佛山市宏達發展公司清算組 v. East Legend Investment Ltd

HCA 581/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 581 OF 2002

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BETWEEN

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Before: Deputy High Court Judge To in Court

Dates of Hearing: 18 - 20, 23 - 24 and 26 April 2007

Date of Judgment: 7 June 2007

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J U D G M E N T

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Introduction

1.This is an action by the Plaintiff in its capacity as the liquidation committee (the “Liquidation Committee”) of 佛山市宏達發展公司 (the “Company”) against the Defendant seeking, inter alia, transfer of properties purchased by the Company’s funds and held by the Defendant and repayment of the balance of the Company’s funds net of the proceeds of sale of the properties to be returned.  The Defendant counterclaims for a declaration that the properties are not held by the Defendant as trustee for the Plaintiff and that the deeds of trust in respect of some of the properties in favour of the Plaintiff are void and of no effect.   

2.The Company was a state-owned company incorporated in the People’s Republic of China (the “PRC”) on 3 February 1993.  The Treasury and Finance Committee of the Foshan municipal government(佛山市人民政府財政金融委員會) (the “Foshan Treasury Committee”) is and was its sole shareholder.  On 28 November 2001, the Company was placed under liquidation by the Foshan Administration For Industry & Commerce (廣東省佛山市工商行政管理局) (the “Foshan Administration”).  Pursuant to the order of the Foshan Administration, the Foshan Treasury Committee appointed the Industrial and Commercial Bank of China Foshan Branch (中國工商銀行佛山市分行) (the “ICBC”) to form the Liquidation Committee on 28 February 2002 to conduct the liquidation of the Company.  The Defendant is a company incorporated in Hong Kong on 11 June 1997.

A preliminary issue - the Plaintiff’s locus standi

3.The Writ of Summons in this action was issued in the name of the Company on 19 February 2002.  On 14 March 2002, the Defendant applied to strike out the Writ of Summons on the ground that the Company no longer existed as a legal entity.  On 25 March 2002, the Liquidation Committee applied to have its name substituted for that of the Company as the Plaintiff in the Writ of Summons.  After filing and exchanging affirmations and expert evidence on the PRC law in support of and opposition to the above two applications, Consent Order was made on 21 January 2003 granting: (1) leave to the Defendant to withdraw its striking out application; (2) leave to the Liquidation Committee to have its name substituted for that of the Company as the Plaintiff in this action; (3) leave to the Plaintiff to amend the Writ of Summons and Statement of Claim; and (4) some other consequential directions.  

4.At the last pre-trial review hearing, in response to the Plaintiff’s enquiry, Mr Ho, counsel for the Defendant, confirmed that despite the Consent Order made on 21 January 2003, the Defendant would challenge the Plaintiff’s capacity or locus standi in instituting the present action.  Against the objection of Mr Wong, counsel for the Plaintiff, I ruled that the issue of the Plaintiff’s locus standi in instituting the present action would be tried as a preliminary issue on the first day of the trial.  Counsel agreed that this issue would be determined on affirmation evidence only and the legal experts on PRC law would not be called.

Whether the Defendant is precluded from raising the issue on locus standi

5.At the hearing of the preliminary issue, Mr Wong advances two arguments in support of the Plaintiff’s locus standi in instituting the action.  His first argument is a procedural one.  He submits that the question of locus standi of the plaintiff is not a defence and an application to strike out the plaintiff’s name for lack of locus standi must be raised and dealt with at the outset and should not be left for determination at trial.  He referred to the English Court of Appeal decision in Airways Ltd v Bowen and another [1985] BCLC 355 in support of his proposition.

6.In Airways Ltd v Bowen and another, the English Court of Appeal allowed the defendants’ appeal against the county court’s decision refusing the defendants’ application to strike out the name of the plaintiff for lack of authority to bring the proceedings.  Kerr LJ held at 358 to 360:

“So far as concerns the practice of applying to strike out the plaintiffs’ name, we were referred to a number of authorities, in particular to the leading decision of the House of Lords in Russian Commercial and Industrial Bank v Le Comptoir d’Escompte de Mulhouse [1925] AC 112.  The relevant passage is in the speech of Viscount Cave (at 130).  He said, in relation to the issue as to the authority of the company’s secretary, Mr Jones, to bring those proceedings in the name of the plaintiffs:

‘My lords, I do not think that it is open to the defendants to raise this question by way of defence to the action.  If the defendants desired to dispute the authority of Mr Jones to commence these proceedings in the name of the plaintiff company, their proper course was to move at an early stage of the action to have the name of the company struck out as plaintiff and so to bring the proceedings to an end.’

…

The important point … which the judge must have overlooked is that a contention that an action is not properly constituted, due to lack of authority from the named plaintiffs to bring it, is one which cannot be raised by way of defence.  It must be raised at the outset, and it must therefore be dealt with at the outset.  The only qualification is that even if it is not raised at the outset, but if it then comes to the notice of the court or of the defendants in the course of the proceedings, then it can still be raised as an issue at that stage, but not by way of defence to the action.  In the present case it was properly raised at the outset.  The judge should therefore have borne in mind that this issue had to be decided at the outset, subject only to the possibility of adjourning the application.  Once the issue has been raised, it is, with respect, plainly wrong to decline to decide the issue on the ground that the rights and wrongs as to the control of the company and the propriety of the proceedings may be in doubt, and then to allow the action to go on by dismissing the application without having decided it on the merits.  That, unfortunately, was the course which the judge ultimately took at the end of the lengthy and careful consideration which he gave to this issue, being one with which he may not have been familiar in the ordinary course of his experience.  If the application is dismissed, when it is either clear that the action has in fact been brought without authority or that it is at any rate doubtful whether it was brought with authority, and if the action is thereupon allowed to proceed, which is what the judge decided, then that must be a plainly erroneous conclusion.  The reason is that the defendants will then never have any further opportunity of raising this issue, however well-founded their application may be.

…

Once it is clear, as it was by these concessions, that the action was improperly constituted, this action could not be allowed to proceed.  Whatever the form of the order made in that regard, whether the action is dismissed, struck out or stayed, the effect must be, in the words of Viscount Cave, that the proceedings must be brought to an end.”

The above principles were adopted by Andrew Cheung J in Kammy Town Limited and Super Glory Corporation Limited (unreported) HCA 3524/2003, 14 January 2005.

7.The principles relied on by Mr Wong are well-established.  Based on those principles, he argues that by choosing to withdraw its striking out application and consenting to the Plaintiff’s application to substitute the name of the Liquidation Committee for that of the Company, the Defendant was admitting that the Liquidation Committee had locus standi to institute the present proceedings and is debarred from raising any question about the Plaintiff’s locus standi.  He also argues that the same conclusion can be reached by applying the principle of res judicata and/or abuse of process.  He further argues that the challenge should have been made at the outset and it is now too late.

8.The Liquidation Committee’s application was for leave to substitute its name for that of the Company in the action.  The application does not seek determination of any legal or factual issue.  The burden of an applicant in an application for leave is a light one.  His burden is only to pass the judge in the sense of persuading the court that a particular issue, whether of law or of fact, is arguable.  He does not have to satisfy any burden of proving any factual issue to the standard required at trial, i.e. on a balance of probability in a civil matter.  Granting of leave, whether by consent or after adjudication, does not involve final determination of any factual issue.  If leave is granted by consent to a plaintiff to amend his statement of claim, this does not mean or imply that the defendant admits the facts pleaded in the amended pleadings.  The defendant only sees no reason for the issue of the amendment to be argued at the interlocutory stage.  The defendant admits there is a triable issue in respect of the facts pleaded in the amended pleadings and no more.  The ground of the Defendant’s striking out application was that the Company ceased to exist at the time of the issue of the Writ of Summons.  After the issue of the striking out application, the Liquidation Committee sought to substitute its name for that of the Company as the Plaintiff.  If the application of the Liquidation Committee would be successful, and there was no reason why it would not, the Defendant’s objection would become academic.  So, in view of the action taken by the Liquidation Committee, it would be expedient and costs saving for the Defendant to withdraw its striking out application.  I find that the Defendant’s consent to the application is no admission of the Liquidation Committee’s locus standi in instituting the proceedings.  The position would be the same even if leave was granted after a contested hearing.  The adjudication would be on the issue whether leave should be granted.  It could not have beenan adjudication that the Liquidation Committee had locus standi to institute the proceedings.  As there is no adjudication on this issue, the Plaintiff’s argument that the challenge is a re-litigation and an abuse of process falls away.  The issue of res judicata simply does not arise.  But, if the Defendant wishes to raise the issue of locus standi, it shall do so by a separate application.  This then brings me to Mr Wong’s argument that it is now too late to raise the challenge.

9.I have quoted extensively from Airways Ltd v Bowen and another.  In that case, Kerr LJ referred to Russian Commercial and Industrial Bank v Le Comptoir d’Escompte de Mulhouse in which the House of Lords held that the issue on locus standi must be raised at an early stage and not by way of defence.  However, Kerr LJ added a qualification that even if it is not raised at the outset, but if it then comes to the notice of the court or the defendants in the course of the proceedings, it can still be raised as an issue at that stage, but not by way of defence to the action.  I think the ratio deccidendi in Russian Commercial and Industrial Bank are that the issue on locus standi may not be raised as a defence and that if the issue is to be raised, the proper course is to do so at an early stage.  The principle is a sensible one from case management point of view.  There is no purpose to waste time and costs on the substantial merits of the case when to start with the plaintiff has no locus standi to make a claim or to obtain judgment.  Hence, the proper course is to raise this issue at the outset.  The House of Lords did not go as far as to hold that the issue may not be raised at all once trial has commenced.  Hence, Kerr LJ thought it open to him in Airways Ltd v Bowen and another to add the qualification.  Our civil justice leans heavily in favour of adjudication on merits and is very jealous of adjudication by default.  If a party has no locus standi to bring an action, he is not entitled to bring an action and to have the chance of obtaining an award.  Hence, it matters not when the issue of the plaintiff’s locus standi is raised, though the proper course is to raise it at the outset.  If it is not raised at the outset, it may still be raised at any stage in the course of the proceedings provided that there is no prejudice to the plaintiff which may not be compensated for by costs.  But a late challenge may have costs consequences.  If the issue was not raised at the outset and substantial costs have been incurred by the plaintiff, the defendant who successfully challenged the plaintiff’s locus standi may be deprived of his own costs or may even have to pay the plaintiff’s costs thrown away by reason of the late challenge.

10.In the present case, other than filing affirmations in opposition to the Liquidation Committee’s application for leave, the Defendant never formally challenged the Plaintiff’s locus standi.  It was not until the last pre-trial review when Mr Wong sought the Defendant’s confirmation that the issue would not be argued that Mr Ho confirmed the Defendant’s position to challenge the Plaintiff’s locus standi.  This is a late challenge.  However, all the evidence that were needed by the Plaintiff to resist that challenge were available.  Mr Ho also confirmed that the Defendant had no request for the Plaintiff’s experts in PRC law to be cross-examined.  There were no factual issues in dispute.  There was no prejudice that might be suffered by the Plaintiff.  Justice requires that all disputes between the parties should be ventilated at some stage if not at trial.  If the Plaintiff had no locus standi to bring this action, it would be a grave injustice to allow it the opportunity to obtain judgment only because the Defendant woke up too late to raise the challenge.  I could see no reason for denying the Defendant of its right to raise this issue, provided that it was not by way of defence.  Accordingly, I hold that despite the late challenge, the Defendant was not precluded from raising this issue as a preliminary issue, after all trial has not yet commenced.  But the late challenge may entail some costs consequences.

