Excel Courage Holdings Ltd v. Seto Ming Wai and Another

HCA 1976/2016

[2024] HKCFI 984

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1976 OF 2016

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BETWEEN

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J U D G M E N T

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Introduction

1.The Plaintiff, Excel Courage Holdings Limited (“Excel”), a company incorporated in the British Virgin Islands (“BVI”) was up to 25 September 2013 the owner of shares in two listed companies: 974,180,000 shares in Luxey International (Holdings) Limited (“Luxey”) and 147,000,000 shares in China National Culture Group Limited (formerly called China Railsmedia Corporation Limited, “Railsmedia”) (“Shares”). Between 21 February 2011 and 25 September 2013, the sole shareholder and sole director of Excel was Wong Sin Lai Derek. Excel says that he was a nominee. This is pleaded in [2] of the Re-Amended Statement of Claim, although it is not stated for whom he was a nominee. Paragraph 3 of the Re-Amended Statement of Claim asserts that on 21 February 2011 Mr Wong signed a declaration of trust, which left the identity of the beneficiary blank. He also signed a blank undated share transfer form and an undated letter of resignation. On 25 September 2013, Mr Hung Ka Lueng completed the blank forms and replaced Mr Wong as the sole shareholder and director. Excel does not plead that Mr Hung was the beneficial owner at the material time.

2.On 24 September 2013 Mr Wong attended office of CLC Securities Limited (“CLC”) and opened a securities account on behalf of Excel with CLC on terms contained in CLC’s terms and conditions of service and account opening form (“Account” and “Agreement” as the context requires). The 1^st Defendant, Ms Seto Ming Wai, an account executive at CLC, dealt with Mr Wong. On 25 September 2013, Mr Wong caused the Shares to be transferred from Fulbright Securities, where they had been held, to CLC.

3.The following four individuals also had securities accounts with CLC at the material times. Sun Xiao Xiang opened an account on 5 September 2013. The account opening process was conducted by Ms Seto. Ringo Tsang opened an account with CLC on 4 July 2011. Ms Seto was the account executive. Alvin Tsang opened an account with CLC on 24 September 2013. The account opening process was conducted by Chan Kin Kee. TK Wong opened an account with CLC. Excel allege that Ringo Tsang asked Mr Chan and TK Wong to act as a nominee of Mr Sun in relation to certain securities transactions. I will refer to them collectively, for reasons that will become apparent in the next paragraph, as the “Recipients”.

4.On 25 September 2013 Mr Wong caused the Shares to be transferred to the Recipients’ accounts with CLC. Mr Wong produced bought and sold notes signed by him and the Recipients. The settlement instructions were signed by Ms Seto. Excel did not receive consideration for the transfers. On 25 September 2013 the Recipients sold the shares or transferred them:

(1) Mr Sun sold all 243,000,000 Luxey shares he received for around HK$11,552,376.30;

(2) Alvin Tsang sold all 243,000,000 Luxey shares he received for around HK$7,917,074.22;

(3) TK Wong transferred his entire part of the Shares (i.e. 243 million Luxey shares) to another securities company known as KGI Securities Limited (“KGI”);

(4) Ringo Tsang sold 115,600,000 Luxey shares and 78,538,000 Railsmedia shares for HK$3,156,096.50 and HK$22,631,485.26, respectively, leaving a balance of 129,580,000 Luxey shares and 67,934,000 Railsmedia shares in his account with the 2^nd Defendant.

5.It is not in dispute that Excel was never paid for the Shares. As I have explained on 25 September 2013, Mr Hung Ka Leung completed the blank forms and became the sole shareholder and director of Excel. Excel and Mr Hung commenced HCCL 34/2013 against Mr Wong and the Recipients seeking damages for what Excel alleges was the wrongful transfer of the Shares.

6.Mr Wong and Mr Sun counterclaimed. Mr Wong claimed that the Shares were beneficially owned equally by him and Joseph Lau Chi Yuen and sought an order for the transfer of 50% of the Shares and or proceeds to him. Mr Lau is a well-known property developer. He was the Chairman and CEO of Luxey at the material time. As is well known he had been convicted of bribery and money laundering in Macau in 2014 and Mr Lau was sentenced to five years and three months imprisonment. His appeals were unsuccessful. As Hong Kong and Macau do not have extradition treaties, he has been able to evade imprisonment.

7.The matter came on for trial in October 2015 before DHCJ Ismail SC. In her judgment the Deputy Judge states that between February 2010 and January 2011 Excel’s sole shareholder was Choi Chiu Fai. In [11] the Deputy Judge describes Mr Choi as a friend of Mr Lau and that Mr Lau arranged for the acquisition of Excel on behalf of an undisclosed person. From 15 January 2011 to 21 February 2011, Chen Xiao Tong, who had been the sole director, whilst Mr Choi was the sole shareholder, became a shareholder and he remained the sole director until he was replaced by Mr Wong, as I have explained, on 21 February 2011. It appears that in September 2011 Excel acquired a travel agency, Achiever World Limited, which remained under the same day to day management. Mr Lau’s companies had some dealings with Achiever World. In 2012 Excel bought and sold a property at Bel-Air for a modest profit. These matters are all described in the judgment and appear not to have been controversial.

8.In [39] of the judgment the Deputy Judge refers to Excel and Mr Hung pleading that “Through the agency of Mr. Lau, Mr. Wong agreed to be nominee shareholder and director of Excel on behalf of Mr. Hung.” The Deputy Judge goes on to explain that the Plaintiffs claimed that the Shares were disposed of without Mr Hung’s authority and that the Recipients dishonestly assisted in the theft of the shares. In [40] the Deputy Judge explains Mr Wong’s pleaded case. To the extent relevant it is described as this. Mr Wong agreed to assist Mr Lau by acting as a front to acquire the travel agency business. Mr Wong was aware of the blank forms and had signed them on the basis that only Mr Lau would be the beneficiary. He was subsequently told by Mr Lau the blank forms had been destroyed. In February 2012 Mr Wong agreed with Mr Lau they would each invest HK$30 million in a fund to acquire securities. Mr Wong acquired the Shares after discussions with Mr Lau. Between February 2013 and August 2013, Mr Wong had discussions with Mr Lau about selling the Shares as the Luxey share price had not risen much and Railsmedia was thinly traded. On seeing the results on 25 September 2013, Mr Wong caused the Shares to be sold because he thought it in his and Mr Lau’s best interests. Mr Wong had previously contacted Mr Sun (the 2^nd Defendant in HCCL 34/2013) who was interested in acquiring the Shares as a block trade. Mr Sun’s position at trial was that he did wish to purchase the Shares and did not know who owned Excel at the time. He was a bona fide purchaser. It appears that Mr Sun’s position at the trial was that the Recipients were acting as his nominees.

