Lew Kee Jack v. China Railway Investment (HK) Ltd and Others
Read the full judgment text of HCA 2845/2003 on BabelCite. This High Court CFI judgment was delivered on 11 November 2005.
1. This is a claim by the 1st plaintiff (“Lew”) against the 1st and 2nd defendants for refund of HK$151 million as price he paid for RMB¥16 million shares of China United Telecommunications Corporation (“CUTC”). He also claims against the 3rd defendant for damages for misrepresentation. Regarding the 4th defendant Yiu Fung also known as Frank Yiu (“Yiu”), he claims refund of HK$15 million that he had paid Yiu as commission for the purchase of the said shares. He also pleads for some ancillary
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HCA2845/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 2845 OF 2003 --------------------- BETWEEN
---------------------- Before: Deputy High Court Judge L. Chan in Court Dates of Trial: 11, 12, 13, 14, 15, 18, 19, 20, 21, 22 and 27 April 2005. Dates of filing of supplemental written submissions: 25 May 2005 and 1 June 2005 Date of Delivery of Judgment: 11 November 2005 ------------------------- J U D G M E N T ------------------------- 1.This is a claim by the 1st plaintiff (“Lew”) against the 1st and 2nd defendants for refund of HK$151 million as price he paid for RMB¥16 million shares of China United Telecommunications Corporation (“CUTC”). He also claims against the 3rd defendant for damages for misrepresentation. Regarding the 4th defendant Yiu Fung also known as Frank Yiu (“Yiu”), he claims refund of HK$15 million that he had paid Yiu as commission for the purchase of the said shares. He also pleads for some ancillary remedies. Default judgment has been entered against Yiu, but his whereabouts is unknown. 2.CUTC is a telecommunications company incorporated in the Mainland. China Unicom Ltd. (“China Unicom”) is a subsidiary of CUTC listed in the Hong Kong Stock Exchange. The listing took place on 22 June 2000. 3.Lew sad he bought these shares because of an oral representation made on about 30 June 2000 by one Hao Guilin Sam (“Hao”), the managing director of the 3rd defendant, that these shares would be converted into shares of China Unicom on a one for one basis no later than 2 years from the time of his purchase and the converted shares would then be tradable in the Hong Kong Stock Exchange. He said Hao gave him a verbal money back guarantee for the conversion. 4.Lew said that as a result of the representation and the guarantee, he entered into two oral agreements on about 30 June and about 27 July 2000 to purchase RMB¥6 million and RMB¥10 million CUTC shares respectively. Pursuant to the oral agreements, he and the 2nd plaintiff as his trustee then entered into two written agreements on 12 and 27 July 2000 respectively to purchase the said shares. 5.There was no conversion of the CUTC shares into China Unicom shares within the said two years or even up to now. He thus brought this action against the defendants. 6.The defendants denied that Hao had made the representation or given any guarantee. They said that no oral agreements were concluded on about 30June 2000 as alleged. They further said that Hao had only told Lew that the shares originated from a registered shareholder of CUTC, and that Hao was not sure whether there could be any conversion and, if so, the timing for it. They further contended that Lew’s agent was well aware that Hao could not guarantee any conversion. 7.In the alternative, the defendants said that if oral agreements had been made as alleged, they had been superseded by two written agreements in Chinese signed on 12 July 2000 and 27 July 2000 which do not contain the representations alleged by Lew. Furthermore, they said the misrepresentation should be regarded as spent by virtue of the two written agreements. 8.In response to this argument, Lew said that the two written agreements were drawn up subsequent to the two oral agreements which do not reflect the terms of the oral agreements between the parties. Lew’s alternative response is that if the two written agreements were effective agreements, he was induced to enter into them by the same fraudulent misrepresentation. He further contended that by reason of the defendants’ fraudulent misrepresentation, he had rescinded the two oral agreements; or alternatively he was entitled to rescind the two written agreements. 9.The Defendants however argued that even if Hao had made the misrepresentation as alleged, Lew had lost his right to avoid any of the agreements because he had, with knowledge of material facts, accepted dividend payment of CUTC. The plaintiffs’ case Lew’s evidence 10.Lew is a Canadian Chinese. He is a businessman. He used to operate a restaurant chain called the Manchu Wok which had restaurants in the US, Canada and the UK. He sold his business as a going concern in 1989. He then became an investor investing mainly in listed shares in Hong Kong, Taiwan and Australia. He is an experienced investor in listed shares and has accounts with various reputable stockbrokers. He said his investment strategy was to actively trade in securities for short-term gains rather than to hold them for long-term appreciation. He has frequently conducted substantial transactions of listed securities through his brokers and investment banks. However, he is not a venture capitalist or an institutional investor and did not buy into private companies. 11.Lew had a friend called Paul Fortune who was a solicitor in Hong Kong. In June 2000, Fortune told him that he was aware of parties who represented a seller of a substantial quantity of China Unicom shares. Fortune then introduced him to one David Fan in Macau. He produced at the trial a fax he received from Fortune on 2 June, 2000. This fax appeared to have originated from David Fan who said that a Mainland investor had some financial problem and wanted to sell his part of the original China Unicom shares at HK$10 per share. The fax also referred to the listing of China Unicom. It appears that the shares referred to in this fax were China Unicom shares, but the shares that Lew had bought as a result of the introduction of Fan were CUTC shares. 12.Lew then got in touch with Fan. He met Fan on 3 June 2000 as he had stuck Fan’s name card against the entry for 3 June 2000 in his appointment book for 2000. I will refer to his appointment books in greater detail below. He then returned to Canada on the same day. 13.Fan later on introduced him to Yiu, the 4th defendant. He met Yiu on about 26 June 2000. Yiu said that he himself was the sole agent of a PRC state-owned company which was one of the founding shareholders of CUTC. Yiu said that this founding shareholder had 12,000,000 founder shares in CUTC to sell at HK$10 per share and the purpose of the sale was to fund a pension scheme for its employees. This aroused his interests in the shares. Yiu further said that the founder CUTC shares would be converted into China Unicom shares tradable in the Hong Kong Stock Exchange and the conversion was likely to take place within six months. In the meantime, the buyer would get 6% interest pending the conversion. Lew then told Yiu that he was interested in purchasing the shares at HK$10 per share. 14.Before meeting Yiu, Lew had discussed the economic rationale of the offer with his broker one Eric Lee. Lee was a director at Guotai Junan Securities (“Guotai Junan”), a leading stockbroker in the Mainland. At that time China Unicom shares were trading at around HK$16/$17 in the Hong Kong Stock Exchange. Thus the prize of HK$10 represented a 40% discount to the market price. Lee told him that the offer was similar to pre-IPO placing of shares which would be locked up for 6 months and such were usually priced at a 50% discount. He thought the asking price of HK$10 per share attractive as the period pending conversion was short. 15.An arrangement was then made for him to meet the seller on 30 June 2000. He clarified in re-examination that the meeting was fixed on the phone on 27 June 2000 when one Alex Leung called him. Alex Leung was a solicitor who claimed to be representing the 3rd defendant and China Railway Telecom Limited. Leung in fact was a solicitor and had advised the 1st defendant and Hao. He at one time thought that this meeting took place on 28 June, however, it is now agreed by both sides that it actually took place on 30 June. 16.He went to the meeting in the company of Eric Lee and he intended that Lee would act as the interpreter as he did not speak Chinese. The meeting took place at the office of the 3rd defendant at Room 207, KCRC Hung Hom Building in Hung Hom, Kowloon. He met Hao and one or two of his colleagues there. Yiu and some other persons were also present. 17.At the meeting, Hao handed Lew his business card. It stated that Hao was the managing director of the 3rd defendant. Hao’s English was fluent and it was not necessary for Eric Lee to interpret for him. Hao said that the 3rd defendant was the Hong Kong arm of the third largest PRC state-owned enterprise. He referred to this enterprise simply as “China Railway” in English and spent a lot of time to describe the background of the enterprise. He also described its assets which included the lands adjacent to the railways and the rights to lay telecommunication cables along the railways. He referred to the many projects that had been undertaken by the enterprise which included projects with the Hong Kong Government and the West Rail project. He pointed to the many photographs on the wall of his office showing these projects. 18.Lew said Hao’s introduction of the China Railway Group gave him comfort as to the credibility of the Group and the legitimacy of the proposed transaction. He further said that Hao had assured him that he should not worry as Hao’s parent company would support and guarantee all that Hao did. Hao also said that the parent company would not let any of its subsidiary companies fail. 19.Hao also repeated what Yiu had told him previously that China Railway was a founding shareholder of CUTC and had founder’s shares because it had invested capital into CUTC at its formation in the early 90s. Hao also said that the purpose of the sale of the 12 million shares was to fund China Railway’s employee pension scheme. Regarding the price of HK$10 per share, Hao said that HK$1.50 per share would be payable to Yiu as commission. Lew treated the commission as part of the costs of the purchase and assumed the task of paying Yiu direct. 20.Since Lew had previously indicated to Yiu that he was interested at the price of HK$10 per share, there was no need for him to negotiate the price with Hao. Hao also told him that the CUTC shares would be held by the China Railway Group for safekeeping prior to conversion and his name would appear on a certificate in respect of those shares. 21.Lew said that Hao was persuasive and had urged him to act quickly as Hao claimed to have several other interested buyers considering the purchase. Lew however was concerned that he should be able to dispose of the shares within a definite period of time. The conversion of the shares into China Unicom shares was therefore foremost on his mind and he wanted Hao to confirm the terms of the conversion. Hao told him that it was very likely that the conversion would take place within six months. Hao backed himself up by saying that his company was very close to China Unicom and their respective top officials knew each other very well. Lew was not satisfied and Hao said that the conversion would take place within one year for sure. When Lew was still not satisfied, Hao said that he could not imagine the conversion not happening within two years and that if it did not take place within two years, the money would be returned to Lew. Lew accepted this guarantee and immediately agreed to purchase the shares. 