China Health Group Ltd v. Li Zhong Yuan and Others
Read the full judgment text of HCA 2549/2017 on BabelCite. This High Court CFI judgment was delivered on 20 December 2023.
1. The Plaintiff in the present Action is China Health Group Limited (“ China Health ”), which is incorporated in Bermuda and listed on the Main Board of the Hong Kong Stock Exchange with stock code 673. Until 14 January 2016 it was called China Healthcare Holdings Limited. Its principal business activities have involved business-to-consumer services and healthcare management systems in Mainland China. Until 18 June 2016 the 1 st Defendant, Li Zhong Yuan (“ Dr Li ”), was an executive director of
Cited by 4 cases · Cites 6 cases
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HCA 2549/2017 and HCA 2569/2017 [2023] HKCFI 3290 HCA 2549/2017 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 2549 OF 2017 ____________________
____________________ HCA 2569/2017 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 2569 OF 2017 ____________________
(Consolidated by the Order of Master M Lam dated 19 January 2018) ____________________
________________ J U D G M E N T ________________ Introduction 1.The Plaintiff in the present Action is China Health Group Limited (“China Health”), which is incorporated in Bermuda and listed on the Main Board of the Hong Kong Stock Exchange with stock code 673. Until 14 January 2016 it was called China Healthcare Holdings Limited. Its principal business activities have involved business-to-consumer services and healthcare management systems in Mainland China. Until 18 June 2016 the 1st Defendant, Li Zhong Yuan (“Dr Li”), was an executive director of the China Health. He was the chairman of the Board of China Health until 26 March 2013 when the position was taken over by Jia Hong Sheng. 2.The 2nd Defendant (“Capital Foresight”) is incorporated in the British Virgin Islands and is an investment company. It has no active business operations. Chen Li Bo (“Mr Chen”) has at all material times been a director and shareholder of Capital Foresight. Mr Chen was by the time of the trial Capital Foresight’s sole shareholder. It has previously had two other shareholders: Yu Feng and Rupert Li. 3.The 3rd Defendant (“Li Hong”) is also incorporated in the British Virgin Islands. Ho Kin (“Mr Ho”) is its sole shareholder[1]. 4.The dispute has its origins in an attempt by Li Hong to enforce a promissory note (entitled loan note) for US$4,000,000 dated 1 August 2015 with a maturity date of 31 January 2016, on its face apparently issued in Li Hong’s favour by China Health (“Loan Note”)[2]. China Health refused to pay it and Li Hong issued a statutory demand in September 2016. China Health commenced proceedings to enjoin presentation of a winding up petition, which was successful. In brief, in the present proceedings China Health seeks to establish that the Loan Note was issued by Dr Li in breach of his fiduciary duties as a director of China Health, is unenforceable and Dr Li should pay damages to China Health caused by his breach. By a counterclaim Capital Foresight seeks to enforce the agreement pursuant to which its says the Loan Note was issued thus obtaining payment of US$4,000,000 originally, says Capital Foresight, intended to be payable to Li Hong pursuant to the Loan Note. Li Hong has been joined to be bound by the declaration sought by China Health to establish US$4,000,000 is not payable whether pursuant to the Loan Note or the agreement pursuant to which the Loan Note was allegedly issued. Li Hong does not seek to enforce the Loan Note, which it endorsed to Capital Foresight after it was enjoined from presenting a winding up petition against China Health. 5.It is easiest to understand the claims by initially considering in chronological order the events leading up to the present proceedings which commenced in November 2017 and how, in particular, China Health’s case and evidence have evolved over time. The History of the Matter 6.Capital Foresight purchased 15,000 redeemable convertible cumulative preference shares (“Preference Shares”) in China Health from the OZ Group pursuant to an agreement dated 19 April 2010 for US$15,000,000. The terms of the Preference Shares included:
7.Li Hong had, prior to April 2010, held 8,595,000 shares in China Health (representing 3.28% of China Health’s issued capital). On 5 April 2010 another company owned by Mr Ho (ZhongXing Limited) subscribed for convertible notes. 8.From 2010 to 2011 China Health was negotiating an acquisition with the Shanghai Fu Shou Yuan Group (“FSY Project”). Although a sale and purchase agreement was entered into on 19 August 2010 the acquisition was terminated by the counterparty, who commenced litigation against China Health seeking RMB45,000,000. 9.On 31 March 2011 China Health and Capital Forsight agreed to extend the Maturity Date of the Preference Shares to 17 May 2013. In excess of HK$464,000,000 would be due upon redemption. On 23 November 2012 a further agreement was entered into between China Health and Capital Foresight dealing with China Health’s liabilities under the Preference Shares (“November Agreement”). Rather than extend the Maturity Date further China Health agreed to redeem the Preference Shares for a total of US$19,000,000 of which US$15,000,000 was payable in cash representing a payment of principal and US$4,000,000 interest. The interest component was to be paid by a promissory note in the form contained in Schedule 1 to the November Agreement. The form of promissory note leaves the maturity date and the beneficiary blank. 10.China Health questions the propriety of the November Agreement and the circumstances in which it came to be entered. Amongst its reasons for doing so are the way in which the negotiation of the November Agreement evolved, which China Health summarises as follows in [11] to [12] of its Written Opening.