9.Mr Lau gave evidence at the trial. In [55]–[69] the Deputy Judge deals with Mr Lau’s evidence in relation to what would appear to have been an alleged attempt to intimidate Mr Wong. Mr Hung did not give evidence, because, so it is recorded, had had ceased to have a commercial interest in the outcome of the Action as he had sold his Shares to Huge Leader in March 2015. Each of the Recipients gave evidence except Ringo Tsang, who had died by the time of the trial. Nobody gave evidence on behalf of Excel, who contended that they were an officer, shareholder, employee or agent of the Excel in September 2013 or had first-hand knowledge of the circumstances in which the Shares came to be sold. In addition to Mr Lau, Mr Sun, the accountant who assisted Mr Lau with the acquisition of Excel and who prepared the blank forms did give evidence. He told the Deputy Judge he did not know who the beneficial owner of Excel was and had not asked.

10.The Deputy Judge noted in [86b] that prior to the Action both Mr Lau and Mr Wong adopted the position that Mr Wong was the 100% owner of the Shares as demonstrated by the public disclosure in respect of the shareholdings in Luxey. Mr Lau did this on 24 September 2013 (i.e. one day before the Shares were transferred) when he signed Luxey’s annual report to the effect that Mr Wong was the beneficial owner. The Deputy Judge rejected Mr Lau’s attempted explanation for this clear inconsistency and found that he did not tell the Court the truth.

11.In [135] the Deputy Judge found that the Plaintiffs had failed to establish that Mr Hung was the beneficial owner of Excel at any material time up until and including 25 September 2013. I would note at this juncture that evidence was given on behalf of Excel at the trial before me by Ms Chan Ka Wai, who currently owns 30% of Huge Leader, which is the current sole shareholder of Excel. Siu Pao-yee owns the remaining 70% of Huge Leader. Ms Chan confirmed in cross-examination that she was the Cherry Chan referred to in the Deputy Judge’s judgment, although she denied being Mr Lau’s girlfriend. She was not cross-examined on the circumstances in which she came to acquire shares in Excel. Essentially, Mr Suen’s cross-examination involved putting to her that on the basis of the public records of shareholdings in Luxey, Mr Wong was the owner of the Shares and had authority to transfer them. Ms Chan disputed this, although she accepted that she had no firsthand knowledge at the arrangements in respect of Excel in 2013. Ms Chan’s evidence was of little relevance or value. I have no evidence of who was the beneficial owner of Excel in September 2013 and no explanation of why or how Huge Leader acquired Excel or, if it paid for its shares, how the value of this claim was taken into account.

12.The Deputy Judge also found that Mr Wong had not acted in Excel’s best interests when selling the Shares. The Deputy Judge also found that the 2^nd Defendant (Mr Sun) had assisted Mr Wong in the disposal of the shares and acted dishonestly [174]. The Deputy Judge also found the necessary element of dishonesty made out against the 3^rd and 5^th Defendants, but did not do so in the case of the 4^th Defendant and made the orders in [197].

13.What is clear, and principally relevant for the purposes of this trial, is that the transfer of the Shares to CLC and their subsequent sale and transfer were made dishonestly and in breach of duty by Mr Wong. I think it reasonable to infer that this was possible because Mr Wong had become the sole shareholder and director of Excel in order to hide the fact that somebody else was the beneficial owner of the Shares. Excel has not, and cannot, challenge DHCJ Ismail’s decision that it was not Mr Hung. Other than for the unhelpful and unconvincing evidence of Ms Chan which I have referred to in [11], I have no evidence as to who the beneficial owner was between 21 February 2011 and 25 September 2013. What is in my view clear is that it was not Mr Wong. I do not agree with the Defendants argument that it is necessary for Excel to demonstrate, who was the beneficial owner during this period. In my view it is sufficient in respect of each of the claims Excel advances for it to demonstrate that the Transfers were made in breach of duty and caused loss. However, the way in which the beneficial owner of Excel between 21 February 2011 and 25 September 2013 caused its affairs to be conducted does inform a consideration of the claims. The beneficial owner during this period wanted to mislead third parties about Excel’s beneficial ownership as demonstrated by contravention of the Securities and Futures Ordinance, Cap. 571 by filing false substantial shareholder returns in respect of Luxey. This created a situation in which wrongdoing was possible. That does not extinguish the duties that the Defendants were under, but it is relevant to an assessment of what in practice those duties required. At certain stages of the claims it advances Excel is complaining that the Defendants did not see through the sham that the beneficial owner of Excel had consciously created to mislead third parties dealing with the company. This is an unattractive argument, but more importantly, and as I will demonstrate, it is relevant, in ways unhelpful to Excel, to certain parts of its case, namely, causation, remoteness of damage and contributory negligence.

The Claims

14.Excel makes the following claims. First, that the Transfers were not properly authorised by Excel and took place because of the Defendants’ negligence. The negligence is said to involve:

(1) The Defendants failure to ensure that Mr Wong had authority to open the Account, operate it and instruct the Transfers.

(2) Failed to verify the identity of the beneficial owner of Excel.

(3) Failed to identify the source of funds for the acquisition of the Shares.

(4) Failed to identify the purpose of opening the Account.

(5) Opening the Account and accepting a copy of a certified true copy of the certificate of incumbency (“COI”) of Excel more than 18 months before the date of opening the Account rather than requiring a new one, which Mr Wong would not have been able to provide, because Excel’s company secretary knew Mr Wong was no longer the beneficial owner of the Shares and would have refused to obtain one.

(6) The immediate Transfers to the Recipients were suspicious for reasons I describe in more detail later as were the immediate disposals by the Recipients of most of the Shares.

15.Secondly, Excel also alleges that the Defendants dishonestly assisted in Mr Wong’s breach of duty. Excel relies on substantially the same matters as it relies on in support of its negligence claim.