Whether the Company has authority to sue after its business licence has been revoked

11.I now turn to the substantial merits of the challenge.  The following factual background is not in dispute.  The Company is and was at all material times a state-owned enterprise with the Foshan Treasury Committee as its only shareholder.  In breach of article 50 of the Regulations of the People’s Republic of China on Administration of Registration of Companies(《中華人民共和國公司登記管理條例》), the Company failed to complete the annual audit for the year 2000.  Thus, pursuant to article 68, the Foshan Administration by a Notice of Determination of Administrative Penalty (行政處罰決定書) dated 28 November 2001 (the “Determination”) revoked the business licence of the Company and ordered that the Company’s shareholder, i.e. the Foshan Treasury Committee, to form a liquidation committee to conduct the liquidation of the Company.  The Company might request the Foshan Administration to review the Determination within sixty days or to appeal to the People’s Court within three months.  No such review or appeal was lodged by the Company.  On 3 December 2001, the Foshan Treasury Committee appointed ICBC to form the Liquidation Committee.  By a letter dated 4 December 2001, the Foshan Treasury Committee informed the Foshan Administration that they had authorized ICBC to conduct the liquidation of the Company and requested the Foshan Administration to confirm the appointment.  The Foshan Administration confirmed the appointment on 22 May 2002.  By a letter dated 28 February 2002, ICBC informed the Foshan Treasury Committee that the Liquidation Committee consisting of two accountants and two officers of ICBC had been formed pursuant to article 192 of the Company Law of the PRC (《中華人民共和國公司法》).

12.The Defendant produced three written legal opinion on Chinese law.  One by Guangdong Nan Tian Ming Law Office (廣東南天明律師事務所) and two by Yuntian Law Firm (廣東中粵雲天律師事務所).  The Defendant’s challenge on the Liquidation Committee’s locus standi is essentially based on the legal opinion of the latter expert.  The Defendant’s grounds of challenge are as follows.  Firstly, the Company, and hence the Liquidation Committee in its place, had no capacity to institute the present proceedings.  Secondly, the Foshan Treasury Committee had no power to form the Liquidation Committee.  Thirdly, the composition of the Liquidation Committee was irregular.  There are no factual disputes involved.  Hence, unlike Kammy Town Limited and Super Glory Corporation Limited, it is not inappropriate for the issue of locus standi to be determined on affirmation evidence of the parties’ legal experts.

13.The argument of the Defendant’s legal expert on the first ground may be summarised as follows.  Under article 36 of the General Principles of the Civil Law (《中華人民共和國民法通則》), a legal person’s civil rights and capacity for civil conduct commences upon its inception and ceases upon its termination.  Under article 45 of the General Principles of the Civil Law, an enterprise legal person ceases to exist when it is terminated in accordance with the law.  The revocation of the business licence of the Company was such an event which terminated the Company.  Hence, the Defendant’s legal expert was of the opinion that as the business licence of the Company was revoked on 28 November 2001, the Company as an enterprise legal person ceased to exist.  By virtue of articles 36 and 45 of the General Principles of Civil Law of the PRC, the Company had no capacity for civil rights and no capacity for civil conduct with effect from that day.  Articles 36 and 45 of the General Principles of the Civil Law of the PRC provide as follows:

「第三十六條：法人是具有民事權利能力和民事行為能力，依法獨立享有民事權利和承擔民事義務的組織。

法人的民事權利能力和民事行為能力，從法人成立時產生，到法人終止時消滅。

Article 36:        A legal person shall be an organization that has capacity for civil rights and capacity for civil conduct and independently enjoys civil rights and assumes civil obligations in accordance with the law.

A legal person’s capacity for civil rights and capacity for civil conduct shall begin when the legal person is established and shall end when the legal person terminates.

第四十五條：企業法人由于下列原因之一終止：

(一) 依法被撤銷；

(二) 解散；

(三) 依法宣告破產；

(四) 其他原因。

Article 45:    An enterprise as legal person shall terminate for any of the following reasons:

(1)          if it is dissolved by law;

(2)          if it is disbanded;

(3)          if it is declared bankrupt in accordance with the law; or

(4)          for other reasons.」

14.The Defendant’s legal expert also referred to a document entitled “Implementation opinion on certain questions concerning registration and administration of enterprises” (國家工商行政管理局關于企業登記管理若干問題的執行意見) (the “Implementation Notice 1999”) issued by the State Administration for Industry and Commerce (中華人民共和國國家工商行政管理總局) (the “State Administration”) dated 29 June 1999.  Paragraph 10 of the notice stated as follows:

「十.      企業被吊銷營業執照的，其法人資格或經營資格終  止。其中，公司被依法吊銷《企業法人營業執照》的，由股東組織清算組清算；非公司企業法人被吊銷《企業法人營業執照》的，由主辦單位、投資人或清算組織負責清算。工商行政管理機關對被吊銷的企業不負責清算，但應當在處罰決定書或吊銷公告中載明清算責任人。」

The Defendant’s legal expert relied on the first sentence of the paragraph which stated that when the business licence of an enterprise is revoked, its status as a legal person or its capacity to operate is terminated.  They opined that this statement supported their interpretation of the meaning and effect of articles 36 and 45 of the General Principles of the Civil Law of the PRC. 

15.The Plaintiff’s legal expert, the Chuang Yu Law Firm(廣東省創譽律師事務所), referred to Directions 23 and 24 of 2000 of the Supreme People’s Court to the Higher People’s Court of Gansu Province and the Higher People’s Court of Liaoning Province respectively.  The directions are reported in Civil and Commercial Trial Review [2000] Vol 3 (《經濟審判指導與參考》2000年第3卷).  The two directions are to the same effect.  I shall refer to Direction 23 of 2000.  The plaintiff in that case instituted action against a company whose business licence had been revoked.  The Intermediate People’s Court of Nanzhou City dismissed the plaintiff’s action on the ground that the company no longer existed as its business licence had been revoked.  The plaintiff appealed to The Higher People’s Court of Gansu Province.  The majority of the Higher People’s Court was of the opinion that the appeal should be allowed.  But, for the purpose of satisfactorily resolving similar problems of the kind, the Higher People’s Court sought directions from the Supreme People’s Court.  The question posed by the Higher People’s Court of Gansu Province is precisely on the point, i.e. whether an action against a company whose business licence had been revoked may be dismissed on the ground that it has lost capacity for civil conduct.  The Supreme People’s Court replied as follows:

「三.   本庭答覆意見

對本案被告民事訴訟主體資格如何確認問題，本庭採納了後一種意見，并以法經 [2000] 23號函答覆甘肅省高級人民法院，函覆內容如下:

甘肅省高級人民法院：

你院 (1999) 甘經終字第193號請示報告收悉。經研究，答覆如下：

吊銷企業法人營業執照，是工商行政管理局對實施違法行為的企業法人給予的一種行政處罰。根據 《中華人民共和國民法通則》 第四十條、第四十六條和 《中華人民共和國企業法人登記管理條例》 第三十三條的規定，企業法人營業執照被吊銷後，應當由其開辦單位 (包括股東) 或者企業組織清算組依法進行清算，停止清算範圍外的活動。清算期間，企業民事訴訟主體資格依然存在。本案中人民法院不應以甘肅新科工貿有限責任公司 (以下簡稱新科公司) 被吊銷企業法人營業執照，喪失民事訴訟主體資格為由，裁定駁回起訴。

…

根據 《公司法》 第192條規定，新科公司被吊銷企業法人營業執照後，應當由作出該行政處罰決定的行政機關甘肅省工商行政管理局或者新科公司的上級主管部門負責組織有關機關、人員進行清算。但國家工商局給甘肅省高級人民法院的答覆意見明確工商局不負責對吊銷營業執照的公司進行清算。該答覆意見是有一定道理的。… 」

16.The Supreme People’s Court took the view that revocation of business licence of an enterprise legal person is an administrative penalty imposed by the relevant AdministrationFor Industry & Commerce for breaches of the law by an enterprise legal person.  It quoted articles 40 and 46 of the General Principles of the Civil Law of the PRC and article 33 of the Regulations of the People’s Republic of China for Controlling the Registration of Enterprises as Legal Persons (《中華人民共和國企業法人登記管理條例》) which stipulates the effect of revocation of business licence of an enterprise legal person.  The regulation provides that upon revocation of the business licence, the department in charge (including the shareholders) shall conduct liquidation of the enterprise legal person in accordance with the law and shall cease all activities of the enterprise legal person which are outside the scope of liquidation.  The regulation expressly preserves the capacity of the enterprise legal person in conducting litigation.  After quoting the statutory authority, the Supreme People’s Court then stated its opinion that the Higher People’s Court of Gansu Province ought not dismiss the action against the company on the ground that by reason of the revocation of its business licence the company had lost its capacity to conduct civil litigation.  Hence, the Plaintiff’s legal expert argues that until completion of the liquidation procedure, the Company has capacity to sue and be sued.

17.The Defendant’s legal expert sought to distinguish the case before the Supreme People’s Court and the present case on the basis that the company in that case was being sued as a defendant when justice required that someone be answerable to the wrong complained of, whereas in the present case the Company is suing as the plaintiff.  I am not convinced by that argument.  In my view, the distinction is one of no difference.  In fact, the majority of the Higher People’s Court of Gansu Province thought that a company whose business licence was revoked still had legal capacity to sue and be sued.  Furthermore, articles 40 and 46 of the General Principles of the Civil Law of the PRC and article 33 of the Regulations of the People’s Republic of China for Controlling the Registration of Enterprises as Legal Person relied on by the Supreme People’s Court as well as articles 36 and 45 of the General Principles of the Civil Law of the PRC relied on by the Defendant’s legal expert draw no distinction whatever between the legal capacity to sue and the legal capacity to be sued.  It is natural to consider the capacity to sue goes hand in hand with the capacity to be sued.

18.The Defendant’s legal expert opined that Directions 23 and 24 of 2000 of the Supreme People’s Court are erroneous as being contrary to paragraph 10 of the Implementation Notice 1999 and to articles 36 and 45 of the General Principles of the Civil Law of the PRC.  The Defendant’s legal expert also suggested that there is no evidence to the effect that the opinion of the Supreme People’s Court shall prevail over the statutory law.  I think that is both a bold and bald assertion and based on the legal expert’s misunderstanding of the law.   I have quoted the text of articles 36 and 45 in full in paragraph 13 above.  Article 36 provides that upon termination, a legal person ceases to have any capacity for civil conduct.  Article 45 sets out the circumstances when a legal person may be terminated.  Article 45(1), which is relied on by the Defendant’s legal expert provides that an enterprise legal person shall terminate “if it is dissolved by law” (依法被撤銷). The Defendant’s legal expert then equated revocation of business licence (吊銷營業執照) as dissolution by law, which then triggered article 36.  The Defendant’s legal expert produced no evidence or judicial authority in support of that assertion.  A plain reading of article 45 does not support that proposition.  I would have thought dissolution by law in the case of a company refers to dissolution under article 189 of the Company Law of the PRC in the case of a company being declared bankrupt or under article 190 in the case of a company being dissolved according to the terms of its articles of association or pursuant to its shareholders’ resolution or as a result of merger or division.  On the face, revocation of a business licence is not synonymous with dissolution by law and does not imply termination of the status of the legal person to whom the licence was issued.  On the other hand, the Supreme People’s Court has clearly explained that revocation of business licence is only an administrative penalty imposed by the relevantAdministration For Industry & Commerce.  The revocation only triggers liquidation under article 33 of the Regulations of the People’s Republic of China for Controlling the Registration of Enterprises as Legal Persons.  The Supreme People’s Court took the view that until completion of the liquidation process, the company retains its status as a legal person and its capacity for civil right and capacity for civil conduct at least for the purpose of liquidation.  This is where, according to the Defendant’s legal expert, the opinion of the Supreme People’s Court conflicts with Implementation Notice 1999 of the State Administration.  But, the two are not necessarily irreconcilable.  I think when referring to the termination of the status as an enterprise legal person or its capacity to carry on business upon revocation of the business licence (法人資格或經營資格終止) in paragraph 10 of Implementation Notice 1999, the State Administration must be using the latter as a definition of the former, i.e. the State Administration must be referring to the same thing.  Thus, what is being terminated is the capacity of an enterprise legal person to carry on business and not all the capacity of the enterprise legal person in its entirety.  In any event, there is no evidence from the Defendant’s legal expert that Implementation Notice 1999 has the status of statute law such that the Directions 23 and 24 of 2000 of the Supreme People’s Court could be said to have erroneous assumed prevalence over the law.  Furthermore, the Supreme People’s Court must be the highest authority in interpretation of the law. 

