 and HK$600,000 as at 31 March 2003. The latter was clearly referring to an investment in Ningbo. As submitted by Mr Lui, these records show that in the period from 1 April 2003 to 30 September 2003, the Plaintiff had further invested HK$6,600,000 in securities. Though the actual purchase price was HK$2.90 per share, it is likely that such investment refers to the acquisition of 2,200,000 shares in Grandtop. In fact, the figures in the 2003 Interim Report also tally with the internal records kept by the Plaintiff.

37.Further, the 3^rd Defendant also told the SFC that the purchase of 2,200,000 shares in Grandtop had probably been completed with the shares received prior to 30 September 2003, such that it had already been reported in the 2003 Interim Report.[4]

38.In his final submissions, Mr Park has pointed out certain “inconsistencies” between the oral testimony of the 1^st Defendant and what he told the SFC in the previous 7 interviews. However, the only inconsistency that was specifically put to the 1^st Defendant in cross-examination was that he told the SFC he had given the 3^rd Defendant a price range without mentioning HK$2.90. In response, the 1^st Defendant admitted “when [he] attended the interview with the SFC, [he] didn’t deal with the interview very seriously”. In re-examination, he further explained:

“Because at that time, in those years, I worked very seriously and worked very hard for the company. So I have never thought of being sued so when SFC interviewed me, so I did not deal with that seriously. So in the hindsight, had I dealt with it seriously at that time, perhaps today I would not have been sued.”

39.I accept such explanation as a genuine one. Indeed, the 1^st Defendant repeated the answer when being asked why he had not talked about the June 2003 Agreement with Garry Siu in SFC’s interviews. One must not assume that everything the 1^st Defendant said earlier was perfectly accurate or complete, or that the 1^st Defendant could not have made mistakes. What is most important is that there is no indication of fraud in the transaction itself.

40.For these reasons, there is insufficient basis to establish the serious allegation that the June 2003 Agreement is a fabrication.

41.There is also a suggestion by the Plaintiff that, even if the June 2003 Agreement were to exist, the Defendants should have renegotiated for a lower purchase price as the share price dropped to about HK$2.00 in December 2003. However, the 1^st Defendant explained that, as a responsible businessman, he would not do so as the parties had made an agreement in June 2003. On the contrary, he would not have agreed to pay more if the share price were to increase after the making of the June 2003 Agreement. After all, businessmen like him would treasure integrity and one would not go back on the agreement once made. Furthermore, the 1^st Defendant held a positive view about the long-term prospect of the Grandtop’s shares. Coupled with the benefit that might be obtained from the mutual cooperation of the two groups of companies, he was not concerned about short-term fluctuation in the share price. Under such circumstances, he did not ask for a renegotiation of the purchase price.

42.Again there is no basis for the court to doubt the genuineness of such explanation. After all, the 1^st Defendant had substantial interests in the Plaintiff by that time, any agreement to pay a higher price for the Grandtop’s shares would hurt the 1^st Defendant’s own interests. Unless there is any evidence to show that the share acquisition or the June 2003 Agreement was a fraudulent transaction, which there is none, there is no basis for the court to doubt the genuineness of the 1^st Defendant’s evidence.

(iii)  Allegation about the concealment of the true purchase price

43.The second allegation in support of fraud is the purported concealment of the true purchase price for the Grandtop’s shares. Apart from the fact that there is no causation between such alleged concealment and the loss pleaded in the sum of HK$1.98 million, the evidence does not support such serious allegation.

44.First, the acquisition of the Grandtop Shares was fully and properly disclosed in the Plaintiff’s 2004 and 2005 Annual Reports. It seems that the Plaintiff is only complaining about the lack of particulars as to the identity of the company invested in and the specific price per share. Yet, the Plaintiff’s Amended Statement of Claim itself refers to those two annual reports as plainly “corresponding” to, and only to, an acquisition price of HK$2.90 per share.[5] Further, for the purpose of making public announcements through annual reports, the internal records relating to these transactions must have been and were actually provided to the auditor of the Plaintiff’s Group, HLB Hodgson Impey Cheng (“HLB”), for audit. Such internal records unequivocally specified an acquisition price of HK$2.90 per share. Hence, the Plaintiff’s complaint has no merit at all.