The Principal Issues

16.The issues, which in my view largely determine the outcome of the Action are these. First, should CLC have accepted the COI, if not should CLC have declined to activate the Account and trade until an up-to-date COI was provided and, finally, if CLC had insisted on a up to date COI is it probable Mr Wong would not have been able to provide one with the consequence that the Transfers would not have taken place? Secondly, whether the characteristics of the Transfers and the Recipients should have alerted the Defendants to the impropriety of the Transfers and CLC should have declined to execute them. I will deal first with the relevant legal principles.

CLC’s Duty of Care

17.A provider of financial services, such as CLC, owes duties to its client to act with reasonable skill and care in providing those services. They arise from the agreement between the service provider and its client. Although, the Agreement does not expressly impose a duty of care it recognises in clauses 6.1 and 10.2, which refer to CLC’s “liability of negligence” and failure “to exercise reasonable skill and care”, that it is under such a duty, which necessarily is to be implied if not expressly stated. The duties also sound in the tort. This is explained by Lord Sumption in [13] of PT Asuransi Tugu Pratama Indonesia TBK v Citibank N.A.[1]

18.When Mr Wong executed the Agreement, he was the sole shareholder and director of Excel. He, therefore, had the power and authority to execute the Agreement. Although, Excel pleads that the Transfers were not properly authorised by it, in my view this is not correct and conflates Mr Wong’s authority with his duty to act in the best interests of Excel. The fact that the anonymous beneficial owner of the Excel did not know of, or approve, the Transfers does not mean that Mr Wong, as the sole director and sole shareholder of Excel, did not have authority to open the account and instruct the Transfers[2].

19.The live legal issues in respect of a claim in tort, in my view, concern the scope of the duty of care in the sense of what was required of CLC. CLC also asserts that even if there was a breach of duty in the opening of the Account it did not cause any loss. I return to this matter later.

The Scope of the Duty of Care

20.A financial adviser when opening an account owes the client a duty, which extends to taking reasonable steps to prevent the account being used as a vehicle for actions, which will damage the client[3]. This begs the question: what is reasonable? The answer to this question has evolved with time. Currently, financial institutions have extensive, sometimes onerous, ‘know your client” and due diligence processes, which require the institution to obtain detailed information about prospective clients and their source of funds. The principal driver for this is international governmental concern about money laundering and financing of terrorism. In Hong Kong there are a number of relevant codes of conduct. In the relevant period there was (1) the Code of Conduct for Persons Licensed by or Registered with the SFC, (2) the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, and (3) the SFC’s Guideline on Anti-Money Laundering and Counter-Terrorist Financing dated July 2012 (“AML guidelines”). I agree with the Defendants that they do not create a statutory duty on which a client could sue, but it seems to me clear that they are directly relevant to a consideration of what a broker such as CLC acting reasonably, and necessarily having regard to these Codes, would have required and done when opening an account. I will refer to the requirements of these codes and guides generally as “customer due diligence”.

21.It is clear from the AML guidelines that until customer due diligence had been completed an account should not be opened or a transaction processed: [4.7.1]. Section 4.9 emphasises the need to know who the beneficial owner of an account is. Of course, if a company has a sole shareholder and director, it will be difficult for the client to demonstrate a negative, namely, that the sole shareholder is not a nominee otherwise than by declaring it. On occasions an institution may have objective reasons to question whether an alleged owner is the beneficial owner because of a mismatch between the personal information he has provided and the amount he wishes to transfer into an account; but that is not an allegation made in the present case. In the case of a foreign company [4.9.11] requires (in a case, such as the present, to which it is relevant) “a certificate of incumbency or equivalent issued by the company’s registered agent in the place of incorporation” and footnote 23 states that the certificate of incumbency “should have been issued within the last 6 months”.

22.The following seem to me plain. First, that the AML guidelines are directly relevant to the determination of what generally in September 2013 a financial institution’s duties to its client required it to do or decline to do. Secondly, in particular, the AML guidelines inform the determination of what was required of a financial institution in processing an application to open an account. Thirdly, that in dealing with a foreign incorporated company (and in my view particularly one incorporated in a jurisdiction with a notoriously opaque company registration system such as the BVI) a reasonable financial institution giving proper weight to the AML guidelines would not have opened, or at least operated, an account until a compliant certificate of incumbency had been provided[4].

Opening an Account and Trading without an up-to-date COI

23.In my view CLC breached its duty of care to Excel in opening an account and allowing Mr Wong to trade without first obtaining a compliant COI. It does not follow that this breach necessarily caused loss and I deal with that issue later.

24.For the reasons I have already explained, in my view Mr Wong did have the authority to open an account. The only sensible ground for contending that despite this CLC should have declined to open the Account is the out of date COI. If Mr Wong had produced a genuine original COI dated, say, 10 days earlier I can see little basis for suggesting, as Excel plead, that by virtue of a miscellany of other matters such as insufficient personal details, lack of information about source of funds, the company name missing from the board resolution approving opening the account and information about source of funds, there would have been a credible argument that CLC were materially negligent in opening an account and accepting a transfer of shares from another reputable broker (Fulbright). CLC knew where the Shares came from and if it was satisfied that Mr Wong was the sole shareholder and director of Excel it seems to me that it would have been difficult to argue that the AML guidelines and other codes required CLC to undertake investigations to establish how Mr Wong had come to finance the acquisition of the Shares held in an account at Fulbright; investigations, which might, but not necessarily have revealed that it was likely he was not the beneficial owner or sole beneficial owner. I note in passing that Excel itself has been silent on how it came to open an account with Fulbright or fund the acquisition of the Shares. That having all been said, it does seem to me that the way in which the Account was opened and the way in which the Recipients accounts were opened clearly indicates a lax attitude to compliance issues by CLC and its employees and provide relevant context in which to determine whether the failure to obtain the COI constituted negligent breach of duty under the Agreement or in tort, which as I have stated in the previous paragraph I find it did. It is also relevant to the claim for breach of the Quincecare duty, which I address in [26]–[30] and [62]–[64].

25.Before dealing with the subsequent transfers to the Recipients, I will address the principles relevant to the claims based on the transfers of the Shares to the Recipients.

