Lee Sing Leung Robin v. Luk Wing Kwong Quintin

HCA 1890/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1890 OF 2010

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JUDGMENT

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Background

1.In this case, Mr Lee Sing Leung (“Lee”) claims damages from Mr Luk Wing Kwong (“Luk”) in the sum of $88,317,369.90, which he claims represents the damages sustained by him as a result of Luk’s breach of contract and/or breach of fiduciary duties Luk owed to him.

2.According to the Amended Statement of Claim filed in these proceedings, Lee relies on 2 loan agreements allegedly made between Luk and himself in July 2008 and August 2008. The 1^stLoan was allegedly for $15 million which Luk orally agreed to lend to Lee, on terms that it was to be made available to Lee in July 2008, to be repaid within 6 months, with interest in the sum of $1 million to be payable quarterly, and secured by 500 million shares of a listed company Grand TG Gold Holdings Limited (“Company”). According to Lee, Luk paid a total sum of $7.5 million into Lee’s share margin account maintained with Sun Hung Kai Investment Services Limited (“Share Account”) in July and August 2008, and Lee procured the transfer of 300 million shares of the Company to Luk, all pursuant to the oral loan agreement. It is not in dispute that Lee was not able to procure the transfer of the remaining 200 million shares of the Company to Luk, as agreed, and as a result, Luk did not advance the balance of the 1^stLoan (of $7.5 million) to Lee. The parties instead entered into an agreement for the 2^ndLoan, or so Lee alleges.

3.According to Lee, under the new agreement in respect of the 2^ndLoan, Luk was to advance a total sum of $19.5 million to Lee, comprising the $7.5 million already paid as part of the 1^stLoan, with interest to be paid by Lee at 20% per annum, and to be secured by a convertible bond of the Company (“Bond”) of the value of $90 million. The Bond was issued by the Company on 30 April 2008, due in 2013, the holder of which was entitled to convert the Bond into ordinary shares of the Company (“Shares”) in accordance with the terms of the Bond.

4.What cannot be disputed is that on 29 August 2008, Lee and Luk executed a Loan Agreement in writing (“Loan Agreement”), an Escrow Agent Agreement (“Escrow Agreement”) and a deed of Charge over the Bond (“Charge”), all dated 29 August 2008. These documents (“Loan Documentation”) were all prepared by lawyers instructed by Lee and Luk respectively. It is not disputed that after execution of the Loan Documentation, the parties also signed a Supplemental Loan Agreement, whereby a new clause 9 replaced clause 9 of the Loan Agreement, dealing with the service of notice requiring remedial action to be taken by the borrower in the event of non-payment of any interest on its due date.

5.On Lee’s pleaded case, he claims that before the execution of the Loan Documentation, Luk demanded that 300 million shares of the Company should be provided by Lee as additional security for repayment of the 2^ndLoan. He agreed, and further agreed to provide an additional 40million shares of the Company as further security.

6.According to the Amended Statement of Claim, Luk was to make available to Lee the sum of $11,016,986.44, comprising the principal amount of the 2^ndLoan ($19.5million), less the principal amount of the 1^stLoan ($7.5 million), and the 1^stinstallment of interest payable in respect of the 2^ndLoan (of $983,013.56). Lee claims that in breach of contract, Luk only paid $8,060,000 into his Share Account on 29August 2008, and failed to pay Lee the balance of $3 million. Lee further claims that upon his demand for the balance, it was agreed that Lee should pay a sum of $60,000 to Luk “as partial repayment of the 2^ndLoan”. According to Lee, he made the deposit of $60,000 on 1September2008, and procured 40 million shares of the Company to be transferred to Luk as security, but Luk failed to advance to him the balance of the 2^ndLoan, in the sum of $3million.

7.It is not disputed by Lee that he failed to make payment of the second or any further installment of the interest payable under the Loan Agreement. On 11 May 2009, Luk wrote to Lee to demand payment of all interests in arrears within 14 days. On 1June 2009, Luk notified Lee that he would exercise his rights over the Bond under the Loan Documentation, and thereafter, the Shares were converted under the Bond, and sold.

8.In the Amended Statement of Claim, Lee initially complained that Luk was in breach of the Loan Agreement and the Charge, in failing to serve a remedial notice as required before Luk exercised his rights under the Charge. It was only at the commencement of trial that this claim was (sensibly) abandoned. Lee maintains, however, that Luk was in breach of contract in failing to make the balance of the 2^ndLoan ($3 million) available to him, and that accordingly, Lee had no right to exercise his rights under the Charge, or the Escrow Agreement, to realize the Bond, or to sell the Shares of the Company. Lee claims that as a result of Luk’s breach, he sustained damages of $88,317,369.90, which was based on the face value of the Bond and the value of the 340million Shares of the Company, less the monies actually advanced by Luk, the interest payable by Lee in respect of the 2^ndLoan, and the only payment of interest he made on 23 December 2008 (in the sum of $350,000).