11.I would note at this juncture that in my view for reasons I explain later the Board meeting on 23 November 2012 did take place and the Board minutes are genuine and I so find. 12.Subsequently, China Health and Capital Foresight entered into a series of supplemental agreements to modify the November Agreement, which China Health was unable to comply with. 13.On 31 March 2013 the Parties executed the “1st Supplemental Agreement”, which provided for the redemption of principal by 30 November 2013. China Health was to pay a non-refundable deposit of HK$10,000,000 which would be applied to the redemption amount if that was paid by 30 November 2013, but otherwise it would be forfeited. A dividend would accrue from 1 December 2012 onward at 5% per annum with the right for China Health to settle the dividend by issuing shares at HK$0.3201 per share. 14.On 28 June 2013 the Parties executed the “Amendment Agreement”, which extended the date for repayment of principal to 30 June 2014 and provided that China Health pay a non-refundable deposit of HK$10,000,000 by 29 June 2013. The non-refundable deposit was to be forfeited if redemption was not achieved by 30 November 2013. Dividends accrued from 1 December 2013 to 30 June 2014 at 6% per annum with China Health having the rights to settle the same by issuing shares at HK$0.3201 per share. 15.On 30 June 2014 the Parties executed the “2nd Supplemental Agreement” (referred to in some documents as the 630 Supplemental Agreement). This changed the date for the repayment of principal to five business days after completion of a proposed fundraising. China Health was given the right to settle Dividends II and III (which was a reference to the dividends payable under the 1st Supplemental Agreement and the Amendment Agreement respectively) by issuing shares at HK$0.25 per share. If the fundraising could not be completed, the date of redemption was to be extended to 31 March 2015. Dividends accruing from 30 June 2014 to 31 March 2015 would be at 7% per annum. China Health had the right to settle the dividends by issuing shares at HK$0.15 per share. 16.On 12 September 2014 the Parties executed the “3rd Supplemental Agreement” (referred to in some documents as the 912 Supplemental Agreement). This provided for the redemption of principal by 10 November 2014 with settlement of dividends “within a reasonable time thereafter”. China Health was to pay US$1,500,000 to Capital Foresight as a security deposit by 26 September 2014. If China Health were to redeem the principal on or before 10 October 2014 and settled the dividends with a reasonable time thereafter the security deposit was to be deducted from the aggregate principal. If China Health failed to redeem by 10 October 2014, but before 9 November 2014 and settled the dividends within a reasonable period thereafter, US$500,000 of the security deposit would be assigned to China Foresight as a “special dividend”. In the event that China Health failed to redeem by 10 November 2014, the remaining US$1,000,000 of the security deposit would be assigned to Capital Foresight as a “special dividend”. 17.The principal amount of US$15,000,000 was eventually paid by 2 December 2014. China Health says that the four supplemental agreements and Mr Chen’s frequent requests for repayment (which is not in dispute) demonstrate that Capital Foresight took obtaining repayment very seriously; not that there is anything surprising about that. China Health, however, points to the absence of evidence prior to July 2015 of Capital Foresight chasing for the promissory note, as being consistent with its claim that it was never intended to be a payment to Capital Foresight, but was an illicit payment channelled through Capital Foresight, whose intended recipient was Dr Li. China Health’s explanation for it being paid has developed during the case and I will explain it later. 18.On 22 April 2015 China Health issued 46,296,000 shares to Capital Foresight at HK$0.28 per share. Capital Foresight says that the shares were to settle Dividends II, III and IV, which payable pursuant to the 1st Supplemental Agreement, the Amendment Agreement and the 2nd Supplemental Agreement. However, China Health’s public announcements at the time describe the share allotments as fundraising. 19.A day before completion on 21 April 2015, Mr Chen apparently requested Dr Li to transfer an amount of HK$12,962,880 of “dividends” to Capital Foresight’s account. This amount of HK$12,962,880 corresponds to the subscription amount, namely, 46,296,000 shares at the subscription price of HK$0.28 per share. 20.It appears that after completion of the subscription, China Health paid an amount equivalent to the subscription price to Capital Foresight purportedly in discharge of its liability to pay dividends under the previous supplement/amendment agreements. Dr Li appears to have confirmed as much by an email to Chung Ho (“Mr Chung”), director of China Health at the time, dated 13 April 2015. 21.On 23 April 2015, Mr Ho wrote a cheque for HK$12,962,800 to Capital Foresight. Capital Foresight and Mr Ho claim this was consideration for the latter’s purchase of the promissory note. This amount is, of course, the same as the subscription amount and “dividend payment” to which I have referred. 22.On 28 April 2015, Capital Foresight transferred 46,296,000 shares to HKSCC Nominees Ltd. 23.On 30 June 2015, Dr Li (through Ms Wendy Huang (“Wendy”)) proposed to add to the agenda of a China Health Board meeting approval of a promissory note to “Anchorage Associates Ltd” (“Anchorage”). The item was withdrawn from the agenda by Dr Li. 24.Anchorage was a company owned by Mr Chen. In an email from Mr Ho to Dr Li dated 24 July 2015, Mr Ho forwarded a draft letter concerning the transfer of 75% of Anchorage’s shareholding to him by Mr Chen. In response to Mr Ho’s email, Dr Li replied on 25 July 2015 stating that the draft letter “looks fine”, and requested Mr Ho to let him know when everything was in order so China Health could “issue the promissory note to Anchorage”. China Health observes that this email correspondence was only between Dr Li and Mr Ho. 25.Other than in draft documents circulated on 30 June 2015, there is no further mention of issuance of a promissory note to Anchorage in China Health’s internal documents or in communications with Capital Foresight. At a Board meeting of China Health on 20 September 2015 the directors were invited in the convening notice to consider an allotment of shares to settle a portion of the US$4,000,000 payable under the Loan Note. The matter was not resolved. 26.On 23 May 2016, China Health received a letter from Li Hong enclosing an undated loan note purportedly executed by Dr Li on behalf of China Health (“Impugned Loan Note”) and an instruction letter dated 31 July 2015 from Capital Foresight to China Health directing that the promissory note be issued to Li Hong as its designee (“July 2015 Nomination Letter”). This was the first time China Health had received the July 2015 Nomination Letter. 