19.I accept Directions 23 and 24 of 2000 of the Supreme People’s Court as a true statement of the law.  Though not referred to by the Supreme People’s Court or by the legal experts of both parties, I think a quick answer to this legal issue could be found in article 193 of the Company Law which provides:

「第一百九十三條:  清算組在清算期間行使下列職權

(一) 清理公司財產，分別編制資產負債表和財產清單；

(二) 通知或者公告債權人；

(三) 處理與清算有關的公司未了結的業務；

(四) 清繳所欠稅款；

(五) 清理債權、債務；

(六) 處理公司清償債務後的剩餘財產；

(七) 代表公司參與民事訴訟活動。」

“Article 193:  During liquidation, a liquidation committee shall exercise the following functions and powers:

(1) to check up on the company’s assets, and separately formulate a balance sheet and a detailed inventory of assets;

(2) to notify creditors by notice or announcement;

(3) to dispose of and liquidate the company’s unfinished business;

(4) to pay off taxes owed by the company;

(5) to clear up claims and debts;

(6) to dispose of, after paying off the debts of the company, its remaining property; and

(7) to participate in civil lawsuits on behalf of the company.”

Article 193(7) clearly gives the liquidation committee civil capacity to conduct civil litigation on behalf of the company under liquidation.  Arguably, article 193(5) also gives the liquidation committee capacity to process the company’s claims against its debtors just as it has capacity to pay the company’s debts claimed by its creditors.  The above is mentioned by way of observation.  The basis of my finding is nevertheless on the legal opinion of the Plaintiff’s legal expert and the two Directions of the Supreme People’s Court.

20.The Defendant’s legal expert referred to article 40 of the General Principles of the Civil Law of the PRC which provides that upon termination of an enterprise legal person, it shall proceed to liquidation and cease all activities outside the scope of liquidation.  The Defendant’s legal expert then opined that taking legal action against the Defendant is not within the scope of liquidation.  I think such argument is contrary to common sense and to article 193 of the Company Law.  Recovery of debt owing to the legal person is clearly within the scope of liquidation.  No authority was produced by the Defendant’s legal expert.  I reject their opinion.   

21.I consider the opinion of the Defendant’s legal expert wholly without basis.  I accept the opinion of the Plaintiff’s legal expert. Based on Directions 23 and 24 of the Supreme People’s Court, I am satisfied that upon revocation of the business licence of an enterprise legal person, its department in charge (including the shareholders) shall conduct liquidation of the enterprise legal person in accordance with the law and shall cease all activities of the enterprise legal person which are outside the scope of liquidation.  Not until completion of the liquidation and de-registration process, the enterprise legal person retains its status as a legal person and its legal capacity to sue and be sued.  Accordingly, despite the revocation of its business licence, the Company has capacity for civil rights and capacity for civil conduct.  It is a proper party to this action.

Whether the Foshan Treasury Committee has power to organize the Liquidation Committee

22.The basis of the Defendant’s second challenge to the locus standi of the Liquidation Committee is that the Foshan Treasury Committee had no authority to appoint the Liquidation Committee.  The Plaintiff’s legal expert relied on article 192 of the Company Law and a document entitled “Notice in respect of the question of implementation of organizing the liquidation committee after the business licence of a company is cancelled” (國家工商行政管理局關于公司被吊銷營業執照後其清算工作組織實施問題的通知) (“Implementation Notice 1997”) issued by the State Administration on 14 July 1997 as the legal source giving authority to the Foshan Treasury Committee to form the Liquidation Committee.  Under article 192 of the Company Law of the PRC, upon revocation of the business licence of an enterprise legal person, the department in charge (有關主管機關) shall organize the shareholders, relevant departments and relevant professionals to form a liquidation committee to conduct liquidation of the enterprise legal person.  Article 192 of the Company Law provides:

「第一百九十二條:  公司違反法律、行政法規被依法責令關閉的，應當解散，由有關主管機關組織股東、有關機關及有關專業人員成立清算組，進行清算。」

“Article 192:         Where a company is ordered to be closed down in accordance with the law due to its violation of the law or administrative rules and regulations, it shall be dissolved.  In such a case, the department in charge shall organize the shareholders, relevant departments and relevant professionals to form a liquidation committee to conduct liquidation.”

“Department in charge” was interpreted by the State Administration in Implementation Notice 1997 as the department or authority which has the right to order a company to close down according to the laws and administrative regulations of the PRC. 

23.Based on those provisions, the Plaintiff’s legal expert opined that the department in charge in the present case is the department which revoked the business licence of the Company, i.e. the Foshan Administration or the responsible department in charge of the Company.  As the State Administration stated in Implementation Notice 1999 that it will not organize the Liquidation Committee, the Plaintiff’s legal expert opined that the Foshan Treasury Committee as the only responsible department in charge of the Company may organize the liquidation committee.  The Plaintiff’s legal expert said that that was the reason why the Foshan Administration stated in the Determination that the shareholders of the Company shall organize the Liquidation Committee.  Presumably that opinion was based on the fact that the Foshan Treasury Committee as the sole shareholder and the department in charge of that state-own enterprise had power to order the Company to close down.  The Defendant’s legal expert disputed that opinion arguing that the interpretation given by the State Administration could not have included the responsible department in charge of the Company.  The Implementation Notice 1997 was not annexed to the Plaintiff’s legal expert’s opinion.  I think the Plaintiff’s legal expert must be right.  Though not so argued by the expert, the Supreme People’s Court in Directions 23 and 24 of 2000 have quoted article 33 of the Registration of the People’s Republic of China for Controlling the Registration of Enterprises as Legal Persons as the statutory authority giving the department in charge (including the shareholders) the authority to form a liquidation committee to conduct the liquidation of the company.  I have no doubt about the validity of the Plaintiff’s legal expert’s opinion. 

24.The Plaintiff’s legal expert also relied on Implementation Notice 1999 as an alternative source of the Foshan Treasury Committee’s authority to organize the Liquidation Committee.  Paragraph 10 of the Implementation Notice 1999 stated that where the business licence of an enterprise legal person has been revoked in accordance with the law, the shareholders of the company shall form the liquidation committee to conduct the liquidation of the company but where the business licence of a non-enterprise legal person has been revoked the responsible unit in charge, the investors or the liquidation committee shall be responsible for liquidation (see paragraph 14 above).  Paragraph 10 of the Implementation Notice 1999 also stated that the State Administration will not be responsible for conducting liquidation but added that it shall set out in the determination of administrative penalty or other announcement of revocation the person who shall be responsible for liquidation.  The Plaintiff’s legal expert thus opined that the Foshan Treasury Committee as the sole shareholder of the state-own enterprise is the proper authority to be designated by the Foshan Administration in the Determination to organize the Liquidation Committee under article 192 of the Company Law and Implementation Notice 1999.  The Determination issued by the Foshan Administration on 28 November 2001 which stipulated that the shareholder of the Company would organize the liquidation was therefore sufficient authority for the Foshan Treasury Committee as the sole shareholder of the Company designated by the Foshan Administration to organize the Liquidation Committee.  I also accept this opinion.

25.Another objection raised by the Defendant’s legal expert in this challenge is that the Company is a joint venture and hence it was not appropriate for the Foshan Treasury Committee alone to organize the Liquidation Committee.  The factual evidence relied on by the Defendant is its pleading in paragraph 2 of its Re-Amended Defence in which it pleaded that the Company was registered as a joint venture and that pleading was admitted by the Plaintiff.  The fact that the Company was registered as a joint venture is not disputed by the Plaintiff.  The Plaintiff’s case is that the de facto position is that the Foshan Treasury Committee is and was the sole shareholder of the Company since its incorporation on 3 February 1993.  The Plaintiff filed an affirmation of Mr Hou Ruinan (“Hou”), the legal representative of the Company, testifying to the above effect.  That affirmation is not contradicted by the Defendant.  Accordingly, this ground of objection must fail on the uncontested fact.

26.Lastly, the Defendant’s legal expert opined that even if the Foshan Treasury Committee was empowered under article 192 of the Company Law to organize the Liquidation Committee, the Foshan Treasury Committee had no power to appoint ICBC to carry out the liquidation of the Company.  It appeared from the Foshan Treasury Committee’s letter of appointment to ICBC dated 3 December 2001 that ICBC was appointed to proceed with liquidation of the Company.  The language used was unfortunate.  But the undisputed facts and incontrovertible documents show that ICBC was only appointed to form the Liquidation Committee and it was for the Liquidation Committee thus formed to proceed with liquidation of the Company.  The Foshan Treasury Committee and the ICBC must be presumed to know the area of the law which is within their expertise and that the Foshan Treasury Committee was only authorised to form the Liquidation Committee and not to proceed with liquidation.  Indeed, in its letter dated 4 December 2001 to the Foshan Administration, the Foshan Treasury Committee informed the Foshan Administration of their appointment of ICBC to form the Liquidation Committee and sought the Foshan Administration’s confirmation or approval.  The Foshan Administration then endorsed its approval on the letter and instructed the Foshan Treasury Committee to proceed with liquidation in accordance with the law.  In accordance with article 192 of the Company Law, ICBC formed the Liquidation Committee consisting of two officers from ICBC and two accountants to conduct the liquation.  It is not the case that ICBC proceeded with the liquidation of the Company on behalf of the Foshan Treasury Committee.  This ground of objection therefore also fails.

27.On the legal opinion provided by the Plaintiff’s legal expert, I am satisfied that the Foshan Treasury Committee has authority to form the Liquidation Committee to conduct the liquidation of the Company. 

Whether the appointment of members of the Liquidation Committee was irregular

28.The third ground of challenge by the Defendant is that the appointment of the members of the Liquidation Committee was void as it was tainted with irregularities in its composition.  The Defendant’s legal expert referred to article 192 of the Company Law which authorises the department in charge to organize “the shareholders, relevant departments and relevant professionals to form a liquidation committee”.  Two of the members of the Liquidation Committee are practising accountants in Foshan and two are officers of ICBC.  The irregularity alleged is the appointment of the two members of staff of ICBC which is a creditor of the Company and therefore falls outside any of the categories described in article 192 of the Company Law.  The Plaintiff’s legal expert’s answer is that even though ICBC was a creditor of the Company, they were appointed by and as agent of the sole shareholder of the Company to form the Liquidation Committee.  As such, the two appointees from ICBC personally are agents of the sole shareholder of the Company.  It can hardly be argued that the appointments were in breach of article 192 of the Company Law.  I agree with that opinion.

Conclusion

29.I accept the legal opinion of the Plaintiff’s legal expert.  The opinion is cogent and supported by authority.  On the other hand, the opinion of the Defendant’s two legal experts is just semantic and in obvious contradiction to relevant statutory provisions.  The opinion is unsupported by authority.  I reject their opinion.  I am satisfied that the Company has the legal capacity to sue despite its business licence has been revoked and that in the course of its liquidation the Liquidation Committee has the legal capacity to sue on behalf of the Company.  I am also satisfied that the Foshan Treasury Committee was authorised to organize the Liquidation Committee, that the Liquidation Committee was properly constituted and that the appointment of its members regular.  Accordingly, the Plaintiff has discharged the burden of proving that the Liquidation Committee has the locus standi to institute the present action.  This issue as to the Plaintiff’s locus standi should have been raised earlier and determined at the outset.  Irrespective of the outcome of the trial, it is appropriate that the Defendant shall pay the costs of this preliminary issue. 

The Main Action

Dramatis personae

30.The Company is and was a state-owned enterprise as described in paragraphs 2 and 11.  At the material time before 6 April 1998, Mr Huang ChaoLiang (“Huang”) was the legal representative of the Company.  Thereafter, Hou replaced Huang as the legal representative.