22.Hao however told Lew that he could not confirm in writing the “conversion in two years or money back” guarantee (“the Guarantee”) without getting formal approval from his superiors in Beijing, however, he had no doubt that the conversion would take place as he promised. He further said that what he said would be backed up by the China Railway Group. Lew was not deterred by the lack of written confirmation as he considered Hao to have sufficient authority to give the Guarantee. He then asked Hao to stand up and he shook hands with Hao to show that they had made the deal there and then. 23.After he had made the deal with Hao, Lew received calls from those who had been involved in introducing him to Yiu and they asked Lew for commission. Lew then entered into a commission agreement with Yiu for Yiu to share his commission with these people. 24.On the documentation for the purchase of the CUTC shares, he gave Eric Lee a power of attorney for him to deal with it and he returned to Toronto. He could not read or speak Chinese. He told Lee that payment should be made to the China Railway Group once Lee was satisfied with the documentation showing his entitlement to the CUTC shares. 25.After he had returned to Toronto, he was told that only 6 million shares would be available for his purchase and the remaining 6 million shares would be available later. On 4 July 2000, Eric Lee signed a Chinese agreement on his behalf with the 1st defendant for his purchase of 6 million CUTC shares from the 1st defendant and HK$5.1 million was released to the 1st defendant. The agreement was a trustee agreement where the 6 million shares would be held by the 1st defendant as trustee for him pending the conversion. 26.Later on, Hao asked for a new agreement to be made to replace the one already made and the 2nd defendant, another member of the China Railway Group, would replace the 1st defendant as the vendor in the new agreement. Lew agreed and the new agreement was made on 12 July 2000 resulting in the release of the balance of the purchase price at HK$45.9 million. At about this time, Lew had received advice from his solicitors Baker & McKenzie and had some doubts about the legal recognition of a trust arrangement in the Mainland. Eric Lee raised this for him with Hao, but Hao assured him that the trust structure was legal and valid under PRC law. He accepted Hao’s assurance and proceeded with the transaction. 27.Since the 2nd defendant was a BVI company, Lew wanted a letter of comfort from the 1st defendant to confirm that it was responsible for the transaction. Hao provided two versions of the letter which Lew did not find satisfactory. The final form came from the Lew’s side which had been revised twice by Lew and contained suggestions by Baker & McKenzie. It had also been revised by Hao and the solicitors for the 1st defendant. It was signed on 12 July 2000 by Hao and his fellow director Zhu Baolin for the 1st defendant. This letter reads:
28.Regarding the words “in due course” in paragraph 4, this was one of three options for Hao to choose. Lew’s draft originally had three options on the time for conversion in paragraph 4 and this one was chosen by Hao. Paragraph 4 of the draft read:
29.In order to show that the parties had contemplated the conversion to take place in a not too distant future, Lew has also produced in evidence a fax from Yiu dated 11 July 2000 which showed that Yiu had purportedly relayed a message for Hao that Hao wanted Lew to complete the purchase of the 6 million CUTC shares on 12 July as the market price for China Unicom share in the Hong Kong Stock Exchange was already at HK$19.40 and Hao worried that his company’s other directors would increase the price for the CUTC shares. If they were not contemplating a conversion within the near future, one wonders what effect the then market price of the China Unicom share would have on the price of the CUTC share. 30.Lew said he did not press for the inclusion of the Guarantee in the letter of 12 July 2000 (or in any other document) as Hao had already told him that Hao could not put it in writing without formal approval from his superiors in Beijing. He accepted this letter as his understanding was that China Railway Group was a founding shareholder of CUTC with a substantial quantity (more than 6 million) of CUTC founder shares. He and Eric Lee also assumed that Guangzhou South China Telecom Investment Company (“GSCT”), which held the 6 million CUTC shares on trust for Asianotice, was a member of the China Railway Group. They had this assumption because Hao had previously told them that the China Railway Group was a founding shareholder of CUTC and he would be sold founder shares of CUTC. 31.Shortly afterwards, Hao also provided them with a Chinese document showing that GSCT was the registered holder of 6 million CUTC shares. He and Eric Lee therefore thought that GSCT was a member of the China Railway Group. Lew further said that if he should have known that the shares would be held on trust by a third party pending conversion and not by the China Railway Group, he would not have entered into the deal as the China Railway Group would not have been in a position to ensure delivery of the China Unicom shares in the event of conversion. He also referred to the assurance by the 1st defendant in paragraph 4 of the letter of 12 July 2000 referred to above and said that such assurance would also be meaningless if the CUTC shares were held on trust for him by a third party. 32.After completing the purchase of the 6 million shares on 12 July 2000, he paid Yiu the commission of HK$9 million on 13 July 2000. He then pursued the remaining 6 million shares through Yiu, but was later told that the second tranche would be at 10 million shares which could not be broken down to smaller parcels. 33.He was also told by Hao that Hao’s superiors in Beijing regretted the sale price of HK$8.5 per CUTC share as the price of China Unicom in Hong Kong was much higher than that. Hao also told him that the price for the second tranche would be higher. After negotiation, they agreed that the price for 10 million CUTC shares, excluding commission to Yiu, was at HK$100 million. Apart from the price, the second transaction was on the basis of the same terms as for the first transaction. 34.Eric Lee also dealt with the documentation for the 10 million CUTC shares for him as before. The vendor for this second tranche of shares was the 1st defendant and not the 2nd defendant, but the 2nd plaintiff Miss June Ah Ling purchased these shares on behalf of the 1st plaintiff. Hao also sent Eric Lee a letter dated 27 July 2000 referring to the original shareholder of the 10 million shares as China Railway Telecommunications Centre. Lew and Eric Lee again assumed this company to be a member of the China Railway Group. 35.The purchase by Miss Ah Ling from the 1st defendant was completed on 27 July 2000 by the making of a trust agreement and Lew paid the 1st and 2nd defendants HK$100 million on 28 July 2000. Hao never told Lew that China Railway Telecommunication Centre was not a member of the China Railway Group or that the China Railway Group was not the founding shareholder of these 10 million founder shares. Lew also paid Yiu HK$6 million as commission for the purchase of these 10 million shares. 36.After the purchase of the 16 million shares, Lew and Hao had met on a number of occasions when Lew was in Hong Kong. These were social gatherings and they had casual discussions on the current events and the general business climate. Lew also asked Hao in these meetings on the expected date of conversion, but Hao never gave a firm date. Hao however reassured him that the China Railway Group still held a substantial number of founder shares which were far in excess of those Lew held. Hao also said that it was in the interests of China Railway Group to see the conversion take place and that Hao’s Beijing office was pressing CUTC about the conversion. 37.In a meeting on 22 March 2001, Hao told Lew that CUTC planned to have an “A” share listing later in that year. “A” shares are shares of Mainland companies listed in the Mainland stock exchanges. Only nationals of the Mainland can hold these shares and foreigners cannot hold them. Since “A” shares were irrelevant to his purchases, he ignored what Hao told him. 38.In June, 2001, Hao asked Lew through Eric Lee to sign a document to characterise Lew’s payments for the CUTC shares as being loans to the 1st defendant which were secured by mortgages granted by the 1st defendant over the 16 million CUTC shares. Hao told Lee that the China Railway Group was being audited and the mortgage document was required to facilitate their accounting for the transactions. Lew declined the request because the document mis-described the transaction that he had entered into. 39.Towards the end of 2001, Hao sent Eric Lee a hard copy of a power-point presentation on the potential of “A” shares of CUTC. In a meeting in a restaurant in Wanchai on 7 March 2002 in which Eric Lee was present, Hao told Lew that the timing for the conversion into China Unicom shares was not in his control and it was possible that the founder CUTC shares might be converted into “A” shares to be listed in Shanghai instead of China Unicom shares already listed in Hong Kong. However, Lew told Hao that he was not prepared to accept “A” shares as it was unlawful for him to hold “A” shares. 40.When the two-year deadline was drawing close, Lew was worried that he might have been defrauded by Hao and Hao might have acted without authority of his superiors. Lew therefore requested Hao through Eric Lee to arrange a meeting between Lew and Hao’s superiors in Beijing to make sure that the parent company was behind the two sale and purchase agreements. At that time, the market price of China Unicom shares in the Hong Kong Stock Exchange was below HK$10, but Lew was prepared to accept these shares if conversion should take place within two years as he had agreed to do so in the two purchase agreements. 41.The meeting between Lew and Hao’s superiors took place on 10 June 2002 at the China Railway Group’s headquarters in Beijing. Miss Ah Ling went with Lew to the meeting. They met Mr. Hu Zhenyi, the vice president and chief economist of the China Railway Construction Corporation and Mr. Long Xiangbong, the secretary of the political committee and the overseas department of the Corporation. Both of them were directors of the 3rd defendant. They did not speak English and Hao acted as the interpreter. Both of them confirmed to Lew that the two transactions were authorised by the head office and they stood behind the transactions. They also confirmed that the China Railway Group was still holding a far greater number of their own founder shares of CUTC and had just communicated at the senior level with CUTC and had pressed for the conversion, but that was a matter ultimately out of their control. 