9.Such is Lee’s case, in gist.

10.Luk denies Lee’s claim of an oral agreement for a loan of $15 million to Lee. On Luk’s case, he agreed to lend $6,000,000 to Lee in July 2008, repayable in 6 months, with interest at 10%, to be secured by 500 million Shares of the Company. He made the advance as agreed by 2payments on 8 and 17 July 2008, but Lee was unable to provide the 500million shares as security. Lee proposed other terms of the loan instead, and Luk ultimately advanced further sums of $1.5 million, $3.04million and $8.06 million in August 2008. According to Luk, a total sum of $18.6 million was accordingly lent to Lee, at his request, and it was agreed that the Loan Documentation should be prepared for execution. Lee agreed to pay interest for the loan at 20% per annum, which interest was to be payable in advance, quarterly.

11.The Loan Agreement stipulates the principal amount of the loan to be $19.5 million, to be repaid by 29 August 2009. Interest is stated (in clause 3) to be payable in advance on 29 August 2008, 29November 2008, 28 February 2009 and 29 May 2009. On Luk’s evidence, interest on the total advance of $18.6 million which he had already made, at 20% per annum, amounts to $930,000 per quarter, but Lee also had to borrow from Luk the $930,000, which was the 1^stinstallment of interest payable on the execution of the Loan Agreement on 29 August 2008. Hence, quarterly interest on $930,000 (in the sum of $46,500) was included, with the advance of $18.6 million already made by Luk to Lee, in the calculation of the principal amount of the loan ($19,576,500), but rounded up to $19.5 million.

12.On Luk’s case, the only security for his loan to Lee was the Bond, as evidenced by the express terms of the Loan Agreement, the Charge and the Escrow Agreement. Luk denies that the 340million Shares of the Company were accepted by him as security for his loan to Lee. He claims that these were the shares transferred to him as reward for financial services which Luk had provided to Mr Chan Hing Yin (“Chan”), the former chairman and majority shareholder of the Company and a friend of Lee, pursuant to an arrangement between Chan and Lee, since Lee was also indebted to Chan. There is no dispute that the Loan Documentation makes no mention whatsoever of the 340 million Shares of the Company as security for the loan.

13.The Bond was charged by Lee to Luk under the Charge. The Bond certificate and instruments of transfer (“Escrow Documents”) were deposited by Lee with the escrow agents under the Escrow Agreement, clause 2.2 (A) of which provides that the Escrow Documents shall be released to Luk upon receipt of a written notice signed by Luk confirming that Lee had defaulted in repayment under the Loan Agreement. By letter dated 14 April 2009, Luk notified the escrow agent under the Escrow Agreement, pursuant to clause 2.2 (A), that Lee had defaulted in payment under the Loan Agreement, and instructed the release of the Escrow Documents to him. The letter was copied to Lee. On 11 May 2009, Luk’s solicitors wrote to Lee to demand payment of the interest installments due for payment on 29 November 2008 and 28February 2009, and notified Lee that in default of payment of the interest in arrears, Luk would exercise his rights under the Charge and enforce the security. On 1 June 2009, Luk’s solicitors further notified Lee that since Lee had failed to take remedial action despite the happening of an event of default, Luk would forfeit the Bond and apply for the Bond to be transferred to Luk.

14.Despite these notices in writing, Lee did not raise any complaint with regard to Luk’s alleged breach of the Loan Agreement. Instead, by letter dated 14 April 2010, Lee acknowledged through his solicitors that an event of default had occurred, that Luk had exercise his rights pursuant to the Loan Documentation, and that Luk’s rights under the Loan Agreement were not disputed. He only pressed for information as to the amount Luk claimed to be due from him, asserted that Luk’s rights were limited to the extent of recovering the total outstanding loan due from him, and not more, and further claimed that Luk had to realize the Bond at the best selling price.

15.In his Defence, Luk alleges that the claims made by Lee in this action on the basis of the 2^ndLoan have in any event been settled and compromised, by agreement reached between Lee and Luk in August 2010 (“Settlement Agreement”), as part of a global settlement of HCA 790/2010 issued by Luk against Lee and HCA 922/2010 issued by Lee against Luk. By virtue of such full and final global settlement, Luk claims that Lee is not entitled to pursue any further claims in respect of the alleged 2^ndLoan, and has further waived his rights to dispute Luk’s rights to deal with the security under the Loan Documentation.

16.Luk eventually realized a total sum of $22,666,657.66 from the exercise of his rights over the Bond and the sale of the Shares converted under the Bond. He claims that this amount is less than the sum due from Lee to him under the Loan Agreement. By way of counterclaim filed in these proceedings, Luk asserts that if Lee’s claims in relation to the alleged 2^ndLoan are not precluded by, and compromised under, the Settlement Agreement, he is entitled to a sum of $1,361,313.01, which is the balance of the amount due to him under the Loan Agreement.

