Et-China.com International Holdings Ltd v Cheung

[2021] NSWCA 24

Court of Appeal

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:

ET-China.com International Holdings Ltd v Cheung [2021] NSWCA 24

Hearing dates:

7–9 September 2020

Date of orders:

03 March 2021

Decision date:

03 March 2021

Before:

Bathurst CJ at [1]; Bell P at [2]; Leeming JA at [287]

Decision:

Appeal dismissed with costs

Catchwords:

APPEALS – appellate review of factual findings – appellate review of credit findings – interaction between contemporaneous documents and witness testimony – whether an adverse credit finding on one aspect of a witness’ evidence requires that his or her evidence should be rejected on all issues

CORPORATIONS – directors’ duties – whether two directors breached their duties in relation to the sale of shares in a subsidiary of the company of which they were directors – whether transfer of shares in subsidiary company in 2012 transferred the beneficial ownership of those shares in all the circumstances of the case – whether shares transferred for nil consideration – whether sale of shares in subsidiary company in 2013 was at a gross undervalue

CORPORATIONS – minutes of board meetings – disputed version of minutes – competing versions of minutes does not mean that one version is necessarily false – when party alleging false minutes did not challenge director who signed minutes with that allegation

EQUITY – sham transfer of shares – whether beneficial interest in shares passed on registration of share transfer in circumstances where consideration for transfer of shares not paid – whether transfer of shares for nil consideration was a gift – where no intention on the part of directors to give away company property – where plausible explanation supported by context negated any suggestion that shares were intended to be given away

TRUSTS – resulting trusts – whether presumption of a resulting trust over property transferred for nil consideration does not apply to personalty or shares

Legislation Cited:

Evidence Act 1995 (NSW) ss 60, 136

International Transfer of Prisoners Act 1997 (Cth)

Uniform Civil Procedure Rules 2005 (NSW) r 51.36(2)

Convention on the Transfer of Sentenced Persons (1983) ETS 112 (entry into force 1 July 1985)

Cases Cited:

Abalos v Australian Postal Commission (1990) 171 CLR 167; [1990] HCA 47

ASIC v Hellicar (2012) 247 CLR 345; [2012] HCA 17

ASIC v Loiterton [2004] NSWSC 172

ASIC v Macks (No 4) [2020] SASC 209

ASIC v Mitchell (No 2) (2020) 382 ALR 425; [2020] FCA 1098

ASIC v Rich (2009) 236 FLR 1; [2009] NSWSC 1229

Banque Commerciale SA (En Liqn) v Akhil Holdings Ltd (1990) 169 CLR 279; [1990] HCA 11

Best v Rosamond [2020] NSWCA 90

Biogen Inc v Medeva plc [1997] RPC 1 HL(E); [1996] UKHL 18

Boensch v Pascoe (2019) 375 ALR 15; [2019] HCA 49

Browne v Dunn (1893) 6 R 67 HL(E)

Calverley v Green (1984) 155 CLR 242; [1984] HCA 81

Charles Marshall Pty Ltd v Grimsley (1956) 95 CLR 353; [1956] HCA 28

Devries v Australian National Railways Commission (1993) 177 CLR 472; [1993] HCA 78

Equity Nominees Ltd v Tucker (1967) 116 CLR 518; [1967] HCA 22

Evans v McLean (No 2) [1987] WAR 110

Foss v Harbottle (1843) 2 Hare 461; 67 ER 189

Fox v Percy (2003) 214 CLR 118; [2003] HCA 22

George v Bank of England (1819) 146 ER 1089

Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC (Comm) 3560

Gwe v Commissioner of the Australian Federal Police [2020] NSWCA 247

Hamod v New South Wales [2011] NSWCA 375

Hewett v Court (1983) 149 CLR 639; [1983] HCA 7

Hudson Investment Group Ltd v Australian Hardboards Ltd [2005] NSWSC 716

Jarrett v Perpetual Trustee Co Ltd [2007] NSWSC 1231; (2007) 64 ACSR 552

Jones v Hyde (1989) 85 ALR 23; [1989] HCA 20

Leary v Federal Commissioner of Taxation (1980) 32 ALR 221

Lee v Lee (2019) 266 CLR 129; [2019] HCA 28

Mackreth v Symmons (1808) 15 Ves Jun 329; (1808) 33 ER 778

Magann v The Trustees of the Roman Catholic Church for the Diocese of Parramatta [2020] NSWCA 167

Magnacrete Ltd v Douglas-Hill (1988) 48 SASR 567

Mendonca v Tonna [2020] NSWCA 196

Mirvac (WA) Pty Ltd v Binningup Nominees Pty Ltd [2020] WASC 28

Moore v Whyte [No 2] (1922) 22 SR (NSW) 570

Namrood v Ebedeh-Ahvazi [2017] NSWCA 310

Napier v Public Trustee (WA) (1980) 32 ALR 153

Richard Brady Franks Ltd v Price (1937) 58 CLR 112; [1937] HCA 42

Robinson Helicopter Co Inc v McDermott (2016) 331 ALR 550; [2016] HCA 22

Shephard v Cartwright [1955] AC 431

South Western Sydney Local Health District v Gould (2018) 97 NSWLR 513; [2018] NSWCA 69