42.The two-year conversion deadline expired in July 2002. Lew then decided to press the China Railway Group for the return of his money. He wanted to give Hao a chance to come up with a satisfactory proposal. He spoke to Hao in mid-September and was told that Hao was passing through Toronto on the next day or so. They therefore arranged to meet on 18 September 2002. They actually met at a café near the Toronto airport. Lew’s brother Albert Lew was also present and was sitting at the next table where he could hear the discussion between Hao and Lew. 43.Lew in this meeting told Hao that since there was no conversion within the two-year period, he wanted the return of his money and some reasonable return on it. Hao instead diverted the discussion to CUTC “A” shares. Hao also brought along a copy of the South China Morning Post which had an article about the impending listing of CUTC in Shanghai on the “A” share exchange. Hao told Lew that the 16 million shares could be converted by stages into CUTC “A” shares. He tried to persuade Lew to hold the “A” shares instead of China Unicom shares traded in Hong Kong by saying that the “A” shares would trade at a higher price. The newspaper that bore the handwriting of Hao was produced by Lew at the trial. Hao also suggested that arrangements could be made for Lew, as a foreigner, to hold the “A” shares through a PRC nominee company. Lew however maintained his demand that the China Railway Group should make a proposal to resolve the matter. They agreed to meet again when Lew was in Hong Kong. 44.Lew later learnt from Hao that CUTC was listed on the Shanghai “A” share market at the beginning of October 2002. They met again on about 11 October 2002 and Eric Lee was also there. Hao again persuaded Lew to accept “A” shares but Lew declined as it was not lawful for him to do so under the law of the Mainland. Lew insisted that the China Railway Group should come up with a proposal to resolve the matter. 45.They met again on about 22 October 2002 and Eric Lee, Miss Ah Ling and two fellow directors of Hao were present. Hao confirmed to Lew that he could receive either China Unicom shares or “A” shares. Lew told Hao that he was not prepared to take “A” shares as it was not lawful for him to do so, but Hao told Lew that Hao could arrange for the shares to be held for Lew. A colleague of Hao also showed Lew a document and persuaded him to accept “A” shares. Lew however wanted a private discussion with Hao to resolve the matter and the two of them adjourned their discussion to another occasion. 46.In November 2002, Lew had spoken to Hao several times in relation to the dividend which had been declared prior to July 2002. On 22 November 2002, Lew sent Hao a fax telling him to forward the dividend to Lew’s account with the Dao Heng Bank on a without prejudice basis. 47.At about this time, Lew realised that the agreements did not expressly reflect the warranty of conversion of the CUTC shares into China Unicom shares within two years and he should secure some proof of it. He then drafted statements for Eric Lee and Yiu to sign. The statements are of similar contents. Lew said in drafting the statements, he only focused on the particular warranty. The statement by Yiu dated 5 December 2002 reads as follows:
48.Lew met Hao and his two fellow directors again on about 9 December 2002 at the Nikko Hotel in Hong Kong. They handed Lew a cheque representing the dividend and Hao said that it was a payment from the China Railway Group itself. Lew told them that he was prepared to accept the cheque as partial repayment of his money but not as a dividend. Hao disagreed. His fellow directors then left with the cheque. Hao then asked Lew if he would be satisfied if he could get his money back. Lew however wanted the commissions to Yiu to be included in the payment and also a reasonable rate of interest for the total sum. Hao told Lew to set out his position in writing to Hao’s superiors. Lew on 10 December 2002 sent a letter to Hao and copied it to his superiors Mr Long and Mr Hu seeking the return of his money plus interest at 8% per annum. 49.Lew met Hao and his two superiors on 16 December 2002 at the office of Guotai Junan in Hong Kong. Mr. Long told Lew that the China Railway Group had not received any China Unicom shares by a way of conversion and the conversion timetable was out of their control. Lew reminded them of the Guarantee. Hao said that it was not in the written agreements, Lew reminded him of the agreement made at their first meeting, but Hao denied any such agreement. 50.Mr. Long then said that the China Railway Group had its own large pool of founder CUTC shares and had pushed CUTC for conversion for their own benefit as well as for the benefit of their purchasers including Lew. Messrs. Long and Hu reiterated that the China Railway Group was responsible for the transactions. In the end it was agreed that the China Railway Group would give Lew a proposal by 17 February 2003 to resolve the dispute and Lew would withhold proceedings until then. Lew then issued a letter dated 17 December 2002 to Hao and copied to Long and Hu to confirm this arrangement. 51.Sometime in January 2003, Lew learnt from Po Sang Bank that the dividend for his CUTC shares at HK$744,186 had been paid into his account at this bank on about 12 December 2002. He was not aware of it until he was told by the bank and the bank further told him that the payment was made by the 1st and 2nd defendants. He converted this sum into Canadian dollars and set it aside. He then wrote on 13 January 2003 to Hao and copied to Long and Hu that he was holding this sum as partial repayment of the consideration with respect to the China Unicom founding shares. 52.On 21 January 2003, Lew received a letter from Hao suggesting that Lew could name a price for his interest in the CUTC shares and they could find a buyer for his interest. Lew declined this suggestion. There were subsequent arrangements for Lew and Hao to meet but they had to be cancelled as Hao was unable to attend them. The matter was then put in the hands of the lawyers of the parties. Lew had also returned to Canada because of the outbreak of SARS in Hong Kong. Proceedings were then commenced at the end of July 2003. 53.Lew used to keep an appointment book from time to time. In addition to his appointments, he also kept a lot of information in these books. He used the books as a sort of diary and wrote a lot of notes in it. Many of these notes were about the people that he had met and his travel itinerary. His notes also covered financial matters like exchange rates of different currencies, the level of stock indices and the listing of shares. He also stuck various pieces of paper in it. They included name cards of newly made acquaintances, name cards of restaurants, photographs of parties, newspaper cuttings that he found interesting and many of his spent airline-boarding passes showing the places he had been to and the dates of the journeys. 54.He said in evidence-in-chief that he would log in the appointment first. The notes would be written after he had returned home after the event. The notes were thus made at about or shortly after the happening of the events. The things he stuck in the book were indeed contemporaneous. 55.He produced three of his appointment books at the trial. They were for the years of 2000, 2001 and 2002. From the nature of the notes he made in these books, it is likely that he would have made some notes in relation to his purchases of the 16 million CUTC shares and the events developed therefrom. There are indeed a number of such notes. They were not written as corrections or as an overlay of another version. They appear to be original notes on the purchases and the events developed therefrom. They also appear to be contemporaneous notes. Mr. Chan, counsel for the 1st to 3rd defendants, did not suggest to Lew in cross-examination that any of the notes was made on a date long after the date against which the note was made or that any note was made falsely and was made specially for this action. There is also no notice by the defendants under Order 27 rule 4 of the Rules of the High Court to challenge the authenticity of these books or the entries therein. These notes are transcribed as follows:
56.Lew was severely cross-examined. He said in early June 2000, he was quite neutral about China Unicom shares. He was not interested in them. He however spoke to David Fan because of the persistence of his friend Paul Fortune. Fortune had on about 2 June 2000 faxed to him a fax from others on the availability of some China Unicom shares at HK$10 per share. It was suggested to him that he knew the China Unicom shares referred to in the fax were CUTC shares when he first received the fax, but he denied the suggestion. After speaking to Fan, he spoke to one Nelson Ng. He was however still not interested in these shares. As a result of the persuasion of these people, he agreed to meet Yiu. 57.China Unicom share was then trading in the Hong Kong market at about HK$16 per share. At HK$10 per share, the discount for such shares as held by the state company was at about 40% when compared with the market price of China Unicom share. It was put to Lew as a matter of mathematics, if the market price of China Unicom should remain at HK$16.6 per share, a conversion of the shares held by the state company into China Unicom shares tradeable in Hong Kong within six months would yield a profit of HK$6.6 per share in six months. This rate of return, when annualized, i.e. on the assumption that the purchase at HK$10 share and subsequent conversion and realization at HK$16 per share would be done once every six months with the principal and profit reinvested for the second time also at HK$10 per share and yielding the same result of HK$16.6 per share at the end of the next 6 months, would be 178%. Since we are talking about just one purchase and one conversion, I do not think it fair to have this rate put to him. 58.If the conversion should take place not within six months but in a year, the rate of return would be 66.7%. If the conversion should only take place in two years time, the annualised rate of return would be at 29%. Lew agreed to this calculation but was of the opinion that this model of calculation was flawed. He said in reality, the fund managers would acquire this stock to answer the stocks compositing requirements in the trust deed for their unit trusts. However, once they have accomplished their tasks, they would not buy in more and the price of the stock will crash after about six months. 59.On discounts for pre-IPO placing of shares, it was put to Lew that depending on the supply and demand, pre-IPO placing could be at a discount or a premium and there was no usual discount at 50%. Lew however maintained that there were more cases of pre-IPO placements at a discount rather than at a premium as the underwriters would fix as high an IPO price as possible. He was able to give examples of pre-IPO placements at substantial discounts. It was however undisputed that the pre-IPO placement for China Unicom on 30 May 2000 to a listed company in Hong Kong was at the IPO offering price. 60.On the meeting on 30 June 2000, Lew said he went to the meeting with an open mind. He maintained that Hao had told him that the China Railway group was a founding shareholder of CUTC and had founder shares of CUTC. The cross-examination of him on the period within which there should be a conversion failing which he would get his money back is as follows:
61.Lew was further cross-examined on the next day on why there was no documentary proof of the Guarantee.
