Menno Leendert Vos v. Global Fair Industrial Ltd and Others

HCA 4200/1995

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4200 OF 1995

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BETWEEN 

AND BETWEEN

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J U D G M E N T

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INDEX

(A)  Introduction

Introduction

1.This is an action for breach of fiduciary duty against a director and shareholder of two companies and for dishonest assistance in the breach of duty and knowing receipt of the companies’ properties against the other defendants.  The properties involved were unit 1A and unit 1D of Thomson Commercial Building in Wanchai (“Unit 1A” and “Unit 1D” respectively or “Units” collectively).  The events in this action took place some twenty years ago.  The major events occurred between 1991 and 1993. 

2.In May 1991, the Plaintiff (“Vos”) and Wealth Country Limited (“Wealth Country”) under the control of the 2^nd Defendant (“Yung”) entered into a partnership in the trading of veterinary medicine.  They acquired Goldmark Agents Limited (“Goldmark”) as the corporate vehicle for carrying on their business and for holding Unit 1D.  In May 1992, they acquired another shelf company, World Champ Limited (“World Champ”), for holding Unit 1A.  The partnership was short-lived as a result of distrust and disputes between Vos and Yung.  In June 1993, Vos entered into negotiation to sell his interest in Goldmark and World Champ (“Companies”) to Yung.  The negotiation fell through.  Then Yung sold the Units to the 1^st Defendant (“Global Fair”) which was under the control of the 6^th Defendant (“Cheung”).  In August 1993, Vos petitioned for the winding up the Companies.  The Official Receiver was appointed provisional liquidator of the Companies on 20 August 1993.

3.This action was originally commenced by the Official Receiver in his capacity as the provisional liquidator of the Companies against Global Fair, Yung, the 3^rd Defendant (“Start Win”), the 4^th Defendant (“Au”) and the 5^th Defendant (“New Champion”) on 3 May 1995.  On 6 September 2000, Cheung and the 7^th Defendant (“Mrs Yung”) were joined as the defendants pursuant to the order of Master Barnes, as she then was.  The rights and interests of the Companies in this action were then assigned by the Official Receiver to Vos who was the only other shareholder of the Companies.  On 18 October 2006, the assignment was approved by A Cheung J and Vos substituted the Companies as the plaintiff in this action.  The litigation had a long procedural history which took thirteen years to reach the stage of trial.  While what is behind this action was a shareholders or partnership dispute and Vos featured himself as the Plaintiff, the claims are those which rightfully belong to the Companies.  This action has to be viewed in this context. 

4.This action is primarily against Yung for breach of fiduciary duty owed to the Companies as director in disposing of the Units at an undervalue and against Cheung for dishonest assistance in the breach of fiduciary duty and knowing receipt of the Companies’ properties which had been disposed of by Yung in breach of trust.  Global Fair and Start Win were corporate vehicles used by Cheung for acquiring or holding the Units.  New Champion was a corporate vehicle used by Yung to take over the business of Goldmark.  Mrs Yung is Yung’s wife.  The 4^th Defendant (“Au”) is the brother of Frankie Au who is the common law husband of Mrs Yung’s sister, Iris Leung.  They all played various roles in assisting Yung in the breach of fiduciary duty.

5.The claims may be grouped under four headings:

(1)  loss caused by Yung’s and Mrs Yung’s attempt to make secret profit in the purchase of Unit 1A against Yung and Mrs Yung (“Attempted Secret Profit Claim”);

(2)  funds misappropriated by Yung and Au  in their conduct of Goldmark’s business (“Misappropriation Claims”);

(3)  loss caused by sale of the Units at an undervalue (“Sale of Units Claim”) against Yung; and

(4)  Sale of Units Claim against Cheung, Global Fair, Start Win and Au.

Dramatis personae

6.Menno Leendert Vos (“Vos”) -   Vos is the Plaintiff.  He is a Dutch veterinary surgeon.  He joined Alphasan International BV (“Alphasan Group”), a conglomerate of Dutch corporations trading in veterinary pharmaceutical products.  Alphasan Group included Alphasan Far East Limited (“Alphasan FE”) and Chemproha Chemical Distributor Limited (“Chemproha”).  Vos was posted to Hong Kong as the general manager of Chemproha in 1988.  He became a director of Alphasan FE in 1990.  When the operation of Alphasan Group in Hong Kong closed down in 1991, he was given distribution rights in Alphasan veterinary medicine as part of his compensation package.

7.Vos was inexperienced in business.  He was very impressed by Yung as a successful businessman and competent manager.  He trusted Yung as a kind and generous friend who helped him out during his first attempt to operate a business by providing him with free office accommodation and supporting services.  He was very casual in his dealing with Yung.  He readily co-signed cheques presented to him by Yung.  On the whole, save for his evidence denying his demand to increase the price for the sale of his shares in the Companies to Yung, his evidence is credible.  He gave evidence in a responsible manner.

8.William Leung -   William Leung is a certified public accountant.  He was the proprietor of an accounting company known as William Leung & Co. which was later incorporated.  William Leung & Co. provided secretarial services through Atkins Secretaries & Consultants Ltd (“Atkins Limited”), Long’s Managers Limited (“Long’s Managers”) and Long’s Nominees Limited (“Long’s Nominees”).  William Leung was instructed by Yung to provide secretarial services to Avant Garde Company Limited (“Avant Garde”) and Global Fair.  He kept record of the instructions he received from Yung.  He gave evidence in a responsible manner.  I accept his evidence.

9.Johannes de Vries (“Dr de Vries”) -   Dr de Vries was a veterinary surgeon recruited by Vos from Holland to work in Animal Health Centre Limited (“Animal Health Centre”) operated by Goldmark.  He was a responsible and credible witness.  I accept his evidence.

10.Eddie Kan -   Eddie Kan was a former employee of VIP Media Supplies (“VIP Media”) operated by Mrs Yung.  She is a pet lover.  After Goldmark obtained distributorship of pet food products from Hill’s Science Diet of Colgate-Palmolive Corporation (“Hill’s”), Yung recruited her to work in Goldmark as marketing executive.  She came to know Dr de Vries whom she later married.  She tipped off Vos about Yung and his family members selling Goldmark’s goods and pocketing the proceeds of sale.  Her evidence was supported by sales invoices issued by VIP Media.  That evidence was not disputed by the Defendants.  I accept her evidence.  She was dismissed by Yung and developed some animosity against him.  She also gave evidence about other irregular activities of Yung against Goldmark.  But that aspect of her evidence is not relied on or pursued by the Plaintiff.

11.Ewa-Anna Dahn (“Dr Dahn”) -   Dr Dahn was a veterinary surgeon employed by Global Fair to work in Phoenix Veterinary Clinic after acquiring Unit 1D.  She is not an interested party.  I have no reason to doubt her credibility.  I accept her evidence.

12.Paul Varty (“Varty”) -   Varty is a professional surveyor.  He was called as an expert witness to explain the valuation of the Units given by Mr Togher (“Togher”) of Vigers Hong Kong Limited (“Vigers”) as Togher was unavailable to give evidence.  He demonstrated competence as an expert.  His evidence was fair and unbiased.  I accept his evidence.

13.Yung Ka Po (“Yung”) -   Yung is the 2^nd Defendant.  He was a Hong Kong citizen.  He was Cheung’s classmate in a renowned government school in Hong Kong.  Between 1976 and 1981, he studied civil engineering in the University of Calgary in Canada.  In 1981, he returned from Canada and joined an architectural firm in Hong Kong.  During the course of his employment, he acquired much knowledge in computer science.  He left the architectural firm to start his computer services business in Wanchai Computer Centre in Lockhart Road.  He came to know Mrs Yung who operated VIP Media opposite his stall.  Yung’s services complemented VIP Media which sold office supplies and computer equipments.  Subsequently, Yung and Mrs Yung married and purchased unit 8D of Thomson Commercial Building (“Unit 8D”) from where they operated VIP Media.

14.Yung was a seasoned businessman.  He had a mind for business and charisma.  He was articulate and possessed the skill of persuasion.  He took advantage of Vos’ trust on him and caused Vos to co-sign cheques to reimburse himself for expenses which he had not incurred or had been already reimbursed.  He was dishonest with the funds of Goldmark.  He was able to manipulate the accounts of the Companies and put forward apparently convincing explanations for what he did.  However, upon a close scrutiny of the objective evidence, I find him not a witness of truth.  He was capable of turning himself into wolf in sheep’s clothing.

15.Leung Tsui Yu (“Mrs Yung”) -   Leung Tsui Yu is the 7^th Defendant.  She is Yung’s wife.  She operated VIP Media with her sister Iris Leung.  Their father was employed by Goldmark as delivery man.  Later, Au’s brother Frankie Au joined VIP Media and became the common law husband of Iris Leung.  The business of VIP Media was later incorporated and held by Wealth Country in 1990.  Mrs Yung held three shares and Yung held one share in Wealth Country.  The Plaintiff obtained judgment on liability against Mrs Yung by default on 17 April 2001.  She did not appear in this trial.

16.Iris Leung -  Iris Leung is Mrs Yung’s sister.  She is the common law wife of Frankie Au. 

17.Au Ka Fai (“Au”) -  Au is the 4^th Defendant.  He is the brother of Frankie Au.  He was an employee of Goldmark, World Champ, New Champion and Global Fair at different stages.  He did a lot extraordinary acts which had the effect of concealing Cheung’s and Yung’s identity.  He admitted that he was foolish and had done what an ordinary employee would not have done.  However, his evidence was vague.  He avoided answering questions under cross-examination by blaming on his memory.  He insisted that he was employed and instructed by Cheung to sign various company documents, resolutions and bank documents.  That was inconsistent with Cheung’s evidence that she did not take part in the management of Global Fair.  He was obviously insincere, evasive and was still trying to conceal the truth from this Court.  I give little weight to his evidence.  But, I am satisfied that he was a dummy.

18.Cheung Wai Yin (“Cheung”) -   Cheung is the 6^th Defendant.  She studied in the same government school with Yung when they came to know each other in 1972.  She then studied medicine in the University of Hong Kong while Yung left for Canada.  After her graduation in 1981, she joined the Prince of Wales Hospital.  She went to the United Kingdom in 1985 to qualify as a specialist in paediatric medicine.  In 1987, she started private practice in Tuen Mun and Shatin.  She was married and has three children.

19.This litigation became known to her family when the Official Receiver sought to impose a charge on her matrimonial home.  Her husband broke up with her and she left the matrimonial home.  She and her husband are now separated though not legally divorced.  About a year before this trial started, she closed down her practice to prepare for the litigation as she could not afford the hefty legal fees charged by her solicitors. 

20.Cheung is a medical practitioner with good character.  She said that despite the uncertainty over her title to the Units, she discharged the mortgage over the properties.  That would have weighed heavily in favour of her honesty and credibility.  Seeing all that she had gone through in connection with this litigation and assuming that indeed she discharged the mortgage over the properties, it would be extremely difficult not to accept her evidence.  However, though the mortgages were paid off, the source of payment was unsupported by documentary evidence which would reasonably be expected to have been produced.  I consider her assertion an empty assertion. 

21.Another consideration strongly in her favour is that Cheung appeared to be a simple medical practitioner operating a solo and simple medical practice who was not alert to the frauds in the commercial world.  She said that she was deeply impressed by what Yung told her, i.e. Yung had been defrauded by Vos who drained the Companies of their funds leaving Yung with nothing but the burdened Units which Yung had to sell to save the crippled Companies.  This purportedly simple and unfortunate woman could have easily and unwittingly fallen prey to her long trusted but dishonest friend who, as I have said, was a wolf in sheep’s clothing.

22.On the other hand, Cheung was an extremely intelligent woman as demonstrated by her professional achievement and by the very competent way she presented the legal arguments on behalf of herself and Yung.  I agree with most of the legal principles she advanced, though not the distorted way she applied them to the distorted facts she advocated.  She is certainly not a naïve woman as she tried to impress me.

23.Having considered the totality of the evidence and her conduct in the entire incident, in particular the secrecy and corporate structure she used to cover up her identity as the purchaser and owner of the Units, I form a very unfavourable view of her credibility.  I find it was more likely than not that she was a knowing party to Yung’s design in stripping the Companies of their asset than an innocent party who had accidentally wandered into Yung’s fraudulent design.  I do not believe in her evidence.

24.Goldmark Agents Limited (“Goldmark”) -  Goldmark was the corporate vehicle acquired by Vos and Yung for the purpose of carrying out their partnership business.  Vos and Yung were its only directors.  Vos held one share in Goldmark.  Unknown to Vos, the other share was held by Wealth Country instead of Yung.  Wealth Country was a company owned by Yung and Mrs Yung and controlled by Yung. 

25.World Champ Limited (“World Champ”) -

World Champ was a company acquired by Mrs Yung for the purpose of holding Unit 1A for sub-sale.  Initially, it was held by Mrs Yung’s father and brother as Mrs Yung’s nominee and was under Yung’s control until 28 April 1992.  Since then, it became the corporate vehicle of Goldmark for holding Unit 1A.  But the shareholdings were not regularized until 24 February 1993.  Half of its issued shares were held by Kensway Limited on behalf of Vos and the other half were held by Mrs Yung’s mother.  Vos, Yung and Goldmark were its directors.

26.Fudo Limited (“Fudo”) -

Fudo was a company owned and controlled by Yung and Mrs Yung who were also its directors.  Initially, Yung suggested to use Fudo as the corporate vehicle for holding Unit 1A.  Later, Fudo dropped out of the transaction.

27.Avant Garde Company Limited (“Avant Garde”) -

Avant Garde was a company incorporated and registered in British Virgin Islands (“BVI”).  It is a bearer share company.  While Cheung’s and Yung’s case is that it is a company beneficially owned and controlled by Cheung, the evidence shows that it was under the control of different persons at different times, including Cheung, Yung and Au.  It holds 99% of the issued shares of Global Fair and Start Win.

28.The other companies -

The following companies were and are under the ownership or control of Yung and/or Mrs Yung: VIP Media, Wealth Country and New Champion.

29.The following companies were and are under the ownership and control of Cheung: Global Fair, Start Win and Avant Garde.

30.Vos and Mrs Vos were and are the owners of Kensway Limited (“Kensway”).

The background

31.Vos came to Hong Kong to take up appointment as the general manager of Chemproha in 1988.  He came to know Yung who provided computer services to Chemproha.  They became good friends.  When Alphasan Group closed down its operation in Hong Kong in March 1991, Vos started his business selling Alphasan products.  Initially, he operated from the office of VIP Media in Unit 8D with Yung providing accommodation and supporting services.  After a couple of months, Vos and Yung decided to enter into a partnership selling veterinary products.  In May 1991, they purchased Goldmark and used it as the corporated vehicle for carrying on their partnership.  Vos held one share and unknown to Vos the other share was held by Wealth Country instead of Yung personally.  Vos and Yung were the first directors of Goldmark.  Vos was responsible for marketing and securing distributorship in veterinary medicine.  Yung was responsible for administration, accounting and secretarial duties.  They each contributed $50,000 to the business.  Goldmark operated at Unit 8D.  It opened an account with the International Bank of Asia Limited (“IBA”).

32.In August 1991, Goldmark and VIP Media moved to slightly larger rented premises at unit 7A of Thomson Commercial Building.  At that time, Goldmark secured distributorship in Delft Blue earthenware and coffee products.  It opened another account with a Dutch bank, Cooperatieve Centrale Raiffeisen - Boerenleenbank BA also known as Rabobank Nederland (“Rabobank”).  Vos’s wife was the secretary to its president Mr Postma.

33.In September 1991, one of Yung’s client in his computer service business offered to sell him Unit 1D for $2.9 million.  Vos and Yung decided to purchase it for use as the office of Goldmark.  Each agreed to contribute $800,000 to the capital of Goldmark, of which $700,000 would be treated as shareholders loans to be applied towards the purchase of Unit 1D while the balance would be treated as capital for trading purpose.  The balance of the purchase price would be financed by a mortgage loan from Rabobank.  Vos told Yung that his contribution for the purchase would not be available until December 1991.  Yung agreed.

34.Two other important events occurred in September 1991.  Firstly, Iris Leung was appointed as director of Goldmark on 21 September 1991.  The parties are in dispute as to the circumstances, purpose, duration and legal effect of Iris Leung’s appointment.  This issue will be dealt with separately in Section (B) before dealing with the various claims of the Plaintiff.  Secondly, on 28 September 1991, Mrs Yung entered into a provisional agreement to purchase Unit 1A from Sonatina International Limited (“Sonatina”) at $2.32 million.  She nominated World Champ as the purchaser.  This was the first of a series of transactions which ended with Kensway (on behalf of Vos) and Yung’s mother (on behalf of Yung) each owning 50% of the issued shares of World Champ.  Those transactions formed the basis of the Plaintiff’s Attempted Secret Profit Claim which will be dealt with in Section (C).

35.In October 1991, Vos secured distributorship of Intervet vaccines which provided a greater range of veterinary pharmaceutical products.  Then he left for Holland to get married.  On his return, Yung and Frankie Au helped Vos to move into an accommodation in Robinson Road.

36.In November 1991, the sale and purchase of Unit 1D was completed.  Goldmark and VIP Media moved into Unit 1D.  Round about that time, Yung and Vos discussed and agreed to purchase Unit 1A at $2.85 million.  Eventually, World Champ was used as their corporate vehicle for purchasing and holding Unit 1A on their behalf.  The sale and purchase was completed in 28 April 1992 with Rabobank providing a loan of $1.5 million to Goldmark to finance the purchase.  Those transactions will be dealt with in greater details in Section (C).

37.Between November 1991 and April 1992, Vos expanded into the pet accessory and pet food business.  He and Smulders who was the beneficial owner of Iceville Limited (“Iceville”) negotiated with another Dutch veterinary surgeon, Dr Urquhart, to acquire all the shares of and in Jade Rainbow Limited (“Jade Rainbow”) which owned distributorship or agency in pet accessories from fourteen suppliers for $450,000.  Iceville was the distributor of Iams’ pet food, which dominated the Hong Kong market.  On 15 February 1992, the sale and purchase of Jade Rainbow was completed, with Goldmark and Genius Wisdom Investment Limited (“Genius Wisdom”) on behalf of Smulders each holding one share in Jade Rainbow.  In March 1992, on behalf of Jade Rainbow Vos applied to Hill’s for distribution of Hill’s pet food.  However, Jade Rainbow dropped out and the distributorship was subsequently awarded to Goldmark instead.  On 1 April 1992, Vos signed the distributorship agreement on behalf of Goldmark with Hill’s for pet food and prescription diet. 

38.By the end of that period, the business of Goldmark expanded tremendously.  It acquired distributorship in Intervet vaccine and Kruuse.  Through Jade Rainbow, it owned distributorship from fourteen pet accessories suppliers.  It acquired sole distributorship in Hill’s pet food and prescription diet.  The pet food business was particularly promising and Vos anticipated it would generate annual profit of $1 million.  Yung secured the tenancy of a warehouse in Chaiwan to store pet food.  Frankie Au was put in charge of the warehouse.  Goldmark purchased a van and employed a driver and Yung’s father-in-law as a delivery assistant.  Goldmark also employed Eddie Kan, a former staff of VIP Media, as marketing executive to cope with the increased business.  The future of Goldmark was very promising.  Goldmark instructed Café Leung to prepare an audited account for the period from 15 August 1991 to 14 April 1992.

39.During that period, Cheung entered the scene.  She first appeared with her husband at Goldmark’s stall in the Holland Festival and purchased some Van Nelle coffee promoted by Goldmark.  Thereafter she visited Goldmark’s office in Unit 1D on a number of occasions.  She was introduced to Vos by Yung.

40.Starting from July 1992, Goldmark sold Hill’s pet food on a small scale from residual stock left by the previous distributor.  Both Vos and Yung injected $400,000 into Goldmark to finance the pet food business.  Then the first container of pet food arrived in September 1992.  Dr Chandler from Hill’s visited Hong Kong in October 1992 to supervise the launch of Hill’s products by Goldmark. 

41.Since Unit 1A could not be rented out, Goldmark moved into Unit 1A and offered Unit 1D for rent.  Again Unit 1D could not be let out.  Vos and Yung discussed about operating an animal clinic and an animal social club in Unit 1D.  It was agreed that the clinic and social club should be run by different companies. 

42.On 20 November 1992, Yung and Mrs Yung acquired one share each in Hong Kong Animal Health Association Limited (“Animal Health Association”).  The business of Animal Health Association was to operate a social club to promote Hill’s pet food, Jade Rainbow’s pet accessories and the veterinary clinic provided by Animal Health Centre.

43.On the same day, Vos and Goldmark each acquired one share in a shelf company which was then re-named as Animal Health Centre.  Dr de Vries was recruited by Vos from Holland as the surgeon in charge of the clinic.  The clinic started operation on 8 February 1993.  Mrs Vos occupied a corner in the clinic selling pet food and accessories to walk-in customers under the name of Kensway, which was a company jointly owned by Vos and Mrs Vos.

44.On 12 December 1992, Genius Wisdom sold its 50% shareholding in Jade Rainbow to Goldmark for $50,000.  On 31 December 1992, Goldmark transferred 40% of the shareholding in Jade Rainbow to Kwok.  Kwok, Goldmark, Yung, Vos and Eddie Kan became directors of Jade Rainbow.  But Yung was the sole signatory of the bank account of Jade Rainbow.

45.Towards the end of 1992, there was a break down in confidence between Vos and Yung.  Vos accused Yung of withholding the business records and accounts of Goldmark and depleting Goldmark’s cash by failing to arrange Jade Rainbow to pay for the goods supplied to it by Goldmark and keeping the proceeds of sales.  On the other hand, Yung accused Vos of refusing to contribute to the increased capital requirement of Goldmark and similarly causing Goldmark to pay for purchases by Animal Health Centre.  They also disputed about the operation of the clinic.  Vos suggested to have the accounts of Goldmark audited by KM Leung of KM Leung & Co. (C.P.A.).  Yung agreed. 

46.The distrust and dispute between Vos and Yung escalated.  On 20 May 1993, Mrs Vos changed the locks of the clinic and refused to give a set of duplicate keys to Yung.  Eddie Kan also informed Vos that she was instructed to sell Goldmark’s goods using invoices of VIP Media and to collect payment for the goods sold on behalf of Wealth Country.  On the evening of 21 May 1993, Vos and Mrs Vos raided the warehouse in Chaiwan to check the stock of Goldmark.  They discovered that an additional lock was installed.  Then they returned to the office of Goldmark and searched Yung’s office.  Most of the documents were locked up.  They made copies of some documents.  Yung suddenly returned.  The confidence between Yung and Vos totally broke down.

47.Vos sought advice from KM Leung on 22 May 1993.  A meeting was arranged between KM Leung, Yung, Frankie Au, Au and Vos on the following day.  After a meeting of ten hours into the early morning of 24 May 1993, an agreement was reached for Yung to buy out Vos’ interest in Goldmark for $2.7 million (“Provisional Settlement Agreement”).  Under the agreement Vos was to keep the medicine business while Yung was to keep the rest of the business including Hill’s distributorship.  The parties were to enter into a formal settlement agreement in the office of Messrs Johnson Stokes & Master (“Messrs JSM”) on 25 May 1993.  During the course of finalising the formal settlement agreement, Vos insisted Yung to pay another sum of $1.8 million.  Yung declined and the parties fell into a dead lock.

48.In June 1993, Yung stepped up hostility against Vos.  He locked up Vos’ computer and records relating to the veterinary medicine and denied Vos access to bank statements of Rabobank and IBA.  He secretly moved the operation of Goldmark and VIP Media and the telephone line to unit 14A of Thomson Commercial Building (“Unit 14A”).  Between 21 June and 10 August 1993, Yung withdrew $588,000 from Goldmark’s account with IBA to pay himself.  Those payments formed the basis of part of the Misappropriation Claims and will be dealt with in Section (D).

49.Yung dismissed Eddie Kan.  He transferred from Goldmark all of its stock of Hill’s pet food to Jade Rainbow for US$15,575.60.  He collected vitamin B12 from Jean Marie Pharmacal Co. Ltd on behalf of Goldmark for credit in the amount of $27,600 and sold them through Jade Rainbow to Macau Racing Company for $58,850.  Yung also instructed Messrs Hau, Lau, Li & Yeung (“Messrs HLLY”) to issue a letter of demand to Vos demanding repayment of loans from Goldmark in the amount of $298,831 and to Kensway demanding repayment of $47,000.  Vos retaliated by complaining to the Independent Commission Against Corruption (“ICAC”) against Yung and his family members for fraudulent conduct.

50.On 11 June 1993, Yung presented a cheque number 505802 drawn on Rabobank in the amount of $500,000 pre-signed by Vos and himself to Rabobank.  The cheque was not honoured by Rabobank due to lack of funds.  On 16 June 1993, Rabobank froze Goldmark’s account.  On 29 June 1993 Rabobank demanded Goldmark to repay its outstanding loan of $4,083,047.21 together with accrued interest within two weeks.  Rabobank arranged a meeting to be held on 1 July 1993 with Vos and Yung about repayment of the loan.  Yung did not turn up.  On that day, Dr de Vries also closed down the clinic to return to Holland.  On 2 July 1993, Messrs JSM offered a finalised settlement agreement to Yung for execution before 6 July 1993.  Yung did not sign the agreement.

51.On the other hand, on 18 June 1993, Yung procured Iris Leung to sign as director of Goldmark jointly with him a resolution (“1^st 1993 Resolution”) changing the mandate of Goldmark’s account with IBA so that the account could be operated by the single signature of Yung.  As a result, Yung withdrew a total of $293,310 from the IBA account to pay himself and Iris Leung.  Those withdrawals formed the basis of part of the Plaintiff’s Misappropriation Claims against Yung, which will be dealt with in Section (D).

52.On 8 July 1993, Yung and Iris Leung passed a resolution on behalf of Goldmark to sell Unit 1D (“2^nd 1993 Resolution”).  On 9 July 1993, Yung in his personal capacity and on behalf of Goldmark as World Champ’s director passed a resolution to sell Unit 1A (“3^rd 1993 Resolution”).  On the same day, Yung instructed Top Auctioneer Limited to sell the Units by auction.  The auction was advertised on 12 to 14 July 1993.  Cheung made a bid through Global Fair offering to purchase Unit 1A and Unit 1D for $2.05 million and $2.2 million respectively.  On 16 July 1993, on behalf of the Companies Yung accepted Global Fair’s offer.  On 28 July 1993, the sale and purchase of the Units was completed.  On the same day, Goldmark repaid the loan owed to Rabobank.  This sale and purchase formed the basis of the Plaintiff’s Sale of Units Claim against Yung and against Cheung, Global Fair, Start Win and Au.  Those claims will be dealt with in Sections (E) and (F).

53.On 11 August 1993, Yung caused the balance of the purchase price paid to World Champ for the sale of Unit 1A in the amount of $90,000 to be withdrawn to pay himself.  This withdrawal formed the basis of part of the Plaintiff’s Misappropriation Claims against Yung and Au.

54.On 20 August 1993, Vos petitioned for the winding up of the Companies.  The Official Receiver was appointed provisional liquidator for the Companies on the same day.

55.On 23 September 1993, Yung acquired New Champion which then took over Hill’s distributorship from Goldmark.  Cheung and Yung employed Dr Dalglish to operated the veterinary clinic in Unit 1D under the name of Phoenix Veterinary Clinic and as New Champion’s consultant for Hill’s pet food.  Subsequently, in the first quarter of 1995, the sale of Hill’s pet food increased to thirty-six containers per year.  Hill’s pet food market share ratio against Iams, increased from one to ten in 1993 to five to ten by 1997.  It is estimated that New Champion made a net profit of $1.25 million per year.  In 1997, Hill’s set up its Hong Kong office to supervise the local business.  A former marketing manager of Iceville was appointed to head Hill’s Hong Kong office.  It then terminated New Champion’s distributorship in 1997.

56.On 12 November 1993, Global Fair mortgaged Unit 1D to Hong Kong & Shanghai Banking Corporation (“HSBC”) as security for overdraft facilities in the amount of $2.5 million to be given to New Champion.

57.On 24 November 1993, Cheung caused Global Fair to transfer Unit 1A to Start Win under a purported sale and purchase agreement at a consideration of $4 million with a mortgage loan of $2 million from Dao Heng Bank to Start Win secured against a mortgage of Unit 1A.

58.On 3 May 1995, the Official Receiver commenced proceedings against the 1^st to 5^th Defendants and obtained a mareva injunction against Global Fair and Start Win restraining them from selling the Units.  On 6 September 2000, Cheung and Mrs Yung were joined as parties to the proceedings.  On 18 October 2006, the injunction was discharged after eleven years.  Pursuant to the order of A Cheung J, the Units were sold and a sum of $2.25 million from the proceeds of sale was paid into Court on behalf of Global Fair and Start Win pending the outcome of this trial.  A total sum of similar amount representing the rental income collected from the Units was also paid into Court by the Official Receiver.

The approach

59.The Plaintiff’s claim is for breach of fiduciary duty against Yung as director of the Companies and against Cheung and her group of companies for dishonest assistance and/or knowing receipt of trust properties belonging to the Companies, which had been disposed of by Yung in breach of trust.  I used the words “Plaintiff’s claim” to remind myself that though Vos has substituted the Companies as the plaintiff in this action by an assignment of the right of action of the Companies by the Official Receiver, the action is, nevertheless, about the rights of the Companies and not Vos’ personal rights as shareholder of the Companies.

60.In essence, Yung’s defence is a denial that he was in breach of his fiduciary duty as director and he gave explanations as to how he conducted the affairs of the Companies.  An overall view of his explanations is that Vos failed to contribute to the working capital of Goldmark, used Goldmark’s funds to finance his veterinary clinic, by duress forced him into buying out Vos interest in the Companies and despite that Vos resiled from the Provisional Settlement Agreement and demanded for an increase in the purchase price.  When he refused Vos’ unreasonable demand, Vos caused Rabobank to demand Goldmark to repay its loan almost immediately.  In order to avoid a forced sale of the Units by Rabobank, he sold the Units under auction.  He had been legally advised in respect of what he did.  The price for the sale of the Units was reasonable.  The sale was a commercial decision made bona fide and in the interest of the Companies. 

61.Yung also introduced as the main issue Smulders’ ambition to control the pet food market through Iceville and his 50% interest in Jade Rainbow.  He argues that there were only two competitors in the pet food market, Iams and Hill’s.  Iceville was the distributor of Iams’ pet food.  Smulders intended to obtain distributorship in Hill’s pet food under the cover of Jade Rainbow and Yung’s identity as a local businessman.  Then when Yung discovered the non-competition clause in Hill’s distributorship agreement, Smulders or Jade Rainbow had to abandon the application for Hill’s distributorship in favour of Goldmark.  As a result, Smulders’ ambition to control the pet food market evaporated, Smulders lost his interest in Jade Rainbow and sold his shares in Jade Rainbow to Postma.  Then eventually, Smulders revenged on him by causing the termination of New Champion’s distributorship when Iceville’s ex-marketing manager was employed by Hill’s to take charge of Hill’s operation in Hong Kong. 

62.Even assuming all that Yung alleged about Smulders’ ambition in the pet food market was true, those facts are irrelevant to the Plaintiff’s very narrow case as opened by Mr Lam, counsel for the Plaintiff.  Even if Vos acted oppressively in forcing an agreement on Yung and in bringing about Rabobank’s demand for repayment of loan, those circumstances could not relieve a director from his obligation to act in the best interest of the Companies.  The question is whether under, what Yung did amounted to breach of fiduciary duty.  The allegations against Vos might have an impact on Vos’ credibility; but that is irrelevant because whether Yung was in breach of fiduciary duty is largely to be determined by his conduct which is to be assessed on the basis of objective evidence.  Smulders’ motive to control the pet food market and to drive New Champion out of the pet food market is clearly irrelevant.  The latter event took place after the present dispute.  Mr Lam is right that much of those disputes are irrelevant.  I have set out those disputes and their background and am not going to embark on any inquiry as to those irrelevant allegations. 

63.Yung also argues that Vos’ motive in petitioning the winding up of the Companies was to bring about the termination of Hill’s distributorship.  Such motive is irrelevant to the present action.  Any damage to Goldmark would be suffered by Vos and Yung equally.  In any event, through New Champion, Yung had acquired Hill’s distributorship.

64.Cheung’s primary defence is that there was no breach of fiduciary duty on Yung’s part.  Further and in the alternative, her defence is that she was a bona fide purchaser for value without notice of any breach of fiduciary duty and that the price she paid reasonably reflected the forced sale value of the Units.  She had not been dishonest in the purchase of the Units.  Au has no specific defence.

65.I shall deal with the four headings of claims in Sections (C), (D), (E) and (F).  While doing so, I shall bear in mind the totality of evidence and the overall credibility of the witnesses. 

66.No one is likely to benefit from the outcome of this litigation.  If the Plaintiff succeeds, it is unlikely that Vos will recover any damages from Yung who is not a Hong Kong resident and may not have any assets in Hong Kong.  Any damages and costs awarded against Cheung and her companies may be recovered from the payments made into Court by Global Fair and Start Win.  The damages will have to be paid over to the Companies of which Yung was the major creditor to benefit.  As Yung has rightly pointed out, the litigation has no effect on him, save to clear his name and to support Cheung in her defence.  If the Plaintiff fails, Yung and Cheung will also face the difficulties of enforcing any costs order against a foreign plaintiff.

(B)  validity of iris leung’s appointment as director of goldmark  and the 1^st, 2^nd and 3^rd 1993 resolutions

Introduction

67.Before dealing with the more complicated issues of fact and law, it would be convenient to firstly and separately deal with the parties’ dispute as to the validity of Iris Leung’s appointment as director of Goldmark.  There were one resolution in 1991 and three resolutions in 1993 in issue.  On 21 September 1991, Vos and Yung passed a resolution appointing Iris Leung as director of Goldmark (“1991 Resolution”).  Pursuant to that resolution, Iris Leung and Yung passed the 1^st 1993 Resolution on 18 June 1993 changing the mandate of Goldmark’s bank account with IBA.  Then they passed the 2^nd 1993 Resolution on 8 July 1993 authorising the sale of Unit 1D.  Lastly, Yung both in his personal capacity and in Goldmark’s capacity as director of World Champ passed the 3^rd 1993 Resolution on 9 July 1993 authorising the sale of Unit 1A.

The 1991 Resolution

68.According to Vos, Yung was going to leave Hong Kong for the United States of America on 21 September 1991 to keep Mrs Yung’s company when giving birth to their child.  Yung approached Vos and suggested to appoint Iris Leung during his absence in case something happened while he was away.  Vos insisted that the appointment was only to cover the period while Yung was away and that it was to be recorded by a minute of board meeting.  Immediately, a board meeting was held and the resolution passed.  Yung drafted the minute which was signed by Vos and Yung.  At Yung’s instruction, Vos signed a notice of change of director.  The notice was filed with the Companies Registry by Yung or someone on his behalf.

69.According to the minute, Vos chaired the meeting.  The board resolved (a) the budget for Goldmark from 24 August 1991 to 23 March 1992; (b) that Vos shall be entitled to the first $250,000 profit, i.e. $145,833 for the period up to 23 March 1992; (c) the scope of business; and (d) Iris Leung’s appointment as director.  In respect of item (d), the resolution was in the following terms:

“d)  Appointment of Director :

Miss Leung Choi Hung is hereby appointed Director for the Company while Mr Yung is absent from the Colony.  Miss Leung shall resign as Director of the Company in the next Directors’ Meeting which shall be held when Mr Yung returns to the Colony.”

70.According to Yung, the minute was drafted by Vos.  It was Vos who raised the question of the resolution as he would be going to Holland for his marriage and then to Singapore for a trip.  It had nothing to do with Mrs Yung giving birth to their child as Yung’s two children were born in early 1989 and December 1992.  Vos was concerned that Yung would be on business trips while Vos was away and there was no one to attend to the business of Goldmark especially the completion of the purchase of Unit 1D.  Another and most important concern of Vos was to secure his right to the first $250,000 profit.

71.Whether Mrs Yung gave birth to her child in 1991 was not conclusively proved.  According to Vos, Mrs Yung returned in October 1991 with a child.  Assuming that Vos was mistaken, it was Yung’s evidence that Vos was concerned that Yung might be on business trip out of Hong Kong during October 1991 when Vos was away.  This suggests that the concern in Vos’ mind was that Yung might be out of Hong Kong.  When the evidence is understood in that light, whether Yung was away because Mrs Yung was going to give birth to her child at the time is of minor significance.

72.Yung denied that the board meeting was held in a hurry.  There were only two directors and the conduct of Goldmark’s business was very informal.  Matters were discussed without a formal meeting or notice of meeting.  Decisions were made and recorded in minutes prepared after discussion.  Yung said that he was inexperienced in company affairs other than those relating to small family companies, whereas Vos had more experience in company affairs and formalities through his employment with Alphasan Group. Hence, it was Vos who usually prepared the minutes and attended to filing of company documents.  Yung said that the minute was the first minute relating to running a business that he ever experienced in his life.  That submission is blatantly misleading.  Admittedly Yung was in charge of administrative, secretarial and accounting functions of Goldmark.  He was very experienced with secretarial affairs of all the companies under his control.  He was knowledgeable about off-shore and bearer share companies.  In all likelihood, he was the one responsible for the preparation and filing of this minute.

73.Yung also referred to two other minutes of the same date signed by Vos and Yung changing the bank mandate of Goldmark’s bank account with Rabobank and IBA authorising Vos and Iris Leung to sign jointly on cheques and authorisations relating to the accounts.  On the top left hand corners of those three minutes were the date “20/9/91” which admittedly were written by Vos.  Yung submits that the minutes were all prepared by Vos.  He argues although those minutes were all dated 21 September 1991, Vos at least had sight of those minutes beforehand.  This is a very forceful argument.  Those matters took place eleven years ago before Vos wrote his witness statement and seventeen years ago before he testified in Court.  Those were trivial routine matters.  Yung agreed that he would be away on business trips at that time.  Vos might well have honestly mistaken when re-constructing what had happened.  As Mr Lam submits, who drafted the 1991 Resolution contained in that minute was besides the point because both Vos and Yung signed on the minute and assented to the contents.  I agree.

74.Yung did not dispute the authenticity of his signature on the minute but refused to confirm that the contents of the copy of minute in the document bundle bore the exact wordings as in the original which presumably was kept by the Official Receiver and not made available at trial.  He impliedly suggests that Vos or those representing him had forged the copy of the minute.  That is too far reaching.  In any event, his dispute as to authenticity of the minute came far too late.  If Vos in collusion with his solicitors were to forge the minute, they would have inserted contents which would have put the matter beyond dispute.  I do not see any reason why his solicitors would have taken the risk to commit an offence to further Vos’ cause.  Yung’s equivocal stance about the contents of the minute shows a lack of good faith in his defence.  I dismiss Yung’s suggestion.

75.Then Yung submits in the alternative that if the wordings in the copy of the minute were the same as those in the original, the minute had failed to record their true common intention.  Yung argues that Iris Leung’s appointment as director was intended to cover Vos’ absence in October 1991 during Vos’ trip to Holland and Singapore and had nothing to do with his trip to the United States because Mrs Yung did not give birth to their child in 1991.  It is difficult to see how the word “Vos” and “Yung” could have been mixed up.  Then Yung further argues that Iris Leung’s appointment was intended to be a regular or permanent one so that she would be called upon to act if either Vos or Yung was absent.  In the 1991 Resolution, it was unequivocally stated that Iris Leung was appointed while Yung was absent from Hong Kong and that she would resign as director in the next directors’ meeting held when Yung returned.  The terms of Iris Leung’s appointment could hardly be clearer.  Yung was thoroughly familiar with the English language.  He graduated from one of the top government secondary schools in Hong Kong.  He went to live and study in Canada.  He graduated with an engineering degree.  He communicated with Vos in English effectively.  He prepared his witness statement and submission in English, which showed that his standard of English was of an absolutely high standard.  He could not have misunderstood the meaning of the 1991 Resolution as recorded in the minute.  If the resolution did not accord with his intention, he would have raised it there and then.  If in fact their intention was to have Iris Leung to substitute Vos, even if Yung failed to notice the mistake, Vos would have.  There was no reason why Vos when acting bona fide at that stage of his relationship with Yung would not have put the matter right.  Yung’s argument is hardly convincing. 

76.Yung draws support for his argument that Iris Leung’s appointment was intended to be a regular or standing appointment from the notice of change of director filed by Vos with the Companies Registry.  He submits that the description of Iris Leung’s appointment in the notice was one without limitation and if Vos really intended her appointment to be a short term one, Vos should have filed a notice of resignation with the Companies Registry after the term of her appointment expired.

