Securities and Futures Commission v. Yin Yingneng Richard and Others
Read the full judgment text of HCMP 2502/2012 on BabelCite. This Court of First Instance judgment was delivered on 16 January 2015 before Anthony Chan J.
Securities and futures regulation – s 214 of the Securities and Futures Ordinance (Cap 571) – disqualification of directors and compensation – whether Mutual Understanding & Agreement (MUA) existed regarding distribution of excess net assets – acquisition of financial information services company via wholly-owned BVI subsidiary – Letter of Confirmation and Clarification Announcement – whether directors acted dishonestly – directors' duties of skill, care and diligence under common law, Companies Ordinance (Cap 622) s 465, and Rules 5.01 and 5.03 of the GEM Listing Rules – credibility of witnesses – contemporaneous documents – adverse inference – alleged Indemnity from Company to two Respondents – SFC's case proven against all three Respondents. The acquisition was of the entire shareholding of GoHi Holdings Ltd, the owner of First China Investment Services Ltd, from Fame Treasure Ltd owned by Wang, through a wholly-owned BVI subsidiary Aceview, with a fixed amount of dividends (RMB34,743,349.13) to be paid pre-completion and a net asset guarantee of not less than RMB8 million – the net assets of First China Investment substantially exceeded RMB8 million by early 2008 – a Letter of Confirmation and Clarification Announcement were signed and published in late 2008 purporting to record a pre-existing MUA under which the excess net assets of approximately RMB18,692,000 belonged to the seller. The first issue was whether the MUA existed – the court held it did not exist, as the express terms of the Sale and Purchase Agreement (including the complete agreement clause and the defined amount of dividends) were irreconcilable with the alleged MUA, the MUA was vague and left no trace in any contemporaneous documents, the critical events from August 2008 showed the company scrambling to deal with the excess net assets, and Wang (who bore the evidential burden) failed to provide credible evidence. The second issue was whether Yin and Lee acted dishonestly in respect of the non-existing MUA – applying the combined objective and subjective test from Twinsectra Ltd v Yardley, the court held both acted dishonestly; Yin's leadership role in the negotiations, his status as first signatory of the LC, his preparation of a Letter of Indemnity, and his active efforts to find methods to pay the ENA to Wang, together with Lee's failure to verify the MUA and his inconsistent explanations, led the court to conclude they had struck an agreement to distribute the ENA using the non-existing MUA as a pretext or at best deliberately turned a blind eye. The third issue was whether s 214(1)(a) to (d) was engaged – the court held it was, with the conduct falling within all four limbs (oppression, defalcation/misfeasance/misconduct, lack of information, and unfair prejudice). The fourth issue concerned appropriate orders – compensation ordered with Wang bearing primary responsibility as the sole beneficiary, the Indemnity granted by the Company to Wang and Lee was held inappropriate, an announcement order was made, disqualification was deferred to a further half-day hearing, and a costs order nisi was made with the Company's recoverable costs reduced by half. Both Yin and Lee have not gained from the matter but were found to have had reasons to accede to Wang's request, including retaining good relations with the substantial seller.
Legal issues: Existence of the alleged Mutual Understanding & Agreement (MUA) · Whether Yin and Lee acted dishonestly in respect of the non-existing MUA · Whether s 214 of the Securities and Futures Ordinance is engaged · Appropriate orders under s 214 of the Ordinance
Outcome: SFC's case proven against all three Respondents. Liability established under s 214 of the Securities and Futures Ordinance. Disqualification hearing to be fixed separately.
Cited by 2 cases · Cites 5 cases
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HCMP 2502/2012 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 2502 OF 2012 ___________________
__________________ BETWEEN
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________________ J U D G M E N T ________________ 1.This is the trial of a Petition filed by the Securities and Futures Commission (“SFC”) on 7 November 2012 against Yin Yingneng Richard (“Yin”), Lee Yiu Sun (“Lee”), Wang Wen Ming (“Wang”) and First China Financial Network Holdings Ltd (“Company”) (for convenience Yin, Lee and Wang will be referred to collectively as “Respondents”) pursuant to s 214 of the Securities and Futures Ordinance, Cap 571 (“Ordinance”). 2.In this Petition the SFC seeks (a) disqualification orders against the Respondents and (b) an order that the Company shall itself or procure its subsidiary Aceview International Ltd (“Aceview”) to bring court proceedings against Fame Treasure Ltd (“Fame Treasure”) and/or other parties to recover a sum of RMB18,692,000 paid to Fame Treasure as dividend. 3.Pursuant to an order dated 4 January 2013, the Company’s role in this trial was confined to making submissions on relief (b) identified in the preceding paragraph. However, with the prompting of the court at the beginning of this trial, the parties have agreed that where liability is established against any of the Respondents, those found liable should jointly and severally compensate the Company for its loss. Hence, the Company’s participation in this trial has largely been that of an observer. Background 4.A Statement of Agreed Facts (“Agreed Facts”) has been filed by the SFC on 16 October 2014 pursuant to the directions given by this court on 30 September 2013. Further, a good summary of the essential factual background can be found in the Opening Submissions of the SFC. The summary is not controversial and, with gratitude, I shall adopt it with modifications in paras 5 to 38 below. The Acquisition of First China Investment 5.The Company was incorporated at the Cayman Islands on 24 May 2001 and is listed on the Growth Enterprise Market (“GEM”) of the Stock Exchange of Hong Kong Ltd on 11 January 2002 with stock code 08123. 6.Lee was an initial shareholder of the Company. On 1 June 2005, he was appointed an executive director of the Company. On 28 September 2006, he was appointed the Chief Executive Officer (“CEO”) of the Company. 7.Yin was another shareholder and was on 11 May 2005 also appointed an executive director of the Company. He became the Chairman of the Company on 1 June 2005. 8.On 11 July 2007, Lee presented[1] a board paper (“Board Paper”) to the board of directors of the Company (“Board”) in relation to the acquisition of the entire equity interest of a financial information services company by the name of First China Investment Services Ltd (“First China Investment”). It was stated in the Board Paper, inter alia, as follows :
9.On 11 July 2007, the Company held a board meeting. Both Yin and Lee were present. The minutes of the board meeting (chaired by Yin) stated, inter alia, as follows :
10.Before finalisation of the minutes, a draft had been circulated by Cindy Chui to, inter alia, Yin and Lee via email on 12 July 2007 for comment. 11.On 11 July 2007, by a Sale and Purchase Agreement (“Agreement”), the Company, through Aceview, acquired First China Investment by acquiring all the issued shares of its sole shareholder (GoHi Holdings Ltd (“GoHi”)) from its sole owner, Fame Treasure, a company owned by Wang, a Mainland businessman. 12.In the Agreement, Fame Treasure was defined as the Seller, Aceview was the Purchaser, First China Investment was defined as “the Company” and GoHi was defined as the Holding Company. The Agreement stated, inter alia, as follows :
13.Clause 7.7 of Schedule 5 of the Agreement entitled “Seller’s Warranties” also provided as follows :
14.On or about 30 July 2007, a supplemental agreement was executed by the same parties to the Agreement (“Supplemental Agreement”). The Supplemental Agreement stated, inter alia, that the liabilities of the parties under the net assets guarantee as prescribed in clause 9.3 of the Agreement (“Net Assets Guarantee”) were joint and several and that the definition of “Net Assets” in the Agreement be modified to refer to the assets of the “Holding Company and the Subsidiaries (as consolidated)”. Otherwise, no amendment was made to the wording of clause 9.3 of the Agreement. 15.On 30 July 2007, the Company published an announcement (“2007 Announcement”) about the Agreement. When the 2007 Announcement referred to clause 9.3 of the Agreement, it was silent on how any net assets in excess of RMB8,000,000 would be dealt with. A draft of the 2007 Announcement was e-mailed to Wang on 28 July 2007. 16.On 22 October 2007, the Company pursuant to the requirements in the GEM Listing Rules, issued a circular to its shareholders in advance of the EGM to be held on 8 November 2007 concerning the Agreement and the Supplemental Agreement (“Circular”). The Net Assets Guarantee was referred to in the Circular, but there was no express reference to any net assets in excess of RMB8,000,000 or how the same might be dealt with. The directors of the Company (including Yin and Lee) took “the view that the … Net Assets Guarantee [is] achievable based on a profit forecast [of First China Investment] for the coming year”. The Agreement and the Supplemental Agreement were approved at the EGM held on 8 November 2007. The EGM was attended by, inter alia, Yin (who chaired the meeting) and Lee. Wang also attended as a non-shareholder. 17.Completion of the transaction took place on 16 November 2007. 18.Pursuant to a written resolution of GoHi passed on 15 November 2007, its directors declared a dividend of RMB18,121,000 payable to its shareholders whose names appeared in its register of members as at 15 November 2007. Excess of Net Assets of First China Investment 19.By the latest in around early 2008, it became clear that the net assets of First China Investment exceeded RMB8 million (“ENA”):