31.Joyful Always Investment Limited (“Joyful”) was a company incorporated in Hong Kong in about October 1997.  Huang was a director and a shareholder holding ninety-nine of the one hundred issued shares of Joyful.  Mr Deng Zhizhong (“Deng”) was the other director holding one share.  Deng was in charge of the accounts of Joyful.  At all material times Joyful was beneficially owned by the Company.  It was a director and shareholder of the Defendant between June 1997 and September 1998.

32.The Defendant, East Legend Investment Limited (東朗投資有限公司), is a company incorporated in Hong Kong on 11 June 1997.  Initially, Mr Lau Kin Tung (“Lau”) and Joyful were directors and shareholders of the Defendant with Lau holding 9,000 shares and Joyful holding 1,000 shares.  On 1 November 1997, Lau transferred 2,250 shares to Mr Leung Chau Cheung (“Leung”), who then became a director and shareholder of the Defendant.  Joyful ceased to be a director on 27 August 1998.  On 1 September 1998, Joyful transferred all its shares in the Defendant to Lau.  On 15 September 1999, Lau also ceased to be a director and shareholder after transferring all his shares to Super Trend Limited (“Super Trend”).  Thus, since 15 September 1999, Leung and Super Trend were the sole directors and shareholders of the Defendant.  But despite that, Lau was nevertheless actively involved in the business of the Defendant.

33.Super Trend is a British Virgin Islands company.  Little is known about this company except that Mr Chan Wai Cheung was its authorised representative.  It shares the same address in British Virgin Islands as Perfect Trend Limited and Victory Shine Limited which are shareholders of East United (Hong Kong) Investment Limited.

34.East United (Hong Kong) Investment Limited (“East United”) is an associated company of the Defendant and was incorporated on 26 September 1997.  Initially, Huang and Lau were the directors and shareholders of the company with Huang holding 6,000 shares and Lau holding 4,000 shares.  Leung replaced Huang as director of the company upon Huang transferring his 6,000 shares to Leung on 11 September 1998.  In September and November 1999, Leung and Lau transferred their shares in East United to Perfect Trend Limited and Victory Shine Limited respectively, both of which are companies incorporated in British Virgin Islands sharing the same address with Super Trend.

35.南海市羅村聯星東順石材工藝廠 (“Tung Shun”) is the parent company of the Defendant which is its representative office in Hong Kong.  At the material time, Leung was its legal representative.

36.佛山市東朗工貿有限公司 (“Tung Long”) is an associated company of the Defendant and Tung Shun.  The Chinese name of this company is strikingly similar to that of the Defendant.  At the material time, Lau was its legal representative.

An overall view of the parties’ case and credibility of witnesses

37.An overall view of the Plaintiff’s case is as follows.  Between 13 November 1997 and 20 August 1998, the Company transferred about $137 million to Joyful which were then remitted to the Defendant and East United.  In addition, the Company also transferred properties in the PRC to the Defendant in the value of RMB 59,000,000 in June 1998.  The total amount thus transferred to the Defendant was RMB 210,520,000.  The funds were used to purchase seven properties in Hong Kong (the “Properties”) held in the name of the Defendant and Lau as the Defendant’s nominee.  The Company’s indebtedness was revealed as a result of the implementation of the “macro-economic control policy” (宏觀調控) in the PRC.  The Company, Joyful, Tung Shun and the Defendant executed three sets of agreements to dress up the transfer of funds as a joint venture in 1996 and promised repayment of the funds transferred by the Company.  The three sets of agreements are: three joint venture agreements dated 23 May 1998 (投資協議), a memorandum dated 25 August 1998 (關於聯營石材的說明) and a dissolution agreement dated 13 August 1998 (退出聯營協議書) (the “Joint Venture Agreements”, the “Memorandum” and the “Dissolution Agreement” respectively).  The Plaintiff and the Defendant also executed another repayment agreement (返還投資款協議) (the “Repayment Agreement”) dated 7 March 2000 under which Tung Long agreed to transfer properties in Foshan to the Company as repayment of the Company’s investment and to repay the balance.  The properties were transferred pursuant to that agreement but the balance of the funds owing was not fully repaid.  In September 2000, Hou on behalf of the Company instructed a PRC legal firm, the Tianlun Law Firm(佛山市天倫律師事務所), to take recovery action against the Defendant.  Through the intervention of Tianlun Law Firm, the Defendant entered into an oral agreement to transfer the Properties to the Company for sale and to repay the shortfall, if any, to the Company after realisation of the Properties (the “Transfer Agreement”).  However, after returning two of the Properties, the Defendant refused to honour the agreement.  At some stage, Huang absconded.

38.In essence, the Defendant admitted that it and East United had received $137,743,304.53 as alleged by the Company.  Its defence is that except for $57,510,472.20 which was received as the Company’s contribution to a joint venture with the Defendant in marble trading business, the balance were the Defendant’s own money.  As for the sum of RMB 59,000,000, the Defendant averred that it belonged to Tung Long.

39.The Plaintiff called three witnesses.  Ms Zhang Qi Hua is a staff of ICBC and a member of the Liquidation Committee.  Prior to her appointment as a member of the Liquidation Committee, she had investigated the affairs of the Company on behalf of ICBC as the Company’s creditor.  She did not have first hand information about the three sets of agreements.  Her evidence about the agreements is basically hearsay.  Her other evidence is about her examination of the accounts and documents of the Company and the inference she drew from her examination.  Her evidence could not have been seriously challenged by the Defendant’s witnesses.  I find her honest and credible.  Most of the inferences she asked me to draw are reasonable.

40.Mr Li Xin Liang (“Li”) is a PRC lawyer of Tianlun Law Firm employed by the Plaintiff in taking recovery action against the Defendant.  His evidence about recovery of the Properties is based on his personal dealing with Lau and Leung.  His evidence, some of which is hearsay, is supported by contemporaneous documents and corroborated by Mr Kelvin Shuen (“Shuen”), another witness of the Plaintiff.  As both Lau and Leung are not called to give evidence for the Defendant, Li’s evidence could not have been seriously challenged.  I accept his evidence.

41.Shuen is a Hong Kong solicitor engaged by the Company in the conveyancing transactions for the purpose of transferring the Properties held by the Defendant and Lau to the Company.  His evidence is supported by contemporaneous documents and could not have been seriously challenged by the Defendant’s witnesses.  His evidence is detailed and cogent.  He was not shaken in cross-examination.  I find him honest and credible.  I accept his evidence.

42.The Defendant called two witnesses.  Miss Chau Siu Ha (“Chau”) was an accountant of Joyful and then of the Defendant.  She did not have first hand information about the three sets of agreements.  She was a simple-minded but very loyal employee.  She readily drew assumptions without thinking and readily accepted as true what her employers, Lau, Leung and Deng, told her.  Probably out of ignorance and non-observance rather than dishonesty, she denied she was a director of East United as shown in the annual return filed by East United which she had signed.  She was an easily doped witness.  I have some doubts about her honesty but even if she was honest, her evidence is unreliable.  I give no weight to her evidence.

43.Mr William Leung is a Hong Kong solicitor.  He acted for the Defendant in the purchase of some of the Properties.  Afterwards, he acted for the Company.  He did not have first hand information about the source of funds used in the acquisition of the Properties by the Defendant.  His evidence is that he had no knowledge that the Properties were held on trust by the Defendant for the Company.  I have no doubt about his honesty but his evidence is neither helpful nor detrimental to either party. 

44.The single and most crucial person who could offer evidence to challenge the Plaintiff’s case was Lau, who was a director of the Defendant at the material time until 15 September 1999 and who only could explain the source of the funds received by the Defendant and the purpose.  Though his shares in the Defendant were transferred to Super Trend, he was able to command the co-operation of Super Trend.  He also gave two witness statements containing serious allegations against the Company and evidence in support of the Defendant’s case.  Probably, he is still connected with and had control over the Defendant.  Apparently, he also had control over the proceedings at trial because Mr Ho was able to put Lau’s allegations and suggestions to the Plaintiff’s witnesses which are not even contained in his witness statements.  Those allegations were all denied by the Plaintiff’s witnesses.  Lau was not called to give evidence to substantiate his allegations put to the Plaintiff’s witnesses by counsel.  I give no weight to those allegations.

45.Another important witness whom the Defendant could have called was Leung who is still a director and shareholder of the Defendant and legal representative of Tung Shun.  Though he is a minority shareholder holding about 25% interest in the Defendant, he is also a director.  He must be interested in the proceedings.  It is surprising that it was necessary for the Defendant to apply for a subpoena to command Leung’s attendance in Court to give evidence.  It is all the more surprising that having obtained the subpoena, nothing was done to secure his presence at trial and no explanation was offered. 

46.There is a total absence of documents in support of the Defendant’s case on the source of the funds which it admittedly received from the Company through Joyful but which it claimed belonged to the Defendant or Tung Long.  There is also a total absence of evidence of the source of funds used to finance the purchase of the Properties which it claimed was the Defendant’s.  But, of course, the burden rests fairly and squarely on the Plaintiff to prove that the Properties were purchased with the Company’s fund.

47.Mr Wong asks me to draw adverse inference against the Defendant on those issues which it has the relevant witnesses and documents in its possession and chooses not to adduce them.  I do not need to.  In respect of issues which the Defendant has no burden to discharge, the unexplained absence of its crucial witnesses from the witness box made the Plaintiff’s case difficult to challenge.  In respect of issues which the Defendant has the burden of proof, the Defendant is unable to discharge that burden for failure to adduce evidence. 

48.On the other hand, the Plaintiff’s case is not free from difficulties.  The Plaintiff could call no witnesses from the Company or from Joyful to prove the transfer of funds from the Company to Joyful and thence to the Defendant.  Hou was not called to give evidence about the making of the Repayment Agreement.  The Plaintiff could produce no bank account to evidence the transfer of funds from the Company to Joyful understandably because the transfer had to be effected through the black market because of foreign currency control in the PRC.  The officers from ICBC and the Foshan Treasury Committee who interviewed Huang were not called.  The Plaintiff’s case is based on the evidence of Li, the documents signed by the Company, the transfer of properties pursuant to the Repayment Agreement and Transfer Agreement and inferences to be drawn from those documents and property transfers.  The Plaintiff’s case is made all the more difficult by the fact that on the one hand, it is alleging that the three sets of agreements were false in that there was no underlying joint venture, but on the other hand, it is relying on some of the statements contained in those agreements.  Given the state of the evidence of the parties, the questions of fact have to be resolved on the basis of the pleadings, inferences to be draw from basic facts which I am satisfied of and on the burden of proof.  While I have compartmentalised the issues of facts in this judgment, my finding of fact is based on the totality of the evidence.

49.The dispute between the parties is a factual one.  The legal issues involved are well established and not in dispute.  The factual issues in this case are:

(1)       whether the joint venture referred to in the various documents was genuine or bogus;

(2)       what was the total amount of funds received by the Defendant and its associated company from the Company;

(3)       whether the parties reached the oral Transfer Agreement for the transfer of the Properties to the Company in November 2000;

(4)       whether the Properties were purchased by using the Company’s funds; and

(5)       if the joint venture was bogus, whether the Defendant had actual or constructive knowledge of the unlawful transfer of funds and/or was the Defendant acting dishonestly in those transfers.

Whether the joint venture was bogus or genuine

50.Mr Wong relied on the three sets of agreements and the Repayment Agreement executed by the Company, Joyful, the Defendant and Tung Shun which, Mr Wong submits, supports the Plaintiff’s case that the Defendant received $137,743,304.53 and RMB 59,000,000 from the Company through Joyful.  On the other hand, Mr Ho submits that those agreements were contemporaneous documents and supportive of the existence of the joint venture, which supports the Defendant’s case.  The joint venture forms the basis of the Defendant’s defence that the Company’s contribution was only $57,510,472.20 and gives credence to the defence that the balance was the Defendant’s own money.  Counsel have no dispute on the authenticity of those agreements in that they were signed by the Company, Joyful, the Defendant and Tung Shun.  Their dispute is whether there was an underlying joint venture.