Southern Resources Ltd v Residues Treatment and Trading Co Ltd (1990) 56 SASR 455

State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (in liq) (1999) 160 ALR 588; [1999] HCA 3

Tonna v Mendonca [2019] NSWSC 1849

Warren v Coombes (1979) 142 CLR 531; [1979] HCA 9

Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; [2012] WASCA 157

Texts Cited:

JD Heydon and MJ Leeming, Jacobs’ Law of Trusts in Australia (8th ed, 2016, LexisNexis Butterworths)

Category:

Principal judgment

Parties:

ET-China.com International Holdings Ltd
(First Appellant)
Matthew Chik-Hui Ng (Second Appellant)
Freada Kwan Cheung (First Respondent)
Vision Capital (Asia) Limited (Second Respondent)
Financial International Holdings Limited
(Third Respondent)
Christopher Peter Rose (Fourth Respondent)
Marco Marcou (Fifth Respondent)
Pyma Pty Ltd (Sixth Respondent)
Map ET-China Holdings Pty Ltd
(Seventh Respondent)

Representation:

Counsel:

D L Williams SC with B D Kaplan (Appellants)
J K S Entwisle (First to Third Respondents)
T Bagley (Fourth to Seventh Respondents)

Solicitors:

HBA Legal (Appellants)
Victoria & Hancock (First to Third Respondents)
Advanta Legal Pty Limited (Fourth to Seventh Respondents)

File Number(s):

2020/0065494

Publication restriction:

N/A

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity — Commercial List

Citation:

[2019] NSWSC 1874

Date of Decision:

20 December 2019

Before:

Stevenson J

File Number(s):

2018/00227514

HEADNOTE

[This headnote is not to be read as part of the judgment]

Mr Christopher Rose (Mr Rose) and Mr Marco Marcou (Mr Marcou) were directors of ET-China.com International Holdings Ltd (ETCI), whose sole asset, held through a wholly owned subsidiary incorporated in Hong Kong (ETCH) and its three Chinese subsidiaries (the ETC Subsidiaries), was a 54.43% interest in a Chinese (PRC) state-owned entity, Guangzhou GZL International Travel Service Ltd (GZL). The majority of the PRC’s interest in GZL was held by Guangzhou Lingnan International Enterprise Group Co Ltd (Lingnan). Due to restrictions on the foreign ownership of local businesses in the PRC, ETCH’s interest in GZL was not by way of a formal shareholding. Instead, it was held through a series of indirect contractual arrangements with citizens of the PRC, creating what is known as a “Variable Interest Entity” structure.

Mr Matthew Ng (Mr Ng) was the founding director of ETCI and had been, prior to November 2010, its President and Chief Executive Officer. On 18 June 2010, Lingnan wrote to ETCI demanding that it explain how it had gained control of GZL and asserted that it had “acted illegally when acquiring control of GZL”. In November 2010, Mr Ng was arrested by Chinese authorities and charged with offences including “bribery”, “misappropriation of funds”, “misstatement of registered capital”, “official embezzlement” and “organisational bribery”. On 6 December 2011, Mr Ng was convicted on these charges and sentenced to a term of 14.5 years imprisonment by the Intermediate People’s Court of Guangzhou Municipality. Mr Ng’s incarceration left ETCI in a vulnerable position with its PRC bank accounts frozen.

ETCI secured the services of a PRC citizen, Madam Freada Kwan Cheung (Madam Cheung), in June 2011 to assist in selling its shares in ETCH and to obtain some value for its shareholders. This ultimately involved entering into a conditional transaction for a sale of the ETCH shares to a company controlled by Madam Cheung and the transfer of the shares to that company (the ETCH Share Transfer). Notwithstanding the transfer of the shares, no consideration was paid. Only Messrs Rose and Marcou, but not the other directors of ETCI, were aware of this transaction.

Shortly before this transaction was entered into, a meeting between ETCI and Lingnan in relation to a possible sale of ETCI’s indirect interest in GZL was postponed and Lingnan subsequently commenced civil proceedings in the Guangzhou People’s Court against one of the ETC Subsidiaries.

On its face, the ETCH Share Transfer to Madam Cheung’s company had the consequence that ETCI lost its indirect interest in the ETC Subsidiaries and thus its economic interest in GZL, but neither Madam Cheung nor Messrs Rose or Marcou conducted themselves as though ETCI’s indirect beneficial interest in GZL had been lost and that the beneficial interest in the ETCH Shares had passed.