27.According to Capital Foresight and Li Hong, Capita Foresight and Li Hong had entered into an Agreement on 11 April 2015 (“CFL-LHHL Agreement”) whereby Capital Foresight agreed to transfer its interest in the US$4 million promissory note to be issued by China Health to Mr Ho, for US$1.67 million. It is further claimed that, pursuant to the CFL-LHHL Agreement, Mr Ho wrote a cheque to Capital Foresight on 23 April 2015. 28.As I have already mentioned Li Hong issued a statutory demand for payment of the Loan Note leading to the application in HCMP 2593/2016 (“HCMP 2593”) and Chow J enjoining on 8 February 2017 presentation of a winding up petition on the grounds that there was a bona fide defence on substantial grounds to the alleged debt. Capital Foresight and Li Hong say that subsequently Li Hong endorsed the Loan Note back to Capital Foresight. 29.As China Health explains in [34] of its Written Opening the crux of China Health’s case is that the November 2012 Agreement was a façade created to disguise what was really going on, namely, issue by China Health of a promissory note for US$4,000,000 to Capital Foresight or its nominee as a means of channelling a secret profit to Dr Li. China Health has referred to this as the “Backdoor Arrangement”. This is the shorthand term by which it was referred to at the trial and I will use it in this judgment. 30.It is important in my view to understand the evolution of China Health’s case on the constituents of the Backdoor Arrangement as this is relevant to the assessment of China Health’s case and the strength of the evidence it relies on. It starts with the evidence filed for the hearing before Chow J. The application was supported by the affirmation of Chung Ho, who was appointed as a director of China Health on 28 December 2012. He remained on the Board after it was reconstituted on 18 June 2016 when control of China Health passed to a new shareholder, Speedy Brilliant Investments Limited. Mr Chung also gave evidence at the trial before me. Mr Chung explains what he understood to be the reason for the Backdoor Arrangement in [24]–[25] of his 1st affirmation in HCMP 2593:
31.Mr Chen made an affirmation dated 25 October 2016 in opposition to China Health’s application. In [30] he disputed Mr Chung’s suggestion that the FSY Project had been introduced by Dr Li, asserting in very clear terms that he had done so and accusing Mr Chung of lying:
32.As demonstrated by [17] of his reasons for judgment dated 29 March 2017, Chow J in HCMP 2593 clearly understood China Health’s case to be that the Backdoor Arrangement had been entered into because Dr Li had introduced the FSY Project, (that Li Hong disputed the suggestion that Dr Li had introduced the FSY Project) and that it was Dr Li’s introduction of the FSY Project that was the rationale for the Backdoor Arrangement. 33.In [8] and [10] of the Statement of Claim the Backdoor Arrangement was pleaded in terms consistent with the case advanced in HCMP 2593:
Capital Foresight denied this plea in its Defence. 34.China Health’s own solicitors clearly understood in April 2019 that their client’s case remained as pleaded as demonstrated by [12(1) & (2)] of the affirmation of Li Pik Yuk (a solicitor) filed in this Action on 2 April 2019, which states:
This would explain why [8] and [10] of the Statement of Claim remained the same when the pleading was amended on 1 April 2019, the day before Ms Li’s affirmation was made. It is also clear from [12(2)] of Ms Li’s affirmation that China Health and its solicitors understood that Capital Foresight disputed that Dr Li had introduced the FSY Project. 35.In Mr Chung’s first witness statement he explains the principal reasons he suspected the Backdoor Arrangement had been made in [17]–[18].
36.Mr Chen makes it clear in [10] of his witness statement dated 24 January 2019 that he introduced the FSY Project to China Health not Dr Li. 37.Precisely what Mr Chung was told, assuming he was told anything, by Mr Chen at a meeting about the purpose of the proposed promissory note for US$4,000,000 is of central importance to China Health’s case. It was the only direct evidence relied on by China Health of the Backdoor Arrangement. If the justification Mr Chung says he was given for the payment to Dr Li is improbable necessarily it calls into question whether he is telling the truth or made up an excuse for China Health not paying the Loan Note to avoid a winding up petition being issued against the company. 38.It was clear in my view following Mr Chen’s evidence at trial that the FSY project was introduced by him to China Health. It was not introduced by Dr Li and, therefore, it is unlikely that it would have ever been thought by either Dr Li or Mr Chen to be a matter, which justified Dr Li receiving payment in respect of it. It would appear that Mr Chung realised this shortly before the trial. 39.On 1 June 2023 China Health issued a summons seeking to introduce a supplemental witness statement of Mr Chung. He made an affirmation in support of the application. In it he explains in [5]–[6] why he wishes to supplement his evidence:
40.The supplemental witness statement contained two significant changes to China Health’s case on what Mr Chung said he had been told about the rationale for the Backdoor Arrangement. First, was the explanation Mr Chung says he was given by Mr Chen for the payment to Dr Li of US$4,000,000. In [6(a) & (b)] of the supplemental witness statement he says this:
41.Mr Chung was now saying that he understood that the payment was not made to reward Dr Li for introducing the FSY Project, but to compensate him for the loss resulting from the dilution in his shareholding and influence in China Health if a significant new investor were to be introduced. 42.Secondly, the justification said by Mr Chung to have been advanced by Dr Li for the payment to him of US$4,000,000 changes and becomes consistent with what Mr Chung says he was told by Mr Chen:
Mr Jia did not give evidence at the trial. He was removed from the Board at the time it was reconstituted in 2016. Mr Chung explained in cross-examination that he had not approached Mr Jia to give evidence because they were not on good terms. 43.Mr Chung was cross-examined about the reason China Health had left it so late to seek leave to file further evidence on Day 2 of the trial. He explained that “Upon reading Chen Libo’s statement, I could see that he intentionally manoeuvred the fact to say that he was the one who introduced the Shanghai Fu Shou Yung project, why would the compensation be directed to Li Zhong Yuan?” Later he said “On this occasion, when I had my discussion with my legal team, I realised that this manoeuvre of him was leading towards a wrong direction or it’s a misleading statement. I felt that Chen LiBo was intentionally trying to change the compensation into a commission. So I felt that I had a need to have a supplementary explanation of it and my lawyers also felt that it's important to let the court know this explanation, the explanation of the original meaning of the word ‘compensation’ in my mind.” 44.Mr Chung said that the statement he refers to in the first of the quoted passages was a reference to Mr Chen’s affirmation in HCMP 2593 that he read in preparation for the trial. It is quite possible that Mr Chung in the run-up to the commencement of the trial had read Mr Chen’s evidence, discussed it with his legal team and this caused him to reconsider precisely what Mr Chung had told him in their meeting, however, that does not account for his failure to mention at anytime in the previous six years the meeting with Mr Jia, which was obviously very important. It also seems to me that his suggestion that he thought Mr Chen was trying to manoeuvre the characterisation of the payment is unconvincing. China Health did not dispute at the trial that Mr Chen was correct that he, not Dr Li, introduced the FSY Project. This being the case Mr Chung had no reason to think Mr Chen was doing anything other than correcting Mr Chung’s mistake. The Defendants suggest that Mr Chung realised in the run-up to trial that his explanation for the Backdoor Arrangement was flawed and he then altered his evidence to circumvent the flaw, namely, his suggestion that Dr Li introduced the FSY Project to China Health. 45.The Defendants unsurprisingly opposed China Health’s application for leave to introduce Mr Chung’s supplemental witness statement. I dismissed the application but allowed Mr Man to examine Mr Chung in chief on its subject matter and he was then cross-examined extensively on the reason why the new evidence has been introduced late. Mr Chung did not accept that there was any inconsistency between his original evidence and China Health’s case and his new evidence. His position was that he had described the payment at the outset as compensation to Dr Li and this continued to be how he understood it was characterised. This seems to me to be unconvincing. There is a material difference between characterising the payment as made in recognition of the value of the introduction by Dr Li of a new project and characterising the payment as compensation for dilution in Dr Li’s shareholding and influence in the management of China Health as a consequence of the introduction of a major new investor. The former was clearly China Health’s case until 1 June 2023. 46.China Health’s case advances serious allegations against Dr Li, Mr Chen, Mr Ho and Rupert Li. It is not in dispute that cogent evidence commensurate with the gravity of the allegations are required to prove them. Mr Man acknowledged at the outset of the trial that China Health is alleging that Dr Li, Mr Chen, Mr Ho and Rupert Li conspired together to procure the improper payment of US$4,000,000 to Dr Li and that their explanation of the genesis of the Loan Note is a lie. Although, such allegations made against anybody would be serious, in my view it is relevant when considering the likelihood of such allegations being true that all four men are successful businessmen and professionals. Dr Li is a mathematician by education and taught for a period at MIT. Rupert Li is an American qualified lawyer with a degree from Columbia and is currently a senior partner of King, Wood Mallesons. Mr Chen was originally a banker and has been a director of significant listed companies. Mr Ho is said by the Defendants to be a very successful investor and businessman. Although Mr Man suggested in closing that no evidence had been adduced to prove this neither was it suggested to Mr Ho in cross-examination that it was untrue. 47.China Health’s case was based until 1 June 2023 (the trial commenced on 5 June) on the allegations I have previously explained and various matters from which it suggested inferences could be drawn supporting the existence of the Backdoor Arrangement. As I explain in [22]–[23] of Re Chinaculture.Com Limited[5] a disciplined approach is necessary to drawing inferences said to support a finding of a serious breach of duty or wrongdoing:
48.Mr Man argued that if I am satisfied that China Health has demonstrated a prima facie case it is necessary for the Defendants to demonstrate a defence to that case. I accept that generally this proposition is correct. However, a prima facie case can be weak or strong. Where its sits on that spectrum is relevant to an assessment of the evidence necessary to call it sufficiently into question that the court concludes that the Plaintiff’s case has not been proved on the balance of probabilities. I have explained the necessity for a disciplined approach to the drawing of inferences of serious wrong-doing in [47]. Although the standard of proof is the civil standard regardless of whether or not the allegation is of conduct which may be criminal, the court proceeds on the basis that serious misconduct is less likely than lesser forms of misconduct and as a consequence requires the evidence of serious misconduct to be of commensurate cogency. This is explained in [182] and [184] of Nina Kung v Wong Din Shin[7]:
49.In the present case the only direct evidence supporting China Health’s case is Mr Chung’s evidence of what he says he was told at the meetings in June and July 2014. There are no contemporaneous documents corroborating this evidence. In addition to the evidence of Mr Chung about what he was told China Health rely on a number of other matters, which they say support the inference that the Loan Note was issued pursuant to the Backdoor Arrangement. The Amended Statement of Claim does not plead that this inference is to be drawn from facts and matters identified in the Amended Statement of Claim. China Health’s Written Opening Submissions do not identify precisely what facts and matters, it will seek to prove at trial from which it contends the inference can be drawn. Four “features” are, however, said to be relevant:
50.In practice China Health’s case has involved cross-examining Dr Li, Mr Chen, Mr Ho and Rupert Li with a view to demonstrating that its critique is justified, and that they cannot explain why the transactions were dealt with in the unconventional way China Health suggests that they were. In assessing the facts and matters China Health have attempted to prove, and whether or not they support the inferences that I am invited to draw, it is important for me not to lose sight of the principles I have explained early, namely, that the evidence must be sufficiently cogent to justify concluding that the Backdoor Arrangement has been proved. This requires China Health to prove facts and matters which are sufficiently compelling to support the drawing of the requisite inferences. Assessing the evidence and making findings of fact involves a consideration of whether, as well facts and matters that are capable of supporting China Health’s case, there are facts and matters, which point either to the opposite conclusion or suggest that there is sufficient uncertainty about what was motivating the parties that I cannot safely conclude that the Backdoor Arrangement was agreed and implemented. The assessment is not an accounting exercise in which I find some facts, which are capable of supporting China Health’s case and some that do not and then determine whether the balance is in China Health’s favour. Neither is it a matter of impression; both are clear from the passage from Sir Anthony Mason’s judgment in HKSAR v Lee Ming Tee referred to by Ribeiro PJ in the paragraphs of Nina Kung v Wong Din Shan, which I have quoted in [47]. A cogent case had to emerge from the assessment of the evidence that points compelling to the conclusion that the Loan Note was issued pursuant to the Backdoor Arrangement. In practice this means that the focus should be on significant facts capable of supporting the existence of the Backdoor Arrangement, alternatively, which impugn it. 51.I have already addressed one significant matter, which is relevant to this assessment, namely, what in my view is clearly a late change of evidence by Mr Chung about what he says he was told by Mr Chen and Dr Li about the justification for the payment of US$4 million. This calls into question at least the accuracy of his memory or, as the Defendants argue, the veracity of his evidence generally. The Evidence 52.China Health argue that the facts (A) that the Loan Note was not included in the early stage of the negotiation and (B) it was to be issued to a company controlled by Mr Ho, suggests that it was not part of Capital Foresight’s negotiation of the payment of the sums due to it, but an addition included at the end of the negotiation as part of the Backdoor Arrangement. It seems to me that this is a weak argument even without regard to the Defendant’s evidence. If Dr Li had intended, as China Health allege, to use the agreement with Capital Foresight as a conduit for payment to himself it is inherently more likely that he would have included reference to payment of US$4,000,000 and how it was to be made, at the beginning of the negotiation not at the end. 53.China Health also point to the absence of there being any evidence of Capital Foresight ever requesting issue of the Loan Note and not agreeing a maturity date as indicating it had no interest in it. It is correct that the text messages and emails during the period that Capital Foresight were chasing for payment of the US$15 million do not also request issue of the Loan Note. Mr Chen was cross-examined about this. Mr Chen said, Mr Man having established that in addition to sending messages they met and talked, that he had raised the subject of the Loan Note during these conversations. So far as the maturity date is concerned he said he was not concerned about it as he was willing to accept a 12-month period, which was generally the maximum maturity of a promissory note. 54.Rupert Li was also cross-examined about the apparent failure to agree a maturity date until shortly before it was issued. Mr Li accepted that it was necessary for the Loan Note to have a maturity date. 55.Mr Li disagreed that the absence of any reference to a Loan Note in the early drafts of the agreements was explained by the fact that the amount to be paid on top of US$15 million, which Capital Foresight characterise as effectively interest on the amount owed to it but unpaid, had not been agreed. Mr Li’s evidence was that the amount of interest was under negotiation and that there was no need for what Mr Man described as “place holder” in the draft—a reference to interest with the details left blank. The reference to the payment of US$4 million by way of Loan Note first appears in clause 2 of the draft attached to an email dated 14 November 2014 from Dr Li. The form of the Loan Note is in schedule 1 to the draft agreement. It contains a number of blanks—both the amount and the maturity date. Mr Li said in an answer to a question as to whether or not he thought at the time that “there is something a little bit short here because we don’t have an agreement on when the maturity date should be” that he was not surprised because the Loan Note was going to be issued in the future and the maturity date would be determined when China Health was confident it could pay. Mr Li said Mr Chen was negotiating the agreement and that he understood he had decided not to insist on a date. 56.A further draft was circulated by Dr Li on 19 November 2012. The draft Loan Note has against the heading maturity date—12 months. Mr Li could not recall who introduced this provision. A further version was circulated by Dr Li on 20 November 2012. In the email chain is an email from Mr Li to Ida of Capital Foresight commenting that the agreement could be signed with the dates open, which reflected the fact that he understood at that time that a maturity date had not been agreed. 57.Mr Li was also taken to an undated letter from Capital Foresight to China Health instructing the Loan Note to be issued to Mr Ho, which was sent to Dr Li about 20 November 2012. Mr Li said that at this time he understood Mr Chen and Mr Ho had agreed to the sale and purchase of the Loan Note. He was not, however, aware of any preceding documents evidencing this. A few days after the letter was sent he found out that in fact Mr Ho had not agreed to purchase the Loan Note. Mr Li was aware that the letter had been sent to China Health and China Health had not been told it had been revoked. He was asked why he did not suggest that it should be revoked. Mr Li said that although he was not now able to recall his thinking at the time there was no need to revoke the nomination letter, which is why it had not been; it was not an oversight. There was no necessity to revoke it, he suggested, as (1) the nomination letter was not intended to form part of the agreement, which allowed Capital Foresight to nominate the beneficiary of the Loan Note; (2) the November Agreement had not been signed; (3) the November Agreement allowed Capital Foresight to change the beneficiary; and (4) it was still hoped that Mr Ho would agree to buy the Loan Note. 58.Mr Li rejected the suggestion that the reason the subsequent amendment agreements provided only for interest for late payment on the US$15 million not the US$4 million component was because Capital Foresight was not interested in the latter sum as it was always intended to be for Dr Li. 59.It is China Health’s case that Mr Li knew that the provision for issue of a promissory note in the November Agreement was intended to channel money to Dr Li. The US$4 million was not intended for Capital Foresight. This would seem a necessary component of China Health’s case as Mr Li was one of the shareholders in Capital Foresight at the time and presumably if he had not been told he would have expected this sum when paid to become available to its shareholders including himself. The consequence of this is that in order to find in China Health’s favour I have to find not only that Mr Li was party to a conspiracy effectively to misappropriate US$4 million from China Health, but was also willing to come to court to lie about the transaction. Predictably the Defendants ask rhetorically why would somebody in Mr Li’s position be willing to do either of these things? The consequence of the court finding that he had lied would presumably be professionally catastrophic. 