HCMP769/2002

HCMP769/2002

由此 A A B HCMP 769/2002 B C IN THE HIGH COURT OF THE C HONG KONG SPECIAL ADMINISTRATIVE REGION D D COURT OF FIRST INSTANCE E MISCELLANEOUS PROCEEDINGS NO. 769 OF 2002 E ____________ F F IN THE MATTER of Order 88 of the G Rules of the High Court G H and H I IN THE MATTER of the property I known as No. 11 Changsha Street, Kowloon (All those portion of J J Kowloon Inland Lot No.7339) K and K L IN THE MATTER of a Debenture L dated 29th day of October 1999 M M and N N IN THE MATTER of a Tenancy O Agreement dated 20th October 2001 O made between Labour Buildings Limited and China States Limited P P and Q Q IN THE MATTER of a Sub-Lease R dated 16th November 2001 made R between China States Limited and S Hong Kong International Fraternity S Association of Heilongjiang Limited T T U U V V 由此 A -2- A B B and C C IN THE MATTER of a Sub-Lease dated 22nd November 2001 made D between China States Limited and D Chance Land International Limited E E and F F IN THE MATTER of a Sub-Lease G dated 19th November 2001 made G between China States Limited and Yim H Shui Fong H and I I IN THE MATTER of a Sub-Lease J dated 28th November 2001 made J between China states Limited and K Invest China Limited K L and L M IN THE MATTER of 2 Sub-Leases M respectively dated 23rd January 2002 N and 29th January 2002 made between N China States Limited and World O Honest Holdings Limited O and P P IN THE MATTER of a Sub-Lease Q dated 29th January 2002 made between Q China States Limited and Daisy R Decorative Tin (Hong Kong) Limited R S and S T IN THE MATTER of a Sub-Lease T dated 29th January 2002 made between U U V V 由此 A -3- A B B China States Limited and South Metal Construction C C and D D IN THE MATTER of a Sub-Lease E dated 5th February 2002 made between E China States Limited and Christian F Cornerstone Church F G and G H IN THE MATTER of a Sub-Lease H dated 9th February 2002 made between China States Limited and Maltese I I Music Art and Education Center J J and K IN THE MATTER of a Sub-Lease K dated 29th January 2002 made between L China States Limited and Lau Shut L Hon M M and N N IN THE MATTER of 2 Sub-Leases O respectively dated 9th February 2002 O and 21st February 2002 made between China States Limited and Cosmos P P Energy International (HK) Limited Q Q and R IN THE MATTER of a Sub-Lease R dated 28th February 2002 made S between China States Limited and S Idealtours Center Limited T T and U U V V 由此 A -4- A B B IN THE MATTER of a Sub-Lease dated 27th February 2002 made C C between China States Limited and Golf (China) Limited D D and E E IN THE MATTER of a Sub-Lease F dated 1st March 2002 made between F China States Limited and Sasa Bridal G Salon Company G ____________ H H BETWEEN I I THE BANK OF EAST ASIA, LIMITED Plaintiff J J and K LABOUR BUILDINGS LIMITED 1st Defendant K CHINA STATES LIMITED 2nd Defendant L L HONG KONG INERNATIONAL FRATERNITY ASSOCIATION OF M M HEILONGJIANG LIMITED 3rd Defendant N CHANCE LAND INTERNATIONAL LIMTED 4th Defendant N YIM SHUI FONG 5th Defendant O INVEST CHINA LIMITED 6th Defendant O WORLD HONEST HOLDINGS LIMITED 7th Defendant P P DAISY DECORATIVE TIN (HONG KONG) LIMITED 8th Defendant Q SOUTH METAL CONSTRUCTION (a firm) 9th Defendant Q CHRISTIAN CORNERSTONE CHURCH 10th Defendant R R MALTESE MUSIC ART AND EDUCATION CENTER (a firm) 11th Defendant S S LAU SHUT HON 12th Defendant T COSMOS ENERGY INTERNATIONAL T (HK) LIMITED 13th Defendant U U V V 由此 A -5- A B B IDEALTOURS CENTER LIMITED 14th Defendant C GOLF (CHINA) LIMITED 15th Defendant C th SASA BRIDAL SALON COMPANY (a firm) 16 Defendant D D ____________ E E Before: Deputy High Court Judge Gill in Court F F Dates of Hearing: 3-7, 10-13, 17-21, 24-25 September, 2-5, 8-12, 15-18, 22-24, 29-31 October, 1, 22, 26-27 November, 3-5 G December 2007 G H Date of Judgment: 23 January 2008 H _______________ I I JUDGMENT J _______________ J K K 1. This case has all the hallmarks of an ordinary debt recovery by L L a bank against a defaulting customer. M M 2. The plaintiff bank (BEA, or the Bank) in 1995 was N N approached by the 1st defendant (LBL) with whom there had been no prior O connection, asking for financial assistance. The upshot was that in 1996 it O had agreed to lend to this new customer up to $40 million (later increased P P to $50 million) to meet the cost of redevelopment of its property in Chang Q Sha Street, Mongkok. The primary security became a debenture (the 1999 Q Debenture) by which BEA took a charge over LBL’s assets and R R undertaking including a legal charge over the land in question. S S 3. Demolition and reconstruction began. The loan was advanced T T in tranches by instalments. By 2000 a derelict building had been torn U U V V 由此 A -6- A B B down and replaced by an edifice of 18 floors. It was leased to the C 2nd defendant (CSL). There were also sub-leases, to the 3rd to 16th C defendants. They have left, driven off by this litigation, and are no longer D D involved. LBL is still the owner, and CSL the lessee in possession. The E building has been remodelled. Currently it is run as two hotels. E F F 4. Of the amount advanced some was repaid, with interest. This G left by 1 March 2002 a balance of $47,139,733.06. But none of that has G been repaid. BEA sues in contract to recover this amount and accrued H H interest and costs. Against LBL and CSL it also sues in default of payment I for possession of the property and mesne profits. As at the first day of trial I (3 September 2007) the debt had become $82,402,127.58 with interest J J accruing thereafter at $27,091.11 per day. K K 5. So, a sizeable sum involved, but otherwise, a typical, ordinary L L debt recovery by a bank? M M 6. The defences pleaded indicate an emphatic ‘No’. This is N N anything but a typical and ordinary debt recovery. O O 7. It is alleged that a particular, perhaps essential ingredient in P P the transaction was that BEA’s management at the highest level anticipated Q political advantage in becoming banker to this particular prospective Q R customer. R S S 8. A compelling feature of the terms of advance that came to be T agreed was that interest margins were pared back to a bare minimum at the T request of the borrower. And the usual practice of a guarantee by the U U V V 由此 A -7- A B B project sponsor, in this case the majority corporate shareholder, was also C foregone, again at LBL’s management’s request. C D D 9. Whether it was the political motive that had over-riding E priority or otherwise, BEA’s servants and agents, namely its officers and E solicitors, allowed the 1999 Debenture and prior security documents (inter F F alia what are called the 1997 Debenture and the Supplement to Debenture) G to be executed without proper authority by LBL. G H H 10. The result is that the debentures were unenforceable; in I particular, the 1999 Debenture is not binding on LBL and BEA’s claim is I unsustainable. J J K 11. Furthermore, or in the alternative, it is pleaded that two former K directors of LBL, having their own agenda, contrary to the provisions of L L the security documents and in particular the 1997 Debenture, caused M significant amounts of the advance paid, sub-totalling $10,307,000 and M $7,649,411, to be drawn down for purposes otherwise than for the funding N N of LBL’s redevelopment at Mongkok. These directors thereby were in O breach of their fiduciary duties owed LBL. O P P 12. It is alleged that key officers of BEA knew or turned a blind Q eye to this misconduct; thereby, the defence pleads dishonest assistance by Q R BEA’s officers, alternatively breach of BEA’s duty of care owed to LBL. R S S 13. LBL thus counterclaims for a declaration that the 1999 T Debenture is null and void, and consequential damages. T U U V V 由此 A -8- A B B 14. BEA refutes vehemently that there were irregularities in the C documents that render the 1999 Debenture and other securities C unenforceable. But if there were they were inconsequential and BEA and D D its officers and solicitors could not be expected to have been aware of such E irregularities, in exercise of the rule in Turquand’s case. Likewise, it E refutes that there was any unauthorized disbursement of some of the loan F F moneys, much less that BEA knew of this or turned a blind eye. LBL G borrowed money to build a new skyscraper. The project was completed G some years ago. The building is now occupied and run as a commercial H H enterprise. LBL is profiting thereby whilst refusing to honour its I commitment to repay the advance. As Mr Whitehead SC leading the team I representing BEA submitted at the outset of the trial: J J “This is a bona fide claim under a debenture where the borrower K is in default. The defence put up is nothing but smoke and K mirrors, for the purpose of trying to get out of what is due to be L repaid.” L M M 15. BEA maintains that as its primary position. Further, it claims N the defence is estopped from denying the validity of the 1999 Debenture. N O O 16. But if the 1999 Debenture is held to be unenforceable, as a P counterclaim to the counterclaim it seeks recovery of the money advanced P under an ineffectual transaction and interest thereon. Q Q R 17. A feature of this case is that there are not a lot of matters of R fact which are in dispute; the documents entered into by the parties largely S S tell the story. What is in issue is what lies behind the documents and what T inferences may be drawn from what has not been recorded. T U U V V 由此 A -9- A B B 18. I come next to give a brief portrait of the parties, followed by C a summary of what took place that is not in contention. C D D 19. As the history unfolds I shall attempt to introduce E circumstances which give rise to the defence’s contention that what E emerged between the parties was not an ordinary run of the mill F F commercial relationship between a bank and its customer. What emerged G were failings in the documents so obvious that the BEA and its officers G and solicitors could not have avoided being aware of them or put on notice. H H A particular example was LBL’s Board’s minutes of the meeting I authorizing execution of the 1999 Debenture, which the defence alleges is I a forgery, for the meeting never took place. J J K K BEA L 20. The Bank needs no introduction. It is one of the foremost in L Hong Kong with branches in cities throughout the region. M M N 21. In Hong Kong the Head Office is led by the Chief Executive N Officer David Li and a Board of Directors including the Deputy CEO O O called Joseph Pang. P P 22. There are various departments beneath this senior Q Q management, each with its own hierarchy. Pertinent to this case is the R R Business Development Department (BDD), whose main function is to S drum up new business for the bank, and the Corporate Lending and S Syndication Department (CLSD) formerly known as the Project Finance T T and Syndication Department. The primary role of the officers of the CLSD U U V V 由此 A - 10 - A B B is to consider the viability of prospective loans to customers asked for to C finance projects, such as redevelopment of realty; thence to negotiate the C particular terms with the customer before preparing and submitting a D D proposal and recommendation to the Bank’s Credit Committee. E E 23. The CLSD’s Head of Department and Deputy Head were at F F the time this history unfolded William Chu and Christine Wong. They are G still with the bank in these positions and were primary witnesses in the trial. G H H 24. In 1989 BEA applied to the Taiwan Ministry of Finance for I permission to set up a representative office in Taipei. For overseas banks I looking for exposure in Taiwan, that represents the first rung of the ladder. J J K 25. At this time the ruling political party in Taiwan was the K Kuomintang (KMT). Thus the Ministry of Finance was under the control L L of the KMT. M M 26. In 1989 BEA’s application was refused. It tried again in 1992. N N Again it was refused. Then in April 1993 after a third attempt the approval O came through. O P P 27. 20 months later BEA applied again, this time to upgrade its Q status to a branch office. According to press releases, this would allow it Q R to provide banking facilities to Taiwanese investing in Mainland China. R S S 28. No Hong Kong Bank at that time had the status of having a T branch office in Taiwan, so there was the incentive to secure pole position T in this potentially lucrative field. U U V V 由此 A - 11 - A B B 29. But the problems re-emerged, through 1995 and into 1996. It C seems that the Taiwanese authorities were concerned about the level of C shareholding in BEA beneficially held by Mainland interests. D D E 30. It was against this background that LBL came on the scene. E F F LBL G G 31. As its name suggests LBL was born of an infant labour H movement in Hong Kong in the 1950’s. H I I 32. The movement had strong ties with the KMT political party in J Taiwan and its membership included not only Hongkongers but also J individuals in Taiwan having common interests and goals. K K L 33. Title to the Chang Sha Street property vested in three founder L members called Messrs Ho, Wong & Fung, who held the same in trust for M M the members of what was then known as the Labour Buildings Association. N The original building on site of five stories was built in about 1959. N O O 34. LBL was incorporated in 1963 and took title to the Chang Sha P Street property. Following an increase in capital in 1969, the shares were P owned by the Hong Kong and Kowloon Trades Union Council (HKTU) as Q Q to 27%, by residents of Taiwan as to 32% and by residents of Hong Kong R R as to 41%. In 1972 the HKTU assigned about 7% to various member S associations and unions of the HKTU. S T T U U V V 由此 A - 12 - A B B 35. Two directors in those early years were Pang Chun Hoi C (Mr Pang) appointed in 1972 and Liew Nan Kiam (Mr Liew) appointed in C 1986. D D E 36. Following completion of the building on site part of it was let E out but some of it was occupied and run as the branch office and main F F camp of the KMT in Hong Kong. G G 37. It is apparent that from these early years there were close ties H H between the KMT of Taiwan and the HKTU in Hong Kong. The HKTU it I is said was the operational arm of the KMT in Hong Kong, followed I instructions given by and was financially supported by the KMT. Mr Pang, J J the director I have referred to, was chairman of the HKTU but also a K member of the KMT, and acted on instructions given by the KMT. In K Taiwan, the HKTU was recognized as a political and labour entity of Hong L L Kong. It adopted for use here the KMT logo. M M 38. In early 1996 there was on the face of it a major reconstruction N N of LBL, though in reality it seems it was all about the KMT assuming a O commercial interest in LBL. It came about in this way. O P P 39. A company called APH Hong Kong Limited (APH HK) was Q in 1994 incorporated in Hong Kong. It was wholly owned by Asia Pacific Q R Holdings Corporation (APHC) which itself was wholly owned by the R KMT. S S T T U U V V 由此 A - 13 - A B B 40. Next, six individual shareholders of LBL, all of the KMT or C otherwise connected who owned in total 73.2% of LBL assigned their C interests to APH HK which thus became the majority shareholder. D D E 41. The HKTU and those member unions and associations to E whom it had vested some of its shares in 1972 owned the balance of 26.8%. F F G 42. There were consequential changes to the Board. Messrs Pang G and Liew representing the HKTU and by now veteran directors kept their H H seats. Mr Pang was appointed chairman. Six others were appointed I representing the majority shareholder. Their names are Chen Chao Yang I (C Y Chen), David Chen Shin (David Chen), Hsu Chi Ching (Mr Hsu), J J Huang Han Hsiang (Mr Huang), Charles Ma Chi Chun (Charles Ma) and K Yang Chung Che (Mr Yang). K L L 43. Messrs Yang, Hsu and David Chen were also directors of M APH HK. Charles Ma was a director of the parent APHC. M N N 44. LBL since its incorporation and to date has not traded as a O going concern; its sole asset is the Chang Sha Street building and site and O the income generated therefrom. P P Q Q BEA and LBL Get Together R R 45. It was the new management following the restructure of LBL S in 1995 who proposed to redevelop the Chang Sha Street site by S demolition of the old outdated building and construction of that which now T T stands in its stead. U U V V 由此 A - 14 - A B B 46. Capital had to be raised. The first connection between the C parties seems to have been orchestrated by one Humphrey Wan of the C BDD of the BEA, who was doing his job of looking out for new business. D D He met Charles Ma and various other officers of LBL in November 1995. E Charles Ma told him of their plans. E F F 47. Humphrey Wan made a call report, the usual preliminary G document which sets out what sort of assistance a customer, actual or G potential, is looking for. As is usual, the call report was circulated H H amongst various senior figures in BEA, including the CEO, David Li, and I his deputy Mr Pang. I J J 48. The defence notes as significant that Humphrey Wan had K underlined the connection with the KMT, and that on his copy Mr Li had K noted in handwriting: L L “I like to meet them. Should we consider to offer the facilities.” M M 49. There were further meetings on 11 December 1995, and on N N several days in January 1996. Mr Li, the CEO, attended one of them and O O he and the Deputy CEO appeared to maintain an active interest in the P discussions. P Q Q 50. A meeting scheduled for 26 January 1996 was preceded by a R note circulated amongst BEA’s officers headed: R “Points to be Raised”. S S No.4 read: T T U U V V 由此 A - 15 - A B B “To request tactfully their assistance for our Taiwan Branch application.” C C This was obvious reference to the applications that BEA had been pursuing, D D to that date without success, for enhanced status to branch office in Taipei. E E 51. The defence during the trial was keen to ascertain what was F F discussed at this meeting, for the agenda underscored their contention that G this was no ordinary commercial relationship. There were no minutes or G notes of what was said and Mr Strachan, leading counsel of the defence H H team, spent much time cross-examining the Bank’s officers on the topic. I I 52. Negotiations moved forward. William Chu and Christine J J Wong of the CLSD represented the Bank. Then in May 1996 they jointly K made a recommendation to BEA’s Credit Committee in favour of an K advance of $40 million to LBL. L L M 53. Pertinent is the following passage which I repeat verbatim: M “The Borrower’s ultimate parent company, APH, has a very N N strong Taiwan background as 99% of its shareholding is owned by the Kuomintang of the Republic of China in Taiwan. The O strong parentage lends us comfort in the integrity of the O Borrower. Also, this Facility could start a closer working relationship with them which would facilitate this Bank’s P business expansion in Taiwan.” P Q Q 54. Also pertinent were the proposals concerning