China Forestry Holdings Co Ltd (in Official Liquidation) v. Top Wisdom Overseas Holdings Ltd and Another
Read the full judgment text of HCA 1089/2016 on BabelCite. This High Court CFI judgment was delivered on 7 July 2025.
1. In these proceedings, the Plaintiff (“China Forestry” or “P”) claims against its former Chief Executive Officer (“CEO”), Mr Li Han Chun (“Li” or “D2”) and his wholly-owned company, Top Wisdom Overseas Holdings Limited (“Top Wisdom” or “D1”) (collectively “Ds”), for proprietary claim over illicit gains (obtained through Top Wisdom as his alter ego or alternatively as an accessory) and/or equitable compensation on the basis that Li perpetrated a fraud on China Forestry in breach of Li’s fiducia
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HCA 1089/2016 [2025] HKCFI 2893 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 1089 OF 2016 __________________
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_______________ J U D G M E N T _______________ A. Introduction 1.In these proceedings, the Plaintiff (“China Forestry” or “P”) claims against its former Chief Executive Officer (“CEO”), Mr Li Han Chun (“Li” or “D2”) and his wholly-owned company, Top Wisdom Overseas Holdings Limited (“Top Wisdom” or “D1”) (collectively “Ds”), for proprietary claim over illicit gains (obtained through Top Wisdom as his alter ego or alternatively as an accessory) and/or equitable compensation on the basis that Li perpetrated a fraud on China Forestry in breach of Li’s fiduciary duties. 2.Despite having taken active steps to defend these proceedings in the past, including mounting (unsuccessful) stay and striking-out applications, filing defence and exchanging witness statement, Li and Top Wisdom ceased to be legally represented since October 2023 and did not take further steps thereafter. In accordance with earlier court orders, China Forestry had served documents including the trial bundles and P’s written submission (“P’s Skel”) on Ds’ email addresses, but Ds failed to respond and did not attend the trial of these proceedings scheduled to commence on 8 October 2024 before this Court. 3.China Forestry’s case and the relevant evidence in support are set out inter alia in the following key documents (“Key Documents”):
4.At the trial on 8 October 2024, Mr Borrelli, Ms Deng and Mr Wang testified on behalf of China Forestry, adopting their statements or report (as the case may be). Specifically:
5.Further, Mr Manzoni SC, leading Counsel for China Forestry, made oral submissions in support of China Forestry’s claims at trial. 6.On the other hand, Ds have filed the following:
7.As Ds did not attend trial and Li did not testify in support, it should not be open to Ds to rely on Li WS. Having said that, as fairly accepted by Mr Manzoni SC, in the absence of Ds, China Forestry has “an obligation of fair presentation which is less extensive than the duty of full and frank disclosure on a without notice application” (see CMOC Sales & Marketing Limited v Person Unknown [2018] EWHC 2230 (Comm) at [14] per HHJ Waksmann QC, cited with approval by Ng J in Moulin Global Eyecare Holdings Limited v Olivia Lee Sin Mei [2019] HKCFI 1715 at [3]). Therefore, China Forestry has nevertheless identified and addressed the key points in the Defence and Li WS, both in P’s Skel and oral submissions by Mr Manzoni SC. 8.The bases and evidence in support of China Forestry’s claims have been set out in the Key Documents at length. Having considered the same and other relevant evidence, this Court ultimately finds in favour of China Forestry. In this Judgment, this Court will set out the key findings and reasons in support. For the avoidance of doubt, the mere fact that any specific point or argument is not mentioned or addressed herein does not mean that it is not otherwise considered or taken into account. B. Salient background 9.The salient background has been set out in P’s Skel (particularly its executive summary), the Chronology of Events, and Borrelli WS. They are based on contemporaneous documents which are not in any serious dispute. 10.China Forestry was the Cayman Islands incorporated holding company of the China Forestry group of companies (“Group”). It was listed on the Hong Kong Stock Exchange (“HKEx”) since 3 December 2009. The Group charts and directorship information are at Schedule 1 to Borrelli WS. 11.On 26 January 2011, following discovery of serious irregularities in the audit exercise of China Forestry, trading of China Forestry’s shares was suspended on the HKEx. On 12 February 2015, a winding-up petition was presented against China Forestry. Pursuant to the order of the Cayman Court of 18 June 2015, China Forestry was ordered to be wound up and liquidators (including inter alia Mr Borrelli) were appointed. Eventually, China Forestry was delisted from the HKEx on 24 February 2017, and it was also ordered to be wound up by the Hong Kong Court on 20 December 2017. On 16 January 2018, Mr Borrelli and his colleague Ms Jocelyn Chi were appointed as joint and several liquidators of China Forestry in Hong Kong. The present proceedings were commenced by China Forestry in 2016 after it was wound up by the Cayman Court in 2015. 12.Li was the CEO and a director of China Forestry. On 14 February 2011, he was removed as CEO of China Forestry and all his duties and powers in all subsidiaries of China Forestry were removed. The organisational reporting chart of China Forestry prior to January 2011 is at Schedule 3 to Borrelli WS. Further, an overview of (a) key China Forestry personnel (including Li) and other relevant parties and (b) where applicable, their role in the alleged fraudulent activities, can be found at Schedule 4 to Borrelli WS. 13.Through Top Wisdom, Li beneficially owned 6.34% of China Forestry’s shares (“Shares”). Top Wisdom was set up for the sole purpose of holding the Shares for Li. 14.In a nutshell, P claims that Li perpetuated a fraudulent scheme to inflate the Group’s assets and revenue via fictitious plantation rights and business, and Li reaped illicit benefits for his personal gain through his wholly-owned company, Top Wisdom. These illicit gains comprise the proceeds of the sale of the Shares held by Top Wisdom, both pre and post-initial public offering (“IPO”) (in the sum of HK$11,624,930 and HK$398,650,000 respectively) and the dividends received by Top Wisdom in the sum of HK$12,424,093. In addition, China Forestry suffered other losses as a result of Li’s breach of fiduciary duties. 15.According to P, the fraud began to unravel since January 2011:
16.The alleged fraudulent scheme goes to the heart of the Group’s purported business operation.