45.I agree with the Plaintiff that there is some doubt in the transaction as the price of HK$2.00 per share was stated in some of the transaction documents. The 1^st Defendant explained that it was a mistake.

46.About the board minutes, the 1^st Defendant said it was the 3^rd Defendant who had arranged it and he had overlooked the price incorrectly specified. To a certain extent, his evidence was corroborated by the 3^rd Defendant who told the SFC that the minutes had been prepared by his colleague who probably had written HK$4.4 million based on the Bought and Sold Notes, and he had not reviewed the draft minutes before giving it to the 1^st Defendant for signing since he was busy at work by that time and did not find it necessary to check.[6] The 3^rd Defendant also said the minutes had been drafted after signing of the Bought and Sold Notes.[7]

47.About the Bought and Sold Notes, the 1^st Defendant said that he “did not know exactly the reason” why HK$2.00 per share was stated. On the other hand, the 3^rd Defendant, being the signatory, said he did not notice HK$2.00 per share had been written in, and he only checked whether the quantity was correct.[8] The documents were prepared by Ever-Long mainly for stamp duty purposes. This unfortunate mistake may also explain why the 3^rd Defendant made a mistake about the purchase price in his 3^rd interview with the SFC on 27 September 2005, only to be clarified in the subsequent interview on 18 October 2005.

48.I accept that these mistakes raise some suspicion about the transaction itself. This is also the basis of the Plaintiff’s complaint about the concealment of the purchase price. Yet human errors, even obvious ones, may sometimes occur. After all, there is nothing to indicate that the relevant parties put down the wrong figures in these documents fraudulently for some improper purposes. Coupled with the fact that the true purchase price was revealed in the official documents such as the Interim Reports, I accept the 1^st Defendant’s explanation as a genuine one.

(iv)  Conclusion in respect of the Grandtop Investment

49.In my judgment, the 1^st Defendant has provided a credible explanation as to why he honestly believed that it would be in the best interests of the Plaintiff to invest in the Grandtop’s shares at the price of HK$2.90 per share. The acquisition price was in line with the market value of the shares at the relevant time, and there is insufficient evidence for the court to conclude that the June 2003 Agreement is a fabrication. As I have mentioned above, unless there is anything to show that the transaction was a fraudulent one, which there is none, it would not have been in the interests of the 1^st Defendant, or indeed any Defendants, to acquire the Grandtop shares at a higher price. The unfortunate mistakes in the purchase price as stated in the board minutes and the Bought and Sold Notes have been clarified, and the evidence falls short of establishing fraud which is the basis of the claim in respect of the Grandtop Investment. Hence the relevant claim should be dismissed.

THE MAIL INVESTMENT

(i)  Background and the explanations given by the 1^st Defendant

50.I then turn to the MAIL Investment. Though the Plaintiff also relies on fraud, its main contention is that the Defendants were recklessly indifferent as to whether the making of such investment was contrary to the interests of the Plaintiff for the following reasons:

(i)  the Defendants caused the Plaintiff to spend all of its “idle cash” in the amount of HK$15 million into purchasing the MAIL share option with no due diligence conducted and without relying on professional opinion; and

(ii)  the Defendants failed not only to mitigate potential losses, but even wrote off the investment with no explanation.

51.Again the explanations given by the 1^st Defendant relating to this investment have been succinctly summarised in the closing submissions of Mr Lui and the Amended Defence:

(i)  In about early 2003, Edmund Siu told the 1^st Defendant that there was an opportunity to acquire an option for the shares in MAIL; and that MAIL was an information technology company at the time that sought to be listed as a Pink-Sheet stock. The 1^st Defendant trusted Edmund Siu (who was a listing advisor to the Rontex Group) and asked the 3^rd Defendant to further investigate, study and verify the prospect of investing in MAIL through acquiring that option.