20.On 8 May 2008, Wang was appointed an executive director of the Company. On 12 June 2008, Yin was re-designated as a non-executive director of the Company and Wang was appointed the Chairman of the Board. Letter of Confirmation and Clarification Announcement 21.At around 1:33 pm on 30 October 2008, Ms Angela Ho of AHA (“Ho”) sent an e-mail to, inter alia, Cheng, Lee and Wang concerning ENA stating as follows :
22.At around 2:42 pm on 31 October 2008, Ms Patricia Cheung of AHA (“Cheung”) sent an e-mail to Yin attaching, inter alia, a draft of the Letter of Confirmation and the completion accounts of First China Investment as at 16 November 2007. The draft Letter of Confirmation stated, inter alia, that :
23.At around 5:29 pm on 4 November 2008, Cheung sent an e-mail to Cheng copying, inter alia, Lee and Wang stating, inter alia, as follows :
24.At around 3 pm on 13 November 2008, the Company held a board meeting. Wang and Lee attended the meeting with Wang acting as the Chairman. The minutes of the meeting recorded, inter alia, that :
25.On 1 December 2008, Mr Jonathon Lai (one of the auditors of the Company) sent an e-mail entitled “GoHi accounts to 30 June 2008” to his colleagues recording his earlier telephone conversation with Yin as follows :
26.At around 3:03 pm on 1 December 2008, Cheng e-mailed the directors of the Company (including Yin, Lee and Wang), attaching an agenda for a special board meeting to be held at 2:30 pm on 2 December which stated, inter alia :
27.The special board meeting did not eventually take place on 2 December 2008. 28.On 4 December 2008, Cheng sent an e-mail to the directors of the Company, including Yin, Lee and Wang attaching draft minutes of the board meeting held on 13 November 2008 which Yin did not attend. 29.On the same day, Cheng sent the following e-mail to Yin :
30.In a reply e-mail sent at around 9:47 am on 5 December 2008 by Yin to Cheng, it was stated as follows :
31.Later in the morning on 5 December 2008, Cheng sent “clean versions” of the Letter of Confirmation, Clarification Announcement and a board resolution to Yin by e-mail for his execution. In a reply e-mail from Yin shortly afterwards, he stated the following :
32.Yin then signed the Letter of Confirmation (“LC”) as well as the board resolution on 5 December 2008 (“Resolution”) and returned them to Cheng. He also tendered his resignation from the Board. All these happened on that same day. 33.On 5 December 2008, the Company passed the Resolution approving the execution of the LC and the publication of the Clarification Announcement. The Resolution was signed by the Company’s directors, including Lee. Wang, being a shareholder and director of the seller under the Agreement, abstained from voting for purpose of the Resolution. 34.Para 5(1) of the Resolution resolved, inter alia, as follows :
35.The LC dated 5 December 2008 and signed by the Respondents stated, inter alia, that :
36.The Clarification Announcement dated 16 December 2008 (“CA”) stated, inter alia, as follows :
37.In the Definitions section of the CA, the following terms were defined :
38.Meanwhile, Yin resigned as a non-executive director of the Company (on 5 December 2008) with effect from 9 December 2008. SFC’s case 39.Mr Manzoni SC, who appeared for the SFC with Mr Nip, said that SFC’s case is clear and straightforward: the alleged Mutual Understanding & Agreement referred to in the CA (“MUA”) did not in fact exist and that the CA contained misrepresentations of facts which are false or misleading in a material particular. 40.Further, the Respondents as directors of the Company were involved in causing the CA to be published, thereby wrongfully acknowledging the existence of the MUA. In so doing, they had failed to exercise reasonable skill, care and diligence and/or in breach of Rules 5.01 and 5.03 of the GEM Listing Rules and caused RMB18,692,000 to be wrongfully paid out from the Company as a result. 41.In the circumstances, the SFC submitted that reliefs should be granted pursuant to s 214 of the Ordinance. Section 214 of the Ordinance 42.S 214 of the Ordinance provides as follows :
Duties of directors 43.Rule 5.01 of the GEM Listing Rules provides that :
44.Rule 5.03 of the GEM Listing Rules further provides that :
45.In addition, the SFC submitted that each of the Respondents in their capacities as directors of the Company owed at common law a duty to the Company to exercise reasonable care, skill and diligence that would be exercised by a person with (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company and (b) the general knowledge, skill and experience that the director has: see Re D’Jan of London Ltd [1993] BCC 646 at 648 per Hoffmann LJ (as he then was); Daniels v Anderson (1995) 16 ACSR 607 at 668 per Clarke and Sheller JJA; the new s 465 of the Companies Ordinance, Cap 622 which has codified the common law position; and the commentary on s 465 in the Butterworths Hong Kong Company Law Handbook, 16th edn. 46.Mr Manzoni also submitted that executive and non-executive directors have the same responsibility in law as to the management of the company’s business: Re Boldwin Construction Co Ltd [2001] 3 HKLRD 430 at 433J-434E per Rogers VP. 47.These principles of law are not in dispute. Yin’s case[5] 48.Yin’s case is that, so far as he is concerned, he did not enter into any MUA with Wang or any counterparty in the Company’s acquisition of GoHi in July 2007 (“Acquisition”). Therefore, he had no knowledge of the MUA. He was first made aware of the existence of the MUA when Cheung sent him a draft of the LC on 31 October 2008, followed by his meeting with Wang at the Four Seasons Hotel in Hong Kong in early November 2008. By early December 2008, he was convinced by Lee and Wang that there was a MUA between them. 49.It became apparent from the cross-examination of Lee by Mr Scott SC, appearing with Mr Hui, on behalf of Yin that Yin’s case is that he was deliberately misled by Lee and Wang, who knew that there was no MUA, into signing the LC and the Resolution. Lee’s case 50.Lee’s defence to SFC’s case is that :
Wang’s case 51.Mr Wang’s case is, in summary, as follows :
The issues 52.I agree with Mr Manzoni that there are 2 key issues to be determined by this court. Firstly, there is a factual dispute on whether the MUA existed as identified in the LC and the CA. There seems to be no argument that if there was such MUA, the Petition should be dismissed. On the other hand, if the answer is in the negative, it is difficult to see how Wang can escape liability in these matters. Indeed, Mr Wong SC, appearing with Mr Lo for Wang, has fairly accepted that liability against Wang should follow from a finding that the MUA did not exist. As regards Yin and Lee, even if there was no MUA, the court will have to determine whether they knew or ought to have known that it was the case. 53.Secondly, if liability is established against the Respondents, what are the appropriate orders to be made pursuant to s 214 of the Ordinance? 54.Expectedly, the evidential part of this trial was focused on the factual dispute over the existence or otherwise of the MUA. SFC’s case is premised largely upon the contemporaneous documents, which are uncontroversial[6], and the inferences to be drawn on them. Fortunately, there is a good deal of contemporaneous documents. A careful analysis of those documents, made in the light of the evidence given by the Respondents, will produce a fairly good picture on what transpired at the material times which led to the distribution of the ENA. 55.It is convenient to deal with here an issue raised by Mr Maurellet on the failure on the part of the SFC to call various persons, who could, it was said, have provided crucial evidence concerning Lee’s role, as witnesses in this trial. Relying upon Li Sau Keung v Maxcredit Engineering Ltd [2004] 1 HKC 434 at §28 and Chan Sze Yuen v Tin Wo Engineering Co Ltd, CACV 71/2011 (25 July 2012) at §21, it was said that an adverse inference ought to be drawn against the SFC that Lee was not party to any dishonest scheme to concoct the MUA. 56.I do not agree with this submission. Firstly, it is unsurprising that an investigating authority like the SFC does not normally have any first-hand information on the subject matter of investigation. It has to rely upon the information procured from various interviewees and documents unearthed in the course of investigation. These interviewees are not under the control of the SFC. They may or may not be willing to cooperate in terms of testifying for the SFC. There is obvious danger in calling a reluctant witness. 57.Secondly, I agree with Mr Manzoni’s submission that, with the exception of the Respondents, none of the interviewees in this case would have the knowledge whether the MUA existed. At best these witnesses can give evidence of facts which may shed some light on this critical issue. It is unnecessary to call them because the facts are reasonably clear from the undisputed contemporaneous documents. Further, some of the interviewees, like Cheng, had said to the SFC that she had little recollection over the important events. Assessing the credibility of witnesses 58.Mr Wong has reminded the court that in assessing the credibility of a witness’s evidence the followings are to be considered :
59.This court has also been referred to Esquire (Electronics) Ltd v HSBC [2007] 3 HKLRD 439 at §158 and Pathak Ravi Dutt v Sanjeev Maheshwari [2014] 3 HKLRD 597 at §16. 60.Further, the more serious the allegation, the more cogent must be the evidence to prove it. It was held in China Everbright Finance Ltd v Chan Yung, HCA 18300/99 (24 October 2006) at §46 :