The issues

17.As a result of the withdrawal of the claim relating to the lack of notice served under the Loan Agreement, the remaining issues for determination at trial are:

(1) Did the 340 million Shares form part of the security for Luk’s loans to Lee?

(2) Was Luk in breach of agreement in failing to advance a sum of $3 million to Lee?

(3) Did the Settlement Agreement reached in August 2010 settle the claims made in this action?

(4) Has Lee waived his rights to dispute Luk’s exercise of his rights under the Loan Documentation and to deal with the security?

(5) Was Luk in breach of fiduciary duty in failing to realize the Shares under the Bond at market value?

(6) If Luk was in breach of contract or fiduciary duty, is Lee entitled to recover his alleged loss and damage of $88,317,369.90, as claimed?

(7) If the Settlement Agreement did not settle the claims made in this action, is Luk entitled to the recovery of the balance of the loan he made to Lee, in the sum of $1,105,525.25?

18.In deciding factual disputes, the crucial considerations for the court include the inherent probability of the parties’ assertions, whether these assertions are consistent with the parties’ conduct and the contemporaneous documents (if any), and the credibility and demeanour of the witnesses.

19.In Esquire (Electronics) Ltd v Hong Kong and Shanghai Banking Corporation Ltd [2007] 3 HKLRD 439, at para 135, Stock JA stated the following for assessing factual evidence:

“Comparison with contemporaneous documentation is always an aid to reliability of oral testimony, unless there is reason to believe that the documentation is contrived or materially incomplete … The truth … can best be tested by reference to contemporaneous documentation where it exists, or to its absence where one would expect it to have been created, as well as to inherent probabilities … having regard to all the facts that are known. … This is not to say that the documentation should have been treated as if it stood on its own, not to be explained, contradicted or supported by oral testimony. It is however to say that in this case the approach adopted to assessment of the facts placed far too much emphasis on character impression and too little upon what was suggested by the documentation and by the inherent probabilities in their historical context.”

20.On assessment of the credibility of witnesses by reference to their demeanour, I have borne in mind the observations made by the courts in cases such as Ting Kwok Keung v Tam Dick Yuen (2002) 5HKCFAR 336, where Bokhary PJ explained, at p 348:

“It is common to speak of a trial judge’s advantage of having ‘seen and heard’ the witnesses…. the words ‘seen and heard’ are perhaps capable of giving an exaggerated impression of the role which demeanour plays in the resolution of disputes of fact - demeanour being, as Lord Pearce put it in Onassis v Vergottis [1968] 2 Lloyd’s Rep 403 at p 431, ‘mostly concerned with whether the witness appears to be telling the truth as he now believes it to be’. (Emphasis supplied)

Having said that about demeanour, I should make it clear that I accept that trial judges are entitled to take demeanour into account when assessing testimony. In life what really happened is not always what afterwards seems objectively probable. So demeanour has a role to play. Of course trial judges must bear in mind that demeanour can be deceptive and is therefore to be approached with care. In general, I would trust them to do that. Unless good reason to think otherwise appears, trial judges should be taken to have considered demeanour with caution, doing so only in the context of such inherent probabilities as may exist and the whole of the evidence.

It can of course happen that neither rival account is appreciably more inherently probable or improbable than the other, and there may be little or no evidence other than the testimony of the protagonists, each with an interest to serve. In such a situation, there will be little or nothing for the fact-finding judge to go on apart from demeanour.”

21.In EPI Environment Technologies Inc & Anor v Symphony Plastic Technologies plc & Anr [2005] 1 WLR 3456, 3470-3471 at para74, Peter Smith J emphasized that it is essential to have regard to the entirety of a witness’s evidence. As he observed, witnesses can make mistakes, but the mistakes do not necessarily affect other parts of their evidence. Likewise, witnesses regularly lie. However, lies themselves do not mean necessarily that the entirety of that witness’s evidence is to be rejected. A witness may lie in a stupid attempt to bolster his case, but the actual case may nevertheless remain good irrespective of the lie.

22.I acknowledge and bear in mind that a standard of proof commensurate with the seriousness of the allegation is required, and that evidence to a very high standard of cogency is necessary, before a court would be justified in finding that a document has been forged, or that a party has committed an act which is tantamount to a criminal offence. Inferences of fraud and serious misconduct are not to be reached by conjecture, nor on a mere balance of probabilities. The inherent greater improbability of serious misconduct has also to be factored in, such that a party bearing the burden of proving the allegation should be required to do so with evidence of a commensurate cogency. (HKSAR v Lee Ming Tee & Securities and Futures Commission [2003] 6 HKCFAR 336, at paragraph 70-71)

23.I also bear in mind the importance of any undisputed or indisputable facts, and such facts as are recorded in contemporary documents or spoken to by independent witnesses.