(ii)  Later, in about March 2003, the 3^rd Defendant reported to the 1^st Defendant that he had studied MAIL’s financial data and the prospect of its business with Mr Kevin Welch (“Welch”), including profitability, debt ratio, liquidity and development prospects etc. The 1^st Defendant understood from the 3^rd Defendant that: (a) the investment opportunity was a sound one and would bring good return to the Group and the Plaintiff; and (ii) the Plaintiff back then had idle cash of about HK$15 million that could be used to invest. The 1^st Defendant relied on the advice of the 3^rd Defendant.

(iii)  On about 2 April 2003, the board of the Plaintiff resolved to approve the acquisition of an option to acquire an equity interest in MAIL at the price of HK$15 million. The 1^st and 2^nd Defendants delegated to the 3^rd Defendant the work on the detailed arrangement for the acquisition of MAIL’s share option. The arrangement was as follows:

(a)  The Plaintiff used a new company to acquire the shares in MAIL, and one Madam Shu Oi Yung (舒愛容)(“Shu”) would be authorised to sign the agreement with Emerging Growth Partners, Inc (“EGP”) for the acquisition.

(b)  On 2 January 2004, Shu was appointed by the Plaintiff to sign the agreement with EGP.

(c)  On 7 January 2004, Shu on behalf of the Plaintiff signed a share purchase agreement with Mr Wong Tak Chi (王德志)(“Wong”).

(d)  Over a period of 9 months from 12 April 2003 to 21 January 2004, the Plaintiff paid HK$15 million in total to Wong (as instructed by Welch) for the acquisition. On 21 March 2004, Wong duly acknowledged the receipt of such sum of monies.

(e)  Such investment was disclosed in the Plaintiff’s 2004 Annual Report and Interim Report as “Option to acquire an equity interest of a company”.

(iv)  In around April or May 2004, MAIL was in fact listed as a Pink-Sheet stock.

(v)  All along after the acquisition, the 1^st and 2^nd Defendants relied on the 3^rd Defendant to monitor the price. The 3^rd Defendant and the auditor of the Plaintiff’s group (i.e. HLB) never advised the 1^st or 2^nd Defendant that there was problem with that investment. As recorded in notes of HLB, HLB had met with Welch to gather full information on the investment and verify the information provided; and advised that the MAIL investment was reasonable.

(vi)  On 5 April 2005, the Plaintiff exercised MAIL’s share option and acquired 10 million shares in MAIL. Emails in early May 2005 show that Mr Alex Hon (senior manager of HLB) had been involved in the following up work about delivery of share certificate. The relevant share certificate was duly signed by Mr Matthew Wong (solicitors from Messrs Preston Gates acting for MAIL) and Madam Pamela Gray (transfer agent of Atlas Stock Transfer), and received by the Plaintiff in late 2005.

(vii)  The value of the MAIL shares was written off in due course and disclosed in its 2005 Interim Report. The 1^st Defendant explained in SFC’s interview on 21 February 2006 that the write-off was pursuant to the advice from the Plaintiff’s new financial controller.[9]

52.Having summarised the evidence of 1^st Defendant in respect of the MAIL Investment, I then deal with each of the 2 allegations of the Plaintiff in turn. As mentioned above, the Plaintiff’s claim is one based on recklessness.

(ii)  Allegation that no due diligence was done

53.The first allegation is that the Defendants had failed to conduct due diligence exercise or to obtain professional advice as to whether it would be in the interests of the Plaintiff to make the MAIL Investment. Again such allegation is unpleaded and so the Plaintiff should not be allowed to advance such argument at the trial. In any event, such allegation has no merit at all.

54.First, the basis for the Plaintiff’s complaint is quite confusing. The Plaintiff seems to suggest that the 1^st Defendant had not stated clearly when the Plaintiff investigated and verified the MAIL Investment. However, according to the evidence of the 1^st Defendant, the 1^st Defendant did ask the 3^rd Defendant to conduct due diligence before making the investment, and similar work was also done after the board’s resolution in April 2003. In the absence of any rebuttal evidence or any basis for the court to doubt the 1^st Defendant’s evidence in this regard, I accept that the Defendants had caused the Plaintiff to carry out some form of due diligence work before making the MAIL Investment.