Credibility of the Respondents 61.I should say at the outset that the express terms of the Agreement and the contemporaneous documents before the court clearly call for some explanation from the Respondents on the MUA. I do not believe that any one of the Respondents has been truthful in their evidence on the matter. 62.When I consider the critical events below, I shall deal with some of the specific aspects of the Respondents’ evidence. However, none of them has managed to advance a case which is consistent with the documents. Their evidence do not stand up to the scrutiny of cross-examination. Indeed, the various exculpatory explanations advanced in this trial do not sit well with common sense. 63.The analysis of the evidence is complicated by the fact that the Respondents are running “cut-throat” defences against one another. It is not therefore entirely easy to distil the truth from the conflicting evidence. It is not possible to resolve all the conflicting evidence. However, with the benefit of the contemporaneous documents, a reasonably reliable picture can be put together. Analysis 64.The critical events were those which took place from 13 August 2008 to 5 December 2008 when the CA was published. On the 13 August 2008, there was a Board meeting. As explained below, it appears that it was this Board meeting which led to a series of events which resulted in the signing of the LC by the Respondents. These events are especially important for the determination of the liability of Yin and Lee. Before focusing on the critical events, I need to flesh out the evidence on a number of matters. The Respondents 65.Yin is a man of considerable experience in the finance industry. He worked in securities commissions in Australia and in Hong Kong before joining the private sector. During that time, he had worked for SW Kingsway Capital Holdings Ltd and had been appointed as directors of various listed companies in Hong Kong. He is also a qualified accountant and has been a licensed person under the Ordinance since 2005. 66.Lee is 56 years old. He has a degree in Accounting and Finance. He is an associate member of the Chartered Institute of Management Accountants and a fellow member of the Hong Kong Institute of Certified Public Accountants. 67.Lee has over 20 years of experience in the securities and financial service sector. Before joining the Company, he was a director at a number of securities firms. He was the Chairman of the Hong Kong Stockbrokers Association (“HKSA”) from 2007 to 2009 and Vice-Chairman from 1997 to 2007. He was a Council Member of the Stock Exchange of Hong Kong from 1997 to 1999 and a Member of the Chinese Gold and Silver Exchange Society from 1994 to 1999. 68.Lee joined the Company in May 2000 as one of its promoters, mainly to promote the Company’s electronic trading platform. His unchallenged evidence is that he was primarily responsible for the Company’s securities and commodities trading business as well as its proprietary trading business, and for maintaining relationship with the brokers who subscribed for the Company’s initial shares, including running for election as Chairman of HKSA. 69.In 2006, in addition to being appointed as the CEO of the Company, Lee also became the Compliance Officer of the Company. He remains to date the holder of these positions. 70.Wang is a 51 years old businessman who has spent all his working life in the Mainland before joining the Company. He is from Northern China and moved to Shenzhen in 1986 where he developed various businesses including First China Investment. Over the years, Wang has gained industry-wide recognition for his achievements. 71.Despite his business success, Wang was only educated to high school level before joining the Company. After the present dispute had arisen, he started to pursue various courses in business administration to enhance his qualifications. Wang does not understand English and, at the material times, he had no experience in selling a business to a Hong Kong listed company or in the operations of such a company. 72.The evidence is that Wang did not speak Cantonese. However, it is controversial whether he could understand that dialect. I am inclined to accept Yin’s evidence that Wang could do so for 2 reasons. Firstly, it is not uncommon for Putonghua speakers to have some understanding of Cantonese. Secondly, by 2007 Wang had been living in Shenzhen for over 20 years where the use of that dialect was and is common. 73.Although it may be said that Wang was not a highly educated person, I do not believe that he was an unsophisticated person. Plainly, he could not have achieved what he did without being a clever and shrewd businessman. The Acquisition 74.It appears from the relevant papers that this was a fairly straightforward transaction. In simple terms, the Company was to acquire the financial information services business of First China Investment by buying the entire shareholding of GoHi, which owned the former, from Fame Treasure. The consideration for GoHi’s shares was in the form of newly issued shares in the Company. With the Acquisition, all the rights associated with GoHi’s shares would become the assets of the Company (held via a corporate vehicle, Aceview) with 1 exception, namely, an identified amount of undistributed profits, which would be paid to Fame Treasure as dividends prior to completion (see para 12 above). 75.Three further points should be noted about this transaction. Firstly, it is not disputed that it was a very favourable transaction for the Company because it was acquiring a profitable business with no cash payment. 76.Secondly, it was an important acquisition for the Company whose business had been in the doldrums, and making losses, for a number of years. 77.Thirdly, it is undisputed that the normal commercial practice for this type of acquisition was for the vendor to extract the net asset value, which exceeded an agreed amount, from the subject company prior to completion. The reason being that the subject matter of the sale is the business and not the assets of the subject company. The negotiations over the Acquisition 78.Lee says that he took no part in the negotiations over the Acquisition. This is an important aspect of his case. He says that he had no knowledge of any MUA because he took no part in the negotiations. Indeed, he did not even know Wang until May 2008 when Wang was appointed to the Board. 79.I prefer Yin’s evidence in this regard, which is to some extent supported by that of Wang. Yin’s evidence is consistent with the documents and accords with common sense. Further, when giving evidence on this issue, Yin was careful to be fair to Lee. 80.According to Yin, he was leading the negotiations on the Company’s side assisted by Lee and Alvin Lok (“Lok”). Lok was a former colleague of Yin at the SFC. He was recruited by Yin to work as his assistant in the Company. Yin agreed that Wang would have the perception that he was the big boss and that anything to be discussed should be done with him. 81.There was a drafting session at the office of AHA which took place at the beginning of July 2007. It was attended by Yin, Lee, Lok and Wang. Prior to the drafting session, Yin and Wang had agreed some basic terms for the Acquisition, and it was at the drafting session that all the important terms and conditions of the Acquisition were thrashed out. The 4 of them all took part in the discussions over those terms. Having reached agreement on the main terms, the details were then left to the lawyers. 82.Yin said that the first meeting between Lee and Wang was at the drafting session. He also said that all the directors of the Company went up to Shenzhen to meet with Wang prior to the Acquisition. 83.The documents show that from 9 July 2007 onwards various e-mails concerning the Acquisition were copied to Lee, amongst other people. Importantly, the minutes of the Board meeting of 11 July 2007 (see para 8 above) show that Lee took part in briefing the Board about the Acquisition and that he tabled the Board Paper which was in his name as the CEO of the Company. The Board Paper stated that “[the] executive directors have been in negotiation with the shareholders of [First China Investment] …”. 84.It is difficult to accept Lee’s evidence that he knew practically nothing about the Acquisition despite the fact that he was the CEO, and that he merely lent his name for the Board Paper because of Yin’s request to add persuasion to the same. In particular, I find it quite extraordinary that, according to Lee, Wang was not even introduced to him until well after the completion of the Acquisition. Lee has no explanation for this unusual feature. 85.Both the Agreement and the Supplemental Agreement were executed by Lee on behalf of both Aceview and the Company. Both the 2007 Announcement and the Circular were issued by the Board with Lee named as the executive director. These documents militate against Lee’s suggestion that he had little involvement in the Acquisition and that he knew little of the terms of the Agreement. 86.Further, the board paper dated 12 November 2007 on the due diligence for the Acquisition was issued in the names of Lee, Cheng and Albert Lee. This is consistent with Yin’s evidence that these 3 persons made up the due diligence team, and inconsistent with Lee’s evidence that he had no involvement in the due diligence exercise. 87.Both Lee and Wang said that they had met once at the Company’s office. According to Wang, it took place prior to the Acquisition. Wang said that it was a brief introduction by Yin where little was said between him and Lee apart from the exchange of name cards, whereas Lee said that he was introduced to Wang as the CEO of the Company by Yin but Wang was not introduced to him and he did not know who this person was at the time. These evidence do not accord with common sense and are rejected. 