77.I think the important document to consider is the 1991 Resolution and not the notice filed with the Companies Registry.  Yung’s argument is distorting the intention of the parties as reflected in the 1991 Resolution.  In the resolution, it was unequivocally stated that Iris Leung was appointed while Yung was absent from Hong Kong and that she shall resign as director in the next directors’ meeting held when Yung returned.  Those were the terms of Iris Leung’s appointment agreed to by Vos and Yung.  Yung’s argument that it was Vos’ intention to appoint Iris Leung not only as his substitute but also as a permanent director is absolutely absurd.  Goldmark was basically a 50-50 partnership between Vos and Yung.  There was no reason why Vos would have wished to appoint Iris Leung who was Yung’s sister-in-law to replace him during his absence.  That would wholly upset the balance of power which Vos’ and Yung’s own appointment as director was intended to maintain.  Such appointment would have the effect of allowing Yung’s camp to pass any resolutions they wished and to override any objections from Vos.  By the terms of her appointment, Iris Leung was deemed to have resigned upon the next directors’ meeting after Yung’s return on 3 October 1991 or whatever later date.  Even if Iris Leung’s appointment was a standing one effective on any occasions when Yung was out of Hong Kong, she had no authority to act as director if Yung was in Hong Kong and to pass any resolutions jointly with Yung.  Her appointment was as if she was an alternate director under article 6 of the Articles of Association of Goldmark, which provides:

“A Director who is about to go away from or is absent from Hong Kong may with the approval of the majority of the other Directors nominate any person to be his substitute and such substitute whilst he holds office as such shall be entitled to notice of Meetings of the Directors and to attend and vote thereat accordingly and he shall ipso facto vacate office if and when the appointor returns to Hong Kong or vacate office as a Director or removes the substitute from office and …”

78.Yung argues that Iris Leung’s appointment was connived by the board as she never resigned when Yung returned to Hong Kong.  Vos explained that he assumed Yung would attend to the secretarial work and overlooked whether Iris Leung resigned upon Yung’s return.  As shown in Goldmark’s documents, Iris Leung never participated in any of the board meetings since her appointment until she passed the 1^st 1993 Resolution on 18 June 1993 after the outbreak of hostility between Yung and Vos.  Under those circumstances, I am unable to draw the inference that her appointment was connived by failure, whether on the part of Vos or Yung, to ensure that she resigned after Yung’s return or to file a notice of her resignation with the Companies Registry.  Such notice is for the benefit or protection of third parties dealing with the company.  As between the parties to the resolution, they are bound by the terms of the resolution.

79.Yung further argues that by raising no objection to the audit report labelling Iris Leung as director of Goldmark, Vos connived at her appointment.  According to Vos, he only had a fleeting glance of the report as Goldmark had to submit the report urgently to Rabobank in connection with its application to increase the overdraft facilities.  Hence he did not read it with sufficient care as to notice the reference to Iris Leung as director.  The audit report was dated 23 April 1993 when hostility had or was about to commence.  The auditor might have been misguided by the documents filed with the Companies Registry.  The report was signed by Yung and not by Vos.  Yung might have consciously taken advantage of the mistake while Vos might have carelessly overlooked.  I give little weight to that representation contained in the audit report.

80.In conclusion, I find that the intention of Vos and Yung as reflected in the minute of 21 September 1991 was that Iris Leung was to be appointed as director during the temporary absence of Yung from Hong Kong and that she shall resign upon Yung’s return.  Iris Leung’s failure to resign or Vos’ failure to secure her resignation did not extend the term of her appointment.  On the evidence, Iris Leung was effectively appointed as alternate director, though the words “alternate director” were not used and neither Yung nor Vos had any concept of alternate director at the time.  Her appointment fully complied with the terms of article 6 of the Articles of Association of Goldmark.  Under the terms of the 1991 Resolution, Iris Leung’s appointment had the same effect as if she was an alternate director.  By the terms of article 6 as well as by the terms of the 1991 Resolution, upon the first directors’ meeting after Yung’s return on 3 October 1991 or whatever the date, Iris Leung’s appointment was ipso facto terminated.  Iris Leung only had authority to represent Yung during his absence from Hong Kong and could not pass any resolutions jointly with Yung.

The 1^st 1993 Resolution and 2^nd 1993 Resolution

81.By reason of the conclusion reached in the preceding paragraph, Iris Leung had no authority to pass the 1^st 1993 Resolution and 2^nd 1993 Resolution.  Those resolutions are therefore invalid.

82.Yung relied on the alleged advice he received from Alfred Hau of Messrs HLLY.  He said that Alfred Hau had done a companies search and confirmed that Iris Leung was a legitimate director of Goldmark and could sign the 1^st 1993 Resolution.  This incident is described in fuller details and in its proper context in paragraphs 241 - 252 below.  For the present purpose, suffice it is to say that I do not believe Yung’s evidence that he had sought legal advice.  If indeed he believed Iris Leung was a regular director, he would not have taken the trouble to seek confirmation from his solicitor.  Secondly, even assuming that he had sought such advice, that advice, at best, explained that Yung was acting bona fide on legal advice, but cannot resurrect Iris Leung’s appointment which had expired.  An incorrect legal advice from a third party cannot be binding on Goldmark and give effect to Iris Leung’s appointment.

83.Leaving aside my finding of fact on the intention of Yung and Vos in the 1991 Resolution, Mr Lam submits that as a matter of law Iris Leung’s appointment lapsed after eighteen months from the date of incorporation of Goldmark pursuant to section 111(1) of the Companies Ordinance and article 7 of the Articles of Association of Goldmark in default of an annual general meeting held by the company. 

84.Section 111(1) of the Companies Ordinance provides:

“Every company shall in each year hold a general meeting as its annual general meeting in addition to any other meetings in that year, and shall specify the meeting as such in the notices calling it; and not more than 15 months, or such longer period as the Registrar may in any particular case authorize in writing, shall elapse between the date of one annual general meeting of the company and the next:

Provided that, so long as the company holds its first annual general meeting within 18 months of its incorporation, it need not hold it in the year of its incorporation or in the following year.”

85.Article 7 of the Articles of Association of Goldmark provides:

“At the Ordinary General Meeting to be held next after the adoption of these Articles and at every succeeding Ordinary General Meeting all Directors, except Permanent Directors if any are appointed, shall retire from office and shall be eligible for re-election.”

86.The combined effect of section 111(1) and article 7 is that a newly incorporated company must hold its first annual general meeting within eighteen months of its incorporation and at that meeting all directors, except permanent directors, shall retire from office, though they shall be eligible for reappointment.  That was in fact what was held by Deputy High Court Judge Louis Chan in Re J & D Industrial (HK) Ltd [2006] 3 HKC.  In that case the company concerned had an article which was similar to article 7 of the Articles of Association of Goldmark.  I do not find it necessary to quote his Lordship’s well considered judgment in that case.  His Lordship reviewed authorities both from the United Kingdom and from our Court of Appeal and reached the above conclusion which his Lordship was bound to reach.  His Lordship referred to the Court of Appeal decision in Alexander Ward & Co v Samyang Navigation Co Ltd & Anor CACV 20/1971.  In that case, Blair-Kerr SPJ quoted with approval the following dicta of Sargent J inRe Consolidated Nickel Mines Ltd [1914] 1 Ch 883:

“A director on his appointment does not ordinarily step into an office which is perpetual unless terminated by some act, but into an office the holding of which is limited by the terms of the articles.  The meaning of article 101 is that the holding of the office of director was only to last until the end of 1906, or until the earlier date on which the ordinary meeting for that year was held.  If the 1^st defendant and Veritatem & Co ceased to be directors as from 1^st January 1968, or 1^st January 1969 as the case may be, and there has been no other directors appointed, it would appear that the company has had no directors at any rate since 1^st January 1969.”

More recently, in The Incorporated Owners of Finance Building v Bright Hill Management Consultants Co Ltd CACV 386/2000, Leong CJHC, Woo and Cheung JJA reached the same conclusion.  Mr Lam’s proposition of the law is beyond dispute.

87.The present case is on all four with Re J & D Industrial (HK) Ltd.  Goldmark was incorporated on 4 April 1991.  There is no dispute that Goldmark had not held any annual general meeting within eighteen months of its incorporation or at all.  Even if Iris Leung’s appointment under the 1991 Resolution were valid, her appointment expired by operation of section 111(1) of the Companies Ordinance and article 7 of the Articles of Association of Goldmark in default of the company holding any annual general meeting within eighteen months of its incorporation.  That might be a fortuitous event.  But, as a matter of law, Goldmark had no validly appointed directors after 4 October 1992.  Goldmark would have to act through its shareholders in general meeting.  The 1^st 1993 Resolution and 2^nd 1993 Resolution were therefore invalid.

The 3^rd 1993 Resolution

88.Similarly, on 9 July 1993, Yung in his personal capacity and in Goldmark’s capacity as director of World Champ passed the 3^rd 1993 Resolution authorising the sale of Unit 1A.  World Champ was incorporated on 26 August 1991 and had not held any annual general meeting within eighteen months of its incorporation or at all.  For similar reason, Yung’s, Goldmark’s as well as Vos’ appointment as directors of World Champ expired by operation of section 111(1) of the Companies Ordinance and article 7 of the Articles of Association of World Champ on 26 February 1993.  With effect from that date, World Champ had no validly appointed directors and had to act through its shareholders in general meeting who were Vos and Yung’s mother-in-law.  In addition, Yung also had no authority to represent Goldmark on the board of World Champ because his own appointment as director of Goldmark had also lapsed on 4 October 1992 for reason as explained in the preceding paragraph.  The 3^rd 1993 Resolution purportedly passed by Yung and Goldmark was therefore invalid.

89.Having disposed of the questions of validity of the resolutions, I now turn to examine the four heads of claims.

(C)  attempted secret profit CLAIM AGAINST YUNG AND MRS YUNG

The background circumstances

90.The following factual background is not in dispute. 

91.On 28 September 1991, which was at about the same time as or shortly after Vos and Yung were considering the purchase of Unit 1D, Mrs Yung entered into a provisional agreement to purchase Unit 1A for $2.32 million from Sonatina with completion date on 31 December 1991.  She paid a deposit of $50,000.  On 30 September 1991, she instructed Alfred Hau then of Messrs Alsop Wilkinson (“Messrs AW”) to act for her.  On 2 October 1991, she paid a further deposit of $414,000.  On 14 October 1991, she nominated World Champ to be the purchaser.  On 17 October 1991, Mrs Yung’s father and brother acquired World Champ as a shelf company.  Each of them held one share in World Champ and became its first directors.  According to Yung’s case, they held the shares as nominees of Mrs Yung.  On 25 October 1991, Sonatina and World Champ executed the formal sales and purchase agreement (“Sonatina/World Champ agreement”).  Mrs Yung’s father signed on behalf of World Champ. 

92.In November 1991, Yung and Vos discussed about purchasing Unit 1A for $2.85 million.  They agreed to contribute equally towards the purchase price and that Unit 1A be held by a separate corporate vehicle to be identified.  Vos told Yung that his funds would only become available in mid December 1991.  Yung agreed. 

93.On 18 November 1991, Mrs Yung’s father, on behalf of World Champ, entered into a Chinese preliminary agreement for the sub-sale of Unit 1A to Yung for $2.85 million (“World Champ/Yung agreement”).  Under that agreement, a deposit of $285,000 was paid upon signing and a second deposit of same amount was to be paid on 30 November 1991 when the formal sale and purchase agreement would be signed.  The agreement also provided that the purchaser shall pay the vendor commission of 1%. 

94.On the following day, Yung showed the World Champ/Yung agreement to Vos.  Vos co-signed a cheque number 505801 in the amount of $285,000 drawn on Goldmark’s account with Rabobank payable to Yung for the purpose of reimbursing him the deposit he had allegedly paid.  On 20 November 1991, Yung deposited two cheques in the amount of $8,856 and $64,252 into Goldmark’s account with Rabobank.  On 29 November 1991, he deposited another cheque in the amount of $500,000 into Goldmark’s account.  Yung said that these were his shareholders’ loans to Goldmark to enable it to pay the deposit and reduce the overdraft.  Those payments were not disputed by the Plaintiff.  Vos’ evidence went further.  He said that on that day, he co-signed a cheque number 505802 drawn on Goldmark’s account with Rabobank in the amount of $500,000 payable to Yung as security for the above loan advanced by Yung.  The circumstances of the issue of this cheque were disputed by Yung.

95.On 2 December 1991, Yung nominated Fudo Limited (“Fudo”) to be the purchaser in the sub-sale from World Champ.  He arranged for Messrs AW to act for Fudo instead of acting for World Champ and instructed Messrs Shaw Ng and Ma to act for World Champ.

96.On 3 December 1991, Goldmark issued another cheque number 505804 in the amount of $285,000 drawn on Rabobank account payable to Yung as the second deposit for Unit 1A.  Yung suggested to Vos to use Fudo as the corporate vehicle for holding Unit 1A and said that Fudo was a company owned by him and Mrs Yung which they had no use.

97.To allay Vos’ worry that Fudo might have some hidden liability, Yung produced a signed statement on or about 5 December 1991 confirming that he and Mrs Yung were the only directors and shareholders of Fudo which had an asset of $4 only.  On 6 December 1991, Vos agreed to Yung’s suggestion to become a 50% shareholder of Fudo for the purpose of using it as the corporate vehicle for holding Unit 1A.  On the same day, Mrs Yung was allotted sixteen shares in Fudo but Vos was only allotted ten shares.

98.On 16 December 1991, Vos issued a cheque in the amount of $700,000 to Fudo as his contribution to the purchase price.  On 18 December 1991, World Champ and Fudo executed the formal sub-sale and purchase agreement of Unit 1A (“World Champ/Fudo agreement”) with completion date on 31 December 1991.  Mrs Yung signed on behalf of Fudo and her brother signed on behalf of World Champ. 

99.The Sonatina/World Champ agreement and World Champ/ Fudo agreement were both due for completion on 31 December 1991.  However, Yung and Mrs Yung were late in attending the office of Messrs AW which resulted in Sonatina forfeiting World Champ’s deposit and cancelling the Sonatina/World Champ agreement.  Yung informed Vos that the purchase could not be completed.

100.On 7 January 1992, Yung was appointed as director of World Champ.  On 22 January 1992, World Champ instructed Messrs Phyllis KY Kwong & Co. (“Messrs PK”) to institute legal action against Sonatina seeking specific performance of the Sonatina/World Champ agreement.  On 14 April 1992, the court made an order by consent ordering the completion of the Sonatina/World Champ agreement on 28 April 1992 upon payment of $2.236 million by World Champ, i.e. $380,000 over and above the agreed purchase price of $2.32 million. 

101.In the meantime, Yung told Vos that the purchase of Unit 1A could be completed at the lower price of $2.7 million using World Champ as the corporate vehicle to hold the unit upon paying certain legal costs.  Vos agreed.  On 27 April 1992, World Champ and Fudo terminated the World Champ/Fudo agreement.  The Sonatina/World Champ agreement was completed on 28 April 1992 pursuant to the consent order. 

102.Vos’ interest in World Champ was not regularised until half a year later.  On 12 November 1992, ninety-eight shares in World Champ were allotted to Mrs Yung’s mother.  On 14 November 1992, Mrs Yung’s father’s and brother’s two shares were also transferred to Mrs Yung’s mother.  By an instrument of transfer and one set of bought and sold notes dated 14 November 1992, Mrs Yung’s mother transferred two shares to Goldmark.  On 30 November 1992, Goldmark was appointed director of World Champ while Mrs Yung’s father and brother resigned as directors.  On 30 December 1992, one-hundred shares were issued to Kensway and Vos was appointed as director of World Champ.  Thus as at that day, Yung, Goldmark and Vos were directors of World Champ.  On 24 February 1993, Goldmark transferred two shares back to Mrs Yung’s mother.  Thus since that day, Mrs Yung’s mother and Kensway were the 50% shareholders of World Champ.

103.Thus World Champ, as the corporate vehicle of Goldmark or of Vos and Yung acquired Unit 1A at a total consideration of $2.7 million plus the costs of the legal action for specific performance against Sonatina.  Rabobank advanced $1.5 million to Goldmark towards the purchase secured by a mortgage over Unit 1A.  Goldmark paid the legal costs and expenses including Rabobank’s solicitors’ fees of $14,180 for handling the loan and mortgage documentation. 

The Plaintiff’s case

104.The Plaintiff’s case is that Vos first saw the advertisement offering Unit 1A for sale in September 1991 and discussed with Yung about the purchase but Yung ignored him.  Upon knowing of Vos’ interest in purchasing Unit 1A for Goldmark, Yung and Mrs Yung secretly purchased the unit from Sonatina for $2.32 million with intention of reselling it to Goldmark at a profit.  Yung concealed from Vos the fact that he and/or Mrs Yung were the beneficial owners of Unit 1A and orchestrated a sub-sale of Unit 1A to a corporate vehicle of Goldmark, namely Fudo, for $2.85 million with the intention of making a secret profit from Goldmark.  Following Mrs Yung’s failure to complete the Sonatina/World Champ agreement on 31 December 1991, Yung told Vos that the purchase could not be completed because of problems relating to the title deeds of Unit 1A.  Then in February 1992, after Yung had reached settlement with Sonatina, Yung told Vos that the problems with the title deeds were resolved and the sale and purchase could be completed at a reduced price of $2.7 million plus some legal expenses.  Yung persuaded Vos to use World Champ as the corporate vehicle for holding Unit 1A in place of Fudo because of some unexpected indebtedness in Fudo.  Vos agreed and the World Champ/Fudo agreement was cancelled.  As a result of Yung’s unsuccessful attempt to make the secret profit, Goldmark paid $380,000 more than it would have paid plus other legal costs and expenses had Yung not been in breach of fiduciary duty.  Yung is therefore liable to Goldmark for equitable damages in that amount.  Mrs Yung is likewise liable for dishonestly assisting Yung in his breach of fiduciary duty.  Judgment on liability was entered against Mrs Yung by default.  The remaining issue in respect of her case is assessment of the damages for which she is liable.

Yung’s case

105.Yung denied that Vos had discussed with him about the purchase of Unit 1A in September 1991.  His case is that when Vos came to know that Mrs Yung had purchased the unit, he offered to purchase 50% interest in Unit 1A.  Then they agreed to purchase Unit 1A from Mrs Yung at the then market price of $2.85 million using Fudo as the corporate vehicle for holding the unit.  Later, Vos became hesitant in the purchase because of his lack of funds.  When Yung told Vos that Mrs Yung was late on the date of completion, Vos excused Mrs Yung’s fault in failing to complete.  As events turned out, World Champ had to acquire Unit 1A at $2.7 million instead of $2.32 million.  Then Yung offered Vos the option to acquire 50% interest in Unit 1A by acquiring 50% interest in World Champ instead of using Fudo to purchase Unit 1A from World Champ.  Vos agreed in view of the reduction in price.

106.Yung’s defence is that, firstly, the true and intended purchaser of Unit 1A was not Goldmark but a new joint venture between Yung and Vos.  Secondly, prior to 28 April 1992 World Champ and Unit 1A were Mrs Yung’s properties and she owed no fiduciary duty to Goldmark.  Thirdly, in any event, Yung had disclosed to Vos that World Champ would be making a profit from the sub-sale of Unit 1A.

The law - director’s fiduciary duty owed to his company

107.The legal principles governing the fiduciary duties owed by a director to his company is very well settled and can be found in any company law text books.  In general, a director is under a duty to act at all times in good faith and in the interest of the company.  He is under a duty to act for a proper purpose and not to act for a collateral or improper purpose.  He shall not place himself in a position where his duties owed to the company conflict or may conflict with his personal interests or with duties that he owes to others (“no conflict rule”).  The prohibition against conflict is not an absolute one.  It does not extend to entry into a position of potential conflict.  It only prohibits against taking advantage of a conflict when it arises.  If a trustee purchases property which he holds on trust for the beneficiary, he places himself in a position of conflict.  A trustee must not sell trust property to himself, whether or not he makes a profit, except under the most stringent of conditions, which almost invariably include well informed consent of the beneficiary. 

108.Subsumed within this “no conflict rule” is the rule that a director must not, unless expressly authorised, profit from his office.  A director may not obtain any secret profit from his position as director of the company.  This “no profit rule” is a very strict rule.  Mr Lam quoted the following statement of the law as regards secret profit by the High Court of Australia in Furs Limited And Tomkies and others (1935-1936) 54 CLR 583 at 592 as follows:

“In our opinion the decision of this appeal is governed by the inflexible rule that, except under the authority of a provision in the articles of association, no director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and by resolution a general meeting approves of his doing so, or all the shareholders acquiesce.  An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company.  It is no answer to the application of the rule that the profit is of a kind which the company could not itself have obtained, or that no loss is caused to the company by the gain of the director.  It is a principle resting upon the impossibility of allowing the conflict of duty and interest which is involved in the pursuit of private advantage in the course of dealing in a fiduciary capacity with the affairs of the company.  …”

109.In Aberdeen Rail Co v Blaikie Brothers [1843-60] All ER 249, Lord Cranworth LC emphasised that the rules governing fiduciary duties are so inflexible and strict that it does not depend on the extent of the adverse interests of the director, the fairness or unfairness of the transaction, or the genuineness of the transaction.  He said at 252:

“A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting.  Such an agent has duties to discharge of a fiduciary character towards his principal, and it is a rule of universal application that no one having such duties to discharge shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect.  So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into.  It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the cestui que trust which it was impossible to obtain.  It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interests of those for whom he is a trustee have been as good as could have been obtained from any other person; they may even at the time have been better.  But still so inflexible is the rule that no inquiry on that subject is permitted.”

110.In Regal (Hastings) Ltd v Gulliver and others [1967] 2 AC 134, the House of Lords stressed that the “no profit rule” applies even where the fiduciary has acted in good faith.  Lord Russell held at 144:

“ The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action.  The liability arises from the mere fact of a profit having, in the stated circumstances, been made.  The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.”

111.However, the shareholders can, by resolution in general meeting, confirm a contract in which the directors or some of them are interested, and upon such a resolution the director is entitled to vote his shares in whatever way he chooses, even if the result will be to assure the passing of the resolution.  Such a resolution would not, however, be effective if it amounted to a fraud or oppression on the minority shareholders: see Cook v Deeks [1916] 1 AC 554.  Neither Cheung nor Yung sought to rely on this principle to absolve them from liability.

The issues

112.The Plaintiff’s case is not based on secret profit but loss and damage caused as a result of the director’s attempt to make secret profit in breach of his fiduciary duty to act in good faith and in the interest of the Companies.  The parties’ cases are miles apart.  The burden of proof is on the Plaintiff.  Vos may only succeed if he could prove his case as pleaded.  Yung bears no burden of proving anything.  Vos’ evidence would have to be tested against Yung’s.  The issues for determination are:

(1)  whether Mrs Yung purchased Unit 1A after she became aware of Vos’ interest to acquire the unit for Goldmark;

(2)  what were the reasons given by Yung for the failure to complete the World Champ/Fudo agreement and what led to World Champ replacing Fudo as the corporate vehicle for holding Unit 1A;

(3)  whether Yung owned or had a controlling interest over World Champ prior to the completion of the Sonatina/World Champ agreement on 28 April 1992;

(4)  whether Yung had informed Vos that World Champ under Mrs Yung and/or Yung’s control had acquired Unit 1A;

(5)  whether Vos consented to profit to be made by Mrs Yung or World Champ while under her and/or Yung’s control;

(6)  whether Goldmark was the intended purchaser when it made payments towards the purchase of Unit 1A;

(7)  whether Goldmark or World Champ suffered any loss in the purchase of Unit 1A; and

(8)  whether what Yung did amounted to a breach of fiduciary duty to act in good faith and in the interest of Goldmark.

Yung raised many other issues, such as whether Goldmark knew on 28 September 1991 that Unit 1A was available for sale at $2.32 million, whether that information belonged to Goldmark in equity and whether Vos or Goldmark had any beneficial interest in Unit 1A.  Those are non-issues or irrelevant.

The “merry-go-round” cheques

113.Before turning to the issues in respect of this claim, I shall first deal with the evidence about two cheques drawn on Goldmark’s account with Rabobank in connection with the purchase of Unit 1A, cheque number 505802 and 505836.  These cheques may not have much significance in the context this head of claim, but they are featured in the other heads of claim.  Based on these two cheques Yung also attacked Vos for changing his evidence.  On the other hand, Vos alleged that the date on cheque number 505802 was forged by Yung and called into question Yung’s honesty not only generally or in relation to that cheque but a number of issues to which that cheque was related.  It is therefore convenient to deal with these two cheques separately now and get them out of the way.

114.It is common ground that on 29 November 1991 Vos and Yung co-signed cheque number 505802 in the amount of $500,000 and issued it to Yung as security for Yung’s loan to Goldmark. This cheque was not cashed as Goldmark was short of funds.  On 1 March 1992, Vos co-signed another cheque number 505836 which was cleared on 7 August 1992.  According to Vos, cheque number 505836 was to replace cheque number 505802.  Vos called these cheques and other cheques issued for such purpose the “merry-go-round” cheques. 

115.The date as now shown on the cheque was 29 December 1992.  But it is common ground that it was countersigned by Vos on 29 November 1991 as security for a short term loan of $500,000 advanced by Yung to Goldmark on that day.  The dispute between the parties is whether the cheque was dated or undated when issued.  If it was dated, it must have been post-dated to 29 December 1991. 

116.The argument was raised by Yung as an attack on the credibility of Vos for changing his evidence.  He referred to Vos’s witness statement and the Plaintiff’s statement of claim in which it was alleged that cheque number 505802 was used in the acquisition of Unit 1A.  However, in his evidence in Court, Vos said that Goldmark had issued a number of cheques in that amount to Yung.  There were numerous occasions in which Yung showed him cheques of that amount which Yung said he had deposited into the account of Goldmark.  In return Goldmark issued cheques of that amount to Yung as security.  Vos recalled that all those cheques he signed were dated.  He had to spend a lot of time and efforts after liquidation to find out the truth relating to the cheques.  He said that cheque number 505802 which on the face was dated 29 December 1992 was in fact dated 29 December 1991 which was used as a security for a loan of $500,000 advanced by Yung on 29 November 1991.  Later, Yung told him that cheque number 505802 had expired and he issued him cheque number 505836 on 1 March 1992 as replacement.  The replacement cheque was subsequently cleared on 7 August 1992.  Vos alleged that despite Yung told him that cheque number 505802 had expired, it was presented on 11 June 1993 with the date of the cheque altered to 29 December 1992.  The cheque was not honoured by Rabobank because by then Goldmark had already exceeded its overdraft limit.

117.On a proper understanding of Vos’ evidence, he was not changing his evidence when he talked about the “merry-go-round” cheque.  His statement was given on 15 November 2002, which was eleven years after the incident.  There were numerous cheques in the amount of $500,000 issued to Yung as security for or as repayment of Yung’s loans to Goldmark.  It is understandable that Vos may not easily relate cheque number 505802 with cheque number 505836.  It took him some time to find out what the various cheques of $500,000 were for.  By reason of the proximity in time with the purchase of Unit 1A, Vos’ mistake in relating cheque number 505802 with the purchase could readily be understood.  But his witness statement was not inconsistent with his evidence.  Cheque number 505802 was indeed issued to Yung on 29 November 1991 as security for Yung’s loan to Goldmark for the purpose of financing the purchase of Unit 1A.  His evidence in Court only completed the link between cheque number 505802 and cheque number 505836 which was issued as a replacement cheque to repay Yung’s loan.

118.Yung’s evidence was that cheque number 505802 was issued to him on 29 November 1991 as security for a loan of $500,000 which he deposited into Goldmark’s account with Rabobank.  That loan and the purpose for the issue of cheque number 505802 were not in dispute.  The dispute is whether the cheque was dated when issued.  Vos said it was but Yung said that it was not.  Then Yung said that the said loan of $500,000 was rectified as a shareholders’ loan and it was agreed that the cheque be used as security for another director’s loan advanced on 8 November 1991 in the amount of $550,000 which Vos was unable to contribute.  Thus Yung advanced $1,100,000 to Goldmark for the purpose of completing the purchase of Unit 1D.  Then, in February 1993, another cheque number 510297 drawn on Rabobank was issued to Yung as security for his loan of $1,100,000.  Yung’s account is very strained and difficult to understand.  If the loan of $500,000 advanced to Goldmark on 29 November 1991 was rectified or regularised as a proper shareholders’ loan it should have been supported by a loan certificate issued by Goldmark for that amount.  There was none.  The other problem is why should cheque number 505802 be used as security for another loan of a greater amount.  It would have been much tidier for the parties to tear up or cancel cheque number 505802 and issue Yung with a new cheque in the correct amount of $550,000 as security.  Then, why was the situation not rectified in February 1993 when the cheque number 510297 of $500,000 was issued to Yung?  Why did the parties not issue a cheque for $600,000 so as to tie in with the loan?  These difficulties suggest that Yung was trying to give an explanation by juggling with data which do not fit because his explanation was untrue.  I only mention the above evidence for completeness.  There is no need for me to resolve that issue.  The issue I have to decide now is whether the date on cheque number 505802 was forged.  To that issue I now return.

119.Yung attacked Vos’ evidence as incredible because Vos must have known that a cheque would not expire until after six months had lapsed and he would not have issued cheque number 505836 in March 1992 to Yung as a replacement for cheque number 505802 when slightly over three months had passed.  He referred to the date on the cheque and argues that although the figure “2” in the year “1992” appeared different from the figure “2” in the date “29”, it was written in one continuous smooth stroke without correction.  He also argues that Vos must have crossed out or torn up the expired cheque before issuing a replacement.  He submits that Vos was concocting evidence in accusing him of altering the date on the cheque.

120.The figure “2” in the year “1992” and in the date “29” written on cheque number 505802 were very different.  The downward stroke of the figure “2” in “1992” which constituted the main body of the figure appeared vertical and very much like the figure “1” as in “1991”.  Of course, I note that to the naked eye, it appeared to have been written in one continuous stroke without correction, but I am, however, not assisted by any expert opinion.  On the evidence, cheque number 505802 must have been issued at a time between the issue of cheque number 505801 and 505803.  Cheque number 505801 was issued on 18 November 1991 to reimburse Yung of the deposit he alleged paid.  According to the bank statement from Rabobank, the value date was 20 November 1991.  There was no evidence when cheque number 505803 was issued, but the value date as shown in Rabobank’s statement was 3 December 1991.  Therefore, cheque number 505802 must have been issued between 18 November and 3 December 1991.  This supports the parties’ evidence that cheque number 505802 was issued on 29 November 1991.  Vos’ evidence that the cheque was issued on 29 November 1991 but post dated to 29 December 1991 ties in neatly with the above time frame and with the fact that Yung advanced $500,000 to Goldmark on 29 November 1991.  On the other hand, if the cheque was issued undated as Yung alleged, why did he put a date of 29 December 1992 on the cheque and present it six months later on 11 June 1993?  Why didn’t he put a current date on what he alleged to be an undated cheque?  Why didn’t he present it earlier but waited until after the dispute with Vos had erupted?  Why did he present the cheque when he should have known not only that Goldmark was short of funds in Rabobank’s account but had exceeded its overdraft limit?  All these unanswered questions suggest Yung was not telling the truth.  The inescapable inference is that the date of 29 December 1992 on cheque number 505802 was a forgery and Yung was the person who forged it.  Though the burden of proving fraud is a very onerous one especially in the absence of handwriting expert evidence, the circumstances in this case are such as to make Vos’ evidence absolutely compelling and Yung’s evidence manifestly untrue.  I accept Vos’ evidence and reject Yung’s. 

121.My finding in respect of this cheque not only demonstrates Yung’s dishonesty in forging and presenting a cheque which had been replaced, but also the amount of thoughts and caution he exercised in his dealing with Vos as reflected by his preserving a replaced cheque for a year and half and to use it against his company.

Whether Mrs Yung purchased Unit 1A after she became aware of Vos’ interest to acquire the unit for Goldmark

122.Mrs Yung purchased Unit 1A on 28 September 1991 shortly after Yung and Vos were discussing about the purchase of Unit 1D.  According to Vos, at about the same time, he saw a poster at the lobby of Thomson Commercial Building offering Unit 1A for sale.  He discussed with Yung but Yung ignored him.  Then about a month or so later in early November 1991, Yung informed him that Unit 1A was available for sale at $2.85 million.  They agreed that Goldmark should purchase the unit by a separate corporate vehicle to be identified.  Throughout the discussion, Yung never told Vos that Unit 1A had been purchased by Mrs Yung or a company under her and/or Yung’s control.

123.Yung said that Unit 1A was never advertised by poster outside the management office of Thomson Commercial Building.  His evidence was that Mrs Yung was very friendly with a Mr Chan of the management office, who informed her about availability of Unit 1A and introduced her to an estate agent.  Then Mrs Yung purchased Unit 1A through Gallery Company on 28 September 1991.  Yung referred to Vos’ witness statement dated 15 November 2002 in which the allegation was that Yung informed Vos that Unit 1A was available in November 1991.  He attacks Vos’ evidence about having seen a poster in the management office as a recent concoction.  Vos’ evidence was indeed slightly equivocal.  He admitted that he did not know the content of the poster except that it was about Unit 1A as he could not read Chinese.  At one stage under cross-examination he said it was difficult to say he clearly remembered but insisted that he had seen the poster. 

124.Yung submitts that the management office would not have put up any poster disclosing particulars of Unit 1A or allowed such poster to be put up as it was the business of the management office to earn commission by introducing sales.  He said that Unit 1A was bought by Mrs Yung on the very day it was put on the market before the estate agent had prepared the poster.  There was no evidence to that effect from Mrs Yung either.  More importantly, Yung’s submission conflicts with his own evidence because not only that the management office freely disclosed the availability of Unit 1A to Mrs Yung but also diverted the business to an outside agency.  If Mrs Yung had to purchase through Gallery Company, why did she not purchase through the management office.  Yung’s evidence was confusing and illogical.  His evidence suggests that it was not the business of the management office to introduce sales of units inside Thomson Commercial Building and discredits Yung’s evidence that no poster relating to Unit 1A was posted at the management office.  I reject Yung’s evidence.

125.Prima facie, if a witness departs from his witness statement in a material aspect, it damages his credibility.  In assessing the witness’ credibility, the Court must consider the circumstances of the departure, the importance of the departure to the case of the party calling the witness and the totality of evidence.  In the present case, the departure has little to add to the Plaintiff’s case.  According to Vos’ evidence, his suggestion about the purchase was ignored by Yung in September 1991.  The significance of this event might have diminished in Vos’ mind at the time he wrote his witness statement.  I do not consider much damage has been done to his credibility by reason of this departure.  Vos appeared equivocal about the poster.  Bearing in mind that he could not read Chinese and that the event occurred seventeen years ago, he should be reasonably excused.  On the other hand, his demeanour suggests he was a responsible witness.  Though elsewhere, I find him incredible, on the totality of the evidence and his demeanour when cross-examined under this issue, I accept his evidence.  The significance of Vos’ evidence is that Mrs Yung had not acquired Unit 1A before Vos suggested the purchase to Yung.

The reasons Yung gave for the failure to complete the sale and purchase and for World Champ replacing Fudo as the corporate vehicle for holding Unit 1A

126.Vos’ case is very simple.  He was keen to purchase Unit 1A.  He acted according to what he was told by Yung.  On 16 December 1991, he deposited $700,000 into the account of Fudo as his contribution to the purchase price of Unit 1A.  Two weeks later, he was told by Yung that the sale and purchase could not be completed due to problems with the title deeds and he let things rest there.  After about a month, Yung told him that the parties could proceed with the sale and purchase at a somewhat reduced price using World Champ as the corporate vehicle and paying certain legal costs.  He was also told that Fudo could not be used as it had incurred some debts.  It is understandable that he would accept Yung’s suggestion to acquire 50% interest in World Champ which had the effect of completing the sale and purchase of Unit 1A for Goldmark.  Given his trust in Yung, his case is inherently credible.

127.If Vos had indeed been informed of Mrs Yung’s prior purchase at $2.32 million and that she inadvertently failed to complete the Sonatina/World Champ agreement on time, Yung’s case that Vos excused Mrs Yung’s fault could be credible in view of their long term relationship.  If so, Yung’s case about World Champ replacing Fudo as the corporate vehicle to hold Unit 1A could also be credible.  However, according to Vos, that was not the case.  Vos was not even aware that Mrs Yung was the beneficial owner of World Champ and was subselling the unit at a profit.

128.On balance, I think Yung’s case is inherently incredible.  On the one hand, Yung said that Vos was hesitant to purchase Unit 1A because of his lack of funds.  On the other hand, his evidence was that Vos was so eager to purchase that he was willing to pay $2.85 million for a property which was purchased a month or so ago at $2.32 million, a 23% increase in price over a month.  What discredited Yung’s case most was the fact that Vos had his share of the purchase price ready by 16 December 1991.  Vos could not have been hesitant in the purchase due to lack of funds and he had caused Goldmark to pay two deposits.  The totality of the evidence is more consistent with Yung’s covering up his case of attempted secret profit.  Under that scenario, he could not have told Vos that Mrs Yung was responsible for the failure to complete the Sonatina/World Champ agreement because if Vos did not know World Champ was owned by Mrs Yung, Vos would demand World Champ to pay damages under the World Champ/Fudo agreement.  Thus Yung had to conveniently lie to Vos by putting the blame on problems with the title deeds.  As matters subsequently turned out, the sub-sale to Fudo would be non-profitable because of the increase in price, legal costs and stamp duty.  The sub-sale would also result in additional legal costs and stamp duty to Goldmark, half of which would have to be borne by Yung.  It would be more convenient to peruade Vos to take over World Champ, cancel the World Champ/Fudo agreement and thereby pass the legal costs of the action for specific performance against Sonatina to Goldmark.  On balance, I am driven to accept Vos’ evidence. 

Whether Yung owned or had a controlling interest in World Champ prior to the completion of the Sonatina/World Champ agreement on 28 April 1992

129.One of Yung’s defence is that World Champ was owned by Mrs Yung and her family and they owed no fiduciary duty to Goldmark.  In order that Yung may be liable for attempted secret profit from the purchase of Unit 1A, the Plaintiff has to show that Yung controlled or owned or had a substantial interest in World Champ prior to the completion of the Sonatina/World Champ agreement on 28 April 1992.

130.Yung argues that he had no control over World Champ before it became the corporate vehicle of Vos and Yung or Goldmark for the purchase of Unit 1A. He was neither a director nor shareholder of World Champ.  In his witness statement, Yung portrayed a picture that he and Mrs Yung were financially separate from and independent of the other.

131.Wealth Country represents the major asset of Yung and Mrs Yung.  It is the holding company of VIP Media which used to be Mrs Yung’s business.  It also holds one share in Goldmark which represents 50% interest in Godlmark.  It is not disputed that that interest was the greatest asset of Wealth Country.  Initially, Mrs Yung held three shares and Yung held one share in Wealth Country.  Yung was its director until his resignation on 22 October 1990.  But in Goldmark’s financial statement for the year 1992/93 signed by Yung, it stated that Wealth Country was a company controlled by Yung.  Yung seeks to explain the inconsistency by arguing that he was merely authorised by Mrs Yung to manage and control Wealth Country.  I reject his explanation.  I find that Yung was in control of Wealth Country and has at least 25% interest in that company.

132.Yung said in evidence that the one share in Goldmark held by Wealth Country also belonged to Mrs Yung as he had given her everything.  This is contrary to his own witness statement in which he said that one share was held by Wealth Country on his behalf.  Then Yung said under cross-examination that to the outside world, he and Mrs Yung were the same.  He said as between him and Mrs Yung, everything was Mrs Yung’s, though this may not be so to the outside world.  He was being crafty.  I do not accept his evidence.  Despite his minority interest in Wealth Country, he was a director of Goldmark by virtue of Wealth Country’s holding in Goldmark.  He was fully in control of Goldmark while Mrs Yung only played a minor secretarial or clerical role.  This shows that he was the person in control of Wealth Country.

133.Yung admitted under cross-examination that the matrimonial home was registered in his name though it was purchased using funds of Wealth Country.  On the other hand, Unit 8D which was also purchased with the funds of Wealth Country was registered solely in Mrs Yung’s name.  Then the proceeds of sale of Unit 8D was applied towards the purchase of Unit 1A by World Champ.  The income of Wealth Country came from the business of VIP Media and Goldmark.  It is clear that Yung and Mrs Yung shared in the income from Goldmark and VIP Media jointly as a common fund.  There is no truth in Yung’s evidence that they were financially independent of one another and that everything belonged to Mrs Yung.

134.Though Yung claimed that he had no control or interest in World Champ until it became the corporate vehicle of Vos and Yung jointly or of Goldmark in the purchase of Unit 1A, the fact showed that he was actively involved in the affairs of the only business of World Champ at the time, i.e. the sub-sale of Unit 1A.  He said that he paid the first deposit to World Champ on behalf of the joint venture and he was reimbursed by Goldmark to him personally.  As for the second deposit, he said that as World Champ had no bank account, the deposit was paid to him.  He explained that paying him was the same as paying World Champ because if the cheques for the purchase were directly made out to World Champ, it would tentamount to issuing the cheque to himself.  He could not explain why the cheque was not issued to Mrs Yung as World Champ was her company and alter ego.  Of course, his difficulty was that would expose the relationship between Mrs Yung and World Champ which was the secrecy Yung was trying to protect by the use of World Champ as an intermediary in the transaction. 