60.Mr Li gave prompt and clear answers to the questions put to him. There was nothing evasive in his responses or his demeanour, which was confident and professional. It does not seem to me that one can read anything into the absence of disclosure of much in the way of internal communications about the terms of what became the November Agreement. China Health’s submission is that it is consistent with its case that the US$4 million was only introduced at the end of the transaction, because if this is the case the internal documents would make no reference to it and the documents may have been suppressed for this reason. However, as I have already explained it seems to me that if, as China Health allege, by this time Capital Foresight agreed to China Health paying Dr Li US$4 million and that what became the November Agreement was to be the conduit for the payment, it is more likely that it would have been mentioned at the outset not introduced at the end of the negotiations. For the same reasons I do not think that much can be read into the absence of internal communications. It was clear from Mr Li’s evidence that Capital Foresight dealt with the matter in a fairly informal way; deciding not to instruct external counsel. Neither in my view can anything of significance can be read into the issue of the nomination letter and the failure to revoke it. This is consistent with Capital Foresight dealing with the negotiation and documenting of the agreement in a fairly informal way with Mr Li not feeling it necessary to worry about matters that were never likely to be of practical significance. The chances of Mr Ho trying to obtain a promissory note and China Health issuing one to him if he had not agreed to buy it was obviously minimal. 61.Mr Man recognised in closing that Mr Li’s evidence presented a problem for China Health. If I believe him necessarily it follows that I should reject China Health’s claim. Mr Man emphasised that I should not assess Mr Li’s evidence on a stand-alone basis. In other words I should not assess his evidence in isolation from the evidence of other witnesses and if I find it believable conclude that he was truthful and thus reject China Health’s claim. Mr Man argued that I need to assess Mr Li’s evidence in the light of the evidence of other witnesses. I understood this to mean that if I find that the other Defence witnesses were so unreliable as to call into question the veracity of the Defendants’ case this would justify me rejecting Mr Li’s evidence and find that he was an adept liar. 62.I agree that I need to assess the evidence as a whole and not be unduly swayed by one particular witness’s convincing performance in the witness box. Conversely, I should not be unduly swayed by another witness’s poor performance in the witness box. What is required is an assessment of China Health’s forensic argument for me finding particular facts and matters and drawing inferences. However, that process has to give proper weight to the considerations I have explained in [48], recognition that the conduct of business transactions is commonly riven with minor errors, changes of mind and administrative infelicities and that part of the purpose of having oral evidence is for the court to assess the credibility of the witnesses. 63.This is an appropriate point at which to address the credibility of the witnesses generally. Mr Chung was cross-examined extensively. There were in my view a significant number of unsatisfactory parts to his evidence:
64.I have already mentioned that Dr Li is a highly educated man. Although no longer a fulltime academic he sits on the internal advisory board of the University of California at San Diego. He responded directly to questions. He was not evasive. On occasions he showed disdain for the questions put to him, but if his case is correct, namely, that Mr Chung has fabricated a defence to the claim on the Loan Note that is understandable. He disagreement with the case being put to him was clear and firm. He was not “caught out” in cross-examination and I did not understand Mr Man in his closing to suggest that he was. Mr Man’s attack on the evidence given by the Defendants’ witnesses focused on Mr Ho and Mr Chen. 65.Mr Ho was giving evidence on behalf of the Li Hong, which had been joined in order that it is bound by a judgment in China Health’s favour. China Health does not advance a claim against Li Hong and Li Hong has not suggested that it is owed anything by China Health. China Health has advanced no motive for Mr Ho agreeing to involve himself in the backdoor arrangement or actively to defend the action. Mr Ho says, with the support of Dr Li and Mr Chen, that he is a successful and wealthy businessman. Mr Man suggested in closing that there was no evidence of this. This is incorrect. This was the evidence of Mr Ho, Dr Li and Mr Chen. It is correct that Mr Ho did not produce any documents that showed what his business interests are, but he was not cross-examined about this and there is nothing in the evidence before me, which is inconsistent with him being a successful and wealthy businessman. On the contrary it was his uncontested evidence that he became involved in the matter because he in late 2009 to 2010 had at Mr Chen’s suggestion purchased HK$20 million of convertible notes issued by China Health through his company ZhongXing Limited as shown in China Health’s Announcement dated 8 April 2010. China Health does not suggest that this is incorrect. He subsequently converted his shares at Mr Chen’s request in order that he could vote at an extraordinary general meeting in favour of the FSY Project I refer to in [8]. It was the resulting loss that led, says Mr Chen, to him inviting Mr Ho to purchase the Loan Note as a way of reducing the losses that Mr Chen felt some responsibility for. It is difficult to see what motive Mr Ho would have had for agreeing to facilitate the Backdoor Arrangement by appearing to purchase the Loan Note, but in fact with the intention of passing the proceeds when it was honoured to Dr Li, other than the fact that he was a friend of Mr Chen and an acquaintance of Dr Li and Mr Li. It seems to me inherently unlikely that this would have been sufficient to persuade him to involve himself in the Backdoor Arrangement and, when its implementation became problematic actively participate in this action. What is more likely is that he takes exception to the case advanced by China Health and the suggestion that he was dishonestly implicit in the Backdoor Arrangement and has the resources to contest their allegations. 