88.I believe that Lee attempted to distance himself from the Acquisition so as to explain why he says that he believed in the existence of the MUA. Payment of dividends by First China Investment 89.Three dividends were distributed by First China Investment, namely, the sums of RMB23,652,000, RMB18,121,000 and RMB18,692,000. The circumstances of the distribution of these dividends are summarised below. 90.First, pursuant to Clause 2.1 of the Agreement, it was provided that only the “Dividends” would be distributed (see para 12 above for the definition of that term). However, in actual fact, two payments of dividends were declared to be distributable prior to completion of the Agreement. 91.On 8th November 2007, GoHi by a written resolution resolved to pay a dividend of RMB23,652,000 to the seller, Fame Treasure. It is unclear whether First China Investment had passed a resolution to distribute a dividend of RMB23,652,000 to GoHi in the first place. 92.On 10th November 2007, First China Investment’s board of directors resolved to distribute a dividend of RMB18,121,000 to its shareholder, GoHi. A few days later on 15th November 2007, GoHi passed a corresponding resolution to distribute a dividend of RMB18,121,000 to Fame Treasure. 93.The declared dividend of RMB23,625,000 was paid on 28th December 2007. 94.It appears that the declaration of dividends in the amount of RMB23,625,000 plus RMB18,121,000 was only made known to the Board on 20th March 2008 when Farrah Lam of AHA sent an e-mail advising that the dividends to be distributed by First China Investment to Fame Treasure prior to completion would be increased from RMB34,743,349.13 (as per the Agreement) to RMB41,773,000 (see para 19.3 above). 95.The sum of RMB10,000,000 out of the declared dividend of RMB18,121,000 was paid out on 10th April 2008 via First China Investment’s bank account in Shenzhen. 96.As to the third sum of RMB18,692,000, the evidence does not disclose any resolution declaring such dividends. The only reference to this sum was in the CA, in which it was announced that a distribution of RMB18,692,000 would be made by offsetting the other receivables due from Fame Treasure. 97.The dividend of RMB18,692,000 was actually paid on 19th December 2008 by setting off this amount against the pre-acquisition receivables from a related company, Shenzhen Guangxing Investment Co Ltd. 98.The remaining RMB8,121,000 out of the declared dividend of RMB18,121,000 was paid on 30th September 2009 as a set-off against the receivables from Shenzhen Guangxing Investment Co Ltd. MUA 99.Before turning to the critical events, I shall deal with the existence or otherwise of the MUA. As explained above, the Acquisition was a simple transaction. It must be said that the terms of the Agreement were simply irreconcilable with the MUA. This is self-evident from the terms of the Agreement identified above. 100.In addition, according to the Management Accounts exhibited to the Agreement as Appendix 2, the undistributed profits of First China Investment as at 31 May 2007 was RMB37,342,865.50. Yet, pursuant to the definition of “Dividends” in the Agreement, the only amount of undistributed profits of First China Investment which would be distributed to Fame Treasure prior to Completion would be the fixed amount of RMB34,743,349.13. There was therefore about RMB2.5 million of undistributed profits of First China Investment which the parties agreed not to be paid out as dividends. This is inconsistent with any suggestion of a MUA and consistent with the net asset guarantee of not less than RMB8 million. 101.In the premises, it must be right that the evidential burden[7] is on Wang to provide credible evidence on the MUA. He has failed to do so. 102.It should be mentioned that although it was not made clear in Yin’s written opening whether it was his case that there was in truth no MUA, his position had become clear when Lee was cross-examined (“XX”) by Mr Scott. Yin’s case is that there was, to the knowledge of Lee and Wang, in fact no MUA and that he was misled by them into signing the LC. 103.Given the prominence of this issue in these proceedings and the fact that Wang has had some time to reflect over what he has to say about the same, his evidence on what transpired between him and Yin which constituted the MUA is wholly unsatisfactory. He was asked in XX on precisely what was said between him and Yin in respect of the MUA. The reluctance or difficulty on Wang’s part in answering this simple and critical question is not consistent with an honest businessman who felt that he was cheated by Yin as suggested in Wang’s evidence. 104.Eventually, the evidence given by Wang was as follows. He said to Yin that if there was any excess of net assets he would take it away. If there was any shortfall, he would top it up. Yin “indicated his agreement” by saying to Wang: “Old Wang, just guarantee you can achieve the profits. The amount of net assets is not very important. It would be alright if you guarantee RMB8 million.” Importantly, Wang said that at that time they were bargaining on the amount of net asset guarantee. Yin was insisting on RMB10 million and he on RMB8 million. Finally, Yin conceded on the debate and the matter was agreed at RMB8 million. 105.Taking such evidence at the highest, it is a quantum leap to translate it into the MUA. On one view, what was said had been reflected in the Agreement which provided for the payment of dividends of RMB34.74 million prior to completion (see para 12 above). 106.The case put to Yin by Mr Wong was different. It was suggested that during the course of negotiation Wang stated and warranted to Yin that First China Investment would have net assets of RMB8 million upon completion and any excess amount must be returned to the seller. It was also suggested to Yin that he told Wang that he would ask the lawyers to incorporate this term into the Agreement. Both suggestions were denied by Yin. The variation between what was put to Yin and Wang’s evidence further expose the fragility of Wang’s case. 107.When the allegation of MUA is considered against the uncontroversial evidence, there are just too many reasons to reject the same. In addition to the irreconcilability with the terms of the Agreement and the lack of credible evidence to support the MUA, I should mention the following reasons for rejecting the allegation of MUA. 108.The terms of the MUA as alleged in the CA or the LC were vague and uncertain. There was no detail of the time, place, method of reaching the MUA or the people involved. There was also no detail on when and how the excess should be distributed. 109.There is no trace of the MUA or the negotiation over it in any contemporaneous documents. 110.The critical events (see below) demonstrate that the Company was trying to find ways to deal with the ENA, which strongly militates against the existence of the MUA. 111.I agree with Mr Manzoni that the circumstances concerning the additional dividends of RMB18.121 million serve to show that there was no MUA. If there were such, the Respondents or anyone of them would have raised it as the justification for the additional dividends. 112.Finally, Wang’s evidence on why he signed the Agreement when it did not record the MUA is highly unsatisfactory. He gave long answers which were convoluted and contradictory. He tried to blame his inability to understand English, his eagerness to leave the solicitors’ office where the Agreement was signed, his way of doing business in the Mainland and his trust of Yin. Pressed further, Wang then accepted that given the importance of the transaction he should have been very careful to understand precisely what was contained in the Agreement and the only reason not to have done so on that occasion was his trust in Yin. 113.However, according to Wang’s own evidence, Ho told him about the main terms of the Agreement and he did not hear any mention of the right of the seller to take away any NAV in excess of RMB8 million. Wang had no credible explanation when he was asked to explain why he did not then raise any question over the contents of the Agreement. 114.For completeness, a point has been made about the lack of legal advice to Wang when the Agreement was signed. I am not persuaded that the point is of much assistance to him. Firstly, it is a fact that prior to the Acquisition Wang had tried to sell First China Investment to a Nasdaq company. Although that sale did not materialise, a contract was prepared for the same which was later used as a template for the Agreement. Hence, Wang was not entirely unfamiliar with such a contract. Secondly, there is no doubt that Wang could have asked AHA to interpret the terms of the Agreement to him, if that was not done or offered. Indeed, the balance of the evidence is that the terms of the Agreement were explained to Wang before he signed it (see also para 23 above). The critical events 115.The critical events were kicked off with a board meeting of the Company held on 13 August 2008. It was the first board meeting chaired by Wang. It is clear that there was a heated debate during that meeting about receivables due from Wang’s related companies to First China Investment and Wang’s proposed appointment of Zhang Benzheng (“Zhang”) as a non-executive director of the Company. Lee explained that in that meeting he supported Wang by voting in favour of the appointment of Zhang, against the votes of Yin and the other directors. Lee said that thereafter Yin became angry with him and they ceased to be on speaking terms. 116.I believe that this is an important watershed in this case. It is the genesis for the non-existing MUA. 117.Subsequent to this board meeting, one of the independent non-executive directors (“INED”), Mr C K Wong wrote to Wang and Lee (the only executive directors of the Company) on 15 August 2008 expressing “great concern” over, inter alia, the outstanding receivables due from companies controlled by Wang in the aggregate sum of about HK$60 million. 