Quincecare Duty

26.Unsurprisingly, financial institutions owe their clients a duty of care when executing orders. The duty is explained by Baroness Hale in Singularis Holdings Ltd v Daiwa Capital Markets Ltd[5]:

“In Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363, Steyn J held that it was an implied term of the contract between a bank and its customer that the bank would use reasonable skill and care in and about executing the customer's orders; this was subject to the conflicting duty to execute those orders promptly so as to avoid causing financial loss to the customer; but there would be liability if the bank executed the order knowing it to be dishonestly given, or shut its eyes to the obvious fact of the dishonesty, or acted recklessly in failing to make such inquiries as an honest and reasonable man would make; and the bank should refrain from executing an order if and for so long as it was put on inquiry by having reasonable grounds for believing that the order was an attempt to misappropriate funds.” [Emphasis added]

27.In Lipman Gorman v Karpnale Ltd[6], Parker LJ put it as follows (at 1378B-C):

“The question must be whether, if a reasonable and honest banker knew of the relevant facts, he would have considered that there was a serious or real possibility, albeit not amounting to a probability, that its customer might be being defrauded, or, in this case, that there was a serious or real possibility that Cass was drawing on the client account and using the funds so obtained for his own and not the solicitors’ or beneficiaries’ purposes …” [Emphasis added]

The Court considers what objectively a “reasonable and honest banker” would have done.

28.In determining whether the Quincecare duty was breached, according to Lord Sumption NPJ in the recent CFA decision in PT Asuransi Tugu Pratama Indonesia TBK v Citibank N.A.[7]:

“The starting point is what is actually known to the third party without inquiry (or would actually be known to him if he appreciated the meaning of the information in his hands). The question is whether the information which he actually has calls for inquiry. If, even without inquiry, the transaction is not apparently improper, then there is no justification for requiring the third party to make inquiries. But if there are features of the transaction apparent to a bank that indicate wrongdoing unless there is some special explanation, then an explanation must be sought before it can be assumed that all is well. In other words, if a bank actually knows of facts which to their face indicate a want of actual authority, it is not entitled to proceed regardless without inquiry.” [Emphasis added]

29.Mr Suen emphasised in his Closing that the authorities demonstrate that the threshold is high.

Dishonest Assistance

30.In addition to the breach of the Quincecare duty Excel also advances a claim for dishonest assistance. I consider it doubtful whether this adds anything to the Quincecare claim as if that claim is unsuccessful it is difficult to see how a claim for dishonest assistance could succeed as it requirements are more onerous than those of the Quincecare duty. This is apparent from the summary of the components of the principles in Excel’s Opening, which it is convenient to quote:

“The relevant principles were summarised by Rose J (as she then was) in Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Europe Ltd[8]:

(1) Dishonesty requires knowledge by the defendant that what he was doing would be regarded as dishonest by honest people, although he should not escape a finding of dishonesty because he sets his own standards of honesty and does not regard as dishonest what he knows would offend the normally accepted standards of honest conduct.

(2) It is only necessary to show that the defendant’s knowledge of the transaction rendered his participation contrary to normally acceptable standards of honest conduct. He did not need to be shown to have had reflections about what those normally acceptable standards were.

(3) Wilful blindness will satisfy the test for dishonesty. It is no defence for a defendant to say that he did not realise he was acting dishonestly.”

The Transfers to and by the Recipients

31.In addition to its complaints about the opening of the Account, Excel complains that the immediate onward transfer of the shares to the Recipients (which I shall describe collectively as the “Transfers”), plainly should have aroused suspicion. The material details of the Transfers are set out in [27]–[30] of Deputy Judge Ismail’s judgement, which I do not understand to be controversial.

“27. On 25 September 2013, Mr Wong caused Excel to transfer all of the Shares from its securities account with Fulbright to Excel’s securities account with CLC.

28. On the same date Mr Wong caused Excel to transfer the Shares from its own CLC account to the CLC securities accounts in the names of D2 to D5. There have been produced bought and sold notes in respect of the transfers to D2 to D5. These bear the date 25 September 2013 and they state that Excel sold the Shares at $0.08. The opening market price on 25 September 2013 was $0.08.

29. The Shares were partly sold by D2 to D5 on 25 September 2013 to 27 September 2013:

a. D2 sold 243 million Luxey shares for $11,552,376.39.

b. D3 sold 243 million Luxey shares for $7,917,074.22.

c. D4 transferred 243 million Luxey shares into an account in his name with KGI.

i. Between 26 to 27 September 2013, 43 million of those Luxey shares were sold.. Of the proceeds, $607,347.65 remains in the KGI account; what happened to the remaining $1,652,400 is unknown.

ii. On 27 September 2013, 200 million Luxey shares were sold to Chartered Extend Limited. The whereabouts of the proceeds of $8 million is unknown.

iii. Between 27 September and 2 October 2013, Chartered Extend Ltd sold 200 million Luxey shares for $6,142,290.90.

d. D5 received 245,180,000 Luxey shares and 146,472,000 Railsmedia shares.

i. D5 sold 115.6 million Luxey shares for $3,156,096.50, and 78.538 million Railsmedia shares for $22,631,485.26.

ii. The remaining 129,580,000 Luxey shares (25,9166,000 shares after consolidation) and 67,934,000 Railsmedia shares were not sold.

30. Excel and/or Mr Hung have received no payment for the Shares. Indeed, D2 to D5 have made no payment for the Shares other than the provision to Mr Wong of a cheque payable to Excel by D2 in the amount of $4 million (said to be by way of deposit) which has not been banked but remains in the possession of Mr Wong.”

32.Excel alleges that the Transfers to the Recipients should have aroused the Defendants’ suspicions for the following reasons.

(1) Mr Sun opened an account with CLC on 5 September 2013. The account opening process was conducted by Ms Seto. His address was said to be a flat in Zhongshan for which he had paid HK$19.44 million. His account opening form records his annual income as more than HK$1,000,000 and the total net value of his assets was said to be more than HK$5 million. It says he is self-employed, but he provided no details of what he did. He appears to have provided no documentation that supports this information.

(2) Ringo Tsang’s account was opened on 4 July 2011. The account opening process was also conducted by Ms Seto. It stated that his total net worth at that time was HK$3 million. His residential address was Shek Kip Mei Estate in Shamshuipo. The bought and sold notes record him as paying HK$19,614,400 and HK$68,109,480 for the shares transferred to him. His address is a room in Mong Kok.