51.Mr Ho referred to Chau’s evidence.  It should be recalled that Chau had worked with Joyful before she joined the Defendant as an accounting clerk.  She believed that the joint venture was genuine because while she was employed in Joyful, she heard Huang, Deng and Lau talked about the joint venture and that Huang gave her the three Joint Venture Agreements for filing on 25 May 1998.  She had not seen the Memorandum and the Dissolution Agreement while working in Joyful and could not explain why those agreements were not given to her for filing.  Her evidence is selective.  She also said that she had seen letters of credit in relation to import of marble from Italy and Europe during her employment with the Defendant.  She could not give particulars and produced no documents in support.  For reasons as I have already given, I do not consider her a credible witness.  This aspect of her evidence is incredible when contrasted with my analysis of the three sets of agreements below.  I give no weight to her evidence.

52.On the other hand, Zhang said that she had been informed by the Foshan Treasury Committee that Huang admitted that there was no joint venture underlying those three sets of agreements and that they were fictitious and made up as agreements to repay the funds transferred by the Company to satisfy the Foshan Treasury Committee.  Her account lacks detail and is based on hearsay upon hearsay.  I give no weight to that part of her evidence. 

53.Zhang also produced a report from Hou written in 1999 stating that Hou was unaware of the joint venture.  Apart from being hearsay, Hou’s credibility is not free from doubt.  Though the fund transfer started when Huang was the legal representative of the Company, eight of the thirteen remittances were effected while Hou was in charge.  Hou also executed the agreement for sale of Fu Wing Centre (富榮中心) to Tung Shun and was the person in charge of the Company when the debt of RMB 59,000,000 due from Tung Shun to the Company was assigned to Joyful.  While the unauthorized scheme of fund transfer was started by Huang, it appears that Hou was also a party to the unauthorized scheme by perpetuating it and when the scheme was discovered he conveniently dressed himself up as a policeman to join in the chase of the culprit and to take recovery action against the Defendant, while Huang was somehow allowed to disappear.  Hou also subsequently disappeared.  I give no weight to Hou’s report.

54.Whether there was any joint venture underlying the three sets of agreements could best be found out by examining the agreements and the contemporaneous events.  The three Joint Venture Agreements were entered into between Joyful and the Defendant for importing marble into the PRC.  Those agreements were signed by Huang and Deng on behalf of Joyful and by Leung and Lau on behalf of the Defendant.  Those agreements were in identical terms except as to the amount of capital contribution.  Joyful agreed to contribute RMB 59,000,000 under the first Joint Venture Agreement, $47,227,621.54 under the second Joint Venture Agreement and $90,515,682.99 under the third Joint Venture Agreement, while the Defendant’s contributions under the three agreements were RMB 6,000,000, $5,272,378.46 and $10,494,317.01 respectively.  Joyful’s total contribution was RMB 210,520,000 at the then prevailing rate of exchange.  The three Joint Venture Agreements were dated 25 May 1998 and stated that Joyful’s capital contributions were all to be entered into the Defendant’s account on 26 May 1998.  Remarkably, the RMB 59,000,000 is the same amount of money allegedly owed by the Defendant to Joyful or the Company for the purchase of Fu Wing Centre and the two houses in Wah King Garden (華景苑) in Foshan, while the total of the other two sums is exactly the amount transferred by Joyful to the Defendant and East United, i.e. $137,743,304.53, correct to the cent.  It is also remarkable for investments of that magnitude of RMB 210,520,000, the capital contribution under the second and third Joint Venture Agreements were stated in odd sums down to the cent.  The odd sum would not have been due to the exchange rate in Remminbi otherwise the parties would have adopted Remminbi as the currency of the investments.

55.The Company, Joyful, the Defendant and Tung Shun executed the Memorandum dated 25 August 1998, three months after the date of the Joint Venture Agreements.  The Memorandum stated that Joyful was the Company’s representative office in Hong Kong whereas the Defendant was Tung Shun’s representative office in Hong Kong.  It referred to the joint venture between Joyful and the Defendant in marble trading business since September 1996 and confirmed that Joyful’s total capital contribution of RMB 210,520,000 was the investment of the Company whereas the capital contribution of RMB 23,455,790 by the Defendant was the investment of Tung Shun.  The Memorandum also stated that Joyful withdrew from the joint venture and agreed with the Defendant that the Company and Tung Shun would enter into a separate agreement to that effect.  The agreement was signed by Huang and Deng on behalf of Joyful, Hou on behalf of the Company, Lau and Leung on behalf of the Defendant and Leung on behalf of Tung Shun.

56.The Memorandum referred to the Joint Venture Agreements and was signed by the same parties as the Joint Venture Agreements.  It confirmed the relationship between Joyful and the Company and that between the Defendant and Tung Shun.  It also referred to the same total amount of investment of RMB 210,520,000.  The Memorandum is remarkable for the following reasons.  It stated that the parties had entered into the joint venture since September 1996.  Yet, for two years, the parties never saw fit to have the investment agreement of RMB 210 million reduced into writing until less than three months before the day when the parties agreed to dissolve the joint venture.  Also, for over a year, not a cent had been injected by Joyful into the joint venture.  The first remittance was made only on 13 November 1997.  It is also most telling that under the Joint Venture Agreements, it was stated that Joyful’s capital contributions were to be entered into the account of the Defendant on 26 May 1998, almost two years after the commencement of the joint venture but three months before its dissolution.  The Joint Venture Agreements and the Memorandum bear all hallmarks of a poor fabrication. 

57.The Company and the Defendant executed the Dissolution Agreement dated 13 August 1998.  In the recital of that agreement, it stated that the parties had entered into a joint venture in marble trading business on 1 September 1996 and the Company’s capital contribution was RMB 210,520,000.  Under the agreement, the parties agreed, inter alia, that the Company would withdraw from the joint venture on 25 August 1998 and Tung Shun would return the Company’s capital investment.  It stated that as the investment had been converted into stock, the Defendant would return the Company’s investment by way of marble stock of the value of RMB 121,974,663; fix assets of the value of RMB 5,536,000 including office, factory, equipments and a construction contract; and the return of the Company’s investment in marble mines outside China to be agreed subsequently.  The agreement also referred to an attached schedule of marble stock.  The agreement was signed by Hou on behalf of the Company and by Leung on behalf of Tung Shun and attested by a PRC lawyer. 

58.Under cross-examination, Zhang was shown a schedule by Mr Ho which listed eight storage yards of Tung Shun in Foshan and various parts of the PRC including Hong Kong with stock worth RMB 121,974,663.  According to that schedule, the value of the stock in Foshan was RMB 69,314,862.  Zhang had investigated into the Company’s financial affairs as the Company’s creditor in 1999 prior to her appointment as a member of the Liquidation Committee.  She had seen the Dissolution Agreement but could not recall seeing any schedule of marble stock annexed to that agreement.  If she had, there was no reason why she could not recall such a schedule showing very substantial asset own by the Company as she was then seeking to recover the Company’s debt owed to ICBC.  She had been to the storage yard of Tung Shun in Le’an in Foshan with Leung to inspect its stock.  She described the area of the storage yard as less than the size of two basket-ball courts and contained no substantial stock, let alone a stock of RMB 69 million in value.  Had she been shown that schedule, she must have asked Leung to show her the other storage yards in Foshan where the RMB 69 million worth of marble were allegedly stored.  There is no evidence from the Defendant to contradict Zhang’s evidence.  I have no doubt about Zhang’s honesty.  I accept her evidence that there was no schedule attached to the Dissolution Agreement which she had been shown and that there was no substantial stock in Tung Shun’s storage yard in Foshan.  The inference is that the joint venture was just a sham.

59.Another very striking feature of the Dissolution Agreement is that it was dated 13 August 1998.  Yet, seven days after the date of the Dissolution Agreement or five days before the Company’s withdrawal from the joint venture, Joyful sent the last remittance of $9,153,008 to the Defendant.  It is inexplicable that the Company still remitted funds to the Defendant after dissolution of the joint venture had been agreed, when it would have been the Company’s priority to recover its investment from the Defendant.  That remittance formed part of the $137,743,304.53 which the Defendant admittedly received as the Company’s capital contribution to the joint venture five days before the joint venture was to be dissolved.  This suggests there is no truth in the dissolution mentioned in the Memorandum and in the joint venture mentioned in the Memorandum and the three Joint Venture Agreements. 

60.I have identified the striking features of those three sets of agreements.  They bear hallmarks of a poor fabrication.  The existence of the joint venture is inconsistent with the total absence of capital contribution by the Company in 1996.  There was no marble stock of the value of RMB 69 million in the Defendant’s storage yard in Foshan which could have supported the existence of the joint venture.  The authenticity of the three sets of agreements is not disputed.  They were signed by Lau and Leung on behalf of the Defendant.  The Defendant offered no evidence to contradict or to explain the above striking features.  From those striking features, I draw the inference that those three sets of agreements were just sham agreements with no underlying joint venture and that those agreements were prepared for purposes best known to Huang, who could not be located by the Plaintiff, and Lau and Leung, whom the Defendant chose not to call to give evidence.  This finding is further supported by the inference I draw from the Repayment Agreement and the Defendant’s, Lau’s and Tung Long’s conduct in transferring their properties in Foshan and Hong Kong to the Company.

The total amount of the Company’s funds received by the Defendant

61.Between 13 November 1997 and 20 August 1998, twelve remittances were made by Joyful to the bank accounts of the Defendant in the total amount of $134,513,304.53 and another remittance in the amount of $3,230,000 to the bank account of East United, totalling $137,743,304.53.  Those remittances are not disputed by the Defendant.  As stated in the Memorandum, it is common ground that Joyful is the representative office of the Company and Joyful’s contribution to the joint venture belonged to the Company, even though I have found the joint venture was a sham.  The issued share capital of Joyful was $10,000.  Under those circumstances, I have no difficulties to find that Joyful is a company beneficially owned by the Company and that prima facie the funds transferred by Joyful to the Defendant and East United were funds belonging to the Company.  This prima facie evidence is further reinforced by the Defendant’s admission in the Joint Venture Agreements, the Memorandum, the Dissolution Agreement and the Repayment Agreement that RMB 210,520,000, which included the said sum of $137,743,304.53, was the Company’s capital contribution to the fictitious joint venture.

62.The Defendant’s case is that of the said amount of $137,743,304.53 remitted by Joyful to the Defendant, $57,510,472.20 was Joyful’s or the Company’s contribution to the joint venture in marble trading business with the Defendant, $3,230,000 was remitted to East United and the balance of $80,232,832.33 in fact belonged to the Defendant which was paid to Joyful through Lau and the then manager Mr Guo Jianbo (“Guo”).  The Defendant relied solely on Chau’s evidence in support of its case.  Neither Lau nor Leung gave evidence.  As for the RMB 59,000,000, the Defendant alleged that it belonged to Tung Long.

63.Chau was formerly an account clerk of Joyful.  She left Joyful to join the Defendant in April 1999.  She was with Joyful when Joyful made the thirteen remittances to the Defendant and East United.  By the time she joined the Defendant, the funds had already been received by the Defendant.  The last receipt was on 20 August 1998.  She identified eight remittances between 13 November 1997 and 3 June 1998 in the total amount of $57,510,472.20 in Joyful’s ledger which she said were remittances by Joyful for the purpose of the joint venture.  This part of the Defendant’s case may be readily rejected as being inconsistent with the undisputed facts.  The Defendant admitted that Fu Wing Centre was transferred to the Company in repayment of its investment.  Fu Wing Centre was transferred to the Company at a valuation of RMB 136,780,000 or a net value of RMB 113,970,000 which far exceeded the alleged amount of investment.  If the Company’s investment was only $57,510,472.20, there was no reason why Tung Long would have transferred to the Company property of twice that value in repayment of the Company’s investment.