In February 2013, the Guangzhou People’s Court delivered a judgment in the civil proceedings commenced by Lingnan the previous June (the February 2013 Civil Judgment), determining that the relevant ETC Subsidiary “was not a shareholder of GZL … and was not entitled to shareholder’s rights and interests”. The February 2013 Civil Judgment placed ETCI in a perilous financial state, in response to which Madam Cheung contacted Mr Marcou and proposed that the earlier share sale agreement between ETCI and Vision Capital be “simplified and amended” to reflect a purchase price of AU$3 million (later reduced to AU$2 million), to be paid over a period of approximately three months. Four months later, on 7 June 2013, ETCI and Madam Cheung’s company, Vision Capital, executed a share sale agreement (the 2013 Share Sale Agreement), which made no reference to the earlier ETCH Share Transfer and was drafted on the basis that ETCI remained the beneficial owner of the ETCH shares. The consideration was paid in two tranches of AU$1 million each on 6 and 9 September 2013. Within a fortnight of receiving payment, on 20 September 2013, the board of ETCI purported to hold a meeting with only Messrs Rose and Marcou present, the minutes of which recorded that the directors resolved to ratify the 2013 Share Sale Agreement.

Mr Ng continued to be a director of ETCI throughout the period of his incarceration. Following his release on 15 June 2016 and subsequent return to Australia, he commenced proceedings on behalf of ETCI against Madam Cheung, Vision Capital and Messrs Rose and Marcou and two related entities. It was contended that Messrs Rose and Marcou had breached their equitable duties as directors of ETCI in causing or permitting the ETCH Share Transfer to occur without payment, and in purporting to ratify the 2013 Share Sale Agreement “at a gross undervalue”. The claim against Madam Cheung and Vision Capital was for knowing assistance and knowing receipt in respect of the breaches alleged against Messrs Rose and Marcou. ETCI sought equitable compensation for the loss of the opportunity to sell its indirect interest in GZL to Lingnan.

The primary judge dismissed the claims against Messrs Rose and Marcou, and therefore those against Madam Cheung and Vision Capital, holding that:

1. there was no disposal of the ETCH shares for nil consideration in 2012;

2. any loss of opportunity to sell the ETCH shares to Lingnan was not caused by anything that occurred after 4 July 2012; and

3. the ultimate sale of the ETCH shares for AU$2 million, pursuant to the 2013 Share Sale Agreement, was not at a gross undervalue.

ETCI and Mr Ng appealed.

The Court held (Bell P, Bathurst CJ and Leeming JA agreeing), dismissing the appeal with costs:

1. The primary judge did not err in finding that Messrs Rose and Marcou were witnesses of credit. The primary judgment disclosed an exemplary approach to fact-finding and the assessment of witness credibility with the plausibility of witnesses’ testimony being tested against context and that which was revealed objectively by contemporaneous documents: [1] (Bathurst CJ); [212] (Bell P); [287] (Leeming JA).

Devries v Australian National Railways Commission (1993) 177 CLR 472; [1993] HCA 78; Jones v Hyde (1989) 85 ALR 23; [1989] HCA 20; Abalos v Australian Postal Commission (1990) 171 CLR 167; [1990] HCA 47; State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (in liq) (1999) 160 ALR 588; [1999] HCA 3; Fox v Percy (2003) 214 CLR 118; [2003] HCA 22; Robinson Helicopter Co Inc v McDermott (2016) 331 ALR 550; [2016] HCA 22; Lee v Lee (2019) 266 CLR 129; [2019] HCA 28; Biogen Inc v Medeva plc [1997] RPC 1 HL(E); [1996] UKHL 18; Warren v Coombes (1979) 142 CLR 531; [1979] HCA 9; Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC (Comm) 3560, referred to.

2. The ETCH Share Transfer did not involve the transfer of the beneficial ownership of ETCH to Vision Capital in the absence of an intention on the part of ETCI to dispose of the beneficial interest gratuitously: [1] (Bathurst CJ); [221]–[222] (Bell P); [287] (Leeming JA).

Leary v Federal Commissioner of Taxation (1980) 32 ALR 221; Hewett v Court (1983) 149 CLR 639; [1983] HCA 7; Mackreth v Symmons (1808) 15 Ves Jun 329; (1808) 33 ER 778; Evans v McLean (No 2) [1987] WAR 110; Charles Marshall Pty Ltd v Grimsley (1956) 95 CLR 353; [1956] HCA 28; Napier v Public Trustee (WA) (1980) 32 ALR 153; Mendonca v Tonna [2020] NSWCA 196; Moore v Whyte [No 2] (1922) 22 SR (NSW) 570; Shephard v Cartwright [1955] AC 431, referred to.

3. The sale of the ETCH shares in 2012 was intended by both ETCI and Vision Capital to be a genuine transaction but one that was subject to Vision Capital’s due diligence inquiries. It was not a “sham” but merely a transaction that did not come to fruition: [1] (Bathurst CJ); [230] (Bell P); [287] (Leeming JA).

4. Although the ETCH Share Transfer, out of context, may have appeared highly unusual, in fact and in context it involved an attempt to advance the best interests of ETCI in the extraordinary circumstances in which ETCI found itself. If, as was held to be the case, the ETCH Share Transfer was reversible, then even if the non-disclosure of the ETCH Share Transfer entailed a breach of duty, no loss was caused thereby: [1] (Bathurst CJ); [245]–[246] (Bell P); [287] (Leeming JA).