(3) Alvin Tsang opened an account on 24 September 2013. He was 19 years old at the time and lived in public housing in Chai Wan. His account opening form stated that he had an annual income of between HK$200,000 and HK$500,000 and his total net assets were less than HK$500,000. His bank statement shows a balance of HK$100.54.

(4) TK Wong was a driver and lived in public housing in Tsui Wan Estate. His account was opened on 24 September 2013. It was also processed by Ms Seto. The bought and note stated that he had paid HK$19.44 million for the Shares. Although, his account opening form records his annual income as being between HK$200,000 to HK$500,000 and his total net worth as HK$500,000 to HK$1,000,000 the bank account statement he provided dated 23 August 2013 showed a balance of HK$76.78.

(5) The Recipients all sold the Shares on 25 September 2013.

(6) In the case of Mr Sun this was at market and resulted in a loss of HK$8 million assuming the purchase was genuine.

(7) Alvin Tsang did the same incurring a loss of over HK$11 million.

(8) Ringo Tsang sold part of the shares in Luxey and Railsmedia that had purportedly purchased on 25 and 26 September 2013.

(9) On 25 September 2013 TK Wong transferred of the Luxey shares he had purportedly purchased to another account in his name with KGI Securities Ltd. Between 26 and 27 September 2013 he sold those shares.

33.I would add that it is surprising that Mr Wong went to the trouble of opening an account with CLC and transferred the Shares from Fulbright if, as the chronology suggests, by that time he had decided to sell the Shares.

34.It is not difficult to understand why Excel asserts CLC’s staff should have been suspicious about the Transfers; in particular to Alvin Tsang. All the parties called experts to give evidence concerning the scope of a brokers duties and what might reasonably be expected of a broker in 2013 when opening a new account and processing instructions. In relation to the second matter, which is plainly one of fact, the evidence was of little weight. I would, however, address at this point the evidence of CLC’s expert Mr Harris, that in Hong Kong it is not unusual for clients of apparently modest circumstances to conduct larger transactions than might be expected. I would make to two points. First, this is to misunderstand what is required of a broker or similar institution. The question is not whether there might be an innocent explanation for the relevant matter, it is whether the facts suggest that there might be something untoward about it. Secondly, plainly the opening of the Account followed by the immediate transfer of the Shares to the Recipients, in particular Alvin Tsang and TK Wong, was suspicious. The information that Alvin Tsang and TK Wong had provided plainly called into question the genuineness of their acquisitions of a substantial proportion of the Shares.

The Defendants’ Evidence

35.I now turn to consider the Defendants’ evidence.

36.Ms Seto joined CLC as a stock broker in July 2011 and was 24 years old in 2013; she was a relatively junior employee of CLC. She was introduced to Ringo Tsang by a colleague, Ong Chi King, who she assisted. Ringo Tsang introduced clients to her, and it was her evidence that there was nothing suspicious about him. The clients he introduced included Mr Wong and the Recipients.

37.Mr Wong attended CLC’s office on 24 September 2013 in order to open an account in Excel’s name. He presented Ms Seto with corporate and personal documents including the COI. Ms Seto said that she checked the documents and did not notice any irregularities. Ms. Seto then passed the documents, and the account opening forms to Ms So Chung Wai, who she describes in her witness statement as the Responsible Officer. Ms So approved the opening of the account and the trading limit and credit limit available to Excel.

38.So far as the Recipients are concerned Ms Seto gave the following evidence. She was assigned by CLC to be responsible for Mr Sun’s account. Ms Seto dealt with the opening of his account on 5 September 2013. Mr Sun’s documents show the matters to which I referred earlier. Ms So approved the opening of the account with “another senior with surname Yip as the authorized person of CLC.”

39.Although Alvin Tsang opened his account on the same day as Excel it took place at different times. Although, Ms Seto was assigned by CLC to take care of the account, she says in her witness statement that the broker for the account was KK Chan the Vice President of CLC. Ms Seto signed the account opening form as the witness and KK Chan signed the column “Official use by CLC”. Ms So approved the account opening forms and countersigned the account opening form along with the “Yip” I have referred to previously, as the authorised person of CLC.

40.Ms Seto was also assigned by CLC to deal with the opening of TK Wong’s account, which took place on 24 September 2013. The process was similar to the opening of Alvin Tsang’s account. KK Chan was the broker and signed in the column “Official use by CLC”. Ms So signed as approver along with “Yip”. As Ms Seto notes in her witness statement; the procedure was more or less the same for Excel and the Recipients. She says that she had no reason to believe that were acting in concert; all she knew was that Mr Sun, Alvin Tsang, TK Wong and Derek Wong were introduced by Ringo Tsang. She did not know if they knew one another.

41.On 25 September 2013, Excel issued a settlement instruction. It was signed by Mr Wong on behalf of Excel and Ms Seto as broker. It was approved by Ms So. Tina Hui of CLC verified the signature and “Simon” dealt with CCASS, requesting the transfer of the Shares from Fulbright to CLC. Ms Seto’s responsibility was to hand over the settlement instruction to other staff to action. Ms Seto says that afterwards, Mr Wong submitted four bought and sold notes all dated 25 September 2013 to CLC requesting the transfer of the Shares to the accounts at CLC of Mr Sun, Alvin Tsang, TK Wong and Ringo Tsang. Ms Seto says that the instruction by Mr Wong was entirely consistent with the information presented by him when the account was opened. It showed him as the sole director, shareholder and signatory of Excel and on the face of the documents he was authorised to transfer the Shares. Ms Seto does not address the date of the COI.

42.Ms Seto says that when she phoned TK Wong and Ringo Tsang to confirm the transfers to them, they both wished to transfer the Shares to other securities accounts they had with other brokers. As I understand Ms Seto’s evidence she and her colleagues then processed the transfers to the Recipients. On 25 September 2013 Ms Seto and other, unnamed colleagues at CLC, received orders from Ringo Tsang, Mr Sun and Alvin Tsang to sell the shares they had received in the market.