55.The Plaintiff then seems to argue, again without being pleaded, that the 3^rd Defendant and HLB had no expertise to advise on the MAIL Investment. However, there is no basis to support such complaint. In fact, the 3^rd Defendant and HLB had investigated the matter and provided useful information for the 1^st Defendant’s consideration, and the latter, being the main decision-maker, had considered such information.

56.In his oral testimony, the 1^st Defendant explained that he made the decision to invest because of the boom in the IT sector at that time, and he trusted Welch because of his previous track record of successful investments and the introduction by Edmund Siu. He knew that MAIL was engaged in computer business solution and also e-commerce solution, and the company had concrete assets and business. In fact, the notes by HLB confirm that HLB had verified the investment, and the 1^st Defendant testified that the Plaintiff’s board relied on the advice of Edmund Siu and HLB in making the MAIL Investment. The then independent non-executive directors of the Plaintiff, Mr Chow Chi Kit and Mr To Yan Ming Edmond, also confirmed in their interviews with the SFC that HLB had done the investigation and they had accepted its report in making the resolution for the investment.[10]

57.The Plaintiff has not pleaded or adduced any evidence to show what other due diligence work should have been done, or what other professional advice should have been obtained, before deciding whether to make the MAIL Investment.

58.The Plaintiff argues that there is confusion in the evidence as to whether HLB had given its advice before the Plaintiff’s board resolved to make the MAIL Investment in April 2003 when the HLB’s notes was only dated July 2004. However, the 1^st Defendant has testified that the due diligence exercise was a continuous one with some of the works done before the making of the board’s resolution and some after. The fact that there were written notes dated July 2004 does not necessary mean that there was no due diligence works done before that. Most importantly, HLB had studied the target investment and was of the view that the making of such investment was reasonable in the circumstances.

59.On this particular subject, the Plaintiff relies on some “inconsistencies” between the 1^st Defendant’s evidence and the answers given by others in the SFC’s interviews. However, most of those points were not even put to the 1^st Defendant in cross-examination. In the absence of a fair opportunity given to the 1^st Defendant to deal with the alleged “inconsistencies”, it is not right for the court to reject his evidence or explanations about the conduct of the due diligence exercise.

60.In support of its claim, the Plaintiff also complains that the MAIL Investment was made in breach of the Listing Rules relating to discloseable transaction under Chapter 14. Though it was stated in 2004 Annual Report that the MAIL option was acquired by “piece-meal” method, the consideration ratio was 7.5% as calculated by Mr Park. That would be substantial enough to be a discloseable transaction under the Listing Rules.

61.However, this point is again unpleaded and so the issue is irrelevant for the purpose of the present claim. In any event, there is no serious dispute that the 3^rd Defendant was the officer in charge of compliance matters. He told the SFC that he had in fact considered the question of compliance with the Listing Rules and whether the MAIL Investment was discloseable; and after his calculations based on the Plaintiff’s interim accounts for 2003, he considered it unnecessary to make any disclosure.[11] I agree with Mr Lui that this point is important: the situation was not that the Defendants ignored the issue of compliance or deliberately avoided disclosure so as to conceal matters as the Plaintiff alleges. Hence, there is no basis for any complaint of intentional fraud or recklessness. Apart from that, there is doubt as to whether there is any causation between the non-disclosure and the loss pleaded by the Plaintiff. There is therefore no merit in such complaint.

62.In his closing submissions, Mr Park complains about the failure on the part of the 1^st and 2^nd Defendants to produce documents such as the option agreement signed by the 1^st Defendant and Welch referred to in the notes made by HLB. Nevertheless, the absence of these documents is not sufficient for the court to draw any adverse inferences against the Defendants. There may be a lot of reasons why such documents are not available at this stage. In fact, in his interview with the SFC, the 3^rd Defendant said that he had kept all not-so-frequently-used documents in the Rontex Group’s Mainland office including those from Welch on the MAIL Investment, but those documents could no longer be retrieved.[12]

63.The Plaintiff also seems to make a point about using all the idle cash of the Plaintiff in making the MAIL Investment. However, apart from the fact that such complaint has not been pleaded, the 3^rd Defendant had already explained to the SFC that he had discussed with Welch, who had provided documents to him showing the calculation of the HK$15 million price for the MAIL option.[13] Hence, it was not because there was HK$15 million cash that the 1^st Defendant decided to spend it all. Instead, the price was derived from actual calculations justified by information and documents from Welch, and the 3^rd Defendant had considered the basis for that price.