17.Relevantly, P’s case is that Li took active part as a perpetrator (and indeed the mastermind) of such scheme, which resulted in material overstatement of the Group’s financial position. In short:
18.Worse still, as alleged by China Forestry, Li reaped huge personal benefits from that artificially inflated share price (which was the result of Li’s breach of fiduciary duties):
C. Summary of China Forestry’s claims and Ds’ Defence C1. China Forestry’s claims 19.Against the above background, China Forestry commenced these proceedings against Ds. Its claims may be briefly summarised as follows:
C2. Ds’ case 20.The Defence does not plead a positive case and generally adopts an approach of denial or non-admission. The thrust of the Defence is to disavow any participation and distance Ds from the alleged fraud, on the basis that Li was allegedly not involved in the daily business or local operations handled by the staff of the Mainland subsidiaries. Pausing here, such line of defence is, to say the least, highly dubious given inter alia (i) the substantial scale of fraud permeating the entire business of the Group, (ii) the role assumed by Li as CEO, (iii) Li’s supervision of other staff of the Group including his cousin, Ms Wu Xiaofen (“Ms Wu”), being the Chief Financial Officer (“CFO”) for Mainland China and head of the finance department; (iv) Li’s involvement in the 2010 Guizhou and Yunnan Sham Transactions and (v) suspicious timing of Top Wisdom’s disposal of the Shares before the unravelling of the fraud. 21.For present purposes, it suffices to say that the key points of the Defence are in line with such theme of alleged non-participation on the part of Li. Accordingly, consistent with such theme, the Defence alleges that:
22.Further, China Forestry has fairly brought this Court’s attention to the arguments raised by Ds in their previous application to strike-out certain parts of the Statement of Claim (“Strike-Out Application”). Ds argued that, as a matter of law, absent any legitimate claim of proprietary interest over the Shares, there is no basis for China Forestry to mount a proprietary claim over the sale proceeds of the Shares, and China Forestry is thus not entitled to claim a constructive trust. The Strike-Out Application was rejected by Ng J in his Judgment handed down on 21 September 2021 in [2021] HKCFI 2761 (“Strike-Out Judgment”) in reliance on FHR European Ventures LLP v Cedar Capital Partners LLC [2015] AC 250 and Tang Ying Loi v Tang Ying Ip [2015] 1 HKLRD 712. In discharge of its duty to present the case fairly, China Forestry has once again addressed the arguments raised by Ds in the Strike-Out Application. D. Key issues and other preliminary matters D1. Key issues 23.China Forestry submits that the following key issues require adjudication by the Court:
24.In my view, the first issue may be broken down into two components, namely (i) whether the False Accounting Scheme existed and, if so, (ii) whether Li perpetuated or participated in the same. Further, there should be relatively little dispute on the illicit gains obtained by Ds and the loss and damage suffered by China Forestry under the second and fourth issues. Rather, the key questions hinge on whether China Forestry may claim constructive trust and equitable compensation under the third and fifth issues. 25.Before considering these issues, this Court would first address a few preliminary matters. D2. Top Wisdom’s locus standi 26.One of the preliminary matters raised in P’s Skel concerns the question as to Top Wisdom’s locus standi, given that Top Wisdom is now a dissolved company under BVI law. The relevant circumstances have been set out in P’s Skel and should not be in dispute. 27.On 29 May 2023, China Forestry and the SFC were informed for the first time by Ds’ former solicitors, Messrs King & Wood Mallesons (“KWM”), that (i) Top Wisdom had been struck off the BVI Companies Registry from November 2019 and (ii) following an amendment to the BVI Business Companies Act 2004 (“BCA”), Top Wisdom would be automatically dissolved after 30 June 2023. In this regard, as pointed out in Appendix 1 to P’s Skel, a number of amendments were made to the BCA on 1 January 2023, one of which was to the effect that if a BVI company had been struck off as at 1 January 2023 and no application to restore it was made within 6 months, it would be “deemed dissolved”. 28.Acting sensibly, both China Forestry and the SFC immediately agreed to a withdrawal from the Frozen Funds for the purposes of restoring Top Wisdom. However, despite China Forestry’s attempts to engage with Ds through KWM (who were granted leave on 31 August 2023 to cease to act for Ds) and subsequently Messrs. Chiu & Partners (who purported to represent Ds but never formally filed a Notice to Act until stating on 9 October 2023 that they had ceased to act for Ds), Ds failed to take action to restore Top Wisdom. 29.Therefore, as things now stand, Top Wisdom has the status of a dissolved company under BVI law. Accordingly, a question arises as to whether China Forestry can continue this action against Top Wisdom. It is China Forestry’s stance that Top Wisdom can act and defend these proceedings, which were commenced before its dissolution. 30.In fact, the matter was already addressed at the Case Management Conference held on 21 December 2023. On that occasion, Master Ho was satisfied that China Forestry could properly continue this action against Top Wisdom, and he granted leave for China Forestry to set the case down for trial. 31.With a view to assisting the Court, China Forestry has made detailed legal submissions on Top Wisdom’s standing as set out in Appendix 1 to P’s Skel. Having considered the same, I agree with the submissions of China Forestry as summarised below:
32.Accordingly, there should be no dispute that China Forestry can continue the present proceedings (and may obtain enforceable judgment) against Top Wisdom. D3. Adverse inference 33.As Ds did not attend trial and Li has not come forward to testify, no viva voce evidence has been adduced on behalf of Ds at trial in support of the Defence. Further, P has not had an opportunity to cross-examine Li. 34.There are authorities in support of drawing adverse inferences from the absence or silence of a witness. Relevantly, such inferences may be drawn from the absence of a witness who might be expected to have material evidence to give on an issue in an action, provided there have been some evidence adduced by the opposing party on the matter or a case to answer on that issue, and there is no satisfactory reason for the absence of the witness: see Wisniewski v Central Manchester Health Authority [1998] PIQR 324 at 340; Pacific Electric Wire & Cable Company Limited v Texan Management Limited (unreported, HCCL 16/2009, 17 September 2013) at [106]; see also Jones v Dunkel (1959) 101 CLR 298 at 312 (approved in Polaroid Far East v Bel Trade Co Ltd [1990] 2 HKLR 447 at 454). P has also fairly drawn this Court’s attention to the recent dicta by Lord Leggatt JSC in Royal Mail Group Ltd v Efobi [2021] UKSC 33 at [41]:
35.In the present case, Li plainly could and is expected to give material evidence in this trial. Indeed, the thrust of the Defence is that Li did not participate in the False Accounting Scheme and surely Li is a key witness to give material evidence on behalf of Ds. As a matter of fact, Li is the only witness put forth by Ds when exchanging witness statements. 36.Further, Ds’ absence at trial may be contrasted with the period before October 2023, when Ds had taken active steps to vigorously defend the present proceedings. This tends to suggest that Ds could readily attend trial and defend these proceedings if they wished to, and would undermine any reason or excuse which may be put forth to explain their absence. In any event, Ds have not given any explanation (let alone a credible one) for their absence. 37.The fact is that, pursuant to earlier court orders, P has served documents including the trial bundles and P’s Skel on Ds’ email addresses. As there is nothing to suggest that Ds are unaware of the present proceedings including the trial dates, the Court will proceed on the basis that Ds are fully aware of the trial but have chosen not to attend trial or call upon Li to testify. 38.In the premises, I agree with P’s submissions that the Court should more readily draw all available inferences in favour of China Forestry. D4. MMT proceedings and report 39.On 2 August 2024, the MMT issued a report (“MMT Report”) declaring its findings on, inter alia, whether Li and Top Wisdom have engaged in market misconduct. 40.China Forestry has fairly alerted to this Court the issue of admissibility of the MMT Report. 41.As accepted by China Forestry, it is a well-established rule that a judgment and factual finding of another court or tribunal in earlier proceedings is inadmissible in subsequent proceedings: Hollington v F Hewthorn & Co Ltd [1943] KB 587. Such rule has been applied in Hong Kong to exclude evidence of findings of statutory tribunal: Hong Kong Cable Television Ltd v Television Broadcasts Ltd and Galaxy Satellite Broadcasting Limited (unreported, HCA 1171/2005 and HCA 1256/2005 – heard together, 19 December 2005). 