interest rates and R the issue of a project guarantor. R S S 55. In the negotiations LBL had sought prime plus 0.25% in HKD T or LIBOR + 1.5% in US$. BEA had countered with prime + 0.5% and T U U V V 由此 A - 16 - A B B LIBOR + 2%. LBL stood firm as to its figures even as BEA proposed to C meet it half way. C D D 56. On the matter of project guarantor, a position that in the E normal course would have been occupied by APH HK as majority E shareholder, this was rejected on the basis that it was not their practice to F F provide a corporate guarantor. G G 57. In their credit proposal William Chu and Christine Wong said H H of this: I “At an interest rate of 0.5% pa over Prime or 1.5% pa over I LIBOR, the pricing of this Facility is not particularly attractive. J But having taking into account that the general pricing paid by J the APH group of companies in Taiwan is around 50bp, the lower return in this Facility could be treated as a price paid to K open up working relationship with APH group in Taiwan in the K future.” L L This extract as was acknowledged contained a typographical mistake, for M what was being offered was an interest rate of prime + 0.25%, the rate that M LBL’s management had insisted upon. N N O 58. They also noted that there would be no corporate guarantee in O the face of the refusal to provide one. P P Q 59. By mid-May 1996 the Credit Committee approved the Q R proposal. An offer was prepared and sent to LBL. R S S 60. Then there followed a further concession at the request of T LBL and acceded to by BEA; the dropping of another usual requirement T that the shares of a prospective corporate borrower be pledged to the BEA. U U V V 由此 A - 17 - A B B 61. The facility was accepted by David Chen, one of the directors C of LBL. This happened on 7 August 1996. C D D 62. And thus, as the defence contends, emerged an agreement E whereby BEA was to advance to a new customer funds to finance a project E at a much lower interest rate than it was initially and then subsequently F F prepared to accept, with far fewer precautions to protect it on default than G were normal in transactions of this type. G H H 63. As the defence contends, it was no coincidence that on I 16 October 1996 the Ministry of Finance in Taiwan approved BEA’s I upgrade from representative office to branch office. J J K K The 1997 Debenture L 64. Members of LBL’s Board met on 17 January 1997 for the L purpose of authorizing two of its directors, Mr Pang and Charles Ma, to M M execute the debenture under seal. N N 65. The defence claims that the minutes of this meeting reveal O O irregularities of such consequence as to render the authorization invalid. P Further, that these were so obvious the Bank’s officers and solicitors must P have known or at least were on notice about them. Q Q R R 66. Two in particular emerged. The first was that the directors S exceeded their power to borrow. The second, that the meeting was S inquorate. T T U U V V 由此 A - 18 - A B B 67. The first stems from LBL’s Articles of Association. By its C terms Table A of the 1st schedule of the Companies Ordinance (CO) was C adopted, save for where the Articles otherwise provided. D D E 68. Regulation 81 of Table A gave the directors power to borrow E monies and issue debentures provided that the moneys borrowed/secured F F by the directors would not at any time without the previous sanction of G the company in general meeting exceed the nominal amount of the share G capital of the Company for the time being issued. H H I 69. The share capital of LBL was $409,400. There had been no I prior increase, and no prior sanction by LBL in general meeting. J J K 70. BEA’s officers and solicitors would have been aware of this, K for they had conducted a search of LBL and had on file copies of the L L Articles. M M 71. The second goes to the requisite quorum for directors’ N N meetings of LBL. O O 72. Article 12 provided that it should be more than half of their P P number; so, at the time of the meeting, not less than five. There were, in Q fact five present; namely: Q R C H Pang; R N K Liew; S S C Y Chen; T Charles Ma; T C C Hsu. U U V V 由此 A - 19 - A B B 73. The three absent directors (C C Yang, David Chen and C H H Huang) were it was said represented by proxy; respectively by C Messrs Hsu, Hsu and Ma. D D E 74. The defence points to apparent difficulties. E F F 75. The first is that the Articles made no provision for the G absentee directors to be present by proxy. G H H 76. The second goes to the matter of conflict of interest. I I 77. Article 14 provides that: J J “no director shall vote in respect of any contract in which he is K interested or any question arising thereon and if he does vote his K vote shall not be counted nor shall he be counted towards the necessary quorum of directors.” L L M 78. Of those present, and who voted, C C Hsu was a director of M APH HK. And APH HK was a party to a document called the N N Subordination Agreement and thereby had an interest in the 1997 O Debenture. O P P 79. The Subordination Agreement as its name suggests Q subordinated moneys advanced from time to time by APH HK to the loan Q from the bank. But there was an exemption, for APH HK had advanced R R some money in order to get the project started. Repayment of that was not S subordinated. S T T U U V V 由此 A - 20 - A B B 80. Charles Ma also voted. Yet he was a director of APHC, the C parent of APH HK. Based on these relationships it is the defence’s C position that the meeting of 17 January was inquorate by two votes. D D E 81. There is no concession by BEA that the meeting was inquorate E or if it was that it invalidated the vote. Nor is it conceded that BEA’s F F officers knew of this or were put on enquiry. G G 82. Yet amongst the records retained and discovered was a letter H H of instruction from JSM to their counterparts representing LBL to the I effect that the named directors of APH HK, including Mr Hsu, should I abstain from voting. J J K 83. In any event the debenture was signed on 26 February 1997 K and there were drawdowns. L L M 84. Again the defence contends irregularities, in that some M payments were paid into an account of LBL not expressly permitted by the N N debenture. The significance of this is that it permitted those funds O intended to finance the redevelopment to be siphoned off to an alternative O destination for the benefit of the majority shareholder’s rulers, and to the P P detriment of LBL and the minority shareholders. Q Q R 85. Meanwhile, by virtue of what happened shortly afterwards, it R would seem that JSM came to recognize that the meeting of 17 January S S was irregular putting the 1997 Debenture at risk of being unenforceable. T T U U V V 由此 A - 21 - A B B The Supplement to Debenture C 86. The next event was occasioned by a request from LBL, C furnished by Charles Ma, for more money; another $10 million. This was D D considered and approved by the Credit Committee of BEA, upon the stated E basis that a valuation of the project revealed a still satisfactory margin E between its worth and money borrowed. F F G G 87. Once again JSM were engaged. They prepared and sent for H signing draft minutes dealing with authorisation of the advance, and H execution of what was to be called the Supplement to Debenture. I I J 88. The Board met and passed a resolution on 13 October. J K K 89. But if the Board minutes preceding the signing of the 1997 L Debenture were irregular, this was too. L M M 90. Once again the amount to be borrowed exceeded the share N capital of LBL. Once again the meeting was inquorate; even more N obviously than before. Only three of the directors were present; namely, O O Charles Ma, Mr Pang and Mr Hsu. And of them only Mr Pang had no P interest. P Q Q 91. As it transpired, unlike events that followed the resolution of R 17 January 1997, LBL and the Bank did not rely on this resolution for the R execution of the Supplement to Debenture. S S T T U U V V 由此 A - 22 - A B B 92. It is, I think, a safe bet that a member of JSM having retrieved C the 1997 Debenture and other security documents for the purpose of C protecting the Bank in the increase of funds to be borrowed, then noted the D D irregularities of the earlier meeting; there was correspondence with the E Bank on the topic in October 1997. E F F 93. This gave rise to the apparent need to ratify; the next topic. G G H Ratification of the 1997 Debenture? H 94. There was correspondence about this which began when JSM I I wrote to LBL enclosing draft minutes whose purpose was, inter alia, to J have the shareholders ratify LBL’s entry into the 1997 Debenture. It also J authorized the entering into of the Supplement to Debenture. K K L 95. The EGM was held on 26 November 1997. The minutes did L not, however, follow the draft submitted by JSM. M M N 96. At any rate they purported to affirm the terms of the existing N advance, to approve the further advance, and to alter the Articles thus to O O empower the directors to borrow any amount of money. P P 97. The defence contends that by virtue of the ratification taking Q Q place after the Board meeting and not prior, as per regulation 81 Table A, R R there was no ratification. Further, the minutes were flawed and the S resolutions which were purportedly passed were invalid. S T T U U V V 由此 A - 23 - A B B 98. In respect of that which was said to have ratified the 1997 C Debenture, the flaw was that almost certainly — at least on a balance of C probabilities — there was insufficient notice of the meeting. For reasons I D D shall come to, a significant date on this point is 6 November 1997. It is E said of that, that notice of the meeting most likely was not sent out before E F that date. Thus only 19 days notice was given; less than the requisite F 21 days by two days. Only a resolution by those present to abridge time G G would have saved the situation, and there was none. H H 99. The Bank’s officers and solicitors should have been alive to I I ensure there was adequate notice, and with the chronology before them J that notice actually given was very likely inadequate. J K K 100. The defence also takes issue with the validity of the third of L the three resolutions, which was purportedly to give the directors L unrestricted power to borrow money and issue debentures, thus removing M M the limitation imposed by regulation 81 Table A. N N 101. Points were made as I shall come to, but the primary one was O O that having recorded what was proposed, came the result which was: P “Passed. As for wording, please request consultant Tai to co- P ordinate and amend.” Q Q 102. The reference to “consultant Tai” is to a solicitor in attendance R R at the meeting called Tai Shek Kwan of the firm Josip Ma & Co., who S represented LBL. S T T U U V V 由此 A - 24 - A B B 103. The defence contends that a resolution not passed in specific C terms but in terms to be formulated later was plainly invalid. C D D 104. At any event, in reliance on the safe passage of the second E resolution, the Supplement to Debenture was executed on 10 December E 1997. F F G G The 1999 Debenture H 105. This was the next event in the calendar, because at LBL’s H request BEA had agreed to extend the date for repayment of the advance I I and interest by five years. J J 106. The machinery deployed was a release of the 1997 Debenture K K and Supplement to Debenture consequent upon repayment of what was due, L paid for by a fresh advance of like amount upon the security of a new L debenture. M M N 107. It is the defence case that again the transaction suffered from N irregularities, and that BEA’s officers and solicitors would have known O O about them or been put on notice. P P 108. The all important authorization for the signatories (this time Q Q Messrs Hsu and Charles Ma) emerged in minutes of a Board meeting R R purportedly held on 17 September 1999. I say purportedly because that is S the date of the record. Those present were said to be Charles Ma, Mr Pang, S Mr Liew, C Y Chen and Mr Huang. T T U U V V 由此 A - 25 - A B B 109. But there were preliminary events, which the defence contend C establish that the meeting could not have taken place before 29 October C 1999, and probably did not take place at all. D D E 110. First was that the Credit Committee’s notification of approval E of the extension of the advance did not emerge until 14 September, which F F was faxed to LBL for Charles Ma’s attention on the same day. G G 111. JSM were as before instructed. By letter of 25 October they H H forwarded to LBL (Attn: Mr Charles Ma) drafts of the appropriate I documents, including Board minutes. Significant in the draft minutes was I paragraph 6, depicting a document required: J J “6. A Letter of Acknowledge to be issued into by Asia Pacific K Holdings Corporation (the ‘Covenantor’) in favour of the K Lender whereby the Covenantor undertakes to fund the outstanding Construction Costs (as defined in the debenture) L (as lender) on terms and conditions therein mentioned;” L M M 112. By further letter of 28 October, JSM imposed the direction N that those directors who held office in APH HK should abstain from voting. N In fact, the draft minutes were so phrased to spell out not only their names, O O but that of the director of the parent company APHC; presumably P Charles Ma. P Q Q 113. Charles Ma responded by fax of 27 October calling for a R number of amendments for consideration. Of particular interest is a R revision of clause 6 of the proposed minutes. S S T T U U V V 由此 A - 26 - A B B 114. These amendments were acceptable to the Bank. JSM wrote C on 29 October, a key date as I shall come to: C “All the amendments made by the Company are accepted by the D Bank. We enclose therefore marked up amended draft for your D reference.” E E 115. The amendment draft incorporated an amended clause 6, now F F to read as follows: G G “6. A Letter of Acknowledge to be issued by Asia Pacific Holdings Corporation (the ‘Covenantor’) in favour of the H Lender whereby the Covenantor undertakes to supervise H the Borrower in strengthening its financial management and operation so as to fulfil its obligation under the I I Facilities on terms and conditions therein mentioned;” J And this, the defence says, is compelling evidence that the meeting, if held J at all, could not have been held before this date. And why? Because the K K Board minutes of 17 September contained this clause precisely in its L L redrafted form. M M 116. There are the defence contends further irregularities. N N O 117. Of these, the first is that as before the directors had no power O to authorize borrowing beyond the share capital of LBL. The resolution P P purportedly passed to give unlimited power at the EGM of 26 November Q 1997 was not passed as a special resolution, this being an essential Q ingredient in a resolution to amend the Articles of a company. R R S 118. The second is that at the meeting a draft of the 1999 S Debenture was tabled, when in fact it was not forwarded for consideration T T until 25 October. U U V V 由此 A - 27 - A B B 119. The third, the meeting took place but three days after the C Credit Committee of the BEA had approved the extension, well before the C terms thereof had been worked out. D D E 120. The fourth, of the five directors said to have been in Taiwan E and in attendance, two and almost certainly a third were not in Taiwan. F F G 121. Finally, fifthly, the draft minutes appear to have been filled in G by Charles Ma, and he almost certainly was not in Taiwan on H H 17 September. Furthermore, he crossed out reference to the director of I APHC having to abstain from voting. He of course was that director. The I meeting was thus inquorate. J J K 122. Furthermore, it is contended that the officers and particularly K the solicitors of BEA knew or were on notice about all or most of these L L irregularities; JSM because they were responsible for the drafting and for M overseeing the transaction for the protection of their client, and the officers M because of the timing of the meeting relative to the credit approval. N N O 123. I shall come in due course to BEA’s response. Suffice to say O for the moment that the only irregularity conceded is the date of the P P meeting, and that otherwise it was proper and sufficient authority for the Q execution of the 1999 Debenture. Q R R 124. That was entered into and dated 29 October 1999. S S T T U U V V 由此 A - 28 - A B B The Building is Completed; What Next? C 125. There was a sea change in the structure of LBL which took C place in 2001. The KMT in the shape of APH HK pulled out altogether, D D selling its interest to an entity with apparently no allegiance to the KMT. E The Board of Directors came to be changed, unsurprisingly. And although E the sale was expressly made subject to mortgage, LBL, having under the F F old regime begun to reduce the debt, thereafter defaulted in meeting the G G terms of repayment, which culminated in this action, and the various H defences raised. H I I 126. It now behoves me to condescend to detail. J J 127. By assignment of 13 September 2001 APH HK without leave K K of the Bank or notice to it disposed of all of its shares in a sale to a L company called Yan Hei Holdings Limited (Yan Hei). The consideration L of $2,781,600 recognised LBL’s obligation to meet the debt due to BEA, M M then standing at $46,785,385; Yan Hei expressly undertook to bear N responsibility for that debt. Clause 5 of the assignment read thus: N “5. The Transferee and the Transferor must preserve the Bank O of East Asia loan to ensure the loan agreement of the Bank of O East Asian unchanged, so as to prevent from causing financial P confusion, to avoid causing loss.” P Q Q 128. The six directors appointed when APH HK first acquired its R interest resigned upon completion of the sale. Mr Pang, the former R chairman, had retired in October 1999. Mr Liew, the other veteran director, S S retired in August 2001, just prior to the sale. T T U U V V 由此 A - 29 - A B B 129. On the same date Lee Kwok Keung (K K Lee) was appointed. C His background is that in 1989 he became secretary to the HKTU. Whilst C holding that position he was in fact an aide of Mr Pang, who was then D D chairman of the HKTU. In 1996 he was made the HKTU’s chairman, in E place of the retiring Mr Pang. He holds both offices to date. He remains E on the Board of LBL and was the sole witness for LBL at this trial, in F F rather startling circumstances as I shall come to. Yan Hei was appointed to G the Board in May 2002; on the same date so was someone called Leung G Muk Lan. In September 2002 the 2nd defendant China States Limited H H (CSL) became a director. Thus the Board now comprises four directors I being K K Lee, Yan Hei, M L Leung and CSL. I J J 130. CSL was incorporated in September 2001 at about the same K time as the sale to Yan Hei. The next month it took a lease of the entire K building. That is the position to date. A feature of that is that it pays LBL L L rent of only $108,000 per month. This contrasts