66.The attack on Mr Ho’s evidence focused on evidence that arose for the first time during Mr Ho’s cross-examination. During Mr Ho’s cross-examination [day 9] he referred to an agreement that Capital Foresight transfer to him their shares in China Health (about 46 million) as collateral for China Health honouring the Loan Note. Mr Chen asked him to gradually dispose of the shares and the purchase price of the Loan Note of HK$12,962,800 was the assumed value of the collateral. It is correct that this has not previously been referred, no documents have been produced that record the arrangement and the Debt Purchase Agreement records the consideration as US$1.67 million not HK$12,962,800[8]. It is also correct that although Mr Ho did sell the shares over time into the market he did not account as the sales proceeded to Capital Foresight for the proceeds. China Health argues that this new evidence was an attempt to explain why Mr Ho paid HK$12,962,800 to Capital Foresight and answer China Health’s case that the payment was not for the purchase of the Loan Note, but an outright purchase of Capital Foresight’s shares. China Health argues that if this is the case it supports its case that the purchase of the Loan Note was not genuine and the appearance of a sale of the Loan Note to Li Hong was a ploy to disguise the fact that the proceeds of the Loan Note was intended to go to Dr Li. 67.Mr Ho was quite clear in his evidence that he wanted collateral for the amount he was to pay so that he got at least that amount back and that Mr Chen proposed that the purchase price would be the value of the collateral. Mr Ho’s explanation for the agreement recording the purchase price in US$ was that the Loan Note was denominated in US$ and that the cheque he wrote to pay for it was for the equivalent amount in HK$. Mr Ho’s answers were clear and confident. It does not seem to me that this explanation is inherently implausible. 68.If the logic of China Health’s analysis is correct it would seem to follow that Mr Ho was able and willing to purchase Capital Foresight’s shares. It is difficult to understand (and China Health has offered no explanation) why Ho would have agreed to increase his shareholding in China Health and at the same time agreed to become involved in the Backdoor Arrangement. I note that it is not being suggested by China Health that the shares were being sold at an undervalue in fact when they were sold they realised approximately HK$3.3 million less than the alleged purchase price. It cannot, therefore, be suggested (and China Health do not do so) that the shares were sold at a low price in return for Mr Ho agreeing to facilitate the Backdoor Arrangement. 69.It also seems a remarkable coincidence if China Health is correct, that the amount Mr Ho agreed to pay to purchase Capital Foresight’s shares in China Health is the same as the amount Mr Li and Mr Chen agreed to record as being the purchase price for the Loan Note. 70.China Health make other forensic points about what it suggests are questionable features of Mr Ho’s explanation for the way in which the transaction developed and was implemented. It queries, for example, why it was necessary for Mr Ho’s bond to be converted in order that he could vote shares at the special general meeting. The suggestion put to Mr Chen, Mr Li as well as Mr Ho was that clearly the Board of China Health was aligned with its major shareholders and the necessary majority was always going to be obtained. Mr Ho’s evidence was that he simply converted because Mr Chen asked him to in order that he could vote for the FSY Project. He did not know whether this was necessary. I can see no reason not to accept Mr Ho’s evidence. And if, as China Health suggests, Mr Ho converted because he thought that the share price was about to rise (which it did) why would he lie about it? This example illustrates what in my view is a significant difficulty with China Health’s case. It involves trawling through the details of the various transactions and identifying inconsistencies in the way in which a transaction developed or things, which could have been dealt with more effectively. However, experience clearly demonstrates that few people conduct their affairs in a neat and tidy way, free of mistakes, inefficiencies, unexpressed assumptions that may or may not be correct and idiosyncrasies. This is not something that China Health can sensibly dispute as on its own case both Mr Chung and the Chair of the Board, Mr Jia, failed to keep any written record of what Mr Chung says they were told, they failed to communicate their concerns to other directors and they allowed public announcements to be published, which according to Mr Chung they knew contained material misstatements. 71.Mr Chen’s explanation for asking Mr Ho to convert his shares was that this was consistent with what he understood to be the expectation of the prospective investor, namely, that none of the existing major shareholders would increase their shareholding and a desire to make sure there was no problem getting approval. Whether Mr Chen recorded this anywhere, or was correct in his assumption about what the investor expected, or the need to increase the number shares that would be voted in favour of FSY Project, does not advance an assessment of the veracity of Mr Chung’s evidence that he was told by Dr Li about the Backdoor Arrangement anywhere. What is required is proof of facts and matters that support China Health’s case that there was a Backdoor Arrangement. As I have already explained this must be done by advancing a version of events that can be proven, and which points strongly to this conclusion. Not undertaking a far-reaching inquiry into how the various participants conducted their affairs, which is what much of the cross-examination became. 72.Mr Chen was, like Mr Chung, verbose and constantly argued with counsel rather than simply answer the questions. However, he like the other witnesses called, by the Defendants never deviated from substance of the Defendants’ explanation for issue of the Loan Note. His evidence lent itself to the most far reaching critique in closing particularly as he was the person negotiating on behalf of Capital Foresight with Mr Chung and Mr Ho, but for the most part like the example that I have just given in my view it amounted to little other than a series of illustrations of the casual way in which business is frequently conducted. 73.In addition to the above matter in closing China Health emphasised the following matters:
74.Third, the negotiation of the 1st Supplemental Agreement, the Amendment Agreement and the 2nd Supplemental Agreement. China Health point to Capital Foresight’s vigorous pursuit of payment of the principal, but the lack of reference to the US$4,000,000 and suggest that this is consistent with Capital Foresight having no interest in it. It seems to me that little can be read into this. 75.In my view China Health has come no where near proving facts and matters, which justify the court drawing inferences that the November Agreement, the Loan Note and the subsequent negotiation of agreements between China Health and Capital Foresight and Capital Foresight and Mr Ho evidence the Backdoor Arrangement and I reject the claims against all three Defendants in HCA 2549/2017. 76.If I had reached the alternative view, China Health sought a declaration that the November Agreement and the Loan Note are void or voidable and unenforceable. Paradoxically this would put China Health in the position of having to honour its obligations in respect of the Preference Shares. In China Health’s closing it says that if I find the Backdoor Arrangement proved China Health “is content with order [sic] in terms of prayer 1 of the ASOC”, which seeks only a declaration in respect of the November Agreement. For the reason referred in the second sentence of this paragraph I find it difficult to see how this would give China Health any commercial benefit. A point taken against China Health is that it cannot be entitled to recission because it clearly cannot make restitution in integrum[11] and that China Health’s latest interim report (for 2022) suggests that it is not in a position to do so. China Health has not explained why it has pursued a claim that even if successful does not appear to confer any commercial benefit. Capital Foresight’s Claim in HCA 2569/2017 77.In this Action Capital Foresight seeks an order directing forthwith issue by China Health of a promissory note for US$4 million in its favour. In Closing China Health argued that as Capital Foresight has not pleaded a maturity date and the November Agreement does not specify one the Court cannot properly make an order as it would be futile. China Health also argues that this problem cannot be solved by the court inserting a reasonable date. It advances two reasons. First, that if Capital Foresight wished to rely on an implied term, it was necessary for this to be pleaded and this included pleading what a reasonable period would be. The importance of pleading the relevant components of a claim is explained by the Chief Justice Ma (as he then was) in [21] of his judgment in Kwok Chin Wing v 21 Holdings Ltd[12].
78.China Health argue that it was necessary for Capital Foresight to prove that a term should be implied that a particular maturity date (or period) be included in the promissory note that it sought to have ordered and, that as it was not pleaded, this was not an issue for determination and without its determination an enforceable promissory note cannot be ordered and, therefore, the Court should decline to make an order. Secondly, the evidence does not provide the Court with a reliable basis for ordering what is a reasonable period. It seems clear, I accept, that a maturity date was not agreed. Dr Li and Mr Chen gave evidence that maturity dates could range from three months to a year; although Mr Chen said that he would have accepted a year. 79.In Closing Capital Foresight sought damages in lieu of an order for issue of the promissory note on the basis that the Court had the power to order damages rather than specific performance and this was appropriate in the circumstances. The availability of this alternative claim presupposes that Capital Foresight is entitled to an order for specific performance. If it is not for the reasons advanced by China Health it follows that damages are not an available alternative; in other words the claim for damages cannot cure the problem posed by the absence of a maturity date, if it is fatal to the claim for specific performance. 80.I agree with China Health. The absence of any agreement as to the maturity date of the promissory note to be issued is a flaw. The only way it can be cured is by implying an agreement that payment would be within a reasonable period of issue of the promissory note. This should have been pleaded and evidence adduced directed specifically to this point. Plainly it was not. The fact that during their evidence Rupert Li and Mr Chen expressed their views on what Capital Foresight might have been willing to accept by way of maturity date does not cure this flaw. In my view it is not appropriate for the court to determine what the parties would probably have been willing to agree particularly when there is no evidence from China Health directed to this point because it was not pleaded. And I note it was not referred to in Capital Foresight’s opening submissions[15]. Disposition 81.I dismiss both China Health’s claim and also Capital Foresight’s claim. Dr Wong sought a costs order on an indemnity basis against China Health on the grounds that its case was entirely fabricated. That I am not inclined to do, I will order that the costs of HCA 2549/2017 be paid by the Plaintiff to the Defendants with, in the case of the 2nd and 3rd Defendants, a certificate for three counsel, such costs to be taxed if not agreed. In the case of HCA 2569/2017, I order no order as to costs as given the limited time spent on this Action and the fact that it was responsive to China Health’s misconceived this claim seems to me just.
Mr Bernard Man SC, Ms Natalie So and Mr Louis Cheng, instructed by Jones Day, for the plaintiff (in HCA 2549/2017) and the defendant (in HCA 2569/2017) Mr Martin Ho and Mr Adrian Kwan, instructed by Fairbairn Catley Low & Kong, for the 1st defendant (in HCA 2549/2017) Mr William Wong SC, Mr Patrick Chong and Mr Adrian Lee, instructed by Howse Williams, for the 2nd and 3rd defendants (in HCA 2549/2017) and the plaintiff (in HCA 2569/2017) [1] China Health was represented by Bernard Man SC, Natalie So and Louis Cheng, Dr Li by Martin Ho and Adrian Kwan and Capital Foresight and Li Hong by Dr William Wong, Patrick Chong and Adrian Lee. [2] In the evidence and the contemporaneous documents the Loan Note is frequently referred to as a promissory note. However, as it was referred to as the Loan Note during the trial that is how I will refer to it in this judgment. [3] See email at 6 p.m. [4] See Notice dated 25 February 2021. [6] (2005) 8 HKCFAR 337, 443. [7] (2005) 8 HKCFAR 387. [8] US$1,661,897 at an exchange rate of US$7.8; or exactly the same figure at an exchange rate of US$7.76, which is within the range of movement of the US$/HK$ exchange rate. [9] Dr Li XXN. [10] See Dr Li’s email dated 25 July 2015. [11] Snell’s Equity 34th ed., [15-014]. [12] (2013) 16 HKCFAR 663. [13] [2005] 2HKC 638, at 643G-H (para 6(1)). [14] At 643H-I (para 6(2)). [15] See [78]–[79]. | ||||||||||||||||||||||||||||||||||||||
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