42.As noted in P’s Skel, the admissibility of the MMT Report has been considered by the Court in determining the Stay Application made by Ds in these proceedings. As held by Yeung J (reported in [2020] 2 HKLRD 387), since the present proceedings is not an action for market misconduct within the meaning of section 281 of the Securities and Futures Ordinance (Cap. 571) (“SFO”), the exception for using a determination by the MMT as proof of market misconduct does not apply. It follows that, in accordance with the rule in Hollington, the factual findings and conclusions of the MMT Report are inadmissible in the trial of these proceedings. 43.Having said that, I agree with the submissions of China Forestry that the MMT Report can be used in these proceedings for the limited purpose of showing the factual evidence presented to the MMT. This is because the use for such limited purpose would not offend the principle or rationale of the rule, which is to ensure a fair trial so that the judge can make his own decision on the evidence and submissions presented to him, without being influenced by the opinion of an earlier adjudicator, and such concern does not arise in relation to the evidence referred to in an earlier judgment: Capital Century Textile Co Ltd v Li Dianxiao [2018] HKCFI 729 at [23] – [29]. 44.As stated in P’s Skel, China Forestry has limited its references to the MMT Report to only the factual evidence referred to therein, and to the extent it is relevant. In any case, irrespective of the MMT Report, there are ample evidence in support of China Forestry’s case. D5. Fiduciary duty owed by Li 45.There should be little controversy that, as the CEO and director of China Forestry, Li owed fiduciary duty to China Forestry. 46.China Forestry has pleaded inter alia the following specific fiduciary duties owed by Li (at Schedule 3 to the ASOC):
47.Ds admit in the Defence at [17] that Li owed the above duties to China Forestry. 48.Whilst China Forestry has also pleaded that Li owed to China Forestry a duty to act with reasonable care, skill and diligence, Ds have pleaded that such duty does not form part of the fiduciary duties owed by Li. I tend to agree with Ds although it is not strictly necessary to address this because such duty is of little relevance given that China Forestry’s case against Li is really one of fraud, as opposed to negligence or failure to exercise reasonable care. On behalf of China Forestry, Mr Manzoni SC accepted in his oral submissions that it need not rely on such duty in this case anyway. 49.As to the law on directors’ duties, it is well established. There is no need to go into details here, particularly given that China Forestry’s case against Li is one of fraud. Suffice it to say that China Forestry has referred to Re Barings plc and others (No. 5) [1999] 1 BCLC 433 at 489a-c and the Cayman decision in Peter and Ekstorm v Weavering Macro Fixed Income Fund Limited (In Liquidation) [2015] (1) CLR 45 at [55] (bearing in mind that China Forestry is a Cayman company). In addition, Appendix 2 to P’s Skel further summarises the principles on different aspects of the fiduciary duties pleaded by China Forestry, including in particular the following:
50.Plainly, there could be no dispute that a director would be in breach of his or her fiduciary duties if he or she (1) participated in falsifying a company’s accounting records and financial statements; and/or (2) caused the company to enter into sham transactions in order to dissipate the company’s assets. Hence, if Li did perpetuate the False Accounting Scheme, he must be in breach of his fiduciary duties. Moreover, if Li did act in breach, there could be little question as to the illicit gains obtained by Ds or the loss and damage suffered by China Forestry – rather the question is whether China Forestry can assert a proprietary claim and/or recover equitable compensation. It follows that the real contentious issues are as follows:
E. False Accounting Scheme 51.As mentioned above, the Court would first examine the question as to whether the False Accounting Scheme existed, before addressing in more details the role and responsibility of Li in such scheme (if it existed). 52.As mentioned in Section B above, China Forestry claims that the False Accounting Scheme straddled across five key areas of the business, namely: (1) the Group’s principal operating bank account; (2) plantation assets; (3) harvesting; (4) customers/sales; and (5) logging expenses paid to Dehong Hongda. Such scheme resulted in misstatements in China Forestry’s financial statements and massive inflation of its assets, business and profits. In addition, on the back of such inflated figures, China Forestry raised funds through its IPO and subsequent bond offerings in Hong Kong, part of which were further dissipated away through the 2010 Yunnan and Guizhou Sham Transactions. Logically these claims could be dealt with under 4 categories (which is also the approach taken in P’s Skel), namely:
E1 Falsification of plantation rights certificates and harvest permits 53.It is not in dispute that, as at 31 December 2009, the Group, through KUB, recorded holding significant plantation assets in Yunnan and Sichuan pursuant to 46 plantation rights certificates (the particulars thereof are set out in Schedule 11 to Borrelli WS) comprising:
54.These plantation assets represent the vast majority of the Group’s non-current assets, namely (i) 96% for FY2008, (ii) 97% for FY2009 and (iii) 95% for the financial period ended 30 June 2010, i.e. first half of 2010 (“1H2010”). It goes without saying that the falsification of such assets (if proven) would have a material impact on the Group’s financial position. 55.Further, even assuming that a company did own plantation assets, it could only legally exploit those assets if it obtained permits from the relevant county forestry bureaux authorising the harvesting of timber. On the evidence, KUB recorded harvesting 626,490 m3 of timber pursuant to 4,200 harvest permits (the particulars thereof are set out in Schedule 12 to Borrelli WS). Logically, if most of the plantation assets purportedly owned by KUB were falsified, the harvesting activities on these non-existent plantation assets could not have been real. It follows that the harvest permits could not be genuine either. In any event, I agree with China Forestry’s submissions that there is overwhelming evidence, and I find accordingly, that both the plantation rights certificates and harvest permits purportedly held by China Forestry are falsified. 56.First and foremost, there is direct evidence of inquiries made with relevant Mainland authorities confirming the falsity of both the plantation right certificates and harvest permits. As stated in Deng WS, Ms Deng have made inquiries with the relevant county forestry bureaux as follows:
57.By way of further observations:
58.Second, China Forestry has tendered expert evidence from Mr Wang on the authenticity of the plantation rights certificates and harvest permits purportedly held by China Forestry. As mentioned above, such expert evidence is not challenged since Ds elect not to adduce expert evidence and are debarred from doing so. In short, Mr Wang concludes that the purported plantation rights certificates and harvest permits are all falsified because:
59.Having considered the Wang Report, I agree that it fleshes out China Forestry’s case and should be accepted, not only because Ds have not adduced any expert evidence to contradict it, but also because the opinion and conclusions in the Wang Report are substantiated by Mr Wang’s meticulous examination of the purported plantation rights certificates and harvest permits, based on his decades of work experience on Mainland forestry law and practice. 60.Third, I agree with China Forestry’s submissions that the investigation conducted by the Group’s advisors in respect of the audit issues identified by KPMG during its audit for FY2010 also exposed the falsity of certain harvest permits. In particular:
61.Fourth, as submitted by China Forestry, the purported plantation rights certificates and harvest permits exhibit peculiar features which are highly suspicious and indicative of forgery. Without being exhaustive:
62.Fifth, the Liquidators’ fund flow analysis shows that KUB paid no funds for the purported acquisition of forestry rights in Yunnan. 63.As submitted in P’s Skel, KUB recorded that it acquired its Yunnan plantation assets in March and July 2008 pursuant to 18 purchase agreements. The payments which made up the “consideration price” appeared in the false bank statements of KUB’s operating account with Huaxia Bank (华夏银行) (“Huaxia Operating Account”) but not in KUB’s authentic bank statements for 2008 and 2009. 64.If there were no genuine payments for acquiring the Yunnan plantation assets, KUB could not have obtained genuine right or ownership over them. 65.Sixth, in further support of the foregoing, KUB in fact did not pay the forest maintenance fees recorded in its financial statements. 66.It is not in dispute that forest maintenance fees were required to be paid before obtaining harvest permits. Indeed, probably as an attempt to conceal the fraud, the forest maintenance fees purportedly paid by KUB were recorded in the false bank statements of the Huaxia Operating Account. However, there should be no question that such maintenance fees were not in fact paid, as they are not recorded in the authentic bank statements. This is further borne out by the inquiries made by Ms Deng with the Shuangjiang, Luxi and Lianghe County Forestry Bureaux who confirmed that KUB had not paid such fees in 2009. 67.As there were no genuine payments of forest maintenance fees by KUB, this necessarily casts doubts on China Forestry’s purported ownership of plantation assets and corroborates the Liquidators’ findings that KUB in fact did not hold the plantation assets at the relevant times. 68.Seventh, notwithstanding the aforesaid evidence, Ds have not put forth any positive case and merely resort to non-admission of the falsity of the plantation rights certificates and harvest permits. Worse still, Ds chose to be absent at trial and did not call upon Li to testify. Applying the principles examined above, the Court should draw adverse inference against Ds on the question of authenticity of such certificates and permits in any case. 69.Fundamentally, without genuine plantation rights certificates and harvest permits, the Group simply cannot undertake the business of harvesting timbers. It follows that, if such certificates and permits are forged, there could hardly be any (or any substantial) harvesting business and activities. This would in turn cast grave doubt on the authenticity of the Group’s customers, principal logging contractor, and bank / accounting records. Reversely, if the latter could also be proven to be false on independent grounds, it would fortify the conclusion that the certificates and permits were false in the first place. E2 Falsification of customers and principal logging contractor 70.On record, all revenue recorded by China Forestry for FY2008 (RMB544.95 million), FY2009 (RMB793.69 million) and 1H2020 (RMB494.26 million) originated from the sale of harvested timber from KUB’s plantations to 17 purported customers. It goes without saying that the authenticity of these 17 purported customers would have an important bearing on the authenticity of China Forestry’s reported revenue. Moreover, all timbers sold by China Forestry were supposed to be harvested by Dehong Hongda, the sole logging contractor purportedly engaged by KUB. It follows that the authenticity of Dehong Hongda would also have a material impact on the authenticity of the purported harvesting business of China Forestry. 71.Having considered the relevant evidence and the submissions by China Forestry, I find that there were no genuine harvesting business and sales of timbers by the Group, since the records of KUB’s purported (i) customers and (ii) principal logging contractor (Dehong Hongda) were plainly forged. 72.First of all, I accept China Forestry’s submissions and find that KUB’s 17 purported customers in 2009 did not in fact exist. Among others:
73.Second, as submitted by China Forestry, there is compelling proof that Dehong Hongda, the sole logging contractor purportedly engaged by KUB to harvest KUB’s plantation assets in 2008 and 2009, did not exist either:
E3 Falsification of bank statements and accounting records 74.Perhaps the most alarming part of the False Accounting Scheme is the sheer extent to which the perpetrators had gone through, not only to forge plantation rights certificates and harvest permits, but also to falsify bank statements and accounting records to deceive regulators, accountants (such as KPMG) or professional advisors and make the fraud even harder to detect. 75.By way of overview, the investigations by the Liquidators reveal that the False Accounting Scheme is the result of a systemic plan and concerted efforts to fabricate documents and perpetuate fraud on an all-encompassing scale. Specifically, the Liquidators uncovered extensive hard copy documents and forensic images of electronic storage media (including the image of a computer) used by the Group’s finance department at its Beijing head office as follows:
76.Premised on such overview, China Forestry has invited the Court to examine falsification of specific categories of documents. 77.First, in relation to falsification of bank-in slips, the Liquidators identified from Finance PC1 the following evidence:
78.The above is not only telling evidence of fraud, but also strong indicia of participation of Li (through Ms Wu and the staff supervised by her). Importantly, the electronic version of the “work-in-progress” editable bank-in slips found on Finance PC1 could be substantially matched with the “final” fabricated bank-in slips, as shown in Schedule 9 of Borrelli WS. This means the work manuals were used in practice to fabricate bank-in slips. 79.Second, in relation to the creation of a “local book”, Ernst & Young discovered that there were two sets of KUB ledgers for 2008 to 2010:
80.The existence of two sets of ledgers is yet another clear indicia of fraud. It evidences a conscious attempt to fabricate a false set of ledgers to create the false picture that China Forestry had substantial harvesting business and revenues. 81.The reality is that the “local” ledgers (which record much less assets and revenues) are the genuine set of ledgers as they are consistent with KUB’s authentic bank statements. Indeed, as acknowledged by Li (in his witness statement in the MMT proceedings at [153]), if the local ledgers are the genuine set of ledgers, China Forestry would never have conducted any logging activities, and the sales volume in 2009 and 2010 were almost non-existent. 82.Third, there was falsification of the Group’s operating account bank statements. 83.By way of background, on 19 May 2008, KUB (the Group’s main operating subsidiary) opened the Huaxia Operating Account with the account number 4835200001801100002661. Yet, there is compelling proof that the bank statements for the Huaxia Operating Account and related accounting records provided by China Forestry to KPMG for audit were falsified:
84.The existence of such false bank statements evidences a blatant attempt to falsify accounts and conceal the same by resorting to false bank statements. Significantly, the Huaxia Operating Account was used to receive payments from customers and pay for operating expenses and plantation assets. If the bank statements were false, the implication is that the corresponding payments and expenses are fictitious. A comparison with the false set of ledgers indicate that receipts and payments recorded in the falsified Huaxia Operating Account bank statements mainly comprise of:
85.Since the bank statements are false, the above receipts and payments could not be real, and must be fictitious. This is confirmed by the authentic Huaxia Operating Account statements which only record gross receipts of RMB140.3 million and gross payments of RMB140.2 million during the same period. A comparison with the “local” ledgers reveal that such authentic receipts and payments mainly comprise of:
86.Fourth, the falsified statements were actively deployed to deceive regulators and advisors. Specifically, the falsified Huaxia Operating Account bank statements were provided to KPMG for the audits to conceal the fact that China Forestry had no substantial assets and business when they were in truth fictitious (including inter alia (1) receipts from KUB’s purported customers; (2) forest maintenance fees; (3) payments in respect of KUB’s purported acquisition of Yunnan plantation assets; and (4) payments to Dehong Hongda). E4 Defalcations: 2010 Yunnan and Guizhou Sham Transactions 87.Having considered the relevant evidence and China Forestry’s submissions, I am satisfied that these were in fact sham transactions entered into for dissipating China Forestry’s funds. 88.First, in relation to the 2010 Yunnan Sham Transaction, it is not in dispute that, on 25 January 2010, KUB entered into an agreement to acquire rights over 300,000 mu of forests in Honghe prefecture in Yunnan from Beijing Jialan Huaxin Investment Holdings Co., Ltd. (“Beijing Jialan”). On 27 January 2010, KUB paid RMB60 million to Beijing Jialan. Li was involved as he signed the purchase agreement and approved the payment. Yet, there is ample evidence to suggest that this was a sham transaction to misappropriate funds of KUB (and in turn China Forestry):
89.Second, in relation to the 2010 Guizhou Sham Transactions, it is not in dispute that, between March to November 2010, KUB and China Forestry’s two other subsidiaries, Chengdu Fine Fit Forestry Resource Development Co., Limited (“Chengdu Fine Fit”) and Guizhou Wosen Forestry Development Company Limited (“Guizhou Wosen”), entered into seven agreements with Guizhou Jinping Changsheng Xinglv Forest Farm Co., Ltd (“Guizhou Jinping”) and Guizhou Changsheng Green Resource Development Co., Ltd. (“Guizhou Changsheng”) to acquire 768,636 mu of forests in Guizhou. RMB413,928,518 in total was paid to Guizhou Jinping and Guizhou Changsheng pursuant to these agreements. Li was involved as he signed a supplemental letter of intent on behalf of Chengdu Fine Fit and four agreements on behalf of KUB, Chengdu Fine Fit and Guizhou Wosen. He also gave approval for all payments. Yet, as submitted by China Forestry, there is ample evidence to suggest that they were nothing but sham transactions:
90.Third, as part of the tracing exercise, a total amount of RMB 473,928,518 was paid out from China Forestry’s funds, whilst the amount recovered is only RMB50 million, leaving a net balance of RMB 423,827, 518.