with the rent earned per M floor when three floors of the old building were rented out 12 years ago at M $30,000 per floor per month. N N O 131. The building is now operated as two hotels, called Tatami and O Hampton, under the management of a company called Right Gain P P Management Limited (Right Gain). Q Q R 132. A valuation report made in October 2007 reveals the R development is worth $102 million. S S T T U U V V 由此 A - 30 - A B B The Interested Parties — A Breakdown C C 133. During the course of the litigation Mr Whitehead’s team D undertook a forensic examination of some of the companies now D associated with LBL and their members and directors as could be E E ascertained (some are registered overseas). Mr Strachan protested at the F relevance, but I permitted this course. In fact as I shall come to there is F relevance and I gain assistance in coming to findings of credibility, fact G G and law. H H 134. A key participant as it turns out is David Wah Tsang Chan I I (David Chan). He is the proprietor of the firm David W T Chan & Co., the J solicitors who have throughout this litigation represented both LBL (the J st nd 1 defendant) and CSL (the 2 defendant). His firm’s former address is at K K 2001-2, Alliance Building; it has since moved and now occupies 17 Floor, L Nan Fung Tower. L M M 135. David Chan holds all but one share of DWTC Services N Limited and is one of two directors of that company. The other director is N Jan Kam. She is a legal assistant at David W T Chan & Co. O O P 136. Another company relevant to the exercise is called C C P Services Limited. Its address is at the office of David W T Chan & Co. Q Q DWTC Services Limited is a director of C C Services Limited. The other R is called Y L Chow. He owns the remaining share in DWTC Services R Limited. S S T T U U V V 由此 A - 31 - A B B 137. Three further interested parties are a company called DWTC C Fortune USA Limited another called Maximus Developments Limited and C a person called Chan Hon Tsang; this because they are the shareholders of D D Yan Hei. Maximus Development and DWTC Fortune share a common E address. E F F 138. The directors of Yan Hei are C C Services Limited and DWT G Services Limited. G H H 139. I come to the company CSL. Its majority shareholder is called I Elgin Limited. The registered office of both Elgin Limited and CSL is at I the offices of David W T Chan & Co. Its directors are Elgin Limited, C C J J Services limited and one Chan Hoi Fang. K K 140. Finally to complete the picture I come to the management L L company Right Gain. Its major shareholders are Yan Hei and Chan Hon M Tsang (a major shareholder of Yan Hei). Chan Hon Tsang is a director of M Right Gain. The other is someone called Yiu Wan Ying. His address is at N N the office of David W T Chan & Co. O O 141. So, what comes out of this is that David Chan, solicitor, has P P by virtue of his control over C C Services Limited and DWTC Services Q Limited total control over Yan Hei. And Yan Hei is the majority Q R shareholder of LBL, and a director of LBL. R S S 142. He is also through his control of C C Services Limited a voice T on the Board of CSL. T U U V V 由此 A - 32 - A B B Funding the Litigation C 143. There was an EGM of LBL conducted on 18 April 2002 C which is relevant if not conclusive on this topic. In attendance was D D Madam Leung Muk Lan representing Yan Hei, the majority shareholder. E She chaired the meeting. Also in attendance were various others of the E minority shareholders. The meeting was conducted at the offices of David F F W T Chan & Co., solicitors to the majority shareholder. G G H 144. There was reference to this litigation which had begun life in H March 2002, a month earlier. There was reference to some of the monies I I advanced by loan by BEA for construction costs having gone missing; that J this was a serious problem, requiring investigation. J K K 145. It was resolved that David W T Chan solicitors should L represent LBL in the litigation. It was also resolved that Yan Hei would be L responsible for the legal costs. M M N 146. This was confirmed from the witness box by K K Lee in N cross-examination in two exchanges: O O “Q. Now the next matter is rather important. Read on ‘items to be determined, all shareholders discussed and resolved as P P follows.’ And then proposed Resolution No.1. Details: Appoint David W T Chan Solicitors’ firm as the legal Q representative of this company to litigate with the Bank of Q East Asia Limited.’ And then ‘Yan Hei Holdings Limited would be responsible for the legal costs,’ do you see that? R R A. Yes. S S Q. And this resolution was unanimously passed. T A. Yes. T U U V V 由此 A - 33 - A B B Q. So is it correct that the costs of this litigation are being financed, not by the company itself but by one of its C shareholders, Yan Hei? C A. Yes. D D … E E Q. Just one question, Mr Lee. Yan Hei are paying for this litigation, did you ever ask David Chan how the money for F this very expensive litigation is being assembled? F A. No, I did not ask it. G G Q. You never bothered to ask how this litigation is being funded? H H A. No. Because Yan Hei has said it would be responsible for I the costs.” I J 147. Mr Strachan at some point in his closing address said that he J K had instructions to record that this was not the case; that Yan Hei was not K funding the litigation. Of course, I accept that the instruction was given, L L although the source was not revealed. M M 148. But this statement from the Bar table ran contrary to the N N unchallenged evidence from his client’s director and sole witness. Further, O there was no evidence or other documentary account that the resolution O passed on 18 April 2002 did not spell out the truth, or if it did that it had P P since been countermanded. Q Q The Evidence of Lee Kwok Keung R R 149. K K Lee is fluent in English both in reading and writing but S S chose to give his evidence in Cantonese. T T U U V V 由此 A - 34 - A B B 150. He made a witness statement for prospective adoption as his C evidence in chief. That was dated 13 February 2006. He made a C supplemental statement on 24 September 2007. These were written out in D D English, which he could read and understand. E E 151. But from the witness box Mr Lee had to confess that he had F F signed both without reading them first. In fact the first time he read either G was a few days before giving evidence, having as is usual accepted the G invitation to refresh his memory. Further, whilst he was satisfied with the H H truth and accuracy of the supplemental statement and adopted the contents I for his evidence, he felt obliged to make wholesale alterations to his earlier I statement before he could do the same with the contents of that. J J K 152. Furthermore, Mr Lee had made four affirmations in K connection with various interlocutory matters that were advanced in the L L lead-up to trial. And he confessed that he had sworn to the truth and M accuracy of these without reading any of them either. Asked why he had M not read any of these documents, his response was: N N “Because I was highly busy and I had no time to read.” O O P 153. Taken in cross-examination to the first witness statement P Mr Lee said that, as with the other statement and the four affirmations, it Q Q was prepared by LBL’s solicitor David Chan. Then there was this R exchange: R “Q Mr Lee, if you look at the first statement beginning at page S 328, it runs to page 340, there is 12 pages. S A. Yes. T T U U V V 由此 A - 35 - A B B Q. It would only take you I suggest a few minutes to read, wouldn’t it? C C A. Yes. D Q. It would be a very dangerous thing to sign an important D document like this without reading it because it may contain matters which were untruthful or erroneous. E E A. Right. F F Q. Well, Mr Lee, why did you really sign this? Is it correct, I suggest to you, that you just signed anything that solicitor G Chan writes down for you and puts in front of you to sign? G Is that what the truth of this is? H A. Yes. H I Q. Now, of this statement, and you can take it from me there I are 48 paragraphs in it, of which you have either amended part or all of 20 of those 48 paragraphs. J J … K A. Yes.” K L L 154. Thereafter Mr Lee was taken to what were significant changes M in his witness statement; in some instance complete paragraphs, otherwise M one or more sentences or parts of sentences; there were 16 in all. N N O 155. In respect of each of these there was this exchange in these or O similar words: P P “Q. You have deleted this paragraph (or sentence) because it’s Q incorrect? Q A. Right. R R Q. And who made that up? S A. Solicitor Chan.” S T T U U V V 由此 A - 36 - A B B 156. I pause here because at some stage after this counsel on both C sides indicated there was disagreement between them as to the meaning of C the Chinese characters in the questions put to Mr Lee; in particular “Who D D made it up?” Those for the Bank said that it meant “Who fabricated the E paragraph?” Those for LBL said it meant “Who prepared the paragraph?” E F F 157. I was invited to refer this issue to my interpreter as the final G arbiter and I did so. She said that by translating back she came up with the G verb “composed”. It was generally agreed that this was a neutral H H expression which could go either way, depending upon the context. I I 158. What is of particular concern however, is that the passages J J expunged for being incorrect were all significant and some were fact heavy; K for instance that the actual cost of construction of the building was “only K $22,894,500, a ‘fact’ he confessed was in fact not correct. There was other L L reference to Mr Lee recalling what Mr Pang the then Chairman of the M HKTU and of the Board of LBL had told him; namely, the following: M N “He (Mr Pang) said that a construction loan of less than N $30 millions should be enough, but owing to some political reasons at Kuomintang the plaintiff (Bank) offered to lend O $20 millions more under some excuses …” O P He said this was not correct either. P Q Q 159. This begs the question, if these were incorrect statements how R did they came to be in Mr Lee’s witness statement? David Chan, the R composer of it, could not have got it from Mr Pang. He was elderly when S S he retired and died some years ago. And there is no other apparent source. T T U U V V 由此 A - 37 - A B B 160. And David Chan chose not to clarify by volunteering to go C into the witness box himself, though he was in court and aware of the C difficulties. D D E 161. This material were it to have been deposed to by Mr Lee as E truthful and correct would have been against BEA’s interests and in favour F F of his client, and of its major shareholder which he controlled and controls. G G 162. Conscious that I am of the seriousness of this proposition, I H H have to say that the prospect that “made up” or “composed” means in the I context “invented” or “fabricated” is a real one. I J J 163. Needless to say, this all has an adverse effect when it comes to K my assessing the worth of the evidence of K K Lee. K L L Who or What is Driving the Defence M M 164. This becomes apparent from the following circumstances, N which have emerged since APH HK left the scene and Yan Hei came to it: N O (1) Until APH HK sold there had been no default with the Bank O and no claim of irregularity in the debentures or of misconduct P P including fraud and forgery. Q (2) This emerged four years after the first drawdown, in October Q R 2001 when Yan Hei became the majority shareholder of LBL. R David Chan controls Yan Hei and all along has been its S S solicitor. He became solicitor for LBL. He also controls CSL, T and is its solicitor. He has represented LBL and CSL T throughout the litigation. U U V V 由此 A - 38 - A B B (3) Yan Hei has funded the litigation through the 5½ years to trial, C and 42 days of trial. Four counsel were engaged for the trial. C (4) To avoid perjuring himself, K K Lee was obliged to strike out D D large pieces of his witness statement, in circumstances giving E rise to the prospect that parts of it had been made up (in the E sinister meaning of those words). F F G G 165. In the circumstances I am satisfied that whilst the defendants H are LBL and CSL the litigator is in reality Yan Hei, orchestrated and H controlled by David Chan. I I J 166. This has a significance to which I shall return. J K K The Issues L L 1. Was there a political issue, called the Kuomintang Factor, which M caused senior management of BEA to disregard getting the loan M documents and procedures right? N N 2. Was the 1997 Debenture invalid because power to authorize the O borrowing was outside the directors’ powers, and or because the O meeting authorising its execution was inquorate? P P 3. Did BEA dishonestly assist or turn a blind eye to the Q Q misappropriation of some of the loan? R R 4. (a) Was the 1997 Debenture ratified by the shareholders and did S they authorize the further advance? S (b) Did they give the directors unlimited borrowing powers? T T U U V V 由此 A - 39 - A B B 5. Was the 1999 Debenture invalid because of irregularities in the C authorizing of its execution; in particular, because the Board C minutes of 17 September 1999 were a forgery? D D 6. If there were any irregularities in the process leading up to the E execution of the securities as to render them invalid but for E ratification and or the rule in Turquand’s case, is the integrity of the F F securities saved by exercise of the rule? G G 7. In any event can BEA rely on the doctrine of estoppel to enforce H repayment? H I 8. If the debentures, in particular the 1999 Debenture, are invalid, is I BEA entitled to recover the amount advanced and interest thereon J J by restitution? K K The Kuomintang Factor L L 167. There is no question but that LBL through its director and M M spokesman Charles Ma was able to negotiate more favourable terms than N BEA was at first instance prepared to offer. N O O 168. The defence case as argued, and pressed in cross-examination P of the bank officers William Chu and his second in command Christine P Wong, goes further. It is that at various meetings leading up to the making Q Q and acceptance of the Bank’s loan offer, the matter of seeking assistance to R the upgrade of the Bank’s status in Taiwan through KMT channels was R raised, and more likely than not received a favourable response. After all, S S the KMT connection was mentioned from time to time; particularly it was T referred to in the agenda for the meeting of 26 January 1996, and senior T U U V V 由此 A - 40 - A B B executives including the CEO and his deputy appeared to be taking an C unusual interest in what was otherwise an ordinary application to borrow C money. D D E 169. And, it is said, this involvement bore fruit, with the upgrade E going through a bit later. F F G 170. Thus it is contended the Bank was in the unusual situation of G being beholden to a customer offering not only unusually favourable terms, H H but in being lax when it came to the formalities and the documents. I Further, that the Bank assisted or at least turned a blind eye to irregularities I which included the channelling of some of the borrowed money away from J J its purported destination, the construction project, and into KMT pockets. K This was engineered by Charles Ma and Mr Hsu, two of the directors with K direct links with the KMT. Thus, the majority shareholder effectively stole L L from LBL at the expense of LBL and its minority shareholders. M M 171. A feature of the defence’s stance in respect of this issue is that N N the KMT in the shape of the recently incorporated APH HK came onto the O scene suddenly and for the sole purpose of commercial gain; that it was at O arm’s length from the minority shareholders, the main one of which was P P and remains the HKTU. Q Q R 172. My reading of the history and development of what was to R become LBL suggests otherwise. The KMT was from the outset very S S much involved with LBL and its members including the HKTU which was T in effect its branch in Hong Kong. It provided financial support. Most of T the HKTU were of the KMT. Far from being arm’s length they were U U V V 由此 A - 41 - A B B closely knitted together. The advent of APH HK did not alter that. It was C a restructure of LBL assuredly to provide a more attractive proposition for C a lending bank in the funding of the rebuilding. D D E 173. And that worked. The excerpt from the report that went to the E Credit Committee that I have reproduced at paragraph 53 indicates that the F F strong parentage influenced the recommendation to proceed. G G 174. Mr Strachan’s concerted efforts to get concessions out of H H William Chu and Christine Wong in lengthy cross-examinations of them I both did not in the end achieve that. I J J 175. Their accounts from the witness box were that there were no K notes produced of what took place at the early meetings attended by senior K figures from the Bank, including the meeting of 26 January, because no L L notes were taken. This particular event was a lunch in BEA’s executive M dining room and was more of a social occasion. The so-called agenda was M merely a guide for those present, in case it became opportune to raise a N N matter in conversation. Furthermore, as a general rule minutes or notes O were not taken when the meeting was attended by those from the upper O reaches of the Bank. P P Q 176. Both said they were aware of BEA’s wanting to upgrade its Q R presence in Taiwan to branch status. Both were aware of the heavy KMT R involvement in LBL, that it was the ruling party in Taiwan. But both S S denied that there was any pressure exerted by those above them. T T U U V V 由此 A - 42 - A B B 177. That the CEO and his deputy Mr Pang met representatives of C the prospective customer was by no means out of the ordinary and C certainly did not establish or even suggest that they were looking to curry D D favour. E E 178. JSM were instructed to protect the Bank’s interests given the F F size of the advance and they left the detail to them. Otherwise the loan and G its documents proceeded from inception to conclusion as an ordinary G commercial loan, like the hundreds of others that are processed by their H H department of the Bank. I I 179. I accept as the truth all that they said on the topic. J J K 180. As I find the Kuomintang Factor did not amount to anything. K The clues which the defence seized upon to establish this were but straws L L in the wind. M M N The 1997 Debenture N 181. Was the authorization to borrow more than the amount of O O share capital, given at the Board meeting of 17 January 1997, irregular? P P 182. Mr Whitehead did not really seek to argue against that Q Q proposition. The answer is as I find ‘Yes’. R R S 183. Regulation 81 Table A is clear on the point, limiting the S directors accordingly, without previous sanction of LBL in general T T meeting. And there was no previous sanction. U U V V 由此 A - 43 - A B B 184. The second purported irregularity is that the