118.On 10 September 2008, there was another board meeting to discuss, inter alia, the outstanding receivables. When the draft minutes of that meeting was circulated by Cheng on 30 September 2008, it triggered disquiet from 2 INEDs, Mr Michael Wu and Mr Gordon Tsang. In particular, there were some discussions amongst those gentlemen with C K Wong and Yin on whether there was an attempt to “claw back a lot of what was said during the last board meeting”. 119.In the finalised minutes of the September meeting, it was stated that “Michael Wu said that the related parties had to re-pay all receivables … by November 2008”. 120.Clearly, there was dissatisfaction amongst at least some of the INEDs and Wang was under pressure to pay the receivables. 121.Importantly, this was the time of a financial tsunami. According to Lee, the stock market had fallen dramatically during the tsunami. No doubt most people were under financial strain at the time. It is unlikely that the Company or Wang were unaffected. 122.Wang’s evidence is that the outstanding receivables issue had alerted him to the ENA. He has not explained why that was so. I believe that when the facts are analysed carefully it is clear that Wang was looking for ways to pay off the receivables without having to come up with any funds. It is quite likely that in doing so, possibly with the help of third party/parties, Wang came up with the idea of using the ENA to set-off against the receivables. 123.On 9 October 2008, Cheng notified all directors of the Company that a board meeting was scheduled to be held on 13 November 2008 to consider the 3rd quarterly results of the Company. 124.However, before that meeting was held there was an important meeting between Wang and Lee on about the 21 October 2008. According to Lee, he first knew about the MUA between Wang and Yin when Wang told him about it on 21 October 2008. Lee then asked Cheng to deal with it with AHA. 125.Whilst I have no reason to doubt Lee’s evidence on the existence of this meeting, I do not believe that he has been completely candid with what transpired during that meeting. To begin with, RMB18.69 million was not a small sum, especially in time of financial crisis. Secondly, given his knowledge of the Agreement (not to mention the 2007 Announcement and Circular), he must have been surprised by the suggestion that there was such an amount (or any amount) payable to the seller in the absence of any express provision in the Agreement. Common sense dictates that Lee must have questioned Wang about the details of that liability. 126.When Lee was XX about what precisely he was told by Wang, he struggled to provide a clear answer. He managed to come up with different versions and those versions differ with what was stated in the affirmation he made in these proceedings. However, the first version he gave in his viva voce evidence was that “[Wang] said that any net asset in excess of RMB8 million should belong to the seller”. For reasons which I shall explain later, I believe that this version is the closest to the truth. In other words, I do not believe that there was any mention of MUA or words which might constitute the same at that meeting between Lee and Wang. 127.Wang must be getting quite anxious at that time to resolve the receivables issues. More likely than not, he was doing what he could to put pressure on the CEO to agree with him. Lee was fully aware of the receivables issue as shown by the contemporaneous documents. At the time, he might not have a strong resistance to the payment of ENA to the seller because it accorded with general commercial practice (see para 77 above). However, the weight of the documents suggests that Lee had not at that stage simply agreed with Wang but he was prepared to explore how the matter could be resolved. It is true that Cheng was tasked by Lee to deal with the matter with AHA. 128.There is a chain of e-mails which began with one from Cheung to Cheng on 30 October 2008 at 11:52 hrs with which a draft LC (Version 1) was sent for comment. The material part of this document, after referring to the Agreement, was as follows :
129.Importantly, it was designed to be signed by Lee and Wang representing various parties. This document suggests that AHA was asked to prepare the necessary documents to justify the distribution of ENA. 130.On the same day at 13:04, Cheng replied to Cheung, copied to, inter alia, Wang and Lee[8] (but not Yin) by attaching “our amendments to the [LC] for your comments”. The material part of the amendments in this Version 2 was as follows :
131.Clearly, Cheng was only carrying out the instructions given to her by Lee. It is possible that Wang had played a part in giving those instructions but given that he was based in Shenzhen it was unlikely for him to have played a major part in this exercise. This amendment demonstrates 2 important points. Firstly, the instructions given to Cheng were that the ENA “belonged” to the Seller. This is consistent with the version of events referred to in para 126 above and hence it was, in all probability, what Lee was told by Wang. Secondly, this is the first trace of the term “mutual understanding and agreement”. 132.Equally important, in Version 2 the signatories on behalf of Aceview and the Company were changed from Lee to Yin. More likely than not, Lee had examined the draft LC and took the view that any MUA should be confirmed by Yin because he took the lead in the negotiations over the Acquisition on behalf of the Company. This inference is consistent with Lee’s evidence. 133.Cheng’s reply attracted a response from Ho that day at 13:33 that due to principles of company law “it is inappropriate to say that the excess belongs to the seller” (see para 21 above). 134.At 14:26 on the same day, a revised draft of the LC (Version 3) was sent to Cheng by Cheung. The material part of that 3rd version was follows :
135.There were further exchanges of drafts (Versions 4 and 5) between Cheng and Cheung at 14:49 and 16:21. The latter e-mail was not copied to Lee and Wang. In it Cheng was advised that the contents of the LC “need to be agreed by the Parties and confirmed by the auditors”. 136.On the next day (31 October 2008) at 14:42, Cheung sent an email to Yin attaching for his reference (i) a clean copy of Version 5 of the draft LC; (ii) relevant extract from the Agreement; and (iii) a schedule of net asset value of First China Investment as at the date of completion (16 November 2007) provided by Cheng. 137.According to Yin, this was the first time that he knew anything about the MUA. His evidence is that the e-mail was unsolicited and he was bewildered by it. That is likely to be true because none of the prior emails were copied to him and there is no indication in the evidence that he had any knowledge prior to receiving this e-mail. 138.However, Yin has not been candid with the court as to what he did when he received this surprising e-mail. He said that his response was to call Ho to ask who told her to send the e-mail to him, to which she answered “the Company”. Yin did not ask her who gave her the instructions over the MUA, nor whether the Company needed to pay over the ENA. However, he said that he told Ho that there was no agreement between him and Wang on any ENA. Such reaction does not sit well with Yin’s evidence that he was bewildered by the unsolicited e-mail on an entirely unknown matter for which his signature was required. More likely than not, he would have spoken to Wang soon after receiving this e-mail. 139.Further, Yin said that, without any request from him, Ho came up with a method to pay the ENA to Wang by way of director’s remuneration. It is inherently improbable for Ho, as the Company’s solicitor, to take the initiative to advise Yin to pay out the Company’s money without clear legal basis. More likely than not, there was a request to Ho to come up with some solution to pay the ENA to Wang. On the evidence, Yin was the only person who would have made that request, which is consistent with a recorded telephone conversation between him and Wang (see para 153 below). 140.The recording suggests that Yin was wrong on the timing of Ho’s advice. Indeed, I believe that Yin had spoken to Wang soon after he received the e-mail and it was later that he contacted Ho to seek her advice. That accords with common sense, ie, the lawyer was only instructed after Yin had found out what was going on and had at least agreed to explore the ways to resolve the issue. 141.The next e-mail, copied to, inter alia, Wang and Lee, was the one sent by Cheung to Cheng on 4 November 2008 at 17:29 (see para 23 above). Two documents were sent with that email, a revised draft of an announcement and board resolutions (both relating to the LC). Plainly, AHA were seeking to protect themselves from potential liability over the MUA when it was inconsistent with the Agreement. The red light was clearly lit for everyone to see. 142.There were 2 documents which, according to the printed header, were sent by fax on 4 November 2008 at 19:41. They were (a) a copy of the LC (Version 6) which had been stamped with the various corporate chops and signed by Wang and (b) a draft copy of board resolutions concerning the LC and CA which had been signed by Lee. I shall return to these documents later. 143.There is an interesting point to be noted on the draft resolutions. It was marked “Draft 2008.11.04”. Footnote 5 of that document referred to the LC but instead of “distribution in specie” of the ENA (which still appeared in Version 6) it had become “distribution of dividends”. It thus appears that by 4 November 2008 the terms of the LC had more or less been finalised. 