E5. Ramifications of False Accounting Scheme 91.All in all, the falsification of China Forestry’s plantation assets, harvesting activities and sales caused China Forestry’s assets, revenue and profits in its financial statements to be massively overstated, creating an illusion that it was a profitable business with substantial assets. 92.This, in turn, inflated the share price of China Forestry and enabled Ds to obtain the Illicit Gains. 93.On top of the Illicit Gains, the False Accounting Scheme enabled China Forestry to raise substantial funds from the IPO and subsequent bond issuance. Such funds were then transferred to China Forestry’s Mainland subsidiaries, part of which were in turn dissipated to entities associated with Li through the 2010 Yunnan and Guizhou Sham Transactions. 94.In the premises, this Court finds that the False Accounting Scheme existed which enabled (i) the Illicit Gains to be obtained and (ii) defalcations to take place by the 2010 Yunnan and Guizhou Sham Transactions. The next question is Li’s involvement and responsibility and, specifically, whether he perpetrated or participated in the False Accounting Scheme. F. Li’s Involvement and Responsibility, and his perpetuation of the False Accounting Scheme 95.Li was at all material times the former (i) CEO of the Group, (ii) executive director of China Forestry and (iii) substantial shareholder (through Top Wisdom) in China Forestry. Importantly, Li was also appointed as director and general manager of China Forestry’s subsidiaries including in particular (i) KUB (since the date of its establishment on 7 March 2008 until 16 March 2011), (ii) Chengdu Fine Fit (since the date of its establishment on 21 March 2008 until 16 March 2011), and (iii) Guizhou Wosen (since the date of its establishment on 27 August 2010 until 6 April 2011). At all material times, KUB was China Forestry’s principal operating subsidiary, while KUB Chengdu Fine Fit and Guizhou Wozen were the Group’s subsidiaries which purported to acquire plantation assets in the 2010 Guizhou Sham Transactions. In view of Li’s key position and responsibility, any suggestion that Li was ignorant of the False Accounting Scheme and had no involvement whatsoever despite its pervasiveness should, with due respect, be subject to proper scrutiny. 96.In this regard, Section B of Schedule 4 to the Borrelli WS has provided an overview of the responsibility of Li and his role in the fraudulent activities as alleged by China Forestry. Further, Section F of P’s Skel sets out the submission on behalf of China Forestry as to Li’s involvement in the fraudulent scheme. These will be examined further below. It suffices to say that, having considered the same and other relevant evidence, this Court is ultimately satisfied on a balance of probabilities that Li perpetrated the False Accounting Scheme. Li was a key player (and indeed the instigator and mastermind) of the fraud, as a result of which he obtained the Illicit Gains, and enriched himself through the 2010 Yunnan and Guizhou Sham Transactions. F1. Preliminary matter 97.Before going into the key reasons in support of the Court’s findings regarding Li’s involvement and responsibility, there is a preliminary matter which this Court would like to address. Throughout its evidence and submissions, China Forestry has referred to various statements made to the SFC by China Forestry’s ex-employees and former auditors in support. Whilst China Forestry has not called upon them to make witness statements and testify in these proceedings, it nevertheless seeks to rely on them apparently as hearsay evidence. China Forestry submits that the Court should give substantial weight to the evidence of these interviewees because, by virtue of Section 184 of the SFO, they were at the risk of committing a criminal offence if they provided false or materially misleading answers during the SFC’s interviews. In addition, China Forestry relies on the statements made by the relevant witnesses in the MMT proceedings, as referred to in the MMT Report. 98.In my view, whilst it is obviously preferable for China Forestry to cause its ex-employees and former auditors to come forward to testify in these proceedings as witnesses, this is not the only way China Forestry could rely on their evidence. There is, in principle, no inherent bar to China Forestry relying on their statements during the SFC’s interviews and the MMT proceedings, subject of course to the weight to be attached to such hearsay evidence. 99.On the question of weight to be attached to such evidence, I agree with China Forestry’s submissions that, given the risk of committing a criminal offence, the interviewees had little incentive to give answers or statements pointing to Li’s involvement in the False Accounting Scheme, if that was not in fact the truth. Whilst the same rationale may not apply to evidence given in the MMT proceedings, it remains open to the Court to attach appropriate weight to such evidence, particularly bearing in mind that there is no evidence to point to any specific reason or incentive on the part of China Forestry’s ex-employees and former auditors to make false allegations against Li. In the circumstances, material weight could be attached to such evidence, with the caveat that such evidence should be considered in conjunction with other relevant evidence as a whole. 100.Having addressed such preliminary matter, I would move on to consider Li’s alleged perpetration of the False Accounting Scheme by examining various aspects of Li’s role and responsibility vis-à-vis the same. F2. Falsification of accounting records and control of audit process 101.It is China Forestry’s case that (i) the Group’s accounting records were falsified at the direction of Li; (ii) Li’s position as CEO allowed him to rely on his subordinates to do the “dirty work” of falsifying accounting records, (iii) Li also personally falsified the Group’s accounting records, and (iv) Li tried to hide such falsities from KPMG on more than one occasion. I agree with China Forestry that there is strong evidence in support of its case. 102.First of all, there is direct evidence of Li’s personal participation in the falsification of some of the Group’s accounting documents.
103.Second, Li’s previous statements concerning the accounting records are unconvincing and/or inconsistent. Among others:
104.Third, as submitted by China Forestry, Li closely controlled the process of communicating with KPMG in China Forestry’s audits:
105.Fourth, when suspicions were raised by KPMG, Li took active part to downplay such concerns. He also personally arranged site visits and even provided false information to cover up the False Accounting Scheme:
106.All in all, there are compelling proof of Li’s participation in the False Accounting Scheme. As contended by China Forestry, this is consistent with Li being the perpetrator of the False Accounting Scheme, as an instigator of a fraudulent scheme would have taken control of dealing with the auditors himself or herself in order to manage the information provided to the auditors. F3. Li’s involvement in China Forestry’s operations and financial affairs 107.It is significant that the False Accounting Scheme was perpetrated on a substantial scale which permeates the entire business of the Group. As mentioned above, the fictitious plantation assets represent the vast majority of the Group’s non-current assets, namely (i) 96% for FY2008, (ii) 97% for FY2009 and (iii) 95% for 1H2010. A senior officer intimately involved in China Forestry’s operations and financial affairs (such as Li) could hardly claim to be ignorant and innocent in such pervasive fraudulent scheme. 108.First, as mentioned earlier, Li was a director and CEO of China Forestry between 21 December 2007 and 14 February 2011, and he also assumed directorships in China Forestry’s key subsidiaries including KUB, Chengdu Fine Fit and Guizhou Wosen. Whilst Li may claim to be ignorant if the fraud relates only to a minor part of the business, it is an entirely different picture here as the fraud went to the root if not the entirety of the Group’s purported harvesting business. I accept China Forestry’s submissions that, given Li’s position in China Forestry and the key subsidiaries, it defies belief that he was not aware of the Group’s financial matters including the fraud. 109.Second, the above is reinforced by the statements or answers from various former employees of China Forestry confirming Li’s responsibility for the Group’s daily operations and financial affairs (including audits):
110.Third, even on Ds’ own evidence (i.e. Li WS), Li was intimately involved in China Forestry’s business operations and financial affairs:
111.The above points to the intimate role and involvement of Li in the business operations of the Group. As such, if the bulk (if not entirety) of the business operations of the Group are fictitious, it defies belief to suggest that Li was not involved and had no knowledge at all. F4. Li’s involvement in forest acquisition and related fraudulent activities 112.Li was heavily involved in the Group’s acquisition of the fictitious and non-existent plantation assets. As Li was the main person responsible for approving such acquisitions and the payments for the same, it defies common sense to suggest that Li had no knowledge whatsoever that the plantation assets did not in fact exist. 113.First, the process of acquiring plantation assets was controlled by Li, Mr Zhang and Ms Wu.