meeting was C inquorate. C D D 185. But was it? E E 186. JSM certainly believed so. In a letter to LBL’s solicitor of F F 9 December 1996 on the topic they wrote: G “We note from the Articles of Association of Labour G Buildings Ltd. that (a) quorum of a board meeting consists of H half of all directors and (b) interested directors may not be H counted in the quorum and may not vote. Please note that 3 of the directors of Labour Buildings Ltd. namely, 楊宗哲, 許志慶 I and 陳鑫 are also directors of APH Hong Kong Ltd., another I party in the proposed transaction and are accordingly deemed to J be interested in the transaction. Please therefore arrange for the J 3 relevant directors abstained from the meeting.” K K The characters represent C C Yang, C C Hsu and David Chen. L L 187. Disregarding for the moment that the Articles provide that for M M a quorum more than half of the directors had to be present, it seems to be N somewhat of a dereliction of duty by JSM that having received and studied N the Board resolution wherein this direction was disregarded it was not then O O spotted and made good. P P 188. But the question remains, was JSM correct in deciding that the Q Q APH HK directors were interested? R R 189. Mr Strachan submitted that they were; furthermore, that the S S director of the parent company APHC was also interested, making thus T four in all. He queried the legitimacy of the three directors not present T U U V V 由此 A - 44 - A B B C C Yang, David Chen and H H Huang being represented by proxy. He C took me to Palmers Company Law at para. 8.303.1: C “… Proxies may be allowed by the Articles.” D D E 190. As the Articles of LBL made no such provision their votes had E to be discounted. In any event, two of them were interested and could not F F be counted anyway. Further, the two proxies were also interested so G should not have voted either in their own right or for the absentees. G H H 191. The Article going to the issue of interest is no.14, part of I which reads: I J “14. … And no Director shall vote in respect of any contract in J which he is interested or any question arising thereon and if he does vote his vote shall not be counted nor shall he be counted K towards the necessary quorum of Directors. …” K L L 192. The interest, Mr Strachan submitted, was clear cut, deriving M from those directors who held directorships in APH HK which was an M interested party by virtue of the Subordination Agreement. N N O 193. Mr Whitehead had a contrary view. He submitted that the O purpose of Article 14 was to avoid a conflict of interest, and that meant a P P direct interest. The four directors were not personally interested in the Q proposed contract. A directorship in an interested party does not constitute Q an interest. R R S 194. This view is supported in a judgment by Lightman J in the S case Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald [1995] BCC T T U U V V 由此 A - 45 - A B B 474, where the judge allowed an appeal from a Master’s order for C summary judgment and gave leave to defend. C D D 195. On the point he said at p.476: E “A director of a company owes a fiduciary duty to the company E to act bona fide in the best interests of the company and to prefer F its interests to his own where they conflict. If a director on F behalf of the company enters into any arrangement or transaction with himself or with a Company or firm in which he is interested, G that arrangement or transaction may be set aside without enquiry G as to whether the company has suffered thereby (‘the self-dealing rule’); but it is a defence to such a claim that the shareholders of H H the company have consented to the transaction, and if the articles of association of the company provide that a director may vote in I matters in which he is interested the self dealing rule is I excluded.” J J At the trial, whose reference is at [1995] BCC 1000, Deputy Judge K Steinfeld QC said at p.1014: K “In consequence as a matter of the general law [a director] is not L permitted to enter into a transaction with his company in which L he has a personal interest save with the informed consent of the M shareholders given in general meeting. If he does so, the M transaction is voidable at the suit of the company. This rule, often referred to as the ‘self-dealing rule’, is an application of the N general principle of trust law which forbids a trustee from N profiting from the trust and from placing himself in a position in which his duty to his beneficiaries conflicts with his own O O personal interest. It is a rule founded on the proposition that, human nature being what it is, it would be too much to expect P any fiduciary in regard to such a transaction to be truly able to P place the interests of his beneficiaries above his own personal interests.” Q Q R 196. And in a Privy Council case going back two centuries, that R being North-West Transportation Co. v Beatty [1887] 12 App Cases 589, S S Sir Richard Bagally said at p.593: T T U U V V 由此 A - 46 - A B B “a director of a company is precluded from dealing, on behalf of the company, with himself, and from entering into engagements C in which he has a personal interest conflicting, or which possibly C may conflict, with the interests of those whom he is bound by fiduciary duty to protect … Any such dealing or engagement D may however, be affirmed or adopted by the company, provided D such affirmance or adoption is not brought about by unfair or E improper means, and is not illegal or fraudulent or oppressive E towards those shareholders who oppose it.” F F 197. It is a fact that but for the presence of APH HK in LBL the G G affected directors would not be on the Board, representing the interests of H APH HK. That is of course a common occurrence, and there is nothing H wrong about that, unless a director so appointed advances the cause of the I I company he represents to its benefit and to the disadvantage of the J company on whose Board he is sitting. J K K 198. As Lord Denning said in Boulting v ACTAT [1963] 1 QB 606 L at p.626: L “Or take a nominee director, that is, a director of a company who M M is nominated by a large shareholder to represent his interests. There is nothing wrong in it. It is done every day. Nothing N wrong, that is, so long as the director is left free to exercise his N best judgment in the interests of the company which he serves. But if he is put upon terms that he is bound to act in the affairs of O the company in accordance with the directions of his patron, it is O beyond doubt unlawful … or if he agrees to subordinate the P interests of the company to the interests of his patron, it is P conduct oppressive to the other shareholders for which the patron can be brought to book … So, also, if a director of a company Q becomes a member of a trade union on the terms that he is to act Q in the company’s affairs on the instructions of the trade union, or in accordance with the policy of the trade union (rather than R R according to what he thinks best in the interests of the company), such an agreement of membership is unlawful. It is contrary to S public policy that any director should be made to deny his trust S and throw over the interests of those whom he is bound to protect … In each one of these cases the reason is simple: it is T wrong to induce another to act inconsistently with the duty of T fidelity which he has undertaken by contract or trust to perform.” U U V V 由此 A - 47 - A B B 199. With these and other authorities supporting the proposition C that a director of a shareholder is not per se interested in a contract entered C into by the shareholder, JSM were, as I find, being overly cautious when D D they gave the direction forbidding those named directors from participating E in the vote, albeit that their direction was ignored and they apparently E failed to spot that when they received the minutes. F F G 200. Besides, as Mr Whitehead submitted and I accept, there was G no conflict amongst the parties. The company LBL, its shareholders, H H principally APH HK and the HKTU, and its Board all had a common goal I and that was to redevelop LBL’s property at Chang Sha Street. Funds had I to be borrowed for the purpose. J J K 201. The Subordination Agreement was not a burden. It served to K regulate repayment of money so far borrowed to get the project underway, L L for the old building had been demolished and piling for the new one was in M the course of construction. Thus this repayment was exempt from M subordination whilst any other borrowing for another purpose was not. N N There was therefore no burdening; no hardship on any side, for the money O having been borrowed would have had to have been repaid as a debt due in O any event. P P Q 202. Dealing with the matter of voting by proxy, Mr Whitehead Q R made the point that Palmer was authority for the proposition that proxies R may be allowed by the Articles, but not that they were necessarily S S disallowed if the Articles were silent about this. T T U U V V 由此 A - 48 - A B B 203. I agree. There is no rule that I know of that fetters the C directors in the conduct of meetings, provided there is no dereliction of C their duties to the company. D D E 204. If there is any doubt about this it is resolved by regulation 100 E of Table A which reads in part: F F “The directors may meet together for the dispatch of business, adjourn and otherwise regulate their meetings as they think fit.” G G H 205. Proxy voting is not prohibited; nor should it be. It is not a H rarity, and has the very practical advantage of allowing a director to I I participate even when unavailable to attend in person. J J K The Supplement to Debenture K L 206. Mr Strachan submitted in his closing speech at paras. 305 to L 328 that this is and was not binding because the meeting of 13 October M M 1997 was inquorate and the directors who voted exceeded their power to N borrow. N O O 207. But as I have stated the parties did not rely on this meeting P and the resolutions purportedly passed. This was dealt with in General P Meeting. Q Q R 208. I come to that next. R S S T T U U V V 由此 A - 49 - A B B The Extraordinary General Meeting of 26 November 1997 C 209. JSM having discovered the irregularities of the 1997 C Debenture alerted the Bank and then LBL to the need for ratification by D D shareholders. Charles Ma made mild objection, not on the papers for the E purpose of taking advantage of this apparent blunder, but because he E believed there already had been ratification at the company’s AGM. When F F it was pointed out that that had not happened he accepted there had to be a G G further shareholders’ meeting. Besides, he was pressing BEA for the extra H advance of $10 million, which had not been paid out, presumably because H of the perceived inadequacy of the Board meeting of 13 October 1997. I I J 210. JSM sent a draft of minutes required to be considered and J adopted to LBL by letter of 27 October 1997. These were so couched to K K ratify the 1997 Debenture and authorize the entry into the Supplement to L Debenture. L M M 211. Charles Ma’s not hard pressed for attempt to avoid a N shareholders’ meeting because he believed there had been ratification N already was by letter to BEA dated 5 November. He also stated that the O O shareholders knew of and approved the further advance. He concluded: P “Therefore, we would be grateful if your bank could give us P convenience in the procedural matters.” Q Q 212. The response was a letter over the signature of William Chu R R dated 6 November 2007, to the effect that a shareholders’ meeting was S required to validate the original loan retrospectively and approve the new S loan. T T U U V V 由此 A - 50 - A B B 213. Then there followed the EGM, held on 26 November. There C are no longer available any copies of notices sent out for this meeting. C There must have been notice however, for the minutes record that 97.08% D D of the shareholders were present. E E 214. The defence contention of inadequacy of notice derives from F F regulation 52 of Table A, and the fact that the 3rd resolution was to alter G LBL’s Articles by giving the directors unlimited power to borrow. G H H 215. Section 13(1) of the CO requires that the altering of a I company’s articles require a special resolution, and regulation 52 that for I special resolutions notice must be not less than 21 days, exclusive of the J J day it has been served. K K 216. The first matter for consideration and determination is as to L L whether ratification was possible because regulation 81 of Table A speaks M of prior not subsequent ratification. M N N 217. Mr Whitehead submitted that prior ratification was a O contractual provision between the company and its members, and did not O displace the common law principle of ratification subsequently. P P Q 218. He quoted from two cases; the first, Bamford v Bamford [1970] Q R 1 Ch 212, in which Harman LJ said from page 237: R “It is trite law, I had thought, that if directors do acts, as they do S every day, especially in private companies, which, perhaps S because there is no quorum, or because their appointment was defective, or because sometimes there are no directors properly T T appointed at all, or because they are actuated by improper motives, they go on doing for years, carrying on the business of U U V V 由此 A - 51 - A B B the company in the way in which, if properly constituted, they should carry it on, and then they find that everything has been so C to speak wrongly done because it was not done by a proper board, C such directors can, by making a full and frank disclosure and calling together the general body of the shareholders, obtain D absolution and forgiveness of their sins; and provided the acts are D not ultra vires the company as a whole everything will go on as if E it had been done all right from the beginning. I cannot believe E that that is not a commonplace of company law. It is done every day. Of course, if the majority of the general meeting will not F forgive and approve, the directors must pay for it … The only F question is whether the allotment, having been made, as one G must assume, in bad faith, is voidable and can be avoided at the G instance of the company — at their instance only and of no one else, because the wrong, if wrong it be, is a wrong done to the H company. If that be right, the company, which had the right to H recall the allotment, has also the right to approve of it and forgive it; and I see no difficulty at all in supposing that the I I ratification by the decision of December 15 in the general meeting of the company was a perfectly good ‘whitewash’ of J that which up to that time was a voidiable transaction. And that J is the end of the matter.” K K 219. In Rolled Steel Products v British Steel Corp [1986] 1 Ch 246, L L Slade LJ at p.296 said the same thing rather more succinctly: M “However, the clear general principle is that any act that falls M within the corporate capacity of a company will bind it if it is N done with the unanimous consents of all shareholders or is N subsequently ratified by each consents.” O O 220. Mr Strachan advanced the proposition that in these cases there P P was no indication that the companies involved had an article requiring Q ratification to be prior. If subsequent ratification were sufficient, that Q would render the provision of the requirement of previous sanction otiose. R R S 221. It seems to me and I so find that LBL’s members were entitled S to meet to ratify a directors’ resolution after the event. The regulation in T T U U V V 由此 A - 52 - A B B Table A in question is not otiose; it simply gives the members the C contractual right to ratify by another means. C D D 222. The point raised by the defence that notice to the shareholders E was inadequate arises from the date of the Bank’s letter confirming the E need for a meeting, being 6 November 1997. F F G 223. Mr Strachan advanced the proposition that more likely than G not Charles Ma would not have given notice any earlier than receipt of that H H confirmation; hence the inadequacy by two days. I I 224. Mr Strachan alerted me to the provision of section 114(3) CO J J which provides that a meeting of a company called on shorter notice than K specified either by the CO or the Articles will be deemed to have been duly K called: L L “if it is so agreed … by a majority in number of the members M having the right to attend and vote at the meeting, being a M majority together holding not less than 95% in nominal value of the shares giving a right to attend and vote at the meeting.” N N O 225. But he went on to submit that that did not assist the cause of O the Bank. P P Q 226. He cited the case of re Pearce Duff & Co. Ltd [1969] All Q ER 222, in which on the point Buckley J said at p.224: R R “… The Companies Act, 1948, s.141(2), requires twenty-one S days’ notice in the case of a special resolution, with the proviso S as to resolutions being passed on short notice which is to be found in that subsection which I need not read at length. In my T judgment, that proviso requires the persons who agree to a T resolution being passed on short notice to appreciate that the U U V V 由此 A - 53 - A B B resolution is being passed on short notice and to agree to its being so passed with that consideration in their minds. I C think that it is clear that in the present case the shareholders who C signed the consent did not have it in their minds at all that the initial notice was defective in point of time. So, in my judgment, D this consent does not cure the matter in that way.” D E E 227. In this case there is no evidence that the shareholders present F and voting, albeit more than 95% of the membership, had appreciated that F notice was short and the resolution was passed with that in mind. G G H 228. The counter to that proposition was put up by Mr Whitehead. H I I 229. First the practical feature that there is nothing in the evidence J to presuppose that notice of the EGM could only have been given on or J K after 6 November 1997. After all, there was correspondence going back to K 18 October on the topic. And JSM had sent a draft of the proposed L L minutes on 27 October, with reference to the requisite notices to be sent M out. It could not, he submitted, in the absence of any evidence to that M effect, be said that more likely than not notice was irregular. The almost N N 100% turnout suggested on the balance of probabilities that notice had in O fact been regular. O P P 230. And short notice will not of itself render the subsequent Q meeting invalid. Q R R 231. He cited the case Browne v La Trinidad (1887) 37 Ch D 1, S where Lindley LJ said at p.17: S “… I think that, so far, Mr Marten’s argument is right, and if the T Plaintiff had complained that the meeting of directors convened T at such a short notice was not duly convened, and had sought the U U V V 由此 A - 54 - A B B interference of the Court to prevent the directors from acting on a resolution passed at it, I can understand that he would have had a C plausible case. But he did nothing of the kind. He took no C notice of the matter. He did not say that it was inconvenient for him to attend, and he did not ask the directors to adjourn it. He D does nothing at all until this notice convening the extraordinary D meeting has been issued and circulated, nor until four days E before the meeting. His contention now is that what he calls this E irregularity in serving the notice upon him, renders it incompetent for the shareholders to pass the resolution to F consider which they have had notice to meet. It appears to me F that, if we gave effect to such an argument as this, we should be G paralysing the whole course of business of these companies. It is G competent for directors to call meetings, it is competent for shareholders to pass resolutions, and the most that can be said H here is that there is or may be some irregularity, but an H irregularity (if such it be) which can be cured at any moment. In such case the Court never interferes. I think it is most important I I that the Court should hold fast to the rule upon which it has always acted, not to interfere for the purpose of forcing J companies to conduct their business according to the strictest J rules, where the irregularity complained of can be set right at any moment.” K K L 232. This case was followed by Deputy Judge K K Pang (as he then L was) in Hong Kong, in the case Yick Hok Wing v Chan Yook Ming [1997] M M 1 HKC 49. Suffice for me to read from the headnote, held at para.