43.There is nothing in Ms Seto’s witness statements to suggest that she was alive to the importance of the due diligence procedures to which I have referred earlier. It was her position, and that of CLC, that there was nothing in the circumstances in which the accounts to which I have referred were opened or the information provided when this took place to alert Ms Seto or the other members of CLC’s staff who were involved, to the possible impropriety of the Transfers. In relation to the COI she explains in her witness statement that she had no reason to doubt that it was genuine and that as Mr Wong was the only shareholder and director he could have obtained a new one. This presupposes that the suite of documents that Mr Wong had presented reflected the current position. If Ms Seto had required an up-to-date COI and Mr Wong had not procured one, she would have been alerted to there being a possible issue over control of Excel. I address the evidence in relation to Mr Wong’s ability to obtain a new COI in [52]–[53]. As I have mentioned there is nothing in Ms Seto’s witness statement to suggest that she understood the purpose of due diligence or had had any relevant training. Ms Seto also fails to address at all the complaints that the Recipients were on the face of the information they presented when opening their accounts suspicious purchasers of a substantial proportion of the Shares or the timing of the opening of a number of the accounts followed by the immediate Transfer of the Shares involving a loss to at least two of the Recipients.

44.A witness statement was filed on behalf of CLC by Michael Chum, who is its Chief Executive Officer. He joined the CLC Group in 2012. He had no first-hand involvement in any of the transactions I have described. As it transpired, he declined to give evidence, but the contents of his witness statement was adopted by Mr Sin, who I refer to in the next paragraph. The other staff mentioned by Ms Seto as having had some involvement in the transactions are no longer with CLC and did not give evidence. Mr Chum’s witness statement is simply a description of relevant facts and matters gleaned from the contemporaneous documents. In addition, he refers to CLC’s standard procedures for opening accounts and, what he refers to, as education and training of staff. This is said to involve regular training, circulation of information about regulatory developments and an internal manual, which staff are required to read. CLC is also said to have compliance staff, although in his evidence Mr Chum does not explain how they monitor compliance. What is completely lacking is any evidence concerning the training or supervision of Ms Seto or any of the staff she mentions. It does not matter how comprehensive the internal manuals might be if there were no systems in place to ensure that they were complied with. There is no evidence, which demonstrates that Ms Seto had any training or that CLC has a culture of compliance rather than simply paying lip service to it.

45.It seems to me plain, and I so find, that CLC’s staff should have noticed that the Transfers involved a number of highly suspicious features that called into question their propriety.

46.In addition to Mr Chum, Sin Tak Keung also gave evidence on behalf of CLC. He is an executive director of an associated company, CLC International Limited. He had responsibility for dealing with the current proceedings on behalf of the CLC Group. Mr Sin is a solicitor and a certified public accountant. Mr Sin only joined the CLC Group in 2019. The only relevant evidence that Mr Sin gave was in to describe how the various individual and corporate substantial shareholder notices of Luxey between May 2012 and September 2013 misrepresented, according to Excel, that Mr Wong was the beneficial owner of the shares in Luxey registered in its name. Mr Sin also notes that Mr Lau as Chairman of Luxey must have known this. Both in my view are clearly correct. Mr Sin suggests that a possible reason for not disclosing the beneficial ownership of Excel was that if the true beneficial owner of Excel was Mr Lau or parties acting in concert with him and this was disclosed, this would increase Mr Lau’s shareholding in Luxey to 42.39% and this would have triggered a mandatory offer under Rule 26 of the Takeovers and Mergers Code.

47.The purpose of this evidence was to lay the grounds for a submission that the Transfer involved illegality and Excel’s claim should be dismissed for this reason. I deal with the defence in [65].

Certificate of Incumbency and Mr Sum’s Evidence

48.As I have explained the COI was over 18 months old. Excel says for reasons explained earlier that it was out of date and CLC should have required a new one before opening the Account. This Mr Wong would not have been able to obtain with the consequence that Excel should have declined to open an account. The reason why Excel says a new COI could not have been obtained is explained by the evidence of Sum Chun Ho, who is a certified public accountant and describes himself in his witness statement as the administrator of Excel.

49.It was Mr Sum’s evidence that in early 2011 Mr Lau informed him that the one share in excel was to be transferred to Mr Wong who was also to be appointed Excel’s sole director. Mr Sum says that he did not know who the beneficial owner of Excel was. Mr Lau informed him that he was acting on behalf of the beneficial owner. Accordingly, Mr Sum arranged for a transfer of shares to Mr Wong. Mr Sum appears not to have thought it necessary to find out who the beneficial owner was and does not appear to have had any concern that he might be facilitating an improper or unlawful course of conduct. Mr Sum also prepared a declaration of trust, a share transfer form, and a resignation as director letter in order to facilitate a future change of shareholder and directorship. Mr Sum says that he explained to Mr Wong the purpose of each of the documents he was asked to sign. Mr Sum did not seem to think it was necessary to ask Mr Wong why he was prepared to enter this arrangement or if he knew who the beneficial owner was.

50.Mr Sum retained the company kit. He said that as he was the administrator of Excel any instructions to Excel’s BVI agent for obtaining its certificate of incumbency had to be given through him; or he would have to provide his written consent. On 25 September 2013, Mr Sum was informed by Mr Lau that due to Mr Wong's dishonest conduct, the beneficial owner of Excel had to remove Mr Wong as a director and transfer the one share to Mr Hung.

51.When asked questions about how misleading substantial shareholder returns came to be submitted to the Stock Exchange he said in cross-examination “I didn’t know who submitted this information to the Stock Exchange. But I want to add that as an administrator we only do BVI filing on behalf of the client and we only deal with BVI agents. The general operation of the company, we would not be involved.” Mr Sum was not asked to explain what he meant when he described himself as the administrator until after I had asked a series of questions when re-examination had been completed. His evidence seemed to me to be unsatisfactory. Plainly, Mr Sum acted on Mr Lau’s instructions despite, so he would have the court believe, not knowing who the beneficial owner was or ever receiving any instruction from the beneficial owner. By administrator he appeared to mean an agent asked to acquire a BVI company and deal with the paperwork. The administrator would normally retain all the company’s constitutional documents including the share register and would consequently, said Mr Sum need to be involved if the BVI Registered Agent (as it is described in the COI) was to issue a new COI. The practical position was, I accept, that Mr Sum would not have procured a new COI or parted with Excel’s books without Mr Lau’s agreement. It does not necessarily follow that Mr Wong could not have obtained a new COI if he had been required to do so, because he was as a matter of fact the sole shareholder and director of Excel.