114.Second, there is evidence pertaining to Li’s involvement in fraudulent activities relating to China Forestry’s purported plantation assets:
115.For the avoidance of doubt, China Forestry has also relied on the assertions made by Mr Li Kwok Cheong (former Chairman) during his interview with the SFC that Li made reference to bogus harvesting permits and fictitious purchase of timber logs. In my view, given the potential role of Mr Li Kwok Cheong, there is at least a possibility that he might be seeking to shift the blame to other staff. As such, it does not appear prudent or reliable to attach significant weight to the evidence from Mr Li Kwok Cheong himself. 116.All in all, given Li’s responsibility in plantation assets acquisition and the involvement of Mr Zhang and Ms Wu who directly reported to him, it is inherently improbable that the plantation rights certificates and harvest permits would have been fabricated en masse without his instructions. Indeed, given Li’s intimate involvement (including visits to plantations considered for potential acquisition), it is inherently improbable that he did not know that the plantation assets did not exist. Simply put, the non-existent plantations could not conceivably escape the notice of Li (and a fortiori Mr Zhang and Ms Xu who reported directly to him). All these suggest that Li was privy to the fraud. F5. Li’s involvement in the 2010 Yunnan and Guizhou Sham Transactions 117.As examined above (and also accepted in Li WS at [171] – [172]), Li signed most of the agreements for the 2010 Yunnan and Guizhou Sham Transactions and approved all the payments. Li’s indisputable involvement in these transactions which are plainly sham transactions casts further doubts on the credibility of Li and reinforces China Forestry’s case that Li was the perpetrator of the False Accounting Scheme. 118.First, as submitted by China Forestry, in view of Li’s control over the plantation assets acquisition process, Ds’ assertion that Li believed that the 2010 Yunnan and Guizhou Sham Transactions were genuine is not credible. 119.Second, Li wrongly failed to disclose his relationships with the counterparties of these transactions to the Board. Among others:
120.Third, as examined in Section E4 above, it was recorded in a judgment made by the Nanming District of Guiyang City, Guizhou that Li asked Mr Zhou to transfer a total of RMB60 million from Guizhou Changsheng’s account to Li’s associate, including Beijing Jialan, an entity which was also involved in the 2010 Yunnan Sham Transaction. 121.The above not only constituted a clear and egregious conflict of interest in breach of Li’s fiduciary duties, but also reinforces that Li was the perpetrator of the False Accounting Scheme as he stood to benefit from the defalcations of China Forestry’s funds (raised on the back of such scheme) through these sham transactions. F6. Ds’ evidence 122.As mentioned at the outset, since Ds have not attended trial and called upon Li to testify, it is not strictly open to Ds to rely on the evidence in the Li WS. Nevertheless, in discharge of its duty to present the case fairly, China Forestry has also dealt with Ds’ case and evidence in response (some of which has been canvassed above). 123.As noted in Section C2 above, Ds’ main defence is one of general denial or non-admission. As to Ds’ non-admission of the existence of the False Accounting Scheme, it has little mileage given the overwhelming evidence on such fraudulent scheme as analysed in Section E above. 124.As regards Ds’ allegation that Li never had actual knowledge of any material falsity of China Forestry’s financial statements throughout his time at China Forestry, nor was he suspicious or made aware of any suspicions of any substantial falsity until 14 January 2011 when KPMG directly raised such issue with him (Defence at [2.4]), or that he was sidelined by Mr Li Kwok Cheong (Li WS at [55] –[59]), it could hardly succeed bearing in mind the evidence examined above as to:
125.Moreover, given the massive scale of the fraud, it is inherently improbable that the False Accounting Scheme was undertaken by junior accounting staff alone. They would hardly falsify accounting records and government documents without instructions or involvement from senior management, particularly as they would not benefit substantially through such fraudulent scheme. In contrast, Li, as a substantial shareholder of China Forestry (through Top Wisdom), would stand to benefit from the fraud – and as a matter of fact Li did obtain the Illicit Gains and enriched himself in the sham transactions as a result of the such fraud. 126.Further, Li is the only witness on behalf of Ds and yet Ds chose not to attend trial or call upon Li to testify. Faced with the overwhelming evidence presented by China Forestry, Ds have provided no satisfactory explanation for the failure to call upon Li to testify in these proceedings, and I am satisfied that adverse inference should be drawn against Li on the issues of both the existence of the False Accounting Scheme as well as Li’s perpetuation of the same. F7. Findings against Ds 127.For all these reasons, I find on a balance of probabilities that Li perpetrated the False Accounting Scheme and took part in the defalcations of China Forestry’s funds through the 2010 Yunnan and Guizhou Sham Transactions. Indeed, Li was the instigator and mastermind behind the False Accounting Scheme. Not only did he personally fabricate accounting records, he also directed other staff to engage in the False Accounting Scheme, and knowingly signed various agreements and approved the payments for the sham transactions. In doing so, Li acted in breach of his fiduciary duties owed to China Forestry. 128.For the avoidance of doubt, I agree with China Forestry’s submissions that it is not necessary for it to show that Li was the only perpetrator behind the False Accounting Scheme (and the Court has made no finding to such effect). As rightly submitted by China Forestry, the fact that there may have been others assisting Li (or indeed other instigator(s), if any) in such fraud does not otherwise diminish the leading role played by Li and the fact that he acted in breach of fiduciary duties owed to China Forestry. G. Illicit Gains 129.As mentioned in Section B above, the False Accounting Scheme resulted in (i) material overstatement of the Group’s assets, revenues and profitability; and (ii) material misstatement of the Group’s expenses in the Relevant Consolidated Financial Statements (i.e. the 2008 and 2009 Consolidated Financial Statements and the 2010 Interim Consolidated Financial Statements). 130.A detailed analysis of the impact of the False Accounting Scheme on the Relevant Consolidated Financial Statements has been included in Appendix 3 to P’s Skel. For present purposes, it is not necessary to go into the same in details, and it suffices to say that the core impact is as follows:
131.Importantly, the overall result of the False Accounting Scheme is that it overstated the Group’s reported assets, revenues and profits, which would have the effect of painting a much rosier picture of the Group’s financial position and business performance than it was, thereby artificially inflating the price at which the Shares were to be offered on the HKEx upon China Forestry’s listing, as well as the price at which the Shares were to be traded after listing. 132.As a result of the False Accounting Scheme which was perpetrated by Li in breach of his fiduciary duties owed to China Forestry, Ds were able to obtain the Illicit Gains including the Pre-IPO and Post-IPO Sale Proceeds (by disposing of Shares at an artificially inflated price), and the Top Wisdom Dividends (which would not have been declared by China Forestry but for the misstatements in the Relevant Consolidated Financial Statements). It is China Forestry’s case that it has a proprietary claim based on constructive trust against Ds as a result (which will be considered in Section H below). 