(2): N “(2) Short notice did not itself render the subsequent N meeting invalid. The court would be reluctant to interfere with O an irregularity in convening a meeting which could be cured at O any time. But where there was prima facie evidence to suggest that the notice of meeting was highly irregular, the court was P entitled to examine the intention of those convening the meeting P by considering the nature and effect of the resolutions passed in Q order to decide whether the directors were competent to act in Q the meeting. Browne v La Trinidad (1887) 37 Ch D 1 and Re Homer District Consolidated Gold Mines, ex p Smith (1888) 39 R Ch D 546 applied (at 56H-57G).” R S S 233. It serves for me to find, and I do so, that the best that the T defence could hope for is that notice could have been short by only 2 days T U U V V 由此 A - 55 - A B B out of 21 and that is by no means certain. At the meeting where very C nearly all the shareholders were present all resolutions were unanimously C passed. And there was nothing controversial about the resolutions, looking D D to pursue courses of action for the common good. E E 234. For me to hold the meeting was invalid for want of notice F F would be to presuppose there was want of notice with nothing concrete to G go on and then take a purely technical point where there was no G miscarriage of justice. H H I 235. I decline to do so, and find no such invalidity. I J J 236. I come next to deal with the defence’s case that the resolution K purportedly passed as resolution 3 could not hold good for two reasons; the K first, that the resolution being a special one requires not less than three L L quarters who voted to vote in favour of it. There was however nothing on M the record to show the numbers who voted for or against (if any); the M second, that the wording was invalid for want of specificity. N N O 237. As to the first matter of voting; it is dealt with in the text O Company Law in Hong Kong - Practice and Procedure. I quote from P P para.5.121: Q Q “Special Resolutions Introduction R R A special resolution is a resolution passed by not less than three S quarters of the votes cast by members at a general meeting of S which not less than 21 days’ notice, specifying the intention to propose the resolution as a special resolution, has been duly T given.” T U U V V 由此 A - 56 - A B B I have already dealt with the notice point. At 5.123: C “Further, pursuant to section 116(2) of the CO, unless a C poll is demanded, a declaration of the chairman that a special resolution is carried on a show of hands shall be conclusive D D evidence of the fact without proof of the number of proportion of the votes recorded in favour of or against the resolution. E E … F However, a chairman’s declaration is not conclusive where F on the face of the declaration, it is shown that the resolution has not been passed by the majority required by the statute.” G G H 238. Standing back, and reading the minutes as a disinterested H observer, and recognizing that a special resolution is usually required for I I the more important things that a company is required to do, it would not be J difficult to treat the chairman’s commentary of: J K “Passed, as for wording please request consultant Tai to co- K ordinate and amend.” L L as in fact shorthand for passed unanimously on the terms spelt out. M M 239. Mr Tai the solicitor in attendance representing LBL was I am N N sure not in attendance for fun. He was there to ensure that the meeting was O conducted appropriately such that resolutions purportedly passed were in O fact passed. P P Q 240. There was nothing to suggest otherwise; I am prepared so to Q find. R R S 241. As to the lack of specificity; I come to that next. S T T U U V V 由此 A - 57 - A B B 242. It is a matter of common sense and natural justice that a vital C feature of the passing of a special resolution to change the borrowing C powers of the directors requires the resolution passed to match that which D D was put up to the members. E E 243. But that does not mean in precisely the same wording. F F G 244. The matter was dealt with in the case In re Moorgate G Mercantile Holdings Limited [1980] WLR 227. Slade J was dealing with H H whether or not a special resolution had been validly passed in terms of I section 141(1) of the Companies Act 1948. First at p.230 he rehearsed the I relevant terms: J J “Section 141(2) of that Act, omitting an immaterial proviso, K defines a ‘special resolution’ as follows: K ‘A resolution shall be a special resolution when it has L been passed by such a majority as is required for the L passing of an extraordinary resolution and at a general meeting of which not less than 21 days’ notice, specifying M M the intention to propose the resolution as a special resolution, has been given: …’” N N Then he analysed various authorities before stating at p.241: O O “… In the light of this analysis of the authorities and of the wording of section 141(2), I shall now attempt to summarise P what are in my judgment the relevant principles relating to P notices of, and the subsequent amendment of, special resolution: Q Q (1) If a notice of the intention to propose a special resolution is to be a valid notice for the purposes of section 141(2), it must R identify the intended resolution by specifying either the text or R the entire substance of the resolution which it is intended to propose. In the case of a notice of intention to propose a special S resolution, nothing is achieved by the addition of such words as S ‘with such amendments and alterations as shall be determined T upon at such meeting’. T U U V V 由此 A - 58 - A B B (2) If a special resolution is to be validly passed in accordance with section 141(2), the resolution as passed must be the same C resolution as that identified in the preceding notice; the phrase C ‘the resolution’ in section 141(2) means ‘the aforesaid resolution’. D D (3) A resolution as passed can properly be regarded as ‘the E resolution’ identified in a preceding notice, even though (a) it E departs in some respects from the text of a resolution set out in such notice — for example by correcting those grammatical or F clerical errors which can be corrected as a matter of construction, F or by reducing the words to more formal language — or (b) it is G reduced into the form of a new text, which was not included in G the notice, provided only that in either case there is no departure whatever from the substance. H H (4) However, in deciding whether there is complete identity between the substance of a resolution as passed and the I I substance of an intended resolution as notified, there is no room for the court to apply the de minimis principle or a ‘limit of J tolerance.’ The substance must be identical. Otherwise the J condition precedent to the validity of a special resolution as passed, which is imposed by section 141(2), namely that notice K has been given ‘specifying the intention to propose the resolution K as a special resolution’ is not satisfied. L L (5) It necessarily follows from the above propositions that an amendment to the previously circulated text of a special M resolution can properly be put to and voted on at a meeting if, but M only if, the amendment involves no departure from the substance of the circulated text, in the sense indicated in propositions (3) N N and (4) above.” O O 245. In this case I have already stated that no copy of the notice P calling the meeting has been found. But I believe it not improper to take as P read that it would have been in terms of the minutes which were recorded Q Q in Chinese. R R S 246. I am reading from an English translation appropriately S certified. The relevant parts are as follows: T T U U V V 由此 A - 59 - A B B “Propose III C Cause of Business: In view of the present actual situation and C Bank loan requirement, it is intended to have minor addition and deletion to the articles of D association of this Company, please check D and discuss. E E Particulars: … F 2. To increase Article 17 of the original F articles of association: G ‘The directors may exercise all the powers of G the company to borrow money, even to exceed the nominal amount of the share H H capital of the company for the time being issued, and to mortgage or charge in I undertaking, property and uncalled capital, I or any part thereof, and to issue debentures, debenture stock, and, subject to section 57B J of the Ordinance, convertible debentures and J convertible debentures stock, and other K securities whether outright or as security for K any debt, liability or obligation of the company or of any third party.” L L It was following this passage that was recorded: M M “Resolution: Passed, as for wording, please request consultant Tai to co-ordinate and amend.” N N O 247. What becomes apparent and important in the context is what O Mr Tai achieved in the drafting of the resolution for notification to the P P Registry. Was it in a text involving no departure from the substance of the Q circulated text? Q R R 248. That which came to be filed was in the following form: S S T T U U V V 由此 A - 60 - A B B “Company No.9545 C THE COMPANIES ORDINANCE (CHAPTER 32) C SPECIAL RESOLUTION D D OF E LABOUR BUILDINGS LIMITED E F Passed on the 26th day of November, 1997 F G G At an Extraordinary General Meeting of the Members of the Company duly convened and held at 8th Floor, Mascot House, H H 746 Nathan Road, Kowloon on Wednesday the 26th day of November 1997 the following Special Resolution was passed: I I THAT the Articles of Association be and they are hereby amended in the following manner, namely: J J (a) … K K (b) By the insertion of Article 17 as follows: L ‘The proviso of rule 81 of Table A does not apply to the Articles L of Association of the Company. Thus, the Directors may exercise all the powers of the Company to borrow money and to mortgage M or charge its undertaking, property and uncalled capital, or any M part thereof, and to issue debentures, debenture Stock, and subject to section 57B of the Companies Ordinance, convertible N N debentures and convertible debenture stock, and other securities whether outright or as security for any debt, liability or obligation O of the Company or of any third party.’ O (Signed) P P Chairman Pang Chun Hoi” Q Q 249. Mr Strachan complained that the words in italics were added R R post resolution. S S 250. I agree that this is so. But not as I find to change the T T substance of what was passed. U U V V 由此 A - 61 - A B B 251. Mr Tai had made amendment, but not as I find to depart in any C way from the substance. C D D 252. I am satisfied that what happened at the meeting was that the E special resolution giving the directors unlimited power to authorize E borrowing was properly passed. F F G 253. Thus at the meeting of 26 November 1997, the members: G H (a) ratified the 1997 Debenture; H (b) authorized the Supplement to Debenture; I I (c) resolved to give the directors unlimited power to borrow. J J K The 1999 Debenture K L 254. I now come to this security which by virtue of the extension L for repayment of the loan asked for by LBL and approved of by BEA’s M M Credit Committee purported to replace the 1997 Debenture and N Supplement to Debenture, and became, as it is now, the current security. N O O 255. I have already spelt out the grounds upon which the defence P relies with the primary one being that the Board meeting authorizing P execution of the new security, whose purported minutes record that it was Q Q held on 17 September, did not take place, so that the minutes are a forgery. R R 256. In his closing submission Mr Whitehead conceded that I am S S entitled to infer that the date is wrong; that the minutes could not have T come into existence before 29 October 1999. He is right to do so. The T U U V V 由此 A - 62 - A B B analysis undertaken by the defence cannot lead to any alternative. But C there is strong opposition to the allegation that there was no meeting, and C that the minutes are a forgery. D D E 257. In response to that, Mr Strachan submitted that this was not E just about a document having been accidentally dated with the wrong date. F F The sole signatory of the minutes Charles Ma had sent a fax to JSM of G 30 October 1999 which recorded in part: G “2. The Board of Directors had a meeting and discussed the H H matters of loan documents and signing long ago. Director Hsu and I will come to sign on behalf.” I I J 258. This he submitted establishes there was deception, for the day J before, being the earliest date possible, is hardly “long ago”. Furthermore, K K there is the difficulty that Mr Pang, one of the directors purportedly present, L did not leave Hong Kong for the whole of 1999. As he thus submits: L “It is crystal clear that [LBL] did not hold the ’17 September M 1999’ board meeting on another date.” M N N 259. Thus it is the defence case that the minutes are a forgery, a lie O unto themselves. O P P 260. That is the matter I shall now address. Q Q R The Law on Forgery R 261. As with all matters that go to establish facts out of evidence in S S dispute, the burden of proof falls upon he who alleges. The standard of T proof in civil cases is upon a balance of probabilities. This standard does T U U V V 由此 A - 63 - A B B not change even if the allegation is a serious one such as one of dishonesty. C But nevertheless what is required to establish the misconduct complained C of is a degree of probability commensurate with the occasion. D D E 262. This principle was examined by the Court of Final Appeal in E Hong Kong in the case ADS v Brothers [2000] 3 HKCFAR 70. In that F F case the judge at first instance had made a finding of fact on an allegation G of fraud. I record first a part of the headnote: G “Fraudulent trading H H (1) The standard of proof in civil cases, in which serious I allegations of misconduct such as fraud were in issue, was I on the preponderance of probabilities, but the degree of probability must be commensurate with the occasion. J ‘Commensurate with the occasion’ did not mean that the J court was looking for a degree of probability higher than the civil standard. Rather, it meant that the more inherently K K improbable the act in question, the more compelling would be the evidence needed to satisfy the court on a L preponderance of probabilities. Here, the Judge understood L perfectly well what was required.” M M Lord Hoffmann said at p.78: N “In Re H (Minors) (Sexual Abuse: Standard of Proof) N [1996] AC 563 at pp.586-587 Lord Nicholls of Birkenhead O pointed out that if proof is required on a preponderance of O probabilities (ie, a probability of >0.5 on a scale from 0 (impossibility) to 1 (certainty)), it is inconsistent to require a P ‘degree of probability commensurate with the occasion’. This P suggests some other degree of probability, higher than >0.5, Q somewhere between the civil standard and the criminal standard, Q which the courts have wisely never attempted to define as a point on the probability scale. The correct analysis is that the court is R not looking for a higher degree of probability. It is only that the R more inherently improbable the act in question, the more compelling will be the evidence needed to satisfy the court on a S S preponderance of probability. T As an exercise in terminological hygiene, this analysis is, if T I may respectfully say so, timely and faultless…” U U V V 由此 A - 64 - A B B At p.91 he went to the well-established rule that an allegation of fraud has C to be pleaded with sufficient particularity to give the defendant fair notice C of the case he has to meet. Then he went on to say: D D “In addition to particularity in the pleadings, fairness requires that the adverse findings which the Judge will be invited E E to make should have been put squarely to the witness in cross- examination, so that he can have the opportunity to offer an F explanation. The Court has examined in detail the relevant parts F of the cross-examination of Mr Brothers and I cannot find any place in which the two allegations about his state of mind were G adequately put to him.” G H And finally, at p.96: H I “In my opinion, therefore, the evidence to contradict I Mr Brothers is insubstantial. It is hard to escape the conclusion that when the Judge made his finding at para.6.13.45 that J Mr Brothers ‘deliberately withheld the cash flow and, J notwithstanding his belief in support, he was dishonest in doing so’, he must have forgotten what he had said 250 pages earlier in K K his judgment about the standard of proof required to sustain a finding of dishonesty. The onus was on ADS to prove by L compelling evidence that Mr Brothers concealed the cash flow. L The evidence must be sufficient to overcome the inherent improbability that he would have done so. In my view, they M produced nothing more than a speculative theory. They did not M discharge the burden of proof and for that reason also the N misrepresentation appeal must be dismissed.” N O O 263. The principle was central to findings of fact and law that the P CFA made and delivered judgment on in the infamous case Nina Kung v P Wang Din Shin [2005] 8 HKCFAR. I recite part of the headnote: Q Q “If someone wished to dispute the validity of a will … he bore the evidential burden of putting the relevant ground of challenge R in issue. F had positively pleaded forgery in circumstances R necessarily implying the existence of a broader conspiracy. He S had the evidential burden of adducing evidence