52.It was Mr Sum’s evidence that in practice if Mr Wong has asked Offshore Incorporations Limited, the Registered Agent of Excel, to issue a new COI they would not have done so without first checking with him. The reason being that despite what the COI says, namely, that the documents recording the identify of the shareholders and directors being kept at the Registered Office, which is stated to be “PO Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands” the books of Excel were kept at his office and the Registered Agent would have required to check their contents before issuing a new COI. It does not seem to me entirely clear that this would be the case, but it seems to me that on the basis of Mr Sum’s evidence that he had Excel’s books including the share register and directors register the position is probably as follows. If Mr Wong has been asked by CLC to produce a new up-to-date COI he would not have been able to obtain one through Mr Sum. If he had approached Offshore Incorporations directly I would have expected them to seek to check Excel’s company books not just have taken his word for the fact that nothing had changed. If, perhaps anticipating this, he had approached, for example, a firm of Hong Kong or offshore solicitors and asked them to write to Offshore Incorporations asking for a new COI they would probably have requested to see Excel’s books. Certainly, they should, in my view, have done so and not just taken Mr Wong’s word for the fact that he remained the sole shareholder or that the substantial shareholder notices were accurate. Mr Wong would not have been able to provide the company books, and I think it reasonably to conclude that in these circumstances Mr Wong would not have been able to provide an up-to-date COI to CLC, who in the circumstances would, or certainly should, have declined to open an account or facilitated the transfers.

53.The Defendants also argue that Excel’s claim faces another hurdle when it comes to causation, namely, the fact that Mr Wong could have kept the Shares at Fulbright and transferred them to the Recipients. There is no evidence, which sheds any light on why Mr Wong decided to transfer the Shares to CLC. Clearly the fact that he could do so demonstrates that he was able to operate the Fulbright account and dispose of the Shares. It is not for the court to speculate on the reasons why Mr Wong chose to transfer the Shares to CLC before transferring them to the Recipients. It seems to me that in the absence of any explanation for Mr Wong’s decision to transfer the Shares to CLC I am driven to conclude that Mr Wong could have transferred the Shares to Recipients from the Fulbright account. This being the case the opening of the Account did not cause loss to Excel[9].

Remoteness

54.The Defendants also argue that in respect of the opening of the Account even if there was a breach of duty, which caused loss, the loss was too remote because it does not fall within the scope of the risk created by the negligence and is, therefore, too remote and legally irrelevant. As explained by the High Court of Australia in Wallace v Kam[10]:

“A limiting principle of the common law is that the scope of liability in negligence normally does not extend beyond liability for the occurrence of such harm the risk of which it was the duty of the negligent party to exercise reasonable care and skill to avoid.”

55.This principle is often illustrated by Lord Hoffmann’s mountaineering example[11]: a doctor negligently advised a mountaineer as to the fitness of his knee. If the mountaineer were to be injured on an expedition because his knee gave way, the doctor might be liable; but if he were injured by a risk of mountaineering unconnected with his knee (e.g. being hit by a rock) the doctor would not be liable for that injury because that injury, although foreseeable, is not within the risk created by the doctor’s negligence.

56.Applying that principle here, CLC submits:

(1) If the Defendants were under a duty to Excel to ask for an updated COI, the point of that duty or exercise is to avoid any risk of a third-party masquerading as Excel’s shareholder and/or director.

(2) However, that risk simply did not materialise on the facts of the present case because it is common ground between the parties that Mr Wong was in fact Excel’s sole shareholder and director at the material time, even though the COI provided was outdated.

(3) The information disclosed under any updated certificate of incumbency would have been exactly the same as the COI provided to the Defendants by Mr Wong given that he was the sole shareholder and director at the material time.

(4) The loss which Excel has suffered was caused by the alleged breach of fiduciary duty owed by Mr Wong to Excel, which is not a harm falling within the type of risk which a duty to require an updated certificate is meant to prevent, and is therefore too remote.

57.With this I agree. I see little room for argument that the purpose of obtaining an up-to-date COI was to establish who the beneficial owner was or who in practice was directing corporate decisions.

Transfers of the Shares to the Recipients

58.CLC argues that in order to demonstrate that it breached the Quincecare duty Excel has to demonstrate that that there were features of the Transfers known to CLC, which unless explained pointed to misappropriation of assets by Mr Wong. In my view this puts the matter a little too high. As is clear from the passages quoted in [26]–[27] what Excel needs to demonstrate is that there are features of the Transfers that suggest impropriety of some sort, which might involve a wrong done to the company and requires explanation. I accept CLC’s argument that this involves something materially more than demonstrating that regulatory best practice has not been complied with. I also accept that a general irregularity in the structuring or documenting of a transaction will generally be insufficient. We are here concerned with claims by a client in respect of loss it has suffered as consequence of the completion of a transaction. The facts that are relevant are those, which not only suggest an irregularity, but an irregularity, which might cause some loss to the client.

59.CLC makes the obvious point that as Mr Wong was the sole shareholder and director of Excel it was entitled to proceed on the basis that he could properly cause the transfer of Excel’s assets and there was no reason to consider the instruction with a skeptical frame of mind starting from an assumption that it might involve improperly dissipating Excel’s assets. Something was needed to excite scrutiny. For example something that suggested that Excel was in severe financial difficulties and the Transfers were an attempt to put the assets of Excel beyond the reach of its creditors; or it involved a furtive transfer of assets out of Excel in an attempt to hide them from Mr Wong’s spouse, it being known that Mr Wong was a party to divorce proceedings and his Wife was seeking financial relief.

60.The issue boils down to this. Did the matters I have described in [32] suggest that the transfers to the Recipients were not genuine commercial transactions and might deplete the assets of the company (Excel) and require explanation? This question must be answered by reference to what was known to CLC’s staff at the time, principally Ms Seto; not with the benefit of hindsight.

61.In my view the transfer to CLC of the Shares followed by their immediate transfer to the Recipients, at least two of whom were clearly not credible purchasers of so many shares, was clearly unusual and there was reason to question whether they were genuine sales. By not genuine I mean that, to take the most obviously unusual transactions, Alvin Tsang and TK Wong were not going to pay for the shares the documents recorded them as purchasing. This could arise either by the shares transferred to them never being paid for, or by them being paid for by a third party, who the transferees were acting as nominee for. The latter would not cause loss to Excel. The former would and, on the information available to CLC, for no apparent commercial reason. It was not, for example, offsetting a debt.