Observations on the witnesses’ evidence

24.The loan transactions and dealings in this case involved amounts which cannot, by normal standards, be described as insignificant. Lee is an educated man, holding degrees in accounting and business management, with more than 25 years experience in banking, mergers and acquisitions, and financial services. He is not a simple street vendor of home-made lemonade, but an experienced and sophisticated businessman, and a director of a listed company. As a trained businessman in the financial sector, occupying an important post in a listed company involved in significant financial transactions, Lee cannot simply dismiss the numerous inconsistencies in his case, as reflected in the documents he filed in different legal proceedings, and in the evidence he has given in this action, by claiming ignorance of legal procedure, or by putting the blame on his former lawyers. I find it incongruous that Lee would not have appreciated the significance of written agreements, that he would be bound by the terms and effect of documents which he signs and by documents filed in court and issued by his lawyers, such that he must agree with the contents of such important documents.

25.Lee’s counsel has attacked the credibility of the evidence of Luk and Mr Kenneth Wong (“Wong”) (who gave evidence on behalf of Luk). Wong testified as to his knowledge of the dealings between Chan and Lee, between Chan and Luk, and what he was told of the Settlement Agreement. Notwithstanding Counsel’s submissions, there is no evidence whatsoever from which I should find that Wong had “ulterior motives” for assisting Luk, to the extent of coming to court to give false testimony and to perjure. Contrary to what counsel suggested, I find Wong’s evidence to be direct, forthright, and believable.

26.At the heart of the factual dispute between the parties in this case is the amount advanced by Luk to Lee at the latter’s request, and the purpose of the transfer of the 340 million Shares of the Company to Luk. The court has to decide whether the disputed sum of $3 million had been advanced by Luk, in the manner he claims, whether the 340million Shares were transferred by Lee to Luk as security for the loan (as Lee claims), or whether such transfer was totally unrelated to the loans but had been transferred to Luk as remuneration for his services separately rendered to Chan (as Luk claims). Luk was able to give consistent answers as to his calculations and treatment of the monies he had advanced to Lee. His case is supported by the contemporaneous Loan Documentation and the correspondence. It is also supported in part by the independent evidence of Wong. Even if I were, for any reason as suggested by Lee’s counsel, to ignore the entirety of Luk’s and Wong’s evidence, the burden remains firmly on Lee to establish to my satisfaction, on a balance of probabilities, that his claims made in this action in relation to the loans and the transactions are credible, and as he maintained. In my judgment, Lee has failed to discharge such burden.

Did the 340 million Shares form part of the security for Luk’s loans to Lee?

27.As Leading Counsel for Luk emphasized, the 340million Shares were never referred to in any of the Loan Documentation prepared by the lawyers, as being part of the security for the loan. There are comprehensive provisions in the Loan Agreement, in the Charge and in the Escrow Agreement, in respect of the Bond being the security for the loan, and how the security might be exercised by Luk in the event of default under the Loan Agreement. Counsel further pointed out that each of the Loan Documentation contains an entire agreement clause.

28.In the Amended Statement of Claim, Lee pleads that it was “shortly before the proposed execution of the Loan Documents” that Luk demanded for 300 million Shares of the Company to be provided by way of security for the loan of $19.5 million, and Lee himself then undertook to provide a further 40 million Shares as security. On Lee’s own testimony, the alleged 2^nd Loan of $19.5 million was agreed in early August 2008 and he and Luk had agreed to sign the Loan Documentation between early August and 29 August 2008. If the 340 million Shares had been agreed to be provided as security for the loan, I cannot comprehend, and Lee has offered no credible explanation, why he would not instruct his solicitors to make provision for that in the Loan Agreement. He accepted that there was sufficient time to do this.

29.It is particularly pertinent that the lawyers, no doubt with the parties’ approval and on their instructions, went into the trouble of preparing and having the parties execute a Supplemental Loan Agreement on the same day, after the signing of the Loan Agreement, to amend clause 9 and clarify and “reflect the parties’ true intention”, with regard to the happening of an event of default upon non-payment of the loan when due on the maturity date, and non-payment of the interest. (There had been no reference to non-payment of interest in the original clause 9 of the Loan Agreement.) It is totally improbable that Lee and/or Luk would fail to inform their lawyers, if their true intention and agreement had been for the 340 million Shares to be provided by Lee as security for the loan under the Loan Agreement, and equally improbable and incongruous that their lawyers would have failed to make express provision in the Loan Documentation with regard to the security of the 340 million Shares. Bearing in mind that the 340 million Shares were transferred outright to Luk on 18 August 2008, it would be necessary for the protection of Lee’s interest to have provisions made in the Loan Documentation, that such transfer was only to secure the non-payment of the loan, and that the Shares should revert to Lee in the event that the loan was duly repaid.