Richard Brady Franks Ltd v Price (1937) 58 CLR 112; [1937] HCA 42, referred to.

5. ETCI did not lose its opportunity to sell the ETCH Share to Lingnan by reason of any breach of duty by Messrs Rose and Marcou: [1] (Bathurst CJ); [247]–[250] (Bell P); [287] (Leeming JA).

6. Even if ETCI’s opportunity to sell its indirect interest in GZL to Lingnan was not lost by 4 July 2012, the ETCH Share Transfer would not have had the effect of precluding a sale to Lingnan, as the transfer was reversible in equity and had not effected a transfer of the beneficial ownership in the shares. The ETCH Share Transfer, therefore, could not have been causative of any loss of opportunity to sell to Lingnan: [1] (Bathurst CJ); [250] (Bell P); [287] (Leeming JA).

7. The primary judge was correct to reject the entertainment of an allegation of the “backdating” of the 2013 Share Sale Agreement on the basis that the allegation was akin to an unpleaded allegation of fraud. It is a fundamental requirement of procedural fairness that allegations of or akin to fraud are pleaded with particularity. Not only was the “backdating” allegation not raised before the primary judge, but the Appellants’ positively asserted that the 2013 Share Sale Agreement was entered into on 7 June 2013, being the date that the document bore: [1] (Bathurst CJ); [172] (Bell P); [287] (Leeming JA).

Banque Commerciale SA (En Liqn) v Akhil Holdings Ltd (1990) 169 CLR 279; [1990] HCA 11, referred to.

8. The sale of the ETCH shares pursuant to the 2013 Share Sale Agreement was not at a gross undervalue. The relevant assessment of the value of the shares, and whether that was or ought to have been known to Messrs Rose and Marcou, must be by reference to the date of sale. At that point in time, with ETCI on the brink of insolvency and with no other assets, and ETCH subject to a powerful adverse judgment in the PRC, there was no basis for concluding that the sale was at a gross undervalue: [1] (Bathurst CJ); [261]–[262] (Bell P); [287] (Leeming JA).

9. The primary judge did not err in assessing the quantum of the alleged loss of the opportunity to sell the ETCH shares to Lingnan. The primary judge did not have any reliable means of assessing the value of the opportunity said to have been lost. The contingencies were many and complicated by the fact that any assessment would need to take into account the fact that the value of the opportunity was necessarily affected by the February 2013 Civil Judgment and the allegations contained therein: [1] (Bathurst CJ); [275]–[276] (Bell P); [287] (Leeming JA).

10. Observations by Bell P regarding:

1. the importance of an understanding of matters of chronology, context and contemporaneous documents in fact finding: [1] (Bathurst CJ); [24]–[29] (Bell P); [287] (Leeming JA);

2. the approach to appellate review in respect of credit findings, and the principle that an adverse finding about an aspect of a particular witness’ evidence does not mandate that his or her evidence must or should be rejected on all issues: [1] (Bathurst CJ); [181]–[188] (Bell P); [287] (Leeming JA); and

3. disputes arising as to what may have been said at meetings of boards of companies, in which the mere fact that there may be competing versions of minutes does not mean that one of the different versions is necessarily false: [1] (Bathurst CJ); [197] (Bell P); [287] (Leeming JA).

Judgment

1. BATHURST CJ: I agree with Bell P.

2. BELL P:

Introduction

On 20 December 2019, in a lengthy, fact intensive judgment following a seven day trial (the primary judgment or PJ), Stevenson J (the primary judge) dismissed a claim for breach of directors’ duties against Mr Christopher Rose (Mr Rose) and Mr Marco Marcou (Mr Marcou): see [2019] NSWSC 1874. His Honour also dismissed a claim for knowing assistance and knowing receipt against Vision Capital (Asia) Limited (Vision Capital) and Freada Kwan Cheung (Madam Cheung).

3. Madam Cheung, a Chinese national, was the sole shareholder in and had effective practical control of Vision Capital. Vision Capital was incorporated in the British Virgin Islands (BVI). She also controlled another BVI company, Wealthy Capital Enterprises Inc (Wealthy Capital), the role of which will be explained in due course.

4. The claim was brought by Mr Matthew Ng (Mr Ng) on behalf of ET-China.com International Holdings Ltd (ETCI) (together the Appellants). Mr Ng was the founding director of ETCI and had been, prior to November 2010, its President and Chief Executive Officer.

5. ETCI is a Jersey company, listed on the Alternative Investment Market of the London Stock Exchange (AIM). ETCI, through a wholly owned subsidiary (ETCH) incorporated in Hong Kong, held a 54.43% interest, through three Chinese entities (the ETC Subsidiaries), in a Chinese (PRC) State-owned entity, Guangzhou GZL International Travel Service Ltd (GZL).

6. GZL was one of the largest group leisure travel companies in South China.

7. ETCI’s indirect interest in GZL was its sole asset: PJ [506].

8. The PRC’s interest in GZL was held ultimately by Guangzhou Lingnan International Enterprise Group Co Ltd (Lingnan) together with a number of PRC State entities.