64.The Plaintiff also queries why the simple transaction had to involve persons like Shu and Wong. In this regard, the 1^st Defendant had already explained that such arrangement had been agreed by the 3^rd Defendant and Welch. In his interviews with the SFC, the 3^rd Defendant did provide an account as to the involvement of these two persons:

(i)  As for Shu’s involvement, she was the person who signed the Share Purchase Agreement because she had been personally involved in discussions with Welch earlier;[14] and since the Plaintiff had tax issue concern (that capital gain was taxable and would be considered as profit), Shu as a Mainland citizen had been asked to assist in order to achieve tax savings.[15]

(ii)  As for Wong’s involvement, Welch also had tax issue concerns and specifically requested that the purchase monies be first paid to Wong for onward transfer to Welch himself.[16] Hence, Wong was a party to the Share Purchase Agreement and the person issuing receipt of monies.

65.Having considered all the evidence in the present case, I accept that the Defendants had undertaken due diligence investigation about the MAIL Investment which was considered by them as adequate in the circumstances. Though the Defendants may be criticised for having placed too much trust on Welch, they had been advised by HLB that the investment was a reasonable one. There is no evidence to show that HLB, though it was the auditor of the Plaintiff’s Group, was in any way not qualified to give the advice on the proposed investment. Under such circumstances, there is insufficient evidence to substantiate the Plaintiff’s complaint that the Defendants were reckless in making the decision to invest in the MAIL option.

(iii)  Allegation about failure to mitigate the loss

66.The second complaint is about the failure to mitigate the loss. According to the Plaintiff, there is no commercial justification as to why the Plaintiff paid HK$15 million up front, only to wait for a year later to exercise the option, meanwhile MAIL was never listed on the American Stock Exchange (“AMSE”) because otherwise it would not be difficult to dispose of the shares on the public market. Further, MAIL was not listed on AMSE. MAIL even ceased trading as a Pink Sheet stock by 19 May 2007. Despite HLB’s reminder, the 1^st Defendant was not aware of or did not monitor MAIL’s financial status, but claimed to have simply handed the matter over to the 3^rd Defendant to handle. Instead of demanding any part of refund from anyone, in the interim account as at 30 September 2005, write-off had been made in regard to the MAIL Investment. The Plaintiff complains that such conducts on the part of the Defendants amount to fraudulent or reckless breach of trust.

67.First, there is an issue as to whether the agreement to acquire the option was made on the basis that MAIL would be listed on the AMSE or the Pink Sheet. In this regard, it is clearly stated in Clause 5.3 of the Share Purchase Agreement that “[Wong] undertakes to take appropriate steps to arrange that [MAIL] will be quoted on the Pink Sheets as soon as practicable with 120 days Business days after the issue of the shares of [MAIL]”. The 1^st Defendant in his evidence also confirmed that obtaining listing status as a Pink-Sheet stock was the intention at all material times. The Plaintiff’s counsel had not challenged the 1^st Defendant’s evidence about such intention, and indeed there is no factual basis to support the Plaintiff’s allegation that the intention of the parties was only to get listed on AMSE.

68.Further, there is also no allegation or evidence to suggest that, in making the agreement to acquire the MAIL option, the Defendants should have insisted for a refund in the case that MAIL could not be listed on the AMSE. After all, if the Plaintiff is running such line of argument, there must be some evidence on the costs-and-benefit analysis about the difference between listing on the AMSE and the Pink Sheet, of which there is none in the present case.

69.It is true that the minutes of the Plaintiff’s board dated 2 April 2003 did record the aspiration for MAIL to be listed on AMSE. However, even if the Plaintiff’s management and Welch at the time did intend that MAIL would obtain a listing status on AMSE in future, they could still adopt the Pink-Sheet listing status as the operative basis for the refund guarantee. There was nothing unusual or dubious about such arrangement, and there is also no basis for the Plaintiff to enforce the guarantee recorded in Recital (C) of the Share Purchase Agreement. There is simply no evidence to show that the terms agreed in the Sale and Purchase Agreement were unreasonable in the circumstances.