144.By an e-mail dated 5 November 2008 from Ho, Yin received a draft of the board resolutions and CA, as well as the e-mail chain regarding the draft LC. Yin said in XX that Ho sent this e-mail to him simply for his information because she was his friend. Further, he said that he did not respond to the e-mail because it required no action to be taken on his part. He did not even call Ho to ask why the drafts were prepared. 145.Yin’s evidence regarding this e-mail cannot be accepted. The draft resolutions clearly concerned him as one of the signatories. Moreover, these documents reveal the falsity in Yin’s evidence that he had told Ho that there was no agreement between him and Wang over any ENA (see para 138 above). It is inherently improbable for Ho to have continued to work on documents the factual basis of which she knew to be false. 146.I now return to the 2 documents referred to in para 142. Lee said that he signed it on 5 November 2008 in the following circumstances. Cheng knocked on his door, told him that “it’s okay” and gave him the resolutions to sign. Lee thought that by “okay” it was confirmed that the LC had been amended with Yin and Wang as signatories and that they had signed the document. Accordingly, Lee signed the resolutions. After signing it, Lee discovered that it was marked as a draft and upon enquiries with Cheng he found out that Wang and Yin had not yet signed the LC. Subsequently, Lee told Cheng to ask Wang to sign the LC before asking him to sign the resolutions. He also asked Cheng to shred the document which he signed. Lee did not know why the document surfaced again. 147.I have no doubt that Lee’s explanation is not true. Such evidence is at variance with his affirmation filed in these proceedings. There is no reason why Cheng would have asked him to execute a draft document, nor to ignore the instruction to shred the signed document. More likely than not, Lee would have noticed that the document was marked as a draft before he signed it. It is very difficult to believe that Lee did not even glance at the document which he was asked to sign. There is a suggestion advanced in Yin’s case as to why that document was signed (see below). 148.On 7 November 2008, Cheng sent out an agenda to all directors of the Company in respect of the meeting of the Board on 13 November 2008. It should be noted that there was no mention of anything concerning the ENA in the agenda. 149.According to Yin, he had the first meeting with Wang in respect of the MUA on 7 November 2008 (as analysed above, I do not believe this to be their first contact on this subject). The first of the 2 taped conversations is supportive of the existence of a meeting on that day. Prior to that meeting, Yin had been made aware of the LC and the related documents and, as he accepted in XX, he was alive to the possibility that Wang might ask him to sign those documents at the meeting. However, there is no controversy that the LC was not signed by Yin until the 5 December 2008. 150.Yin’s evidence is that Wang took along the documents referred to in para 142 above (“Signed Drafts”) to the meeting to support his claim for a MUA. However, the meeting was not a happy one. Yin was accused by Wang to have cheated him. On an objective appraisal, it is unsurprising that the meeting did not end in amicable terms because Yin had refused to agree to the MUA. 151.There is force in the suggestion that the Signed Drafts were produced by Wang at that meeting to persuade Yin to agree to the MUA. There were Chinese characters written on those documents the purpose of which, apparently, was to assist a non-English speaker (Wang) to distinguish them and to identify where Yin should sign. I am inclined to accept this part of Yin’s evidence as true. I further believe that Lee’s signature on the resolutions was likely to have been procured by Wang. On his part, Lee probably took the view that he was only signing a draft resolutions. The resolutions could not be finalised without having the LC signed and he would only put his name to the LC if Yin was willing to do so. 152.On 10 November 2008, one of the INEDs, Mr C K Wong, resigned from such directorship. In all likelihood, it was an act related to the receivables issue. 153.The first of the taped telephone conversation took place on 10 November 2008. The date can be accurately identified because the conversation referred to the resignation of C K Wong on that day. There was also a reference to an event on Friday where Wang asked Yin to consult Ho on the payment of money to him. The Friday before 10 November 2008 was the 7 November 2008. Hence, the meeting between Wang and Yin on that day. This piece of evidence suggests that despite Yin’s refusal to agree to the MUA at that meeting, he agreed to consult Ho on how the ENA could be paid to Wang. 154.As shown in the transcript of the recording, it is clear that Yin was trying hard to come up with a solution to pay the ENA to Wang. This is consistent with Yin’s evidence that he would have agreed with the distribution of ENA to the seller had it been raised by Wang during the negotiations over the Agreement. He was sympathetic to Wang’s request that the ENA be paid to him, and he was trying to find a legitimate and transparent way to do so. 155.It appears from the transcript that, with the help of Ho, Yin had come up with the idea of paying the ENA to Wang by way of director’s remuneration. He apparently thought that the method would work and he asked Wang to thank him for coming up with this solution. 156.It should be noted that Yin mentioned during this conversation that he, together with another INED, Mr Michael Wu, intended to resign from the Board on Wednesday (12 November 2008). 157.The second taped conversation was a tripartite conference call between Yin, Gordan Tsang (a non-executive director of the Company and Chairman of the Audit Committee) and Wang. Yin’s evidence is that it took place in early November 2008 after his “first meeting” with Wang. 158.During this conversation, Yin said to Tsang (using both Cantonese and English) that he had told Wang very frankly that he could not sign any document because “that was not what was agreed”. The rest of the conversation (the part between Yin and Wang was in Putonghua) was about working out a rational basis for distributing the ENA, and there was a consensus that, with the backing of a legal advice and the auditor’s agreement, the ENA could be distributed as director’s remuneration. 159.On 12 November 2008, as foreshadowed both Michael Wu and Yin tendered their resignation as director of the Company with immediate effect. However, Yin’s resignation was met with a letter from Lee on the same day stating that the Board had resolved not to accept his resignation. According to Article 89(1) of the Articles of Association of the Company, the resignation of a director is subject to the approval by the Board. 160.I am in no doubt that the refusal by the Board to accept the resignation of Yin was related to the ENA issue. Neither Wang nor Lee was willing to let Yin resigned without having that matter resolved. 161.There was a meeting of the Board on the next day, 13 November 2008. It was chaired by Wang and Yin did not attend that meeting because he was away. The minutes of that meeting recorded Lee to have said that the profit of about RMB18 million “shouldbelong to the seller”. This was apparently said in the course of discussing the outstanding receivables. It was suggested that the RMB18 million would be used to offset part of the receivables. 162.Lee explained in XX that the words “according to the Chairman” ought to be inserted into the minutes as he was simply stating what Wang had told him prior to the meeting. I have no doubt that Wang had indeed told Lee that the ENA belonged to the seller (see para 126 above). However, there were too many instances where Lee simply acted in accordance with someone’s instructions. It is a convenient, but not credible, excuse. Lee was the CEO of the Company and an experienced professional. It is unlikely that he would have conducted himself in the way he has tried to portrait. 163.On Lee’s own evidence, what he told the Board was preceded by the communication between him and Wang. I bear in mind that the meeting on 13 November 2008 was close to the deadline (see para 119 above) by which the receivables issue would have to be resolved by Wang. The weight of the evidence suggests that Lee was alive to the fact that Yin had not agreed to the MUA at that time and hence he only referred to what was said to him by Wang but not the MUA. 164.I have been referred by Mr Maurellet to a letter from Gordon Tsang’s solicitors dated 25 March 2010 written in reply to the enquiries of the SFC made in the course of its investigation into these matters. It was stated in the letter that after the board meeting of 13 November 2008 and prior to 1 December 2008 Tsang had made enquiry with Yin about the MUA and the latter had confirmed the existence of same. I am not inclined to rely upon this piece of evidence. Apart from the fact that such evidence has not been tested in XX, I believe that Tsang might have a selective recollection in these matter because of his own involvement (see paras 157 and 158 above), albeit that he had played no major role. 165.In respect of the proposal to pay the ENA by way of director’s remuneration, the evidence is not entirely clear as to why it was abandoned eventually. However, Lee’s evidence is that he objected to it in strong terms when he was told about it because it was unreasonable to pay Wang such a large sum when he had only been a director of the Company for a short time. According to Lee, he was told about this proposal at a tripartite meeting attended by him, Yin and Wang. This is probably what Yin referred to as the “third meeting” (see below). However, Lee thought that this meeting took place at the end of November 2008. For reason explained below, I believe that Lee is correct on the timing. 