62.He was also questioned about the recital of his agreement with the 1st defendant for 6 million CUTC shares (which was later replaced by an agreement with the 2nd defendant). The recital stated that the CUTC shares might in the near future be converted into registered shares capable of being listed in Hong Kong. He was asked why there was no suggestion in the recital that the conversion would very likely take place within six months or that it would take place within one year for sure as Hao had allegedly told him. He explained that this document was in Chinese which he was unable to read and his friend Eric Lee had not interpreted the details to him. He was thus unable to comment on these terms. 63.He was also questioned on why the letter of comfort by the 1st defendant dated 12 July 2000 did not state the oral agreement on 30 June or the Guarantee. He replied that on 30 June, he had agreed with Hao not to require written confirmation of the Guarantee. Since the matter had been dealt with then and he believed in Hao, it did not have to be dealt with again. He later added that “in due course” as stated in the letter meant “two years” to him as the conversion was due in two years. 64.He was also asked about the same omission in the statements made by Yiu and Eric Lee in December 2002 which were drafted by him. He explained that he referred to the entry in his appointment book when he prepared the statements. The entry in the appointment book on 30 June 2000 in fact did not refer to the Guarantee. It only conversion periods of 6 months to 2 years. 65.He was also referred to the demand letters from his solicitors which again did not mention the Guarantee. However, all the demand letters did ask for return of the purchase price. 66.On the custody of the shares, he said he thought that the shares would be held by the China Railway group for safekeeping and he would be given a share certificate issued by CUTC with his name on it. He also said he had asked Hao whether it was lawful for him as a Canadian citizen to become a shareholder with his name appearing on the share certificate of a state-owned company. He was assured that because the shares would be physically held in China by China Unicom, the situation would be a lawful one. He also agreed that he knew that it was unlawful for a foreigner to become a shareholder of the state-owned corporation in the Mainland. He however accepted Hao’s assurance that the arrangement was lawful as Hao was the managing director of the third largest PRC entity and Hao also presented himself as an authority in this area. Though Hao and his company were strangers to Lew, Hao’s assertion, the way he made his presentation and his assertiveness charmed Lew into believing him. 67.Regarding the commission, Lew said after the lawyer of the China Railway group Mr. Alex Leung had called him on 27 June and arranged for the meeting on 30 June, he was getting phone calls from people like Paul Fortune, David Fan and Nelson Ng complaining and threatening against him or each other. He guessed that they probably had not secured their position with Yiu on their shares of commission for introducing the deal. He did not want any trouble to arise from the deal and wanted to make sure that the sharing of commission had been agreed to by everybody. 68.At the meeting, he asked Hao what was the commission that Yiu was to receive and Hao told him that Yiu would be getting HK$1.5 out of the HK$10. He then assumed this payment obligation and made sure that Yiu would share the commission with those people involved in the introduction. He further said in re-examination that he tried to ensure that there would be harmony among all these people and to have something signed by Yiu to confirm that Yiu would them their shares. He also said he had not negotiated with Hao for the price. The reason being that he had agreed the price with Yiu in return for Yiu’s disclosure of the vendor and to proceed with the negotiation of the deal. He thought that it was dishonourable and disrespectful to go back on that. 69.He also said that he had not negotiated with Yiu on the rate of commission, however, the commission for the 12 million shares agreed on 30 June had been split into two tranches and there appeared to be a reduction from 9 million to 6 million for one tranche. 70.He also said that his perception was that he was dealing with the China Railway Group and he regarded the 3rd defendant China Railway Construction Company as part of the Group. Eric Lee’s evidence 71.Mr. Lee is an experienced share broker. He was the executive director of Guotai Junan. Before joining Guotai Junan in 1996, he had worked for a number of years in the securities and finance industry. He came to know Lew in 1995 who was a customer of his then employer. He acted for Lew in many securities transaction is in Hong Kong. He said Lew was an active trader in securities and he was used to receive orders from him and to report to him by phone and fax when he was overseas. 72.On the whole, Lee’s evidence in chief corroborated the evidence of Lew. Towards the end of June 2000, Lew contacted him and told him that Lew had been approached about a possible purchase of CUTC shares at HK$10 per share which were to be converted into China Unicom shares. Lew said the conversion was likely to take place within 6 months. They then had some discussions about the purchase price. They both agreed that the conversion should not be open ended, otherwise it would be impossible to ascertain the value of the deal and there would be no financial sense. 73.Lee at Lew’s request went to the meeting with the seller on 30 June 2000 with a view to translate for Lew. He found Sam Hao’s English fluent and Hao could communicate with Lew without the need of his translation. Hao told them that the 3rd defendant was the Hong Kong arm of the 3rd largest state-owned corporation in the Mainland. The meeting lasted for about 2 hours and Hao used most of the time to introduce his company and its projects. Hao referred to the entity of which the 3rd defendant formed part as “China Railway”. Hao said “China Railway” in Hong Kong was a solid company with many contracts in railway projects and its activities were fully backed by its parent company in the Mainland. Hao also showed them a table of shareholders of CUTC and pointed at parts of the table as China Railway interests. 74.Hao told Lew that the conversion of the CUTC shares into China Unicom shares was likely to take place as within six months to 1 year and it would definitely happen within 2 years. Hao also assured Lew on this he said by saying that his company was very close to China Unicom and their top officials knew each other very well. By way of further assurance, Hao also told Lew that if the conversion did not take place within 2 years, Lew could have his money back. On these terms of conversion, Lew immediately agreed to make the purchase. Lee understood that the terms of conversion was a deciding factor which induced Lew’s agreement. When Lew asked for written confirmation of these terms, Hao said that he could not do so without approval from his superiors in Beijing, but he had no doubt that the conversion would take place as promised. Lew appeared to be satisfied with this and stood up to shake hands with Hao to cement the agreement. 75.Since Lew was going back to Toronto, Lee was appointed as his attorney to conclude the deal with Hao. The quantity of shares was later reduced from 12 million to 6 million. His understanding from what Hao had said in the meeting was that China Railway was the original owner of the CUTC shares. He was surprised to learn after the commencement of proceedings that these shares had been bought by the 1st defendant in the market and then sold to Lew. 76.Lee on 10 July 2000 also received a fax copy of a Chinese document issued by GSCT as the registered holder of the 6 million CUTC shares stating that it was holding these shares for the benefit of Lew. He was told that this certificate evidenced the transfer of title to the shares. He though that GSCT was an entity through which China Railway Group held these shares. The transaction for these 6 million shares was completed on 12 July 2000 at Lee’s office. 77.On the warranty in the confirmation letter issued by the 1st defendant on 12 July 2000 that the CUTC shares would “in due course” be converted into China Unicom shares, Lee said the conversion period was not stated in it because Hao had said that the period could not be put in writing. Lee’s understanding on conversion time however remained the same because the letter stated that conversion of Lew’s shares would have priority over conversion of other CUTC shares owned by China Railway Group. 78.Regarding the further 10 million CUTC shares, the negotiation was conducted between Lew and Hao directly. Lew later told Lee that the purchase price was HK$10 per share excluding commission with the other terms the same as for the first transaction. These shares were purchased in the name of the second plaintiff on behalf of Lew and Lee also acted on behalf of the 2nd plaintiff. The seller for these shares was the 1st defendant. Hao provided a letter of the 1st defendant dated 27 July 2000 saying that the original shareholder was China Railway Communication Centre. Lee took China Railway Communication Centre as an entity through which the China Railway Group held the founder CUTC shares. Lee concluded the documentation for the 2nd plaintiff. 79.Thereafter, Lee would arrange Lew to meet Hao from time to time when Lew came to Hong Kong for Hao to update Lew on the time for conversion of the CUTC shares into China Unicom shares. Hao had also suggested implicitly that Lew could receive “A” shares by conversion. Lee told Lew that “A” shares could only be held legally by Mainland citizens and Lew did not pursue this idea. 80.In June 2001, Hao contacted Lee and asked Lew to execute a loan document to characterise the payments by Lew as his loans to the 1st defendant and secured by mortgages over the 16 million CUTC shares. Hao said that the loan document was to facilitate the accounting for the transactions as the China Railway Group was being audited. However, Lew declined the request as the document would mis-describe the transactions. 81.He also said that in the meeting of 30 June, 2000, Hao had shown Lew and him a table of shareholders of CUTC and referred to some shareholders as China Railway interests. 82.He was cross-examined at length on a number of points including a few minor inconsistencies between his evidence and Lew’s evidence. He was also questioned on why he made the same errors as Lew on a few minor matters. Lee however maintained that he had a vivid memory of what went on in the meeting on 30 June 2000 though he did not recall dates vividly. He emphasised that the meeting was a unique event and he had a vivid memory of what went on during the meeting. He had had nothing to do and just sat there and listened. June Ah-Ling’s evidence 83.Miss Ah-Ling appeared to be nervous and confused. She was not accustomed to the environment of the court. She could remember that Lew had bought 12 million China Unicom “founder” shares from China Rail. She had also accompanied Lew to Beijing in June 2002 when Lew sought confirmation from Hao’s superior that the parent company was behind the two sale and purchase agreements. She however made the same errors as Lew did. It seems that she had been assisted by Lew in preparing her witness statement and her independent recollection of the relevant matters was limited. Albert Lew’s evidence 84.Mr. Albert Lew is the younger brother of Lew. He said in the summer of 2000, Lew told him that he had made a deal to purchase from China Railway founder shares of China Unicom. Lew told him that Lew had received very strong guidance that those shares would be converted to China Unicom shares tradeable in Hong Kong within 6 months. Lew said he was assured that if the conversion did not happen within 2 years, he would have his money returned. Lew also said that he had been told by Hao that he was dealing with the third largest state-owned enterprise in the PRC and he accepted Hao’s representation as credible. He corroborated Lew on Lew’s meeting with Hao in September 2002 in a café near the Toronto Airport. The defendants’ case Evidence of Sam Hao 85.Hao is the only witness for the defendants. He was assigned by the China railway Construction Corporation (“the Corporation”) to work in Hong Kong in March, 2000. His task was to manage the 3rd defendant which is a wholly owned subsidiary of the Corporation. The 1st defendant is in turn the wholly owned subsidiary of the 3rd defendant. 86.In March, 2000, he heard from a friend Chow Kwong Yiu (“Chow”) that some shareholders of CUTC had sold their share rights. Chow asked him to look for potential buyers of the rights in CUTC shares. CUTC had 16 shareholders and one of them was the Mainland Government. Chow gave him some documents including CUTC’s charter made in 1994 for him to read. He learned from these documents that GSCT was a potential seller. 87.In early June 2000, another friend of his one Kenny Lee (“Kenny”) asked him whether he wanted to buy any CUTC share rights. He told Kenny that he also knew someone who had such share rights to sell. Kenny was an investor in taxi licences a few years before that. At about the same time, there were other people asking him for source of sale of such share rights. 