135.More importantly, even before World Champ became Goldmark’s or Yung’s and Vos’ corporate vehicle for holding Unit 1A, Yung had become its director and had conduct of the action for specific performance against Sonatina.  Thus, Yung had control of World Champ even at a time when Mrs Yung was the sole beneficial owner of World Champ.

136.The totality of the evidence shows that Yung and Mrs Yung were not financially independent of one another but their assets were treated as one pool of family asset controlled by Yung.  Specifically, Yung had control of Mrs Yung’s interest in Wealth Country and World Champ.  I accept Mr Lam’s submission that it was clear from the above that the modus operandi of Yung in his business dealings was to hide himself behind the corporate structures of which, he was neither a director nor a shareholder, although he was the one in actual control.  He was deeply involved in the affairs of World Champ before he became its director before 7 January 1992 and certainly more involved since.  I find that he and Mrs Yung were parties to the design to purchase Unit 1A and sub-sell it at a profit to Goldmark. 

Whether Yung had informed Vos that Mrs Yung or World Champ had acquired Unit 1A and whether Vos consented to profit being made by Mrs Yung or World Champ from the purchase

137.These two issues are related and can be conveniently dealt with together.  According to Vos, on 8 November 1991, Yung informed him that Unit 1A was available for sale at $2.85 million and they agreed for Goldmark to purchase the unit using a separate corporate vehicle.  On 19 November 1991, Yung showed Vos the Chinese preliminary sale and purchase agreement for Unit 1A dated 18 November 1991, i.e. the World Champ/Yung agreement.  Vos could not read Chinese and accepted that it was an agreement entered into by Yung on behalf of Goldmark or the new corporate vehicle to be identified.  According to Vos, Yung did not tell him that Unit 1A was owned by Mrs Yung and her family or company under their control or that they were to make a profit out of the sale.  As a result Vos issued two cheques of $285,000 each from Goldmark’s bank account to reimburse Yung in respect of the two deposits Yung allegedly paid to World Champ.  These are respectively cheque numbers 505801 and 505804.

138.According to Yung, on or around 18 November 1991, Vos learned that Mrs Yung had purchased Unit 1A and sought confirmation from him if that was the case.  Vos expressed his interest in investing in half of the property.  Yung told Vos that it was Mrs Yung who had become the true owner of Unit 1A for her family and that the then market value was $2.85 million.  Vos agreed to buy 50% interest in the unit and suggested using a separate corporate vehicle to hold the unit jointly with Yung.  Later that evening, on behalf of the new joint venture which was yet to be born and identified Yung entered into the Chinese World Champ/Yung agreement for the sale and purchase of Unit 1A.  Then on the following day, Yung presented the World Champ/Yung agreement to Vos and interpreted its content to Vos who wrote down in English the translation of some of the relevant provisions of the agreement.  Yung expressly informed Vos that World Champ was a company related to Yung or Mrs Yung.  Vos had no objection and consented to profit to be made by Mrs Yung. 

139.This dispute is one of fact which stands or falls on my finding of Vos’ and Yung’s credibility.  Yung submits that the Chinese World Champ/Yung agreement was peculiar in that it provided that the purchaser was to pay 1% commission to the vendor and not to an estate agent.  He argues that this term supports his case that Vos had knowledge of the special relationship between the vendor and World Champ and of Mrs Yung’s ownership of Unit 1A. 

140.Yung referred to the English translation of some of the terms of the World Champ/Yung agreement, which Vos admitted were his handwriting.  He submits that this is further evidence in support of his case that he had explained the agreement to Vos and informed him of Mrs Yung’s ownership of Unit 1A.  Though Vos admitted that the translation was written by him, Vos’ evidence was that it was written by him when he was explained the content of the agreement while going through Goldmark’s documents after liquidation of the Companies.

141.Yung referred to the two deposits which were paid to him instead of to World Champ and argues that this is another piece of evidence that Vos knew World Champ was related to him or Mrs Yung.  But Vos’ evidence was that the first payment was made to reimburse Yung for what he had allegedly paid under the World Champ/Yung agreement and that the other payment was made to Yung at his suggestion as he trusted Yung and entrusted him with the purchase of Unit 1A.

142.Yung referred to the indulgence given by World Champ in not forfeiting the deposit when Vos failed to pay the second deposit on 30 November 1991 when the formal World Champ/Fudo agreement was originally scheduled to be signed.  He submits that this again reflected the special relationship between World Champ and Mrs Yung, which Vos was aware of.  However, even according to Yung’s witness statement, he explained that the delay in signing the World Champ/Fudo agreement was probably due to his failure in identifying the corporate vehicle to hold Unit 1A and nothing was mentioned about late payment of the deposit by Vos.  Fudo was only suggested by Yung on 3 December 1991.  The delay or indulgence was all a matter caused by or under the control of Yung.  I reject his submission.

143.Then, Yung argues that under the World Champ/Yung agreement as well as the subsequent formal World Champ/Fudo agreement, World Champ was the vendor of Unit 1A to the joint venture between Vos and Yung, but ultimately, World Champ became the final purchaser and corporate vehicle for the joint venture.  He submits that Vos must have noticed this and must have asked why.  He also submits that this arrangement was not possible without Fudo having to pay cancellation fees for which Vos would be liable.  He further submits that it was impossible for Vos not to have asked about the relationship between World Champ and Fudo.  These questions are self answered, if I accept Vos’ evidence that upon Mrs Yung’s failure to complete the Sonatina/World Champ agreement in time, Yung persuaded Vos to accept World Champ as the corporate vehicle for holding Unit 1A for them or Goldmark.  Furthermore, there could be no question of any cancellation fee to be paid by Fudo to World Champ because it was World Champ which failed to complete the Sonatina/World Champ agreement with the result that it could not complete the World Champ/Fudo agreement.  If any cancellation fees had to be paid, it would have been World Champ which had to pay Fudo.  After all, at the material time, both Fudo and World Champ were manipulated by Yung.  Yung’s submission on this point is disingenuous could be readily dismissed.  Yung’s submission demonstrates how crafty he was in manipulating the facts to his advantage.

144.Yung was the engineer of those transactions.  The use of two intermediaries, World Champ and Fudo, suggests the whole purpose was to use World Champ to conceal Mrs Yung’s identity as the vendor to Fudo.  Had the transactions been as transparent as Yung would have me to believe, Fudo was not necessary.  Yung could have given effect to the intention of the parties by simply allotting 50% of the shares in World Champ to Vos.  There would be no need to enter into the World Champ/Yung agreement and the World Champ/Fudo agreement.  It would not have been necessary to engage an additional solicitor and to pay additional legal costs and stamp duty.  All those sub-sales were done to dress up the World Champ/Fudo agreement as an arms’ length transaction when it was actually not.  The only reasonable inference is that Vos had not been informed of the true relationship between Mrs Yung and World Champ nor consented to profit to be made from the transaction.  That gives support to Vos’ evidence which I accept.

Whether Goldmark was the intended purchaser of Unit 1A under the World Champ/Yung agreement

145.The Plaintiff’s case is that Goldmark was the intended purchaser of Unit 1A, though the agreement was that the unit was to be held by a separate corporate vehicle.  Yung’s case is that Unit 1A was intended to be a separate and distinct investment of Vos and Yung personally.  The significance is that if the purchaser was a distinct entity, Yung’s fiduciary duty owed to Goldmark is not in issue.  The key to this issue is who provided the source of funds for the purchase.

146.Mr Lam referred me to Goldmark’s cheque number 505836 dated 1 March 1992 in the amount of $500,000 payable to Yung which was entered in Goldmark’s books prepared by Yung as payment for the purchase of Unit 1A.  It should be recalled that that cheque was issued as a replacement for cheque number 505802, which was issued as a security for Yung’s loan.  It was cleared on 7 August 1992.  This is evidence coming from Yung that Goldmark paid $500,000 towards the purchase of Unit 1A.  However, I shall assume for the benefit of Yung that the said sum of $500,000 was a reimbursement to Yung for the funds he had put in the purchase or as repayment of a loan he had advanced to Goldmark for the purchase of Unit 1A.  Accordingly, that amount should be ignored, otherwise that payment would make a double count.  The significance of this evidence is that Goldmark’s books confirmed that the sum of $500,000 had been paid by Goldamrk towards the purchase of Unit 1A.

147.There is no dispute that the two deposits of $285,000 were paid using cheques drawn on Goldmark’s bank account.  There is also no dispute that Vos paid $700,000 into the account of Fudo on 16 December 1991 for the purpose of purchasing Unit 1A as is acknowledged in Table A submitted by Yung in the course of his closing submission.  The balance of the purchase price was financed by Goldmark’s loan of $1.5 million from Rabobank.  Those funds totalled $2.77 million which was more than sufficient to cover the purchase price for Unit 1A.  All the legal costs and expenses in connection with the purchase were paid by Goldmark.  Thus, the evidence is overwhelmingly in favour of Goldmark being the purchaser.

148.Yung put forward a very complicated model to explain the various payments by Goldmark.  He said that though Vos wanted to acquire a 50% interest in Unit 1A, Vos had no money to pay his share of the purchase price.  Then Yung and Vos, as shareholders of Goldmark, agreed that Goldmark should refund part of the shareholders’ loans to Yung and Vos so that they could pay the deposit.  Thus, Goldmark issued a cheque number 505801 drawn on Rabobank to pay the deposit of $285,000 on behalf of the new joint venture between Vos and Yung.  As World Champ had no bank account at that stage, the cheque was made payable to Yung.  This explained why the first deposit was paid by Goldmark to Yung.  Yung said that all these facts had been explained to Vos.

149.After thus repaying $285,000 to the shareholders, Goldmark was depleted of funds.  On 20 November 1991, Yung lent $64,252 to Goldmark and, at the suggestion of Vos, a further sum of $500,000 on 29 November 1991.  Vos co-signed and issued Yung a cheque number 505802 drawn on Rabobank as security for the loan.  At about the same time, Vos suggested that he intended to use the funds which he had originally promised to make available to Goldmark for purchase of Unit 1D to pay for the purchase of Unit 1A under the new joint venture instead.  Yung objected and insisted that those funds should be applied as shareholders’ loan to Goldmark towards Goldmark’s purchase of Unit 1D.  Vos reluctantly agreed.  This explained the issue of cheque number 505802, which will become relevant later on.

150.By 30 November 1991, Vos could still not come up with his contribution towards payment of the second deposit.  Again, Vos suggested that Goldmark should return more shareholders’ loan to the shareholders for paying the second deposit.  Yung agreed.  Hence, on 3 December 1991, Goldmark issued a cheque number 505804 drawn on Rabobank in favour of Yung for the purpose of paying the second deposit.  This explained the payment of the second deposit by Goldmark.  Yung submits that Vos knew about all those arrangements and that it was because of the close relationship between World Champ and the new joint venture that World Champ did not forfeit the first deposit despite their failure to pay the second deposit on 30 November 1991.  But, I have rejected that agreement. 

151.Yung’s story went on as follows.  On 6 December 1991, Fudo was named as the corporate vehicle for the new joint venture between Vos and Yung.  At the time, Vos was allotted ten shares, while Mrs Yung held sixteen shares.  Thus, Vos just held a little over one-third of the shares in Fudo.  Yung explained that the unequal shareholding was to reflect the larger amount of funds put in by Yung towards the purchase price.  On 18 December 1991 when Fudo signed the formal sale and purchase agreement, Vos still failed to provide his contribution towards the purchase of Unit 1A and dropped out from the joint venture.  However, Yung and Mrs Yung kindly agreed to allow Vos to remain as a minority shareholder of Fudo and give him the option of re-joining the joint venture if he paid his half share of the purchase price upon which he would be issued his full 50% shares in Fudo. 

152.Vos’ evidence was that he knew nothing about the unequal shareholding as he entrusted all administrative and secretarial arrangements to Yung.  On an objective view, Yung’s allegation is hardly credible because there is no dispute that on 16 December 1991, just two days before signing the formal sale and purchase agreement, Vos had deposited $700,000 into Fudo’s bank account.  Since the purchase would be financed by a loan from Rabobank of $1.5 million, Vos had fully paid his contribution, be it his contribution to Yung’s alleged new joint venture or to Goldmark.  I accept Vos evidence.  I reject Yung’s story.

153.Vos’ payment of $700,000 into the account of Fudo is very important.  It completely destroyed Yung’s case.  Not only was Vos’ payment of the $700,000 not disputed by Yung, it is acknowledged by Yung in Table A of his written submission.  Furthermore, a number of loan certificates issued by Goldmark, World Champ and Fudo were disclosed by the Defendants.  In Certificate No 1 issued by Fudo, Fudo acknowledged a shareholders’ loan of $700,000 from Vos.  That certificate was signed by Vos and Yung.  It was undated, but there is no other evidence about any other shareholders’ loan of that amount from Vos.  That certificate must be referable to Vos’ contribution of $700,000 on 16 December 1991 which could not be disputed.

154.I note that the Certificate No 1 was marked cancelled.  No explanation had been given by Yung.  I assume that it was cancelled because Fudo was subsequently replaced by World Champ as the corporate vehicle for holding Unit 1A and the loan was transferred elsewhere.  There is no evidence that the loan was returned to Vos.  But there were two certificates issued by Goldmark, Certificates No 3 and 4, which acknowledged a shareholders’ loan of $700,000 respectively advanced by Vos and Wealth Country to Goldmark.  During his cross-examination of Vos, Yung put to Vos that his $700,000 was not paid to Fudo but to Goldmark.  The inference is that the $700,000 paid by Vos on 16 December 1991 was first deposited into Fudo’s account pursuant to the agreement that Fudo was to be the corporate vehicle and was then transferred to Goldmark when World Champ was used to replace Fudo as the corporate vehicle for holding Unit 1A.

155.Could the money have been transferred to World Champ instead as World Champ became the corporate vehicle for holding Unit 1A?  Probably not, because there was no evidence of any certificate from World Champ issued to Vos for $700,000.  Instead, there were two certificates issued by World Champ to Vos and Wealth Country, Certificate No 1 and 2 respectively, acknowledging a shareholders’ loan of $800,000 from each of them.  Those certificates were undated but Vos inserted the date of 30 November 1992 under his signature.  There were also two certificates issued by Goldmark to Vos, Certificates No 5 and 9, acknowledging two shareholders’ loan of $400,000 and two certificates issued by Goldmark to Wealth Country, Certificates No 6 and 10, similarly acknowledging two shareholders’ loan of $400,000.  Those four certificates were undated and marked cancelled.  Interposed among those certificates were Certificates No 7 and 11 from Goldmark which were receipts signed by Vos acknowledging repayment of his two loans of $400,000.  Certificate No 11 was dated 30 December 1992, but Vos put down the date of 30 November 1992 on both certificates.  There were also Certificates No 8 and 12 from Goldmark, which were receipts signed by Yung and Mrs Yung on behalf of Wealth Country acknowledging repayment of their two loans of $400,000.  Certificate No 12 was dated 30 December 1992. 

156.Under cross-examination, Yung said that towards the end of 1992, an agreement was reached between Vos and Yung to adjust the books of Goldmark, in Yung’s words, “segregate” the purchase of Unit 1A, as reflected in Goldmark’s audited reports for the year ended 1992, which were produced in April 1993.  As part of the segregation arrangement, shareholders’ loans to Goldmark from Vos and Wealthy Country were cancelled to the extent of $800,000 with the same being treated as going towards the purchase price of Unit 1A.  This confirmed that the two sums of $800,000 were transferred from Goldmark to World Champ as evidenced by the certificates. 

157.The inferences to be drawn from those certificates are as follows.  Vos and Wealth Country advanced two sums of $400,000 each to Goldmark at some stage (Goldmark’s Certificates No 5, 6, 9 and 10).  Those loans were repaid (Goldmark’s Certificates No 7, 8, 11 and 12).  At least one of those repayments was made on 30 November 1992 or 30 December 1992.  Then on the same day, the two repayments of $800,000 were transferred as two loans of $800,000 each advanced by Vos and Wealth Country to World Champ (World Champ Certificates No 1 and 2).  Because the two repayments to Vos by Goldmark and the shareholders’ loan to World Champ were all dated 30 November 1992, the inference is that the repayment by Goldmark to Vos and Wealth Country and the loan by Vos and Wealth Country to World Champ took place on the same day or were regularised on the same day.  Whether that day was 30 November 1992 or 30 December 1992 does not matter that much. 

158.Based on the above facts, Yung advanced a somewhat futile argument that the transfer of the two shareholders’ loan of $800,000 from Goldmark to World Champ towards the end of 1992 segregated Unit 1A from Goldmark.  Thus, with the transfer of the shareholders’ loan from Goldmark to World Champ or this segregation of the World Champ’s account from Goldmark’s account as suggested by Yung, World Champ had a loan of $1.6 million from Vos and Wealth Country which together with Goldmark’s loan of $1.5 million from Rabobank was more than sufficient to pay for the purchase price of Unit 1A.  Yung’s argument is that this transfer or segregation of account evince the intention that World Champ was the purchaser of Unit 1A as an intity independent of Goldmark.

159.Such intention has never been put to Vos.  Be that as it may, the relevant time to consider the intention of the parties was the time of contribution of the purchase price of Unit 1A.  The crucial facts were that at the point of time of the purchase of Unit 1A, the purchase was financed by Vos’ initial deposit of $700,000 into Fudo’s account which as the facts show were transferred to Goldmark and the Goldmark’s loan of $1.5 million.  The two initial deposits and all attending legal costs and expenses were paid by Goldmark.  The irresistible inference is that the intention of Yung and Vos was that Goldmark was to be the purchaser.  On the facts, no contrary intention could be inferred.  The segregation of accounts of funds seven months later is not sufficient to overturn this inference.  It was just a regularisation exercise and was neither here nor there. 

160.Following Mrs Yung’s failure to complete the Sonatina/World Champ agreement on 31 December 1991, Yung went on with his story as follows.  He said that Vos as director of Fudo raised no complaint or accusation about Mrs Yung’s failure to complete the purchase and excused Mrs Yung’s fault.  Then he said that Fudo failed to tender the appropriate payment on time and World Champ could have issued legal action against Fudo, but it did not.  Yung was very evasive and equivocal in his evidence.  On the contrary, Vos’ evidence is that he was told by Yung specifically that the sale and purchase could not be completed because of problems with the title deeds.  Vos never knew that the real cause was Mrs Yung’s arriving late for completion.  That fault was, of course, World Champ’s and not Fudo’s.  Yet, Yung has the audacity to say that out of his and Mrs Yung’s generosity, they condoned Fudo.  His allegation that Vos raised no complaint against Mrs Yung should also be considered in the light of Vos’ evidence that he did not know Mrs Yung was behind the transaction.  Had Yung told Vos that the failure to complete was because of World Champ’s default (without mentioning that Mrs Yung was behind World Champ), Vos surely would have insisted to demand compensation from World Champ for recovery of double deposit, a handsome profit of $570,000 within less than a month.  When Yung’s and Vos’ evidence is analysed against the above background, it is amply clear that Yung’s evidence is utterly incredible.  I accept Vos’ evidence.  I find that Yung had not told Vos the true reason for the failure to complete the purchase and falsely represented to Vos that the failure was due to problems with the title deeds.  Then when some progress was made in the settlement negotiation with Sonatina, Yung told Vos that the problem was resolved.  He then persuaded Vos to accept World Champ as the corporate vehicle for holding Unit 1A.  This finding further supports Vos’ evidence that he had not been told about the relationship between World Champ and Mrs Yung and explains why he raised no question when World Champ which was the vendor of Unit 1A to Fudo became Goldmark’s corporate vehicle for holding Unit 1A.  Vos probably did not even know that World Champ was the vendor.

161.To complete Yung’s evidence on this issue, he said that when Vos came to know in February 1992 that Unit 1A could be acquired for $2.7 million, Vos decided to purchase his half share in Unit 1A.  As Vos could not contribute his $700,000 to pay for his half share, Goldmark issued a cheque number 505836 drawn on Rabobank to Yung as repayment of shareholders’ loan so as to enable Fudo to complete the purchase of Unit 1A.  Yung submits that this explained why Goldmak’s cheque was used to pay part of the balance of the purchase price.  But that cheque was an outright payment to Yung which was not referable to any repayment of shareholders’ loan for the purpose of paying the purchase price towards completion of the purchase of Unit 1A.  On the other hand, Vos’ evidence that cheque number 505836 was issued to replace cheque number 505802 which was referable to the loan given by Yung towards payment of the two deposits.  Vos’ evidence was certainly more compelling.  Furthermore, the purchase was financed by a loan of $1.5 million from Rabobank. Having analysed the parties’ evidence up to this stage of the event, Yung’s evidence above can be readily dismissed because there is no dispute that Vos had paid his contribution of $700,000 into the account of Fudo on 16 December 1991.

162.Yung argues that World Champ paid nothing towards the purchase of Unit 1A and that except for the loan of $1.5 million from Rabobank, the entirety of the balance of purchase price of $1.2 million was paid by Mrs Yung.  Those payments were $50,000 initial deposit, second deposit of $414,000 and $736,000 deducted from the client’s account held by Messrs PK with money transferred from Messrs AW.  The two deposits were paid by Mrs Yung as the purchaser on behalf of World Champ when World Champ was her alter ego.  Subsequently, World Champ as Vos’ and Yung’s or Goldmark’s corporate vehicle had the benefit of those payments.  But the indisputable fact was that Goldmark paid $570,000 to Yung by way of two deposits.  That amount must have found its way into Mrs Yung’s pocket.  That leaves a balance of $630,000 which Mrs Yung apparently might not have been repaid.  Yung was in charge of the accounts of Goldmark and World Champ before and after 28 April 1993.  He had received the two deposits of $570,000 saying that paying him was the same as paying World Champ or Mrs Yung.  Yet, he had the audacity to mislead the Court by arguing that the balance of the purchase price of $1.2 million was all paid by Mrs Yung.  It is difficult to give any weight to his argument.  Furthermore, even on Yung’s case, by reason of the segregation of accounts in November or December 1992, World Champ had been allotted $1.6 million shareholders’ loan from Vos and Wealth Country.  That together with the loan of $1.5 million from Rabobank was more than enough for World Champ to have paid the purchase price of $2.7 million including all attending costs.  Yung was in charge of accounts of the Companies.  He must somehow have arranged for the said sum of $630,000 to be repaid to Mrs Yung or himself.  That sum could well have formed part of the $800,000 shareholders’ loan from Wealth Country just as Vos’ payment of $700,000 to Fudo’s account could hve formed part of Vos’ shareholders’ loan to World Champ.  In view of the above, the insincere way in which Yung gave his evidence and submission and the absence of evidence from Mrs Yung, I reject Yung’s argument.

163.Another explanation proffered by Yung for the use of Goldmark’s cheques in paying the deposits and various other payments towards the purchase was to show that the payments represented his joint interest with Vos under the new joint venture.  He argues that he and Vos were just using Goldmark’s bank account to show that the funds were their joint funds from their new joint venture and that they were just borrowing the use of the Goldmark’s cheques to evince that common intention.  That explanation is hardly credible or logical.  Yung was and is a seasoned businessman.  If there was a conscious intention to segregate the investment in Unit 1A from Goldmark’s business, that was precisely the opposite of what should have been done.  If there was a new joint venture and the intention was to evince a separate joint fund, the easiest way to do so was to open a new joint account.  Both Yung and Vos were very familiar with members of the senior management of a number of banks in Hong Kong.  In any event even without such connection, opening a joint account in those days and nowadays was and is a very simple matter.  The sale and purchase of Unit 1A did not occur all of a sudden, but extended throughout a period of two months.  Yung and Vos could have opened such a joint account, if not in time for reimbursing Yung the first deposit, at least for the purpose of paying the second deposit and all the other payments thereafter.  I reject Yung’s arguments.

164.Yung tries to play down the significance of Rabobank’s loan of $1.5 million to Goldmark to complete the purchase of Unit 1A by arguing that it was just a commercial arrangement and that the loan was secured against World Champ’s interest in Unit 1A.  Security was one thing, but liability was more important.  World Champ had no liability for the loan except to the extent of its interest in Unit 1A, but Goldmark attracted liability under the loan agreement with Rabobank if the new joint venture was unable to repay and the value of security fell below the amount of outstanding loan.  Under cross-examination, Yung admitted that World Champ would have no difficulties obtaining a mortgage loan by itself, provided that Yung and Vos would offer their personal guarantees.  This was especially so as Yung and Vos were very familiar with the major banks in Hong Kong.  On the other hand, Goldmark was operating a very promising business at the material time.  Even though the shareholders behind the Companies were the same, there was no reason why Goldmark should attract such a burden and risk, if World Champ was not its corporate vehicle for holding Unit 1A.  After all, the purpose of using a corporate vehicle to own property was to protect the shareholders from unforeseen liability arising from the ownership of the property.  I reject Yung’s argument.

165.There are some other minor arguments raised by Yung, such as that there was no documentary evidence showing World Champ was a subsidiary or related company of Goldmark.  I dismiss those arguments as carrying little weight in the light of the totality of the evidence.

166.Vos’ case is very simple and straightforward.  It is credible when measured against the totality of the evidence.  The two deposits of $570,000 paid by Goldmark, Vos’ deposit of $700,000 into Fudo’s account and Goldmark’s loan of $1.5 million from Rabobank were more than sufficient to pay for the purchase price of Unit 1A.  All the legal costs and expenses in connection with the purchase were paid by Goldmark.  These objective and incontrovertible evidence support Vos’ evidence that the agreement between him and Yung was that Goldmark was to purchase Unit 1A using a separate corporate vehicle.  The evidence in favour of Goldmark as the purchaser is overwhelming.  Yung put forward a very complicated model to explain the various payments by Goldmark.  The model is too complicated to be true.  The more complicated is the explanation, the farther away that explanation is from the truth.  The model is incredible and has been demonstrated to be false in a number of material respects as discussed above.  In particular, that model stands on the basis that Vos could not provide his share of contribution to the purchase price.  That basis was completely destroyed by Vos’ payment of $700,000 into Fudo’s account.  I reject Yung’s evidence.  I find that Vos and Yung as directors of Goldmark agreed that Goldmark was to purchase Unit 1A using a separate corporate vehicle.  Fudo was the intended corporate vehicle but as events turned out, it was replaced by World Champ.

167.Goldmark paid another sum of $500,000 towards the purchase price as recorded in the books of Goldmark by Yung.  That amount had probably been advanced by Yung or Mrs Yung and was then repaid by cheque number 505836 which was cleared on 7 August 1992.  It might even have come from Mrs Yung’s proceeds of sale from her Unit 8D as alleged by Yung.  That is immaterial.  The balance of the purchase price was financed by Rabobank’s loan to Goldmark of $1.5 million.

Finding of fact

168.I therefore make the following finding of fact.  Vos became aware that Unit 1A was up for sale and informed Yung.  Knowing that Vos was interested in the unit, Yung and Mrs Yung decided to purchase it and sub-sell to Goldmark for quick profit.  Mrs Yung purchased Unit 1A on 28 September 1991 with completion on 31 December 1991.  To conceal her identity as the owner of Unit 1A, Mrs Yung nominated World Champ as the purchaser.  She purchased World Champ as a shelf company and had its shares held by her father and brother as her nominees.  World Champ was controlled by Yung.  In early November 1991, Yung informed Vos that Unit 1A was available.  They reached agreement that Goldmark was to purchase Unit 1A for $2.85 million using a separate corporate vehicle to be identified.  Then on behalf of the corporate vehicle to be identified Yung entered into the World Champ/Yung agreement with World Champ and presented it to Vos on 19 November 1991.  He did not tell Vos the relationship between World Champ and Mrs Yung or himself.  Vos did not know and was not informed by Yung or Mrs Yung that Unit 1A was being purchased from them or from World Champ which was owned by Mrs Yung, still less that they stood to make a profit of $530,000 from the deal.

169.As events turned out, due to Mrs Yung’s default, the Sonatina/World Champ agreement and World Champ/Fudo agreement were not completed.  Following the settlement with Sonatina, Yung persuaded Vos to use World Champ as the corporate vehicle for Goldmark for holding Unit 1A and Fudo dropped out of the arrangements, presumably to reduce costs.  The Sonatina/World Champ agreement was then completed on 28 April 1992.  Thus through World Champ, Goldmark acquired Unit 1A for $2.7 million.  Even though there was a subsequent adjustment of the books of Goldmark to segregate the accounts of World Champ and Unit 1A from Goldmark’s books and accounts, that was irrelevant as acts relied on as breach of fiduciary duty had already taken place.

Whether Yung was in breach of fiduciary duty

170.Had Mrs Yung not been late for completion on 31 December 1991, the Sonatina/World Champ agreement and the World Champ/Fudo agreement would have been completed.  Fudo or Goldmark would have paid $2.85 million instead of $2.32 million to purchase Unit 1A.  World Champ or Yung and Mrs Yung would have profited $530,000 from the transaction.  Under that scenario, it would have been a straightforward case of breach of fiduciary duty by Yung as director of Goldmark.  Knowing of Goldmark’s intention to purchase Unit 1A, in collaboration with Yung, Mrs Yung purchase Unit 1A from Sonatina and Yung made arrangements to sub-sell it to Fudo.  The arrangements were unknown to Vos and hence unknown to Goldmark.  Had the design worked out, Yung would have placed himself in a position of conflict and would have made a secret profit.  Yung would have been in breach of the “no conflict rule” and the “no profit rule”.  Mrs Yung would have been liable as accessory for assisting Yung in his breach.  That designed failed.  That, however, is not the end of the matter.

171.Yung was under a duty to act in good faith and in the interest of Goldmark.  He should not have attempted to make secret profit from his dealing with Goldmark.  Had he been loyal to his duty, he would have brought about the purchase of Unit 1A for Goldmark direct from Sonatina in September 1991 at the price of $2.32 million.  But for his crooked design, Goldmark ended up paying $2.7 million.  Goldmark suffered loss of $380,000.

172.But, assuming that Vos did not know about the availability of Unit 1A in September 1991, the position is no different on my finding of fact that Yung held a significant interest in World Champ.  He, Mrs Yung and World Champ were one and the alter ego of the other.  He and Mrs Yung acted pursuant to a common design to sub-sell Unit 1A to Goldmark at a profit.  He was the controlling mind of World Champ.  Even if it was Yung who first suggested to sell Unit 1A to Goldmark, he should have informed Vos that World Champ would make a profit of $530,000 and that World Champ was a company in which Mrs Yung and himself were interested.  Again, it was his attempted breach of the “no conflict rule” and the “no profit rule” which brought about the damage suffered by Goldmark.

173.Under either scenario, Yung is liable for breach of fiduciary duty and Mrs Yung is liable as accessory for assisting in Yung’s breach.  They are jointly liable for equitable damages to Goldmark. 

Loss suffered by Goldmark

174.Apart from the price difference of $380,000, Goldmark paid the following sums which would not have been incurred but for Yung’s breach of fiduciary duty.

175.Goldmark would not have incurred and paid the fees of Messrs AW for representing Fudo in the World Champ/Fudo agreement in the amount of $20,870.  This payment was effected by a cheque number 376990 drawn on Goldmark’s account with IBA made payable to Yung.  Vos explained that the cheque was made payable to Yung at Yung’s request as an reimbursement of what he had paid Messrs AW.  Vos accepted what was represented to him.  On the payment voucher prepared by Yung’s Philipino maid, Lita, it was recorded as payment to “ALSOP” for licence fee, presumably referring to Messrs AW.  There is no evidence and it is inconceivable what licence fee this solicitors’ firm was charging Goldmark.  This reflects the illicit purpose of the payment and the fraudulent design engaged by Yung in covering up not just this payment but the entire design in his attempt to make secret profit from the purchase of Unit 1A. 

176.Goldmark would not have incurred the legal costs of Messrs PK for commencing proceedings on behalf of World Champ against Sonatina for specific performance of the Sonatina/World Champ agreement.  Those fees amounted to $40,468.60. 

177.Goldmark would not have paid World Champ as vendor of Unit 1A the commission of $28,500 under the World Champ/Fudo agreement.  The commission was made payable to Yung on Yung’s representation that it was a reimbursement to himself for what he had paid World Champ.  Again, Vos accepted what Yung said and issued Yung a cheque number 376991 drawn on goldmark’s IBA account for that amount.  It is only too clear that because of his trust in Yung built up since their partnership, he readily accepted what Yung represented to him.  It demonstrates how easy it was for Yung to take advantage of Vos’ trust and how readily Vos fell prey to Yung’s illicit design.  But there should be a set off in respect of the commission of $23,200 paid by Mrs Yung to Gallery Company in her or World Champ’s purchase of Unit 1A from Sonatina.  The net amount is $5,300. 

178.Lastly, had Goldmark purchased Unit 1A at $2.32 million, it would have saved stamp duty in the amount of $14,575.

179.The total loss suffered by Goldmark in respect of this claim is $461,213.60 (i.e. $380,000 + $20,870 + $40,468.60 + $5,300 +  $14,575).

Conclusion for Attempted Secret Profit Claim

180.Yung was in breach of his fiduciary duty owed to Goldmark and is accordingly liable for damages representing the loss suffered by Goldmark which I assess in the amount of $461,213.60.  Judgment on liability having been entered against Mrs Yung for conspiracy, I therefore assess the damages for which she is liable in the same amount.  Accordingly, Yung and Mrs Yung are jointly liable to the Plaintiff in the amount of $461,213.60 in respect of the Attempted Secret Profit Claim.  The award shall be with interest with effect from the date of completion of World Champ’s purchase of Unit 1A, i.e. 28 April 1992.

(D)  misappropriation claims AGAINST YUNG

Introduction

181.These are miscellaneous claims for misappropriation of Goldmark’s funds by Yung discovered during the course of the winding up of the Companies.  They were related to Yung’s conduct before the breakdown of his relationship with Vos in May 1993 and thereafter when he hijacked the management of Goldmark.  There are two claims in respect of the former period and five claims in respect of the latter period.  These claims are relatively straightforward.  It is virtually impossible to argue that misappropriation by a director of the company’s assets does not involve breach of fiduciary duty. 

Fraudulent reimbursement of legal fees from Goldmark

182.The Plaintiff’s claim is that on 26 November 1991 Yung presented Vos with a cheque number 368754 drawn on Goldmark’s account with IBA in the amount of $19,500 payable to Yung for signature.  Yung represented to Vos that the payment was a reimbursement of payment made by Yung in settlement of bill number 8637 issued by Messrs AW on 13 November 1991.  The bill was in respect of legal services rendered by Messrs AW in Goldmark’s purchase of Unit 1D.  Upon winding up, it was discovered that the services rendered by Messrs AW was complimentary.  Messrs AW confirmed to the Official Receiver by their letter dated 22 December 1993 that they had waived the fees of $19,500.  The bill rendered by Messrs AW showed that the costs for attending to the agreement and assignment in the amount of $19,500 was marked complimentary and Messrs AW only charged Goldmark for the disbursements in the amount of $1,050.

183.The above facts are not disputed by Yung.  Yung’s defence is that at the time of signing the cheques Vos agreed to pay him a bonus because of the savings he had made for Goldmark.  Yung said that, firstly, Messrs AW waived the fees for the agreement and assignment of $19,500 because of his relationship with Messrs AW.  Yung was on good terms with a solicitor, Alfred Hau then of Messrs AW, who subsequently left and started his own firm Messrs HLLY.  That Alfred Hau had much to do with the subsequent auction of the Units.  Secondly, Yung said that he brought about the purchase of Unit 1D without going through an estate agent and saved $29,000 by way of commission.  He also said in evidence that as he was informing Vos of his demand for the bonus he was holding a pencil and crossed out the words “complimentary” from the bill meaning that the fee for the agreement and assignment had to be paid to him.  All these were denied by Vos.  In any event, Yung’s assertion that by crossing out the word “complimentary” Vos could have agreed to make a bonus to him does not make any sense.

184.Yung referred to the two cheques, one in the amount of $19,500 issued to him and the other in the amount of $1,050 issued to Messrs AW for the disbursements.  He submits that Vos must have realised that the names of the payee written on the two cheques were different, must have asked why and must have agreed to give Yung the reward when he signed the two cheques.  Vos denied that was the case and said that signing two cheques for one bill it was not unusual in his dealings with Yung.  I do not share Vos’ opinion.  I think it is highly unusual to have issued two cheques to two different payees to settle the same bill.

185.On the other hand, the cheque stubs showed that the cheque issued to Messrs AW was remarked as “Wilkinson Legal Fee” and the cheque issued to Yung was remarked as “Legal fee paid by Kapo”.  Yung presented the cheques to Vos for countersignature.  He must be the one who wrote the cheques and cheque stubs or at least approved their contents.  In the payment voucher in respect of these cheques, it was noted that both payments were for “professional service”.  If what Yung said was true, the payment voucher and the cheque stub for cheque number 368754 should have recorded the payment as “bonus”.  It is also worth noting that the payment voucher was prepared by Yung’s maid, Lita, and during the Official Receiver’s examination of Yung in the winding up proceedings, Yung falsely alleged that Lita was the part time account clerk hired by Vos.  All these objective evidence weigh heavily against Yung.

186.Though it is unusual for Vos to have signed two cheques to settle the same bill, there was an explanation.  I have found in respect of the earlier claims that it was Vos’ practice to accept what was represented to him by Yung and sign cheques payable to Yung as reimbursements which Yung claimed to have paid on behalf of Goldmark.  In going through the documents, I find it a special feature in this case that many of the payments in respect of Goldmark’s liability were effected as reimbursements to Yung rather than as direct payment by Goldmark to the recipient.  Because of his trust in Yung, Vos accepted the payments as reimbursements without question and signed many cheques payable to Yung for expenses which allegedly had been paid by Yung on behalf of Goldmark.  On the bill was written the words “Paid by Capo”.  The cheque stub showed that the cheque was issued as reimbursement of legal fees paid by Yung.  In the light of all these incontrovertible and objective evidence, I think the balance leans heavily in favour of Vos’ evidence being closer to the truth than Yung’s.  I accept Vos’ evidence.  I find that Yung had misrepresented to Vos that he had paid the legal fees which was marked as “complimentary” on the bill.  Vos took Yung’s words for granted and issued him the cheque for a liability which never existed. 

187.Though Yung might have saved Goldmark from estate agent’s commission in purchasing Unit 1D and might have saved Goldmark’s legal fees, it nevertheless was a director’s duty to act in the interest of the company and to reduce the company’s expenses.  A director is not entitled to extra bonus unless agreed to by the company.  Just as Vos secured Hill’s distributorship without charging any commission or bonus, neither should Yung.  There was no agreement that Yung should receive a bonus.  His conduct was deceptive and in breach of his fiduciary duty as director.  He is liable to make good the funds lost.

Double reimbursement of legal fees from Goldmark

188.On 28 April 1992, Messrs Ho & Wong as solicitors of Rabobank issued a bill number 92215 in the amount of $14,180 for their fees in handling Rabobank’s loan of $1.5 million to Goldmark and the mortgage of Unit 1A.  Yung procured Vos to countersign and issue him a cheque number 372611 drawn on Goldmark’s account with IBA dated 19 May 1992 as reimbursement to Yung for the fees paid.  The cheque was supported by a voucher dated 20 May 1992 prepared by Lita.  However, Yung procured Vos to countersign and issue him another cheque number 376989 drawn on Goldmark’s account with IBA dated 28 July 1992 for the same purpose.  The second cheque was supported by a payment voucher dated 8 June 1992, which was also prepared by Lita.

189.Yung has no defence to this claim save to argue that the auditor must have known about this sum when auditing the accounts in March 1993 and made adjustments.  As submitted by Mr Lam, this was unlikely.  An auditor would merely rely upon the vouchers prepared by the directors, in this case by Yung’s maid, Lita.  It is unlikely that the auditor would have gone behind each and every voucher especially for a relatively small sum as this.  He would most likely have relied on the description given in the voucher of “professional fees” and regarded it as having been properly incurred.  Having received a double payment, even if innocently, Yung became a constructive money.  The burden is on him to show the appropriate adjustment had been made by the auditor when reconciling Goldmark’s account.  There is no such evidence.  Hence, Yung is under a duty to return the said sum of $14,180.

Payment of four sums from Goldmark’s account with IBA to Yung

190.The Plaintiff claims misappropriation of four payments made by Yung after the break down of relationship between Vos and Yung in June 1993.  Hitherto, Goldmark’s account with IBA could only be operated on the joint signatures of Vos and Yung.  On 18 June 1993, Yung procured Iris Leung to sign as director of Goldmark together with himself the 1^st 1993 Resolution changing the bank mandate with IBA so that all cheques and authorisations must be signed singly by Yung.  With the change of mandate, Yung withdrew three sums of $200,000, $30,000 and $33,310 from Goldmark’s account with IBA for himself and a sum of $30,000 for Iris Leung.