probative of such S forgery. When weighing up and assessing the probabilities to be ascribed to such evidence, the court must bear in mind the T seriousness of the misconduct alleged, recognising that it carried T an inherent degree of improbability. Also, here the court was U U V V 由此 A - 65 - A B B invited to reach a conclusion of forgery as an inference on the basis of circumstantial evidence, but any such inference must be C properly grounded in the primary facts. Inferences of fraud or C serious misconduct could only be drawn where such inferences were compelling; it was not permissible merely to choose what D might be the more likely of two guesses if neither was properly D justified by the primary facts.” E E Ribeiro PJ, delivering judgment, also referred to Re H & Others (Minors) F at p.440: F G “G.4 The relevance of Re H to the respondent’s case on forgery G 181. There was much discussion as to the extent to which the H principle explained in Re H & Others (Minors) (Sexual Abuse: H Standard of Proof) [1996] AC 563, is applicable in the present case in relation to the respondent’s allegation of forgery. I I 182. The majority in the House of Lords in Re H & Others J (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 held J that the civil standard requiring proof on a balance of probabilities continues to apply where, in civil proceedings, an K allegation is made of criminal (or similarly serious) misconduct, K but explained that such standard is to be applied flexibly, L factoring in the inherently greater improbability of serious L misconduct as compared with lesser forms of misconduct, and therefore requiring the person bearing the burden of proving the M allegation to prove it with evidence of a commensurate cogency. M The well-known passage in the speech of Lord Nicholls of Birkenhead states as follows: N N ‘The balance of probability standard means that a O court is satisfied an event occurred if the court O considers that, on the evidence, the occurrence of the event was more likely than not. When assessing the P probabilities the court will have in mind as a factor, P to whatever extent is appropriate in the particular Q case, that the more serious the allegation the less Q likely it is that the event occurred and, hence, the stronger should be the evidence before the court R concludes that the allegation is established on the R balance of probability. Fraud is usually less likely than negligence. Deliberate physical injury is usually S S less likely than accidental physical injury. A step- father is usually less likely to have repeatedly raped T and had non-consensual oral sex with his under age T stepdaughter than on some occasion to have lost his U U V V 由此 A - 66 - A B B temper and slapped her. Built into the preponderance of probability standard is a generous degree of C flexibility in respect of the seriousness of the C allegation. (at p.586)” D D Finally on the topic, is the case of Ming Siu Ching v Ming Shiu Sum [2006] E 9 HKCFAR. The judge at first instance drew an inference that the E memorandum in Chinese had been forged implicating parties called F F Lawrence and Ivy Wong. Ribeiro PJ said at p.354: G “53. The meaning and evidential status of the Chinese G memorandum is discussed further below in the context of the H Court of Appeal’s judgment. Just what can be inferred on the H basis of that document is in issue. However, what is entirely clear is that fraud — by necessary implication fraud on the part I of Lawrence and Ivy Wong — cannot legitimately be inferred, I whether on the basis of the Chinese memorandum or on the basis J of any of the other evidence in the case. J 54. The fraud theory was simply not open to the Judge. K It is nowhere pleaded. It was not explored in evidence and was K never put to either Lawrence or Ivy Wong when they gave evidence at the trial.” L L He then went on to quote a passage from the judgment of Lord Hoffmann M M in ADS v Brothers I have already referred to. N N O Is Forgery Made Out? O 264. Returning now to the facts of this case. The fraudster, if fraud P P there was, was Charles Ma. Realistically it could be no one else, for his Q Q signature and his alone is on the minutes, well recognisable from numerous R letters and documents in the trial. R S S 265. Yet Charles Ma was not called to give evidence, to face fairly T and squarely the serious allegation that he had committed fraud. And there T was no explanation as to why not, beyond that he is “probably somewhere U U V V 由此 A - 67 - A B B in Taiwan”. Needless to say he was not joined as a party or independently C sued; there has been no complaint made to the police. There is thus no C evidence which might go to establish what did, or did not, take place prior D D to execution of the 1999 Debenture. E E 266. It goes without saying that if there was a Board meeting but F F that it took place on a later date prior to the signing of the 1999 Debenture G it could not be branded a forgery. G H H 267. There is this further anomaly; forgery invariably is an act I undertaken to create something out of nothing for personal illicit gain. I Where is Charles Ma’s motivation to undertake seriously dishonest activity? J J There is nothing contentious. 97% of LBL’s membership had voted in K favour of the Bank’s participation in the project back in 1997. It was K entirely for the benefit of LBL that the 1999 Debenture be executed. L L Nobody complained at the time or thereafter that the directors had not M approved of and authorized the extension in the shape of this document. M Throughout the years of the project there had been unanimity in the N N meeting of minds. O O 268. These are all compelling features of the case which go to the P P inherent improbability of Charles Ma committing so grave a sin as to have Q made up the minutes. Q R R 269. Could the meeting have been held in circumstances where not S S all those said to have been at the meeting were physically present? T T U U V V 由此 A - 68 - A B B 270. Mr Whitehead took me back to Company Law in Hong Kong C at 5.05: C “Alternative modes of conducting meeting D D The gist of a meeting being the meeting of the minds, it is also not necessary that all persons must attend a meeting face-to-face E E in the same place provided that there are adequate audio-visual links to enable all persons to hear and be heard and to see and be F seen. In the words of Browne-Wilkinson V-C in Byng v London F Life Association: G ‘The rationale behind the requirement for meetings in G the 1985 Act is that the members shall be able to H attend in person so as to debate and vote on matters H affecting the company. Until recently this could only be achieved by everyone being physically present in I the same room face to face. Given modern I technological advances, the same result can now be achieved without all the members coming face to face; J J without being physically in the same room they can be electronically in each other’s presence so as to hear K and be heard and to see and be seen. The fact that such K a meeting could not have been foreseen at the time the first statutory requirements for meetings were laid L down, does not require us to hold that such a meeting L is not within the meaning of the word ‘meeting’ in the M 1985 Act…’ M The more difficult question, however, is whether a general N meeting could be held through telephone conference. It was held N in Re Associated Color Laboratories Ltd that a meeting could not be held over the telephone or by similar means. That is however O O not conclusive. First, the Court placed specific emphasis on the company’s articles which provided for a physical meeting or a P written resolution signed by all and said that the framers of the P articles could not be taken to have contemplated a third way, namely, directors’ meetings over the telephone. Second, this Q case was cited by counsel for the plaintiff in Byng v London Life Q Association in support of the argument that a meeting required an R assembly of persons who were present face to face at one time R and place and not separate assemblies at different places which, as cited above, was dismissed by the Court. Applying the S reasoning of Browne-Wilkinson V-C, there is no sound reason S why a meeting could not be conducted via a telephone conference (let alone a video conference) during which all T T members could hear and be heard simultaneously and U U V V 由此 A - 69 - A B B instantaneously. This is also consistent with the dicta of Tadgell J in the Australian case of Bell & Another v Burton & Others on C directors’ meetings: C ‘No doubt there is no necessity nowadays — if there D ever was — that directors should gather physically D together at a directors’ meeting. In appropriate E circumstances they may meet by assenting to a E document, or by telephone, video link, or other electronic means which caters for a meeting of their F minds.’” F G G 271. I have already referred to regulation 100 Table A which H entitles the directors to conduct meetings as they see fit. With some of the H directors in Hong Kong and others in Taiwan it seems quite feasible that I I some less formal approach was taken, particularly as there could have been J no potential dissent to what was to be resolved. There could have been a J conference call, or contemporaneous exchange of emails, or voting by K K proxy. All these alternatives in the context I find to be perfectly L reasonable and feasible. L M M 272. As Ribeiro PJ said at p.360 in Ming v Ming: N N “Whether at the end of the day the court is entitled to draw the inference sought by the plaintiffs therefore depends on the O evidence as a whole, the evidence both for and against such O inference.” P P 273. In the circumstances of this case I am not satisfied that the Q Q allegation of forgery of the minutes has been made out. R R 274. The other allegations of irregularity of the minutes fall away S S consequent upon my findings on the validity of the EGM of 26 November T 1997. T U U V V 由此 A - 70 - A B B Improper Disbursements C 275. These allegations were pleaded in the Statement of Defence as C amended. D D E 276. Paragraph 15 provided a number of excerpts from the 1997 E Debenture. At 15(f): F F “(f) Clause 12.01 provides that: G G ‘All payments to be made hereunder by the lender to the Borrower in respect of each Drawing shall on the date of H such Drawing be made available by the Lender to the H Borrower by crediting the Current Account or by a cheque or I cheques made payable to the Borrower or to its order or as I the Borrower shall direct and drawn on a licensed bank in Hong Kong in immediately available funds.” J J Paragraph 26 reads: K K “26. Further or in further alternative, the Defendants aver and say that: L L (a) The payment provision of the alleged banking facilities M was provided for in Clause 12.01 of the 1 st Debenture M as pleaded in paragraph 15 hereinabove. N (b) On divers dates from 24th February 1997 to 8th July N 1998, in breach of Clause 12.01 and without any or any proper authority from the 1 st Defendant, the Plaintiff O O made payments of the total sum of HK$10,307,000,00 directly to 2 accounts of the 1 st Defendant maintained P with a Taiwan-controlled Hua Nan Commercial Bank P operated by Kuomintang’s signatories instead of the designated current account under the 1997 Debenture. Q Q (c) The said accounts in Hua Nan Commercial Bank were not operated for the benefit of the 1 st Defendant and R R had nothing to do with the project of the Property. The current management of the 1 st Defendant was unable to S trace the whereabouts of the fund transferred to the S Hua Nan Commercial Bank accounts. T (d) Further, the Plaintiff, as the 1 st Defendant’s banker, has T a duty to exercise reasonable care and skill to handle U U V V 由此 A - 71 - A B B the 1st Defendant’s bank accounts and the banking facilities being granted. The Plaintiff has been in C breach of this duty in relation to the said payments of C HK$10,307,000.00 made by the Plaintiff. Further, by reason of matters set out in paragraphs 23, 24 and 25 D above and also in paragraphs 27 and 27A herein below, D insofar as the Plaintiff had actual knowledge of the E matters referred to therein in addition to the E circumstances hereof, it is averred that in making the said payments of HK$10,307,000.00 directly to the F said 2 accounts maintained with a Taiwan-controlled F Hua Nan Commercial Bank, the Plaintiff had acted in G knowing breach of Clause 12.01 of the 1 st Debenture G and had dishonestly assisted directors of the 1st Defendant at the material times in misappropriating H the said HK$10,307,000.00 which should not have H been paid out in the manner that was done and was therefore liable to account to the 1 st Defendant for the I I same. Accordingly it is averred that the 1 st Defendant is not liable to the Plaintiff for any such amount. J J (e) Further or alternatively, the Plaintiff should be ‘put on inquiry’ about the funds transferred or withdrawn by K the 1st Defendant for this matter. K (f) The 1st Defendant had not retained the said L L HK$10,307,000.00 or any part thereof and the payment by the Plaintiff of the said HK$10,307,000.00 M conferred no benefit on the 1st Defendant.” M N Paragraph 27(b) onwards reads in part: N “27(b) By …allowing monies to be drawn down by the O 1st Defendant to pay back a total sum of O HK$7,649,411.00 to APH which APH had previously, if at all, channelled through the 1st Defendant for payment P P out for various purposes of APH which were, to the knowledge of the Plaintiff, not for the benefit of the Q 1st Defendant (particularly when the Plaintiff could have Q but did not require the said sum of HK$7,649,411.00 to be subordinated to the indebtedness under the 1997 R R Debenture), the Plaintiff dishonestly assisted in the breaches of fiduciary duties of the directors of the S 1st Defendant. In any event the Plaintiff was at the very S least in breach of its duty as set out in paragraph 23 above not to release any facilities under Tranches B and T C; T U U V V 由此 A - 72 - A B B (c) The Plaintiff knew that the said sum of HK$7,649,411.00 was not for the benefit of the C 1st Defendant in that: C (i) The Plaintiff had a copy of the letter dated D 17th October, 1996 from the 1 st Defendant to its D then solicitors which contained a breakdown of E an alleged loan of HK$6,100,000.00 from APH E to the 1st Defendant. The breakdown included items such as loans of HK$2,430,000.00 to a F shareholder of the 1 st Defendant and management F fees of HK$540,000.00 to APH which were unrelated to the construction project. The parts G G of the loan alleged to have been used for construction purposes were under a separate H heading described as ‘工程款’ in the said letter; H (ii) The amount of alleged shareholders’ loan from I APH to the 1st Defendant at the I HK$6,100,000.00 as at 17th October, 1996 was J allegedly increased to HK$7,649,411.00 as at the J date of the Subordination Agreement dated 26th February, 1997, when there was no activity K on the part of the 1st Defendant in relation to the K construction project during that period which would have necessitated any increase of such L L shareholder’s loan; M (iii) The Plaintiff did not permit monies to be drawn M from Tranche A (which was for construction expenses) for repayment of the HK$7,649,411.00 N but instead permitted a sum of HK$2,859,304.00 N and another sum of HK$4,790,107,000 to be O drawn respectively from Tranche B and O Tranche C for such repayment; P (d) The applying for and using of such increased banking P facilities, in particular for repaying the HK$7,649,411.00 to APH, in the name of D1 in manner Q as pleaded in (b) of this paragraph by one or more of the Q directors of the 1st Defendant at the material time were R in breach of their fiduciary duties as directors to the R 1st Defendant. S (e) The 1st Defendant avers that it has suffered loss and S damages because of the said assistance of the Plaintiff to breach of fiduciary duties by directors of the T T 1st Defendant at the material times, or alternatively because of the Plaintiff’s said breach of duty to the U U V V 由此 A - 73 - A B B 1st Defendant as set out in paragraph 27(b) above, and that the 1st Defendant would use whatever damages it is C entitled to hereunder to offset against any liability it C might have to the Plaintiff under these proceedings. D … D (h) Instead of insisting on all shareholder’s loans from E E shareholders to the 1 st Defendant to be subordinated to the banking facilities as one of the conditions for F drawdown (as the Plaintiff is entitled to do under the F Subordination Agreement with APH and the 1st Defendant), the Plaintiff without any or any proper G inquiry or investigation permitted shareholders’ loans of G HK$7,649,411.00 to be paid off with monies drawn H down under Tranches B and C of the 1997 Debenture; H …” I I Finally in the counterclaim at paragraph 49: J J “49. In the premises, the Plaintiff was liable to the 1st Defendant as constructive trustee, or alternatively in K damages for breach of duties (including breach of K contractual duty if (which is denied) the 1997 Debenture L and the 1999 Debenture were valid and effective) and/or L for dishonest assistance in the breach of fiduciary duties by the directors of the 1 st Defendant (as hereinbefore M pleaded), in relation to any misappropriation of funds M obtained from the Plaintiff by the 1 st Defendant’s N directors before 2001. Pending full discovery, the N 1st Defendant avers that the amounts of $10,307,000.00 and $7,649,411.00 respectively referred to in paragraphs O 26 and 27 above were part of the misappropriated fund.” O P P 277. The Hua Nan account in question is one of several held by Q LBL in its name. The $10,307,000 was the sum total of seven drawdowns Q made by BEA into that account at the request in turn of Charles Ma or R R Mr Hsu between February 1997 and July 1998. S S 278. The complaint is that the Bank knew or ought to have known T T that Charles Ma and Mr Hsu were of the KMT, to whom they owed U U V V 由此 A - 74 - A B B allegiance ahead of their loyalty to LBL, and that they knew or ought to C have known that paying the money otherwise than as designated in C clause 12.01 of the 1997 Debenture put it at risk of being spirited away and D D thus otherwise than for use in the construction project. Mr Strachan E submitted: E “603. Thus P, when remitting the said 7 sums to the order of F Charles Ma or Hsu Chi Ching, appeared to be content F not to act in accordance with either of the only two G methods of payment provided for by the 1 st Debenture. G The consequence of the remission of these funds by inter bank transfers was that it rendered the destination of the H funds very difficult to trace and facilitated the H dissipation of the funds by the Kuomintang signatories I (Charles Ma and Hsu Chi Ching) who operated the I accounts.” J J 279. What was lately established, by virtue of a court order asked K K for and made