88.A few days later, Kenny asked him if he had the share rights to sell to a potential buyer. He then contacted Chow for the share rights. Chow said he would be meeting the senior officers of GSCT in a few days. Chow later told him that GSCT was interested in selling its share rights and its representative would contact him direct. Chow also said that he would be charging HK$1.2 per share as his commission. 89.Sometime later, one Ba Kun (Ba”), who claimed to be the vice chairman of GSCT, contacted him and told him that someone on Ba’s behalf would contact him. Then a Mr. Au Chi Ming (“Au”) and a lady called Annie paid him a visit. They claimed to be the assistants of Ba and that GSCT had RMB¥10 odd million share rights of CUTC for sale, but Ba the price would be negotiated by Ba himself. He then met Ba in a hotel in Shenzhen on 10 June 2000 when Ba offered to sell RMB¥6 million share rights at HK$6.00 per share right. This included a commission for Au Chi Ming at HK0.5 per share right. He told Ba that the price was acceptable and the 1st defendant intended to re-sell the share rights. 90.On 11 June 2000, Au gave him a draft agreement for sale of the share rights. On 17 June 2000, GSCT confirmed in writing to the 1st defendant that it would sell the 1st defendant RMB¥12 million share rights. 91.Hao then told Kenny that the cost per share right was HK$7.2 (HK$6.00 to GSCT which included HK$0.5 commission to Au plus HK$1.2 to commission to Chow) and the 1st defendant would make a profit of HK$1.00 per share right. Kenny told him that Kenny himself and one Yim Wai Ning (“Yim”) would each charge a commission of HK$0.5 per share right. Yim was the one who introduced the buyer. The sub-sale price would thus be at least HK$9.2. Kenny later told him that the buyer was only prepared to pay HK$8.5 per share right. Kenny and Yim then reduced their commissions from HK$0.5 to HK$0.4 and the 1st defendant reduced its share of profit from HK$1.0 to HK$0.5. That resulted in a total unit price of HK$8.5. The commission of HK$0.5 payable by GSCT to Au Chi Ming was later paid by the 1st defendant and GSCT reduced its unit price from HK$6.00 to HK$5.5. 92.He then had a meeting with Kenny, Yim and Yiu on 26 June 2000. Yim introduced Yiu to him as the agent of the buyer. He subsequently knew that Yiu was Lew’s agent. Yiu asked when the CUTC share rights could be converted into listed shares and he replied that he had no idea as it was a matter to be decided by the Mainland government. At the end, Yiu said that he would discuss with his principal and revert to him later. Kenny later called and fixed a meeting on 30 June 2000 at his office for him to meet the buyer. 93.Lew came to his office on 30th of June in the company of Yim, Yiu, Eric Lee and another person. His fellow director Zhu Baolin was also present. He said Lew asked for his name card with the 1st defendant. He did not have it and instead gave Lew his name card with the 3rd defendant. He told Lew that the CUTC share rights that were sold by the 1st defendant originated from one of the registered shareholders of CUTC. 94.He said Lew had asked him to compare the CUTC share rights with the listed China Unicom shares, but he declined as he was not an expert in that. He suggested that Eric Lee could provide the answer as he learnt from Lee’s name card about his occupation. Lee than gave Lew some explanation. Hao also asked Lew to do the conversion rate for himself. Lew then asked him when the CUTC share rights would be converted into China Unicom shares, but he told Lew that he did not even know whether there would be a conversion, not to say when it would take place. He further said that even the chairman of CUTC could not tell as it was a decision to be made by the Central Government. 95.The meeting lasted for around 1 ½ hour and Lew impressed him an experienced investor and Lew seemed to know what he was doing in the meeting. 96.Hao emphasised in his witness statement that since he did not even know if there would be a conversion, he would not have given the Guarantee. He also said that Lew had expressed his cognizance that this investment had “high risk, high return.” At the end of the meeting, Lew promised to consider the deal and revert to him. 97.He said his standard of English was not good and sometimes during the meeting, he did not know how to express himself. He then used Putunghua and Eric Lee and Yiu translated for him to Lew. When he did not know what the plaintiff said, Eric Lee and Yiu also translated for him. 98.On about 2 July 2000, Hao was informed by GSCT that they would only sell RMB¥6 million share rights first and leave the remaining RMB¥6 million to a later stage. He then asked Kenny to relay to Lew’s agent the reduction in quantity and that the sale of the remaining RMB¥6 million would have to be negotiated later. Kenny later told him that Lew accepted the reduction. 99.On 3rd July, Ba of GSCT told him that they would like to sell the RMB¥6 million share rights to a BVI company instead of a Hong Kong company. He thus acquired the 2nd defendant for this purpose and used the 2nd defendant to enter into the agreement with Lew on 4 July 2000. The defendants’ case is that there was never any written agreement made between Lew and the 1st defendant on 4 July 2000. The agreement made on that date was already between the 2nd defendant and Lew. It was necessary to make a fresh agreement dated 12 July 2000 between the same parties because of certain amendments initiated by Ba which were incorporated into the fresh agreement on 12 July 2000. 100.Despite the making of the agreement between the 2nd defendant and Lew on 4 July 2000, Lew on 10 July 2000 raised the need for the letter of comfort from the 1st defendant. I have already referred to this letter and the three options on time of conversion provided in paragraph 4 of Lew’s original draft. 101.Hao said he asked Lee why there were the options on conversion time and was told that the stipulation of time was to give some comfort to the investor. He was further advised that the options would cause no harm to the 1st defendant as no specific time was mentioned. He believed in Lee. He then asked his solicitor Mr. Alex Leung for comment on this draft. Leung asked him whether he had warranted that CUTC share rights would be converted into China Unicom shares tradeable in Hong Kong. He told Leung in the negative. Leung then said that the whole clause should be deleted, but then Leung could see no harm in this clause as no specific time was mentioned. Leung then suggested the first option of “in due course” and he accepted it. The letter of comfort adopting the first option was then provided by the 1st defendant to Lew on 12 July 2000. 102.Regarding the next RMB¥10 million share rights, he got them from Chengdao Training Centre (“Chengdao TC”) of China Railway Communication Centre (not part of the China Railway Construction Corporation) through one Li Waidong (also known as David Li) at RMB¥7 per RMB¥1 share right. These shares were held by China Railway Communication Centre on trust for the benefit of the Electrical and Engineering Office of the China Railway No. 14 Bureau (“the EE Department”) of the China Railway Construction Corporation. The EE Department in turn held those rights for the benefit of Chengdao TC. 103.Hao said he and Lew agreed through Kenny and Lew’s agent that Lew would purchase this RMB¥10 million share rights at HK$10 per RMB¥1 share right or HK$100 million for the RMB¥10 million share rights. The agreement was made on 27 July 2000 between the 1st defendant as the vendor and the 2nd plaintiff as the purchaser. Lee acted as the attorney for the 2nd plaintiff. Hao in turned procured the 1st defendant to enter into a written agreement with Chengdao TC on 25 August 2000 for the purchase of the RMB¥10 million share rights. The consideration was however changed to HK$7 per RMB¥1 share right. 104.On the proposed mortgage which Lew refused to sign, Hao explained that the idea came from Li Waidong who did not want Chengdao TC to issue a formal invoice to the 1st defendant to collect the balance of proceeds of sale of the share rights. Hao said Li Waidong had told him that an invoice would expose Chengdao TC to a substantial tax liability. He thus suggested to Hao to convert the sale to a mortgage transaction to avoid such liability. At his request, Hao relayed this idea to Lew and faxed the draft mortgage documents for Lew’s consideration. Hao further said that he had not even read those documents. The suggestion was not implemented because of Lew’s refusal. 105.The draft mortgage documents that Hao had sent to Lew however did not support Hao’s explanation. There were in fact two sets of draft mortgage papers. The set that was intended for use between Lew and the 1st defendant has been produced. It deals with the RMB¥6 million share rights sold by GSCT. The other set deals with the RMB¥10 million share rights sold by Chengdao TC and was intended for use between Miss Ah Ling and the 1st defendant. This second set of draft has not been produced but a draft addendum of it has been produced. The existence of these two sets of documents covering both transactions therefore cast doubt on Hao’s explanation that it was Li Waidong who suggested changing the sale by Chengdao TC to a mortgage to avoid a tax issue for Chengdao TC. If that was the case, there was no reason for Li Waidong to prepare a further set of mortgage documents to cover the first transaction of which Chengdao TC was not involved. 106.Furthermore, both the audited accounts of the 1st defendant and the management accounts of the 2nd defendant do not show the income and expenditure of these two transactions. The profit of over HK$23 million made by the 1st and 2nd defendants from the transactions was concealed by means of cancellation by a fictitious entry of account payable in the same sum in the accounts of the 1st defendant. Hao explained in re-examination that this entry was to cover a possible claim by the EE Department in the second transaction. This explanation clearly cannot stand as he had said that this potential claim was at most 1/3 of the 1st defendant’s profit from the second transaction. This in any event was less than HK$7 million. 107.If the intended but unfulfilled purpose by the mortgage documents was to conceal the two sale and purchase transactions from the auditors of the 1st and 2nd defendants, this purpose was still achieved by Hao by these irregular accounting treatments. These are simply false accounts. It is thus more likely than not that it was Hao who wanted to conceal these two sale and purchase transactions for his own purpose. He thus initiated the idea of converting the two sales into mortgages which was declined by Lew. He then tempered with the accounts to achieve the same result. When Lew made use of the mortgage issue to discredit him, he conveniently put the blame to Li Waidong so as to put up an innocent appearance. I do not think Li Waidong had anything to do with this. Hao’s case for putting the blame to Li Waidong is not supported by any document from him to Chengdao TC even after Chengdao TC’s solicitors had written to the 1st defendant. 108.I disbelieve Hao’s evidence on why he sent the draft mortgage documents to Lee. I find that he wanted to use the mortgage documents to conceal from the 1st defendant’s accounts the true nature of the two transactions with Lew. I further find that when Lew refused to co-operate to create the false mortgages, Hao simply omitted the two transactions from the accounts of the 1st defendant and created a false account payable entry to cancel out the profit of over HK$23 million. In this way, he simply concealed the existence of the two transactions from the 1st defendant’s accounts. 109.On the proposed listing of CUTC shares as “A” shares in the Mainland, Hao said it was raised by Lee and not by him. He also said he knew nothing about it and thus had not suggested to Lew that he should take the “A” shares instead of China Unicom shares. 110.Regarding Lew’s visit to the CRCC’s senior officers in Beijing, Hao said Lew had expressed interest in investing in the Mainland but was not familiar with the investment environment there. Hao thus suggested to and arranged for Lew to go to Beijing to meet his senior officers to acquire such information. Hao hoped that the meeting could result in joint investment between CRCC and Lew. The meeting took place on 10 June 2002 in Beijing. Hao said Lew had only discussed investment environment in the Mainland and other world issues with his senior officers Messrs. Hu and Long. Lew had only mentioned in passing his purchases of CUTC shares from Hao’s company and said nothing further about it. Hao denied that the meeting had anything to do with his authority to enter into the two transactions with Lew and the 2nd plaintiff. 111.This explanation of Lew’s visit to Beijing was not persuasive at all. I cannot see any reason why Lew should have gone all the way to Beijing just for one meeting and a lunch. If he wanted advice on the investment environment in the Mainland, he could have learnt it from Eric Lee or his colleagues in Guotai Junan which is a leading stockbroker that deals with stocks and shares in the Mainland stock markets. 112.On their rendezvous in Toronto, Hao denied that he had persuaded Lew to take “A” shares. Instead he said he had told Lew that his CUTC share rights could not be converted into “A” shares and Lew was disappointed. But Lew had not asked him to return the purchase money. Hao also denied he had on any subsequent occasion asked Lew to accept “A” shares. But if Hao had not persuaded Lew in Toronto to take “A” shares and instead had told him that his CUTC share rights could not be converted into “A” shares, I do not understand why Hao should have written some analysis on the newspaper. 