64.On the crucial evidence about the source of the $80,232,832.33, Chau’s evidence is as follows.  She identified three receipts in Joyful’s ledger of its current account with Yien Yieh Commercial Bank Ltd (“Yien Yieh Bank”) and one receipt in Joyful’s ledger of its saving account with the Yien Yieh Bank on 27 and 28 May 1998 in the total amount of $71,079,824.33.  She had written against those entries in the ledger that those sums were deposited by Lau.  Similarly, she identified three receipts in Joyful’s ledger of its current account with Yien Yieh Bank on 20 August 1998 in the amount of $9,153,008 against which entries she had written that the deposits were transferred by Guo.  She said those deposits were Lau’s money because she was so told by Deng who also instructed her to make the entries in Joyful’s ledgers.  Her evidence as to the source of the money was based on what Deng told her.  Deng was not called to give evidence.  Lau who was allegedly the source of the money had given two witness statements but chose not to give evidence.  In the circumstances, I give no weight to Chau’s hearsay evidence.

65.The banking documents provided by the parties are incomprehensive.  But a careful examination of those documents revealed the following.  On 27 May 1998, Lau paid Joyful $18,500,000.  On the following day, Joyful transferred the same amount to the Defendant and Lau’s bank account was reimbursed $18,500,000 from an unknown source.  Likewise, on 27 May 1998, the Defendant paid Lau $20,000,000, Lau transferred the same amount to Joyful and Joyful remitted $21,800,000 to the Defendant, an excess of $1,800,000 was remitted.  On 28 May 1998, Lau paid Joyful two sums of $16,500,000 and $16,079,824.33 and Joyful remitted to the Defendant two sums of $18,000,000 and $12,779,824.33, a surplus of $1,800,000 was withheld by Joyful.  The total amount deposited by Lau to Joyful tallied with the total amount Joyful remitted to the Defendant, which was $71,079,824.33 as claimed by the Defendant.  While the bank documents show that the $71,079,824.33 came from Lau’s bank account, the bank documents also show that Lau was paid $58,500,000 by the Defendant and an unknown source.  The sequence of the transfers is illegible on the documents.  It is impossible to determine whether Lau was funded by the Defendant and the unknown source before he paid Joyful or he was reimbursed after he had paid.  Similarly, for the three sums totalling $9,153,008 deposited by Guo into the account of Joyful on 20 August 1998, there are three transfer slips showing that the Defendant transferred the three sums in the respective amounts to Guo on the same day.  The bank document evidencing Joyful’s transfer to the Defendant is not available.  It is not possible to find if Guo was first funded by the Defendant before he paid Joyful or if Guo was reimbursed by the Defendant after he had paid.

66.The deposits by Lau and Guo and the reimbursements to them are highly suspicious and are inexplicable on the basis of the Defendant’s pleaded case.  $80 million in cash is a huge sum of money.  The issued share capital of the Defendant is only $10,000.  The $80 million deposited could not have been the Defendant’s own funds.  There is no evidence to show that Lau and Guo had such a financial resource.  While the Defendant has no burden to prove that the money belonged to Lau or to anybody, the circumstances are such as to call for some evidence from Lau or the Defendant as to their financial resources and an explanation about the source of the reimbursements before the Court will take for granted that the $80 million was the Defendant’s or Lau’s own funds, as oppose to the fact that it was Lau and Guo who physically deposited the money.  Guo was not called and Lau chose not to testify.  I give no weight to Chau’s evidence and to the bank documents in support of the Defendant’s allegation. 

67.While I have rejected Chau’s evidence that the $80,232,832.33 was the Defendant’s own money, the burden of proof that the entirety of the funds was from the Company is on the Plaintiff.  The Defendant has no burden to prove that the funds were Lau’s own funds.  Mr Wong asks me to take into the possibility that Lau and Guo were provided the funds by the Company through the black market, but there is no basis for me to draw that inference.  However, as I have already held, as the receipt of the $137,743,304.53 is not disputed by the Defendant and having rejected Chau’s evidence, the prima facie evidence that the Company was the owner of the entirety of the funds received by the Defendant including the said $80,232,832.33 is not displaced.

68.As for the $3,230,000 paid by Joyful to East United, the payment and receipt by East United is not disputed.  The Defendant’s defence is apparently that it was not paid to the Defendant.  At the material time, Huang and Lau, and later Leung and Lau, were directors and shareholders of East United.  They were the same person in control of Joyful and the Defendant.  The remittance to East United was made by Joyful under the same circumstances.  The receipt of that remittance was acknowledged by the Defendant in the three sets of agreements and the Repayment Agreement as part of the RMB 210,520,000 provided by the Company.  On that basis I find that the remittance to East United was funds from the Company received by the Defendant.

69.The Plaintiff’s evidence of the RMB 59,000,000 transferred by the Company to the Defendant is derived from Zhang’s knowledge acquired in the course of her investigating the Company’s accounts and documents.  Zhang produced a sale and purchase agreement between the Company, Guangdong No 6 Construction Group Co Ltd (廣東省六建集團有限公司) and Tung Long dated 2 June 1998.  It was impressed with Hou’s chop as signature for the Company.  By that agreement, Tung Long agreed to purchase nine units of Fu Wing Centre with a total floor area of 18,354 square metres from the Company for RMB 83,510,700.  By a supplemental agreement dated 25 May 1998 which was seven days before the sale and purchase agreement, the Company and Tung Long agreed that RMB 45,000,000 had been paid by Tung Long and after setting off the Company’s liabilities to Guangdong No 6 Construction Group Co Ltd which were assumed by Tung Long, the amount due to the Company was RMB 11,990,000 and another amount of RMB 5,000,000 being reimbursement of compensation paid to a bank paid by the Company on behalf of Tung Long.  The supplemental agreement was also impressed with Hou’s chop.  On the face of those two agreements, the outstanding purchase price due to the Company was RMB 16,990,000.  Zhang also produced another agreement dated 12 August 1998 entered into between the Company, a developer and Tung Long, under which Tung Long agreed to purchase Houses 16 and 17 of Wah King Garden from the Company for RMB 10,760,967.92.  According to Zhang, her examination of the accounts of the Company show that in respect of the sale of Fu Wing Centre, the RMB 45,000,000 and reimbursement of RMB 5,000,000 had never been paid and in respect of the sale of the two houses in Wah King Garden, only RMB 1,760,967.92 had been paid.  Hence, Zhang said that the amount due to the Company was RMB 59,000,000 under those two sale and purchase agreements.  Zhang further said that she had seen documents evidencing the assignment of the said RMB 59,000,000 receivable by the Company to Joyful and assignment of the liability to pay the said amount by Tung Long to the Defendant.  But she produced no documentary evidence in support at all.  She simply asserted that the RMB 59,000,000 was then treated as the Company’s contribution to the joint venture. The assertion is denied by the Defendant.  The Plaintiff relied on the first Joint Venture Agreement as the Defendant’s acknowledgement of the receipt of the said RMB 59,000,000.  Clause 4 of that agreement provided that the RMB 59,000,000 would be injected into the Defendant’s account on 26 May 1998.  However, the first Joint Venture Agreement was dated 25 May 1998.  As at 25 or 26 May 1998, the two sale and purchase agreements had not been entered into.  If the Joint Venture Agreements were indeed genuine and entered into on 25 May 1998, it is impossible to connect the first Joint Venture Agreement to those two sale and purchase agreements.  But, if the Joint Venture Agreements were fictitious and there was no underlying joint venture as I have found, the impossibility could be easily explained on the basis that by inadvertence the parties chose the wrong date when fabricating the Joint Venture Agreements.  While I would not use this as a basis for finding that the Joint Venture Agreements were fictitious.  I would give no weight to the discrepancies in the dates of all those agreements.

70.There is nevertheless an admission by the Defendant in the first Joint Venture Agreement that RMB 59,000,000 was received by the Defendant.  The admission of the receipt of that sum of RMB 59,000,000 was repeated in the Memorandum, the Dissolution Agreement and the Repayment Agreement as part of the Company’s investment of RMB 210,520,000.  Pursuant to the Repayment Agreement, nine units in Fu Wing Centre and some units in Tong Yuen Road (唐園路) belonging to Tung Long and two properties in Hong Kong held in Lau’s name (to be described below) were transferred to Company.  The Defendant Company would not have so transferred the properties if it had not received the said sum of RMB 210,520,000.  There is no dispute that the Joint Venture Agreements, the Memorandum, the Dissolution Agreement and the Repayment Agreement were all signed by Lau and Leung.  They chose not to testify to explain their signatures on the documents under circumstances which calls for an explanation if their admission is to be denied.  Lau has given two witness statements and was very much around in the court room giving instruction to his counsel so that allegations not contained in his witness statements were put to the Plaintiff’s witnesses.  A subpoena was issued against Leung but the Defendant has not secured his attendance.  There is no explanation either.  Under all these circumstances, it is open to me to give weight to the admissions contained in the first Joint Venture Agreement, the Dissolution Agreement and the Repayment Agreements, which I do. 

71.The Defendant acknowledged in the Joint Venture Agreements, the Memorandum, the Dissolution Agreement and the Repayment Agreement that the total sum of RMB 210,520,000 had been provided by the Company which included the thirteen remittances by Joyful in the amount of $137,743,304.53 and the RMB 59,000,000.  On the basis of the pleading, the admission in the above documents, the property transfer and all the circumstances, I find that the entirety of the RMB 210,520,000 received by the Defendant were funds of the Company. 

The Repayment Agreement

72.I now turn to the fourth agreement, i.e. the Repayment Agreement dated 7 March 2000 entered into between the Company and the Defendant.  This agreement was signed by Hou on behalf of the Company and by Lau and Leung on behalf of the Defendant.  It referred to the Joint Venture Agreements, the Memorandum and the Dissolution Agreement and provided that those agreements would cease to have effect when the Repayment Agreement took effect.  The Repayment Agreement provided for return of the Company’s investment in the amount of RMB 210,520,000 by the Defendant transferring its properties to the Company.  This is an acknowledgement of the receipt of the said sum of RMB 210,520,000 from the Company by the Defendant.

73.Under this agreement, the Defendant agreed to transfer nine units in Fu Wing Centre to the Company at a provisional valuation of RMB 170,000,000.  The provisional valuation was subject to a proper valuation report.  It should be recalled that the nine units in Fu Wing Centre were sold to Tung Long at RMB 83,510,700 less than two years ago.  The provisional valuation was therefore at a substantial premium favourable to the Defendant.  The Defendant warranted that the property would be free from encumbrances.  The other terms of the Repayment Agreement were that the Defendant would repay RMB 2,000,000 to the Company within fifteen days of execution of the agreement, another sum of RMB 8,000,000 within one month after the valuation of Fu Wing Centre had been confirmed by the parties and the balance within two years after the said confirmation.

74.The Repayment Agreement was properly signed by the parties.  The Defendant does not dispute that the Repayment Agreement is a valid and binding agreement.  It only disputes that the amount it is liable to pay under that agreement was only $57,510,472.20 but not RMB 210,520,000.  Thus, the validity of that agreement is not in question, despite the fact that the joint venture was fictitious.  The agreement was an agreement to repay money had and received.  Intention to form a binding agreement and consideration can be readily presumed.  The agreement was partially performed under circumstances which I shall describe below.  I therefore have no difficulties to find that the parties had entered into the Repayment Agreement which is a valid and binding agreement, though there was no underlying joint venture. 