9. An organisational chart taken from the judgment at first instance is reproduced in the Appendix to these reasons. The broken line between ETC PRC and the three ETC Subsidiaries represents the fact that, although it is convenient to describe these entities as “subsidiaries”, ETCH’s interest in them existed not by way of shareholding but by means of various ultimately indirect contractual arrangements with PRC citizens, deployed by reason of restrictions in the PRC on foreign ownership of local businesses (and creating what is known in as a “Variable Interest Entity” structure).

10. Messrs Rose and Marcou were directors of ETCI. Both were involved in the transfer on or about 25 July 2012 of ETCI’s shares in ETCH to Vision Capital (the ETCH Share Transfer). That transfer lies at the heart of these proceedings. On its face, at least, it had the consequence that ETCI lost its indirect interest in the ETC Subsidiaries and thus its economic interest in GZL. Ultimately, ETCI received AU$2 million for the transfer of its shares in ETCH but that was pursuant to a Share Sale Agreement with Vision Capital dated 7 June 2013 (the 2013 Share Sale Agreement) with the $2 million being paid in two tranches on 6 and 9 September 2016.

3. Apart from the circumstances surrounding the disposal of its shareholding in ETCH, how ETCH (and thus ETCI) acquired or at least was said (in Court proceedings in China in both 2011 and 2013) to have acquired its interest in the ETC Subsidiaries in the first place was also, as will be seen, of critical contextual significance to the present proceedings.

4. In holding that the various claims made on behalf of ETCI failed, the primary judge concluded that the breaches of duty alleged against Messrs Rose and Marcou had not been established and that, even if they had been established, his Honour held that no loss to ETCI had been established.

5. At first instance, as recorded at PJ [151], ETCI ultimately confined its case concerning Mr Rose’s and Mr Marcou’s alleged breach of their duties as directors so far as concerns the ETCH Share Transfer to:

(a)    a claim for equitable compensation (as opposed to an account of profits),

(b)    for the loss of the opportunity to sell its indirect interest in GZL to Lingnan (as opposed to the loss of the ETCH shares themselves).

14. The primary judge held that the opportunity to sell ETCI’s indirect interest in GZL was lost by 4 July 2012 and that no breach of directors’ duties had been established by that date (see PJ [568]–[574]), that no loss of commercial opportunity which had some non-negligible value had been established on the balance of probabilities and that, even if it had been, there was no basis in the evidence to make any assessment of that value: PJ [599]–[601].

15. To the extent that ETCI received a sum of $2 million for the transfer of its shares in ETCH pursuant to the 2013 Share Sale Agreement, the primary judge also rejected a claim that that transfer had been at a gross undervalue and that Messrs Rose and Marcou were or ought reasonably to have been aware of this: PJ [605]–[612].

16. It followed from the failure of the directors’ duties claims that the claims for knowing assistance and knowing receipt brought against Vision Capital and Madam Cheung necessarily failed.

Notice of Appeal, Notices of Contention and challenges to factual findings

17. The Further Amended Notice of Appeal (the Notice of Appeal) contained some 21 grounds of appeal and ran to some 8 closely typed pages. These included challenges to particular factual findings which the primary judge had made to support aspects of his reasoning as well as to legal conclusions.

18. The Appellants also filed a statement prepared in accordance with r 51.36(2) of the Uniform Civil Procedure Rules 2005 (NSW) specifying the particular factual findings challenged and the findings which it was contended should have been made (the Rule 51.36 Statement).

19. The importance of such a Statement has been emphasised in a number of recent decisions of this Court: Magann v The Trustees of the Roman Catholic Church for the Diocese of Parramatta [2020] NSWCA 167 at [52]–[54]; Hamod v New South Wales [2011] NSWCA 375 at [774]; South Western Sydney Local Health District v Gould (2018) 97 NSWLR 513; [2018] NSWCA 69 at [135]; Best v Rosamond [2020] NSWCA 90 at [21]; Namrood v Ebedeh-Ahvazi [2017] NSWCA 310 at [61].

20. There was an extensive overlap between some of the grounds of appeal and some of the challenges to factual findings.

21. The Notice of Appeal is a complex and somewhat unwieldy document with many of the grounds of appeal containing multiple subparagraphs and a degree of repetition. For clarity’s sake, it will be necessary to group various grounds of appeal in the consideration which follows. It should also be observed that there was a dispute between the parties as to whether or not some of the matters sought to be argued on appeal were open to the Appellants to argue.

22. Messrs Rose and Marcou, and Madam Cheung and Vision Capital both filed notices of contention seeking to uphold the primary judgment on grounds in addition to those found in their favour by the primary judge. There were detailed written submissions and the appeal was heard over three days.

23. Before setting out the key facts which are necessary to understand and resolve the various ground of appeal, it is desirable to make a number of observations about witness credibility, documentary evidence and fact finding.