191.Yung did not dispute the above facts.  His defence is that by reason of Iris Leung’s appointment as director of Goldmark under the 1991 Resolution, the 1^st 1993 Resolution changing the mandate was valid and that the three sums were not payments to himself but to the cash account he maintained for Goldmark’s business.  Having found on the facts that Iris Leung’s appointment under the 1991 Resolution expired upon Yung’s return to Hong Kong on 3 October 1991 or whatever the date and on the law that her appointment would in any event have lapsed pursuant to section 111(1) of the Companies Ordinance and article 7 of the Articles of Association of Goldmark, the 1^st 1993 Resolution changing the mandate is invalid.  But, this is really besides the point.  The issue is not whether the new mandate was valid by reason of the 1^st 1993 Resolution, but whether Yung misappropriated the funds of Goldmark.  Even if the mandate or the 1^st 1993 Resolution were valid, that did not legitimise his pocketing the funds which belonged to Goldmark.

192.Yung’s further defence is that since the outbreak of hostility, Vos refused to sign further cheques, bringing Goldmark to a standstill.  He therefore had no choice but to pass the 1^st 1993 Resolution to give him sole authority to operate Goldmark’s account with IBA.  Such evidence was contradicted by the indisputable fact that on 25 May 1993, Vos signed a series of cheques of Goldmark at Yung’s request at the office of Messrs JSM.  Yung then alleged that he telephoned Vos but could not reach him.  No attempt was made to look for Vos at his residential address in Robinson Road or to contact him through Messrs JSM.  Despite the many communications between Vos and Messrs JSM about finalising the formal settlement agreement, there was no record of Yung’s complaint about Vos refusing to sign cheques or even of request for Vos to sign cheques.  Yung said that he did not wish to trouble any third parties and merely left a message with Messrs JSM to ask Vos to contact him.  Again, there was no record of any such attendance notes on Messrs JSM’s files.  Yung said that he had even sought advice from Alfred Hau of Messrs HLLY but could not explain why he was not advised to contact Messrs JSM or why Messrs HLLY never wrote on his behalf to Messrs JSM concerning this matter.  On the contrary, at all material times, Messrs JSM was chasing Yung to sign the formal settlement agreement, but to no avail.  Yung’s allegation that Vos refused to sign cheques and that he could not get in touch with Vos was just an empty excuse.

193.When asked why he did not give Vos notice of meeting for the purpose of passing the 1^st 1993 Resolution, Yung was very evasive.  He was equivocal and said he might have given notice to Vos about the board meeting but he could no longer remember.  He was unable to say how the notice would have been given.  He accepted that he did not give notice to Vos through Messrs JSM nor did he give a copy of the 1^st 1993 Resolution to Vos or Messrs JSM.  Vos denied to have received any notice of board meeting for the purpose of passing the 1^st 1993 Resolution.  Vos had been checking on the Goldmark’s balance in the IBA account every now and then.  Had he been given notice of such board meeting, he would certainly have reacted most strongly, especially as he was already represented by a top firm of solicitors.  He would have applied for an injunction or must have at least alerted IBA of the invalidity of Iris Leung’s appointment.  I reject Yung’s evidence.  It is only too obvious that Yung deliberately withheld information about the passing of the 1^st 1993 Resolution from Vos so that he could secretly change the mandate without Vos’ knowledge and empty Goldmark’s funds in Goldmark’s IBA account.  From the secretive and illegitimate manner with which Yung held the board meeting and passed the 1^st 1993 Resolution, dishonesty on the part of Vos in his withdrawal of the funds from the IBA account could readily be inferred.

194.Yung did not dispute withdrawing the three sums of $200,000, $30,000 and $33,310 to pay himself without Vos’ consent.  He said that the funds were paid into Goldmark’s “cash account” or “cash bank” to be used mostly for transactions in relation to the company.  He could produce no books or ledgers kept in respect of that cash account.  He said that the cash account was kept in his computer.  There were no contemporaneous printouts and no supporting documents.  Such a cash account could be made up or altered at any time.  I give no weight to his evidence.  He bears the burden of proving he was entitled to be reimbursed the three sum of money, which he failed. 

195.Yung did not deny that on 21 July 1993 he issued a cheque to Iris Leung from Goldmark’s account with IBA in the amount of $30,000.  Iris Leung was an employee of VIP Media and was at all material time on the payroll of VIP Media.  There is no dispute that Goldmark had never paid Iris Leung salary prior to 21 July 1993.  Yung explained that he felt Iris Leung deserved to be paid a salary.  Even if Iris Leung deserved to be paid a salary in view of her increased contribution to Goldmark, Yung was not entitled to act unilaterally.  He had never consulted Vos or obtained Vos’ consent for such payment.  The very secretive and improper way in which the 1^st 1993 Resolution was passed and the payment was made suggest that Yung’s reason for making the payment was not genuine.  He has to account to Goldmark for his misappropriation of that sum of money.

196.Accordingly, Yung is liable to refund $293,310 which he misappropriated from Goldmark’s account with IBA.

Yung’s appropriation of $90,000 from World Champ

197.Yung instructed Messrs Wong Shum & Co. (“Messrs WS”) to act for the Companies in the sale of the Units to Cheung.  Upon completion of the sale and purchase of the Units, part of the proceeds of sale in the amount of $90,000 was payable to the Companies.  On 10 August 1993, Yung instructed Messrs WS to pay the said sum to Goldmark, presumably believing that he could withdraw the money if it was paid into Goldmark’s account with IBA.  However, on the same day, on the instruction of Vos, Messrs JSM instructed IBA not to release any funds from Goldmark’s account without Vos’ prior written approval.  On 11 August 1993, Yung instructed Messrs WS to pay the sum $90,000 to World Champ instead.  Upon deposit of the said cheque from Messrs WS into World Champ’s account with IBA, Yung withdrew the money to pay himelf.

198.Yung did not dispute the above facts.  His defence is that World Champ was indebted to Mrs Yung in relation to its acquisition of Unit 1A for a long time and the loan was repayable on demand.  Pursuant to the instruction of Mrs Yung, he issued a cheque payable to himself as he believed he was entitled to receive this cheque for and on behalf of Mrs Yung.  Of this funds, $30,000 was loaned to Goldmark on 9 August 1993 as shown in Goldmark’s cash account.

199.Yung’s defence is a whole load of nonsense.  The funds used by World Champ in the purchase of Unit 1A all came from Goldmark.  It might include loans from Yung to Goldmark.  But there was no evidence whatever of any loan from Mrs Yung.  Whatever money Mrs Yung might have used in the purchase of Unit 1A, was used to pay Sonatina under the Sonatina/World Champ agreement when World Champ was under her wings.  She was then purchasing Unit 1A for herself.  When World Champ became Yung’s and Vos’ corporate vehicle for holding Unit 1A, all funds for the purchase were clearly shown to have come from Goldmark, the two deposits totaling $570,000 Vos’ deposit of $700,000 into Fudo’s account and Goldmark’s loan of $1.5 million from Rabobank.  There was also a loan of $500,000 from Yung which was secured by Goldmark’s cheque number 505802 which was then replaced by cheque number 505836.  I assume in favour of Yung that this sum was used to pay the two deposits so as to avoid a double counting.  Whatever money World Champ might have benefited from Mrs Yung’s payments when World Champ was her nominee must have somehow been cleared between herself and Yung or between Goldmark and Yung because Goldmark had fully provided the purchase price of $2.7 million.  This shows how gallantly Yung was trying to pull wool over the Court’s eyes, not to mention his dishonesty in forging cheque number 505802 and attempt to cash that cheque when the loan had already been repaid by cheque number 505836.  I reject Yung’s evidence.  He is liable to make good the amount of $90,000 which he misappropriated from World Champ.

Conclusion for Misappropriation Claims

200.In conclusion, Yung is liable to repay the Plaintiff $416,990 under the Misappropriation Claims ($19,500 + $14,180 + $200,000 + $30,000 + $33,310 + $30,000 + $90,000).  The award shall be with interest from the date the cheques were paid.

(E)  sale of units claim against Yung and mrs yung

The Plaintiff’s case

201.The Plaintiff’s case is that the sale involved breach of fiduciary duty on the part of Yung as director of the Companies.  The 2^nd 1993 Resolution and 3^rd 1993 Resolution authorising the sale of the Units were invalid.  Yung had no authority to sell the Units.  The Units were sold to Yung and Mrs Yung with Cheung, Global Fair and Avant Garde as their nominees to conceal their identities.  Yung was in breach of his duty to act in good faith and in the interest of the Companies, the “no conflict rule” and the “no profit rule”.  The Units were sold at an undervalue as part of Yung’s attempt to strip the Companies of their assets after the disputes had arisen between him and Vos.  As for the case against Mrs Yung, judgment on liability was entered against her.  The outstanding issue is assessment of damages.

Yung’s case

202.Yung denied that the 2^nd Resolution and 3^rd 1993 Resolution were invalid.  He argues that proper notice of board meeting to consider the resolutions had been given to Vos, but Vos failed to attend.  He denied that the Units were sold to himself or at an undervalue.  His further defence is that at the time he believed he had no way out and the auction of the Units was the only way to save Goldmark.  His case is that by July 1993, Goldmark was in severe financial difficulties due to the operation of Jade Rainbow and Animal Health Centre which placed huge burden on Goldmark’s cash flow.  As a result of his dispute with Vos, Vos colluded with Rabobank to destroy Goldmark by freezing its account and overdraft facilities and demanding repayment of all indebtedness.  He was desperate.  To save Goldmark’s business and to protect the Units from being force sold by Rabobank, he considered the only way out was to sell the Units as quickly as possible, even if the price obtained was just sufficient to cover Goldmark’s indebtedness to Rabobank.  He therefore passed the 2^nd 1993 Resolution and 3^rd 1993 Resolution to authorise the sale of the Units.  The sale was a genuine business decision made bona fide in the interest of the Companies.  Even if he was in breach of the “no conflict rule”, the rule should be relaxed as he was the legal owner of 50% of the issued shares in the Companies and the equitable owner of the remaining 50% and the major creditor of the Companies.

203.Lastly, Yung had a counterclaim against the Companies for monies which he had advanced to the Companies and any claim against him can be set off against those advances.

The approach and issues

204.The Plaintiff’s pleaded case is breach of fiduciary duty and not merely breach of duty of care as director.  The Plaintiff is effectively alleging fraud on the part of Yung and Cheung.  There were numerous factual issues raised by Yung and Cheung.  Many were about competition in the pet food market, which I do not think are relevant.  I shall only deal with those issues which are relevant.  Essentially, Yung and Cheung submit that the decision to sell the Units by auction was a bona fide commercial decision made in the interest of the Companies.

205.Yung and Cheung argue that the decision to dispose of the Units was a business decision to meet creditor’s, namely Rabobank’s, demand and to avoid imminent threat of winding up of the Companies.  The Companies had no choice then but to sell the Units.  Cheung correctly submits that the court does not pass judgment on the merits or demerits of management decisions of directors and that the court only determines judicially whether directors of a company have breached their fiduciary duty to act in good faith and in the interests of the company as a whole.  In approaching the question whether a director was acting bona fide, the court’s approach is as follows.  The court will presume the directors acted in good faith and will give the best consideration to the subjective views of the directors.  If the directors’ decision was one which a reasonable board could consider to be in the interests of the company then the court presumes that the directors acted bona fide and had good grounds for their decision: see Tett v Phoenix Property and Investment Co Ltd [1984] BCLC 599 at 621, per Vinelott J.  However, in the absence of relevant considerations, good faith by itself is insufficient to satisfy the court that the directors have discharged the duty to act bona fide in the interests of a company.  The test used to judge whether an act is bona fide in the interest of a company is whether a hypothetical director who, acquainted with the facts and circumstances and credited with intelligence, could reasonably have acted in the way the director did.  I shall approach Yung’s evidence with the above principles in mind.

206.Essentially, the Plaintiff’s complaint is that Yung sold the Units at substantial undervalue to his own nominees.  Sale at an undervalue is strong evidence of negligence, but the Plaintiff’s pleaded case is not negligence.  Negligence is not to be equated with breach of fiduciary duty: see Bristol and West Building Society v Mothew [1998] Ch 1, per Millett LJ, as he then was.  Under the above principle, the court will not normally question a sale even at undervalue, if it is a bona fide business decision and the court proceeds with the presumption that it is.  However, where the sale was at such a gross undervalue as to suggest lack of good faith, some inference of impropriety could be drawn.  That opens the question whether the decision was a bona fide business decision.  This is particularly so, if the sale at undervalue was to the director or his nominees.  If the sale was not a bona fide business decision, the director was in breach of his duty to act in good faith and in the interest of the company.  If the sale was also a sale to himself or his nominees, he was also in breach of the “no conflict rule” and the “no profit rule”.

207.The foremost issue is whether the Units were sold at an undervalue.  If they were not, the Plaintiff’s case cannot even get off the ground.

208.The second issue is whether Yung had given Vos notice of board meeting to consider the 2^nd 1993 Resolution and 3^rd 1993 Resolution.  Though I have already found that the two resolutions were invalid and that neither Goldmark nor World Champ had any validly appointed directors at the time, whether notice of meeting had been given to Vos goes a long way in proving whether Yung acted with any fraudulent intention or whether the decision to sell was a bona fide one.

209.The third issue is whether Yung was desperate for the reasons he gave.

210.The fourth issue is whether the auction was a sham.

211.The fifth issue is whether Cheung and her companies were nominees of Yung.  That calls for an investigation into the source of funds of Cheung’s purchase of the Units.  This issue will be fully canvassed in Section (F) when dealing with the Sale of Units Claim against Cheung and her group of companies (paragraphs 390 - 412).  For the purpose of this section, my finding is in the affirmative. 

212.The last issue is whether in the light of the finding on the above issues, that Yung’s decision to sell Units by auction was a genuine business decision bona fide in the interest of the Companies.

213.Some of the issues relevant to the claim against Yung and his group were intertwined with those relevant to the claim against Cheung and her group of companies.  I shall first make finding of fact in relation to those factual issues and then deal with the claim against Yung and the claim against Cheung and her group of companies separately. 

214.The factual background is as set out in paragraphs 91 to 103 above.  The followings are the further finding of fact relevant to this claim against Yung, Cheung and their related companies.

Valuation of the Units

215.Before considering the parties’ evidence and submissions on valuation, I shall make a few observations on the methodology in valuation.  The methodology adopted by Vigers in the valuation reports presented to Court is what is commonly called the direct comparison method.  That method is usually adopted by valuers and is preferred especially if suitable comparables are available.  The idea and principle behind this method is simple and logical.  The basic principle is to compare like with like, in terms of time, size, location and such factors as are relevant to the particular subject matter for the valuation.  The method involves calculating the unit rate in sale and purchase transactions of similar properties made at about the same time as the value date of the subject property.  The valuer then makes adjustment for size, time lag, location and any other factors which the valuer considers appropriate and calculates the adjusted unit rates.  Then, the valuer applies a weighting factor to the adjusted unit rates and calculates the unit rate for the subject property from which he assesses the valuation.  If comparable transactions in the same building are available, they are preferred.  Fewer adjustments will have to be made and the weighting factor may also be dispensed with altogether.  In such a case, the valuer only needs to make adjustments for size and time lag.  Adjustment for time lag is usually made by reference to the Jones Lang Wootton Capital Value Index (“JLW Index”).  The index shows the fluctuation in property value in various districts in Hong Kong at different times.  It is regarded as a reliable guide for adjusting property value over the period of time as covered by the JLW Index.  It is also accepted by the surveying profession that the larger the size of the property, the lower is its unit rate per square foot.  The adjustment usually ranges from 5% to 15%.  Except for adjustment for time lag for which a valuer may be guided by the JLW Index, the other adjustments are essentially based on the intuition and experience of the valuer. 

216.In September 1993, about two months after the auction, Vigers also prepared a valuation report of the Units at the instruction of the Official Receiver (“1993 Vigers Report”).  In November 2002, the Plaintiff’s then solicitors, Messrs Stephenson Harwood & Lo instructed Vigers to assess the open market value of the Units as at various dates for the purpose of this litigation.  Togher prepared a very comprehensive report with a covering letter consisting of forty-four pages (“2002 Vigers Report”).  Togher was not available to give evidence.  Instead, the Plaintiff called Varty who is also a professional surveyor of thirty years standing.  Varty has given expert evidence in the High Court and Lands Tribunal.  I accept his evidence as expert.  He reviewed the 1993 Vigers Report and 2002 Vigers Report, a valuation letter and a valuation certificate prepared by Vigers in respect of the Units. 

217.The 2002 Vigers Report described the Units, the location, the encumbrances and the Crown lease.  From the registered floor plan, Vigers calculated the saleable area of Unit 1A to be 705 square feet with a storeroom of 146 square feet and a flat roof of 105 square feet and the saleable area of Unit 1D to be 910 square feet.  It gave the following valuations:

Date	Valuation for Unit 1A	Valuation for Unit 1D	Unit rate per square foot
08/11/1991		$2,366,000	$2,600
28/04/1992	$2,823,000		-
16/07/1993	$3,821,000	$4,004,000	$4,400
24/11/1993	$4,039,000	$4,232,000	$4,650
12/11/2002	$1,303,000	$1,365,000	$1,500

The unit rate is calculated based on the valuation for Unit 1D which contained no non-saleable area.  Vigers assessed the value of Unit 1A and Unit 1D at $3.821 million and $4.004 million respectively as at 16 July 1993, i.e. the date of the auction of the two units.

218.Presumably there were no transactions in respect of large units on the first floor of Thomson Commercial Building available as comparables, Vigers referred to comparable transactions of smaller units in higher floors.  Except for the valuations for 12 November 2002 in which four comparables were referred to, Vigers referred to eight comparables of higher floors and smaller sizes with a unit rate ranging from $4,183 to $5,205 per square foot.  Specifically, it referred to the sale of Unit 1A by Global Fair to Start Win which was not a genuine but a controlled sale by Cheung on 3 November 1993 at a unit rate of $4,606.  There are non-saleable areas in Unit 1A, namely the flat roof and storeroom which make simple calculation difficult.  As Togher was not called, I have no idea about the basis of his valuation of Unit 1A.  But I can safely assume, as suggested by Varty, that Togher adopted the same unit rate in respect of saleable area in Unit 1A and Unit 1D and gave a discount for the unit rate for the non-saleable area.  On that basis, I assume Vigers adopted a unit rate of $4,400 per square foot in valuing the Units as at 16 July 1993.  

219.The 1993 Vigers Report and covering letter consisted of twelve pages.  It is the usual valuation report which this Court is familiar with.  It described the Units, the location and the Crown lease.  It classified Thomson Commercial Building as a grade B office building at Wanchai where the demand for commercial space appeared to be moderate.  In the report, Vigers gave a slightly different floor area for the Units.  Based on the floor plans, Vigers assessed the saleable area of Unit 1A to be 716 square feet with a store room of 143 square feet and a flat roof of 139 square feet and the saleable area of Unit 1D to be of 858 square feet.  The report referred to four comparables on higher floors of smaller sizes ranging from 262 square feet to 274 square feet transacted between February and June 1993.  Those four comparables were also used in the 2002 Vigers Report.  The unit rate of those four comparables ranged from $4,015 to $4,599 per square foot.  Vigers assessed the valuation of the Units at $3.4 million each and gave a forced sale value of $2.55 million for each property, a discount of 25% off the open market value. 

220.Varty agreed with those valuations.  He explained Vigers’ valuation as follows.  He assumed that Vigers calculated a unit rate of $4,329 per square foot from the four comparables and then made a minus 10% adjustment for size as the Units are larger in size than the comparables, thereby reaching an adjusted unit rate of $3,896 per square foot.  He thought that probably Vigers made no adjustment for time as the JLW Index was flat between the time of the various comparable transactions and July 1993.  Varty opined that by applying that adjusted unit rate to the saleable area and a unit rate discounted by one-sixth for the non-saleable area, Vigers probably reached the valuation of Unit 1D at $3.34 million and the valuation of Unit 1A at $3.44 million which Vigers then averaged out making a valuation of $3.4 million for each property.  He disagreed with Cheung’s suggestion that adjustment should also be made for height.  He thought that height was not a very significant factor for commercial buildings in the type of environment as Thomson Commercial Building or at most a minus 5% adjustment might be given for a comparable at the highest floor of the building.

221.The same result would be reached by using the reverse calculation method which is probably simpler.  Adopting that method, I assume Vigers adopted the unit rate for Unit 1D as the unit rate for the saleable area of Unit 1A, i.e. $3,963 (i.e. $3,400,000 ¸ 858) and allot the balance of the value of Unit 1A to the non-saleable area, which would then give a unit rate of $1,995 for the non-saleable area (i.e. ($3,400,000 –$3,963 x 716) ¸ (143 + 139)).  The discount on the unit rate for the non-saleable area is about 50%, which appeared reasonable.  The valuation for Unit 1A could therefore be explained on the basis that Vigers adopted the same unit rate for saleable area as that of Unit 1D and a 50% discount on the unit rate for the non-saleable area for Unit 1A.  The overall difference is small, but the logic is more appealing and involves fewer loose ends than the method suggested by Varty.

222.At the instruction of Rabobank, Vigers also issued a letter with a certificate valuing Unit 1A at $2.6 million as at 24 May 1993 (“valuation letter”) and an abbreviated report valuing Unit 1D at $3.4 million as at 7 June 1993 (“abbreviated report”).  Those valuations were obtained by Rabobank in connection with Goldmark’s application for banking facilities should Yung take over Vos’ shareholdings in the Companies.

223.Varty opined that the valuations contained in Vigers’ valuation letter and abbreviated report were of little value.  Such valuations were requested by banks.  They were known as mortgage valuations and were done verbally and usually over the telephone within a matter of minutes.  The valuations are usually made by trainees or junior staff by the dozens in a day.  Details or floor plans were not available to the valuer.  The valuer never inspected the property.  The valuer merely referred to immediately available transactions which they had.

224.Having taken into consideration all the points raised by Yung and particularly by Cheung, Varty calculated the unit rate of comparables to be $4,620 per square foot.  He made a minus 10% adjustment for size.  He is of the opinion that the value of Unit 1A was $3.61 million and Unit 1D was $3.78 million as at July 1993.  Allowing for some adjustment for height of not more than 5%, which he would have thought unnecessary, he was prepared to accept the valuation contained in the 1993 Vigers Report which was lower than that in the 2002 Vigers Report prepared for the purpose of this litigation.

225.Cheung raised numerous criticisms against Varty’s evidence.  Except for her argument on the adjustment for size, none of her criticisms has any substance.  Cheung produced some transactions in Thomson Commercial Building between 29 July 1996 and 1 September 1997 and argues that based on those transactions, adjustment for size should be between 22% and 32%.  She submits that Varty’s adjustment of 10% was grossly inadequate and that Varty failed to explain her data.  Varty was thrusted with her data under cross-examination and had no opportunity to really consider and analyze the data as he otherwise would have had he been fairly given the data in advance to respond to.  This is not the way to approach expert evidence.  Varty replied that he was skeptical of statistical analysis of that nature.  He said that those data did not show the general trend for Thomson Commercial Building and that he would not be surprised to see contrary statistics but he had no opportunity to review all relevant reports and transactions.  He suggested there might be other adjustments such as time and that he was skeptical of the transactions in 1997.

226.I think the way in which the data was presented to Varty was unfair.  Had Varty been shown the data and argument in advance, he would have been able to examine other transactions during the period and verify if there were other transactions which showed a different trend and in particular if the transactions shown by Cheung were just hand picked ones to advance her argument.  Two other points raised by Varty were also relevant.  He mentioned about adjustment in time and the frantic transactions in 1997.

227.Cheung quoted the transaction of the large unit on 29 July 1996 and then a number of transactions of small units from 5 July through to 31 December 1996.  She also quoted transaction of another large unit on 7 January 1997 and then a number of transactions of small units from 26 March 1997 through to 1 September 1997.  Based on those transactions, she calculated the unit rate of a large unit was 68% of that of small units in 1996 and 78% of small units in 1997 or an adjustment of minus 22% to 32%.  It is common knowledge that the property market was rising from 1996 through to the last quarter of 1997 and the Court can take judicial notice of this fact.  The property market in the second half year of 1997 was particularly frantic.  The JLW Index for office property in Wanchai for 1996 and 1997 were as follows:

	January	April	July	October
1996	757.5	771.9	813.1	834.8
1997	1,013.7	1,046.4	1,087.7	1,011.1
Annual increase	33.82%	35.56%	33.77%	21.12%

Before Cheung could make the proposition she suggested, she has to adjust the unit rate of the small units to the notional unit rate on the same date as the transaction of the large unit which she wished to compare.  The transactions in the small units were all at a much later date.  In a rising market as the JLW Index showed, time alone would account for 10% to 18% increase in unit rate in a six months period.  In a broad brush, this would knock down Cheung’s adjustment from the range of 22% to 32% to the range of 4% to 22%.  Thus Varty’s adjustment of 10% or my general observation of 15% from other cases I am aware of is not inappropriate.

228.I shall now take a step further to work on Cheung’s data by applying the JLW Index to adjust the unit rate of the small units to the notional unit rate as at the date of transaction of the large unit in the following table:

Date	unit rate	JLW Index	percentage change in index	adjusted unit rate	average adjusted unit rate	percentage adjustment
29/07/1996	$3,262	813.1	-	$3,262		-21.30%
05/07/1996	$4,703	813.1	-	$4,703	$4,145
20/12/1996	$4,934	1013.7	19.79%	$3,959
31/12/1996	$4,702	1013.7	19.79%	$3,771
07/01/1997	$4,003	1013.7	-	$4,003		-17.73%
26/03/1997	$5,239	1046.4	3.12%	$5,076	$4,866
27/06/1997	$4,826	1087.7	6.8%	$4,498
30/07/1997	$5,019	1087.7	6.8%	$4,678
31/07/1997	$5,212	1087.7	6.8%	$4,858
01/09/1997	$5,205	1011.1	-0.26%	$5,219

The JLW Index is only available quarterly.  In doing the calculation above, I only selected the JLW Index which was closer to the transaction in question.  I could have made some adjustment to the index.  I do not consider that necessary as it would be futile because, as Varty said, I am not sure if I have the data of all the transactions during the year.  Furthermore, the purpose of the table is to show the qualitative picture to weigh Cheung’s submission.  The table is not intended to show the quantitative values and, not being an expert myself, I do not intend to rely on the quantitative values.  The above table shows that after adjusting for time lag, the adjustment for size is between minus 17.73% and minus 21.30%.  Another observation is that the transaction on 05/07/1996 is out of line with the other two transactions in small units in the same year and should be rejected.  If that transaction is taken out, the average adjusted unit rate would be $3,865 and the adjustment for the 1997 transactions would be minus 15.6%.  This is in line with my observation that the usual adjustment for size is between 5% and 15%. 

229.As a non-expert, the effort Cheung spent in presenting her argument is admirable, but her argument cannot withstand logical analysis and is only to be rejected.  But, having critically examined the data, I agree that Varty’s adjustment of minus 10% for size is inadequate.  The appropriate adjustment should have been minus 15%.

230.Both Yung and Cheung advanced the argument that in late 1980s or early 1990s, a lot of factory premises were being converted for use as office premises and as a result users of grade C office, such as those in Thomson Commercial Building, moved to factory premises causing a drastic reduction in the price of grade C offices, including the Units.  Varty’s answer is that the event was irrelevant.  Those factory premises were in North Point extending eastward and there were no factory premises in Wanchai where Thomson Commercial Building is situated.  Users looking for office space in Wanchai would not be interested in accommodation in North Point.  Besides the office accommodation converted from factory premises were of sizes ranging from 10,000 square feet upwards.  Those accommodation has no effect on the demand of small office accommodation in Wanchai.  I agree with Varty’s opinion.  Besides, the valuations prepared by Vigers were based on real transactions in Thomson Commercial Building.  Those transactions reflected all the relevant considerations a buyer for such accommodation would have, including the one raised by Yung and Cheung if it has any bearing.

231.Cheung attacks Varty’s opinion as not a genuine professional opinion.  She said Varty was unable to inform the Court how the open market value of $3.4 million for Unit 1A and Unit 1D as pleaded in the Re-re-re-amended Statement of Claim was arrived at.  I disagree.  My summary of the evidence above precisely showed how Varty arrived at the valuation of over $3.4 million for each property but he was prepared to accept the lower value as pleaded or as assessed in the 1993 Vigers Report.

232.Cheung argues that Varty was unable to explain the discrepancies in valuations made in the 1993 Vigers Report, 2002 Vigers Report, valuation letter and abbreviated valuation.  He was not the maker of those documents.  He could not have known how the makers reached their valuations.  But I think Varty has stated his professional opinion.  He has shown by his own calculation using the data in the 1993 Vigers Report that the valuation in that report was reasonable and he rejected the valuation in the 2002 Vigers Report.  He has given his professional opinion why the valuation letter and the abbreviated valuation were unreliable. 

233.Cheung argues that Varty was instructed by the Plaintiff’s solicitors, whereas the 2002 Vigers Report was requested by the solicitors for the Official Receiver.  She argues that no one knows what was the instruction given to Vigers and the methodology used by Vigers in arriving at the valuation.  She criticized Varty for not having discussed the 2002 Vigers Reports with Togher who wrote the report.  There is no substance in those arguments.  The instructions given to Vigers under the 1993 Vigers Report and 2002 Vigers Report were clearly set out in the reports.  Varty is an expert in surveying and knows of the relevant principles in valuation.  He explained the two reports and the methodology clearly. 

234.Cheung raised other criticisms such as Varty had never worked with Vigers, had not received any information from Vigers about the valuation and about how they prepared the valuation letter and abbreviated valuation for Rabobank, had not been shown the internal memorandum from Rabobank, had not visited the properties, etc.  I do not think I need to respond to those unfounded criticisms than to say I reject them all.

235.Varty fully understood his primary duty was to assist the Court rather than to advance his client’s case.  In the end, Varty did not prefer the valuation in the 2002 Vigers Report.  He gave his opinion in a fair and responsible manner.  He gave an unbiased opinion which fairly favoured the Defendants by preferring the lower valuation contained in the 1993 Vigers Report.  Save for his opinion about the quantum of adjustment for size, I accept his opinion.

236.Based on the data in the 1993 Vigers Report and the two other comparables available from the 2002 Vigers Report, Varty assessed the value of Unit 1A and Unit 1D at $3.61 million and $3.78 million respectively.  He allowed a 10% discount for size which I consider inadequate.  If an adjustment of minus 15% is adopted, the valuation would become $3.43 million and $3.59 million respectively.  Both valuations are higher than that given in the 1993 Vigers Report which has been pleaded by the Plaintiff.  It is not known what adjustment for size Togher allowed when arriving at the valuation.  On the data available to me, it must have been more than minus 15%.  Togher might also have made a negative adjustment for height which Varty did not consider necessary for commercial building in the kind of environment in which Thomson Commercial Building stood.  In any event, the valuation in the 1993 Vigers Report could not have erred.

237.It is also interesting to note that in November 1993, Cheung caused Global Fair to transfer Unit 1A to Start Win at a purported consideration of $4 million.  While Cheung says that the transaction was a fictitious one and the purchase price of $4 million was suggested by the bank officer in order to obtain a mortgage loan of $2 million, the loan would not have been approved without a professional valuation report called for by the bank.  The JLW Index for January 1993 and January 1994 were 602.1 and 830.0 respectively, which represents a monthly increase of 3.15% during the period.  On a very rough basis, this means an increase of 14.2% during the four and half months from mid July to late November 1992.  Working forward from the July 1993 valuation of $3.4 million for Unit 1A, the valuation in the end of November 1993 would have been $3.88 million.  That suggests the purchase price of $4 million was only 3% over valued which was by no means excessive.  Working backward from the purchase price in late November 1992, the valuation of Unit 1A in July 1992 would have been $3.43.  That is consistent with the valuation in the 1993 Vigers Report.

238.In the same month, HSBC granted an overdraft facility of $2.5 million to New Champion secured against Global Fair’s mortgage on Unit 1D.  Given the well known cautious approach of this top Hong Kong bank, the facility granted would not have exceeded 60% of the professional valuation of Unit 1D.  That suggested HSBC acted on a valuation of Unit 1D at above $4.16 million.  This mortgage supported the valuation in the 1993 Vigers Report.

239.In conclusion, I accept the valuation of the Units in the 1993 Vigers Report.  I find that the open market value of the Units as at the date of the auction was $3.4 million each.  I also accept Vigers’ opinion that the forced sale value for Unit 1A and Unit 1D were both $2.55 million in July 1993.  On the basis of this valuation, the sale was at a discount of 37.5% off the open market value or 17% discount off the forced sale value.  The sale was at a gross undervalue.

Yung’s knowledge of the invalidity of Iris Leung’s appointment as director of Goldmark

240.In Section (B), I make the finding that Iris Leung’s appointment as director of Goldmark lapsed before passing the 1^st and 2^nd 1993 Resolutions.  I now turn to consider whether Yung had knowledge of the invalidity of her appointment.  On the facts, it was Yung who raised the question of Iris Leung’s appointment to cover his absence from Hong Kong.  The minute was written in simple English, which Yung could have no difficulties in understanding.  He must know that was the terms of her appointment and that her appointment lapsed upon the first directors’ meeting on his return. 

241.Furthermore, on 23 June 1993 he instructed Messrs HLLY to demand on behalf of Goldmark, Vos and Kensway to repay certain sums owing.  This prompted Messrs JSM to write to Messrs HLLY to challenge their authority to represent Goldmark.  In their letter dated 12 July 1993, a few days after passing the 2^nd 1993 Resolution, Messrs JSM expressed the undisputable legal opinion that Iris Leung’s appointment have lapsed because no annual general meeting had been held for over eighteen months since the incorporation of Goldmark.  Yung admitted having been show that letter by Messrs HLLY and asked to produce the 1991 Resolution authorising Iris Leung’s appointment to Messrs HLLY for legal advice.  Neither did he produce the 1991 Resolution to Messrs HLLY for legal advice nor did he instruct Messrs HLLY to seek a copy from Messrs JSM.  Yung ignored both the legal opinion expressed by Messrs JSM in their letter dated 12 July 1993 and his own solicitors’ advice to produce the 1991 Resolution for their consideration.  The irresistible inference that could be drawn from his conduct is that he knew the terms of Iris Leung’s appointment, that the appointment had lapsed and that he did not want to expose the invalidity of her appointment by producing the 1991 Resolution to his solicitors. 

Whether notice of board meeting to consider the 2^nd 1993 Resolution and 3^rd 1993 Resolution had been given to Vos

242.Vos’ evidence was that he was not served with any notice of board meeting for the purpose of passing the 2^nd 1993 Resolution and 3^rd 1993 Resolution to sell the Units.  Vos could not recall having been served any such notice.  He certainly would have recalled if he had received the notice as the purpose of the meetings was to sell the only and major asset of the Companies.  He must have attended the meetings to protect his interest or do something to prevent the sale from occurring.  It is difficult for someone to prove the negative.  But, I think Vos has raised sufficient evidence to shift the legal burden of proof of this issue to Yung.

243.Yung’s evidence was that he had discussed with Alfred Hau of Messrs HLLY about Goldmark’s urgent need to sell the Units in view of Rabobank’s demand.  He told Alfred Hau how Vos betrayed Goldmark and that he was worried Vos would not attend the meetings for the purpose of passing the two resolutions to authorize the sale of the Units.  Then Alfred Hau told Yung that he had done a company search and found that Iris Leung was a director of Goldmark and that as long as Iris Leung and Yung attended the meetings, they could resolve to sell the Units.

244.Then according to Yung, Alfred Hau told him that the meeting must be arranged in the proper manner.  Alfred Hau advised him of the proper procedure and in particular about service of the notice by posting it on the door of Vos’ registerd address.  Alfred Hau then drafted the notice of meeting for Goldmark and gave it to Yung to serve on Vos.  Yung then instructed Frankie Au to serve it on Vos at Vos’ residence in Robinson Road.  Alfred Hau also undertook to prepare all the documentations, board minutes and introduced Yung to Top Auctioneer.

245.To sell the sole and substantial asset of a company is obviously an important and serious matter.  In view of the hostility which had developed between Vos and Yung at the time, it is extremely unlikely that a prudent solicitor advising his client dealing with a hostile opponent on such an important matter under such precarious circumstances and volunteering to draft the notice of meeting would not have volunteered to serve the notice by his staff as well but would have left it to his client to serve the notice.  A prudent solicitor would have arranged service by his competent staff who is experienced with the procedure and for an affidavit to be prepared in case litigation arises.  No explanation was given why Messrs HLLY did not serve the notice to Vos.

246.No copy of the notice of meeting was disclosed by Yung.  Frankie Au was not called to prove service of the notices.  Frankie Au is the common law brother-in-law of Mrs Yung.  No explanation was given as to the failure to call him to give evidence.  This casts serious doubts on whether such notice had been served. 

247.Alfred Hau was not called to give evidence to support Yung’s version of events.  No advice or attendance notes from Messrs HLLY has been produce to support Yung’s evidence.  Both Yung and Cheung were well familiar with the existence of such attendance notes in Messrs JSM and Messrs WS.  No explanation for his failure to call Alfred Hau and to produce the attendance notes was given by Yung.  Again, this casts serious doubts on whether such advice had been received and the truthfulness of Yung’s evidence.

248.Similarly, any prudent solicitor would also have served a copy of the notice on Messrs JSM who was then acting for Vos.  Yung accepted that he had not caused a copy of the notice to be served on Messrs JSM.

249.Then, lastly, Yung admitted that he had not serve a copy of the resolutions passed on Vos or Messrs JSM either.

250.It was argued by Cheung on behalf of Yung that Yung had told Vos many times about the sale of the Units.  However, the only documentary evidence Cheung could refer to was an internal memorandum from Messrs JSM in which Vos’ solicitor quoted his telephone conversation with Yung on 16 June 1993.  In the memorandum, Yung was reported to have reiterated his view that he would not be prepared to enter into any formal settlement agreement until he received written evidence that Unit 1A held by World Champ would be sold.  But that was not notice to Vos that Yung was going to sell Unit 1A and the manner of sale. 

251.I think Yung’s evidence is wholly incredible.  His conduct was not consistent with someone who was acting on proper legal advice.  He did not call his advising solicitor to support his evidence.  More importantly, his evidence about having sought legal advice from Alfred Hau is contradicted by the evidence he gave during his examination by the Official Receiver.  On that occasion, he said that he had not consulted his solicitors for advice about the auction and how to pay back the mortgage loan demanded by Rabobank.  His failure to call Frankie Au and Alfred Hau is something which weighs heavily against his credibility.  The circumstances he described were improbable.  I think Vos would have to have some degree of mental disorder not to attend the meetings or not to do anything to prevent the meetings from being held, if he had received the notice.  I accept Vos’ evidence that he had not been served with any notice of board meetings for the purpose of passing the two resolutions.

252.Yung must have appreciated the importance of giving notice of such meetings to Vos.  If not, he would not have tried to tender the evidence, though which I rejected, that he was acting on legal advice.  The meetings were to discuss a very important matter, namely selling the most valuable asset of the Companies.  At the time he was at logger heads with Vos.  His failure could not have been accidental or due to an oversight.  It must have been his deliberate intention to conceal the two resolutions from Vos so that he could dispose of the Units without Vos’ knowledge or intervention.  This casts a very bad light on the rest of his evidence in relation to this claim.

Whether Goldmark was in financial difficulties due to the operation of Jade Rainbow or Animal Health Centre

253.Yung contended that Jade Rainbow and Animal Health Centre were operating at substantial loss each month, which resulted in a severe burden on Goldmark’s cash flow and placed Goldmark in financial difficulties.  This, he alleged, was part of the reason for selling the Units.