30.Luk’s evidence on the reason for the transfer of the 340million Shares to him is credible, and probable. Chan was not able to give evidence at trial, since he had passed away in June 2010, but Wong gave evidence to support Luk’s claim that the 340 million shares were transferred to Luk at Chan’s direction. Chan was at the material time the majority shareholder, chairman and a director of the Company. Chan, Wong and Lee were friends, and according to Wong, he had been told by Chan that he had agreed to give 340 million shares of the Company to Luk, in lieu of monetary payment, in return for services which Luk had rendered to Chan. Wong had also been told by Chan that as Lee was indebted to Chan, Chan had directed Lee to procure the transfer of the 340million Shares to Luk, in partial settlement of the debt Lee owed to Chan.

31.Not only was there no mention in the Loan Documentation of the 340 million Shares as security, in the letter dated 14 April 2010 issued by Lee before the commencement of these proceedings, there was no reference at all to the 340 million Shares, when Lee referred to the loan advanced by Luk, queried the amount claimed to be outstanding, and referred to the realization of the Shares under the Charge and the Bond. Since Lee was seeking an account of Luk’s realization of his securities, it is unbelievable that he would have failed to mention the 340million Shares if they had indeed been offered as security for the same debt.

32.In any event, Lee himself finally admitted and accepted, in the course of cross-examination, that the 340 million Shares were not in fact security for the alleged 2^ndLoan. On his evidence in court, the 340million Shares ceased to be securities, after they were replaced by the Bond when the Charge was executed. He claimed that he wanted to get the 340 million Shares back from Luk after the provision of the Bond, which was why he failed to mention the Shares to his lawyers. This incredible change of stance, hitherto never pleaded nor mentioned in his witness statement, is sufficient to dispose of his claim on this issue.

33.I reject Lee’s claim that the 340 million Shares form part of the security for the loan advanced by Luk.

Was Luk in breach of agreement in failing to advance $3 million to Lee?

34.None of the contemporary documents or correspondence refers either to Luk’s failure to advance $3 million (or any part of the loan referred to in the Loan Agreement), or to Lee’s complaint or demand for the alleged shortfall. In July 2010, Lee commenced HCA 922/2010 (“HCA 922”) against Luk (after Luk had commenced HCA 790/2010 (“HCA 790”) against Lee for $1,804,671.15 due in respect of a promissory note issued by Lee). In HCA 922, Lee relied on the same oral loan agreements made in July and August 2008, and the same Loan Documentation. In HCA 922, Lee sought (inter alia) declarations that the Loan Documentation are unenforceable on the basis that Luk was not a licensed money-lender, alternatively, that the interest rate charged exceeded 60% per annum, that the security he had offered for the loan was held on trust by Luk for him, and for an account of what was due from Luk to Lee. No reference, however, was made in HCA 922 that the loan stipulated in the Loan Agreement had not been advanced in full, or that there was a shortfall, or breach of agreement by Luk.

35.The claim made by Lee in these proceedings, that Luk is in breach of agreement and hence not entitled to exercise his rights to realize the security by selling the shares converted under the Bond, lacks legal basis. There has been no claim, and no pleading, that as a result of any alleged failure on Luk’s part to advance the alleged sum of $3 million, the Loan Agreement had been rescinded or in any way terminated as a result of such alleged breach. Apart from this, Lee in fact never disputed Luk’s exercise of his rights under the Loan Agreement, as acknowledged by Lee’s solicitors in their letter dated 14 April 2010, in which they unequivocally stated:

“We understand that Event of Default had occurred and you had exercised your rights pursuant to the above clauses (ie of the Loan Agreement, the Charge and the Escrow Agreement). While not disputing your said rights under the Loan Agreement, it is common ground that you were only entitled to request for the release of the proportion of the Charged (Bond) to the extent of recovering the total outstanding sum but nothing more ...”

36.On Luk’s part, he claims that the $3 million had already been advanced to Lee in mid-August 2008, by way of settlement of share purchases on Lee’s behalf. On his evidence, Lee asked for a loan in mid-August 2008 to purchase 160 million Shares of the Company. Luk agreed to help, but because he had already made several advances to Lee and there had been no repayment, Luk wanted to purchase the 160million Shares in his own name (instead of in Lee’s name), so that he (Luk) could be protected in some way. The cost of the purchase made on 19 August 2008 was $8,016,020. According to Luk, Lee orally promised to purchase the Shares back from Luk within a couple of days.

37.On Luk’s evidence, Lee then informed him that he had no money to purchase the Shares back from Luk. He suggested that Luk should keep the Shares for himself, but Luk refused. After some bargaining, it was agreed that Luk would keep the shares he had purchased for Lee, at a discounted price of $0.031 per share instead of the purchase price of $0.05 per share, and that the shortfall in value, of $3,040,000 ((0.05 - 0.031) x 160 million) would be treated as part of the loan under the Loan Agreement.