during the trial, requiring the Hua Nan Bank to produce L LBL’s bank accounts for the period, was that at least some of these L amounts were transferred to APH HK, which ran an account or accounts at M M the same bank. N N 280. As can be seen in the excerpts from the pleadings, the O O $7,649,411 represents the total of $2,859,304 and $4,790,107, being P amounts the Bank permitted to be excluded from the Subordination P Agreement. Further, the Bank permitted these sums to be repaid out of Q Q funds allocated for the project. R R 281. It is said of this that the Bank’s officers by allowing the S S Subordination Agreement to be framed in this way knowingly assisted T Charles Ma and others with allegiance to APH HK to favour APH HK at T U U V V 由此 A - 75 - A B B the expense of LBL. Further, that the total figure was accepted at face C value without any evidence that this was the total due. C D D 282. This resulted, Mr Strachan submitted, in Charles Ma being: E “given a free hand by [BEA] to draw down $7,649,411 under the E loan facility. He was therefore enabled to dissipate such monies F in anyway he saw fit.” F And further: G G “By disbursing the said sums at the instigation of Charles Ma H and Hsu Chi Ching [BEA] dishonestly assisted the breaches of H trust on the part of those persons. It is also contended that P dishonestly assisted breaches of trust in connection with D1’s I entry into the 2nd Debenture and the drawing of monies I thereunder: …” J J 283. In response, Mr Whitehead submitted that the annual accounts K K independently audited for the years under review made available by LBL L L to the Bank in terms of both debentures disclosed the total indebtedness M which was acknowledged, properly reported and had never been disputed M during the relevant times. These accounts showed that by the end of 2000 N N the total amount due to the Bank was $44.385 million. At that time O $42.104 million had been expended on the project. O P P 284. These accounts were not then and have not now been Q challenged. K K Lee was of no help to the cause; he said he had no Q personal knowledge of the accounts and he did not even know how much R R was borrowed from the Bank. S S T T U U V V 由此 A - 76 - A B B 285. But an interesting feature emerged following his wholesale C redacting of his witness statement once in the witness box. Clause 35 C reads (in its original form) as follows: D D “35. I was specifically asked by the 1 st Defendant’s solicitors as to an alleged loan owed by the 1 st Defendant to APH. E E As the Chairman of HKTU (the 2 nd largest shareholder of the 1st Defendant), I was always informed by Mr Pang F sitting as the chairman of the 1 st Defendant’s board. I was F not aware of any loan from APH to the 1st Defendant because the 1st Defendant had no expenses at all. The G 1st Defendant was merely the conduit of funding of G HKTU missions by Kuomintang. From my experience H and knowledge of the practice of Kuomintang, the H alleged sum of $7,649,411 ($2,859,304 + $4,790,107) should be funds for carrying out different political I missions by different groups of Kuomintang I members.” J J Then it was that he required the last two sentences (in heavy case for ease K of reference) to be crossed out explaining in cross-examination that they K were incorrect. L L M 286. But of course he overlooked that LBL did have the M expenditure associated with the project and that had to be funded. So the N N rd 3 to last sentence was obviously wrong as well. O O 287. Mr Whitehead went on to make four points concerning the P P drawdowns which totalled $10.307 million. I spell them out verbatim: Q Q “204.1. First, both accounts at Hua Nan Bank to which the 7 drawings were made belong to LBL, not to Mr Ma, not R to Mr Hsu and certainly not to KMT. R 204.2. Second, the signatories of these accounts were the S directors of LBL including Mr Pang who represented the S interest of HKTU. T T U U V V 由此 A - 77 - A B B 204.3. Third, the Defendants made no genuine attempts to trace these monies until they made an application for a C Bankers’ Books Order on the 26th day of the trial upon C the suggestion from the legal team of the Bank. In compliance with the order, Hua Nan Bank duly D produced the bank statements in relation to the accounts D of LBL and APH on 22 October and 5 November E respectively. E 204.4. Fourth and most important, the evidence establishes that F this HK$10,307,000.00 was used for nothing else but the F benefit of LBL.” G G He went on to show from the material released how all but $700,000 of H this amount can be seen to have gone to meet project costs. H I I 288. Further, he took me to the Hua Nan records to show that the J two amounts which the defence now contends were wrongly utilised are in J fact one amount; namely the $10.307 million which was used almost K K entirely for the construction project. L L 289. I am satisfied on analysis that it has not been established that M M there was anything untoward in the disbursement of funds; in particular the N specific sums referred to. N O O 290. There is nothing to the point that the Subordination P Agreement was in terms that unfairly favoured the majority shareholder to P Q the detriment of LBL. After all, there was a debt properly due, on account Q of project costs. So it was repayable and BEA had agreed to fund the R R project costs and other incidental expenditure. It was all part of the S original terms negotiated and then settled. S T T U U V V 由此 A - 78 - A B B 291. I treat as accurate the accounts independently audited and the C analysis undertaken by Mr Whitehead’s team to show that there was no C spiriting off of any of the money. In the result they were not able to D D account for every dollar. But that is hardly surprising after this passage of E time and with no project manager available to assist. E F F 292. But in truth the burden is not on the Bank to prove any of this. G G 293. There was as I find no misappropriation, no dishonest H H assistance by the Bank’s officers, and no breach of any fiduciary duty I owed by the Bank to its customer LBL. I J J 294. For completeness I shall briefly touch on the law going to a K bank’s duty where funds held in the Bank are misappropriated causing K loss to the customer. L L M 295. The case of Barclays Bank plc v Quincecare Ltd [1992] 4 All M ER 363 is on the point, the only material difference being that in this case N N the money taken was the customers, not the capital of a loan advanced. I O do not find this distinction to be a material one. O P P 296. Steyn J (as he then was) whose judgment it was, made the Q observation that the obligation should not be too irksome, for this would Q R unreasonably hamper the effective transacting of bank business. He R quoted from the judgment in Lipkin Gorman (a firm) v Karpnale Ltd [1992] S S All ER 331 wherein Alliot J considered what a bank’s relevant contractual T duties are towards a customer. T U U V V 由此 A - 79 - A B B At p.349: C “(1) The bank is entitled to treat the customer’s mandate at C its face value save in extreme cases. (2) The bank is not obliged to question any transaction which is in accordance with the D D mandate, unless a reasonable banker would have grounds for believing that the authorised signatories are misusing their E authority for the purpose of defrauding their principal or E otherwise defeating his true intention. (3) It follows that if a bank does not have reasonable grounds for believing that there is F fraud, it must pay. (4) Mere suspicion or unease do not F constitute reasonable grounds and are not enough to justify a G bank in failing to act in accordance with a mandate. (5) A bank G is not required to act as an amateur detective.” H H Steyn J went on to identify a factor which might well be decisive at p.377: I “Having stated what appears to me to be the governing principle, I it may be useful to consider briefly how one should approach the problem. Everything will no doubt depend on the particular facts J J of each case. Factors such as the standing of the corporate customer, the bank’s knowledge of the signatory, the amount K involved, the need for a prompt transfer, the presence of unusual K features, and the scope and means for making reasonable inquiries may be relevant. But there is one particular factor L which will often be decisive. L M That is the consideration that, in the absence of telling M indications to the contrary, a banker will usually approach a suggestion that a director of a corporate customer is trying to N defraud the company with an initial reaction of instinctive N disbelief. In Sanders v MacLean (1883) 11 QBD 327 at 343 Bowen LJ observed: O O ‘But the practice of merchants, it is never P superfluous to remark, is not based on the P supposition of possible frauds. The object of mercantile usages is to prevent the risk of insolvency, Q and of fraud; and any one who attempts to follow and Q understand the law merchant will soon find himself R lost if he begins by assuming that merchants conduct R their business on the basis of attempting to insure themselves against fraudulent dealing. The contrary S is the case. Credit, not distrust, is the basis of S commercial dealings; mercantile genius consists principally in knowing whom to trust and with whom T T to deal, and commercial intercourse and U U V V 由此 A - 80 - A B B communication is no more based on the supposition of fraud than it is on the supposition of forgery.’ C C That was, of course, a very different case, and the relationship between merchants is very different from the relationship D between a banker and a customer. But, it is right to say that trust, D not distrust, is also the basis of a bank’s dealings with its E customers. And full weight must be given to this consideration E before one is entitled, in a given case, to conclude that the banker had reasonable grounds for thinking that the other was part of a F fraudulent scheme to defraud the company.” F G Steyn J held on the facts that there was no want of probity on the part of G Barclays Bank and no question of assisting a breach of trust arose. H H I 297. This judgment was expressly approved of and followed when I Lipkin Gorman went on appeal whose reference is [1989] 1 WLR 1340. J J K 298. In this case the only feature that might be said to have been K out of the ordinary was that LBL in its drawdown notices requested the L L Bank to pay the funds on 7 occasions other than in strict accordance with M clause 12.01 of the 1997 Debenture. M N N 299. Mr Strachan made the point that this demonstrated that the O Bank’s officers were ready to permit conduct that was in breach of the O Debenture and permit drawdowns in anyway requested. P P Q 300. My view is that that was a technical breach in the extreme; Q one that could hardly have raised even half an eyebrow, given that it was R R an account in the customer’s name. There was otherwise no clue of any S dishonest activity; certainly not cogent and compelling evidence of S T dishonest activity. T U U V V 由此 A - 81 - A B B The Turquand Rule C 301. The discussion that follows presupposes a result, contrary to C that which I have arrived at, that there were irregularities not subsequently D D rectified by ratification at the various times now well documented when E the security was charged or extended. E F F 302. In such circumstance the defence contends that the Bank’s G G officers and solicitors had actual knowledge of these irregularities or were H put on notice about them so that the Bank could not seek protection behind H this rule. I I J 303. The case is The Royal British Bank v Turquand [1856] 6 E&B J 327. K K L 304. The rule states that a third party dealing with a company is L presumed to know the contents of documents lodged with the Registrar M M and which are thus open to inspection, such as the Memorandum, the N Articles, Annual Returns and so on. But the third party need not inquire N into the regularity of internal proceedings, also known as the indoor O O management, conducted by the company. Thus he may assume that steps P which need to be taken for a particular act to be properly authorized have P been taken. Q Q R 305. The rule is rationalized in Company Law in Hong Kong at R para.9.012: S S “A third party dealing with a company may sometimes find it T difficult to ascertain whether the transaction in question is duly T authorised by the company even if he has examined the U U V V 由此 A - 82 - A B B provisions of the memorandum or articles of association of the company before he enters into the transaction with the company. C For example, they are not in a position to compel the directors to C prove that the shareholders have endorsed the transaction in question or insist on inspecting the minutes-book of the company. D For this reason, the law provides some protection to an outsider D who deals with the company in good faith.” E E 306. The application of the Turquand rule to a banker/outsider was F F considered by the House of Lords in Mahony v East Holyford Mining Co G G [1875] LR 7 HL 869 in which the official liquidators/respondent tried to H recover from the bankers/appellant the amount of cheques signed by the H purported directors and secretary of a bubble company, who had never I I been properly appointed. Lord Chelmsford said at p.889: J “We have a right to assume that the bankers, acting with proper J caution, before they commenced transactions with the company, referred, as they were bound to do, to the articles of association, K to ascertain in what manner the account which had been opened K was to be drawn upon. Beyond the particulars of the objects of L the company, and information as to the mode in which the L account was to be dealt with, which alone the bank was concerned to know, I do not consider that any more preliminary M inquiries were necessary.” M N Lord Hatherley provided guidance on the operation of the rule at p.894: N “… when there are persons conducting the affairs of the O O company in a manner which appears to be perfectly consonant with the articles of association, then those so dealing with them, P externally, are not to be affected by any irregularities which may P take place in the internal management of the company. They are entitled to presume that that of which only they can have Q knowledge, namely, the external acts, are rightly done, when Q those external acts purport to be performed in the mode in which R they ought to be performed. For instance, when a cheque is R signed by three directors, they are entitled to assume that those directors are persons properly appointed for the purpose of S performing that function, and have properly performed the S function for which they have been appointed.” T T … U U V V 由此 A - 83 - A B B “Now, if the question came to be which of two innocent parties (as it is said) was to suffer loss, I apprehend, my Lords, that in C point of law what must be considered in cases of that kind is this: C which of the two parties was bound to do, or to avoid, any act by which the loss has been sustained. I think there can be no doubt D that in this case the shareholders of the company were the D persons who were bound to see that nobody usurped or assumed E the office of director unduly; … Now whose business was it to E see that that was all done properly? It was the business of the shareholders to see that it was done, and properly done … if F there is a fault on the one side or the other, it is on the side of F those who allowed these transactions to take place, when they G were not conducted by persons legitimately appointed on the part G of the company. On the other hand, on the part of the bankers, I see no possible mode by which they might have pursued their H inquiries in the manner contended for at the Bar without H requiring all the minute-books of the company to be produced to them, and without conducting a detailed investigation into all the I I transactions of the company as to the appointment of directors and the like — a duty they were not called upon to perform, and J a duty which, if it was objected to, they could not have insisted J upon performing.” K K 307. A third party is entitled to assume the internal regularity of a L L company in executing a mortgage under seal even though the Board M meeting of the company which authorised the execution of the mortgage M was inquorate; see: County of Gloucester Bank v Rudry Merthyr [1895] 1 N N Ch.629. In this case there was internal irregularity in the shape of an O inquorate meeting which authorised execution of a mortgage. It was held O “that as between the company and the mortgagers, who had no notice of P P the irregularity, the execution of the deed was valid.” Q Q 308. And here lies an established exception to the Turquand rule, R R namely, that the third party cannot pray in aid the rule if he knows of the S irregularity or is put on enquiry by the circumstances; see, for example S Liggett (Liverpool) v Barclays Bank [1928] 1 KB 48. T T U U V V 由此 A - 84 - A B B 309. A case in point is Rolled Steel Products v British Steel C Corporation [1986] 1 Ch.246. In this case a director procured the C company to execute a guarantee in favour of a third party for the personal D D benefit of the director. The third party was aware of the impropriety. The E Court of Appeal held the third party could not enforce the guarantee E against the company. Slade LJ said at p.292: F F “In the absence of notice to the contrary, the lenders would thus have been entitled to assume, on the authority of the principle in G G Turquand’s case, and on more general principles of the law of agency, that the directors of the borrowing company were acting H properly and regularly in the internal management of its affairs H and were borrowing for the purposes of the company’s business … However, a party dealing with a company cannot I rely on the ostensible authority of its director to enter into a I particular transaction, if it knows they in fact have no such J authority because it is being entered into for improper purposes. J Neither the rule in Turquand’s case nor more general principles of law of agency will avail him in such circumstance.” K K L 310. The third party can be assumed to be put on enquiry as to an L irregularity where there are unusual circumstances that ought to arouse his M M suspicion. In these cases the rule shall not apply; see Company Law in N Hong Kong at 9.014. N O O 311. Did BEA have knowledge or was it put on notice qua its P officers or solicitors in their capacity as agent of BEA? P Q Q 312. In the circumstances of this case the spotlight really falls on R JSM. Although Christine Wong and William Chu had the material R capacity to inspect and ensure regularity of procedures and documents, S S there would hardly have been any point were they to have done so having T T U U V V 由此 A - 85 - A B B engaged lawyers whose role was expressly to protect the Bank’s interests C with particular expertise in the performance of this important