166.According to Yin’s evidence, he met with Wang for the second time in late November 2008. In this meeting, Yin reiterated his position that there was no MUA between them. But Wang was adamant that the ENA should belong to him. Also, during this meeting Wang represented to Yin that Lee had already agreed that any net assets in excess of RMB8 million at completion should belong to the seller. 167.I can well accept that this second meeting took place because Wang must be very anxious to resolve the receivables issue and there was still no agreed solution. On the other hand, I am not prepared to simply accept Yin’s evidence as to what transpired at that meeting. I do not find him to be a reliable witness and he clearly has a motive to be economical with the truth. 168.Before I set out Lee’s account of the “third meeting”, which I believe took place at the end of November 2008 as suggested by him, I should mention that Wang agreed that there was such a meeting, and when he was XX by Mr Maurellet in a leading manner he simply agreed to this part of Lee’s evidence. According to Lee, when he arrived at the meeting, Yin presented the director’s remuneration method, to which he objected. Yin justified his position by stating that there was no MUA or words to that effect (Yin’s evidence is that they were not using those technical terms in their conversations). At that stage, Lee felt that Yin wanted to give the money back to Wang, but did not want to do it through the MUA method. Lee left after saying that Yin did not need to sign [the LC] if there was no such MUA, but Yin should consider whether to sign if there was. 169.Yin’s evidence concerning this meeting is not impressive. It was put to him in XX that Lee did not refer to any mutual understanding at the meeting, to which he replied that Lee did. The following up question on what was said by Lee produced the following account: “To the best of my recollection, [Lee] said that that he knew I had meeting with Wang. I interjected and said: “Kenny, I had no such understanding between myself and Wang.” He then said: “Yeah, yeah, yeah, right!” Then I said: “Wang agreed the matter should be referred to [SFC] for advice.” The rest of the conversation was about how to refer the matter to SFC and what would be their reaction.”. Yin eventually agreed that Lee did not refer to any mutual understanding at that meeting. 170.I am not inclined to accept either the account of Lee or that of Yin as telling the whole truth. However, it is common ground that Yin said at this meeting that there was no MUA. In all likelihood, the three of them were there to discuss how to resolve the issue of ENA so that the money might be used by Wang to set off against the outstanding receivables. Equally likely, Wang was putting pressure on Yin and Lee. 171.It is undisputed that on 5 December 2008, the LC was signed by the Respondents. They must have struck an agreement on the MUA before that day. I believe it is likely that the agreement was struck at the “third meeting” because of the next event. 172.There was an internal e-mail dated 1 December 2008 from Jonathan Lai of HLB (the Company’s auditors) to his colleagues. It has been referred to in para 25 above. 173.Although the reliability of this document is challenged by Yin, I do not believe that the accuracy of what was recorded can be seriously questioned because this e-mail was followed by one from Cheng issued to the Board on the same day at 15:03, attaching an agenda for a special board meeting to be held on the next day. That agenda referred to the meeting “held at the request of [Yin]” who would clarify that NAV in excess of RMB8 million belonged to the seller (see para 26 above). 174.The 1 December 2008 e-mail from Jonathan Lai helps to put a date to the “third meeting”. Indeed, that e-mail referred to a meeting between Yin and Wang the day before. 175.When Yin was XX on this e-mail, he acknowledged the existence of the phone conversation and said, inter alia, that he agreed to the additional dividends to GoHi on the basis of an understanding between Lee and Wang. Hence, the dispute can only be confined to what was said by Yin in this conversation with Lai. Lai was a professional man who had no personal interest at stake. He was making a report to his colleagues about 1 of their clients. I believe that the contents of Lai’s email are likely to be accurate. 176.There is a wrinkle in the sense that the agenda referred to the money belonging to the seller. There was an advice by Ho some time ago that this was not a permissible treatment (see para 21 above). It is not possible to resolve all the twists in the evidence. It is unlikely that the agenda was prepared by Yin or Lee (Cheng was properly the author). Hence, the reference to the ENA belonging to the seller might be attributable to a misunderstanding by the person who prepared the agenda. 177.However, the special board meeting was not held. There is a document from Helen Young (the assistant company secretary) sent at 16:39 on 1 December 2008 to the directors informing them of the cancellation of that meeting. There is no clear evidence as to why the meeting was cancelled. 178.There is a handwritten file note from AHA which is said to record a meeting between Yin and Ho during which Yin confirmed his agreement to the distribution of dividends and to sign the LC. The contents of this document are contentious and I am not inclined to rely on it because of the cryptic nature of the notes. 179.On 4 December 2008 at 17:22 Yin sent an email to Wang attaching a Letter of Indemnity for his comments. That document aimed to provide Yin with an indemnity from the Company and Wang in return for his signature on the LC over, inter alia, any claims by the SFC. Further, under the document the Company undertook to obtain a no objection confirmation from the SFC in respect of the distribution of dividends to Wang. 180.It is true that the Letter of Indemnity was not eventually executed but self-evidently it provides an important insight to Yin’s state of mind at the time. He certainly was not comfortable about signing the LC. 181.On 4 December 2008 at 18:58, Cheng sent an email to Yin stating that she would submit the CA to the SFC after he had signed the LC and the Written Board Resolution (“WBR”). 182.Yin replied by e-mail the next morning. He asked Cheng to ensure that the Company obtained a no objection confirmation from the SFC over the CA and the distribution of dividends. He stated that “This was what [Wang] agreed and undertake”. It may well be true that in the course of persuading Yin to agree to signing the LC Wang had made such promises to him. 183.Yin’s reply was followed by an email from Cheng to him dated 5 December 2008 attaching for his information and signature a copy of the LC, WBR and CA. 184.After Yin received the documents from Cheng, he replied to Cheng on the same day stating that he did not have any objection to signing the LC on behalf of the Company but that he would not sign on behalf of Aceview since he was no longer its director. Yin said in XX that it was bothering him that Lee was not signing the LC. There is a ring of truth to this evidence of Yin. More likely than not, he wanted Lee to put his name on the LC when he was a party to this agreement on the MUA. 185.After the signatory for Aceview was changed to Lee on the LC, Yin signed on it as well as the WBR which were returned in an e-mail to Cheng on 5 December 2008. In addition to those 2 documents, Yin also enclosed his letter of resignation from the Board and a written resolution of the Board in respect of his resignation pre-signed by him. In the latter document, the date on which his resignation would take effect was left blank. It is, however, common ground that such resignation took effect on 9 December 2008. 186.It is significant that Yinwas the first person to sign on the documents. He led the negotiations over the Acquisition and it could be expected that the Board would not have agreed to the MUA without his confirmation. 187.The CA was published by the Company on 16 December 2008. It should be pointed out that it differed with the version sent to Yin on 5 December 2008 in that there was material expansion in the contents of the final version. However, that difference does not affect the substance of SFC’s case against Yin. The MUA was referred to in both the version sent to Yin and in the final version in largely identical terms. No credible explanation by Yin or Lee 188.The above analysis of the critical events based on the contemporaneous documents demonstrates a strong case against both Yin and Lee on their involvements on the non-existing MUA. There is no credible evidence to counter the adverse inference to be drawn on the documents. Indeed, neither of them had any credible answer to the most basic probing questions. 189.Yin and Lee both allege that they were convinced by the other that there was a MUA. However, both of them maintain that they had no discussion with each other about the MUA. This is simply unreal. It is inconceivable that an honest director, aware of the terms of the Agreement, would have failed to take the most elementary step in finding out about the MUA before agreeing to put his name on the LC. 190.Yin’s evidence is that he was told by Wang at the “second meeting” that Lee had agreed that net assets in excess of RMB8 million belonged to the seller. However, he did not ask Lee why he so agreed. This is all the more incredible given the fact that Yin was the leader of the negotiation team representing the Company in the Acquisition and he agreed in XX that any agreement over any material term of the Agreement would have involved him and Wang. The failure to make enquiries with Lee can only be explained by Yin’s attempt to shift the responsibility over the MUA to Lee and Wang. 191.Further, when asked to explain what opportunity there was for Lee to reach an agreement with Wang without his knowledge, Yin gave the following answer :