Transfer of properties in Foshan and partial repayment pursuant to the Repayment Agreement

75.The Defendant did not honour the Repayment Agreement.  In September 2000, i.e. six months after the date of the Repayment Agreement, the Company instructed Tianlun Law Firm to seek recovery action against the Defendant.  Through the effort of Tianlun Law Firm, Lau on behalf of Tung Long executed a property transfer agreement (房屋產權轉讓合同書) (“Fu Wing Centre Transfer Agreement”) to transfer the nine units in Fu Wing Centre which the Defendant agreed to transfer to the Company as repayment under the Repayment Agreement.  Save for a payment in the amount of RMB 650,000, the Defendant did not pay the balance due to the Company after setting off the value of the nine units in Fu Wing Centre.  The transfer of the properties reflects that the Defendant acknowledged the validity of the Repayment Agreement and the fact that the Defendant had received RMB 210,520,000 from the Company.  However, the Defendant alleged that the execution of the Fu Wing Centre Transfer Agreement was obtained by duress, the duress being the assault on Leung by lawyer of Tianlun Law Firm.  The Defendant mainly relied on the plea of duress as a vitiating factor to avoid the oral TransferAgreement, but it is chronologically convenient to deal with the allegation of assault at this stage.  

76.Li and a number of his colleagues in Tianlun Law Firm were involved in the recovery action.  But only Li was called by the Plaintiff.  He had direct liaisons with Lau and Leung, but did not have first hand information of all the factual issues involved in connection with allegation of duress.  Li had a series of meetings separately with Lau and Leung at their suggestion as they were in disagreement about the management of the Defendant and its associated companies.  Li said that at a meeting held towards the end of October 2000 at the factory of Tung Shun attended by Leung, Mr Wang Jian Bin of ICBC (“Wang”), Mr Qiu Dailun (“Qiu”) who was a partner of Tianlun Law Firm and himself, Leung admitted that the Defendant had used the Company’s funds to purchase properties in Hong Kong and agreed to transfer the properties to the Company as a settlement.  Leung also undertook to persuade Lau to bring about the transfer. 

77.The transfer of the nine units in Fu Wing Centre was handled by Qiu who has since migrated to Australia.  Thus, part of Li’s evidence about this issue is hearsay, but it is supported by documentary evidence.  According to Li, he went with Qiu and Wang to the office of Tung Shun on 30 October 2000 to discuss with Lau about the transfer of the nine units in Fu Wing Centre to the Company.  A draft agreement to be entered into between the Company and Tung Long had been prepared by Tianlun Law Firm but with the valuation left blank.  Under that agreement, Tung Long agreed to transfer to the Company the same nine units in Fu Wing Centre which the Company had sold to Tung Long in 1998.  At the meeting, the parties agreed that the valuation was RMB 136,780,000.  Qiu inserted that valuation in the blank and an addendum to clause 4 of the agreement to the effect that Tung Long shall be responsible for settling the outstanding construction costs of RMB 22,810,000.  It should be recalled that when the nine units were sold to Tung Long, Tung Long assumed liability to pay the outstanding construction costs as a set off against the price.  Lau then signed on behalf of Tung Long and Leung affixed the chop of Tung Long.  Li, Qiu and Wang left happily with the belief that the mission had been accomplished and went to dinner separately.  When Qiu returned to the office after dinner, he discovered that Leung had affixed the chop of Tung Long at the place to be signed by the Company.  He was annoyed and telephoned Leung.  Leung agreed to re-affix the chop two or three days later, but Qiu insisted that to be done at once.  Leung agreed but felt offended saying that Qiu did not trust him.  Then Qiu went to the office of Tung Shun alone to have the agreement chopped.  Li did not go.

78.What then happened at the factory of Tung Shun between Qiu and Leung is hearsay.  Mr Ho put to Li that Qiu assaulted Leung at the factory of Tung Shun as a result of which Leung re-affixed the chop on the Fu Wing Centre Transfer Agreement and also subsequently agreed to the oral Transfer Agreement and signed the declaration of trust to be described below.  Li’s evidence is that he and Qiu knew nothing about the allegation of assault that night.  They only came to know about the allegation a few days later when the police conducted the inquiry.  He asked Qiu what had happened.  Qiu denied that he had assaulted Leung and said it was impossible for him to have done so as the meeting took place in Tung Shun’s factory where there were security guards employed by Tung Shun.  Furthermore, according to Li, Qiu was a lawyer of good reputation and a partner of a reasonable size of law firm in the PRC.  Also, according to Li, Leung had agreed over the telephone to affix the chop again, though he was unhappy as he thought Qiu did not trust him.  Under those circumstances, the allegation of assault as put by counsel is incredible.  Mr Ho also relied on Chau’s evidence that Lau told her that Leung was assaulted in China. 

79.It is common ground that Leung made a report of assault to the police against Qiu later that night.  It is not disputed that the police dismissed Leung’s complaint about assault but accepted his complaint that Qiu committed criminal damage by damaging a marble ash-tray in the factory of Tung Shun and administered an administrative penalty on Qiu.  Qiu appealed to the Intermediate People’s Court of Foshan City which allowed Qiu’s appeal.  This evidence is also hearsay, but is supported by the judgment of the Intermediate People’s Court of Foshan City produced by Li.

80.Though Li’s evidence is hearsay, in the totality of all the evidence, I find it credible.  Chau’s evidence is multiple hearsay.  Leung could have been called by the Defendant to testify but was not called and no explanation was given.  I give no weight to Chau’s evidence.  It is on the totality of all the evidence that I accept Li’s evidence and reject the Defendant’s allegation of assault.  I am satisfied that Qiu had not assaulted Leung and that the execution of the Fu Wing Centre Transfer Agreement was not obtained by duress.  Furthermore, it is common ground that Lau signed the Fu Wing Centre Transfer Agreement on the afternoon of 30 October 2000 before the alleged assault.  Thus, even if Qiu had assaulted Leung, the assault could not have been causative of the execution of the Fu Wing Centre Transfer Agreement which had already been signed before the alleged assault took place and not to mention the fact that the alleged assault was upon another person.  This plea of duress in respect of the Fu Wing Centre Transfer Agreement is doomed to fail. 

81.I therefore accept the Plaintiff’s case that the nine units in Fu Wing Centre were transferred to the Company at the agreed valuation of RMB 136,780,000.  Tung Long had failed to pay the construction costs of RMB 22,810,000 to the contractor which the Company might have to pay.  Thus, after setting off the said construction costs, the net amount repaid by the Defendant by reason of the transfer of the nine units in Wing Fu Centre was RMB 113,970,000.

82.By a similar agreement, Tung Long agreed to transfer to the Company five apartments units in No 1 and 5 Tong Yuen Road in Foshan at a valuation of RMB 4,030,000.  The agreement was signed by Lau on behalf of Tung Long and by Hou on behalf of the Company.  In fact, some of the units had already been sold by Tung Long and Tung Long was un-cooperative in handing over possession of the remaining units to the Company which necessitated an action for specific performance.  In the end, two properties were recovered, but the proceeds of sale were only sufficient to cover the Company’s legal costs.  Thus, this property transfer resulted in no repayment to the Company.

The Transfer Agreement and the transfer of properties in Hong Kong pursuant to the Transfer Agreement

83.I now turn to the Transfer Agreement and the transfer of the Properties in Hong Kong, which is the focal point of this action.  According to Li, he and Qiu together with Wang had no less than three meetings with Leung in October and November 2000.  Because of Leung’s former complaint of assault, the meetings were conducted in the presence of a staff of ICBC.  At the meetings, Leung admitted using the Company’s funds to purchase properties in Hong Kong and agreed to transfer the properties to the Company free from encumbrances to settle the outstanding balance of the debt due under the Repayment Agreement and to persuade Lau to effect the transfer of the properties.

84.Li also had a series of meetings with Lau at the office of ICBC.  At the end of the series of meetings, Lau telephoned him and admitted using the Company’s funds to purchase the properties in Hong Kong and agreed that the Defendant should transfer the properties to the Company.  Subsequently, Lau provided a list of the seven Properties in Hong Kong which he agreed to transfer to the Company.  Those Properties are:

(1)         10/F, Flat D, Tower 6, Deerhill Tower, Deerhill Bay (the “1^st Property”);

(2)         Car Park No 30, Basement 1 of Garage A below Towers 1 to 6 of Deerhill Bay (the “2^nd Property”);

(3)         5/F, Flat A, Tower 8, Deerhill Villas, Deerhill Bay (the “3^rd Property”);

(4)         Car Park No 51, Garage B below Towers 7 to 11, Deerhill Bay (the “4^th Property”);

(5)         Unit 2908, 29/F, West Tower, Shun Tak Centre, 168-200 Connaught Road Central (the “5^th Property”);

(6)         Unit A and Unit B on 5^th Floor, CNT Commercial Building, 302 Queen’s Road Central (the “6^th Property”); and

(7)         Unit 4, 7^th Floor, Block A, Hongway Garden, No 8 New Market Street and No 7 On Tai Street (the “7^th Property”).

85.Then, Li went to Hong Kong in early November 2000 and sought legal advice from Shuen.  After his return to Foshan and after consulting his colleagues, he decided to bring about the transfer of the Properties by way of a declaration of trust.  He liaised with Lau and Leung separately between 5 and 11 November 2000 and they agreed to the transfer of the Properties to the Company on the following terms (the “Transfer Agreement”):

(1)         the Defendant will transfer or cause to be transferred the Properties to the Company;

(2)         the Defendant will discharge all mortgages or charges, if any, on the Properties and to transfer the Properties to the Company free from encumbrance;

(3)         the Defendant confirmed that the stamp duty and legal costs for the purchase of the Properties had been paid with the Company’s funds and will transferred the Properties to the Company in its capacity as trustee; stamp duty paid upon the transfer shall be deducted from the proceeds of subsequent sales of the Properties;

(4)         upon completion of the transfer of all the Properties, the Company shall sell the Properties and apply the proceeds of sale net of stamp duty towards repayment of the outstanding debt due to the Company;

(5)         the Company agreed to inform the Defendant before the sale of any of the Properties and offer the Defendant the right of first refusal; and

(6)         if the proceeds of sale of all the Properties are insufficient to repay the debt due to the Company, the shortfall shall be paid by the Defendant.

86.In order to implement the Transfer Agreement, Li prepared a declaration of trust in Chinese (信託聲明書) to be signed by Leung declaring that the Company was the beneficial owner of the seven Properties, that the purchase price of the Properties, stamp duty and legal costs were provided by the Company, that the Defendant held the Properties as trustee for the Company, that as director and shareholder of the Defendant, Leung firmly agreed to transfer the Properties to the Company and authorised Lau to sign the necessary documents and to affix the company seal of the Defendant.  Leung signed the declaration of trust on 15 November 2000.  When signing the declaration of trust, Leung wrote against the 3^rd Property that it was held in Lau’s name.  Then one or two days later at the office of Tianlun Law Firm, Lau gave Li a board resolution of the Defendant authorising Lau to sign all necessary documents and to affix the Defendant’s seal for the purpose of transferring the seven Properties to the Company.  The board resolution was signed by Super Trend.  It should be recalled that at that time Leung and Super Trend were the sole directors and shareholders of the Defendant as Lau had transferred his shares in the Defendant to Super Trend on 15 September 1999.  The Plaintiff’s case is that the declaration of trust and the Defendant’s board resolution evidenced the Transfer Agreement.

87.Li then instructed Shuen to handle the conveyancing transaction to effect the transfer of the Properties to the Company.  Initially, Shuen prepared one set of deed of trust and assignment to cover the transfer of all the Properties.  Later, Li instructed him to prepare separate sets of documents for the individual property because Lau said it was his solicitors’ advice to deal with each property separately.  Thence, Shuen prepared separate sets of documents for the different Properties.

88.On 19 November 2000, Lau executed the deeds of trust and assignments in respect of the 3^rd and 4^th Properties before Shuen in the Company’s office in Foshan.  According to Shuen, he had duly interpreted the documents to Lau.  Hau signed on the assignments on 20 November 2000.