70.Being that the condition was only to list MAIL on the Pink Sheet, the Plaintiff then complains that the Defendants had not given any thought about the subsequent disposal of the shares, as only stocks listed on AMSE could be traded freely in the market. Though the 1^st Defendant admitted that he did not personally check or tell anyone to check with Welch or anyone else the prevailing market value of MAIL, the 1^st Defendant said the “follow-up was handed to [the 3^rd Defendant] for him to handle”; whereas the 3^rd Defendant said Welch had explained how to sell MAIL shares, although he had forgotten the details, and the 3^rd Defendant himself knew Welch could arrange for future disposal.[17]

71.Based on such evidence, the Defendants may be criticised for placing too much on Welch, but there is not enough evidence to substantiate the allegation that the Defendants were recklessly indifferent as to the possible future disposal of the shares. After all, the parties might be prepared to take some risk associated with the disposal of the shares. Whether the deal was reasonable would have to be evaluated holistically, and there are simply insufficient materials before the court to show that the whole deal was unreasonable in the circumstances.

72.It seems that the Plaintiff is also complaining that the Defendants should not have written off the MAIL Investment as there might be other ways to recoup the loss. In his closing submissions, Mr Park submits that the “real reason” for write-off could not have been the advice from the Plaintiff’s new financial controller because there could be “other methods” to calculate the fair value of the shares.

73.I am not quite sure about the exact nature of such complaint: is the Plaintiff suggesting that they might be other ways to recoup the loss, or is it suggesting that book value of the investment should not be zero because there were other methods to calculate the fair value of the investment? No matter what is the exact basis, there is no evidence to show what might be the other ways to recoup the loss. For the failure to assess a fair value, there is again no evidence to show what other methods were available to the Plaintiff’s management at the time. Further, since the Plaintiff’s claim is based on fraudulent or reckless breach of trust, there is nothing to show that the Plaintiff’s management by that time knew that there were other ways to recoup the loss or other methods to calculate the fair value of the investment. According to the 1^st Defendant, he was upset by the investment and had instructed the 3^rd Defendant to see if there were other ways to mitigate the loss, but in the end nothing could be done. Again, there is nothing to doubt the 1^st Defendant’s evidence in this regard.

(iv)  Conclusion in respect of the MAIL Investment

74.I agree that the MAIL Investment may look dubious. After all, the investment did not go well within a short period of time and the Plaintiff lost HK$15 million as a result. The Defendants may be criticized for placing too much trust on Welch. Welch might have exaggerated the potential of the investment, and there might be inadequate consideration as to how to dispose of the shares in the case of the exit of the investment. Under such circumstances, one would certainly query whether adequate due diligence had been carried out. But as I have repeated many times in this Judgment, it is the burden of the Plaintiff to prove its pleaded case against the Defendants. The Defendants had given evidence as to how the investment decision was made, and there is nothing to doubt the genuineness of such explanation. After all, both the 1^st and 2^nd Defendants had substantial interests in the Plaintiff at the material times, and they were the ones who would suffer the most in the case of an unsuccessful investment. The Defendants did carry out the due diligence investigation they considered adequate in the circumstances, and the auditor of the Plaintiff’s was involved in the exercise. Based on the evidence available at this stage, the Defendants cannot be considered as reckless in making the investment decision. After all, a lot of investors lost money because of the dot-com IT boom. So long as the Defendants had caused the carrying out of due diligence work that they genuinely believed to be adequate in the circumstances, there is no basis for the Plaintiff’s complaint on fraudulent or reckless breach of duties.

75.For the above reasons, the Plaintiff’s claim in respect of the MAIL Investment must fail.

THE KKL INVESTMENT

(i)  Background and the evidence of the 1^st Defendant

76.I then turn to final investment, i.e. the KKL Investment. The background of this investment has been succinctly summarised in the closing submissions of Mr Lui and the Amended Defence:

(i)  In around mid-June 2004, Mr Hon Shum Kwun (“Hon”) introduced to the 1^st Defendant the opportunity of investing in KKL which specialized in the retail business of men’s suits in Beijing. Hon was one of the shareholders of Rontex (Beijing), in which the Plaintiff held 40% shareholding.