133.For the avoidance of doubt, I agree with China Forestry’s submissions that Li’s assertion, that at the time of arrangement of the January Share Sale he was not aware that KPMG had identified audit irregularities, is no answer because China Forestry’s claim is premised on Ds obtaining the Illicit Gain as a result of Li’s breach of fiduciary duties, which is not dependent on the timing of his knowledge that his breach of fiduciary duty had been uncovered. In any case, on the evidence, KPMG raised audit issues with Mr Zhang and Ms Wu and followed up with Li on the same day on 3 December 2010, well before Li’s disposal of most of his Shares by the January Share Sale. H. P’s Proprietary Claim H1. Constructive Trust over the Illicit Gains 134.China Forestry’s cause of action is premised on Li’s breach of his fiduciary duties in the execution of the False Accounting Scheme, as a result of which he made the Illicit Gains, benefiting from the increased share price. China Forestry contends that the relevant law is clear. In short, when an agent or fiduciary acquires a benefit he is treated as having acquired that benefit on behalf of his principal, so that the benefit is owned by the principal who has a proprietary (as well as personal) remedy against the agent or fiduciary. The rule is not compensatory, but is a disgorgement of the profit: FHR European Ventures LLP v Cedar Capital Partners LLC [2015] AC 250 at [7] & [33]; Joe Zhixiong Zhou v SAIF Partners II L.P. and Another [2020] HKCFA 44 at [14]. 135.Importantly, China Forestry asserts a proprietary claim against Ds. It relies on the decision of the UK Supreme Court in FHR for the proposition that the benefit gained is acquired on behalf of the principal and the obligations of the agent/fiduciary is to deliver it up to the benefit of the principal. Hence, China Forestry seeks an equitable proprietary interest over the Illicit Gains acquired by Ds as a result of Li’s fiduciary position, or through an opportunity resulting from that position. 136.As mentioned in Section C2 above, in the Strike-Out Application, Ds argued that, as a matter of law, absent any legitimate claim of proprietary interest over the Shares, there is no basis for China Forestry to mount a proprietary claim over the sale proceeds of the Shares, and China Forestry is thus not entitled to claim a constructive trust. Such argument was rejected by Ng J in the Strike-Out Judgment (particularly at [26] and [28]) in reliance on FHR and Tang Ying Loi v Tang Ying Ip [2015] 1 HKLRD 712. 137.In particular, in Tang Ying Loi, Chow J (as he then was) concluded at [100(3)] that FHR shows that a constructive trust may be imposed even though the benefit (i) did not flow from an asset which was (a) beneficially owned by the principal, or (b) intended for the principal, or (ii) was not derived from an activity of the agent which, if he chose to undertake it, he was under an equitable duty to undertake for the principal. 138.In my view, the above should provide sufficient legal basis for China Forestry’s claim of constructive trust over the Illicit Gains, and Ds have not attended trial to argue otherwise. 139.Nevertheless, in discharge of its duty to present the case fairly, China Forestry has addressed once again the arguments raised by Ds in the Strike-Out Application. For completeness, I would briefly address this. 140.First, Ds’ primary argument in the Strike-Out Application (that China Forestry is not entitled to a proprietary claim because it did not assert proprietary interest over the Shares) is contrary to established legal principles. Having considered the relevant authorities including FHR, Tang Ying Loi and the Strike-Out Judgment, I see no reason to depart from the consistent views expressed therein. That should suffice as an answer to Ds’ legal argument. 141.Second, in the Strike-Out Application, Ds argued that under Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2012] Ch 453, a beneficiary of a fiduciary’s duties cannot claim a proprietary interest over assets purchased by the defaulting fiduciary with funds which were not beneficially owned by the claimant or derived from opportunities beneficially owned by the claimant. Ds further argued that Sinclair was only partially overruled by FHR insofar as bribes or secret commissions were concerned. 142.As pointed out by China Forestry, such argument was rejected by Ng J at [34] of the Strike-Out Judgment, stating that “this court does not agree that the discussion in FHR of the ‘rule’ in equity was confined to cases of bribe or secret commission”. It is in any case clear from FHR (particularly at [33] – [35] & [48]) that the Supreme Court was choosing between the respondents’ position that the general rule in equity applies to all unauthorised benefits (which is consistent with fundamental principles of law of agency), and the appellant’s position that the rule should not apply to a bribe or secret commission (which is more likely to result in uncertainty). The Supreme Court found in favour of the respondent, upheld the general rule and declined to make an exception for bribes and secret commissions. It follows that the general rule should apply to all unauthorised benefits, including the Illicit Gains obtained in breach of fiduciary duties in the present case. 143.In other words, there is nothing in FHR to limit the application of the rule to bribes or secret commission – rather it was held that the rule is of general application, and bribes or secret commission (and by extension of logic other unauthorised benefits) are of no exception. That the rule is of general application is also buttressed by the general formulation coined by Chow J (as he then was) in Tang Ying Loi at [100(3)]. 144.Third, Ds argued in the Strike-Out Application that because the SFC may apply under the SFO for disgorgement of profits in respect of the Post-IPO Proceeds, to declare a constructive trust over the Post-IPO Proceeds would unjustly elevate China Forestry’s interest to a level above China Forestry’s shareholders. 145.Such argument did not find favour with Ng J. As he stated at [41] of the Strike-Out Judgment, the present proceedings are only concerned with the rights and liabilities between China Forestry and Ds inter se. As such, the remedies under the SFO are irrelevant to China Forestry’s entitlement to a proprietary remedy, and whether China Forestry’s proprietary claim has priority over a third party’s competing claim is a separate question which this Court does not need to concern itself with. I agree with Ng J’s view. 146.In any event, if either China Forestry or SFC wishes to assert priority over another’s competing claim, there is no apparent bar to such party taking out an appropriate application in relevant proceedings. In this regard, as acknowledged by China Forestry in P’s Skel at [199], the SFC has obtained an Injunction Order in HCMP 176/2011 to freeze the Frozen Funds, which largely represent the Post-IPO Proceeds, and since both China Forestry and the SFC are parties to HCMP 176/2011, neither of them will be able to enforce the Frozen Funds without the knowledge of the other and adjudication by the Court in HCMP 176/2011. H2. Proprietary Claim over Top Wisdom Dividends 147.In principle, the above analysis should apply not only to the Pre-IPO Proceeds and the Post-IPO Proceeds, but also the Top Wisdom Dividends, on the basis that they represent the benefits acquired by Ds by Li as an agent or fiduciary of China Forestry, in breach of Li’s fiduciary duty owed to China Forestry, such that Li is treated as having acquired such benefits on behalf of China Forestry. 148.On top of that, Mr Manzoni SC stresses that, in relation to the Top Wisdom Dividends, China Forestry asserts a proprietary claim not only due to the alter ego argument (as examined in Section H3 below) but also that China Forestry has a claim to the return of what was its money. Simply put, the Top Wisdom Dividends is a straightforward payment out of China Forestry’s own money and paid in breach of fiduciary duty. On that basis, China Forestry claims to retain a continuing equitable proprietary interest in it, and such claim in respect of Top Wisdom is also proprietary in nature. China Forestry prays in aid Selangor United Rubber Estates Ltd v Cradock (No. 3) [1968] 1 WLR 1555 at 1575-1577 per Ungoed-Thomas J and Belmont Finance Corp v Williams Furniture Ltd (No.2) [1980] 1 All ER 393 at 405 per Buckley LJ, and the analysis of these authorities in Byers and others v Saudi National Bank [2024] 2 WLR 237. 149.In Byers, the UK Supreme Court held that to sustain a claim in knowing receipt, a claimant must establish a continuing proprietary interest in the asset received. In considering the issue, the two members of the Court who gave the principal judgments each analysed the authorities referred to on dispositions of company property in breach of fiduciary duty, and concluded that such cases are best analysed as ones in which the company retains the equitable beneficial interest in the assets, this interest arising at the moment that the assets are applied in breach of that duty: see Byers per Lord Briggs JSC at [32], [49] and [61], and per Lord Burrows JSC at [177]-[188]. 