113.On Lew’s demand letter dated 10 December, 2002, Hao said it was written at his suggestion. He said he had asked Lew to write him the letter so that he could use it to persuade CRCC to register Lew’s share rights under its name to ensure that Lew would get the China Unicom shares after conversion. However, the content of Lew’s letter was totally different from his suggestion. But I find such explanation incredible. If Lew had so behaved, I see no reason why he should not have written back and set the record straight. 114.In cross-examination, he admitted to have given Lew on 30 June 2000 a name card that bore a false qualification of MBA as he at that time had not even finished with the course work for it. However, after having admitted to the falsity on the first day of his cross-examination, he on the next day tried to explain away the falsity and withdraw the admission. But he was stuck fast on the first day and his attempt to withdraw on the second day made him looked worse. 115.He denied in cross-examination that he was aware on 30 June 2000 that Frank Yiu was to received HK$1.5 commission per share. He also said that interest was not mentioned in the 30 June 2000 meeting. 116.He also denied that he had told Lew that CUTC had telephone lines running on the land adjacent to the railways built by CRCC. But the China Unicom prospectus did say “We have installed fibre optic cables in polyethylene conduits buried alongside railways and, to a lesser extent, alongside highways”. Lew also said that Hao had on 30 June 2000 described the assets of CRCC which included the lands adjacent to the railways and the rights to lay telecommunication cables along the railways. If Hao did not tell Lew about this, then Lew must have picked this out from the thick prospectus of China Unicom and used it to lie against him. But I do not think this a likely explanation. I think it was more likely that Hao did make this misrepresentation to Lew so as to make Lew believe that CRCC was a founder shareholder of CUTC. 117.The comfort letter gave priority to Lew’s shares for conversion over other shares or interests that the 1st defendant own or control in CUTC. Hao agreed in cross-examination that this provision meant that the 1st defendant owned or controlled other CUTC shares apart from those it sold Lew. The 1st defendant in fact did not own any CUTC shares. If Hao had told Lew that the 1st defendant was merely making a sub-sale and had not misrepresented to Lew that CRCC had a lot of founder shares, one wonders why this provision was inserted by Lew or his lawyers in the comfort letter. Even if this was suggested Lew, Hao would have told him that it was unnecessary as the 1st defendant did not have any CUTC shares and was merely buying them from elsewhere for sale to Lew. But Hao had not queried Lew on this provision. He instead just accepted it despite it was based on a false premise. I do not believe Hao’s explanation on this. I find that it was more likely that Hao had represented to Lew that CRCC was a founding shareholder and had a lot of founder CUTC shares. 118.On the provision of three options in the comfort letter, I think this is an indication of some understanding between Hao and Lew that the CUTC shares would be converted at some stage in the future. If Hao had made no representation on conversion and there was no understanding of some sort between him and Lew on conversion, the provision of the three options by Lew was a very unfriendly act. It was an attempt to procure some sort of representation on conversion from Hao when he had previously and adamantly refused to make any. Hao would only have deleted all three options. But that was not what he did. His adoption of the phrase “in due course” clearly showed that he had made some representation on conversion. 119.Hao also agreed that the phrase “will in due course be converted to” in paragraph 4 of the letter did not mean “it might or might not be converted to”. In order to maintain that he had only told Lew that the conversion might or might not take place, he therefore explained that he did not know the meaning of the phrase “in due course” when he signed the letter. He also said that Lee had told him that Lew’s draft with the three options was similar to the earlier version from him and the options would cause no harm to the 1st defendant for no conversion time was provided therein. His explanation was a lame one. I do not believe that Lee would tell him that. If the two versions were similar, there was no point in Lee asking him to sign the new one from Lew. He would also have declined to do so. He also had the advice of a solicitor on what to do with this draft from Lew. 120.Furthermore, he was the managing director of a railway company in Hong Kong. He was responsible for running this company which was assisting in the construction of our West Rail. He had sufficient intelligence to understand that each of the options meant a representation. Even if Lee should have told him what he alleged, he would not have believed in that. I of course do not believe that Lee had told him so. There was no reason for Lee to do so. 121.I also do not believe the solicitor Alex Leung, after having received Hao’s confirmation that he had not given any warranty on the conversion of the CUTC shares, would have advised Hao to accept the phrase “in due course” merely because Leung could see no harm in this clause for no specific conversion time was mentioned. Leung knew that this letter was an important document. Leung must have understood the meaning of the phrase “in due course”. If Hao really did not understand it (and I do not believe him on this), Leung must have told him about it. If Leung should have advised in the way as Hao alleged, Leung should have been called to give evidence to explain why he did that. The excuse that there was some dispute on costs between Leung’s firm and the 1st defendant is a bad excuse for not calling him. He can be subpoenaed to appear. He is a solicitor. He would not and could not refuse to give evidence simply because of a costs issue with the 1st defendant. 122.On the payment of dividend to Lew, the shareholders could have chosen to receive dividend or bonus shares. There was no evidence to show whether GSCT had chosen dividend or bonus shares. There was also no documentary evidence showing payment of dividend from GSCT to the 1st or 2nd defendant. The only evidence is a credit entry for HK$279,070 in the bank passbook of the 2nd defendant. There was not even a receipt voucher saying what the money was. Regarding the dividend from Chengdao TC, it was clear that the EE Department had withheld the same. But the 1st defendant paid Lew HK$744,186 out of the said sum of HK$279,000 and its own resources as dividend for the RMB¥16 million share rights. 123.I also note that when Hao was cross-examined, he sighed deeply and repeatedly. He was appeared to be very uneasy throughout. The defendant’s attacks on Lew and his witnesses 124.The defendants say that Lew’s case has many problems. Was Lew neutral about the proposed sale? 125.The defendants submitted that Lew was lying when he said that he was neutral about the proposed purchase prior to the meeting on 30 June. In gist, Lew was prepared to see David Fan, who was a stranger, on 3 June when he was about the leave for New Zealand. He also spoke to Lee on 12 June when he was holidaying in New Zealand. He called David Fan on 15 June when he was still in New Zealand. He admitted in cross-examination that he called Fan because of his interest in the CUTC shares. On 22 June, he recorded in his diary the listing price of China Unicom. Before disclosing his diaries, he created the impression that he only met Fan after returning from New Zealand. 126.To say that one is neutral about the proposed purchase is not that he had no interest whatsoever. The few things he did from early to 22 June show that he was not disinterested at all. However, they did not show that he was keen. I think his conduct was compatible with his case that he was neutral in the sense that he would not mind knowing some more about it. Whatever interest he had could be just to know more about it rather than a positive desire to enter into the purchase. He had admitted of having been in touch with David Fan when holidaying in New Zealand. His failure to disclose the first meeting with Fan on 3 June before leaving for New Zealand could be because of poor memory. After all, that meeting did not appear to assume much significance in the whole matter and I cannot see any reason for Lew to lie about this. Did Lew know that the proposed deal was on CUTC shares? 127.The defendants submitted that Lew was aware that the proposed deal was on CUTC shares before the meeting on 26 June because he had in his witness statement said that Paul Fortune had told him that it was a private stake in a PRC telecommunications company. Furthermore, the original shares referred to in the fax he received on 2 June could not have meant China Unicom shares that were to be listed soon and could only be a reference to CUTC shares Under cross-examination on day 7 at page 59 of the transcript, he agreed that it was his interest in the shares of “CUTC” that led to his conversation with David Fan on 15 June. Though he wrote China Unicom shares against the date of 22 June in his appointment book, he was not referring to such shares as it was offered to him at only HK$11 per share when the price on listing in the market on that day was HK$15.8 per share. Lew also admitted to this in cross-examination on day 7 at page 48 of the transcript. In his affirmation filed on 17 July 2003, Lew said that when Yiu in the meeting of 26 June talked about the offer, Lew had commented that “he knew that CUTC was a PRC company which operated one of the largest mobile telecommunications business in the PRC and that CUTC had injected various PRC communications network business into China Unicom Limited which had just listed in Hong Kong and New York”. It was also submitted that if Lew wanted to buy China Unicom shares, he could have gone to the many brokers surrounding him. 128.Though Fortune had referred to a stake in a PRC telecommunications company, the fax from him on 2 June referred to China Unicom shares and the fact that China Unicom would be listed on 20 June. Furthermore, China Unicom is also a telecommunications company originated from the Mainland. What Fortune said could be about China Unicom or CUTC. I also do not see why the “China Unicom Shares” as referred to in the fax could only be a reference to CUTC shares. In the next line in the fax was the statement that “Unicom will be listed on 2000/20/June.” Any reader would take the expressions “China Unicom” and “Unicom” to mean the same entity. If the writer of the fax intended “China Unicom” to refer to CUTC and “Unicom” to refer to China Unicom, I can see no reason why he could not have written CUTC shares or the shares of the parent of China Unicom in place of China Unicom Shares. Most people call a spade a spade if there is no cause for a different conduct. 129.Regarding the so-called agreement by Lew in cross-examination on day 7 at page 59 of the transcript that it was his interest in CUTC shares that led to his conversation with Fan on 15 June, the expression “CUTC” was used in the question as a reference to the subject matter of the proposed sale and not as an expression for the purpose of distinguishing CUTC from China Unicom. Furthermore, Lew merely agreed that it was his interest in the subject matter referred to in the question that he talked to David Fan on 15 June. He did not expressly confirm that he was talking to Fan on that day about “CUTC” shares. In fact, on the next page of the transcript, he reiterated that what he wrote on 22 June in his appointment book was a reference to something with respect to China Unicom. He only got a good feeling of what it was when he met Yiu on 26 June. On his so-called admission in cross-examination on day 7 at page 48 of the transcript, he in fact made no admission. The cross-examination on this continued to page 54 of the transcript. Despite the tough examination, Lew still maintained that he only acquired a more concrete perception of what exactly it was in the meeting on Monday 26 June. 130.On the co-called comment by Lew to what was said by Yiu on 26 June as contained in his Lew’s affirmation filed on 17 July 2003, in fact did not say that he had made the comment to Yiu. Lew was saying in the affirmation about his knowledge of CUTC at the time of the meeting. China Unicom had already been listed on 22 June. It would not be surprising that he knew about CUTC and its relationship with China Unicom on 26 June. His case however is that he only became aware at that meeting that the shares proposed to be sold were those of CUTC. 131.It is off the point for the defendants to comment that if Lew wanted to buy China Unicom shares, he could have gone to the many brokers surrounding him. Lew’s case is not that he had gone out to seek China Unicom shares which he could have obtained through his brokers. His case is that he was being offered something which was related to China Unicom and he only had a clear idea that it was CUTC shares in the meeting on 26 June. 132.I accept Lew’s evidence that he only had a clear idea on 26 June 2000 that he was offered CUTC shares. I would also add that I do not see any need for Lew to pretend that he did not know that the offer was for CUTC shares and only learn about it in the meeting on 26 June. Even if he should have said that David Fan had told him on the phone long before 26 June that the offer was of CUTC shares, his case would still be the same. Did Hao represent that CRCC was a founding shareholder of CUTC? 133.The defendants argued that the conduct of Hao and Lew showed that Hao would not have represented to Lew that CRCC was a founding shareholder of CUTC. They said that the agreement faxed by Hao to Lee stated that the 1st defendant was a trustee of the founding shareholder. Subsequent document showed that the founding shareholder was GSCT. Hao had not told them that GSCT was part of CRCC. Lee only said that it was his understanding. Hao also never told them that Chengdao TC was part of CRCC. Lew only claimed that it was his understanding. Hao knew that Lee came from one of the largest securities house and he might know or could find out the background of GSCT, it was thus improbable for Hao to have made the misrepresentation. 