254.However, Yung’s allegation was just an empty assertion which is not supported by any documentary evidence.  No profit and loss account of Goldmark for 1993 was produced.  Yung was cross-examined on the profit and loss accounts of Jade Rainbow for the period from 1 January to 31 March 1992 and for the period from 1 April to 30 June 1992.  The accounts showed a gross profit of $306,623.28 for the first six months of 1992.  The majority of that amount in the sum of $237,174.83 was earned since Goldmark and Genius Wisdom acquired Jade Rainbow.  On the other hand, the accounts showed a net loss of $17,141.25 for the first six months and a net loss of $9,838.66 for the first three months.  The loss incurred since Goldmark took over Jade Rainbow was only $7,303.  The loss was mainly due to payment of rent to Goldmark in the amount of $32,056 and staff salaries in the amount of $105,998.80.  The rent paid to Goldmark was just a paper payment which did not affect the overall cash flow of Goldmark and Jade Rainbow.  The loss to Jade Rainbow was a gain to Goldmark.  Before acquiring Jade Rainbow, Goldmark did not have that rental receipt.  Discounting that rental payment, Jade Rainbow had a net profit of about $24,753 for the second quarter of 1992 or a monthly net income of $8,251.  Another reason for the loss was the salary payment.  Under cross-examination, Yung admitted that the salary payment by Jade Rainbow included salaries for staff of Goldmark.  He could only identify Eddie Kan as being mainly engaged in the business of Jade Rainbow.  Her salary was only $9,000 per month.  The loss caused by the salary payment was only an accounting loss, most of which was incurred for the business of Goldmark.  Effectively, Jade Rainbow contributed about $82,000 to the cash flow of Goldmark by paying the salary of the staff of Goldmark.  That was the position as at 30 June 1992.  No evidence was presented by Yung as to the position in June 1993.  I can only assume it was similar.  Thus, Jade Rainbow was an asset and not a burden to Goldmark.  The only burden which Yung could identify is that facilities from Rabobank in the amount of $200,000 was taken from Goldmark and earmarked for Jade Rainbow.  That has no effect on the overall position of Goldmark.

255.The profit and loss account for Animal Health Centre prepared by Mrs Vos showed a net loss of $95,141.78 as at 26 May 1993.  Yung’s complaint was that all capital investment for Animal Health Centre such as the X-ray machine, equipments, fittings and furniture as well as medicine were paid by Goldmark.  The amount of those liabilities as shown in the profit and loss account was $605,943.98.  That I agree imposed a burden on Goldmark.

256.Up until 20 May 1993 before hostility commenced, Goldmark had no problem with cash flow.  Goldmark had an overdraft facility with Rabobank in the amount of $1.3 million.  A review of the bank statements of Goldmark’s account with Rabobank showed that cheques were issued from that account drawing on the overdraft facility and then every now and then a cheque in a round sum from Goldmark’s IBA account was deposited to reduce the overdraft, keeping it below $1.1 million.  There were almost no deposits of odd sums into the Rabobank account suggesting that the Rabobank account was not used to receive business payments.

257.Animal Health Centre commenced operation on 8 February 1993.  By then, presumably, all major capital expenses had been paid.  The opening and closing balance of the Rabobank account for February 1993 was a debit balance of $946,773.66 and $1,043,388.95 respectively.  A cheque of $200,000 from the IBA was paid in on 25 February 1993 to reduce the amount of overdraft.  The overdraft was still within comfortable margin.  There was a credit balance of $54,009.78 in the IBA account.  Despite the burden imposed by Animal Health Centre, Goldmark did not appear to have any difficulties in maintaining normal operation.

258.In March 1993, the debit balance of the Rabobank account was increased by about $30,000 to $1,072,321.68.  There was a cheque deposit of $10,000 from the IBA account and another cheque deposit in the amount of $42,500.  The overdraft was still maintained within comfortable margin.  There was a credit balance of $55,039.03 in the IBA account.  Again, Goldmark did not appear to have any difficulties in its normal operation.

259.In April 1993, the debit balance of the Rabobank account was increased by about $200,000 to $1,127,329.65.  There were two deposits amounting to $60,399.37, but no deposit from the IBA account.  Though the overdraft facilities were near exhaustion, a facility of about $173,000 was still available.  The balance in the IBA account increased to $142,857.40.  Had money been transferred from the IBA account as it used to in the past, Goldmark’s position would have been healthier.  Despite that, Goldmark did not appear to have any difficulties in its normal operation.

260.In May 1993, the debit balance of the Rabobank account was increased by about $44,000 to $1,171,699.72.  There was a cheque deposit of $353,681.80, which appeared to be a business payment in view of the odd sum.  A facility of about $133,000 was still available.  The balance in the IBA account was reduced to $16,584.34.  There was no deposit from the IBA account, but $100,000 was transferred out from the IBA account.  It should be recalled that on 20 May 1993 hostility broke out between Yung and Vos.

261.Then in June 1993, the debit balance of the Rabobank account was increased by about $321,000 to $1,493,128.33 as at 11 June 1993 just before Yung deposited the forged cheque number 505802.  There was no payment from the IBA account and no deposit whatever.  On the other hand, the balance in the IBA account increased to $232,328.64 just before Yung caused a transfer of $200,000 to pay himself on 23 June 1993 after altering the mandate in the IBA account.  The balance in the IBA account was $82,075.23 at the end of that month.  Had Yung not transferred $200,000 from the IBA account to pay himself but instead deposited it into the Rabobank account, the Rabobank account would be as healthy as ever.

262.It would be futile to examine the Rabobank and IBA accounts thereafter, as Yung had been withdrawing from the IBA account to pay himself and the Rabobank account had been deliberately kept inactive except to carry on with the massive debit balance.  Looking at the two accounts together, it appeared that the financial position of Goldmark was all along the same from February to June 1993.  Had Yung not made the unauthorised withdrawals of $293,310 from the IBA account in June 1993 and deposited them into the Rabobank account, Goldmark would have been in the same position as it was in April 1993.  It would have had free facilities of about $300,000 available in the Rabobank account.  Yung alleged that the account was frozen by Rabobank.  But the reality was he did not put in funds from the IBA account to keep the Rabobank account within its overdraft limit. 

263.The following are further reasons why the operation of Jade Rainbow and Animal Health Centre could not have been a cause of Goldmark’s financial difficulties.  According to Eddie Kan, soon after acquiring the Hill’s distributorship she was instructed by Yung to sell pet food and other Goldmark’s stock using invoices of VIP Media and to insert in the delivery notes a direction to the customer to pay Wealth Country.  She was told by Yung not to let Vos know about this arrangement.  She recovered a number of invoices and delivery notes from her customers in support of her evidence.  She said that Mrs Yung and Iris Leung also sold Goldmark’s stock using the invoices of VIP Media.  Yung did not dispute Eddie Kan’s evidence and her evidence was indisputable in the light of the invoices recovered.  Yung only argues that there was an agreement between him and Vos that Goldmark would not sell direct for retail.  Hence, the retail business was carried out by Animal Health Centre using invoices of VIP Media.  His other argument was that the amount involved was small.  I do not wish to unnecessarily burden this judgment.  Even if that was the case, there was no reason for Yung to instruct customers to pay Wealth Country and then not to reimburse Goldmark, which was what Vos was complaining.  Yung, Mrs Yung and Iris Leung were effectively selling Goldmark’s stock to pay themselves.  A simple description of their activities was theft.  The total amount shown in the invoices recovered by Eddie Kan was not insubstantial.  But such activities had been carried out by everybody and had been carried on for a long time, about a year before the outbreak of hostility.  Such activities must have an impact on Goldmark’s cash flow.

264.Accordingly, I dismiss Yung’s allegation about financial pressure caused by the operation of Jade Rainbow and Animal Health Centre as a mere excuse of no substance at all.  I note, of course, that an available margin of $300,000 for the type of business Goldmark was engaged in might be tight.  But Vos had made application to Rabobank to increase the total facilities from $4.15 million to $5.9 million.  The application was approved by Rabobank on 11 May 1993 and the increased facilities of $1.75 million would have been available had the proper documentation been completed by Yung.  As a result of the intervening dispute between Vos and Yung since 20 May 1993 and the breakdown in the settlement negotiation, the extra facilities never became effective. 

Collusion between Vos and Rabobank to freeze Goldmark’s account, to demand repayment of outstanding loan and to damage Goldmark

265.Yung alleged that he was put in fear by Rabobank’s demand to repay the outstanding loan.  This fear was exacerbated by Rabobank refusing to honour cheque number 505802 made payable to himself on 11 June 1993.  Cheung reinforces Yung’s allegation by arguing that there was a close relationship between Smulders, Vos and Postma, the president of Rabobank, who were all Dutch.  She emphasises that Mrs Vos was Postma’s secretary and Rabobank is a Dutch Bank.  She also relies on Vos’ reporting Yung’s corruption to the ICAC on 9 June 1993 as evidence of Vos’ intention to damage Goldmark.  She argues that Vos and Rabobank teamed up to oppress Yung for some ulterior motive.  She argues that Rabobank was never interested in the repayment as it ignored Goldmark’s solicitors’ enquiries for the redemption amount four times in connection with the sale of the Units to Global Fair.

266.In support of his argument that there was no reason for Rabobank to demand repayment of the loan, Yung said that on 11 May 1993 Rabobank approved an increase of facilities to $5.9 million with several guarantees from himself and Vos and an all monies mortgage on the Units.  He said that before the new facilities became effective Vos proposed to increase the facilities to $6.2 million and to change the guarantee to a personal guantee of $6.2 million solely from Yung.  That was for the purpose of facilitating Yung’s purchase of Vos’ interest in the Companies. He said that Rabobank agreed to the increase and in its internal communication on 31 May 1993 noted that he was a man with a net worth of $8 million.  He said there was no reason why Rabobank would have refused to honour cheque number 505802 when Goldmark’s account would not have exceeded its facilities limit of $4.2 million.  He therefore believed and accused Vos of colluding with Rabobank to freeze Goldmark’s account and demand immediate repayment of the outstanding loan.

267.Vos denied having anything to do with Rabobank’s refusal to honour the cheque number 505802 or to demand immediate repayment of the outstanding loan.  He said it would not have been in his interest to do so as he was negotiating with Yung for the purchase of his interest in the Companies.  Indeed there was no dispute that Vos even went as far as to procure Rabobank to increase the facilities and to accept Yung as the sole guarantor to enable Yung to complete the settlement agreement and to pay him.

268.There is no dispute that on 11 May 1993 Rabobank approved Goldmark’s application to increase the facilities from $4.15 million to $5.9 million with a corresponding increase of the overdraft facilities from $1.3 million to $2 million.  But the documentations were never completed and the new limits were not operative.  Then on 20 May 1993, hostility broke out and on 24 May 1993 the parties reached a preliminary settlement agreement for Yung to buy out Vos’ interest in the Companies for $2.7 million.  In view of that there was no reason to proceed with the documentation for increasing the facilities.  The limit of the overdraft facilities remained at $1.3 million.

269.Again, there is no dispute that Vos procured Rabobank to further increase the facilities to $6.2 million with Yung as the single guarantor while Vos’ obligation under his existing guarantee was to be released.  Obviously as Vos said, this arrangement was to facilitate Yung’s purchase of his interest in the Companies.  According to Rabobank’s internal document, its credit committee approved the new facilities on 1 June 1993.  But Yung never proceeded with the documentation, obviously because of the deadlock in the settlement negotiation.  Thus the limit of the overdraft facilities remained at $1.3 million as before.  Yung must know that the limit of the overdraft was $1.3 million and not $2 million as he alleged.  Plainly obvious, cheque number 505802 was not honoured due to lack of funds.

270.Yung referred to his alleged conversation with Jennifer Chan of Rabobank after the bank refused to honour cheque number 505802.  He said that Jennifer Chan told him to speak to Vos if he wished to know why the account was frozen.  Yung said that by “frozen” he understood to mean that the account became inoperative even if money was deposited to reduce the overdraft. 

271.I find that evidence impossible to believe.  On the face, the overdraft facilities had been exceeded when the cheque was presented.  That must be the first and most obvious reason a bank officer would give to his client for refusing to honour the cheque.  In the normal course of business, if overdraft was maintained within approved limits, there was  no reason why the account would be frozen.  Yung was not a third party  to the account but a director of the account holder and signatory of the account.  There was no reason why Jennifer Chan would not have told him directly that there was no funds in the account but to tell him that  the account was frozen and that he should speak to Vos to find out the reason.  Were Yung a third party payee, it would have been likely for Jennifer Chan to have told him to refer to the drawer as a matter of usual practice.  But, Yung was effectively the account holder.  His evidence of Jennifer Chan’s conversation is inherently incredible.  His evidence of what he understood by the word “frozen” is also beyond apprehension.

272.Yung was the person in charge of the accounts of Goldmark and had control of its account with Rabobank.  It is impossible that he did not know the limit of Goldmark’s overdraft facilities was $1.3 million and not $2 million as he alleged.  The total of all facilities was only $4.15 million.  He knew the new limit had never become effective.  He had been maintaining the account within the approved limit until the end of May 1993 when hostility broke out.  He then started to exceed that limit in June 1993, which was tolerated by Rabobank until it reached a debit balance of $1.493 million on 8 June 1993.  Rabobank might have been tolerant to Goldmark as a familiar and important client and allowed it to exceed its overdraft limit by about 10%.  But a prudent banker would not have tolerated a withdrawal of a significant amount of $500,000 which would have exceed the limit by as much as 53%.  Yung must have known the reason for the rejection of cheque number 505802 was because the overdraft limit had been exceeded.  Of course, he also knew that the date on the cheque was forgery.  I find his evidence about what Jennifer Chan said and his allegation that Rabobank had frozen Goldmark’s account in the sense he understood it were other concoctions of this extremely dishonest witness.

273.It is not clear what triggered Rabobank to call in its loan.  Between 23 May 1993 and 16 June 1993, Vos and Yung were negotiating for Yung’s buying out Vos’ interest in the Companies.  Up until 16 June 1993 or even until 6 July 1993, Vos was still hopeful that the settlement agreement would be finalised.  It made no sense for Vos to collude with Rabobank to demand repayment of the loan to destroy Goldmark, even if it was merely intended to put pressure on Yung. 

274.Yung and Cheung argue that no evidence was called from Rabobank to explain why it called in the loan.  There is no burden on a party to call evidence to rebut any allegation raised by the opponent which are not relevant or necessary, especially where the allegation concerns a non party.  Otherwise, litigation would become unnecessarily costly and protracted as this one already is by reason of the many frivolous arguments raised by Yung and Cheung.  Rabobank is a reputable international bank.  Despite its president, Postma, was personally known to Vos and that Mrs Vos was Postma’s secretary, it was extremely unlikely that it would have agreed to enter into any collusion to damage its customers’ interest and its own image by acting arbitrarily as Yung suggested.  On the facts of this case, the reason is obvious.  Despite that the limit of the overdraft account had already been exceeded, a director attempted to further draw a substantial amount.  That was a red signal to any prudent bank officer.  It is understandable that a bank in those circumstances would, for its protection, demand repayment of all outstanding loan.  Being a seasoned businessman with his close relationship with bank officers from various major banks in Hong Kong, Yung must have realised that must have been the reason for Rabobank calling in the loan.  Yung’s argument is frivolous and vexatious. 

275.Yung and Cheung argue that upon discovery, they found documents from Rabobank suggesting that their solicitors were prepared to institute legal action against Goldmark for recovery of the loan and that support their belief that Vos had colluded with Rabobank to destroy Goldmark.  I think that was just standard practice of a bank and what its solicitors would do in the face of a defaulting borrower who failed to respond to their demand to repay or even to discuss about repayment of the loan.  Indeed Yung failed to turn up for the meeting with Rabobank on 1 July 1993.  Furthermore, those documents were not known to Yung before he sold the Units.  The discovery could not have supported their belief of collusion and fear of Rabobank’s possible action at the time.

276.The question is not just whether Vos and Rabobank had colluded to destroy Goldmark, but whether Yung’s belief and fear of such collusion were honestly held.  The burden is on Yung and Cheung to prove collusion.  They could offer no such evidence.  The facts of the case do not even raise any suspicion of such collusion.  As such, Yung could not have honestly and genuinely held any such belief and fear.  Indeed, on the facts, since 18 June 1993, Yung was taking preparatory steps to drain Goldmark of its funds.  Instead of attending the meeting with Rabobank on 1 July 1993 to discuss about repayment of the loan, Yung was siphoning funds out of Goldmark, withdrawing money from the IBA account to pay himself and taking preparatory steps to sell the Units.  This evidence also rebuts his evidence about his belief and fear of collusion.

277.I reject Yung’s evidence about his belief and fear that Vos had colluded with Rabobank to demand repayment of the loan in order to damage Goldmark.  Yung knew full well the limit of the overdraft facilities.  He knew he was giving false evidence about his belief and was advancing false arguments.  He knew the purpose for which the cheque number 505802 was issued to him had been spent and he had received payment via cheque number 505836.  Yet he forged the date on cheque number 505802 and presented it to Rabobank.  Under those circumstances, it is extremely dishonest of him to accuse Vos of procuring Rabobank not to honour the cheque and of colluding with Rabobank to demand repayment of the loan to damage Goldmark.  I reject Yung’s allegation in its entirety.  Not only that he gave false evidence and that his submission started on a false premise, he was wilfully attempting to deceive the Court and demonstrated a total lack of good faith in the conduct of this litigation.

Whether Yung honestly believed auction of the Units was the only way to save Goldmark

278.The main thrust of Yung’s defence was that he was put in fear by Rabobank’s demand to repay the outstanding loan and Vos’ refusal to sign cheques of Goldmark which brought Goldmark’s business to a halt.  He feared that Rabobank would take possession of the Units and force sell them at a very low price.  He was very concerned about protecting Goldmark and in particular its Hill’s distributorship.  Hence, to sell the Units by auction was the only way to save Goldmark.

279.Yung’s fear of Rabobank’s action and belief that auction of the Units was the only way out were essentially build on a number of false allegations.  Yung alleged that the operation of Jade Rainbow and Animal Health Centre caused Goldmark financial difficulties.  He accused Vos of refusing to sign cheques for Goldmark and Vos could not be contacted, thereby bringing Goldmark’s business to a halt.  He alleged that Vos colluded with Rabobank to demand immediate payment of the loan of over $4 million.  All those allegations have been dismissed by me as untrue.  Essentially, there was no basis for his fear and belief that auction of the Units was the only way to save Goldmark.  But, assuming that he was put in fear by reason of Vos’ collusion with Rabobank, I shall go on to consider whether his belief that auction of the Units was the only was out, could have been honestly held.

280.As submitted by Mr Lam, even if Rabobank was acting unreasonably in calling in the loan, there was no reason why Yung did not liaise with Rabobank for an extension of time to pay or attend the meeting with Rabobank on 1 July 1993.  He might have thought that Vos had great influence over Rabobank, but there was no reason for him not to attend the meeting.  Yung denied he was ever informed about the meeting.  On Vos’ evidence which is supported by the internal documents of Rabobank, Yung did not attend the meeting scheduled on 1 July 1993 to discuss about defreezing of Goldmark’s account.  In the light of the evidence, I dismiss Yung’s allegation.

281.Even if he had no confidence with Rabobank, Yung could have entered into discussion with other banks in Hong Kong to transfer the mortgage and facilities or for a bridging loan to arrange for the orderly disposal of the Units instead of an auction.  On Yung’s and Cheung’s evidence, Yung was very familiar with a number of senior bank officers.  Goldmark had good relationship with IBA.  Yung was very familiar with Mr Donaldson of HSBC who promptly arranged facilities for New Champion secured against Start Win’s mortgage of Unit 1D.  Yet, he did not contact any of these banks to discuss about transferring the mortgage and facilities to IBA or HSBC.  On Yung’s and Cheung’s case, Yung was a very resourceful businessman.  He raised $850,000 to enable Cheung to pay the deposit within one day and raised $1.35 million to enable Cheung to complete the purchase within a few days.  With such resources and his connection with the banks, he could have walked into IBA or HSBC and easily arranged a small bridging loan of say $2 million enable the mortgage facilities from Rabobank to be transferred to another bank.  He did not.  Instead, he brought about a forced sale of the Units himself.  Yung’s explanation was that he was confused at the time and did not wish to trouble his friends with those matters.  That is hardly convincing for a seasoned businessman faced with what Yung alleged to be a very serious situation.  

282.Yung contended that those possibilities might not work as he did not think Vos’ cooperation would be forthcoming.  But the indisputable fact was that he never asked.  He claimed that Vos could not be contacted, but I rejected that allegation.  The fact was he did not even attempt to contact Vos direct or through Messrs JSM.  He even concealed the passing of the 2^nd 1993 Resolution and 3^rd 1993 Resolution to sell the Units.  He said that he had received legal advice about the validity of Iris Leung’s appointment as director and hence passed the resolutions.  Even if he believed Vos’ cooperation would not be forthcoming, he could equally have sought Iris Leung’s cooperation to obtain facilities, permanent or bridging, since he believed Iris Leung’s appointment was valid.

283.Even if the Provisional Settlement Agreement fell through and the parties were in dead lock, if Yung considered selling the Units was the only way out, he should have informed Vos, as the only other director and 50% shareholder of the Companies, that he was going to sell the Units.  Instead, on my finding of fact, he proceeded with the sale secretly.  He did not give Vos notice of the proposed resolutions to be passed.  If he genuinely believed Iris Leung was properly appointed as director and that sale of the Units was in the interest of the Companies, he should have and would have fearlessly informed Vos of the board meetings and told him that he and Iris Leung were going to pass the resolutions regardless of Vos’ wishes.  He did not. 

284.On the evidence, Yung had no basis for his fear and belief.  All the evidence showed that Yung was bent on going ahead to sell the Units and to do so without Vos’ knowledge.  His alleged fear about possible action by Rabobank and his belief that sale of the Units by auction was the only way out could not have been honestly held.

The auction of the Units

285.According to Yung, he discussed with Alfred Hau about Vos’ distrayal of the Companies, Rabobank’s demand for repayment of the loan, his belief that Vos colluded with Rabobank to damage Goldmark, his fear that Rabobank would force sell the Units and his intention to sell the Units by auction.  Alfred Hau explained to him the procedures for calling a board of directors’ meeting and prepared the documentation for him including the notice of meeting.  Alfred Hau advised him that he had checked with the Companies Registry record and confirmed that Iris Leung was a director of Goldmark.  I have discussed those aspects of Yung’s evidence and rejected all those allegations.  Yung’s further evidence was that Alfred Hau advised him that he and Iris Leung might validly pass a resolution to sell the Units and introduced Top Auctioneer Limited to him.  In short, he was saying that the auction was conducted on legal advice.

286.On the evidence, Yung admitted that he never obtained a valuation report of the Units before instructing Top Auctioneer Limited to sell the Units.  He said, shortly after passing the 2^nd 1993 Resolution and 3^rd 1993 Resolution, he made inquiries with estate agents in the area and with the management office of Thomson Commercial Building.  He alleged that he was told it would be very difficult to sell the Units quickly under the then market environment and was allegedly suggested a price of $4 million to $5 million.  His concern was simply to sell the Units so as to repay the Rabobank loan.  Hence, he was prepared to sell the Units at any price above $4 million.  I am surprised that a prudent solicitor would have failed to advise him to obtain a valuation report first before taking such a drastic and arbitrary decision. 

287.Yung said that he was told by Top Auctioneer Limited that it would take several days to prepare the tender documents and then several days to advertise the auction in newspapers.  Yet, he instructed Top Auctioneer Limited to advertise the auction of the Units on 12 to 14 July 1993 with tender closing at noon on 14 July 1993.  The tender period was only two and half days.  When asked whether he thought the time was too short to receive a realistic tender, Yung replied that he did not think about it at all.  I do not think there was any truth in that statement from this seasoned businessman.  I think Yung was being evasive.  According to Varty, whose opinion I have no doubt is correct, he was shocked to see that the tender period was so short.  He said that the normal tender period was four to six weeks and at least three weeks.  That was to allow time for the market to become aware of the availability of the property and for interested buyers to make at least some preliminary investigation and to inspect the property.  He even called two days “unconscionably short”.  I entirely agree with Varty’s opinion.

288.In the meantime, Yung did not even wait for estate agents to look for any interested purchasers.  His explanation was that he sensed it would be quite difficult for the estate agents to sell the Units.  He did not advertise the sale of the Units within Thomson Commercial Building either.  He did not inform Vos as the only other director and shareholder of the Companies or Messrs JSM as Vos’ legal representative the resolutions to sell the Units and the auction.  I do not think a prudent solicitor would not have advised Yung not to take any of the above steps.  Furthermore, Yung admitted that he and Mrs Yung were interested to bid for the Units.  If that was the case, there was all the more reason for him to have made the auction more transparent.  It was all the more important for him to disclose the auction and his intention to bid to Vos.  I do not think a prudent solicitor would not have emphasised to Yung the importance of keeping Vos informed of the auction.

289.I have expressed my doubts that a prudent solicitor retained to advise Yung about the proper procedure for selling the Units under the special circumstances of this case would not have arranged service of the notice of meetings and resolutions passed on Vos.  I am even more unconvinced that a prudent solicitor would have in the present circumstances advised Yung to have the Units auctioned under such a tight time schedule.  Alfred Hau was not called to confirm such were the advice he gave to Yung.  A prudent solicitor would have suggested his client to liaise with the bank for time to sell the security so as to repay the loan.  Even if Rabobank were to turn a deaf ear to any form of negotiation, a prudent solicitor knows that a mortgagee could not go about selling the mortgaged property at will, let alone within two weeks as what Yung was effectively doing.  A prudent solicitor knows that if the mortgagor resists a sale it could take at least six to twelve months for a mortgagee bank to obtain an order for sale.  A persistent mortgagor who resists and appeals on each and every stage of the proceedings may delay the process for years.  Reality would have dictated Rabobank to cooperate with Yung to allow him to sell the properties within a reasonable time frame.  Being a seasoned businessman and according to his evidence he had the unpleasant experience of a forced sale before, Yung must know that Rabobank could not sell the Units within two weeks.  A prudent solicitor would have advised his client to obtain a valuation report before putting the property on auction.  Apparently such advice had not been given.  Even if Top Auctioneer Limited were introduced to Yung by Alfred Hau, which I doubted, I do not believe Alfred Hau would have advised Yung to sell under such a tight schedule without first obtaining a valuation report and without giving Vos notice of the intended sale and particulars of the auction.  Yung was only trying to give credibility to his evidence by falsely claiming that he was acting under legal advice.  I do not accept his evidence. 

290.Though there was nothing unusual about the tender documents and advertisement, the tender period, as Varty put it, was “unconscionably short”.  I could not agree with him more.  A tender period of two and half days was unconscionably short as against the normal period of four to six weeks.  I find that the auction was tailored only for Yung or his nominees to bid.  It was a sham. 

Whether Yung was in breach of fiduciary duty

291.The answer to the question whether Yung was in breach of fiduciary duty owed to the Companies is whether Yung genuinely believed the auction was a business decision in the interest of the Companies. 

292.Cheung advanced a number of arguments that the auction was in the interest of the Companies and the creditors.  She argues that it was not financially viable for the Companies to keep the Units, that sale of the Units was in the interest of the creditors and shareholders of the Companies and that effectively Yung’s team was the major creditor.  She also argues that the sale was a genuine business decision to meet creditor’s demand to avoid imminent threat of winding up.  She said that Rabobank had been paid in full, that Yung would not be demanding any repayment of his loans and Vos may not demand repayment of his loans without Yung’s consent.  She said that most important of all was that by selling the Units Goldmark was able to maintain the Hill’s distributorship.  She further argues that as Vos and Yung had entered into the Provisional Settlement Agreement, Yung was the sole shareholder of the Companies in equity.  She submits that creditors would prefer sale of the Units by the Companies than foreclosure by Rabobank.  I do not find it necessary to deal with all of Cheung’s arguments.  Most of the issues Cheung raised are irrelevant to the central issues in this case which is whether Yung was in breach of fiduciary duty in selling the Units at an undervalue.  Even if the issues Cheung raised were all resolved in favour of Yung, the point remains whether in selling the Units the way he did, Yung was in breach of his fiduciary duty owed to the Companies.

293.I start with the presumption that Yung was acting bona fide.  But I must consider all the circumstances surrounding the auction.  The sale was at a gross undervalue, being 37.5% off the open market value or 17% off the forced sale value.  The forced sale value is usually the extremity and includes a discount for all possible considerations in a fire sale and it is usually impossible to go much lower.  A further discount of 17% was a very substantial reduction.  In the absence of a reasonable explanation, sale at a gross undervalue is some evidence on which lack of good faith or even bad faith may be inferred. 

294.Yung’s explanation was that Goldmark was in dire financial difficulties caused by the operation of Jade Rainbow or Animal Health Centre.  I have rejected that explanation.  Goldmark was not in financial difficulties at the material time between May and July 1993.  Yung failed to show any genuine financial difficulties threatening Goldmark.  Instead, he and his family members were draining Goldmark’s resources by diverting proceeds of sale of Goldmark’s stock to Wealth Country without ever paying Goldmark.  Any difficulty in respect of Goldmark’s Rabobank account was self-induced by Yung transferring business receipts from Goldmark’s IBA account to pay himself instead of to reduce the overdraft in the Rabobank account as he used to.  This exhausted the overdraft limit in the account.

295.Yung’s other explanation was that Vos colluded with Rabobank to freeze Goldmark’s account and demanded repayment of outstanding loan to damage Goldmark.  He had to sell the Units to pay off Rabobank and to protect Goldmark’s interest in the Hill’s distributorship.  I also rejected that explanation.  While it is not clear why Rabobank froze Goldmark’s account and demanded repayment of the outstanding loan, probably it was because Yung attempted to cash a cheque of $500,000 when Goldmark had exceeded it overdraft limit.  Probably unknown to Rabobank, on my finding, that cheque was a forgery.  The fact remains that Yung did not liaise with Rabobank about extension of time for repayment.  He did not discuss the situation with Vos.  He took no steps to arrange alternative facilities from other banks.  He even deliberately refused to attend the meeting with Rabobank on 1 July 1993 to discuss the account.  Instead, he took steps to sell the Units himself.  He merely used the occasion of Rabobank’s calling in the loan to accuse Vos of colluding with Rabobank to call in the loan as an excuse for his selling the Units to repay Rabobank.  I find that he did not have any genuine belief that Vos had colluded with Rabobank to call in the loan or any genuine fear that Rabobank would immediately force sell the Units. 

296.Yung’s third explanation was that he believed the sale was the only way to save Goldmark.  Again, I have rejected that explanation.  He could have sought alternative financing from other banks, but he did not.  Though Rabobank demanded repayment in two weeks, it had never commenced legal action and foreclosure was a long way off.  Rabobank would take at least six months to obtain an order for sale of the Units from the court.  Yet why should Yung be at such a hurry to?  He was not inducing a forced sale, he was deliberately executing a forced sale on Goldmark and at a ridiculously low price.  It was inexplicable that Yung should start a forced sale of the Units on his own initiative, except on the basis of some ulterior motive or bad faith. 

297.The sale was conducted in a most suspicious manner and bore all tell tale signs of bad faith.  Despite he was warned by Messrs JSM on 12 July 1993 about the invalidity of Iris Leung’s appointment as director of Goldmark and despite he was asked by Messrs HLLY to produce the 1991 Resolution, Yung did not produce the 1991 Resolution to Messrs HLLY for their further consideration.  He knew Iris Leung’s appointment as director of Goldmark had lapsed and she had no authority to pass any resolutions on behalf of Goldmark.  Despite all that, he acted on the 2^nd 1993 Resolution which he procured Iris Leung to pass so as to sell Unit 1D.  In his dual capacity as director of Goldmark and director of World Champ, he passed the 3^rd Resolution to sell Unit 1A.  He did not give any notice of board meeting for the purpose of considering the sale of the Units to Vos and did not give Vos a copy of the resolutions passed.  He deliberately concealed the sales from Vos.  

298.Yung said the auction was arranged under legal advice and the auctioneer was recommended by his solicitors.  Yung did not obtain a valuation of the open market value of the Units and arbitrarily sold the Units to Global Fair at a value which was 37.5% below the open market value or 17% below the forced sale value.  The auction was a sham.  The decision to sell the Units under the terms of the auction was so bizarre that no reasonable board could consider to be in the interest of the Companies.  The auction was just a sham and the decision to auction was manifestly made in bad faith.  It could not have been a bona fide business decision in the interest of the Companies.

Breach of the “no conflict rule” and the “no profit rule”

299.There is no direct evidence that Global Fair was Yung’s nominee in purchasing the Units.  However, in my analysis of the claim against Cheung, Global Fair and Start Win, I made the finding that Cheung bid for the Units pursuant to a common design with Yung.  I am unable to find what was the full extent of that design, but it included at least that Yung and Cheung were to provide the purchase price of Unit 1D and Unit 1A respectively or jointly.  Subsequently, Yung’s and Cheung’s rights were referable to those respective Units.  But that apart, I have rejected Cheung’s and Yung’s evidence that they merely financed Cheung’s purchase of the Units by way of a loan which was substantially repaid.  So the evidence remains that Cheung bid for the Units through Global Fair under a design in which she and Yung provided respectively for the purchase price of Unit 1A and Unit 1D.  The further irresistible inference is that Cheung and Yung either purchased the respective Units separately or the Units jointly.  Whatever it was does not matter.  Yung was in breach of the “no conflict rule” by purchasing through Global Fair.  As the purchase was at a substantial undervalue, Yung was also in breach of the “no profit rule”.

Whether the “no conflict rule” should be relaxed

300.Yung argues that he is effectively the owner of all the issues shares of and in the Companies and their majority creditor.  Hence, in the circumstances, it would be too stringent not to relax the “self dealing rule” or the “no conflict rule” to allow him or Mrs Yung to put in a tender for the Units.  This argument is a non-starter because the Plaintiff’s case is not really about breach of the “self dealing rule” or the “no conflict rule” as such.  The Plaintiff’s complaint is about Yung’s breach of fiduciary duty to act in good faith in the manner in which Yung conducted the sale of the Units.

301.But as a matter of law, his argument has no legal basis.  It is assumed that via Wealth Country and Mrs Yung’s mother, Yung is the beneficial owner of 50% of the issued shares of and in the Companies.  Yung now claims that by reason of his having signed the Provisional Settlement Agreement with Vos, he is also the equitable owner of the remaining 50% of the issued shares held by Vos on trust for him.  Quite apart from the fact that Yung, Wealth Country and his mother-in-law were different legal entities and that in another context Yung claimed to have no interest in Wealth Country, I am unable to agree with that proposition.  A similar argument was rejected in Musselwhite and another v C H Musselwhite & Son Ltd and Others [1962] 1 Ch 964.  I do not find it necessary to go into the detailed arguments in that case.  After drawing analogy from the position of an unpaid vendor of land and that of a mortgagee of land, Russell J concluded at 987 as follows as regards an unpaid vendor of shares:

“ In my judgment, so far as voting powers are concerned, an unpaid vendor remaining on the register is not to be regarded as in a weaker position, so far as the exercise of voting powers is concerned, than a mortgagee.  The purchaser acquires the beneficial interest subject to the vendor’s lien: the mortgagor retains the beneficial interest subject to the charge in favour of the mortgagee, in the form of an equity of redemption.  In the one case the mortgagee is deliberately put on the register to safeguard his money lent: in the other case the vendor is deliberately left on the register until all is paid to safeguard his purchase-money due.

In my judgment an unpaid vendor of shares remaining on the register after the contract for sale retains vis-à-vis the purchaser the prima facie right to vote in respect of those shares.”

According to the views of Russell J, the unpaid vendor of shares is entitled to notice of meeting and to vote in respect of his shares in his own interest and is not bound to vote in accordance with the direction of the purchaser who has not fully paid for the shares. 

302.I agree with that view.  Share is a special kind of property.  Property in shares do not change hands by delivery.  Three legal transactions are required to bring about a transfer of shares.  Firstly, there will be a contract for the sale of the shares.  If the contract is effected through a stockbroker, it will be evidenced by his bought and sold notes.  Secondly, the vendor will execute a document of transfer and deliver the shares to the purchaser.  Usually the vendor will execute the document of transfer upon payment of the full purchase price.  As far as the vendor is concerned, if he was paid, that would be the completion of the sale.  His obligation is not to do anything which would be inconsistent with the sale of the shares.  Thirdly, the purchaser becomes a member and shareholder of the company by having his name entered into the register of the company.  He usually has to sign a transfer form to agree to accept the said shares.  In the case of a private company, usually the transfer has to be approved by the company.  The purchaser will acquire legal ownership of the shares only upon completion of the third transaction.  I am not aware of any authorities on the question when a purchaser acquires an equitable interest in the shares purchased.  Approaching the question from first principle, the answer must be that it depends on the express or presumed intention of the parties.  The right to vote is one of the incidents of legal ownership of shares.  If an unpaid vendor of shares remaining on the register after the contract for sale retains vis-à-vis the purchaser the right to vote in respect of those shares, he must also retain his equitable interest together with his legal interest in the shares.  In the case of an ordinary sale and purchase of shares, I do not think it could have been the presumed intention of the parties that a trust of the shares would be created at any time prior to the payment of the full purchase price.  On the other hand, as soon as the purchase price was paid in full, the vendor must hold the shares on constructive trust for the benefit of the purchaser pending completion of the third transaction, i.e. approval of the transfer by the company and the registration of the shares in the purchaser’s name in the register of the company.

303.There was no express intention under the Provisional Settlement Agreement, nor could any intention be inferred.  I cannot infer any intention other than that a vendor does not hold the shares on trust for the purchaser until he was fully paid.  To hold otherwise would entitle the purchaser who had not even paid to do anything inconsistent with the rights of the legal owner of the shares.

304.On the facts, for the reasons which I have given, I disagree with Yung’s submission that the auction was a genuine business decision bona fide made for the purpose of raising funds to meet the demand of Rabobank to avoid the threat of liquidation.  Yung was not the beneficial owner of 50% of the shares in the Companies held by Vos.  There was no justification to relax the “self dealing rule” or the “no conflict rule”.

Relief under section 358 of the Companies Ordinance

305.Yung argues that he is entitled to relief under section 358 of the Companies Ordinance which excuses a director who has acted honestly and reasonably for the negligence, default, breach of duty or breach of trust.  He quotes extensively from the authorities.  I do not wish to burden this already over burdened judgment.  The conditions for exempting a director from liability are that he has acted honestly and reasonably.  On my finding of fact, not any had Yung acted deliberately and unreasonably, he acted dishonestly in each and every step in bringing about the forced sale of the Units at an undervalue to himself or jointly with Cheung for his benefit and to the detriment of the Companies.  He is not entitled to the relief under section 358 of the Companies Ordinance.

Yung’s defence of set off and counterclaim

306.Yung counterclaims $1.1 million director’s loan made to Goldmark on 8 November 1991 and a shareholders’ loan of $1 million made to Goldmark.  In the event that he was found to be liable for any breach of duty or misappropriation, he counterclaims for a total of $2,894,659.50 as various sums which he claims he ought to be paid.  The total amount of his counterclaim is $4,994,659.50.  New Champion also made a similar counterclaim against the Plaintiff.  The counterclaims are denied by the Plaintiff and Yung was put to strict proof. 

307.Before the winding up of a company, a party is entitled to a legal set off if he has a monetary claim against the company or an equitable set off if his claim is closely related to the claim of the company.  Upon the winding up of the Companies, a claimant’s right to counterclaim is subject to section 35 of the Bankruptcy Ordinance which is applicable to the winding up of an insolvent company by virtue of section 264 of the Companies Ordinance.  Section 35 of the Bankruptcy Ordinance allows mutual credit and set off between a bankrupt, or in this case the company in liquidation and a claimant in respect of their mutual dealings so that the sum due from one party shall be set off against any sum due from the other party.

308.Much has been said by Yung in his evidence about his director’s loan of $550,000 to Goldmark and about Vos’ failure to make a similar advance which resulted in his advancing a second sum of $550,000 to complete the purchase of Unit 1D.  However, there is no documentary proof in support.  Goldmark’s bank statements from IBA and Rabobank did not show any such deposit.  New Champion has absolutely no legal basis for such a claim.

309.As for the shareholders’ loan claimed by Yung, there may well be shareholders’ loans advanced to Goldmark by Wealth Country but not by Yung.  The Plaintiff claims against Yung are personal claims for breach of fiduciary duty and not proprietary claims, whereas Goldmark’s liability for shareholders’ loan is owed to Wealth Country and not to Yung.  In any event, Wealth Country is not a party to these proceedings.  There is no evidence that New Champion advanced any loan to Goldmark.  Neither Yung nor New Champion can have any valid counterclaim for shareholders’ loan advanced by Wealth Country.

310.As for his last head of counterclaim, Yung claims for sums which he is found to have misappropriated and liable to return to Goldmark and other payments which had been properly accounted for in the books of Goldmark.  In respect of the sums which he was found to have misappropriated, his counterclaim is plainly ridiculous.  In respect of the other sums, he has failed to establish the basis of his claims.  Those claims include, for example, the sum of $285,000 paid by Goldmark under Rabobank cheque number 505801 to reimburse him for the deposit he paid for the purchase of Unit 1A, the sum of $500,000 paid by Goldmark under Rabobank cheque number 505836 to him which had been cleared.  Such claims are equally ridiculous.  Neither can I see any basis for a counterclaim by New Champion for those sums.  Yung’s argument demonstrates a total lack of good faith in his conduct of this litigation whether on behalf of himself or New Champion. 

311.On the evidence, Yung and New Champion have failed to prove any legal set off.  Their counterclaims could hardly be connected with the Plaintiff’s claims against him.  They are not entitled to any equitable set off either.  But even assuming they had a counterclaim, they are not entitled to any set off under section 35 of the Bankruptcy Ordinance.