38.In cross-examination, Luk was queried as to why Lee would have agreed to such a discount, when the Shares were traded at the closing price of between $0.05 on 19 August 2008 and $0.079 on 29August 2008. I consider that Luk’s answers are credible. The Shares of the Company were listed on the GEM board. The volume of trading was not substantial. The closing price of the Shares had fluctuated between $0.019 (on 27 October 2008) and about $0.079 (on 29 August 2008). Luk claims that this $0.079 was the highest price of the Shares for a long time, and that the price of the Shares on the GEM board had fluctuated. Luk also explained that if he had indeed sold the entire lot of 160 million shares at the same time in one day, the price of the Shares would have been affected, bringing the price to even below $0.031. In any event, as Luk emphasized, it had never been his intention to purchase the Shares for himself, and he had made the purchase of $8,016,020 on Lee’s behalf and at his request, which justified the deduction in price if Lee could not subsequently repay Luk, and Luk had to keep the Shares.

39.On the whole, Lee has not been able to justify the payments and figures he relied upon and referred to in the Amended Statement of Claim. His assertion that he had to make a payment of $60,000 to Luk in partial repayment of the alleged 2^ndLoan, in exchange for the advance of the $3 million balance, simply defies logic and commercial sense. His cavalier attitude towards making claims, then withdrawing and revising them at whim, shows him to be an unreliable witness. Examples are the claims relating to the alleged security of 340 million Shares, the fact that he had agreed to the release of the Bond under the Escrow Agreement (yet claimed in the Amended Statement of Claim that Luk was in breach of the Loan Documentation), and the full and final settlement reached in August 2010 (referred to below). On balance, I prefer Luk’s evidence and reject Lee’s claim that there was a shortfall of $3 million, and that Luk was in breach of contract. I am satisfied, on the balance of probabilities, that the $3,040,000 was part of the loan advanced, in the manner asserted by Luk. Bearing in mind that the undisputed payments of the loan (totalling $15.56million) had been made into Lee’s Share Account, it is not improbable that Lee would have asked for a loan for the purchase of Shares, in the manner claimed by Luk.

Did the Settlement Agreement settle the claims made in this action?

40.Even if Lee had any claim in relation to the loans and the Loan Documentation, it seems clear to me on the evidence that these claims have been compromised and settled as part of the Settlement Agreement made between Lee and Luk in August 2010.

41.It is not disputed that Lee and Luk entered into negotiations for settlement, after HCA 790 and HCA 922 had been commenced. As a result, HCA 922 was discontinued, with no order as to costs, and for HCA 790, Lee made payment of a sum of $1.5 million by way of settlement of the claims made against him.

42.Although Luk claims that the parties had reached a global settlement in August 2010 in full and final settlement of the claims made in both HCA 790 and HCA 922, Lee denies this. He claims instead that although a Settlement Agreement was made, it was only agreed that in respect of HCA 922, a notice of discontinuance was to be filed, “pending further negotiations”, with no understanding that his claims were to be compromised in any way. Lee claims that it was understood that a fresh action can be brought by him to pursue his claims relating to the alleged 2^ndLoan and the breach of the Loan Agreement, in the event that he and Luk should fail (after further negotiations) to reach a settlement in respect of the claims made in HCA 922.

43.There is no evidence of any negotiations made or meetings held between Luk and Lee after the discontinuance of HCA 922 in August 2010, before these proceedings were commenced by Lee again, in December 2010. Lee made no such assertion in his witness statement. There was no demand for further discussions or negotiations in any letter issued before the commencement of these proceedings.

44.Lee claimed in court that he had made attempts, through Wong, to discuss with Luk the Bond and the Shares having been realized and sold. There is no reference to such attempts having been made by Lee in any of the pleadings and statements filed in court. Even if Lee was to be believed in this respect, it cannot be inferred from his purported attempts to arrange meetings with Luk to discuss the price at which the converted Shares had been sold, that these were necessarily the further negotiations on Lee’s claims in HCA 922, and which Lee claims to be the purpose of discontinuing HCA 922. In any event, Wong denies that Lee had approached him to arrange discussions with Luk on HCA 922 and the claims Lee made therein.

45.Lee and Luk were both represented in the proceedings and in the negotiations in August 2010. Luk relies on the notes of the meeting held in August 2010, prepared by his solicitor in this action, Mr Ho, and by Mr Pang who was involved in the preparation of the Loan Documentation. Their attendance notes record that Luk had agreed to settle HCA 790 and HCA 922 against Lee’s verbal undertaking not to start any new action against Luk relating to their loan transactions and the Bond, and that Luk had taken Lee’s word that Lee would not sue Luk again.