134.If Hao had told Lew and Lee in the meeting on 30 June that the assets of China Railway included the lands adjacent to the railways and the rights to lay telecommunication cables along the railways, China Railway was a founding shareholder of CUTC and had founder’s shares because it had invested in CUTC at its formation in the early 90s and the purpose of the sale of these shares was to fund China Railway’s employee pension scheme, then it would have been natural for Lew and Lee to take GSCT and Chengdao TC as the subsidiaries and vehicles of China Railway to hold the founder shares if they should have believed him. Such misunderstanding would only be dispelled if Hao or somebody else had told Lew or Lee the true picture. Furthermore, even if Lee should have found out the background of GSCT or Chengdao TC, it would have been easy for Hao to provide an explanation like a trust holding as in the EE Department case. The RMB¥10 million shares in the second transaction was registered in the name of China Railway Communication Centre on trust for the EE Department of China Railway which in turn held those rights for the benefit of Chengdao TC. A revelation of the background of the registered shareholder might thus not mean much as the shares could have been held on trust for others. In fact, the EE Department was indeed a member of the CRCC group and this fact would have supported Hao on what he had allegedly represented. 135.I therefore do not think that these arguments of the defendants can convince me that Hao had not misrepresented to Lew and Lee that CRCC was a founding shareholder of CUTC. Would Lew have believed that he would become a registered shareholder of CUTC? 136.The defendants referred to Lew’s evidence that he had been told by Hao that the shares he bought would be held by the China Railway Group for safekeeping prior to conversion and his name would appear on a certificate in respect of those shares. The defendants said that Lew was an international investor and assisted by Lee, an expert. They thus argued that Hao would not have been so foolish as to say such thing to Lew and Lee as Lew, being a Canadian citizen, could not have been a Shareholder of CUTC and Lew would not have accepted such representation as he also knew of the impossibility. They further argued that Lee had behaved strangely in accepting such representation. 137.However, Lew had said in evidence that the illegality did not come to his mind. Lee also said that it did not occur to him in the meeting that the arrangement was illegal. As a matter of fact, Hao indeed gave Lew a certificate from GSCT dated 7 July 2000 confirming the transfer of RMB¥6 million shares to him. This was followed by another certificate issued by the 1st defendant confirming the transfer of the RMB¥10 million shares to the 2nd plaintiff. Time for conversion 138.On conversion to take place within 6 months, the defendants point out that there are at least four versions of the plaintiffs’ evidence. Lew said in his witness statement dated 24 December 2003 that “very likely that the conversion of the shares … would take place within 6 months”. His appointment book recorded “will not be in 6 months”. The written statements Lew prepared and signed by Lee and Yiu said “would be not likely convertible within 6 months” which was similar to his appointment book. Lew’s affirmation made in June 2003 and Lee’s witness statement made in December 2003 were similar to Lew’s witness statement though they did not use the adverb “very”. Albert Lew said in his witness statement that “these founder shares would be converted … within 6 months”. If the minor differences in expressions are ignored, there are in fact two main versions: namely likely to take place within 6 months and not likely within the same period. 139.They also point out that there are at least two versions of evidence on conversion within one year. Lew said in his witness statement that “conversion would take place within a year for sure.” The statements Lew prepared for Lee and Yiu said “would likely occur within a year”. 140.The defendants further argued that Albert Lew looked at the 6-month as a very important deadline and contradicted Lew’s evidence. Albert Lew however never said that once the 6 months were over, there should be disengagement of the deal or the purchase money should be repaid. 141.The defendants further said that Lew’s evidence in cross-examination on the 6 months was more confusing. On the cross-examination, Lew was trying to justify that the different versions meant more or less then same thing as the 6-month period was a sort of guidance. 142.Though the two main versions on the 6-month period convey different meanings, this period was after all not the core element of the representation was the 2-year deadline for conversion. If there should be some confusion over the representation relating to this period, it is understandable as it was made so many years ago. I also note that Lew’s evidence on the making of the deal was consistent. His case was clear that after Hao had given the Guarantee, He stood up and shook hands with Hao to signify the clinching of the deal. 143.There is also the important note in the appointment book. It stated “Comments: Sam said will not be in 6 months, but 12 to 24 months later for sure.” There is no notice under Order 27 rule 4 of the Rules of the High Court to challenge the entries therein. The defendants in fact used some of the entries to attack Lew’s case. 144.The defendants also referred to the first draft agreement faxed by Hao to Lee which only said that the shares “may in the near future be converted into registered shares capable of being listed in Hong Kong.” However, Lew had already in the meeting of 30 June that Hao need not go into writing on the Guarantee on conversion. Lew would be reneging that agreement if he should insert terms of the Guarantee in the draft from Hao. 145.I instead consider whether this statement in the draft agreement can live comfortably with the defendants’ case. Hao said that he told Lew in the meeting that he did not even know whether the CUTC shares would be converted to China Unicom shares, not to mention when conversion would take place. If that was the state of his knowledge and mind, there was no reason for him to have put in the above statement into the agreement. That statement was contrary to his state of mind and stance. I therefore take the view that this statement indicates that there was some understanding between Hao and Lew that the CUTC shares would at some stage be converted into China Unicom shares. 146.Regarding the comfort letter, I have already dealt with it above. I am not satisfied with Hao’s explanation on why he had accepted the provision of priority for conversion for Lew’s shares over other CUTC shares held or controlled by the 1st defendant and adopted the “in due course” phrase to qualify the time for conversion. 147.The defendants however submitted that the letter did not mention the Guarantee. Instead, it gave Hao three options on time for conversion. The defendants therefore argued that if there was the Guarantee, there was no reason why Lew’s solicitors, Messrs. Baker & McKenzie, who had taken instructions from Lew, would have provided the three options for Hao and not spelt out the Guarantee. This submission again ignores Lew’s agreement that Hao need not go into writing on the Guarantee. 148.On the need to make repayment after the 2-year deadline, the defendants repeated its arguments and further said that the terms of the draft agreement was wholly inconsistent with the existence of this promise. However, if Lew had indeed agreed not to insist on written confirmation of the Guarantee, I do not see any thing as raised by the defendants that was really inconsistent with Lew’s case. On the absence of the provision for the need to make repayment from the statements signed by Lee and Yiu, I accept that Lew only referred to his appointment book when he prepared the two statements and his appointment book did not record the money back promise. The defendants further submitted that the demand letters from Richards Butler for Lew did not refer to this money back promise. I note that the demand letters did ask for repayment though not state that there was such a promise. 149.I however think that the important point to note is whether it was likely that the money back promise would have been given if there was the warranty given in the 30 June meeting that conversion would take place no later than 2 years. If there was such warranty, it would have been natural for Lew or any reasonable person in his position to ask the question of what would follow if there was no conversion. If Hao’s reply would be that Lew could then sue them, Lew would very likely walk away. Why should he buy a lawsuit? The reasonable answer would have been the refund of the purchase price. I find that Lew had asked Hao in the meeting what would happen if conversion did not materialize after 2 years and I also find that Hao had answered that there would be a refund of the purchase price. One to one conversion 150.The defendants argued that if Hao had guaranteed a one for one conversion, Lew would have known how much he had lost at any given time. They therefore submitted that Lew had showed the flaw in his case when he said that he did not know how much he had lost on 9 December 2002. Lew indeed said there was no way he could determine the value of the 16,000,000 CUTC shares as there was not yet any conversion of them into any tradeable shares. I think there are different ways to understand Lew’s statement. There are many investors who do not regard unliquidated loss and accrued loss. The CUTC shares had not even been converted, not to mention liquidation of loss. If Lew had been cross-examined on this statement and he should have replied that he did not know how many China Unicom shares he would get upon conversion, then the criticism would be valid. But there was no such cross-examination. Furthermore, if there should be conversion, this event could also trigger a significant change in the market price of China Unicom. Could there have been an oral agreement after a short meeting? 151.The defendants argued that according to Lee, the meeting was a short one and Lew would not have agreed to enter into the transaction involving so much money. It was Hao’s evidence that the meeting took 1 ½ hours. I would not regard that as short. In any case, there was a previous meeting between Lew and Yiu and the meeting on 30 June was not the only meeting to persuade Lew to commit to the purchase. As I will refer to below, Hao had exercised effective salesmanship on Lew in this meeting. It was thus not surprising that Lew would have agreed to the purchase at the end of the meeting. Whose agent was Yiu? 152.Though Hao never said that Yiu was his agent and instead said that Yiu was Lew’s agent, there was evidence to suggest that Yiu was not Lew’s agent. When the proposed sale was first drawn to Lew’s attention by the fax of early June, it referred to the shares at HK$10 per share. It transpired that HK$1.5 out of this HK$10 was for Yiu. According to Lew, he took over the payment of this commission in the meeting of 30 June. I think he later negotiated with Yiu and reduced the total commission of HK$18 million to HK$15 million for the RMB¥12 million CUTC shares although he might have forgotten about this. That was before the RMB¥12 million shares were reduced to RMB¥6 million shares. Though he took over the obligation to pay Yiu, that did not mean that Yiu’s agency would thus switched as whoever was to pay Yiu, it was with Lew’s money. 