312.As correctly aubmitted by Mr Lam, the Plaintiff’s claim against Yung is a claim for breach of fiduciary duty which cannot be a mutual dealing within the meaning of section 35 of the Bankruptcy Ordinance.  The point had been well settled for more than a century.  In Manson v Smith (liquidator of Thomas Christy Ltd) [1997] 2 BCLC 161, the English Court of Appeal held that a misappropriation of assets of a company was not a dealing because the liability for such misappropriation arose as a result of the judgment after the winding up and not as a result of any dealing between the claimant and the company.  That case was about interpretation of rule 4.90 of the Insolvency Rules 1986, SI 1986/1925 of the United Kingdom, which is equivalent to our section 35 of the Bankruptcy Ordinance.  Millett LJ, as he then was, said at 163:

“That raises this question of law: can a person who is ordered to repay moneys to the liquidator of an insolvent company in misfeasance proceedings set off against the sum he is ordered to pay any sums which are owing to him by the company?  That is a question which would undoubtedly be worthy of consideration by the full court if it were a novel point of law, but it is not.  It is settled and has been settled for more than a century that there is no set-off available between a debt due to a misfeasant and his liability to repay the moneys which he has been ordered to pay in misfeasance proceedings.

…

First, r 4.90 and its predecessors require there to be mutual debts or mutual dealings.  When Mr Manson improperly withdrew money from the company this did not constitute a dealing between him and the company.  A misappropriation of assets is not a dealing.  Mr Manson will object to the following analogy, but I hope he will forgive me for it is only an analogy: the thief who steals my watch does not deal with me.  Similarly, the man who steals money from a company does not obtain the money by a dealing within r 4.90.  Accordingly, his liability to repay money he has misappropriated cannot be set off against any debt owing to him by the company.

The second reason is that given in Ex p Pelly by Hall V-C, who referred (at 498) to an earlier decision of his own, in 1880, when he had reached the same conclusion.  I will read from his judgment in that earlier case when he said (see 21 Ch D 492 at 498): 

‘… I have already held Mr Pearse liable under the 165^th section of the Companies Act, 1862, to pay to the liquidator a portion of certain promotion moneys, which portion I considered he had improperly received.  He has claimed to set off against this amount a sum which he says the company owed to him at the date of the winding-up, and I reserved for consideration the question whether the set-off can be sustained; and having considered it I have come to the conclusion that it cannot.  A liability under the 165^th section is a liability of a delinquent, and until the order directing payment in respect of it has been made should not be treated (in the delinquent’s favour) as a debt from him to the company so as to entitle him to a set-off.’”

313.The law is very well settled and beyond argument.  It needs no elaboration.  If a man steals or misappropriates property belonging to a company, the company could not be said to have dealt with the thief in the appropriation of its own property.  If it could, the company must have resisted such theft or act of misappropriation.  The company could not have dealt with the wrongdoer by misappropriating its own property.  Likewise, if a director commits a wrong on the company by his breach of fiduciary duty owed to the company, the company could not be said to have dealt with the director to commit a wrong on itself.  Quite apart from common sense, this rule is well backed by policy.  If creditors or directors to whom an insolvent company owes money are entitled to a set off what they wrongfully misappropriated from the company against what the company owes them, liquidation could never be conducted in any fair and orderly manner.  The assets of an insolvent company will become a game for any directors or creditors who have prior knowledge of its insolvency.  They would secure or compete for priority by committing wrongs against the company.  This would result in a director who has acted improperly recovering in full what the company owed him, whereas a director who acted properly and the honest creditors would be relegated to a proof in the liquidation.  That could not have been the intention of section 35 of the Bankruptcy Ordinance. 

314.On the facts, Yung committed serious breach of fiduciary duty against the Companies.  He deliberately and dishonestly sold the companies’ asset at an undervalue to himself or jointly with another.  Even if he had not benefited from his breach of fiduciary duty, the Companies suffered loss.  His conduct could in no way be interpreted as a dealing with the Companies within the meaning of section 35 of the Bankruptcy Ordinance.  Quite apart from the lack of a factual basis for his claims, as a matter of law, he is not entitled to any set off.  Yung’s and New Champion’s counterclaim must be dismissed.

Damages

315.Yung was in clear breach of fiduciary duty owed to the Companies.  He is liable to make good the loss to the Companies.  Mr Lam submits that Yung’s breach of fiduciary duty occurred at the time of sale of the Units.  The loss is represented by the difference between the then open market value of the respective Units and the sale price.  The damages to be awarded to Goldmark in respect of the sale of Unit 1D is $1.2 million ($3.4 million - $2.2 million).  The damages to be awarded to World Champ in respect of the sale of Unit 1A is $1.35 million ($3.4 million - $2.05 million).  The total damages to be awarded to the Plaintiff is therefore $2.55 million.

316.Yung and Cheung argue that as the Units were subsequently sold by Global Fair for $3.8 million, which was $0.45 million below what Global Fair had paid, the Companies suffered no loss.  While their argument is short of saying that Yung’s breach of fiduciary duty was of service to the Companies, they submit that there was no reason why the Court should “stop the clock” and assess damages as at the date of breach.

317.In Target Holdings Ltd And Redferns (a firm) and another [1996] AC 421, Lord Browne-Wilkinson made an important statement of the principles concerning a trustee’s liability to pay equitable compensation auffered by the beneficiary as a result of his breach of trust.  His Lordship said at 437:

“A trustee who wrongly pays away trust money, like a trustee who makes an unauthorised investment, commits a breach of trust and comes under an immediate duty to remedy such breach.  If immediate proceedings are brought, the court will make an immediate order requiring restoration to the trust fund of the assets wrongly distributed or, in the case of an unauthorised investment, will order the sale of the unauthorised investment and the payment of compensation for any loss suffered.  But the fact that there is an accrued cause of action as soon as the breach is committed does not in my judgment mean that the quantum of the compensation payable is ultimately fixed as at the date when the breach occurred.  The quantum is fixed at the date of judgment at which date, according to the circumstances then pertaining, the compensation is assessed at the figure then necessary to put the trust estate or the beneficiary back into the position it would have been in had there been no breach.  I can see no justification for “stopping the clock” immediately in some cases but not in others: to do so may, as in this case, lead to compensating the trust estate or the beneficiary for a loss which, on the facts known at trial, it has never suffered.”

His Lordship then went on to consider the Canadian authority of Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4^th) 129.  At 438 of his judgment, his Lordship quoted with approval the judgment of McLachlin J in that case.  He said after referring to that case:

“…, I extract the following statements.

At  p.160:

“While foreseeability of loss does not enter into the calculation of compensation for breach of fiduciary duty, liability is not unlimited.  Just as restitution in specie is limited to the property under the trustee’s control, so equitable compensation must be limited to loss flowing from the trustee’s acts in relation to the interest he undertook to protect.  Thus, Davidson states [‘The Equitable Remedy of Compensation’ (1982) 3 Melbourne U.L. Rev. 349]  ‘It is imperative to ascertain the loss resulting from breach of the relevant equitable duty’ (at p. 354, emphasis added).”

At p. 162:

“ A related question which must be addressed is the time of assessment of the loss.  In this area tort and contract law are of little help. … The basis of compensation at equity, by contrast, is the restoration of the actual value of the thing lost through the breach.  The foreseeable value of the items is not in issue.  As a result, the losses are to be assessed as at the time of trial, using the full benefit of hindsight.”  (Emphasis added.)

At p. 163:

“ In summary, compensation is an equitable monetary remedy which is available when the equitable remedies of restitution and account are not appropriate.  By analogy with restitution, it attempts to restore to the plaintiff what has been lost as a result of the breach, i.e., the plaintiff’s loss of opportunity.  The plaintiff’s actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight.  Foreseeability is not a concern in assessing the compensation but it is essential that the loss made good are only those which, on a common sense view of causation, were caused by the breach.” (Emphasis added.)

In my view this is good law.  Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach.”

318.Thus, Lord Browne-Wilkinson held that the two principles fundamental to an award of damages at common law apply equally to equity: firstly, the director’s breach must have caused the damage; and secondly, the company is to be put in the same position as it would have been in if the director had not been in breach of duty.  The principle in assessing equitable compensation is basically to put the trust estate or the beneficiary back into the position it would have been in had there been no breach.  There is no hard and fast rule whether to “stop the clock” at the time of the breach.  In some cases, it may be appropriate to assess the compensation as at the time of breach, but some times it may not.  The appropriate time to make the assessment is at the date of judgment.  The court shall assess what is just and equitable according to the circumstances pertaining at that time.  In making the assessment, the court shall use hindsight and common sense.  If by reason of some intervening event, the loss has been averted or mitigated, there was no reason to “stop the clock”.  In Target Holdings Limited, Lord Browne-Wilkinson found the beneficiary suffered no compensatable loss at the date of judgment. 

319.I consider I am bound by the above principles.  I reject Yung’s and Cheung’s argument that the Plaintiff suffered no loss.  That Cheung sold the Units at a loss was her choice and not Goldmark’s or World Champ’s.  The loss was the consequence of her mis-investment.  There is no reason why Goldmark’s damages should be assessed as at the time when Cheung decided to actualise her loss.  Had Yung not been in breach of fiduciary duty and had Cheung and Global Fair not assisted in that breach, the question of damages would never have arisen.  Now that it has, it has to be assessed in accordance with established legal principles.

320.The present case has taken fourteen years to come to conclusion.  That was a very long time.  At the time of breach, the Units were sold at an undervalue.  Subsequently, the Units were sold by Global Fair and Start Win for $3.8 million at a loss in October 2006.  Property price fluctuated during these sixteen years.  I have not been provided with the valuation of the Units at the height of the property market during these sixteen years or as at today.  Certainly, those valuations were much higher than the price paid by Global Fair.  Under the principle in Target Holdings Limited, the Plaintiff is entitled to have his damages assessed with hindsight and common sense.  Approaching the assessment with hindsight and common sense, the Companies would either have sold the Units in 1993 if a sale was necessary or retained the Units.  Under the first scenario, the sale would not have been a forced sale.  The Companies would have been able to recover the open market value of the Units at that time.  If so, the Units could not have been sold in 2006 for $3.8 million.  If the Units had been retained until today, the Companies would have been entitled to realise the open market value today after giving credit to the $4.25 million which they had received.  The Plaintiff could have asked for assessment as at the date of judgment.  In that case, I believe, the difference between the open market value today and the price for which the Units were sold to Global Fair would have been much higher. 

321.The Plaintiff only asks to have damages assessed as at the time of breach.  That is extremely reasonable.  Accordingly, the Plaintiff, in the shoes of the Companies, is entitled to damages assessed as the difference between the open market value at the time of breach of fiduciary duty and the sale price of $4.25 million, i.e. $2.55 million. 

Conclusion for Sale of Units Claim against Yung and Mrs Yung

322.Yung was in clear breach of fiduciary duty owed to the Companies.  He is liable to pay equitable compensation to the Companies in the amount of $2.55 million.  The award shall carry interest with effect from the date of completion of the sale and purchase agreement of the Units, i.e. 28 July 1993.

(F)  sale of units claim against Cheung, Global Fair and start win

The Plaintiff’s case

323.As against Cheung, the Plaintiff’s case is that Cheung acquired the Units through Global Fair with the knowledge that the Units were being disposed of by Yung at an undervalue and in breach of Yung’s fiduciary duty to the Companies or turned a blind eye to such breach.  Cheung and Global Fair dishonestly assisted Yung by concealing his interest in the Units and were knowing recipients of trust properties which had been disposed of by Yung in breach of his fiduciary duty to the Companies.  Upon Global Fair assigning Unit 1A to Start Win, Start Win was knowing recipient of trust property which had been disposed of by Yung in breach of fiduciary duty to Goldmark and/or World Champ.  Start Win also dishonestly assisted Yung in the disposition and acquisition of the Units by assisting him in continuing to conceal his interest in Unit 1A.  Global Fair and Start Win therefore held the Units respectively as constructive trustees for the Companies and were liable to account to the Companies. 

Cheung’s case

324.Cheung’s defence is that she and Global Fair were bona fide purchasers for value without notice of Yung’s breach of fiduciary duty, if any.  She saw the advertisement for the auction of the Units on 12 July 1993 by coincidence.  She recalled that the Units were the offices of Goldmark.  She enquired from Yung about the Units and told Yung that she wanted to purchase them as an investment and to keep her investment in the Units secret from her husband.  Yung then advised her to use corporate vehicles for holding the Units.  She bid for the Units.  Out of convenience, Yung paid the deposit for her.  She was the only bidder.  The Units were sold to her at arm’s length.  The purchase price she paid reflected the forced sale value of the Units.  The Units were purchased by her using her own funds and funds borrowed from her friends including $1.35 million from Yung and Mrs Yung.

325.Cheung also pleaded limitation.  She was not joined in this action until 6 September 2000 when she was served the Writ and Statement of Claim amended pursuant to the order of Master Barnes, as she then was, on 1 September 2000, which was more than seven years from the events giving rise to the claims against her.

The law - dishonest assistance and knowing receipt

326.The Plaintiff’s claim against Cheung, Global Fair and Start Win is based on dishonest assistance in Yung’s breach of trust and knowing receipt of trust property.  A person other than a director of a company may also be liable for the director’s breach of fiduciary duty as accessory by rendering dishonest assistance to the director and for knowing receipt of assets which are traceable to the breach of fiduciary duty. 

327.The leading authority on the principles of liability for dishonest assistance are set out in the Privy Council decision of Royal Brunei Airlines Sdn Bhd v Philip Tan Kok Ming [1995] 2 AC 378.  The Privy Counsel held that where a third party dishonestly assisted a trustee to commit a breach of trust or procured him to do so, the third party would be liable to the beneficiary for the loss occasioned by the breach of trust, even though the third party had received no trust property and irrespective of whether the trustee had been dishonest or fraudulent.  To be liable as an accessory, the assister must have deliberately or knowingly interfered in the trust relationship by assisting the trustee in depriving the beneficiary of the property held for him by the trustee.  The assister must know that he was assisting in a breach of trust.  He must also have assisted with a dishonest state of mind.  The test of dishonesty contains a subjective and an objective element. Acting dishonestly or acting with a lack of probity, which is synonymous, means not acting as an honest person would act in the circumstances and could usually be equated with conscious impropriety as distinct from inadvertent or negligent conduct or carelessness, although a third party might be acting dishonestly if he recklessly disregarded the rights of others by turning a blind eye.  In that context, dishonesty is to be judged objectively.  But the third party’s conduct has also to be assessed on the basis of his actual knowledge at the time and not what a reasonable person would have known or appreciated.  Regard may be had to his personal attributes including experience and intelligence and the reason for his acting in that way.  To this extent, the test of dishonesty is subjective. The test is put in this way by Lord Hutton in Twinsectra v Yardley and Others [2002] AC 164 at 172: the test is whether the accessory has acted dishonestly by the ordinary standards of reasonable and honest people and has himself been aware that by those standards he was acting dishonestly.

328.The principle in respect of an accessory’s liability based on knowing receipt has been set out by Hoffmann LJ, as he then was, in El Ajou v Dollar Land Holdings [1994] BCC 143 at 154.  To establish liability on a recipient of trust property, the plaintiff must show, first a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets are traceable to a breach of fiduciary duty.  The principle has been approved by the English Court of Appeal in Brown v Bennett [1999] BCC 525 at 530 which stressed that the receipt must be the direct consequence of the alleged breach of trust or fiduciary duty of which the recipient is said to have notice.

329.On the third ingredient, Cheung refers to the five categories of knowledge in Baden and others v Societe Generale pour Favoriser le Development du Commerce et de l’Industrie en France SA (Note) [1993] 1 WLR 509 (“Baden scale”) and submits that the authorities have not given any definitive view as to the level of knowledge required for liability.  The five categories of knowledge on the Baden scale are: (1) actual knowledge; (2) wilfully shutting one’s eyes to the obvious; (3) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make; (4) knowledge of circumstances which would indicate the facts to an honest and reasonable person; and (5) knowledge of circumstances which would put an honest and reasonable person on inquiry.  Under the classical categorisation, the first three categories have been taken to constitute actual knowledge or its equivalent and the last two objective and constructive knowledge respectively.  Cheung submits that only actual knowledge within the meaning of the first category of knowledge under the Baden scale will fix the third party recipient with liability whereas constructive knowledge, objective knowledge or imputed knowledge is not enough.

330.Accessory liability based on knowing receipt is a fairly recently developed principle.  The authorities in the United Kingdom were divided as to which of the five categories of knowledge will suffice.  The situation has been clarified by the English Court of Appeal in Bank of Credit and Commercial International (Overseas) Limited v Akindele [2001] Ch 437.  While retaining the three ingredients necessary for liability based on knowing receipt, Nourse LJ held at 455 that the recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt.  It is therefore no longer necessary or appropriate to find into which category the recipient’s knowledge fell.  The knowledge required to fix the recipient with liability is such knowledge as would make it unconscionable for him to retain the benefit of the receipt.  Actual knowledge is certainly sufficient.  But that does not mean any of the other four categories of knowledge must necessarily be insufficient.  It depends on all the circumstances of the case.  The test is whether it is unconscionable for the recipient to retain the benefit of the receipt. 

331.Prior to BCCI (Overseas) Ltd, the courts had not properly addressed their minds to the distinction between knowing assistance and knowing receipt.  The instinctive approach of most equity judges has been to assume that constructive knowledge as in the case of knowing assistance is enough for knowing receipt.  Other judges adopt the more restrictive approach of requiring actual knowledge.  This distinction is important in explaining the proper approach to be adopted in respect of the two different forms of liability.  A claim based on knowing assistance is a proprietary claim attached to the property.  For that reason, notice, actual or constructive, of another person’s beneficial claim to the property may suffice for this form of liability.  On the other hand, the claim based on knowing receipt is a personal claim founded on constructive trust arising from operation of law.  Actual knowledge is therefore required to bind the conscience of the constructive trustee.  Constructive knowledge is not enough.  This distinction was recognised by Sir Robert Megarry V-C in In re Montagu’s Settlement Trust [1987] Ch 264 at 278.  He said:

“The former is concerned with the question whether a person takes property subject to or free from some equity.  The latter is concerned with whether or not a person is to have imposed upon him the personal burdens and obligations of trusteeship.  I do not see why one of the touchstones for determining the burdens on property should be the same as that for deciding whether to impose a personal obligation on a [person].  The cold calculus of constructive and imputed notice does not seem to me to be an appropriate instrument for deciding whether a [person’s] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee.”

At 285, his Lordship concluded:

“(1)  The equitable doctrine of tracing and the imposition of a constructive trust by reason of the knowing receipt of trust property are governed by different rules and must be kept distinct.  Tracing is primarily a means of determining the rights of property, whereas the imposition of a constructive trust creates personal obligations that go beyond mere property rights.  (2)  In considering whether a constructive trust has arisen in a case of the knowing receipt of trust property, the basic question is whether the conscience of the recipient is sufficiently affected to justify the imposition of such a trust.  (3)  Whether a constructive trust arises in such a case primarily depends on the knowledge of the recipient, and not on notice to him; and for clarity it is desirable to use the word ‘knowledge’ and avoid the word ‘notice’ in such cases.”

In essence, his Lordship was of the opinion that in order to establish liability for knowing receipt, the recipient must have actual knowledge or the equivalent that the assets received are traceable to a breach of trust and that constructive knowledge is not enough.

332.The dicta of Sir Robert Megarry V-C in In re Montagu’s Settlement Trust was approved by Nourse LJ in BCCI (Overseas) Ltd.  Nourse LJ also considered the distinction between knowing assistance and knowing receipt important.  His Lordship reviewed a number of English authorities in which it was held that in commercial transactions, constructive knowledge is not enough: see Eagle Trust plc v SBC Securities Ltd [1993] 1 WLR 484, Cowan de Groot Properties Ltd v Eagle Trust plc [1992] 4 All ER 700 and Eagle Trust plc v SBC Securities Ltd (No 2) [1996] 1 BCLC 121.  However, the preferred view reached in three decisions involving commercial transactions in New Zealand was that constructive knowledge was enough: see Wespac Banking Corpn v Savin [1985] 2 NZLR 41, Equiticorp Industries Group Ltd v Hawkins [1991] 3 NZLR 700 and Lankshear v ANZ Banking Group (New Zealand) Ltd [1993] 1 NZLR 481.  A contrary view was reached in Canada in Citadel General Assurance Co v Lloyds Bank Canada (1997) 152 DLR (4^th) 411. 

333.After reviewing the authorities, Nourse LJ made the observation that the claim in constructive trust in Baden was based on knowing assistance and not on knowing receipt.  He then referred to Lord Nicholls’ dicta in Royal Brunei Airlines Sdn Bhd v Tan at 392 that “knowingly” was better avoided as a defining ingredient of the liability and and affirmed the unconscionability test as adopted by Buckley LJ in Belmont Finance Corpn Ltd v Willaims Furniture Ltd (No 2) [1980] 1 All ER 393 at 405 or by Sir Robert Megarry V-C in In re Montagu’s Settlement Trusts [1987] Ch 264 at 273.  His Lordship said at 455:

“In Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, which is now the leading authority on knowing assistance, Lord Nicholls of Birkenhead, in delivering the judgment of the Privy Council, said, at p 392G, that “knowingly” was better avoided as a defining ingredient of the liability, and that in that context the Baden categorisation was best forgotten.  Although my own view is that the categorisation is often helpful in identifying different states of knowledge which may or may not result in a finding of dishonesty for the purposes of knowing assistance, I have grave doubts about its utility in cases of knowing receipt.  Quite apart from its origins in a context of knowing assistance and the reservations of Knox and Millett JJ, any categorisation is of little value unless the purpose it is to serve is adequately defined, whether it is fivehold, as in the Baden case [1993] 1 WLR 509, or twofold, as in the classical division between actual and constructive knowledge, a division which has itself become blurred in recent authorities.”

What then, in the context of knowing receipt, is the purpose to be served by a categorisation of knowledge?  It can only be to enable the court to determine whether, in the words of Buckley LJ in Belmont Finance Corpn Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393, 405, the recipient can “conscientiously retain [the] funds against the company” or, in the words of Sir Robert Megarry V-C in In re Montagu’s Settlement Trusts [1987] Ch 264, 273, “[the recipient’s] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee”.  But, if that is the purpose, there is no need for categorisation.  All that is necessary is that the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.

For these reasons I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt.  The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt.  A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led.  Moreover, it should better enable the courts to give commonsense decision in the commercial context in which claims in knowing receipt are now frequently made paying equal regard to the wisdom of Lindley LJ on the one hand and of Richardson J on the other.”

Thus, the modern test of liability for knowing receipt is whether it is unconscionable for the recipient to retain the benefit of the receipt.  In applying the test the court is no longer confined to look at the knowledge of the recipient but to look at all the circumstances of the receipt.  This test has done away with the difficulties caused by the fivefold or twofold categorisation of knowledge.  Actual knowledge in the sense of the first category of knowledge in the Baden scale is undoubtedly an important and in most cases decisive factor in determining unconscionability.  But that does not mean the other four categories of knowledge are irrelevant.  The question is whether the recipient’s knowledge, whatever its categorisation on the Baden scale, is in all the circumstances such as to make it unconscionable for him to retain the benefit of the receipt.

The approach and issues

334.In the previous section, I have found that Yung was in breach of fiduciary duty owed to the Companies.  Thus, the main issues in respect of the claim against Cheung and her companies are whether Cheung had knowledge of Yung’s breach of fiduciary duty and was a party to or knowingly assisted in Yung’s breach of fiduciary duty to the Companies by purchasing the Units and that she did so with dishonest intention.  The burden of proof is on the Plaintiff.  There is no direct evidence of such knowledge or intention on the part of Cheung.  Proof will have to be by inference which may be reasonably drawn from basic facts proved.  The basic facts are set out in the sub-section below.  They are indisputable and were disclosed by documents discovered in the course of liquidation of the Companies.

335.The thrust of the Plaintiff’s case is coincidence, secrecy and Yung’s financing in Cheung’s purchase of the Units.  Mr Lam submits that Cheung would not have by a series of coincidences bid for the Units and did the series of acts set out in the background facts below unless pursuant to an agreement or design of Yung.  The secrecy with which Cheung concealed her identity as the person behind all those acts gives support to the adverse inference which may reasonably be drawn against her.  But of course, Cheung has her explanations too.  The dispute between the parties boils down to three issues.  Firstly, are Cheung’s explanations credible?  To determine that issue, it is necessary to find who were in control of Avant Garde, Global Fair and Start Win and whether Cheung’s explanations for the coincidences leading to her bidding for the Units credible.  Ultimately, the key to the mystery is who was or were the source of funds used for purchasing the Units.  On that issue, much turns on the inference to be drawn from the fund movement as a result of the transfer of Unit 1A to Start Win and the mortgage of Unit 1D after November 1993.  Secondly, if Cheung’s explanations are not credible, could the inference of Cheung’s knowledge of and intention to assist Yung’s breach of fiduciary duty be reasonably drawn against her.  Thirdly, did Cheung assist in Yung’s breach of fiduciary duty with dishonesty.  The explanations are solely matters within Cheung’s knowledge.  They are difficult to rebut, especially the explanations involved Avant Garde, a BVI bearer share company which masks the identity of its true owner. 

336.The Plaintiff’s case against Cheung is built on inferences to be drawn from basic facts, most of which are not in dispute.  The adverse inference to be drawn against Cheung’s conduct is overwhelming.  Cheung offers explanations for what she did.  Her evidence is corroborated by Yung’s.  Of course, such evidence is exclusively within the knowledge of Cheung and Yung and is difficult to rebut or challenged.  But on the other hand, there is a general lack of documentary evidence in support of part of their case where such corroborating evidence is reasonably expected, such as bank statements.  Many of the facts and inferences to be drawn from the basic facts are intertwined, particularly those relating to the transfer of Unit 1A to Start Win and the mortgage of Unit 1D to HSBC.  It is impossible to analyse these facts in any orderly and compartmentalised manner without some degree of overlapping and repetition.

337.The factual issues in respect of Global Fair’s and Start Win’s liability based on knowing receipt are the same.  I have found Yung was in breach of fiduciary duty in disposing of the Units.  It is beyond dispute that Global Fair and Start Win were recipients of the Units belonging to the Companies.  The remaining issue is whether they had knowledge that the Units were traceable to the breach of fiduciary duty and the knowledge is such as to make it unconscionable for them to retain the benefit of the receipt of the Units.

The factual background

338.The factual background is as set out in paragraphs 90 to 103 above.  The following are the further finding of fact relevant to this claim against Cheung and her related companies.

339.On 14 July 1993, Cheung bid for the Units.  The deposit of $850,000 was paid by Mrs Yung from the funds of Wealth Country and her own funds kept in HSBC to Messrs HLLY which was the solicitor acting for Goldmark as vendor of the Units.

340.On 15 July 1993, Yung instructed Messrs WS to take over from Messrs HLLY as solicitors for the sale of the Units.  On 16 July 1993, Yung on behalf of the Companies accepted Global Fair’s tender and sold the Units to Global Fair at $4.25 million.

341.On 21 July 1993, Messrs WS received $1,350,000 from Global Fair in part payment of the purchase price for the Units.  The said sum was drawn from the accounts of Wealth Country and Mrs Yung.  On or about 27 July 1993, Messrs WS received the balance of the purchase price in the amount of $2,050,000 from Global Fair’s solicitors, Messrs YC Leung & Co. (“Messrs YCL”).  The funds originated from Cheung’s account with HSBC.  Messrs WS repaid Goldmark’s outstanding loan due to Rabobank with the proceeds of sale.  The sale and purchase was completed on 28 July 1993.

342.Together with the deposit paid by Mrs Yung, the total amount paid by Yung and Mrs Yung was $2.2 million which was exactly the purchase price for Unit 1D.  Cheung’s case is that this was a loan which was later repaid.  The amount of $2.05 million paid by Cheung neatly matched the purchase price for Unit 1A. 

343.Vos commenced winding up proceedings against the Companies in August 1993.  As a result, the title deeds of the Units were withheld by the Official Receiver, despite that the sale of the Units had been completed on 28 July 1993.  The title deeds were subsequently released to Global Fair on 25 September 1993. 

344.On 12 November 1993, with Yung’s assistance, Cheung and Global Fair mortgaged Unit 1D to HSBC as security for overdraft facilities to be granted to New Champion.  Cheung’s explanation is that the facilities were used to repay Dr Ho who lent her $500,000 to purchase the Units and to finance her veterinary business in addition to the business purpose of New Champion.

345.On 24 November 1993, Global Fair assigned Unit 1A to Start Win at a purported purchase price of $4 million.  Start Win obtained a loan of $2 million from Dao Heng Bank secured against the mortgage of Unit 1A as security.  A sum of $1.9 million from the proceeds of the loan which were paid to Global Fair as Start Win’s purchase price was paid over to Yung.  Cheung’s explanation is that the money was used to repay Yung and Mrs Yung in part for their loan of $2.2 million.

346.In December 1993, Cheung commenced operating a veterinary clinic in Unit 1D under the name of Phoenix Veterinary Clinic.  She employed Dr Dalglish as the veterinary surgeon and Au as his assistant and to develop her veterinary business.  Since 1994, Yung moved into Unit 1D to manage and supervise the operation of the clinic.  New Champion also operated from Unit 1D.  Then Dr Dalglish left and was replaced by Dr Dahn.  The clinic was closed down in April 1995.  Since August 1994, Unit 1A was rented to Acota Limited.  The rental income was paid over to Yung.  Cheung’s explanation is that the rental income was used to repay the balance of the loan from Yung and Mrs Yung.  

347.In the course of the years, New Champion’s overdraft from the HSBC and Start Win’s mortgage loan from Dao Heng Bank against which the Units were secured were repaid.  The Units were sold in October 2006 for $3.8 million.  A sum of $2.25 million from the proceeds of sale was paid into court pending the outcome of this litigation.  Cheung claimed that the mortgage loans were repaid from the income from her medical practice.  But she produced no documentary evidence in suppot of her allegation.

348.The above paragraphs set out the factual background which is undisputed.  What is in dispute is the inferences to be raised from the above factual background which are particularly relevant to the Plaintiff’s claim and germane to Cheung’s defence.

The circumstances leading to and surrounding Cheung’s participation in the auction

349.The circumstances how Cheung came to participate in the auction are matters solely within the knowledge of Yung and Cheung.  The major dispute between the parties is whether Cheung coincidentally came to read about the advertisement for the auction or that she came to know about and participate in the auction by design. 

350.There is no dispute that Cheung first entered the scene in early 1992 when she and her husband visited Goldmark’s stall in the Holland Festival and purchased some Van Nelle coffee promoted by Goldmark.  There is also no dispute that thereafter Cheung visited the office of Goldmark and was introduced to Vos.  What happened thereafter is in dispute.

351.According to Vos, between April and May 1992, Yung told him that his friend Dr Winnie Cheung who was a medical practitioner and trusted him completely was interested in becoming a shareholder of Goldmark and would be willing to provide funds to Goldmark.  Yung said that he had successfully invested Cheung’s funds in foreign currency trading.  Vos declined the suggestion as there was no need for more capital at that time.  Soon after that Cheung visited Goldmark and was formally introduced to Vos.  Thereafter Yung talked to Vos about Cheung about once a month until May 1993.  The discussions were usually in the context of Yung’s son receiving treatment from Cheung, but Yung also suggested on several occasions to admit Cheung as a shareholder in Goldmark.  Vos consistently resisted the suggestion.  Yung and Cheung denied that Cheung had expressed any interest in investing in Goldmark.  On the totality of the evidence, I find Vos more credible.  Vos’ answers under cross-examination were spontaneous.  His evidence that Yung had mentioned about his success in foreign currency trading for Cheung was supported by Goldmark’s activities in foreign currency trading.  At that time, Goldmark had made significant break through in its business by acquiring the Hill’s distributorship and appeared to have strong business potential.  It is understandable that Yung might wish his old friend to be part of this promising business and so that he might have greater control over Goldmark.  I accept Vos’ evidence.  But this finding has no real significance. 

352.On the more critical issue as to how Cheung came to see the advertisement about the auction or whether she saw it at all, Cheung’s evidence, which is challenged by the Plaintiff, is as follows.  Since her childhood, Cheung was deeply impressed by her parents of the need to invest in property.  She had always wanted to invest in some properties which she would leave to her children.  After giving birth to her third child, she began looking for properties for investment.  Hence, it was her habit to read property advertisements in her leisure during her long lunch breaks.  On 12 July 1993, she saw the advertisement about the auction of the Units.  She recalled those were the offices of Goldmark.  After she had returned to her clinic and handled a few patients, she telephoned Yung.  Yung told her that the Units were worth purchasing as an investment and could rent for at least $15,000 a month.  She discussed briefly about her husband’s speculation activities in foreign currencies or what she called gambling problem, her wish to keep her property investment secret from her husband and that she wanted to pass the properties to her children.  Then Yung suggested to her the use of corporate vehicles and overseas bearer share companies to hold the Units.  She had never heard about bearer share companies before.  Yung suggested her to seek the services of William Leung. 

353.On the following day, Cheung telephoned Yung and discussed about the price to bid for the Units.  Yung did not give her any suggested price but said words to the effect that “the higher the better” and “according to and appropriate to her means”.  She also enquired more about the use of corporate vehicles for holding the Units.  Yung reassured her that things were not complicated and that he would inform William Leung to make the necessary arrangements.

354.On the morning of 14 July 1993, Cheung telephoned Yung and confirmed that she would bid for Unit 1A and Unit 1D at $2.05 million and $2.2 million respectively.  She told Yung the inconvenience she had of having to go to HSBC and Standard Chartered Bank to collect sufficient cash to purchase a bank draft to pay the deposit and then to go to Hong Kong to lodge the tender form.  Yung then offered to arrange for the bank draft and to prepare the tender form for her.  Later that morning, Au took the tender form with the condition of sale annexed to Cheung’s clinic for her signature. 

355.Cheung’s evidence is corroborated by Yung’s.  Yung said that he and Mrs Yung initially intended to purchase the Units and had taken some preparatory steps to do so such as instructing William Leung to arrange for Avant Garde as the corporate vehicle for holding the Units.  It was during the very time of the tender period that Cheung telephoned him all out of the blues coincidentally and told him that she was interested in bidding for the Units.  He then happily decided it was not necessary for them to bid, though unknown to him Mrs Yung stood by to bid just in case Cheung desisted at the last moment.

356.Understandably, the Plaintiff could offer no evidence to contradict Cheung’s and Yung’s allegations which were solely within their knowledge.  Mr Lam challenged the credibility of Yung’s evidence in cross-examination.  He referred to Yung’s evidence given during the Official Receiver’s examination, in which Yung said unequivocally that he had not told anyone about the auction.  Yung also said that he had not told any of his friends about the problems he had with the Companies.  He mentioned nothing about the sudden telephone call from Cheung.  That evidence is inconsistent with his evidence now before the Court in support of Cheung’s evidence.  In reply to Mr Lam’s cross-examination, Yung explained that what he had told the master during the examination was true because he had indeed not told Cheung about the auction but it was Cheung who talked to him about the auction.  I find such argument artificial and disingenuous.  At that stage, Yung was obviously concealing his and Cheung’s involvement in the auction.  He might do so for an innocent purpose as he might think the truth would be damaging to his case or might unnecessarily implicate Cheung.  If that were his explanation today, I might accept the explanation as an innocent one though his choice to lie was a bad choice made in the confusion of the moment.  But that is not the case.  Instead, he tried to be semantic and crafty.  I find him evasive and defensive.  His demeanour and the tenor of his evidence when tested against incontrovertible evidence shows that he is incredible.  His dishonesty as established in the Misappropriation Claims and the Sale of Units Claim proven against him, his assertion that his maid, Lita, who was asked to make up payment vouchers was Vos’ clerk etc show how ready he was to lie before the Court.  Yung was not telling the truth during the Official Receiver’s examination as well as now before the Court.  I do not believe in his evidence that his discussion with Cheung about the purchase of the Units was by coincidence.

357.Having disposed of Yung’s corroborating evidence, I now turn to examine the inherent credibility of Cheung’s evidence.  Mr Lam submits that a special feature in this case is Cheung’s lack of involvement in relation to the purchase and taking possession of the Units.  Prior to bidding, Cheung had not visited the Units, made no enquiries as to their current market price from estate agents or HSBC with whom she was familiar, had not checked the title of the Units, the terms of the tender, and had not sought legal advice etc.  Much of what Mr Lam submits is counsel of wisdom.  Cheung had been to Unit 1D before on numerous occasions and was familiar with the place.  She had made some enquiries about the Units from Yung whom she trusted.  She was informed of the price at which the Units were purchased a year ago.  On her evidence, she was bargain hunting and was consciously making a very low offer.  I do not think too much could be said for what Cheung had not done and should have done. 

358.However, it was unusual that Yung would have completed the tender form, paid the deposit and lodged the tender form for her and all that Cheung did to make her investment of $4.25 million was to sign her name on the tender form which had been prepared for and delivered to her.  I also find it remarkable in what she further alleged, that she had not even asked or been informed of the time for completion and when the balance of the purchase price had to be paid.

359.Mr Lam submits that it was unusual that after her bid had been accepted, Cheung did not visit the Units to see what she had bought until mid August 1993 and did not check the then market value of the Units to ascertain if she had made a good bargain.  Most peculiarly, she did not even take possession after she had paid the full purchase price.  On her evidence, Cheung did not even know that Unit 1D was equipped as a veterinary clinic with expensive clinic instruments and X-ray machine.  Cheung explained that as Yung was out of Hong Kong she did not wish to trouble Mrs Yung to show her around the Units.  I find it incredible that she did not even do the least to assert her ownership in the Units.

360.Furthermore, all those unusual features which could otherwise be explained on the basis that Cheung and Yung were trusted friends become suspicious and inexplicable when viewed together with the inferences to be drawn from my other findings.  Those other findings, which I shall deal with below, are the payment of deposit by Yung on her behalf, Yung’s financing of the purchase price which matched the purchase price of Unit 1D, Cheung’s concealment of her identity as the person behind Global Fair bidding for the Units, the unusual corporate structure used for holding the Units, the appointment of Au as director of Global Fair in October 1993 and the subsequent dealing with the Units.  Principally because I reject Cheung’s and Yung’s evidence and draw certain inferences from my factual findings in respect of the above issues, I draw as the only irresistible inference that Cheung did not come to know about the advertisement and bid in the auction by coincidence but by design.  As I have said, all those inferences and factual findings are all intertwined.  I shall analyse them in greater details below.  I shall come back to what that design was after completing my analysis of the evidence.  For the time being, suffice it is to say that I find that Cheung bid for the Units by design rather than by coincidence. 

The secrecy and concealment of Cheung’s identity as owner of Global Fair and purchaser of the Units

361.Another special feature in this case is the secrecy and concealment of Cheung’s identity as the owner of Global Fair and Start Win and the person who signed the tender form bidding for the Units for and on behalf of Global Fair.  This is some evidence on which inference could be raised as to Cheung’s knowledge of Yung’s breach of fiduciary duty and her dishonest intention in the purchase.  The evidence is also relevant as to Cheung’s defence of limitation.

362.Mr Lam submits that Cheung and Yung made great efforts to conceal Cheung’s identity as the person behind Global Fair in the purchase of the Units.  In the tender form, Cheung described herself as “Dr Cheung” without giving her full name and used an illegible signature which on her own evidence she had not used for over eight years and that signature was only used in her doctor’s notes and laboratory forms while she was working in Prince of Wales Hospital.  That signature was never used in formal documents such as cheques or legal documents.  Cheung was unable to explain why she did not use her usual legible signature.  When pressed, she offered no reason but that the purchase represented “a new leaf in her life”.

363.In her consent to act as director of Global Fair and other documents filed with the Companies Registry dated 19 July 1993 and on the share certificates of Avant Garde, Cheung signed in Chinese as “Wing Yee”, which admittedly is her daughter’s name.  That was only a few days after she re-adopted her illegible signature for what she called as turning “a new leaf in her life”.  The reason she gave for signing as “Wing Yee” is that while signing her name, she was thinking of her children and wanted to ensure that the company or the Units could be passed onto them, so that by signing as “Wing Yee”, her daughter could claim ownership of Global Fair by presenting her Hong Kong Identity Card in the future.  Such reasoning is simply too naïve to have been genuinely held by an intelligent person like Cheung.  The explanation she gave was a desperate one given while trying to conceal the truth under cross-examination.  It was untrue.  The inference is that Cheung was plainly hiding her identity as the purchaser of the Units.

364.Under cross-examination, Cheung admitted instructing Miss Ma of Atkins Limited to fill in the various company documents stating her occupation as a merchant and giving the address of Atkins Limited as her residential address.  Her explanation for the former was that she did not want to boast about her professional status and did not know that the documents were going to be public documents and for the latter was that she had not thought about it at the time.  Cheung admitted that she had been specifically asked for her residential address.  I find it incredible that the circumstances under which she was filling in the company documents would have provoked her to instruct Miss Ma to quote the address of Atkins Limited as her residential address.  I find that the purpose of her instruction to Miss Ma was to deliberately conceal her identity. 