Witness credibility, documentary evidence and fact finding

24. In reaching his decision, the primary judge rejected a submission that Mr Marcou was an untruthful witness and positively held that, save for one aspect of his evidence, Mr Rose was a witness who impressed as “calm and measured” and as someone who was “doing his best to recollect accurately the events in question”: PJ [64]–[66]. Those events relevantly occurred between 2010 and 2013 in a context that was complex, fraught and, in many respects, quite dramatic, as will be explained in further detail below.

25. As with most commercial disputes, a proper understanding of the chronology of events is critical and, as has been regularly observed, contemporaneous documents generally furnish the most reliable source of evidence as to what occurred or, at the very least, provide a generally reliable reference point from which to assess the reliability of witness testimony.

26. In Fox v Percy (2003) 214 CLR 118; [2003] HCA 22 at [31] (Fox v Percy), Gleeson CJ, Gummow and Kirby JJ, having referred to increasing judicial awareness of scientific research that cast doubt on the ability to distinguish between truth and falsity in witness testimony from the mere appearance of the witness in the witness box, said:

"Considerations such as these have encouraged judges, both at trial and on appeal, to limit their reliance on the appearances of witnesses and to reason to their conclusions, as far as possible, on the basis of contemporary materials, objectively established facts and the apparent logic of events. This does not eliminate the established principles about witness credibility; but it tends to reduce the occasions where those principles are seen as critical."

27. Whilst the quality and accuracy of oral recollection of actual conversations should be treated with care and caution given the fallibility of human memory (of which there has been a growing appreciation within the judiciary in recent decades), oral testimony may still be of value and importance, as was recognised in the nuanced observations of Leggatt J (as his Lordship then was) in Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC (Comm) 3560 at [22] (Gestmin):

“the best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses' recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose – though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events. Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth.” (emphasis added)

28. Documents and events have to be understood in their context, and evidence of context will often be furnished by witnesses in their oral evidence. Documents, moreover, will not always present a complete picture of events. Indeed it would be rare that they do. Nor do contemporaneous documents necessarily or invariably convey or record the background or context in which events took place. That background or context will be familiar to the actors at the time of those events but may not always emerge from documents.

29. Context is critical for at least two reasons. Documents and events take their meaning from their context. The context in which events occurred may not necessarily be apparent to a court many years later when hearing a case. A clear understanding of context, both commercial and cultural, is also important where, as in the present case, some or all of the events under consideration occurred overseas and in settings that may differ from those usually dealt with in domestic litigation.

30. In what follows, key aspects of the background, context and chronology leading to the ETCH Share Transfer and beyond are highlighted, incorporating references to and drawing extensively on unchallenged findings of the primary judge. The reasons then turn to consider the key reasoning in the primary judgment before addressing the grounds of appeal in this Court.

Chronological overview

ETCI, Kuoni and the takeover offer

31. ETCI acquired its interest in GZL, through the ETC Subsidiaries, at a time when Mr Ng was ETCI’s CEO.

32. At all relevant times, the Board of ETCI comprised Messrs Ng, Rose and Marcou together with Ms Maria Ng (Ms Ng) and Mr Martin Simeon (Mr Simeon), representing interests associated with a Swiss company, Kuoni Travel Holding Ltd (Kuoni). Ms Ng was not related to Mr Ng who, for reasons explained below, did not participate in the affairs of the board after November 2010. Mr Rose evidently represented a group of shareholders referred to in some documents as the “Mintpine shareholders”. There was also an independent director, Mr Robert Drummond (Mr Drummond).

33. Kuoni held the largest individual stake (some 30.27%) in ETCI and had, in 2010, been contemplating a takeover of ETCI so as to gain for itself a majority 54% indirect interest in GZL. As the primary judge recorded at PJ [72], on 2 June 2010, Kuoni and ETCI made a public announcement in the following terms:

“The board of [Kuoni] and the Independent Directors of [ETCI] are pleased to announce that they have reached agreement on the terms of a recommended proposal whereby Kuoni will acquire, for cash, all the issued and to be issued ordinary shares in [ETCI] not already owned by Kuoni (the ‘Proposal’). It is intended that the Proposal will be implemented by a scheme of arrangement under Part 18A of the Jersey Law.”

34. A little over two weeks later, on 18 June 2010, Lingnan wrote to ETCI and, according to Mr Ng, “demanded that it explain how it had gained control of GZL” and, on 5 July 2010, Lingnan wrote “an urgent letter” to Kuoni in which, again according to Mr Ng, Lingnan demanded that Kuoni not proceed with the takeover of ETCI and alleged that ETCI had “illegally taken control of GZL” and “has acted illegally when acquiring control of GZL i.e. corrupt practice”: PJ [74]–[75]. As a result of this letter, Kuoni suspended the proposed takeover of ETCI. It formally withdrew its offer on 20 December 2010.

35. As will be seen, much had occurred in the intervening 6 months.

Mr Ng’s detention, trial and incarceration

36. On 23 August 2010, two senior employees of the ETC Subsidiaries, including ETCI’s finance director, Ms Kitty Yang (Ms Yang), were detained by Chinese authorities for 30 days: PJ [77].