192.Yin was clearly struggling with his evidence. It cannot be the evidence of an honest director with Yin’s sophistication. 193.Mr Scott sought to make a point about the timing of the MUA. It was said that according to the LC (see para 35 above), the MUA might have been reached after the Agreement was made but before completion of the Acquisition. I see no substance in this forensic point. Yin had agreed in XX that any agreement reached after the conclusion of the Agreement carried no legal effect. 194.During XX, Lee was asked to explain why he did not contact Yin at all to confirm whether there was a MUA between him and Wang. He proffered two reasons – (i) he was busy dealing with the financial tsunami and (ii) Yin was angry with him for supporting Zhang as a nominee for director of the Company. None of these explanations is acceptable. However busy Lee was with the stock market during the trading days, it closed each day at 4 pm. However reluctant Lee was to deal with this matter, in October 2008 Wang had approached him and presented him with that problem. Consequently, on Lee’s own evidence, he was spending time to deal with it. Regarding the alleged fallout with Yin, Lee accepted that there was nothing to prevent him from approaching or calling Yin. 195.This was plainly an important matter to the Company and to Lee as its CEO. No honest director would have failed to act as alleged by Lee. The alleged non-action on Lee’s part is all the astounding when, on his own evidence, he was told by Yin that there was no MUA. It is unbelievable that Lee would have done nothing to find out why Yin had changed his mind within days. I have no hesitation in rejecting Lee’s case that he signed the LC because of Yin’s signature on that document. He must have either struck an agreement with Wang and Yin to distribute the ENA to Wang by using the non-existing MUA as the reason or, at best, he deliberately turned a blind eye to the dishonest agreement between Wang and Yin. I believe that the former is the more likely. The latter behavior is equally dishonest in accordance with the combined objective and subjective test: see Twinsectra Ltd v Tardley [2002] 2 AC 164 at 172D. 196.Finally, both Yin and Lee argued that they had no personal gain in the matter and it is a matter which should be taken into account in assessing their evidence. Whilst there is no evidence of any personal gain, I am not convinced that there was no reason for either Yin or Lee to accede to Wang’s request for help or to yield to the pressure from him. 197.Yin said in his evidence that the main profit of the Company came from First China Investment which was acquired from Wang, and he was sympathetic to Wang so much so that he looked for ways to help him out. Further, given that Yin remained a substantial shareholder of the Company, there clearly were good reasons for him to retain a good relationship with Wang. 198.The same may be said about Lee. He was the CEO and one of two executive directors of the Company (Wang was the other one). It is likely that he felt more pressure in maintaining a good relationship with Wang. 199.The evidence on this motive point is well-balanced, and it is not an important matter in my assessment of their evidence. 200.It has been emphasised by Mr Scott that this court should not lightly come to a finding of dishonesty against a professional person, and that the court should guard against being too wise after the event: see Re Living Images Ltd [1996] 1 BCLC 348 at 355f-6c. I have indeed given careful consideration to the evidence. I am in no doubt that both Yin and Lee had acted dishonestly in respect of the MUA, and the SFC has proven its case against all the Respondents. 201.I should also mention that Mr Scott has made submissions about the adequacy of the Petition. With respect, I see nothing in the complaint and I agree with Mr Manzoni that the case against the Respondents has been pleaded adequately and fairly in the Petition. 202.Both Mr Scott and Mr Maurellet have fairly accepted if the court finds that Yin and Lee knew that there was no MUA, then liability should follow. I hope that I can be forgiven for not adding to the length of this judgment by dealing with the details concerning the beaches of director’s duties and the various elements of s 214 of the Ordinance. They are not dispute in light of the foregoing findings. 203.I am quite satisfied that by putting forward a non-existing MUA each of the Respondents is, self-evidently, in breach of their duties as directors which have been identified in paragraphs 43 and 45 above. I am equally satisfied that the affairs of the Company had been conducted in a manner (a) oppressive to its members or any part of the same; (b) involving defalcation, misfeasance or other misconduct towards it or its members or part of its members; (c) resulting in its members or any part of its members not having been given all the information with respect to its business or affairs that they might reasonably expect; and (d) unfairly prejudicial to its members or any part of its members. 204.For completeness, Mr Manzoni has submitted that the falsity in the CA went beyond the MUA. It may be said that this is so in light of the findings made herein. On the other hand, the point(s) add little to this case. Indemnity provided to Wang and Lee by the Company 205.Before concluding this judgment, I should mention 1 matter of considerable concern to this court and the SFC. It was revealed shortly before the close of the evidence that by a written resolution dated 13 January 2013 (“Resolution”), the Board agreed to provide an indemnity (“Indemnity”) to Wang and Lee in the following terms :
206.It is right to point out that the Resolution was passed by 4 INEDs and 1 non-executive director with Wang and Lee having abstained from voting. 207.The Indemnity is plainly inappropriate. Any liability on the part of Wang and Lee which arises from the Petition must be on the basis that the Company has been wronged. Likewise, costs claimed by SFC against them must be on the same basis. Further, there is no undertaking by Wang or Lee to repay the costs paid by the Company on their behalf in the event that their defence is rejected by the court. 208.I regret to say that the Indemnity is a very poor reflection of the corporate governance exercised over the Company. 209.Recognising that the Indemnity cannot stand, Wang and Lee have either repaid or are in the course of repaying the legal costs paid on their behalf by the Company, and they have undertaken not to rely on the Indemnity. Conclusions 210.Given the establishment of liability under this Petition on the part of the Respondents, 2 primary relief are sought by the SFC – disqualification under s 214(2)(d) of the Ordinance and payment of compensation to the Company. 211.In respect of the latter, the parties are in agreement on para 4 of the draft order provided by the SFC (“Draft Order”) save that the interest should run from 19 December 2008. However, I should note that there is also consensus that Wang should bear primary responsibility over this compensation because, on the evidence, he is the only person who had benefited from the distribution of dividends in question. 212.Paragraphs 5 to 10 of the Draft Order deal with the Indemnity. I agree with Mr Manzoni that they are justified due to the need for the SFC to be fully informed about the measures to nullify the same. I order accordingly save that the reference to Yin in para 6 should be deleted. 213.I also make an order in terms of para 11 of the Draft Order about the publication of an announcement on, inter alia, the findings of this court in respect of the MUA. 214.In respect of the disqualification of the Respondents, it is agreed by the parties that the issue should be dealt with after the handing down of this judgment. I direct that a half day hearing be fixed to take place as soon as possible to resolve that matter. In the premises, paras 1 to 3 of the Draft Order will await the outcome of that hearing. 215.I make a costs order nisi in terms of paras 12 and 13 of the Draft Order. In respect of the costs of the Company, I see no reason why it should bear its own costs in light of the findings made herein. However, I agree with Mr Wong that the attendance of Counsel for the Company during this trial can be reduced in light of the level of the Company’s partition. I make an order nisi that half of the Company’s costs be paid by the Respondents jointly and severally to be taxed if not agreed. 216.Last but not least, I am grateful to counsel for their assistance in these matters.
Mr Charles Manzoni SC and Mr Norman Nip, instructed by Securities and Futures Commission, for the petitioner Mr John Scott SC and Mr John Hui, instructed by Robertsons, for the 1st respondent Mr Jose Maurellet and Mr Justin Lam, instructed by Boase, Cohen & Collins, for the 2nd respondent Mr Anson Wong SC and Mr Benny Lo, instructed by Sit Fung Kwong & Shum, for the 3rd respondent Mr Adrian Leung, instructed by K C Ho & Fong, for the 4th respondent [1] There is controversy concerning Lee’s role in respect of the Board Paper. [2] This is apparently a translation of the Chinese name of First China Investment. [3] See para 12 above, “Dividends”. [4] One of the directors of the Company. [5] Helpfully, each of the opening submissions of the Respondents contains a summary of his case which is set out herein with modifications. [6] Mr Scott contended that there are 2 documents the contents of which are unclear, and that no weight should be attached to at least 1 of them. These documents will be addressed below. [7] The overall legal burden of proof in these proceedings rests of course on SFC. [8] The rest of the e-mails in this chain were all copied to them unless stated otherwise. |
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