365.Cheung also seeks to explain that what she did was to keep the purchase secret from her husband.  That is a lame explanation for her husband could not have access to the tender form.  On the other hand, signing the company documents of Global Fair and share certificates of Avant Garde as “Wing Yee” would not be effective to conceal her identity from her husband.  If her husband could have access to the company document of Global Fair, he would have known that Cheung was a shareholder of Global Fair and therefore the owner of the Units.  The appearance of the words “Wing Yee” as the signature would double confirm to her husband Cheung’s identity.  If her husband could have access to the documents of Avant Garde on which the words “Wing Yee” appeared, it would only raise more questions which Cheung would have difficulties answering.  I reject Cheung’s evidence that all those acts were done to conceal her identity from her husband. 

366.Plainly, Cheung was deliberately concealing her identity.  Having so rejected her evidence, the inference is that all those acts were done to conceal her identity as the person behind Global Fair which was the purchaser of the Units.  Of all the people in the world, Vos was the only person whom she had reason to conceal her identity from because Vos knew she was connected with Yung.  These inferences are irresistible.  They support the inference that Cheung bid for the Units by a common design with Yung and not by coincidence.

The unusual corporate structure used for holding the Units

367.Cheung adopted a very unusual corporate structure for holding the Units.  The Units were purchased by Global Fair which is jointly own by Cheung and a BVI company, Avant Garde.  Start Win to which Global Fair transferred Unit 1A is similarly held by Avant Garde and Cheung jointly.  The corporate structure is rather unusual for property holding for individuals with few and insubstantial properties such as these. 

368.The theme of Cheung’s explanation for the use of this unusual corporate structure for holding the Units was that she wanted to invest in real property for her children and at the same time keep her investment secret from her husband who indulged in foreign exchange speculation lest he would demand money from her to support his speculation activities.  For the purpose of this exercise, I ignore for the benefit of Cheung the complication of Au’s position in Avant Garde.

369.First of all, this explanation was never pleaded in Cheung’s defence.  The closest averment in her Defence filed was that she wanted to keep her investment away from her husband because of their estranged relationship.  There was absolutely no mention of her husband’s speculation activities.  That allegation is clearly a recent concoction.

370.Secondly, there is little, if any, evidence to support Cheung’s allegation about her husband’s activities in foreign exchange speculation with her money.  Apart from a sum of $72,000 withdrawn from her joint account with her husband which was deposited into the husband’s foreign exchange account, there is no evidence of any fund movement from Cheung’s account or her clinic’s account to the husband’s foreign exchange account. 

371.More crucially, on the record available from the Companies Registry, Cheung was a shareholder of Global Fair, albeit only of one share, and was one of its two directors.  Similarly, the record showed that Cheung was a 1% shareholder of Start Win with herself and her sister as its sole directors from 4 November 1993 through to 14 September 1999.  If Cheung’s husband came to know about Cheung’s shareholding, her directorship in these two companies and the Units held by these two companies, her husband would press for information about the ownership of Avant Garde, her relationship with Yung and Long’s Nominees and so on.  It would raise lots of questions for Cheung to answer and create more problems and embarrassment for her than what the secrecy could avoid.

372.Furthermore, if Cheung’s intention was to keep her investment secret from her husband, there were many and easier ways with which she could have achieved that purpose without the use of such unusual corporate structure.  She could have simply used Avant Garde for holding the Units.  She could have used Global Fair for holding the Units with her sisters or other relatives holding the shares of Global Fair on trust for herself and/or her children.  She could have her sister bidding and holding the Units in her sister’s own name on trust for herself and/or her children.  Cheung explained she did not want to involve her family members in the transaction because she did not wish to disclose her marital problems with her husband to her family.  But just three months later, she asked her sister Cheung Wai Ha to become a director of Start Win.  She then gave a half-hearted explanation that it was a happy affair which she had no problem sharing with her family.  But that raises two unanswerable questions: why was the same was not a happy one three months ago and why was disclosure of her marital problem not a concern three months later.  I think Cheung was hiding the truth.

373.In any event, Cheung’s alleged secrecy from her husband was a lame excuse.  She withdrew $345,000 from her joint account with her husband, which would not go unnoticed by her husband.  Initially, she said she did not intend to use those funds as she did not wish her husband to know.  The fact was that she did use those funds.  Cheung then explained that her husband would not have noticed it as he never checked his account.  But, on her own evidence, her husband did all the accounts of her clinics and prepared tax returns for her.  It would be quite inconceivable that her husband would not have noticed the movement of over $2 million in her account and the overdraft of $380,000 left after 21 July 1993.  Her explanations are contradictory.  The questions why a BVI bearer share company was used for holding the shares of Global Fair, why Long’s Nominees was used for holding a share in Avant Garde and a share in Start Win and why Yung was the person to have control over these shares held by Long’s Nominees remain unanswered. 

374.There is also the indisputable and inexplicable fact that on 25 October 1993 Au replaced Cheung as director of Global Fair and then exercised the shareholder’s right of Avant Garde to pass resolutions leading to the mortgage of Unit 1D to HSBC as security for overdraft facility for New Champion.  These evidence are discussed in greater detail below in paragraphs 367 to 380.  These facts suggest that Cheung’s alleged ownership in Avant Garde and Global Fair was not absolute.  She may be a nominee owner or joint owner in those companies holding the Units on behalf of another.  It was the identity of that other which was what the unusual corporate structure and the secrecy with which Cheung concealed her identity in the tender form was intended to protect.  And that other person could not be any other but Yung, the architect of the corporate structure.  I reject Cheung’s evidence that the purpose of the unusual corporate structure was to keep the purchase secret from her husband.  I find that the purpose was to conceal her identity as the person behind Global Fair bidding for the Units and Yung’s identity as the beneficial or joint owner of the Units.

Au’s appointment as director of Global Fair and his acting for and on behalf of Avant Garde

375.I now turn to a series of very significant events which have an important bearing in my decision.  It should be recalled that as a result of the winding up petition, the title deeds of the Units were withheld by the Official Receiver.  However, soon after the release of the title deeds of the Units by the Official Receiver, Cheung, Yung, Au, Avant Garde, Global Fair, Start Win and New Champion did some most extraordinary things in relation to the Units.  Those extraordinary acts were done solely for the benefit of Yung and New Champion in which Yung was interested.  Those extraordinary acts were as follows.

376.First, on 25 October 1993, Au replaced Cheung as director of Global Fair.  With effect from that date, the directors of Global Fair were Au and Avant Garde, which effectively meant Au was in full control of Global Fair.  On 3 November 1993, Global Fair entered into an agreement for the sale of Unit 1A to Start Win. 

377.On 12 November 1993, Au acting for and on behalf of Avant Garde as the majority shareholder of Global Fair passed two resolutions at shareholders general meeting to alter the Memorandum and Articles of Association of Global Fair to authorise it to guarantee loans of a third party.  On the same day, in his capacity as director of Global Fair and in his capacity acting for and on behalf of Avant Garde, he passed a board resolution to mortgage Unit 1D to HSBC in favour of New Champion.

378.On 23 November 1993, Au, on behalf of Avant Garde as director of Global Fair, passed a board resolution authorising payment of the proceeds of sale of Unit 1A to himself, instead of to a bank account of Global Fair.  This strange arrangement was aborted, presumably because in their good sense, solicitors acting for Dao Heng Bank, the mortgagee, considered such arrangement irregular.  In the end, the proceeds of sale were paid into a newly opened account of Global Fair with First Pacific Bank of which Au was the sole signatory.  It is peculiar that while it is Cheung’s case that she was the absolute owner of Global Fair in which Au admittedly had no interest, Au was the sole signatory of that account.  Subsequently, from that account Au withdrew $1 million on 30 November 1993 and $0.9 million on 1 December 1993 to pay Yung.

379.The above acts are not disputed and indeed they are undisputable.  On the face, those extraordinary acts may even be described as irregular from which adverse inference could reasonably be drawn against Cheung and Yung.  But Cheung and Yung have explanations for those acts and they rely on those explanations as their defence as well. 

380.According to Cheung, the purpose of Au’s appointment as director of Global Fair was to enable Start Win to raise a mortgage loan over Unit 1A so as to enable her to repay part of the $2.2 million she borrowed from Yung and Mrs Yung.  It was Cheung’s case that she did not know she had to complete the purchase of the Units within one month coupled with difficulties in obtaining corporate loans from banks against a mortgage of acquired properties as security.  Then Yung and Mrs Yung conveniently lent her a total of $2.2 million to complete the purchase.  I have rejected that explanation (paragraphs 401 - 402).  To continue with her explanation, Cheung said that upon release of the title deeds by the Official Receiver, she tried to mortgage the Units to raise money to repay Yung.  She approached HSBC, Standard Chartered Bank and a local bank.  She was asked to submit documents for their consideration, but she did not.  Her explanation was that she sensed the banks were reluctant to grant mortgage loan on properties which had already been acquired due to restrictions imposed by the Hong Kong Monetary Authority (“HKMA”).  Then, a bank officer of Dao Heng Bank, who was the brother of her old classmate suggested her to get around that restriction by a fictitious sale of the Units to a related company.  Thus, on 3 November 1993, Cheung caused Global Fair to enter into a sale and purchase agreement with Start Win to purchase Unit 1A for $4 million.  She admitted that the sale and purchase as well as the purchase price were fictitious.  The purpose was to dress up the transaction as a new sale and purchase transaction so as to circumvent HKMA’s restriction and obtain a loan to repay Yung.  She explained that Au was appointed as a director of Global Fair so as to dress up the transaction as an arms’ length transaction between two different unrelated parties; i.e. Au representing Global Fair as vendor and she representing Start Win as purchaser.  She says that the $1.9 million withdrawn by Au was to repay part of the $2.2 million loan lent to her by Yung and Mrs Yung.

381.I do not think Cheung’s explanation credible.  To start with, Cheung said that she had approached a number of banks enquiring about mortgage loans but did not proceed under her apprehension that the banks would not grant mortgage loans on already acquired properties.  I am not aware, as a matter of general knowledge, of such restrictions imposed by banks or HKMA.  It is the business of a bank to earn interest by lending money.  It is difficult to believe that a bank would not lend against mortgage of good quality fully paid properties for genuine business purposes of the borrower with ability to repay but would only lend to finance new purchases.  The banks might be more cautious with mortgage of already acquired property in the amount of the loan to be advanced against the value of the property to be mortgaged and less accommodating with interest rate and terms of the mortgage but would not turn business down indiscriminately.  There is no evidence of the banks’ attitude towards such mortgage.  The fact was Cheung did not even make the application.  But, contrary to what Cheung said, at about the same time, HSBC did grant an overdraft facility of $2.5 million to New Champion on the mortgage of Unit 1D, which was an already acquired property.  Even though that mortgage was arranged through Mr Donaldson of HSBC with whom Yung was familiar, I doubt if that relationship made any difference.  HSBC is the leading bank in Hong Kong and well known for its cautious lending attitude.  The amount of overdraft facility granted by HSBC was 25% higher than the mortgage loan granted by Dao Heng Bank on Unit 1A, which was a property of similar value.  I doubt if Cheung’s explanation was true and if her belief about the banks’ attitude genuinely held.  In any event, there is no credible evidence of such attitude of the banks.

382.Cheung’s explanation of dressing up the transaction as a new purchase is also self contradicting.  She said that the bank officer, the accountant and the solicitors acting for the bank who arranged the documentation all knew about the fictitious nature of the transaction and that the purpose was to circumvent HKMA’s restriction by dressing the transaction up as a new purchase.  I am mindful of the possibility that some bank officers might well adopt irregular practices in order to obtain business.  However, what Cheung said was inconsistent with the transfer being openly treated as an inter-company transfer for the purpose of saving stamp duty.  The bank must know that the transaction was not a new purchase.  Thus, it would not have mattered at all if Cheung were to sign as director for vendor as well as director for the purchaser.  According to Cheung, the procedure was a legitimate way the bank used to circumvent HKMA’s restriction.  In the circumstances, there was no reason why the bank officer could not have been called to support the explanation given by Cheung.  I have difficulties in accepting that it was the bank officer who suggested to Cheung the fictitious transaction to circumvent HKMA’s restriction in order to grant her the loan. 

383.Even assuming that there were such HKMA restriction and that Dao Heng Bank would adopt or turn a blind eye to such arrangements as alleged by Cheung to circumvent the HKMA’s restriction, what is fatal to Cheung’s explanation is that there was absolutely no need to bring Au in as a director of Global Fair to dress up the transaction.  The same result could be obtained by Cheung signing the sale and purchase agreement and assignment as director of Global Fair and her sister signing as director of Start Win.  This destroyed the entire basis of Cheung’s explanation. 

384.Secondly, there was no reason why Cheung would have appointed Au as director of Global Fair.  Cheung had only seen Au once or twice and known him for a few months since July 1993.  Au is related to Mrs Yung’s sister but wholly unrelated to Cheung.  The reason given by Cheung for her choice is that she trusted Au because Yung trusted him too.  That is hardly credible.  At least it cannot explain why Cheung could not have trusted any of her sisters or brother-in-laws for the appointment or why she could have trusted Au more.

385.Even if Au was to be appointed, Cheung could have appointed him as an additional director to sign the necessary documents without herself resigning from Global Fair altogether.  Cheung could not give any satisfactory reason why she had to resign in favour of Au.  Au must be appointed for some other reasons.

386.That leads me to another question, i.e. what role did Au perform in the whole design.  The original design was that the proceeds of sale were to be paid to Au personally and not Global Fair.  However, that plan failed presumably because the solicitors acting for the mortgagee bank felt suspicious about the arrangement.  Then Cheung or whoever in control of the whole design arranged for Global Fair to open an account with the First Pacific Bank.  The extraordinary feature about this account was that Au was the sole signatory.  He had absolutely no interest in Global Fair but became the sole person in control of the net proceeds of the sale of about $2 million, not to say property worth $4 million.  On the other hand, on Cheung case, Cheung who was the sole beneficial owner of 100% of the interest in Global Fair was not a signatory to this account.  The further undisputed fact is that Au almost immediately paid out $1.9 million to Yung.  That explains everything.  The purpose of Au’s appointment was to ensure the payment of $1.9 million from the account of Global Fair to Yung.  He was to protect Yung’s and Mrs Yung’s interest in the $2.2 million which they had put in the design.  There was no reason why Au should be appointed as director to the exclusion of Cheung. 

387.The other extraordinary act Au did was to pass resolutions to bring about the mortgage of Unit 1D to HSBC as security for New Champion.  The arrangement was extraordinary because according to Cheung’s case, she was the owner of Unit 1D, but the property was mortgaged as security for $2.5 million overdraft facility for New Champion in which Cheung was not interested.  Cheung’s explanation for the arrangement was that in view of the $2.2 million loan she was owing Yung and Mrs Yung, Yung suggested her to mortgage Unit 1D to repay him.  I have considered that explanation in another context (paragraphs 407 - 409).  I do not accept that the $2.2 million was a loan from Yung and Mrs Yung.  There can be no doubt that passing the resolutions and to bring about the mortgage of Unit 1D was another important mission of Au’s appointment.  That was for the benefit of Yung.  Again, there was no reason why Cheung could not have passed the resolutions without appointing Au.

388.On the balance of the evidence, I draw as the only irresistible inference that the purpose of Au’s appointment as director of Global Fair to the exclusion of Cheung was to protect Yung’s interest in respect of Unit 1D held by Global Fair and to protect his interest over the $1.9 million obtained by mortgage of Unit 1A.  The need to bring in Au to do all those extraordinary things inconsistent with Cheung’s right as the beneficial owner of Global Fair and Avant Garde and of the Units raises the irresistible inference that Au was appointed to secure the interest of Yung over the Units and that Cheung was not the sole or absolute owner of Avant Garde, Global Fair and the Units.  Probably, Yung did not trust Cheung as much as Cheung trusted him.  Another possible inference is that Cheung knew there was something wrong with the whole design and wanted to dissociate herself from the more sensitive part of it.  Admittedly, Au was the dummy to perform these tasks.  Yung’s interest over the Units may be exclusive or jointly with Cheung.  But that is not a matter I can resolve or need to resolve. 

Yung’s control over the corporate structure

389.It is the common evidence of Yung and Cheung that Yung designed the corporate structure, acquired the corporate vehicles for Cheung to hold the Units and instructed William Leung to provide the secretarial services for setting up the corporate structure.  To William Leung’s recollection, all subsequent instructions relating to these two companies were received from Yung and by documents emanated from the fax machine of New Champion which was under the control of Yung.  In particular, Yung gave directions as to whom William Leung should deliver the bearer share certificates of Avant Garde to, how William Leung was to vote in board meetings of Avant Garde and Global Fair, etc.  William Leung issued invoices to Yung for the services he provided and those invoices were duly settled without complaint from Yung that he was not responsible for the payment.

390.Avant Garde is a BVI bearer share company.  On the facts of this case, particularly with Yung’s involvement in the setting up of this company, one cannot but be very sceptical about the identity of the true owner and person in control of this company.  Yung acquired this company from East Asia Corporate Services (BVI) Ltd.  Avant Garde issued 50,000 bearer shares which are represented by four share certificates of 12,500 shares each.  It was only until early August 1993 when William Leung became concerned about the ownership of the bearer shares of Avant Garde that he asked Yung and Yung informed him that those four share certificates were to be held by Atkins Limited for Cheung.  On 25 October 1993, Cheung collected the four bearer share certificates from William Leung.  There is also some evidence that William Leung was in possession of the company chop of Avant Garde which he applied on Cheung’s instruction to the company documents of Universal Agents Limited which was another company he acquired for Cheung in mid October 1993.  Cheung submits that these are evidence that she was the owner of Avant Garde. 

391.Global Fair was acquired by Yung from a secretarial company, Acota Limited, on or about 14 July 1993.  On 29 July 1993, one subscriber share was transferred to Cheung and one to Avant Garde.  On 30 July 1993, ninety-seven shares were allotted to Avant Garde and one to Long’s Nominees, which was held on trust for Avant Garde.  Thus, Cheung is the legal owner as to 1% of the shareholding in Global Fair and Avant Garde is the legal owner as to 99%.  Cheung and Avant Garde were appointed first directors of Global Fair on 19 July 1993. 

392.Start Win was incorporated on 12 October 1993 with one subscriber share transferred to Cheung and one to Avant Garde.  On 4 November 1993, ninety-eight shares were allotted to Avant Garde.  Thus, Cheung was the legal owner as to 1% of the shareholding in Start Win and Avant Garde was the legal owner as to 99%.  On 13 October 1993, Cheung and Cheung Wai Ha were appointed as the first directors of Start Win.

393.However, it should be recalled that on 12 November 1993, Au acting for and on behalf of Avant Garde as the majority shareholder of Global Fair passed two resolutions at shareholders general meeting to alter the Memorandum and Articles of Association of Global Fair so as to authorise it to guarantee loans of a third party.  On the same day, in his capacity as director of Global Fair and in his capacity acting for and on behalf of Avant Garde, he passed a board resolution to mortgage Unit 1D to HSBC in favour of New Champion.  According to Cheung’s case, she was the 100% shareholder of Avant Garde and Long’s Managers was the sole director of Avant Garde.  Cheung does not dispute Au’s authority to act for and on behalf of Avant Garde in the exercise of its shareholder’s right.  Avant Garde is a bearer share company.  This suggests that Au had somehow become the holder of the bearer shares of Avant Garde on or before 12 November 1993 in place of Cheung.  This renders Cheung’s and Yung’s evidence that Cheung was the owner of Avant Garde gravely suspect.  It supports the inference that Cheung was only a nominee owner of Avant Garde and, as their evidence further suggest, Yung was its real beneficial owner.

394.As director of Global Fair, Au was instrumental to the payment of $1.9 million to Yung and HSBC’s granting overdraft facilities to New Champion secured against the mortgage of Unit 1D.  The two mortgages on Units were raised for the benefit of Yung and his company, New Champion.  Au effectively admitted he was a dummy signing company resolutions and documents related to the transfer of Unit 1A and mortgage of Unit 1D for Cheung.  As I have already find that Au’s appointment as director of Global Fair to the exclusion of Cheung was to secure Yung’s interest in Unit 1A or over the proceeds of the mortgage.  These showed that Yung must be interested in the Units or at least one of them and that Yung was in control of Au, Cheung, Global Fair and Avant Garde since July 1993 until 18 July 1994 at least, when Cheung was appointed director. 

395.Also, I cannot lose sight of the fact that in November 1993, Au was the person in control of Avant Garde which was the 99% shareholder of Start Win.  Thus, through Avant Garde, Au and therefore Yung had control over Start Win as well.  By reason of Yung’s control over Avant Garde, he was also the person in control of Global Fair, at least until Cheung’s appointment as director of Avant Garde on 18 July 1994.

396.In view of all the circumstances, I draw the inference that Yung, being the person who was to be benefited by these transactions, was the one orchestrating these transactions.  He was the mastermind behind Avant Garde and Global Fair from the time when Cheung bid for the Units until at least up to around the time of the transfer of Unit 1A to Start Win and mortgage of Unit 1D as security for New Champion’s overdraft facility, i.e. December 1993 or possibly until 18 July 1994 when Cheung was re-appointed director of Avant Garde.  During that period of time, Yung had control over Avant Garde, Global Fair and Start Win and was the mastermind behind these companies.

397.For completeness, on 27 March 1997 Cheung was re-appointed as director of Global Fair.  On 30 March 1999 Au and Avant Garde resigned as directors of Global Fair and Cheung’s sister, Cheung Wai Ha, was appointed as director.  On 14 September 1999 Au was re-appointed as director.  On 30 March 2000, Au resigned as director.  On 14 September 1999, Au was appointed as director of Start Win.  The on and off appointment of Au as director of Global Fair and Start Win and his capacity to act for and on behalf of Avant Garde which is the 99% shareholder of Global Fair and Start Win is interesting and unexplained.  Not only does it suggest that Cheung’s ownership in Global Fair and Start Win is illusory, it also supports my finding that Au was representing the interest of another at various times.  That other could be no one else but Yung. 

Cheung’s source of funds for the purchase of the Units

398.Cheung admits that she did not have $4.25 million to pay for the purchase of the Units.  There is no dispute that Mrs Yung paid the deposit of $850,000 for Cheung so that Global Fair may bid for the Units and that she paid a further sum of $1,350,000 to Messrs WS to enable Global Fair to complete the purchase.  The total amount paid by Yung and Mrs Yung was $2.2 million, which exactly matched the purchase price for Unit 1D.

399.Cheung said that she had access to a fund of about $3 million.  She had $20,000 cash on hand; $130,000 in her Standard Chartered Bank account; $50,000 in one of her HSBC account; $500,000 overdraft facility in another HSBC account and $345,000 in her joint account with her husband.  On 13 July 1993, she obtained an increase in her overdraft facility by $700,000.  So she had a total amount of available funds of $1,745,000.  She borrowed $1,160,000 from her friends and relatives.  On 21 July 1993, Cheung borrowed $250,000 from Cheung Tsz Hung and his wife whom she repaid on 30 July 1993 with an extra amount of $10,000 to compensate them for having sold their British pounds at a loss in order to lend her the money.  Her two sisters, Cheung Wai Ha and Cheung Wai Kuen lent her $360,000.  A nurse, Sham So Yuen lent her $50,000.  Dr Ho Yuk Hai also lent her $500,000 whom she repaid $520,000 on 16 December 1993.  Those loans totalled $1,160,000.  Some of those deposits and repayments were documented.  Thus, Cheung had a total source of available funds of $2.905 million, say $3 million.

400.Cheung’s bank statement with HSBC shows that on 21 July 1993 the various amounts were paid in and then a sum of $2.05 million was withdrawn from her bank account, leaving a debit balance of about $380,000.  I could have no doubt in the truth of this part of Cheung’s evidence.  Thus, Cheung contributed $2.05 million and Yung and Mrs Yung contributed $2.2 million towards the purchase of the Units which neatly tided in with the purchase price of the Unit 1A and Unit 1D respectively.

401.I now turn to consider Cheung’s account of how she came to obtain the loans from Yung and Mrs Yung.  Cheung explained that Mrs Yung paid the deposit for her just out of convenience to save her the trouble of having to go to two different banks to collect enough money to purchase the bank draft and then go to Hong Kong to submit the tender form.  Convenience was not the answer because the hard fact was Cheung never repaid before completion and she was further short of $1.35 million to complete.  The fact remains that Yung and Mrs Yung paid $2.2 million which happened to be the purchase price for Unit 1D. 

402.Cheung went on to explain that she borrowed $2.2 million from Yung and Mrs Yung because she did not know that the purchase would have to be completed within one month, i.e. on or before 13 August 1993, and it never occurred to her that a corporation would have problem in obtaining bank mortgage loan within the time available.  On her account, she had never seen the tender form.  It was completed by Yung and presented to her for signature at her clinic on the morning of 14 July 1993 by Au.  A copy of the conditions of sale was annexed to the tender form.  She did not read the conditions of sale but assumed that completion would be in one or two months’ time.  She said she was keen to look for properties to purchase and she had never bid in an auction before.  Yet, on her own admission, she did not read the tender form and conditions of sale and did not notice that the purchase would have to complete within one month. 

403.I find her account hardly credible for a person of her education and care and particularly as a first time bidder at an auction.  Before one makes a bid and pays a very substantial deposit, one must bear in mind what his further commitment would be.  When a purchaser has to pay the balance of the purchase price and whether he has the necessary funds to pay when due must be forefront in the mind of any reasonable purchaser because failure to pay would result in the purchase falling through and the deposits forfeited.  Thus even if Cheung had not read the conditions of sale but signed the tender form on the basis of what Yung represented to her, it is incredible that she did not even ask Yung when she would be required to pay the balance of the purchase price.  It is also unlikely that in the circumstances Yung would not have asked her if she would have enough money to complete the purchase as he was going to pay the deposit for her.  The deposit of $850,000 was a substantial sum of money back in 1993, more so was the balance of the purchase price of $3.4 million.  It is incredible that Cheung would not have ascertained when payment would be due and ensured that she could pay on time, should she be successful in the auction.  It is just incredible that when she was successful in the auction, she then helplessly turned to Mrs Yung for help.  In a truly arms’ length auction, her $850,000 deposit would have been forfeited.

404.Cheung had banking facilities with HSBC.  On her evidence, before making the bid she had arranged with HSBC to increase her overdraft facility by $700,000.  Yet, she did not have any preliminary discussion with her bank officer to enquire what finance she could obtain from HSBC or any other banks at all before placing her bid.  She did no more than ensuring she had funds for purchase of one unit only.  Her explanation was that the tender had not yet been accepted and it might not be accepted and hence there was no point in making such inquiries.  I find her explanation a half-hearted one.  Unless she had the finance or had been assured of assistance, it was most surprising that nothing, not even by way of preliminary enquiries, had been undertaken by her about securing the finance to purchase the Units in case her bid was successful.

405.After her bid was accepted, Cheung allegedly made enquiries with HSBC, Standard Chartered Bank and some local banks.  She was allegedly told that as the purchaser was a limited company, it might take six to eight weeks to process a mortgage application.  Then she decided not to proceed any further, or to seek advice from her solicitors or from Yung as to how to overcome the difficulties.  She could have sought Yung’s or Goldmark’s consent to nominate herself as the purchaser to overcome the difficulties, though at the risk of loss of secrecy to her husband, which I held was not a genuine concern.  Alternatively, she could have offered herself as the borrower and her family member as guarantor.  She did not.

406.What Cheung did was this.  She vigorously raised $1.16 million from her sisters and friends.  Other than that, she did nothing but to leave herself in the helpless situation of speaking to Yung on 18 July 1993 Then, Mrs Yung who answered the phone as Yung was in the United States presumably negotiating with Hill’s over distributorship for his new company to be formed.  By way of contrast, the readiness with which Mrs Yung lent her $1.35 million was surprising.  When asked why she did not proceed with an application for bank loan just the same in the hope that it would be approved in time or in any event the loan approved would enable her to repay her friends and Yung earlier, she could offer no reasonable explanation.  Again, had it not been for Yung’s $1.35 million, her deposit would have been forfeited.  Cheung’s attitude was totally inconsistent with someone purchasing in an arms’ length auction solely with her own funds.  The overwhelming inference is that Cheung bid at the auction under a joint enterprise with Yung on joint funds in which her agreed commitment was $2.05 million. 

407.I now turn to further consider Cheung’s other evidence that the $2.2 million provided by Yung and Mrs Yung was a loan which she had repaid or nearly repaid between November 1993 and May 1995.  Firstly, Cheung said that she repaid $1.9 million from the proceeds of the mortgage of Unit 1A.  While I query the reasons for that payment, the payment itself was, nevertheless, incontrovertible.  If Cheung’s evidence is accepted, the payment of $1.9 million could well be a genuine repayment of a bona fide loan to finance her purchase of the Units.  If her evidence is not accepted, the payment could be for any purpose known to Cheung and Yung only which the Plaintiff need not necessary prove in order to succeed.  What the Plaintiff need to do is to show that Cheung’s explanation is not credible and the adverse inference which he seeks to draw is reasonable. 

408.In addition to the $1.9 million, it is Cheung’s evidence that 99% of the loan had been repaid.  Cheung said that at about the same time as the mortgage of Unit 1A with Dao Heng Bank was being arranged, Yung suggested that in view of Cheung’s indebtedness to him, she should consider putting up Unit 1D as security for banking facilities to be given to New Champion.  She agreed.  Then through Mr Donaldson of HSBC, Yung arranged for Unit 1D to be mortgaged by Global Fair to HSBC as security for overdraft facilities of $2.5 million to New Champion.  Cheung withdrew from the facilities $520,000 to repay Dr Ho’s loan of $500,000 with interest of $20,000.  The overdraft facility granted to New Champion was to be used by New Champion as well as by Cheung’s veterinary clinic.  That explained why she agreed to have Unit 1D mortgaged in favour of New Champion.  She said she maintained an account with Yung as to the amount of facilities drawn by her veterinary clinic from the facility.  Eventually, the clinic business was unsuccessful and she closed it down in May 1995 suffering a loss.  She cleared her account with Yung and paid off the outstanding mortgage loan with HSBC.  She also paid off the mortgage loan owing to Dao Heng Bank by Start Win out of the income from her medical practice.

409.That explanation is not without difficulties.  To begin with, on Cheung’s account, nine days after Global Fair had entered into the sale and purchase agreement of Unit 1A with Start Win, Global Fair passed a resolution to amend its Memorandum and Articles of Association to enable it to guarantee the loan to New Champion.  Thus, when Yung suggested Cheung to mortgage Unit 1D as security for overdraft facilities to be granted to New Champion, Cheung had already arranged to repay Yung $1.9 million in about two weeks.  She would then be short of only $300,000 to repay Yung in full.  If indeed Cheung was the owner of the Units, it would make a nonsense of her evidence that for her outstanding loan of $300,000 she would have agreed to Yung’s suggestion to mortgage her Unit 1D for an overdraft facility of $2.5 million for New Champion.  Cheung had nothing to do with the business of New Champion.  She had absolutely no control over the overdraft account of New Champion.  What she did was to attract a liability of $2.5 million and a mortgage over what she said was her property just for her outstanding loan of $300,000 owing to Yung.  Furthermore, according to her case, Yung was a resourceful and helpful friend who could and had raised more than $2 million at short notice and had lent her $2.2 million for half a year without any security or a loan receipt.  Yung certainly knew that $1.9 million was to be repaid to him very soon.  When the bulk of the loan would have been repaid in two weeks, in the tenor of her explanation Yung could not have made such a mean suggestion which necessitated Cheung to incur a lot of trouble and expenses to mortgage Unit 1D and for a facility which was eight times her liability.  Her evidence is incredible.

410.That apart, the mortgage of Unit 1D in favour of New Champion is highly suspicious.  Cheung was not a signatory to the overdraft account of New Champion.  She has neither the knowledge of nor the means to monitor the outstanding balance of the overdraft account.  The mortgage is a clear indication that although the legal title of Unit 1D was held by Global Fair, the true beneficial interest in the unit was vested in Yung solely or jointly with Cheung and Cheung’s explanation of her sharing in the overdraft facility of New Champion is just a cover up of her assistance in Yung’s breach of fiduciary duty after commencement of this action. 

411.Then Cheung proffered two reasons why she provided security for the overdraft facilities for New Champion which were that she had to use part of the facilities to operate Phoenix Veterinary Clinic and to repay Dr Ho’s loan of $500,000.  She said that she maintained an account with Yung in respect of the amount of facilities drawn by her veterinary clinic.  The clinic was unsuccessful and closed down after a year incurring a loss of $700,000.  She settled her account with Yung in respect of the overdraft facilities.  Her evidence that Phoenix Veterinary Clinic was unsuccessful was contradicted by Dr Dahn who operated the clinic.  I shall deal with the evidence about her operation of Phoenix Veterinary Clinic at the end of this section for completeness.  But nothing really turns on such evidence.

412.As for Dr Ho’s loan of $500,000, Cheung’s receipt of the loan in July 1993 is documented, but not her repayment.  Cheung said that she repaid Dr Ho $520,000 in December 1993 including interest of $20,000 by using the overdraft facilities of New Champion.  She produced Dr Ho’s bank statement as proof of her repayment.  The bank statement showed that Dr Ho received two payments of $450,000 and $70,000 but there was no indication of the source of the payment.  I can see no corresponding bank statement from New Champion’s bank account showing the payment out.  I have no doubt that Cheung borrowed the money from Dr Ho and naturally she was the person who repaid him, but not necessarily from New Champion’s overdraft account.  Cheung was selective in her production of documentary evidence.  She took the trouble to obtain the bank statement from Dr Ho but withheld the bank statement of New Champion which was within the possession and control of Yung from whom she could reasonably obtain.  That makes the non production of her own bank statements more inexplicable and suspicious.  On the evidence, I cannot be satisfied that the overdraft facilities of New Champion was the source of funds for repaying Dr Ho.  This undermines her explanation. 

413.Then, lastly, Cheung said that she repaid the mortgage loans from Dao Heng Bank and HSBC.  Again, none of those allegations was supported by any bank statements, which are wholly under her possession, custody and control.  If indeed there was evidence that she repaid the mortgage loan, it would support her case that she was the purchaser of the Units.  If not, the beneficial owner of the Units remains a mystery, but one thing that is sure is that Cheung’s explanation is to be rejected.  The overall inference to be drawn from the totality of the evidence is that Unit 1A and Unit 1D were beneficialy owned by Cheung and Yung respectively according to their contribution to the purchase price or joinly.

414.Cheung provided no documentary evidence about the accounts of Phoenix Veterinary Clinic, the facilities drawn by the clinic, how she repaid Dr Ho, how she settled the overdraft account with Yung and how she paid the mortgage loan from HSBC and Dao Heng Bank.  The Plaintiff could tender no evidence to rebut Cheung’s allegations.  However, Yung and Cheung have been invited to produce bank statements of their personal accounts and New Champion’s account to support their case.  They were aware of the litigation as early as 1993 and should have preserved the evidence which is exclusively in their possession.  They elected not to produce such evidence when suh evidence is reasonably expected of them.  In the circumstances, I can give no weight to their oral testimony. 

415.Furthermore, on Cheung’s account, after repaying $1.9 million, nothing was repaid until Unit 1A was rented out almost a year later and not by way of a lump sum, but by monthly rental income from Unit 1A.  On her evidence, Unit 1A was rented out between August 1994 and May 1995 and the rental income in the amount of $282,000 was paid to Yung as part of the repayment of her loan.  She said that the balance would be settled after the present litigation.  Thus, according to Cheung, she repaid Yung and Mrs Yung $1.9 million in November 1993 and $282,000 between August 1994 and May 1995, which was 99% of the money she borrowed from them.  However, the parties chose not to settle the small balance still owing but to wait until the conclusion of this litigation.  By now it was fifteen years!  Cheung’s explanation is just like fitting a square peg into a round hole, which either does not fit or leaves gaps unfilled.  I am only bound to reject her evidence.

416.Having so rejected Cheung’s various explanations, the payment of $1.9 million to Yung by Global Fair and the payment of the rental income of $282,000 from the Unit 1A to Yung were not only not neutral events, but were the clearest indications that Yung or Yung jointly with Cheung were the true beneficial owner(s) of the Units.  I reject Cheung’s evidence that the $2.2 million contributed by Yung and Mrs Yung was a loan to her and her evidence that the $1.9 million paid to Yung by Global Fair was a repayment of part of that loan. 

417.I draw the inference that Cheung bid at the auction under a joint enterprise with Yung under which she contributed $2.05 million and Yung and Mrs Yung contributed $2.2 million.  I find that the said contribution of $2.2 million by Yung and Mrs Yung was not a loan to Cheung but a contribution pursuant to the said joint enterprise and that the payment of the $1.9 million to Yung from the proceeds of mortgage of Unit 1A was part of that design and not a repayment of loan. 

Cheung’s operation of Phoenix Veterinary Clinic

418.I now turn to examine Cheung’s evidence about her operation of Phoenix Veterinary Clinic in Unit 1D.  Cheung’s evidence that she operated the veterinary clinic with Yung’s assistance is neither here nor there.  My finding here is not necessary for the conclusion that I am about to reach in this judgment but for completeness only. 

419.Cheung said that she did not know Unit 1D was equipped as a veterinary clinic before she bid for the property.  She only came to know that it was renovated as a surgery with facilities like X-Ray machine and operating room when she visited the unit in August 1993.  By December 1993, Unit 1D had been vacant for some time.  Cheung thought it a waste to discard the equipments there and to convert the property back into an office.  At first, she employed Dr Dalglish to run Phoenix Veterinary Clinic.  Then Dr Dahn succeeded Dr Dalglish.  Dr Dahn signed an agreement with Global Fair to take over Phoenix Veterinary Clinic as sole proprietor at a guaranteed monthly salary of $25,000, 50% profit sharing of monthly revenue above $60,000 and free home accommodation.  One of her obligations was to provide consultancy services to New Champion as Hill’s local distributor.  She paid for the veterinary medicine and her assistants.  That agreement was of the nature of a cooperation agreement rather than a contract of employment.  She agreed with Yung that Yung would attend to all bookkeeping and general management of the clinic until after she could take over within the next two to three months.  She opened a bank account with HSBC.  Upon Yung’s insistence as being the person in charge of bookkeeping, Yung was made a signatory of that account.  That arrangement was consistent with Global Fair’s obligation to pay Dr Dahn the guaranteed salary and profit sharing.  Yung was in charge of the management of the clinic.  The business of New Champion was also operated from Unit 1D in which Yung occupied one room and his staff occupied another.  Dr Dahn also signed a tenancy agreement with Global Fair for the lease of Unit 1D at a monthly rental of $35,000.  That amount was to be set off against her consultancy fees to be paid by New Champion.  Thus the rental and consultancy fee were just paper payments.  Then, when the income of the clinic started to build up, Yung wanted to re-negotiate the term of the cooperation agreement.  That was followed by a dispute between Dr Dahn and Yung when she discovered Yung had withdrawn $61,000 from the bank account of the clinic without her knowledge on 3 February 1995.  On 4 February 1995, Yung delivered a letter to Dr Dahn terminating the cooperation agreement.  That letter was signed by Yung for and on behalf of Global Fair.  When his authority to represent Global Fair was challenged, Yung claimed he was a director of Global Fair.  He subsequently replaced that letter within an hour by a similar letter signed by Cheung.

420.Though the accounts of the clinic is not before me, from Dr Dahn’s evidence, which is not disputed, Global Fair was unlikely to have incurred any significant loss from the clinic operation.  Practically, all outgoings and expenses were paid by Dr Dahn.  Global Fair was only responsible for Dr Dahn’s guaranteed salary and accommodation which must have been adequately covered by the rental income of $35,000 it received from New Champion through Dr Dahn.  Besides, the clinic generated a not insubstantial income of no less than $61,000 in three months.  The situation was presumably the same while the clinic was under Dr Dalglish’s operation.  The clinic operation could not have occasioned a loss of $700,000 in about a year as alleged by Cheung.  It casts doubts on Cheung’s allegation that she shared the use of the overdraft facility of New Champion.  

421.I draw no adverse inference and make no finding on Dr Dahn’s allegation of theft of the money from her clinic’s account against Yung as that is not an issue I have to decide.  Dr Dahn’s evidence was not disputed by Yung and Cheung.  On her evidence, Yung was actively involved in the management of the clinic.  He physically worked inside the clinic and New Champion also operated from inside the clinic.  The consultancy fees paid by New Champion to Dr Dahn were ploughed back into Global Fair as rental income of Global Fair.  Unit 1D was used partly for the business of New Champion.  There is also no dispute that under the terms of the Hill’s distributorship New Champion was obliged to engage a veterinary surgeon as a consultant.  This further supports the inference that Phoenix Veterinary Clinic was operated by Global Fair in Unit 1D purchased by funds from Yung and Mrs Yung and that Yung was the beneficial owner of Global Fair.  That is also consistent with Au’s appointment as director of Global Fair every now and then to look after the interest of Yung.