153.If the vendor should have built the agent’s commission into his asking price, obviously the agent was working for him and not the purchaser who might not have appeared in the horizon at that time. I would not simply rely on Lew’s taking over of the commission obligation and regard Yiu as Lew’s agent. Of course after having taken over the payment obligation, it would have been in Lew’s interest to directly negotiate with those who had a share and to reduce it for Lew’s own benefit. If Lew had not taken over this obligation, it would have been for Hao or the 1st defendant to deal with Yiu and his clan. I find that if Yiu was not the agent of Hao or the 1st defendant, then he must have been an independent broker. He was not Lew’s agent. I do not find Lew lying on this. Other attacks 154.The defendants had also made attacks against the individual witnesses for Lew. However, most of these attacks fade away after my above analysis. I should however make particular mention of some of the attacks on Lee. The defendants point out that Lee made the same errors at the same time as Lew did and he made the same corrections also at the same time as Lew. However, they were represented by the same solicitors who assisted them in preparing their statements and affirmations. It was natural to expect that they would consult each other on particulars of events. Their agreed recollection would then enter into their respective statements and affirmations. If their joint recollection was erroneous, the same error would be in the statements and affirmations. If they should have discovered the errors and wanted to effect corrections, the same corrections would be made. 155.The defendants however pointed out that Lee was rude to leading counsel for the defendants and was not neutral. However, Lee only lost his patient on his second day of cross-examination. He was a senior executive of a big securities house. He was busy. He was a finance man and did not appear to be experienced in litigation. One can well understand his impatience with what he might have wrongly perceived to be nit-picking and never ending questioning. He had at one time wrongly regarded the process of cross-examination was to tire him out. But his behaviour at the start of the cross-examination did not have these problems. I do not think Lee’s attitude to counsel had anything to do with his neutrality or otherwise. 156.The defendants further argued that Lee was not truthful when he said he did not know before the 30 June meeting that the shares offered were those of CUTC. I think Lee’s case was that he was aware that the shares offered could be converted into those of China Unicom, but he was not aware that it was CUTC or some other name. He only became aware that they were CUTC shares at the meeting. Credibility of Hao 157.I have already analysed Hao’s case above when I summarized his evidence. His case is that there were rumours in the market that CUTC shares might be converted into China Unicom shares. The market was bullish. Lew had the money but did not know where to buy these shares. By chance, the agents of the vendors and of Lew both bumped into him and bestowed upon his company this opportunity to net over HK$23 million profits. Not a dollar of capital need be deployed. He had no idea of when the conversion would take place or whether it would take place at all. Lew knew that the 1st defendant was not selling founder shares but was buying the shares from elsewhere to sell him. It was a big windfall for the 1st defendant. His story is too good to be true. 158.In the light of my analysis above, I find that Hao has little respect for truth. He lied even on his credential on his name card. He doctored the 1st defendant’s accounts to conceal the transactions. He lied on his ability to understand simple English. I do not think I need repeat all my findings against him which I have made above when summarizing his evidence. Findings on Lew’s case 159.I have been reminded by leading counsel for the defendants that even if I should refuse to accept Hao’s evidence, it does not mean that I have to accept Lew’s. If I should reject the evidence of both Hao and Lew, it would simply mean that Lew has failed to proof his case. 160.I have carefully considered Lew’s evidence including his cross-examination on the conversion time frame and on the absence of documentary proof for the Guarantee. I find him an honest witness and had tried his best to answer the questions. But the lapse of time certainly impaired his memory. However, the notes in his appointment books are important evidence on what actually happened. I also accept the evidence of Lee in so far as he corroborated Lew. The lapse of time of course impaired Lee’s memory too. I also accept Albert Lew’s evidence in so far as it corroborates Lew’s evidence. I do not believe Hao’s evidence whenever it is in conflict with that of Lew and Lee. 161.The meeting was not a casual chat in a little café. It took place in a formal office of the 1st defendant which was a subsidiary of a very large state own construction company. There were photographs on the walls showing the many railway projects that had been undertaken by this company at various places in the world. All the signs there showed that this was a company of substance. 162.Hao, the person in charge of the meeting, was the managing director of this company. At least one other director of this company was also present at the meeting. Lew was accompanied by Lee. Yiu and some other people were present. They were discussing a potential sale and purchase of HK$120 million worth of shares. All the signs showed that the company meant business and it was a solemn and serious one. Even on Hao’s case, the meeting on 30 June took 1 ½ hours. Hao took time to explain to the people present the scale of the business of China Railways and the railways it built all over the world. He at the start spent quite some time to establish the credibility of the 3rd defendant, the 1st defendant and he himself. All these instilled confidence in the minds of the people present over what he said. 163.In this serious meeting and in the presence of the many people, Hao, after having instilled confidence in the minds of these people on his words, referred to China Railway’s ownership of the lands adjacent to the railways, the telephone cables laid by it alongside the railways, it being a founding shareholder of CUTC, the close connections between its senior officers and the senior officers of CUTC and it wanted to sell some CUTC shares to boost up its employees’ provident fund, which is a most legitimate reason for the sale, no one would have thought that he was boasting and lying. The clinching of the deal for the HK$120 million worth of shares depended on what he said. Everybody took his words seriously as the occasion was not for anything casual or boastful. 164.It was also not a one to one meeting and Hao was not doing anything in secret. If in those circumstances he made the Guarantee verbally in the presence of his fellow director and colleague and many other people, they would not have thought that he was just boasting and lying. When he said he could not give the Guarantee in writing and asked to be trusted, it is not surprising that he was trusted by the people present. He was not saying that he could not give the Guarantee in writing because he had no authority from Beijing to give the Guarantee at all. He said China Railway was behind him in the transaction. What he said thus could reasonably be understood to mean that it was the bureaucracy and red tape that had prevented him from providing the Guarantee in writing. 165.I accept Lew’s evidence that he trusted Hao and did not insist that Hao should go through his headquarters in Beijing for approval for the Guarantee to be made in writing. At that time, Hao had already built up sufficient confidence in Lew and Hao was giving the Guarantee orally in front of his fellow director and many other people. I make this finding despite evidence of Lew’s reservation about Mainland companies in general. This time he had been through a session of effective salesmanship by Hao and he was sympathetic with purpose behind the sale; namely to fund the pension fund. 166.I also find that the warranty and representation on the conversion time frame was not given in a neat and tidy statement containing the three-stages of six months, one year and money back if no conversion within 2 years. I accept that Hao had hummed and hawed and weighed and considered. I accept Lew’s evidence that the conversation on the time frame for conversion moved gradually from six months to one year and then to two years, otherwise money back. I also accept that Lew had stood up to share hands with Hao to signify the clinching of the deal when Hao promised the refund of purchase price if there was no conversion within 2 years. 167.Furthermore, Hao was from the Mainland. He had close connections with those who had the founder shares or share rights to sell. Lew did not. Nothing suggested that Lew had any source of information about conversion or when it would take place. He was drawn into this matter by the fax from Paul Fortune. It was unlikely that Hao would be so ignorant as he portrayed himself and Lew would be so knowledgeable. Even if Lew should have heard rumours on conversion, a good way of confirming it was to ask the vendor for confirmation as the vendor is supposed to be close to the source of information. It was a big business that Hao was in and he would have enquired from those who had the shares and probably the information. It was thus reasonable for Lew to have asked Hao the time for conversion. I do not believe that Lew had taken a blind gamble in purchasing the RMB¥16 millionCUTC shares or share rights. It was too big a gamble for an investor. Lew was only an investor, not a gambler. 168.On the trip to Beijing, I also accept that Lew had gone there in the company of Miss Ah Ling in June 2002 to obtain confirmation from Hao’s superiors that China Railway was behind the transactions. Lew got what he wanted as the China Railway was indeed backing the transactions. Lew felt more comfortable then as he thought he had not been cheated and the parent company was behind the transactions. That explained why he was still on good terms with Hao. That also explained that he and Hao had a friendly gathering in Toronto apart from meeting at the café close to the airport. I cannot accept that Lew would have gone all the way to Beijing for a meeting and a lunch with Hao’s two seniors just to chat about the investment climate in the Mainland. 169.I also accept that Hao had repeatedly persuaded Lew to accept “A” shares when he knew that the CUTC shares would be listed as “A” shares in Shanghai. 170.On the receipt of dividends and whether Lew had elected to rescind the two agreements. I accept that Lew did not know that the China Railway Group was not a founder shareholder of CUTC and he only learned about the truth after commencement of proceedings in August 2003. He therefore did not know that he had the right to rescind until then. His receipt of dividend on 12 December 2002 when it was deposited directly into his account by the 1st defendant could amount to his election to affirm the two transactions. 171.Furthermore, Lew had on 22 November 2002 written to Hao saying that he would receive the dividend on a without prejudice basis. I also accept that Lew had in a meeting at the Nikko Hotel on 9 December 2002 told Hao that he was prepared to accept the cheque as partial repayment of his money but not as a dividend. But this was not accepted by Hao or his colleagues who took the cheque away. The dividend was then deposited directly into Lew’s bank account. I do not think in these circumstances, I can hold that by the deposit of this dividend into his account, Lew had elected to affirm the two transactions. It was also clear that his retention of the same was on a without prejudice basis. I do not think the defendants were under any misapprehension about this by reason of the prior correspondence. The agreed issues and findings 172.Prior to the commencement of the trial, the parties have agreed a number of issues for resolution at the trial. I now make my findings upon these issues.
173.One of Lew’s contentions was that he had paid the purchase monies to the 1st and 2nd defendants on the basis that they would be held on trust pending the delivery of converted China Unicom shares to him and they had failed to do so. Lew thus said that the 1st and 2nd defendants are accountable to him as trustees of the purchase monies. 174.I do not think there was any intent to create any trust over the purchase monies of HK$151 million. The oral agreement as made between Lew and Hao did not suggest that the purchase money had to be held on trust pending conversion. The same applied to the written agreements. The transactions were just sale and purchase transactions. I do not accept Lew’s claim of trusteeship on the part of any of the 3 defendants. 175.Lew also contended in the alternative that if the two written agreements are valid, they are void for uncertainty in that they concern the sale of “RMB share rights in CUTC”. On this basis, he asked for refund of all monies he paid to the defendants. I do not think the agreements are uncertain. The share rights being transacted were no different from shares. 176.I order the 1st and 2nd defendants to refund HK$137 million and HK$14 million respectively to Lew. I also order the 3rd defendant to pay damages to Lew at HK$151 million and HK$15 million. The HK$15 million was the commission Lew paid Yiu, the 4th defendant. 177.Lew also claimed that he should be entitled to special damages representing the amount of depreciation of the Hong Kong Dollar against the Canadian Dollar. He said he would have placed his money in Canadian dollars but for the two transactions. I do not think there is any authority, which would justify Lew to receive such special damages. Mr. Scott admits that the authorities he cited were not really on his side. 178.At the end of the closing submissions, Mr. Scott asked me to leave the issues of interests and costs for further argument if I should be with Lew. I am happy to leave the issue of interest. For costs, I prefer to make an order nisi. If any party would prefer a variation, they can apply within 14 days under Order 42 rule 5B(6) of the Rules of the High Court. I make an order nisi that the defendants do pay Lew the costs of this action.
Mr John Scott, S. C. instructed by Richards Butler for the Plaintiff. Mr Warren Chan, S. C. and Mr. Herbert Au-Yeung instructed by Tsun & Partners for the Defendants. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Further hearings and rulings under HCA 2845/2003