62.As I understand CLC’s submission it argues that for the Quincecare duty to be engaged this is not sufficient. It is necessary for the facts to suggest that there is a real possibility that the transactions might cause a wrongful depletion of the client’s assets. This, as I have already stated, I agree. Accordingly, the facts must suggest to an honest and reasonable broker in the position of CLC’s staff that this may be a consequence of the transfers.

63.As I have already indicated in my view the Transfers were unusual. However, Mr Wong was able to transfer the shares from Fulbright without any apparent impediment. He had produced documents, which showed, accurately, that he was the sole shareholder and director of Excel. If he had been asked about ownership of the Shares he could have pointed to the substantial shareholder returns. Although the transfers were unusual on balance it does not seem to me that the totality of the information suggested a serious or real possibility of wrongdoing that involved misappropriation of Excel’s assets or an improper depletion of them.

64.In conclusion, it seems to me that Excel has failed to prove either a breach by the Defendants of the Quincecare duty or, necessarily, the components of dishonest assistance. This disposes of the claim against both Defendants. I will, however, say something briefly about the Defendants’ other defences and the claim against Ms Seto.

Illegality

65.In its Opening CLC contends that if Mr Wong was not the beneficial owner of Excel, it follows that Excel was used by the beneficial owner of Excel as a vehicle for the illegal purpose of hiding beneficial ownership of the shares in contravention of the Securities and Futures Ordinance, Cap. 571 and that applying Patel v Mirza[12] the denial of the claim (assuming it has otherwise been proved) would be a proportionate response. It would seem to me that there is force in this argument. DHCJ Ismail concluded that Excel has not proved who was the beneficial owner of Excel and no effort was made by Excel before me to do so. Ms Chan could not explain why Mr Hung had not been called. I agree with CLC that in the circumstances an adverse inference can be drawn that Excel continues hide the true beneficial ownership of the Luxey shares in September 2013.[13] In these circumstances, it seems to me that a proportionate response would be to deny the claim. However, as CLC acknowledges, the law in Hong Kong is as stated in Tinsley v Milligan[14]. The applicable test is that the plaintiff’s claim will only be barred if the plaintiff must plead or rely on the illegality. This is not the present case (as CLC recognises) and, therefore, the illegality defence is not available to CLC. CLC has, as I understand it, raised it in order that it can be argued if the matter were to go on appeal.

Contributory negligence

66.The Defendants contend that in the event that I find for Excel any damages awarded ought to be reduced to take into account Excel’s contributory negligence under section 21 of the Law Amendment and Reform (Consolidation) Ordinance, Cap. 23. They point to four relevant considerations.

67.First, Excel held Mr Wong out as the sole shareholder and director of Excel with the consequent authority to act on its behalf without any restrictions on the normal powers of a sole director to determine and direct all the affairs of the company.

68.Secondly, Excel appears to have put in place no measures intended to limit Mr Wong’s ability to deal with Excel’s assets. The fact that Excel’s corporate records were kept by Mr Sum provided limited protection, if any to Mr Wong dealing with Excel’s assets as he saw fit as demonstrated by his ability to transfer shares from Fulbright.

69.Thirdly, whoever was the beneficial owner compounded the risk by consciously causing Mr Wong to held out as the beneficial owner of Excel through the substantial shareholder returns submitted to Luxey.

70.Fourthly, Excel should be held vicariously liable for Mr Wong’s conduct[15].

71.The last point engages the question of the extent to which the wrongful conduct of a director should be attributed to the company of which he is an officer. In [34]–[35] of her judgment in Singularis[16] Baroness Hale explains the correct approach to answering this question:

“(1) There is no principle of law that in any proceedings where the company is suing a third party for breach of a duty owed to it by that third party, the fraudulent conduct of a director is to be attributed to the company if it is a one-man company.

(2) The answer to any question whether to attribute the knowledge of the fraudulent director to the company is always to be found in consideration of the context and the purpose for which the attribution is relevant.

(3) The context of the case in Singularis was the breach by the company’s investment bank and broker of its Quincecare duty of care towards the company. The purpose of that duty is to protect the company against just the sort of misappropriation of its funds as took place here. By definition, this is done by a trusted agent of the company who is authorised to withdraw its money from the account.

(4) To attribute the fraud of that person to the company would be to denude the duty of any value in cases where it is most needed. If the bank’s argument were to be accepted in a case such as this, there would in reality be no Quincecare duty of care or its breach would cease to have consequences. This would be a retrograde step.”

In my view Mr Wong’s wrongdoing should not be attributed to Excel.

72.That having been said it seems to me that there is force in the first three points. Clearly, the beneficial owner of Excel created a situation, which was intended to mislead those dealing with the Company to believe that Mr Wong had complete control over its affairs and assets. The fact that Mr Wong was a nominee was consciously and wrongly hidden. To describe this as negligence is something of a misnomer, because it was not an oversight; it was a conscious decision. It would seem to me that it is, however, in the material sense significant contributory negligence and if I had found in Excel’s favour I would have reduced the damages by 50% to reflect it.

Claim against Ms Seto

73.It is unusual to sue a junior employee for negligence for which their employer is vicariously liable. This is often for the practical reason that certainly substantial damages are most likely to recoverable from the employer and there is no point in making the litigation more complicated and expensive than necessary. No commercial reason has been advanced for suing Ms Seto. Ms Seto was not a party to any agreement with Excel and any liability she would otherwise have could only sound in tort. For the reasons I have already explained I dismiss the claim against Ms Seto.

Disposition

74.I dismiss the Action. I will make the following costs orders nisi. The Plaintiff shall pay the 2^nd Defendant’s costs forthwith including all reserved costs with a certificate for two counsel such costs to be taxed if not agreed.

75.It seems to me that the case has been unnecessarily complicated by the commencement of a gratuitous, unnecessary and frankly vindictive looking claim against Ms Seto. I will make a costs order nisi that the Plaintiff pays the 1^st Defendant’s costs forthwith including all reserved costs such costs to be taxed on an indemnity basis if not agreed.

Mr Law Man-Chung SC and Mr Thomas Wong, instructed by ONC Lawyers, for the Plaintiff

Mr Joshua S S Choy, instructed by FONGS, for the 1^st Defendant

Mr Jenkin Suen SC and Mr Terrence Tai, instructed by Tse Yuen Ting Wong, for the 2^nd Defendant