Cheung’s knowledge of Yung’s breach of fiduciary duty

422.Now, I come to the more important issue as to Cheung’s knowledge of Yung’s breach of trust.  Cheung argues that she did not know that Yung was a trustee in relation to the Units, that the Units were disposed of by Yung in breach of trust and that she did not deliberately intrude into this trust relationship by assisting Yung in the breach of trust.  In the case of accessory liability, it is sufficient that the accessory knows he was dealing with a person standing in a fiduciary relationship to another and owed duty to act in good faith in relation to that other in the dealing of property held for the benefit of that other.  The accessory cannot escape liability merely because he does not know one is called a trustee and the other a beneficiary.  Cheung knew she was dealing with Yung in relation to the Units as a director of the Companies which owned the Units.  In this day and age and with her attribute, knowledge and experience, Cheung must have known a director owes fiduciary duty to the company when dealing with the company’s property put under the director’s charge.  A director is not to squander away the company’s property placed under his charge at will or to sell the company’s property at substantial undervalue.  Her argument that she did not know Yung was a trustee or that she had no knowledge of the trust in relation to the Units is simply unsustainable.

423.I have found that Yung was in breach of fiduciary duty in the way he sold the Units.  Cheung took part in the auction and purchased the Units.  That must be a deliberate interference of the trust relationship.  The questions are whether when doing so, Cheung had knowledge of Yung’s breach of fiduciary duty and was dishonest when assisting in the breach. 

424.There is no direct evidence of Cheung’s knowledge that the Units were sold by Yung in breach of his fiduciary duty owed to the Companies or that she was reckless whether he was.  Mr Lam seeks to infer knowledge or recklessness on the part of Cheung from the secrecy and concealment of her identity in the tender form, the use of the unusual corporate structure for holding the Units, Yung’s funding of the purchase, Cheung’s lack of involvement in relation to the purchase, Au’s appointment as director of Global Fair, the subsequent payment to Yung of the proceeds of mortgage of Unit 1A, the mortgage of Unit 1D as security for overdraft facilities for New Champion etc.

425.I have analyzed the above issues in depth and reached the conclusion that those facts point to the irresistible inference that Cheung bid pursuant to a common design with Yung.  The question now is whether those facts are sufficient to infer knowledge on the part of Cheung of Yung’s breach of fiduciary duty towards the Companies.  The most telling factor is that the Units were bid and sold at ridiculous undervalue in an auction with an unconscionably short tender period from which inference of impropriety towards the Companies may be inferred.  Such inference is also supported by the inference which may reasonably be drawn from the secrecy and concealment of Cheung’s and Yung’s identity as the person bidding for and holding the Units.

426.On the inference to be drawn from sale at undervalue, Cheung ably argues that a distinction has to be drawn between the inference to be drawn against a purchaser from that against the vendor.  She quotes Cowan de Groot Properties Ltd v Eagle Trust Plc [1992] 4 All ER 700 in which it was held that the knowledge of the vendor directors selling at gross undervalue could not be imputed to the purchaser.  Based on that case, Cheung argues that even if Yung were in breach of fiduciary duty in selling at undervalue, his knowledge could not be imputed to her.  Cowan de Groot Properties Ltd was a case involving purchase at below open market value in an auction.  The headnote reads:

“In determining whether a purchaser company had knowledge of a breach of duty arising out of the sale of another company’s property at an undervalue, the proper test to be applied was whether knowledge that the directors of the vendor company were deliberately selling at a gross undervalue could reasonably be imputed to the purchaser and, since the breach of fiduciary duty arose out of a typical commercial transaction, the requirement of knowledge as the basis for liability as a constructive trustee would be met where it was possible to show that the purchaser had (i) actual knowledge of the breach, (ii) wilfully shut his eyes to the obvious or (iii) wilfully and recklessly failed to make the type of inquiries that an honest and reasonable man would have made.  In such a situation it would not be appropriate for the court to be astute to find circumstances which could indicate knowledge by a purchaser of breach of fiduciary duty on the part of directors of a vendor company.  The duty of directors of a purchasing company was to buy as cheaply as they could in the light of the mode and terms of the proposed sale and it would be going too far to impose on them a positive duty to make inquiries into the reasons for an offer being made to their company at what appeared to be a bargain price.  The line should be drawn at the point where the price in question was indicative of dishonesty on the part of the directors of the vendor company, regard being had not only to the open market value but also to the terms and mode of sale.”

427.I am in agreement with the principle as stated above.  A purchaser is in a very different position from that of a vendor company’s director.  He owes no duty to the vendor company.  It is of course in his interest to buy as cheaply as possible.  If he purchases on behalf of his company, that would be his duty too.  A vendor company’s director is in a different position.  He owes duty to act in the interest of the vendor company.  It would be a clear breach for him to sell at undervalue.  Whether and the extent to which the sale was at undervalue has to be measured against the circumstances prevailing at the time of sale and the director’s explanation.  The size and number of properties to be sold, the time within which the properties have to be sold, even the term of the sale such as the amount of deposit to be paid and the director’s explanation have an impact on the question whether the sale was at undervalue.  The same applies to the purchaser but in a much more favourable light as it is in his interest to purchase as cheaply as possible.  He is entitled to explore the vendor’s bottom line and even to take advantage of the vendor’s weakness, such as his urgent need for cash, his need for a large deposit, etc.  However, even with all these considerations in mind, there must come a stage where the sale is at such a glaring undervalue as to indicate not merely economic pressure but impropriety and dishonesty on the part of the director authorising the sale.  Under such circumstances, the purchaser would be caught as having the second and third categories of knowledge.

428.Turning back to the instant case, the Units were sold for $4.25 million against an open market value of $6.8 million or forced sale value of $5.1 million, i.e. at 37.5% below the open market value and 17% below the forced sale value.  Cheung said that she did not check the then current market value of the Units before bidding.  But on her evidence, she read thousands of property advertisements everyday and she bid at what she said was a forced sale value.  She said that she decided the bidding price by reference to what Goldmark paid for Unit 1D a year ago, i.e. $2.9 million.  From the very competent way she challenged the Plaintiff’s valuation expert’s evidence, it is obvious that Cheung is a person of exceptional intelligence who had kept herself abreast with the market and was capable of feeling the market.  Having kept abreast with property advertisements, she must have known that the market was rising and her bidding price was well below forced sale value which was usually between 25% to 30% below open market value.  She must have known she was bidding well below forced sale value, too.  A 25% to 30% discount off the open market value was already so low that it was difficult to go any lower.  The price she offered was ridiculously low.  A successful bid at such ridiculous price was more of a warning of impropriety than a sign of luck.  Of course, undervalue, without more, is not sufficient to fix Cheung with knowledge of Yung’s breach of duty.

429.But, according to Varty, whose opinion I have no doubt is correct, the normal tender period was four to six weeks and at least three weeks.  That was to allow time for the market to become aware of the availability of the property and for interested purchasers to make at least some preliminary investigation and to inspect the property.  He even called a tender period of two days “unconscionably short”.  Cheung said that she paid attention to property auction advertisements.  She must have been aware what was the usual tender period and that the auction period in the present case was ridiculously and unconscionably short.  She could not have seen any auction with such a short tender period.  Even assuming that she had been misinformed by Yung that Rabobank was going to sell the Units, there is no evidence that Yung had told her that Rabobank was going to force sell the Units in two weeks or so as to justify Yung to pre-empt Rabobank’s action by selling ahead with such urgency.  Cheung is a woman of exceptional intelligence.  She is a specialist in the medical profession.  She has demonstrated her ability to research into the law and to argue legal proposition with competence.  She would have appreciated that there were ways Yung could have sold the Units under more favourable circumstances by negotiating with Rabobank.  If Rabobank was not going to force sell the Units within a short time, why should Yung attempt to do so in two weeks with a tender period of two and half days.  She must have appreciated that there was something suspicious in Yung trying to auction the Units with two and half days.  No one in his right mind would have failed to appreciate that the auction in the circumstances was tailored made for Yung or his nominees to bid at undervalue.  I do not believe in Cheung’s evidence.  I have no difficulties to draw as the only reasonable inference that by reason of the unconscionably short tender period and the ridiculously low price which Yung was willing to sell, she knew the auction was not one in the ordinary course of business but one involving impropriety of some sort to the owners of the Units, on the part of Yung who was responsible for the sale. 

430.More importantly is this.  I have found that Cheung did not bid in the auction by coincidence and by herself, but by design and jointly with Yung.  She and Yung jointly provided for the purchase price of the Units.  I have also rejected their evidence that Yung’s contribution was by way of a loan to Cheung.  The inference is that she was bidding for the Units jointly for herself and Yung.  Under the circumstances, her position is little different from that of Yung’s.

431.Furthermore, Cheung concealed her identity in the tender form and in the company documents of Global Fair and by the unusual corporate structure for holding the Units.  Then, when it came to the critical events in November or December 1993, she resigned from her directorship of Global Fair in favour of Au and shied herself away as the holder of the bearer shares of Avant Garde.  As commented by Millett J, as he then was, in Agip (Africa) v Jackson and others [1990] 1 Ch 265 at 294, “secrecy is the badge of fraud”.  This comment precisely fit with Cheung’s conduct.  The only and irresistible inference which could be drawn from such secrecy and concealment is that she knew not only that the auction was part of a fraudulent design to transfer the Units from the Companies to another otherwise than in an arm’s length transaction but was conducted with an ulterior and improper purpose.  That improper purpose was to dispose of the assets of the Companies at an undervalue to the benefit of another, be it Yung or her and Yung jointly.  She was part of that design.

432.Cheung had been to Unit 1D before.  She knew that the Units were owned by the Companies.  She had been introduced to Vos and must have known that Vos was the only other partner in the business.  She knew that the nature of Goldmark’s business was selling pet food, pet accessories and veterinary medicine.  The Companies could have no substantial assets other than the Units which represented the major assets of the Companies.  Assuming, as she said, that she had been told by Yung that Vos had drained the assets of the Companies leaving $4 million liability due to Rabobank which caused Yung to auction the Units to repay, she must have some doubts as to whether Vos would have fled leaving behind the Units of substantial worth for Yung to dispose of at will.  If she was acting bona fide, she must have asked Yung for supporting evidence than just accepting what Yung said on its face value.  She must have measured Yung’s representation against Yung’s suggestion to her or their agreement to bid for the Units knowingly at substantial undervalue under a tender procedure which was only tailored made for them to bid and with the intention that Yung would accept the bid for and on behalf of the Companies.  Under those circumstances, even if Cheung did not have full knowledge of Yung’s fraudulent design, she must have known that there was something very untoward or improper about the whole design or at least about Yung’s motive.  In the absence of an acceptable or reasonable explanation, Cheung must know it was a breach of fiduciary duty for a director to create a forced sale situation and to sell the Companies’ properties at substantial undervalue to himself or his nominee. 

433.The present case is distinguishable from Cowan de Groot Properties Ltd.  The price was so substantially low and the tender period was so unconscionably short as to indicate dishonesty on the part of Yung.  These indicate that the auction was tailored made for Yung or his nominees to bid.  Other than that, the condition of tender contained no unusual terms which would explain the substantially low price.  Cheung was purchasing the Units jointly with Yung.  Accordingly, I find that Cheung had knowledge of Yung’s breach of trust when she participated in the bidding.  Even if I were to hold otherwise, I would still find that the circumstances were so suspicious that by participating without making due enquiries, Cheung wilfully turned a blind eye to the obvious or wilfully and recklessly failed to make the type of inquiries which an honest and reasonable man would have made, lest her enquiries would reveal anything she would not wish to know.  Cheung could not be said to be a bona fide purchaser without notice of Yung’s breach of fiduciary duty.

Whether Cheung assisted in Yung’s breach of fiduciary duty with dishonest state of mind

434.To attract liability for a fiduciary’s breach of duty, an accessory must have assisted in the breach with a dishonest state of mind.  By that, it means the accessory has to have acted dishonestly by the ordinary standards of reasonable and honest people and have been himself aware that by those standards he was acting dishonestly: see Twinsectra v Yardley and Others.  The test contains a subjective and an objective element.  Dishonesty is concerned with advertent as opposed to inadvertent conduct or carelessness.

435.I have analysed the facts of this case in great depth.  Yung was in breach of fiduciary duty by selling the Units at undervalue to the detriment of the Companies and Cheung assisted by purchasing the Units.  Purchasing or selling other’s property at such a substantial undervalue as in the present case is just like taking away property belonging to another.  The difference is only one of degree.  Even ignoring the inference that Cheung purchased the Units jointly with Yung, it is beyond argument that honest people do not intentionally deceive others to their detriment or take away others’ property.  Honest people do not use a golden egg to exchange for a gold egg.  Honest people do not participate or assist in such dishonest design.

436.The next question is whether Cheung knew that such assistance was dishonest by that standard.  This question has to be answered in the light of what she actually knew at the time she bid for the Units.  On the facts of this particular case, many of the findings I made in relation to Cheung’s knowledge of Yung’s breach of trust are also relevant.  Cheung ought to know that there was something very suspicious about the unconscionably short tender period of two and half days.  She was given the explanation by Yung that Vos had drained away the assets of Goldmark and Rabobank was demanding repayment of Goldmark’s outstanding loan of $4 million within two weeks.  On my finding, she either purchased Unit 1A for herself and Unit 1D for Yung or both Units jointly for themselves.  She ought to know that Yung was to be benefited by the sale at undervalue.  As Rabobank was not force selling the Units, why should she and Yung be in a hurry to?  She must have known that Yung’s conduct was dubious and suspicious and his explanation was incapable of belief.  Furthermore, she concealed her and Yung’s identity in the tender process.  I have rejected her explanation that she did so to keep her investment secret from her husband.  She would not have so concealed her identity as the person in control of Global Fair bidding for and purchasing the Units if she did not entertain any belief that what she was doing was improper.  I am unable to accept her explanation as her genuinely held belief.  Having so rejected her explanation, I conclude that Cheung knew what she did was dishonest by the ordinary standards of reasonable and honest people.  Accordingly, I am satisfied that Cheung knowingly assisted in Yung’s breach with dishonest intention.

Whether Cheung, Global Fair and Start Win assisted in Yung’s breach of fiduciary duty

437.On the above finding of fact, I find that Cheung knowingly assisted in Yung’s breach with dishonest intention.  She is liable jointly with Yung to make good the loss suffered by the Companies.

438.Global Fair was the corporate vehicle which assisted in Yung’s breach of fiduciary duty and in receipt of the Units sold to it pursuant to Yung’s breach.  As Cheung was a director and the controlling mind of Global Fair, her knowledge was imputed to Global Fair.  Global Fair has therefore assisted Yung in the breach of fiduciary duty and is therefore liable jointly with Yung and Cheung for the loss suffered by the Companies as a result of the sale of the Units.

439.Start Win was not the first hand purchaser of Unit 1A from Yung at the time of Yung’s breach of fiduciary duty.  At the time Global Fair transferred Unit 1A to Start Win, Yung’s breach had already taken place.  It was impossible for it to have assisted Yung in his breach.  Mr Lam submits that by reason of Global Fair’s transfer of Unit 1A to Start Win, Start Win, nevertheless assisted in Yung’s breach by concealing his beneficial interest in Unit 1A and in actualising the value of Unit 1A.  I do not agree with the first limb of his argument for the simple reason that at the time of the transfer Yung’s breach had already been completed.  The transfer of Unit 1A has no effect of covering up the prior sale by Yung to Global Fair.  In respect of the second limb of his argument, I fail to see how by reason of the mortgage, Start Win could have assisted in actualising the value of Unit 1A.  The mortgage created a corresponding liability on Start Win.  Besides, the evidence suggests that Cheung was the purchaser and beneficial owner of Unit 1A for having contributed to its purchase price.  I am unable to find Start Win had assisted in the breach.  It could be argued that the mortgage might have an effect on the value of Unit 1A as a real remedy which may be available to the Plaintiff.  The point is academic in this case as the mortgage had been repaid and the unit sold pursuant to a Court order with part of the proceeds of sale paid into Court.  Start Win is not liable to the Plaintiff for dishonest assistance in Yung’s breach of trust.  

Whether Global Fair and Start Win had knowledge of Yung’s breach of fiduciary duty when receiving the Units and whether it is unconscionable for them to retain the Units

440.I have found that Cheung had actual knowledge of Yung’s breach of fiduciary duty when she tendered for and purchased the Units.  Actual knowledge means the first or the second or the third category under the Baden scale.  Cheung was the director and controlling mind of Global Fair and Start Win at the time when the Units were transferred to Global Fair and Start Win.  A corporation must act through natural persons.  Hence, Cheung’s knowledge of Yung’s breach must be imputed to Global Fair and Start Win.  On the facts of the present case, it does not matter whether Cheung’s knowledge is the first, second or third category under the Baden scale.  Insofar as the knowledge is of the first category, the test of unconscionability has been undoubtedly met.  Insofar as the knowledge is of the second or third category, it makes no difference in the circumstances of this case.  On the facts of the present case, Global Fair and Start Win were the alter ego of Cheung.  Cheung was culpable as a knowing assister.  If she is liable as a knowing assister, it would be plainly unconscionable if she should be allowed to retain the Units.  The same applies to Global Fair as the corporate vehicle used to carry out the design.  Furthermore, Global Fair received the Units at an undervalue which made it unconscionable for it to retain the Units.  The test of unconscionability must be applied with common sense.  It cannot be right that if it is unconscionable for Cheung to retain the Units, she can nevertheless retain them through Global Fair.  Accordingly, Global Fair is liable to the Plaintiff for knowing receipt of the Units.

441.For the same reason, Start Win is the alter ego of Cheung imputed with her knowledge of Yung’s breach of fiduciary duty.  For the same reason as in the case of Global Fair, it must be unconscionable for Start Win to retain Unit 1A.  Furthermore, Start Win was a voluntary recipient of Unit 1A.  The sale from Global Fair was a fictitious transaction.  Start Win paid no consideration for Unit 1A.  It merely mortgaged Unit 1A and paid over the loan to Global Fair.  That payment could not be treated as part of the consideration for the purchase.  Even if the mortgage was treated as consideration, it was at an undervalue.  Even if its knowledge of Yung’s breach of fiduciary is of the second or third category in the Baden scale, it must be unconscionable for it to continue to retain Unit 1A.  A fortiori, if its knowledge is of the first category.  Start Win is therefore liable jointly with Yung, Cheung and Global Fair for the loss suffered by World Champ as a result of the sale of the Unit 1A.

Counterclaim for equitable set-off

442.Cheung argues that as Goldmark had the benefit of being paid the purchase price for the Units which it had used to pay off Rabobank’s loan of $4,111,952, Global Fair is entitled to a counterclaim in respect of interest saved as a result.  The interest was to be calculated at the rate of prime plus 3.75%, which is equivalent to a daily rate of $975.36.  Such counterclaim is groundless as Global Fair had upon completion of the sale obtained possession and use of the Units.  The Companies were entitled to the price plus whatever damages they suffered as a result of Yung’s breach and Global Fair’s knowing assistance in the breach.  Global Fair’s counterclaim is therefore dismissed.

Defence of limitation

443.Yung’s breach of fiduciary duty and Cheung’s assistance took place in July 1993.  The action commenced in 1995.  On 6 September 2000, Cheung was joined as a party pursuant to the order of Master Barnes, as she then was.  A claim of knowing assistance was pleaded against her.  That application was made ex parte.  Though Cheung was not a party to the application, her solicitors acting for Global Fair and Start Win were present at the hearing when the order was made.  Cheung never attempted to have the order set aside.  On 6 May 2005, the Plaintiff applied to amend the re-amended statement of claim.  The amendment was largely technical and for clarification purpose only.  Suffiad J allowed the application.  Cheung did not appeal against the order of Suffiad J.  She then pleaded the defence of limitation.

444.Mr Lam submits that by virtue of section 35(1) of the Limitation Ordinance, the amendment which introduced a new claim against Cheung is deemed to have commenced on the same date as the original action and hence no question of limitation arises.  He submits that amendment to the statement of claim was made pursuant to the order of Suffiad J and as Cheung did not appeal against the order of Suffiad J, that was a determination binding on her.

445.Section 35(1) and (3) provide as follows:

“(1)  For the purposes of this Ordinance, any new claim made in the course of any action shall be deemed to be a separate action and to have been commenced –

(a)  in the case of a new claim made in or by way of third party proceedings, on the date on which those proceedings were commenced; and

(b)  in the case of any other new claim, on the same date as the original action.

…

(3)  Except as provided by section 30 or by rules of court, the court shall not allow a new claim within subsection (1)(b), other than an original set-off or counterclaim, to be made in the course of any action after the expiry of any time limit under this Ordinance which would affect a new action to enforce that claim.”

446.On the face, section 35(1) appears to be exhaustive and deems all new claims to have been commenced at the date of the original action.  However, when read together with section 35(3), it is plainly obvious that it could not have been the intention of the legislature to allow a plaintiff to circumvent the limitation provisions by introducing amendment to the statement of claim under section 35(1).  The practice of the courts is not to allow an amendment which has the effect of reviving an otherwise statute-barred claim.  In Wong Kam Lee v Shimizu Corp & Ors  [1997] 1 HKC 61, Woo J, as he then was, held that insofar as the court has not expressly ruled on the questions as to what was the relevant period of limitation and whether such period had expired, section 35(3) and the deeming provision of section 35(1) do not come into operation.  He said at 74:

“In a case where the person applied to be added as a defendant has made known his wish to rely on limitation, in most cases the following will take place.  Where there is no dispute on evidence on the issues of (1) the relevant period of limitation, (2) the expiry of that period and (3) whether the court should direct a disapplication of s 27 or s 28, the application for amendment can be decided under O 15 r 6(5) and s 35(3) straightaway whereby the decision will also be binding on the plaintiff and the added defendant in respect of the issues.  Where, as in the present case, there is a dispute on the evidence on those issues and the dispute cannot be resolved without hearing viva voce evidence, the application can be granted first pursuant to the power of the court under O 15 r 6(2), and at least the following courses are then open:

(a)  The issues can be reserved by the court for the determination of the trial judge, or be tried as preliminary issues;

(b)  The plaintiff or the added defendant can make an application to determine the issues as preliminary issues;

(c)  The added defendant can apply to court to strike out the plaintiff’s claim against him if he has a very strong case on limitation as to be able to bar the plaintiff’s claim in limine; or

(d)  The added defendant can raise the limitation point in this defence and let the issues be determined by the trial judge.”

I am in agreement with that approach.

447.Cheung had been joined as a party to the action for over four years before Suffiad J dealt with a number of summonses on 6 May 2005.  So far as the Plaintiff’s application for amendment is concerned, it was a simple application.  It was most unlikely that the issue of limitation would have been raised before Suffiad J.  In any event, limitation could not have been an issue to be properly argued before his Lordship.  I am unable to agree with Mr Lam that the order of Suffiad J could have been interpreted as a determination on the limitation issue.

448.Mr Lam’s argument might have greater force in respect of the order made by Master Barnes, as she then was, when joining Cheung as the 6^th Defendant.  That was the most likely occasion when the issue of limitation would have been raised.  However, the joinder application was made ex parte.  Though Cheung’s solicitors representing Global Fair and Start Win were present at the hearing, technically Cheung was not.  Limitation was not an issue which affected Global Fair and Start Win.  Master Barnes, as she then was, made no order whether the limitation point may be raised or argued at trial.  Cheung was not present.  Obviously, the application and the issue of limitation had not been ruled on.  It was most unlikely that Cheung could have realised the effect of the deeming provision in section 35(1) and the need to set aside Master Barnes’ order.  She pleaded limitation after the amendment was allowed by Suffiad J.  Cheung’s case on limitation involves factual disputes which cannot be resolved without hearing viva voce evidence.  In the circumstances, it could not have been the case that by joining Cheung as a party, Master Barnes, as she then was, made a determination that the defence of limitation is wholly unarguable.  I find that it is open to Cheung to plead and argue on the defence of limitation at trial.

449.Six years have lapsed since the accrual of action before Cheung was joined as a party.  Prima facie the action against Cheung has been statute-barred.  Mr Lam relies on section 26(1)(b) and argues that the facts relevant to the Companies’ right of action has been deliberately concealed from him by Cheung and time did not start to run until the Companies have disovered the concealment.  Sections 26(1) and (2) provide as follows:

“ (1)  Subject to subsection (4), where in the case of any action for which a period of limitation is prescribed by this Ordinance, either –

(a)  the action is based upon the fraud of the defendant;

(b)  any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or

(c)  the action is for relief from the consequences of a mistake,

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.

(2)  References in subsection (1) to the defendant include references to the defendant’s agent and to any person through whom the defendant claims and his agent.”

450.Cheung submits that to invoke section 26(1)(b), the Plaintiff must prove deliberate concealment of facts relevant to the Plaintiff’s right by her or her agent.  She argues that she had not concealed anything from the Plaintiff and whatever acts of concealment, if committed, were committed by Yung.  She submits that she is entitled to have the benefit of the deliberate concealment by Yung of the fraud but time nevertheless runs against the Plaintiff in the normal way.  That argument is wholly unsustainable.  On the facts, I have found that Cheung bid for the Units pursuant to a common design with Yung.  What Yung did pursuant to that common design must be attributable to Cheung.  There is no shortage of evidence of deliberate concealment.  The question is what was the earliest time when the Plaintiff could with reasonable diligence have discovered the concealment.  That was when time started to run against the Plaintiff.

451.Cheung submits that there was never any concealment by her or Yung and concealment was impossible as the Official Receiver had taken over the management of the Companies since 20 August 1993 and had possession of all records and documents of the Companies.  She argues that the Official Receiver had possession of the tender form dated 14 July 1993 and could have realised that one “Dr Cheung” with a clinic telephone number bid for the Units on behalf of Global Fair.  She also submits that the Official Receiver could have easily found out her identity.  According to Vos, at that stage he was unable to associate that “Dr Cheung” or Global Fair with Dr Winnie Cheung whom Yung had introduced to him.  I have no doubt in Vos’ evidence.  Even if he could, the name meant nothing until more evidence of the design was revealed during the course of the investigation.  That explains why when the Official Receiver sought a mareva injunction against Global Fair and Start Win, but no injunction was sought against Cheung.

452.Cheung submits that the Official Receiver could have discovered from company search the shareholders of Global Fair, Start Win and Universal Agents Limited.  However, the records would only show Cheung to be a 1% shareholder of Global Fair and Start Win, but the ownership of the remaining 99% shareholding of these companies was concealed by Avant Garde, a BVI bearer share company.  Cheung concealed her own residential address by using the office address of Atkins Limited.  Neither the Official Receiver nor Vos could have associated the person named Cheung at the Atkins Limited address was the same Dr Winnie Cheung of Shatin.  For the same reasons as given above, such discovery would mean nothing to the Official Receiver or Vos.

453.Cheung submits that the Official Receiver could have discovered a copy of the cashier order of $850,000 used to pay the deposit from the files of Messrs HLLY and Messrs WS, that the completion amount came from two different sources, a cheque of $2.05 million from Messrs YCL and $1.35 million from HSBC and that four cheques were used to settle the outstanding loan owing to Rabobank.  In my view, those payments by themselves were just neutral events.

454.Cheung submits that Vos knew Yung operated a veterinary clinic in Unit 1D since November 1993 and that veterinary surgeon was the same consultant for New Champion.  That may link the veterinary clinic with Global Fair.  But Cheung’s identity was concealed by reason of her using the Atkins Limited address.  Thus Vos’ discovery could not suggest any involvement on the part of Cheung.

455.Cheung submits that the land search of the Units after 20 November 1993 would have revealed Au’s appointment as director of Global Fair, the sale of Unit 1A to Start Win and the mortgage of Unit 1D and that when traced along that line, Cheung’s involvement in the Units would become obvious.  She said that Vos knew Au was related to Yung.  In the first place, there is no reason why the Official Receiver should periodically make land searches in relation to the Units.  The Official Recevier entertained no suspicion about Cheung or Global Fair and released the title deeds of the Units to Cheung in September 1993.  Secondly, I do not think the land search record would have revealed anything implicating Cheung.  The record could not have shown Unit 1D was mortgaged as security for overdraft facilities of another company.  The record could not have shown Cheung’s involvement or signature on any of the documents as one of the effects of, if not reasons, for Au’s appointment was to cover up Cheung’s involvement.  Besides, there is no reason why Official Receiver should periodically make land searches in respect of the Units. 

456.While what Cheung and Au did in October to December 1993 was most extraordinary and suspicious, the land search and company search by themselves could not have suggested their connection with Yung, not to mention Cheung, unless viewed together with the bank statements of Global Fair’s bank account with First Pacific Bank.  Those statements would not be available until some months after January 1994.  Unless the Official Receiver could pick up that lead and associate the evidence, he could have no idea of Cheung’s involvement in the design.  Six months thereafter would not have been an unreasonable time for exercise of due diligence for the Official Receiver to pick up the lead in view of the concealment.  Even then, it was still a long way off from having a case against Cheung.  A further six months thereafter would not have been an unreasonable time for the Official Receiver to build up a case against Cheung.  Time did not start to run until January 1995.  On that count, the action was taken out within time.

457.Mr Lam referred to the evidence given by Yung during his examination by the Official Receiver on 6 January 1995 when Yung concealed his communication with Cheung about bidding for the Units.  Yung denied he was lying by craftily arguing that it was Cheung who spoke to him and not that he spoke to Cheung about the Units.  I reject that argument.  I find that he was concealing Cheung’s involvement in the design.  This is the background against which Cheung argues that she was entitled to the benefit of Yung’s concealment.  I reject that argument.  As Cheung and Yung had embarked on a common design, what Yung did pursuant to that common design must be attributed to Cheung.  Mr Lam further argues that by telling the opposite, Yung was concealing.  I agree with that submission.  That evidence shows that even up to 6 January 1995, Cheung and Yung were still concealing Cheung’s involvement in the design.

458.All along, Cheung had well concealed her identity on the tender form, the company documents of Global Fair and Avant Garde.  The first hint of Cheung’s involvement in Yung’s design came from William Leung on 12 April 1995 during an interview with Mr Mak of the Official Receiver when he disclosed a fax from Yung giving him instructions about the company structure for holding the Units.  I think that is when time started to run against the Plaintiff.  Cheung was made a party on 6 September 2000.  That was well within the limitation period of six years.  The action against Cheung was not statute-barred.

Relief and damages 

459.Cheung argues that the Companies suffered no loss as Global Fair and Start Win were restrained from disposing of the Units, which were eventually sold pursuant to a court order below the price for which they were acquired by Global Fair.  She submits that the Companies could have repaid Global Fair $4.25 million and have the Units back at anytime before the sale.

460.The Plaintiff is not seeking to set aside the sale of the Units to Global Fair now.  He is claiming equitable compensation for Yung’s breach of fiduciary duty and for Cheung’s, Global Fair’s and Start Win’s knowing assistance in the breach and knowing receipt of the Units.  Cheung concealed her identity and concealed Yung’s breach of fiduciary duty.  It was not until September 2000 that the Official Receiver was able to map out her involvement in assisting in Yung’s breach.  All along, it had never been Cheung’s stance that she, Global Fair and Start Win were ready and willing to return the Units to the Companies.  She vigorously contested the Plaintiff’s action throughout these sixteen years.  That she sold the Units at a loss was the result of her own mis-investment and has no bearing on the damage suffered by the Companies as a result of her assistance in Yung’s breach of fiduciary duty.  There is no merit in her argument that the Companies suffered no loss as a result of her assistance in Yung’s breach of fiduciary duty.  For reasons as stated in paragraphs 315 to 321, there is no reason for stopping the clock.  Cheung is jointly liable with Yung for equitable compensation which I assess to be $2.55 million.

461.Apart from equitable compensation, the Plaintiff claimed various declarations in respect of the Units and the related property transactions, an account of income and proceeds of any dealing with the Units and an order setting aside the sale of the Units to Global Fair and Start Win.  The appropriateness of those remedies sought have been taken over by events, particularly the sale pursuant to the order of A Cheung J.  As a result of the sale of the Units to third parties, I consider an order for equitable compensation with interest as from the date of breach or date of completion of the sale of the Units to Global Fair, i.e. 28 July 1993, is the only remedy which is appropriate in the circumstances.

(G)  action against the 4^th Defendant

462.Au was alleged to have rendered dishonest assistance to Yung in respect of the Sale of Units Claim and to have been involved in the Misappropriation Claims in respect of the proceeds of sale of the Units in the amount of $90,000.

463.Au was closely related to Yung and Mrs Yung.  He assisted in the operation of Goldmark, VIP Media, Wealth Country, Animal Health Centre and Phoenix Veterinary Clinic.  He was instrumental to passing the shareholders resolutions and board of directors resolution to enable Global to sell Unit 1A to Start Win and to mortgage Unit 1D in favour of New Champion and to Global Fair’s paying Yung $1.9 million.  This is as close as the Plaintiff could associate him with the design of Yung and Cheung.  Au’s conduct was related to Global Fair and Avant Garde subsequent to the auction, but was not proximate enough as to amount to knowing assistance. 

464.The other claim pleaded against Au was that he acknowledged on behalf of World Champ the receipt of a sum of $90,000 from Messrs WS as balance of the price of sale of Unit 1A which he then paid out to himself.  As the evidence revealed, the payment was indeed effected by a cheque signed by Yung and made payable to Yung.  All Au did was to deposit the payment into the bank account of World Champ to which the money rightfully belonged.  Mr Lam then abandoned the claim against Au.  Accordingly, the Plaintiff’s action against the 4^th Defendant is dismissed.

(H)  action against the 5^th Defendant

465.New Champion was Yung’s corporate vehicle for taking over the Hill’s distributorship from Goldmark.  It was a company owned and controlled by Yung.  It had the benefit of the use of Unit 1D as a security for its overdraft facilities from HSBC.  The Plaintiff’s claim against New Champion is based on dishonest assistance and knowing receipt. 

466.Mr Lam submits that New Champion, being a company wholly or substantially owned and controlled by Yung was his alter ego and attributed with the knowledge of Yung’s breach of fiduciary duty.  New Champion had the benefit of the mortgage over Unit 1D as security for the overdraft facilities of $2.5 million granted by HSBC, which was used for the benefit of New Champion.  I have no difficulties with that submission.  It is fully supported by the facts I have found.

467.Mr Lam then submits that therefore New Champion received funds belonging to Goldmark and is liable to account for the same.  The funds were the facilities, i.e. loans to be advanced by HSBC from time to time to New Champion.  The party liable to repay was New Champion, not Goldmark or World Champ.  The funds could not be said to be funds belonging to Goldmark.  HSBC had no right to call upon Goldmark for payment.  I fail to see how New Champion could be said to have received any fund from Goldmark, let alone that those funds were not trust property traceable to Yung’s breach of trust.  It is true that New Champion had the benefit of the use of Unit 1D as security for its purpose.  In the event of New Champion’s default, HSBC will call on the security.  At the time of the mortgage, Goldmark had already sold Unit 1D to Global Fair.  Global Fair was the owner of Unit 1D and not Goldmark.  If the security were sold, it would have been Global Fair that suffered damage and not Goldmark whose damage had already been inflicted at the time of the sale to Global Fair.  Goldmark may lose a real remedy in that the value of Unit 1D would have been reduced by the amount of unpaid debt.  But that was not what the Plaintiff has pleaded, nor can I say the benefit of the use of Unit 1D as a security a property received traceable to Yung’s breach of trust.  Further, in any event, the mortgage had been repaid.  Goldmark could have suffered no loss as a result of the receipt complained of.

468.Mr Lam also submits that New Champion knowingly assisted Yung to continue concealing his interest in the Units acquired by him in breach of fiduciary duty.  I think this argument could only be directed at New Champion in respect of Unit 1D.  I am quite unable to see how the mortgage could have the effect of concealing Yung’s interest in the Units.  Global Fair remained as the legal owner of Unit 1D, though its status was reduced to that of a mortgagor.  New Champion did nothing to mask that fact.  Besides, at the time of the mortgage, Yung’s breach of fiduciary duty had been completed.  As in the case against Start Win, I do not think concealing evidence of a breach of fiduciary duty amounted to assisting in its breach.

469.For these reasons, the Plaintiff’s action against the 5^th Defendant must be dismissed.  For reasons already given, the 5^th Defendant’s counterclaim against the Plaintiff must also be dismissed.

(I)  action against the 7^th Defendant

470.The Official Receiver has abandoned the claims against Mrs Yung, save for the default judgment entered against her for conspiracy in relation to the sale of the Units on liability with damages to be assessed.  Mrs Yung defaulted at this trial.  Accordingly, the damages assessed at this trial shall be made against her.

(J)  Conclusion

471.For the above reasons, I enter judgment for the Plaintiff against the 1^st, 2^nd, 3^rd and 6^th Defendants for damages as set out in paragraph 476 below.

472.This case involves serious breach of fiduciary duty by Yung and dishonest assistance in a serious breach by Cheung and knowing receipt of the Companies’ properties by Global Fair and Start Win.  Yung and Cheung have been most recalcitrant in their defence.  They put forward numerous arguments on the facts, which are frivolous, vexatious and factually incorrect.  In particular, Yung gave false evidence and acted with glaring dishonesty.  He tried every trick to mislead the Court.  Cheung supported him and reinforced his arguments.  An order for costs against them to be taxed on an indemnity scale is appropriate.

473.In respect of the 7^th Defendant against whom judgment on liability have been entered, I assess the damages for which she is liable to the Plaintiff to be the same as that which the 1^st, 2^nd, 3^rd and 6^th Defendants are found liable under the Attempted Secret Profit Claim and Sale of Units Claim.

474.The Plaintiff’s claim against the 4^th Defendant and 5^th Defendants are dismissed.  The 4^th Defendant has obviously brought the litigation onto himself by reason of his suspicious conduct.  The 5^th Defendant has also brought the litigation onto itself by reason of its association with the 2^nd Defendant who was its controlling mind.  Accordingly, there shall be no order as to costs as between the Plaintiff and the 4^th and 5^th Defendants.

475.All of the Defendants’ counterclaims are dismissed. 

476.Accordingly, I make the following order:

(1)  the 2^nd and 7^th Defendants do pay the Plaintiff damages in the amount of $461,213.60 in respect of the Attempted Secret Profit Claim with interest at judgment rate with effect from 28 April 1992;

(2)  the 2^nd Defendant do pay the Plaintiff damages in the amount of $416,990 in respect of the Misappropriation Claims with interest:

i) on the sum of $19,500 with effect from  27 November 1991;

ii)  on the sum of $14,180 with effect from  30 July 1992;

iii)  on the sum of $200,000 with effect from 23 June 1993;

iv)  on the sum of $30,000 with effect from 21 July 1993;

v)  on the sum of $30,000 with effect from 23 July 1993;

vi)  on the sum of $33,310 with effect from  3 August 1993; and

vii)  on the sum of $90,000 with effect from 11 August 1993.

(3)  the 1^st, 2^nd, 3^rd, 6^th and 7^th Defendants do jointly pay the Plaintiff damages in the amount of $2.55 million in respect of the Sale of Units Claim with interest at judgment rate with effect from 28 July 1993, save that the liability of the 3^rd Defendant for damages shall be limited to $1.35 million with interest on that amount;

(4)  all of the Defendants’ counterclaims against the Plaintiff are dismissed;

(5)  unless otherwise covered by previous Court orders, the 1^st, 2^nd, 3^rd, 6^th and 7^th Defendants do pay the Plaintiff’s costs of this action, including all costs reserved, to be taxed on an indemnity basis with interest at judgment rate with effect from 1 December 2009, save that the liability of the 7^th Defendant for costs shall be limited to the costs incurred on or before 17 April 2001 and the costs of assessment of the damages only; and

(6)  all payments paid into Court by or on behalf of Global Fair and Start Win together with all accrued interest shall be paid out to the Official Reciever in partial discharge of the liability of the 1^st and 3^rd  Defendants after fourteen days.

Mr. Douglas Lam, instructed by M/s Dundons, for the Plaintiff by original action and the 1st and 2nd Defendants by counterclaim
1st Defendant (by original action)/1st Plaintiff (by counterclaim), in person represented by the 6th Defendant
2nd Defendant (by original action)/2nd Plaintiff (by counterclaim), in person
3rd Defendant (by original action)/3rd Plaintiff (by counterclaim), in person represented by the 6th Defendant
4th Defendant (by original action), in person
5th Defendant (by original action)/5th Plaintiff (by counterclaim), in person represented by the 2nd Defendant
6th Defendant (by original action)/6th Plaintiff (by counterclaim), in person
7th Defendant (by original action), in person (absent)

(I) Please refer to CACV282/2009 for the relevant appeal(s) to the Court of Appeal. (II) Please refer to HCMP397/2012 for the relevant appeal(s) to the Court of Appeal.