function. C D D 313. In this respect I repeat verbatim short extracts from E Mr Strachan’s cross-examination of Christine Wong: E “Q. Because of the nature of your work, may the court take it F that you have at least some familiarity with matters such as F ensuring that your customer is properly authorised to G borrow money from you? G A. In our usual procedures we would get our lawyer to handle H the corporate authorisation because it is a very technical H matter and on many occasions at the same time we have to deal with many customers at the same time, it’s impossible I I for us to review each and every single customer so we rely on our lawyer on their professionalism. And let me J emphasis the point here. As this is a very technical issue J we are confident that our lawyers are professional enough that they can handle all these matters properly and K appropriately.” K L Are a little further on: L M “Q. And presumably, Ms Wong, when you’re proposing to lend M moneys to a company you yourself get such information about that company as you can from official sources, such N as its articles, and you do not rely exclusively upon your N solicitors to get from the other side its Articles of Association and transmit them to you after the agreement O O has been executed. Long question. P a. I don’t agree. Because to me it is a very technical issue and P very administrative thing and we let our lawyer to handle these issues. And I knew that LBL had its own legal Q representative. And the LBL’s lawyer had the Q responsibility to ensure that when his client signed on any documents that they got sufficient corporate authorisation R R to do so.” S S 314. She and William Chu were entitled to rely on JSM’s certifying T T the correctness of the documentation and their opinion that the borrower U U V V 由此 A - 86 - A B B (LBL) had full power to borrow at the various stages of the transaction; for C instance by a letter of six pages of 27 February 1997 to that effect C following execution and registering of the 1997 Debenture. D D E 315. So what of JSM? Did they have knowledge or were they put E on enquiry about irregularities, assuming that there were irregularities, that F F invalidated the securities? G G 316. Given the task they were required to perform the answer can H H only be ‘yes’. It was after all vital in the interests of the Bank to ensure the I securities were enforceable. By their own directions the 1997 Debenture I was rendered unenforceable because the meeting authorizing it was on J J their view inquorate. Although I have found otherwise there was also the K difficulty about the directors’ limited power to borrow. It was it seems K their good fortune that LBL was prepared to co-operate by ratifying that L L debenture. And there was the potential if not actual danger associated with M the validity of the Board minutes of the meeting to authorize execution of M the 1999 Debenture. N N O 317. I regret to have to say that JSM did not during the course of O this transaction live up to their hard-won reputation for excellence of P P performance and reliability. Q Q R 318. That said, does the knowledge gained through performing as R the bank’s solicitors and agents get to be attributed to the Bank, so as to S S bind the Bank? T T U U V V 由此 A - 87 - A B B 319. Mr Whitehead submitted not so, at least not in the C circumstances of this case. He took me to an excerpt from Gore-Browne C On Companies, (45th edition) at 8[20]: D D “Where the third party is a company, only notice to those in the company who are involved in the deal will defeat the rule.” E E F 320. He contended that as JSM are not persons in the Bank F involved in the deal there is not notice. G G H 321. He also took me to the case of Saffron Walden Second Benefit H Building Society v Rayner [1880] 14 Ch. D 406 which he contended I I supported the proposition that notice given to solicitors is not good notice J to the persons for whom the solicitors are acting. I quote from the J headnote: K K “The Plaintiffs took a mortgage of a reversionary share in a L testator’s estate, and gave notice of the incumbrance to a firm of L solicitors who were acting for the trustees and executors in a Chancery suit to which the testator had been a party, and were M M employed by them in all matters relating to the testator’s estate in which professional assistance was required. The solicitors wrote N accepting the notice on behalf of the trustees. … There was no N further proof of their having received notice of it until after notices of other incumbrances had been duly given to them:- O O Held, by the Court of Appeal, reversing the decision of Bacon, V.C., that notice to the solicitors was not good notice to P P the trustees. Q … Q Held, therefore, that the Plaintiffs must be postponed to the R subsequent incumbrancers. R Held, that the solicitors in accepting service of the notice S on behalf of the trustees were not guilty of a misrepresentation of S fact for which they could be made liable, but were acting under T an opinion common to both parties, but which was erroneous in T U U V V 由此 A - 88 - A B B point of law, that their employment as solicitors enabled them effectually to accept service of the notice.” C C D 322. Mr Strachan on the other hand submitted that applying the D ordinary rules of agency, the answer is clearly ‘Yes’. He quoted from E E Bowstead and Reynolds on Agency, 18th edition. At Chapter 8, Principles F and Third Parties, under the sub-heading Knowledge Acquired Through F Agent: G G “(1) The law may impute to a principal knowledge relating to the subject matter of the agency which the agent acquires H while acting within the scope of his authority. H I (2) … I (3) Where the principal has a duty to investigate and J make disclosure, he may have imputed to him not J only facts which he knows but also material facts of which he might expect to have been told by his K agents.” K L L 323. There is further authority but suffice for me to say that I side M with Mr Strachan on the point. M N N 324. The quote from Gore-Brown is limited to a particular situation O not apposite to this case. O P P 325. And the circumstances in Saffron Walden are distinguishable. Q Q This can be seen upon a reading of the first part of the judgment of R James LJ, at p.408. R “JAMES, L.J.:- S S In this case it is my misfortune to differ from the conclusion at which the Vice-Chancellor has arrived. In the first T place, his Lordship appears to have been of opinion that the T notice given on behalf of the Plaintiffs to Messrs Stevens & U U V V 由此 A - 89 - A B B Bawtree, who were persons acting as solicitors for the executors and to some extent for the trustees, was in itself sufficient notice C to create a priority and to make the trustees liable to the same C consequences as if the notice had been given to them personally. That appears to me a startling proposition. It would be imposing D a most tremendous burden upon trustees to say that merely D because they have employed a solicitor in effecting an E investment of the trust funds upon mortgage, they have made E him their agent to receive any notices of subsequent incumbrances or dealings by the cestuis que trust of that trust F fund. I cannot see any principle leading to such a conclusion. I F have had occasion several times to express my opinion about the G fallacy of supposing that there is such a thing as the office of G solicitor, that is to say, that a man has got a solicitor not as a person whom he is employing to do some particular business for H him, either conveyancing, scrivening, or conducting an action, H but as an official solicitor, and that because the solicitor has been in the habit of acting for him, or been employed to do something I I for him, that solicitor is his agent to bind him by anything he says, or to bind him by receiving notices or information. There J is no such officer known to the law. A man has no more a J solicitor in that sense than he has an accountant, or a baker, or butcher. A person is a man’s accountant, or baker, or butcher, K when the man chooses to employ him or deal with him, and the K solicitor is his solicitor when he chooses to employ him and in L the matter in which he is so employed. Beyond that the L solicitorship does not extend, and a man is not an agent for the purpose of receiving notice of an incumbrance created by a M cestui que trust because he was the solicitor employed to invest M the moneys, or even because afterwards he, for convenience, received from the mortgagor the interest and handed it by N N direction of the trustees to the different persons entitled to receive it.” O O P 326. In this case JSM were actually performing their function for P and on behalf of BEA when knowledge was theirs if they had been alert to Q Q it. This is enough to bring them within the rule that that knowledge was R imputed to the Bank. R S S T T U U V V 由此 A - 90 - A B B 327. Thus were I to have found there was irregularity, the Bank C would not have been able to avoid the consequences by virtue of the indoor C management rule propounded in Turquand’s case. D D E Estoppel E F 328. Given the findings I have made on fact and law the Bank’s F reliance on estoppel is now otiose. But I shall deal with the plea in brief G G outline in case it becomes material. H H 329. It emerges in paragraphs 16A and 26A of the Reply in this I I way: J “1997 DEBENTURE ACTED UPON AND TREATED AS J VALID BY 1ST DEFENDANT AND ITS DIRECTORS AND K SHAREHOLDERS K 16A. At all material times before the commencement of these L proceedings the 1997 Debenture had been acted upon and L treated as valid by the 1 st Defendant, its directors and shareholders, and by the Plaintiff. The 1997 Debenture M M was therefore binding on the 1 st Defendant. The 1st Defendant has acquiesced in and/or waived the alleged N irregularities (if any) in the making or execution or N otherwise of the 1997 Debenture now relied on, and/or is estopped from denying the validity of the same. O O 1999 DEBENTURES ACTED UPON AND TREATED AS P VALID BY 1ST DEFENDANT AND ITS DIRECTORS AND P SHAREHOLDERS Q 26A. At all material times before the commencement of these Q proceedings the 1999 Debenture had been acted upon and treated as valid by the 1st Defendant, its directors and R shareholders (including Yan Hei (Holdings) Limited), and R by the Plaintiff. The 1999 Debenture is therefore binding S on the 1st Defendant. The 1 st Defendant has acquiesced in S and/or waived the alleged irregularities (if any) in the making or execution or otherwise of the 1997 and 1999 T Debentures now relied on, and/or is estopped from T denying the validity of the same.” U U V V 由此 A - 91 - A B B 330. Mr Whitehead submitted that if it were to be found that there C have been irregularities in the indoor management of LBL which were C either known to the Bank or of which the Bank was put on enquiry, LBL D D by its conduct and that of its members and directors became estopped from E denying the validity of the Debentures. E F F 331. He summarized the acts and I repeat that summary verbatim: G “1. The 1st and 2nd Debentures were signed by the directors of G LBL and were affixed with the common seal of LBL. The H Debentures were registered against the Property and LBL in H the relevant registries and became public documents. The 1st Debenture was executed in the presence of LBL’s I solicitors. I 2. LBL submitted various documents (including architect J J certificates and progress reports) to the Bank pursuant to the terms of the Debentures. K K 3. LBL drew down under Tranches B and C to pay the Bank management/front-end fees under the Debentures. L L 4. The loan facility was reported to LBL’s shareholders in general meeting. M M 5. Shareholders holding 97.08% of the shareholding of LBL N ratified and sanctioned the 1 st Debenture and the loan facility N at the EGM in November 1997. O 6. LBL has repeatedly acknowledged the indebtedness in O writing. P 7. LBL negotiated the increase in facility from HK$40 million P to HK$50 million and entered into the Supplemental Q Debenture. Q 8. LBL made drawn downs under the Debentures and accepted R payments into its bank accounts. R 9. LBL made repayments and obtained re-advances from the S Bank. S 10. LBL drew down under Tranches B and C to pay interest to T T the Bank under the Debentures. U U V V 由此 A - 92 - A B B 11. LBL used the monies advanced by the Bank for the construction of the new building on the Property which is C now used to run two hotels. C 12. LBL recognised the loan facility in its audited financial D statements. D 13. LBL obtained from the Bank an extension of 1 month for the E E repayment of the indebtedness under the 1st Debenture. F 14. LBL repaid the whole indebtedness under the 1 st Debenture F to the Bank on 29 October 1999. G 15. LBL sought written consent from the Bank for sub-letting G various units in the new building. H 16. LBL repaid a total sum of HK$4.2 million to the Bank under H the 2nd Debenture. I I 17. At no time before the commencement of this action did LBL dispute the validity and binding effect of the Debentures.” J J K 332. I was taken to the case Hong Kong Rifle Association v Hong K Kong Shooting Association [2007] 4 HKLRD 121. In that case Saunders J L L said that if the validity of proceedings at a meeting is to be challenged, M appropriate action has to be taken at a reasonable time. He said on the M point at p.136: N N “70. The law is that if the validity of proceedings at a meeting is to be challenged because of the absence of a quorum, O O appropriate action must be taken within a reasonable time. If a meeting has reached decisions which are acted upon and treated P as valid by all concerned, it is not within the competence of a P person, not concerned at the time, to much later seek to invalidate the proceedings because of a lack of quorum: see Q Shackleton on the Law and Practice of Meetings (10th ed., 2006) Q para.6-06, and Re Plymouth Breweries (1967) 111 SJ 715.” R R 333. Neither side challenged the correctness of this proposition. S S However Mr Strachan noted that it dealt with the irregularity of inquorate T T meetings not those meetings which did not take place at all. BEA cannot U U V V 由此 A - 93 - A B B rely on the doctrine to keep alive an unenforceable contract. So, as far as C the all important current security is concerned, the doctrine cannot apply. C D D 334. Mr Strachan also noted that it related to a challenge made later E by a person not concerned at the time. In this case the challenge is by the E company itself which of course all along has been concerned. F F G 335. Dealing first with the second perceived distinguishing feature; G I find I have to beg to differ. Earlier in the judgment I found in the H H circumstances that although the litigation is in the company’s, LBL’s, I name, undeniably the driving force is the more recently arrived new I majority shareholder Yan Hei. The reality is that a new owner of the J J company is challenging steps taken (or not taken) by the old owners. And K to Mr Whitehead’s list of acts undertaken can be added: K “that Yan Hei became a member of LBL on the basis that the L L security was valid and subsisting, giving an undertaking (albeit to a third party) that its terms of repayment would be honoured.” M M N 336. As to the first point: Mr Whitehead took me back to the N basics, and an extract from Snell’s Equity, 31st edition, paras 10-01 and 10- O O 02, whereat it is recorded, at 10-02: P “10.02 Application of the doctrine … Estoppel by P representation of fact at common law was traditionally treated as a rule of evidence and not as a cause of action Q Q and the Court of Appeal has recently affirmed this principle although with some reluctance and on the basis R that the flexibility of equity could mitigate its operation. R It follows that it remains the law that no action can be founded upon an estoppel by representation of fact.” S S T 337. Then he submitted: T U U V V 由此 A - 94 - A B B “We are not saying because of estoppel we have got a valid contract, because estoppel cannot form a cause of action. What C we are saying is we have a contract which is valid and because of C the subsequent conduct of [LBL] they are estopped from alleging and proving that the contract is not valid. D D … E E There is no rendering enforceable a contract that is otherwise unenforceable.” F F G 338. I accept the force of this argument. G H H 339. Were it to have been needed the doctrine of estoppel does I arise. LBL’s subsequent conduct did confirm the validity of both I Debentures. J J K Restitution K L 340. Much time and energy has been spent in the pleadings and L argument concerning this, BEA’s, fallback position. M M N 341. By virtue of the Bank’s success in respect of its primary claim N I propose not to deal with this alternative claim. O O P P Overview Q 342. I have come to the final stages of the judgment. It has been an Q intensely interesting and colourful journey with both sides represented by R R counsel who most ably argued their cases thereby making my task the S easier for which I thank them. S T T U U V V 由此 A - 95 - A B B 343. That said, I believe it appropriate to make the following C remarks. C D D 344. I think it would have been a grave miscarriage of justice if E through want of regularity in a technical sense LBL now driven by a new E majority shareholder could avoid repaying a loan raised to finance the F F construction of a tower block it now owns. G G 345. Compounding that injustice would be that the price the H H majority shareholder paid for its shares recognized the amount due on the I loan, and its undertaking to the vendor shareholder that the debt would be I honoured. J J K 346. Mr Whitehead described the litigation, which incorporated the K allegations of fraud and forgery against directors Charles Ma and Mr Hsu L L and dishonest assistance by Christine Wong and William Chu of BEA, as M both adventitious and opportunistic. As I find this is an entirely M appropriate sentiment. N N O O Conclusion P 347. The Bank has made out its claim; LBL is contractually bound P to meet the amount due and payable under the 1999 Debenture with Q Q interest calculated as per the contract up to the date of this judgment R R thereafter at the judgment rate until payment. S S 348. The relief shall be as claimed for against LBL and CSL with T T liberty to apply generally. U U V V 由此 A - 96 - A B B 349. The counterclaims of LBL and CSL are dismissed. C C 350. Costs, nisi, excluding those provided for shall be at the D D contractual rate taxed if not agreed on an indemnity basis with certificate E for three counsel. E F F G G H H (D M B Gill) I I Deputy High Court Judge J J Mr R Whitehead SC, leading Mr S Kwan and Miss J Yuen, instructed K by Messrs Wilkinson & Grist, for the Plaintiff K L Mr M Strachan, leading Mr K Chow, Miss A Chak and Mr W Liu, L instructed by Messrs David W T Chan & Co., for the 1st and M 2nd Defendants M N N O O P P Q Q R R S S T T U U V V