89.Shuen attended the office of Tianlun Law Firm on 10 December 2000 for the purpose of dealing with the conveyancing transaction in relation to the remaining Properties.  Lau, staff of the ICBC, Li and a number of lawyers of Tianlun were present.  Shuen reminded the parties that some of the Properties were subject to mortgage and asked Lau if he knew the amount of the outstanding mortgage payments and if he had brought along the monthly statements in respect of the mortgages.  Lau replied in the negative.  Shuen then advised Li that there was a risk that the outstanding mortgage payments might exceed the value of the Properties.  After consulting amongst themselves, Li instructed Shuen to proceed with the properties which were free from mortgage.  Shuen proceeded with interpreting the deeds of trust and assignments relating to the 6^th and 7^th Properties.  Lau signed the documents.  But when Shuen asked him to produce the Defendant’s company seal, Lau said that he did not have the seal with him.  Lau agreed to attend Shuen’s office in Hong Kong on the following day to affix the company seal.  However, Lau never turned up and refused the requests of Shuen’s staff to affix the seal.

90.The Defendant’s pleaded case is that the parties had never entered into the Transfer Agreement but had entered into a settlement agreement whereby the Defendant agreed to transfer the 3^rd, 4^th, 6^th and 7^th Properties in full and final settlement of the outstanding sum due to the Company.  The 1^st, 2^nd and 5^th Properties were not included as they were subject to mortgage and the Company did not wish to assume liability for the mortgages while the Defendant wished to retain the banking facilities secured by the mortgages.  The Defendant alleged that the declaration of trust and the board resolution were void as they were signed under duress by reason of Qiu’s assault on Leung on 30 October 2000.  The Defendant’s further defence is that the deeds of trust and assignments in respect of the 3^rd, 4^th, 6^th and 7^th Properties were also void as they were obtained by fraudulent misrepresentation.  The basis for that defence is that the deeds of trust and assignments were in English and were signed by Lau without proper interpretation and after having been fraudulent informed that the deeds of trust were merely stamp duty saving devices.

91.Quite apart from the fact that the Defendant has adduced no evidence in support of its case, the fact as I have found is sufficient for me to dismiss that defence.  I have carefully considered the Defendant’s allegation about the assault when I analysed the evidence leading to the signing of the Fu Wing Centre Transfer Agreement.  I have rejected the Defendant’s allegation and found that Qiu had not assaulted Leung as alleged.  With that finding, the Defendant’s defence based on the allegation that the declaration of trust and the board resolution were obtained under duress and that the parties had entered into a settlement agreement not inclusive of the 1^st, 2^nd and 5^th Properties must be dismissed.

92.As for the defence that the deeds of trust and assignments are void, there is no evidence from Lau in support of the Defendant’s case.  On the evidence of Shuen, which I have no reason to doubt, Shuen had clearly interpreted the deeds of trust and assignments to Lau on the two occasions when they were signed. Accordingly, I dismiss that defence.  The execution of those documents and Lau’s delivery of vacant possession of the 3^rd and 4^th Properties support the Plaintiff’s case on the Transfer Agreement.  I am satisfied that the parties had entered into the Transfer Agreement on the terms as set out in paragraph 85 above.  Of the seven Properties, only the 3^rd and 4^th Properties were transferred to the Company.  Subsequently, they were resold in June 2001 for $9,800,000 which was equivalent to RMB 10,780,000 at the then prevailing rate of exchange.

93.I find that the Transfer Agreement is a valid and binding agreement.  It is evidenced in writing by the declaration of trust signed by Leung who was a director of the Defendant and by a board resolution of the Defendant.  The Transfer Agreement was also partly performed with the transfer of two of the Properties.

Whether the Properties were purchased with the Company’s funds

94.The Plaintiff’s case is that the Properties were purchased with the Company’s funds.  This is immaterial insofar as the Plaintiff’s claim based on the Transfer Agreement is concerned, but is a necessary element if the Plaintiff’s claim is based on the Defendant’s breach of trust.  The Plaintiff relies on the admissions by Lau and Leung to Li, the declaration of trust and the Defendant’s board resolution of 15 November 2000 as evidence that the Properties were purchased with the Company’s funds.  I have mentioned the circumstances under which the admissions were made by Lau and Leung.  Li’s evidence about the admissions is supported by the declaration of trust signed by Leung and by the board resolution of the Defendant.

95.I have referred to the contents of the declaration of trust signed by Leung.  It identified the seven Properties.  It stated in unequivocal terms that the Company paid for the price, stamp duty and legal costs for the purchase of the Properties, that the Properties were held by the Defendant as trustee for the Company and Leung was determined to transfer the Properties to the Company.  Leung was at the material time a director of the Defendant who had personal knowledge about those matters.  I give full weight to his admission in the declaration of trust.

96.The board resolution was signed by Super Trend.  It recorded a resolution passed by the board composed of Leung and Super Trend, the only then directors and shareholders of the Defendant.  The board resolved to authorise Lau to execute documents and to affix the Defendant’s seal for the purpose of returning the Properties to the Company.  The seven Properties were identified in the board resolution.  By using the words “退還 (return)”, the board impliedly admitted that the beneficial ownership of the Properties was vested with the Company while the Defendant was only the legal owner.  The board resolution stated that the documents to be executed by Lau included deeds of trust, again impliedly acknowledging that the Properties were held by the Defendant on trust for the Company.

97.Mr Ho submits that the 6^th Property could not have been purchased by the Company’s funds as it was purchased at a price of $19,717,040 on 23 October 1997 well before the first remittance of $10,000,000 by the Company.  However, the sale was by a related company as Guo signed the assignment on behalf of the vendor.  The deposit was only $527,000.  In the circumstances, it would not be difficult for payment of the deposit to be arranged between the parties.  The balance of the purchase price of $19,190,000 was paid on 2 December 1997.  Around the same time, the only other property purchased by the Defendant was the 7^th Property.  The sale and purchase agreement and assignment were signed on 19 November 1997.  The consideration for the 7^th Property was $2,228,085.  The Defendant’s payment obligation at that time was about $22 million.  However, by then, over $30,000,000 had been remitted by the Company to the Defendant which is more than enough to cover the purchase price to be paid by the Defendant for both Properties. 

98.On the other hand, the Defendant’s case that the Properties were purchased by the Defendant’s own funds is based on the evidence of Chau.  Chau said that she had seen there was money in the Defendant’s bank statement to support the purchase of the Properties.  That must be correct otherwise the Properties could not have been acquired by the Defendant, but that is no evidence of the source of the funds.  The Defendant’s bank statements were the sole basis of Chau’s belief.  They were not produced except for statement for the month of September 1997 showing a balance of $439,249.  It cannot be sufficient evidence of the Defendant’s means to pay for the Properties.  If there is any truth in the Defendant’s allegation that the Properties were purchased by its own funds, there is no reason why it should produce just the statement of its bank account for the month of September 1997 and not the statements covering the entire relevant period showing the cash flow of the Defendant.  The single statement produced by the Defendant raises more questions than what it attempted to answer.  It shows a lack of good faith in the defence.  The paid up capital of the Defendant was $10,000.  It was impossible for the Defendant to finance the purchase of the properties out of its own funds.  It could have financed the purchase with funds from its directors or from other sources.  But those who were in the position to give that evidence were not called to testify.

99.I have no difficulties in rejecting the Defendant’s evidence and in accepting the Plaintiff’s.  I am satisfied on the state of the evidence that Lau and Leung made the admissions to Li that the Properties were purchased with the Company’s funds and that the admissions were true.  The admissions are supported by the declaration of trust, board resolution and the fact that $137,743,304.53 were received by the Defendant from Joyful.  I therefore find that the Properties were purchased by using the funds of the Company.

Whether the Defendant had knowledge of the unlawful transfer of funds and/or was acting dishonestly in those transfers

100.I have found that the Joint Venture Agreements were bogus in that there was no underlying joint venture.  They were only documents created by the parties for certain purposes.  However, I am satisfied that the reference to the amount of RMB 210,520,000 as being funds of the Company received by the Defendant is true.  The receipt in the total amount of $137,743,304.53 is admitted by the Defendant.  The Defendant was incorporated in June 1997 with Lau and Joyful as the only directors and shareholders.  It was under those circumstances that the remittances were made by Joyful to the Defendant.  As Huang was the legal representative of the Company and the director and shareholder of Joyful at the time, Joyful must have known that its remittances of the Company’s funds to the Defendant were not for the purpose of the Company or for the purpose of the joint venture which was fictitious.  That knowledge of Joyful must also be imputed to the Defendant as Joyful was a director of the Defendant.

101.Lau was a director of the Defendant since its incorporation until September 1999 when he transferred his shares to Super Trend.  It was during that period of time the thirteen remittances were made by Joyful.  Even assuming that he had no knowledge about what was going on between Huang and the Company, when he saw $137 million pouring into the account of the Defendant within ten months between 13 November 1997 and 20 August 1998, he must be put on enquiry.  He must have known that those remittances were not connected with the regular business of this $10,000 company.  Had he inquired, he must have found out that the remittances were funds from the Company which the Defendant had no right to use.  Yet on his own admission to Li, he used the funds which he knew belonged to the Company to purchase properties in his own name and that of the Defendant’s while he was a director of the Defendant.  That knowledge must be attributed to the Defendant.

102.Leung has been a director of the Defendant since 1 November 1997 before the remittances were received.  At the material time, he was the legal representative of Tung Shun.  He executed the Joint Venture Agreements on behalf of the Defendant and executed the Memorandum on behalf of the Defendant and Tung Shun.  He also signed the Dissolution Agreement and Repayment Agreement on behalf of Tung Shun.  He must have known that there was no joint venture underlying the Joint Venture Agreements.  He must have known at the time the remittances were made that they were the Company’s funds remitted for purposes other than for the Defendant to purchase the Properties or for the joint venture. His knowledge must be attributed to the Defendant.

103.Under those circumstances, the inference that the Defendant had actual knowledge of the unlawful transfer of funds by the Company and was acting dishonestly in receiving and using those funds to acquire the Properties to be held in the Defendant’s and Lau’s name and that the Defendant acted dishonestly in the transfer of funds from the Company may be readily drawn.  The Defendant chose not to call Lau or Leung to give evidence to rebut the inference.  I do draw that inference.  Accordingly, I find that the Properties were purchased by the Defendant knowingly and dishonestly with the Company’s funds.

Conclusion

104.I have resolved all the five factual issues in favour of the Plaintiff.  The Defendant, with the assistance of Huang and Hou, misappropriated and received the Company’s funds in the amount of RMB 210,520,000 which it used to purchase the seven Properties in Hong Kong.  When that design was discovered by the Company, Huang and the Defendant executed the Joint Venture Agreements, the Memorandum, the Dissolution Agreement and the Repayment Agreement to dress up the unlawful design as a joint venture and agreed to repay the Company’s funds.  Part of the funds was repaid by transfer of nine units in Fu Wing Centre to the Company at a valuation of RMB 113,970,000 and a repayment of RMB 650,000.  The parties then entered into the Transfer Agreement whereby the Defendant agreed to transfer the seven Properties admittedly purchased with the Company’s funds to be sold by the Company.  It was also agreed that if the proceeds of sale could not be sufficient to repay the outstanding amount due to the Company, the Defendant would pay the shortfall.  Pursuant to the Transfer Agreement, two of the Properties were transferred to the Company and sold.  After allowing for the net valuation of the nine units in Fu Wing Centre transferred to the Company, the repayment of RMB 650,000 and the proceeds of sale of the two Properties, the outstanding amount of the Company’s funds which have not yet been returned is RMB 85,120,000  (i.e. RMB210,520,000 -RMB 113,970,000 - RMB 650,000 - RMB 10,780,000).

105.I have found that the Transfer Agreement is a valid and binding agreement for good consideration.  The Defendant was in breach of the agreement and the Plaintiff is entitled to specific performance of the agreement.  Accordingly, the Plaintiff is the beneficial owner of the five Properties yet to be transferred to the Company under the Transfer Agreement.  Furthermore, as the Properties were purchased using the Company’s funds, the Defendant held the Properties as a constructive trustee for the Company.  I shall now invite the parties to address me on the terms of the order to be made.

Mr. Anson M. K. Wong, instructed by Messrs William Sin & So, for the Plaintiff

Mr. Ho Chee Choi Jimmie, instructed by Messrs C. K. Mok & Co., for the Defendant