(ii)  The 1^st Defendant considered that the opportunity was beneficial to the Rontex Group, in that Rontex (Beijing) manufactured woven wear including men’s suits, and with various sales outlets in Beijing, KKL would facilitate and enhance the sales.

(iii)  The 1^st Defendant did not only rely on his years of experience in the garment industry but also communicated with each shareholder (including Mr Sek Zin Bing (“Sek”) who was responsible for KKL’s operations); and studied the setup, equipment and location of the same type of company for valuation purposes. By that time, Sek had been running 4 shops in Beijing under KKL’s operation.

(iv)  On 13 October 2004, the Plaintiff’s board resolved to approve the KKL Investment and authorised one Madam Zhou Ying Chun (周迎春) to hold the equity interest in KKL on behalf of the Plaintiff in compliance with the legal requirements of the Mainland. From October to December 2004, the Plaintiff invested about HK$8.5 million, with RMB1.25 million as the registered share capital and the balance being shareholder’s loans. In return, the Plaintiff held 62.5% shareholding in KKL (total registered share capital of RMB¥2 million).

(v)  3 more shops were opened after the making of the KKL Investment.

(vi)  At all material times, the 1^st Defendant attended meetings and participated in the management of KKL. Nevertheless, in early 2005, disagreement arose amongst the shareholders of KKL under the following circumstances:

(a)  In January 2005, a client introduced by the 1^st Defendant cancelled an order placed with KKL. The amount of the order was about HK$6 million. The other shareholders considered that the cancellation was the result of the 1^st Defendant’s fault and requested a deduction of the amount of the cancelled order from the Plaintiff’s HK$8.5 million investment. The 1^st Defendant considered the request unfair.

(b)  At that time, the other shareholders requested additional capital injection into KKL for the purpose of expansion of its retail operation in Beijing. The 1^st Defendant saw a great uncertainty in the intended expansion and refused to cause the Plaintiff to inject additional funds into KKL.

(c)  Despite the disagreement above, the 1^st Defendant confirmed in his evidence that KKL was developing and expanding amidst the disagreement; and the break-down of relationship had nothing to do with any poor business performance.

(vii)  Due to the disagreement, the 1^st Defendant decided to back out from KKL. The 1^st Defendant tried to recoup the Plaintiff’s investment in full but to no avail at first. Owing to the 1^st Defendant’s effort, in about February 2005, the Plaintiff recovered some stock of garment products and sold them for RMB6,912,296 (i.e. HK$6,521,000). The loss on such investment was disclosed in the Plaintiff’s 2005 Annual Report.

77.The Plaintiff’s complaint in respect of this investment is basically two-fold:

(i)  The Defendants did not care about the KKL Investment and they did not carry out due diligence investigation before making the KKL Investment.

(ii)  The Defendants had caused the Plaintiff to exit the KKL Investment abruptly and failed to seek full recovery of the investment and the loans.

78.Both allegations involve recklessness rather than intentional or deliberate fraud. I will deal with each allegation in turn.

(ii)  The justification for making the KKL Investment and the due diligence work conducted

79.As I have mentioned above, the Plaintiff’s claim is based on reckless breach of duty. Negligence by itself is not sufficient to establish the claim. Yet the evidence falls far short of establishing the recklessness as alleged by the Plaintiff.

80.First, when the 1^st Defendant was asked about the nature of the HK$8.5 million with RMB1.25 million being initial investment, he gave the unshaken evidence that the balance was a loan, which is supported by the receipt issued by KKL. Although he admitted there had been no discussion on repayment schedule or interest rate, the 1^st Defendant denied that he did not expect its repayment. Mr Park argues the 1^st Defendant did not know the “exact purpose of the fund”, but there is nothing unusual about such arrangement, as the 1^st Defendant said it was for future development and there was nothing wrong with a degree of uncertainty in the precise use of reserved operating capital.