46.Ultimately, Lee accepted in cross-examination that the meeting held on 4 August 2010 was for a global settlement of both HCA 790 and HCA 922. He accepted that HCA 922 was bought by him for the purpose of gaining “bargaining chips” in his negotiations with Luk to settle the claims made by Luk in HCA 790. This is logical. Lee further admitted that he was the one who suggested having the meeting on 4August 2010, and that the purpose of the meeting was to discuss the settlement of both actions. Against this background, and bearing in mind that as a result of the settlement meeting, Luk agreed to accept a discounted sum of $1.5 million in settlement of his claim against Lee under a promissory note, it is illogical and defies common sense that Luk could have agreed to Lee’s discontinuance of HCA 922, on the basis that Lee would be able to revive the claims he made in relation to the alleged 2^ndLoan and the Loan Documentation. It also defies common sense for Lee to have agreed to discontinue HCA 922 altogether, if the object was to negotiate further on the action and the subject matter of the action. Again, it is pertinent to note that Lee was not an ignorant litigant acting in person. He was advised and represented by lawyers in the proceedings and in the negotiations. As prudent and seasoned commercial men, it is highly improbable that the Settlement Agreement was not a global, full and final settlement of both HCA 790 and HCA 922, as Lee ultimately had to accept in court.

47.I conclude that Lee and Luk had, by the Settlement Agreement, settled all the claims made in HCA 790 and HCA 922, which included Lee’s claims in relation to the alleged 2^ndLoan and his claims under the Loan Documentation.

Has Lee waived his rights to dispute Luk’s exercise of his rights under the Loan Documentation and to deal with the security?

48.Apart from the Settlement Agreement, Lee had clearly through his solicitors by letter dated 14 April 2010 unequivocally acknowledged that an Event of Default had occurred under the Loan Documentation, that Luk had exercised his rights pursuant to the Loan Documentation including the Charge and the Escrow Agreement, and that Lee did not dispute such exercise of Luk’s rights. Prior to the letter, Lee had received Luk’s letter to the Escrow Agent seeking the release of the Escrow Documents to him upon Lee’s default in payment under the Loan Agreement. He had also received the letter from Luk’s solicitors of 11May 2009, demanding payment of the interest in arrears, and he was notified that unless the interest due was paid within 2 weeks, Luk would be exercising his rights under the Charge and the Escrow Agreement to enforce the security. Lee never raised any complaint or objection in relation to these letters. He accepted in court that he had agreed to the release of the Escrow Documents in April 2009.

49.I find without hesitation that Lee had clearly waived any rights which he may have had to dispute Luk’s exercise of rights under the Loan Documentation, and Luk's right to deal with the Bond comprising the security under the Loan Documentation.

Was Luk in breach of fiduciary duty in failing to realize the Shares under the Bond at market value?

50.It is clear that a mortgagee or chargee is entitled to act in his own interests in deciding whether to sell his security, and when to do so (China and South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536 (PC), 536F-G). In the exercise of his power of realising the Bond by sale of the Shares converted under the Bond, Luk is not a trustee for Lee. No evidence has been adduced in this case to support the claim that Luk had realised the Bond, or sold any part of the Shares, below their market value at the time of sale (in August 2009, April 2010 and July 2010), apart from Lee’s assertion that the face value of the Bond is $90 million. The amount realised under the Bond was $22,906,007.06.

51.The value of the Bond is relevant to the issue not only of whether Luk was allegedly in breach of fiduciary duty in realizing the Shares at undervalue, but also to the next issue of whether Lee is entitled to recover his damage of $88.3 million as a result of Luk’s alleged breach.

52.The Bond may have a face value of $90 million but this cannot be taken to represent the value of the Shares converted, at the date of the realisation of the Bond or the sale of the Shares. Nor can the face value of the Bond be taken to be the true value of the Bond at the relevant time, since this depends on the value of the Shares which may be converted under the Bond, the terms of the Bond, the date of its maturity, and the time when the Bond can be realized. Lee himself acknowledges this, in his pleading filed in proceedings instituted by J Thomson Asset Investment Limited (“J Thomson”) against Lee. J Thomson was in fact at all material times the registered holder of the Bond which was offered by Lee to Luk as security under the Loan Documentation. The proceedings instituted by J Thomson against Lee were for indemnity of the damage sustained by J Thomson as a result of its provision of the Bond as security for Luk’s loan to Lee, and the Shares having been sold as a result of Luk’s realization of such security.

53.In the J Thomson proceedings, Lee himself disputed J Thomson’s entitlement to use the face value of the Bond as the basis of J Thomson’s claim of damages. In his Defence filed in HCA 1023/2011 (the J Thomson proceedings) in January 2012, Lee pleads (in paragraph6(1)):

“(d) The maturity date of the Bond is 30 April 2013.

(e) The Bond’s holder has the right to convert the Bond into shares of the Company in accordance with the terms and conditions particularized in the certificate.

(f) The face value of the Bond is HK $90 million which only represents the value that the holder could receive on the maturity date.

(g) Due to the volatility of the Growth Enterprise Market on which the Company was listed and the persistently depressing market price of the Company’s shares below the conversion price at which the Bond could be converted into the Company’s shares during that period of time, the Bond with a face value of $90 million was only valued at a discount to its face value; therefore it was used as a security for the loan (in the amount of $19.5 million).

(h) The actual or true market value of the Bond at any point of time depends on many factors. The market price of Company’s shares into which the Bond could be converted is one of the important factors affecting the actual or true market value of the Bond.