150.In the present case, there can be no question that the Top Wisdom Dividends were paid by China Forestry out of the latter’s funds. As such, once such assets (being China Forestry’s funds) were applied and paid out as dividends in breach of fiduciary duty, China Forestry’s equitable beneficial interest arose at the moment of such application of funds. H3. Top Wisdom’s liability to account 151.On the facts, Li held the Shares through Top Wisdom. On the face of it, it was Top Wisdom (as opposed to Li) who obtained the Illicit Gains (including the Pre-IPO Proceeds, the Post-IPO Proceeds and the Top Wisdom Dividends). The question therefore arises as to whether China Forestry can also assert a proprietary claim against Top Wisdom and, if so, on what basis. 152.Insofar as the Top Wisdom Dividends are concerned, I have found that China Forestry could pursue a proprietary claim against Top Wisdom to the return of what was its money (see Section H2 above). 153.Without prejudice to the foregoing, China Forestry’s primary case is that Top Wisdom is equally liable for Li’s breaches of fiduciary duty because Top Wisdom was simply Li’s corporate alter ego which he controlled and through which he acted, for the purposes of holding the Illicit Gains, and hence the Court should lift the corporate veil. 154.As an alternative, China Forestry claims the same against Top Wisdom for accessorial liability of dishonest assistance and knowing receipt, as pleaded in paragraph 76 of the ASOC. 155.China Forestry contends that, either way, Top Wisdom holds the Illicit Gains on constructive trust for it. H3.1 Top Wisdom being Li’s alter ego 156.There is ample support from authorities that, where a fiduciary controlled a company and made use of it as a vehicle through which the fiduciary enjoyed the profit which he earned in breach of his fiduciary duty, the Court may pierce the corporate veil to make such company liable for the acts of the fiduciary as its controlling shareholder: see e.g. Gencor ACP Ltd v Dalby [2000] 2 BCLC 734 at [26] (where Rimer J lifted the corporate veil on the basis that the offshore company was (i) in substance little other than the fiduciary’s offshore bank account held in a nominee name, (ii) simply a creature company used for receiving profits and (iii) the alter ego through which the fiduciary enjoyed the profit which he earned in breach of his fiduciary duty); see also Highfit Development Co Ltd v Koo Siu Ying [2018] HKCFI 105 at [14] and Pacific Electric Wire & Cable Company Limited v Texan Management Limited and others (unreported, HCCL 16/2009, 12 April 2012) at [538] & [541]. 157.In particular, I agree with China Forestry’s submissions that the following propositions can be distilled from the authorities above:
158.Applying the above principles, this Court is satisfied that the corporate veil of Top Wisdom should be pierced on the facts herein:
159.Accordingly, Top Wisdom is the alter ego of Li and should be directly liable for the acts of Li as its controlling shareholder. H3.2 Alternatively Top Wisdom is accessorily liable 160.In view of the above finding, it is not strictly necessary to consider China Forestry’s alternative case. Nevertheless, I will deal with it here for completeness. 161.As submitted by China Forestry, it is trite that the core ingredients of the cause of action of dishonest assistance are as follows:
162.Whilst the formulation in China Metal Recycling contains a further requirement of “resulting in loss”, it appears that such requirement is not mandatory because a breach does not necessarily result in loss (in the strict sense). Echoing this, it is trite that once the ingredients of dishonest assistance are satisfied, the third party is liable to: (a) compensate for the losses resulting from the trustee/fiduciary’s breach of duty; and/or (b) personally account for his or her profits: FM Capital Partners at [84]. It follows that there is no requirement to show that the assistance provided would inevitably have resulted in the beneficiary suffering a loss (FM Capital Partners at [82(iv)]). 163.On the facts, the above requirements are plainly satisfied:
164.Accordingly, Top Wisdom is liable to account to China Forestry for the Illicit Gains it obtained by way of its dishonest assistance. 165.As regards knowing receipt, it is trite that the core ingredients of the cause of action are as follows:
166.Based on the facts as analysed above, there should be little dispute that such ingredients of knowing receipt are also satisfied. 167.Accordingly, Top Wisdom as the third party knowing recipient should be treated as holding the Illicit Gains upon constructive trust for the company and should restore the same: see China Metal Recycling (Holdings) Limited (In Compulsory Liquidation) v Chun Chi Wai [2021] HKCFI 378 at [86]. I. P’s Claim for Equitable Compensation I1. As alternative to proprietary claim 168.Further and in the alternative to its proprietary claim, China Forestry makes a claim for equitable compensation against each of Li and Top Wisdom in respect of the Illicit Gains. 169.As a starting point, in circumstances where a breach of duty by a fiduciary causes loss or damage to the principal, it is widely accepted that the fiduciary is under an obligation to restore the loss: Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681 at [87]. 170.More specifically, on the premise that Ds hold the Illicit Gains, or any asset into which those sums may be traced, on a constructive trust for China Forestry, it is argued by China Forestry that, where such property cannot be traced and returned in specie, or restoration in specie is inadequate (for example, when there is a shortfall), China Forestry can elect to claim equitable compensation against Li and Top Wisdom for the shortfall, relying on Libertarian at [166] – [172] and China Metal v Chun at [86]. Initially, I have some hesitation whether China Forestry may elect to claim equitable compensation for what essentially are the benefits gained by Ds as opposed to the loss suffered by China Forestry, but I am ultimately persuaded that there is no impediment to such claim, bearing in mind the rule is not compensatory but is a disgorgement of the profit, and the proposition of China Forestry is based on the precise formulation set out in China Metal v Chun at [86]. I2. Other loss and damage suffered by China Forestry 171.There should be little dispute that Ds are also liable to pay equitable compensation for other loss and damage suffered by China Forestry as a result of Li’s breach of fiduciary duties. As submitted by China Forestry, causation is established on a “but for” basis without the constraints of common law causation rules on remoteness and foreseeability, and the Court is entitled to assess compensation with the full benefit of hindsight: Libertarian at [79] – [81] & [90] – [91]. 172.On the facts (having regard in particular to the computation at Appendix 4 to P’s Skel), aside from the Illicit Gains over which China Forestry claims a proprietary interest, this Court is satisfied that Li is also liable to pay equitable compensation for the following loss and damage suffered by China Forestry as a result of his breach of fiduciary duty on a “but for” basis:
J. Conclusion 173.For all these reasons, I find in favour of China Forestry as follows:
174.Further, as costs should follow the event in general, I would order Ds to bear China Forestry’s costs of this action on a party to party basis. 175.In this regard, as stated by Ng J at §46 of the Strike-Out Judgment, since Mr Melwani is not a counsel, it is inappropriate for the Court to give certificate for counsel for his assistance. Instead, Ng J considered it appropriate for the Court to certify that the attendance of Mr Melwani together with Mr Manzoni SC at the hearing was justified for the purpose of taxation. Accordingly, I would adopt the same approach and certify that the attendance of Mr Melwani together with Mr Manzoni SC at the trial was justified for the purpose of taxation. 176.In the premises, I would grant an order in terms of the draft order at Appendix 5 to P’s Skel, with the modification that the reference to “a cost order nisi” at paragraph 5 thereof be replaced by a reference to “a cost order”, given that submissions on costs have already been advanced at the trial. 177.Last but not least, it remains for me to thank Mr Manzoni SC and Mr Melwani for the helpful assistance given to the Court.
Mr Charles Manzoni SC, instructed by, and Mr Vishal Melwani (solicitor advocate), of Karas So LLP, for the Plaintiff The 1st and 2nd Defendants being absent | |||||||||||||||||||||||
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