81.Second, the Plaintiff complains that the 1^st Defendant did not review KKL’s business plan and had no business target at the time. However, the 1^st Defendant’s unchallenged evidence is that he had analysed and determined the investment amount with his Beijing factory partners, viz. Hon and Sek. It was understandable for the 1^st Defendant to have reposed trust and confidence in Hon, who was not a stranger to him but had been his “Beijing factory partner” and “very good/close friend” with whom he had worked for years before the KKL Investment. The 1^st Defendant also said he had studied the setup, equipment and location of the same type of company before deciding to invest in KKL; and he could not look at financial statements or sale history or business plan or conduct any other due diligence investigation as KKL was a new company.

82.Third, there is also no evidential basis to support the Plaintiff’s unpleaded allegation that it was the failure “to ascertain what KKL’s business plan was” that resulted in the disagreement amongst shareholders only 3 months into the investment.

83.Hence, there is no merit in the first allegation.

(iii)  The allegation of abrupt exit and failure to seek full recovery

84.The second complaint relates to abrupt exist and failure to seek recovery. There is again no merit in such allegation.

85.First, there is no reason for the court to doubt the 1^st Defendant’s explanation as to why the Plaintiff would have to exit the investment by that time.

86.Second, the Plaintiff had recovered a substantial portion of its investment following the disagreement between different partners of KKL. It seems that the only point that the Plaintiff is now complaining is that the 1^st Defendant failed to accept the “exit” proposal from KKL described as “option 2” in a letter dated 21 March 2005.

87.However, the 1^st Defendant has clearly explained that he refused the proposal initially pursuant to legal advice. When he later accepted the proposal, KKL then never made the proposed payments. During his oral testimony, there is no challenge by the Plaintiff that the 1^st Defendant was lying in this regard, and so it is not open to Mr Park to argue in his final submissions that “it is more likely than not that [the 1^st Defendant rejected the proposal”. Indeed, the 1^st Defendant frankly admitted that he rejected the proposal initially, but there was nothing unusual that he later decided to accept the proposal instead.

(iv)  Conclusion in respect of the KKL Investment

88.To me, there is no suspicion about the KKL Investment at all. There were good reasons for the Plaintiff to make the investment in the first place. After the making of the modest investment, the business did expand, and it was only because of the subsequent disagreement between the partners which caused the Plaintiff to exit the investment. Even then, the Plaintiff was able to recover a substantial part of the investment. Hence, there is no substance in any of the complaints in respect of the KKL Investment.

THE FINAL ORDER AND THE CLAIM AGAINST THE 3^RD DEFENDANT

89.Though the 3^rd Defendant was absent at the trial, the Plaintiff still has to prove its case against the 3^rd Defendant. In my judgment, though the 1^st and 2^nd Defendants try to shift the responsibility to the 3^rd Defendant by saying that he was responsible for carrying out the due diligence works and the execution of some of the transactions involving the 3 subject investments, the Plaintiff has failed to satisfy the court that the 3^rd Defendant was involved in any fraudulent conducts. For the reckless claim relating to the MAIL Investment, it is clear that HLB was involved in evaluating the prospect of the investment. As there is nothing to show why the 3^rd Defendant should not have relied on the advice of HLB or any other things that the 3^rd Defendant should have done for the due diligence investigation, it cannot be said that the 3^rd Defendant was reckless in the conduct of such diligence exercise. Hence, the Plaintiff has failed to prove its case against the 3^rd Defendant.

90.For the above reasons, the Plaintiffs’ claim is dismissed.

91.Since this action was commenced pursuant to DHCJ Burrell’s Order, and there are a lot of mistakes and confusion in the contents of the ROIs previously given by the Defendants and in the transaction documents (such as the board minutes and Bought and Sold Notes for the Grandtop Investment) which require the clarifications of the 1^st Defendant in this action and the trial, I make an order nisi that there be no order as to costs of this action which shall be made absolute 14 days after the date of the handing down of this Judgment.

Mr Moses Park, instructed by Georgiou Payne Stewien LLP, for the Plaintiff

Mr Mike Lui and Ms Kelly Cheng, instructed by Cheung & Yip, for the 1^st and 2^nd Defendants

The 3^rd Defendant, absent