37. Mr Ng had urgently left the PRC on 6 September 2010 but returned in November 2010 and met with representatives of Lingnan who repeated the allegations that ETCI’s interest in GZL was held unlawfully and had been procured by corrupt practices: PJ [82].

38. On 15 November 2010, Mr Ng was detained by Chinese authorities and arrested a short time later.

39. Mr Ng was charged with various offences for which he was tried in the Intermediate People’s Court of Guangzhou Municipality (the Intermediate People’s Court) in August 2011. On 6 December 2011, he was convicted and sentenced to imprisonment for 14½ years. On appeal, the sentence was reduced to 11½ years. This occurred in March or April 2012.

40. The charges in respect of which Mr Ng was convicted related to the manner in which ETCI acquired its indirect 54.43% interest in GZL. The Intermediate People’s Court made findings of “bribery”, “misappropriation of funds”, “misstatement of registered capital”, “official embezzlement” and “organi[s]ational bribery” concerning the circumstances in which the ETC Subsidiaries acquired their interest in GZL: PJ [124]–[129].

41. At around the same time as Mr Ng was arrested, Ms Yang was again detained and arrested.

42. Minutes of a meeting between representatives of ETCI and Lingnan, which apparently occurred on 10 November 2010, recorded that the commencement of Lingnan’s investigations to prove its allegations had “directly and indirectly caused chaos” in ETCH and GZL and “if left unchecked, could cause dramatic loss in business value of” ETCI and GZL. Those observations were made prior to Mr Ng and Ms Yang’s arrest and conviction.

43. The effect of Mr Ng’s arrest and incarceration was obviously that he was unable to participate in the management of ETCI. This was of no little moment as Mr Ng, according to a filing relating to ETCI’s placement on the AIM in 2007, was responsible for establishing and maintaining ETCI’s key relationships with strategic partners and key suppliers. But the impact for ETCI went beyond the immediate loss of Mr Ng, significant though that obviously was. Its finance director, Ms Yang, was also imprisoned and, as recorded at PJ [86], “senior staff of the PRC businesses had … been detained or arrested, bank accounts had been frozen and financial records confiscated.”

44. The primary judge referred to an email (PJ [90]) from Mr Ng’s then wife, Niki Chow (Ms Chow) to Messrs Rose and Marcou on 23 February 2011, prior to Mr Ng’s conviction, as follows:

“Now [ETCI] has no leader and staff starts to loose [sic] confidence.
Older employees are waiting to be compensated and new ones are leaving. In others’ perspective, [ETCI] cannot last long and will collapse any time without [Mr Ng]. This is the message that [Lingnan] gets and is playing time game with us. If [ETCI] must collapse, let it collapse after they ‘snatch’ GZL back

... If [ETCI] collapse now, [Lingnan] will be happy now and all the shareholders lost [sic] their money and reputation. The government could play time game with us before they put Matthew [Ng] to court.”

45. His Honour also referred to a further email Ms Chow sent Messrs Rose and Marcou on 16 March 2011 (PJ [91]):

“Please do not think about any interest or returns on investment. We have too much debt. If [ETCI] could not get back some cash flow asap, we have no money to compensate our 140 employees and other banks and creditors ... If you and other overseas shareholders insist on returns and interest, all of us risk losing everything very soon.”

46. The difficulty of Mr Ng’s arrest was compounded by the fact that, other than Mr Ng, none of the other directors of ETCI had any direct involvement in the conduct of ETCI’s business in the PRC (PJ [86]) and none spoke Cantonese or Mandarin.

47. The primary judge was correct to describe Mr Ng’s arrest and incarceration as providing a vital backdrop to the case brought against Mr Rose, Mr Marcou and Madam Cheung: PJ [130].

48. After Mr Ng’s incarceration, ETCI was left vulnerable and, far from being “left unchecked” (see [42] above), Lingnan’s investigations had led to Mr Ng’s arrest, trial and incarceration. Internal documents subsequent to his incarceration recognised as much, recording, inter alia, the freezing of bank accounts and very tight liquidity.

49. On the eve of Mr Ng’s and Ms Yang’s indictments in July 2011, Mr Marcou reported to the Board that “there is a risk to the ownership of the shares in GZL by [ETCI] with some of the charges against them”.

50. In a letter to the directors from prison at about the same time, Mr Ng protested his innocence and noted that Lingnan wanted the GZL shares back. He said that without a lawyer to assist his defence, “[ETCI] would be destroyed by [Lingnan] so that they could just take GZL shares step by step”.

51. At a board meeting of ETCI on 23 August 2011 after Mr Ng’s trial, Mr Simeon reported that, according to media reports, in his defence, Mr Ng had said that ETCI “does not own any asset, i.e. the Chinese entities at all.” The minutes recorded that “[i]f this comment is correct, the board needs to prepare for the worst scenario after the court case is closed”.