(i) On 30 April 2008, the closing price of the Company’s chair was approximately $0.275. The Company’s share price dropped between April 2008 and August 2008. In August 2008, the Company’s share price was approximately in the range of $0.048 to 0.103. In April 2009, the Company’s share price was approximately in the range of $0.035 to $0.049.

(j) On or about 4 May 2009, the Company made a 1 for 4 share consolidation.

(k) The Company’s share price dropped between May 2009 and November 2010. In May 2009 after the share consolidation, the Company’s share price was approximately in the range of $0.116 to $0.199. In May 2010, the Company’s share price was approximately in the range of $0.080 to $0.100. In October 2010, the Company’s share price was approximately in the range of $0.069 to $0.084.

(l) Since 11 November 2010, the trading of the Company’s share in the Hong Kong Stock Exchange has been suspended. The last closing price was $0.072.

(m) By reason of the facts and matters pleaded in paragraph 6 (1) (a) to 6 (1) (l), the actual or true market value of the Bond at all material times were worth less than its face value of $90 million.” (emphasis added)

54.Lee’s own pleading, set out above, shows clearly that the assertions made in this case, that he is entitled to damages on the basis of the face value of the Bond of $90 million, are without basis and known by him to be so, and are made recklessly and irresponsibly, to the extent of constituting an abuse of court process.

55.In the Amended Statement of Claim, Lee pleads that the value of the Shares of the Company as at 15 April 2009 was $15,640,000. 15 April 2009 was the date when Luk gave instructions to the Escrow Agent to release the Escrow Documents to Luk. This date is irrelevant for the purpose of assessment of damages for breach, since Luk only purported to exercise his rights to enforce the security under the Loan Documentation after the date of the notice issued by his solicitors on 11May 2009, requiring payment within 14 days. A portion of the shares under the Bond were sold by Luk under his agreement with Mizar Limited dated 1 August 2009, for completion in December 2009. The balance of the Shares under the Bond were converted on 3December2009, and sold between April and July 2010. Lee has acknowledged that he had agreed to the release of the Escrow Documents to Luk, as instructed in April 2009. Even if, as Lee initially claimed, the release of the Escrow Documents in April 2009 constituted a breach of the Loan Documentation, any damage he sustained was as a result of the subsequent sale of the Shares, and not the release of the Bond in April2009.

56.In the absence of any evidence on the market value of the Bond, and that the Bond could have been realised or the Shares of the Company could have been sold over $22,906,007.06 at the material time, I reject Lee’s assertion that Luk was in breach of fiduciary duty, and that he is entitled to damages of $88,317,369.9, as claimed in paragraph 31 of the Amended Statement of Claim.

If Luk was in breach of contract or fiduciary duty, is Lee entitled to recover his alleged loss and damage of $88,317,369.90?

57.This has been dealt with under the preceding heading. Lee’s claim for damages on the basis of the face value of the Bond is rejected for the very reasons he pleads in the J Thomson proceedings.

If the Settlement Agreement did not settle the claims made in this action, is Luk entitled to the recovery of the balance of the loan he made to Lee, in the sum of $1,105,525.25?

58.In view of my finding on the Settlement Agreement, this issue does not have to be decided.

Conclusion and Orders

59.For all the above reasons, the claims made by Lee in this action are dismissed. The costs of the action and of the counterclaim (which was made on the basis only of Luk not being successful in the Settlement Agreement defence) are to be paid by Lee to Luk, with certificate for one counsel.

60.In view of the findings I have made against Lee, his withdrawal of the claim made relating to the alleged breach of clause 9 of the Loan Agreement and the alleged failure to issue a remedial notice, his acceptance in court that the Settlement Agreement was in full and final settlement of both HCA 790 and HCA 922, and the claims Lee made on the basis of the face value of the Bond in direct contradiction to the claims he made in the J Thomson proceedings, the appropriate order for costs of this action is that they are to be paid by Lee on an indemnity basis.

61.I also direct that the case be referred to the Secretary for Justice to consider whether proceedings for contempt of court (or other offences) should be brought against Lee in relation to the Amended Statement of Claim filed in these proceedings on 6 October 2011, and/or Lee’s witness statement dated 29 January 2014, both of which are verified by Lee’s statement of truth. The court expects parties and their legal advisers to be responsible for all documents filed in court, but regrettably, there have been instances when litigants and their lawyers are prepared to proffer statements and affirmations without due regard to the accuracy and truthfulness of their contents, or the source of their belief. It is high time for practitioners and litigants to pay heed and to remain vigilant to the importance of verifying statements made in documents filed in court proceedings, and to bear responsibility for the effect of making false statements.

Mr Hylas Chung, instructed by Mok & Co, for the plaintiff

Mr Anson Wong SC leading Mr Yang-Wahn Hew and Mr Joseph Wong, instructed by Howell & Co, for the defendant