52. The comment was correct. As the 2007 AIM placement document stated, and as noted above, ETCI had no equity interest in the ETC Subsidiaries, which were held by Chinese individuals who had issued what were, in effect, declarations of trust in favour of ETCI and had also entered into certain contractual arrangements with ETCI (see [9] above).

53. The same board minutes recorded that negotiations between Kuoni and Lingnan “had not made any progress at the moment”.

The emergence of Madam Cheung and the “Wealthy Capital Transaction”

54. It was in about mid-2011 that, into the alleged breach, stepped Madam Cheung.

55. On 8 June 2011, Madam Cheung had written to Mr Rose, who had assumed executive responsibilities within ETCI in Mr Ng’s forced absence:

“I’m the sole shareholder and director of Financial International Holdings Ltd. As the biggest private investor when [ETCI] made its IPO in the AIM market in London, I am very concerned about the situation of the company right now. I had met Mr Matthew Ng and Mr Michael Tang in Hong Kong in September 2010 and gave some suggestions, but somehow in the end it was not used. I feel that the best moment of solving the problem had passed so that the situation is getting worse. Now it seems that besides having commercial and political assisting method, one must have the ability and techniques to help the company out of trouble. I invest a lot in Australia besides Hong Kong and Mainland China, so from the bottom of my heart I am not willing to see this dilemma to affect the relations between China and Australia. Therefore I am willing to use my personal influence and energy to solve the problem and protect the legitimate interests of all shareholders. Hope the board will consider my suggestion carefully. Please give me a reply at your earliest convenience.” (emphasis added)

56. In an email sent from Ms Chow to Mr Marcou and Mr Rose on 22 June 2011, it was reported that:

“A lady contacted Chris [Rose] I think last few weeks offering to help but Chris said everything should be fine. She invested in ETC and she offers to help in solving the issues with GZL, ie claim back our dividend (RMB10mil) and other court issues. She is happy to meet you in HKG and discuss possible ways to solve everything. Relying solely on Kuoni negotiating wouldn’t be fruitful if there are no ‘guanxi’ made and it has been months. She offers to utilise her contacts with upper, upper officials for this. What do you think?” (emphasis added)

57. “Guanxi” is a Chinese term which refers to the system of social networks and influential relationships which facilitate business and other dealings.

58. Madam Cheung’s name came up in an ETCI board meeting on 7 September 2011 in the context of a discussion about the need to appoint an official representative of ETCI in the PRC in place of Ms Yang who was imprisoned. In that context, the minutes record the following:

“Martin [Mr Simeon of Kuoni] suggested that the board can consider appointment of someone from the law firm. Marco [Mr Marcou] replied that he would talk to the law firm about this. However, he believes that the law firm may be reluctant to take up this role.

Robert [Mr Drummond] also suggested that the board can consider someone who is a qualified PRC individual but residing in Hong Kong so that the individual may not face the same pressure as the one in China.

Marco also suggested a lady named Madam Cheung who is a PRC lady, residing in Australia and travelling around frequently.

Martin commented that we need to be cautious and mindful of the potential risks and it would be politically incorrect if the board is appointing someone who is associated with Australia or Matthew.”

59. At the same board meeting, Mr Simeon had observed that:

“from both the director and shareholders’ perspective, it is critical to resolve the existing seemingly illegal shareholding structure. If the legality of the shareholding of GZL remain unresolved, the risk of the assets and ownership of GZL still exists.”

60. By 9 November 2011, Mr Marcou had forwarded to Kuoni a proposal for what became known as the “Wealthy Capital Transaction”. The “Overview” section of this document provides a useful snapshot of the proposed transaction as at that time as well as outlining the proposal.

61. Under the heading “Current Status”, the Proposal stated:

• “As a result of the detention of the CEO Matthew Ng and Finance Director Kitty Yang the China operations of Et-China.com International Holdings Limited (ETC) have progressively deteriorated to the point where the local Chinese companies are unable to operate due to restrictions placed on them by the Court and related entities pending a verdict on Matthew and Kitty which has yet to occur”;

• “The court case has alluded to issues or irregularities associated with the transaction process during the acquisition of Guangzhou GZL International Travel Service (GZL) equity by ETC China based subsidiaries”;

• “Both Matthew and Kitty did make admissions in relation to the registered capital of two of the China based GZL equity holding subsidiaries of ETC”;

• “Kuoni continues to be interested in concluding a transaction with ETC that will see it acquire (up to) 54.43% of GZL currently held via three China based subsidiaries of ETC”;

• “Kuoni has stated that for a transaction to occur, clear title of equity in GZL must be in place, to that end the Board of ETC has attempted to achieve this requirement however efforts to date have been slow due to the challenging operating environment in China and depleted resources on the ground”.

62. Under the heading “Proposal”, the following was outlined:

• “An opportunity has arisen through an existing substantial shareholder in ETC (Madam Kwan Cheung) that provides a path forward for ETC and Kuoni to undertake a transaction that will see ETC dispose of its shareholding in GZL with a clear title of equity to Kuoni”;

• “At a high level the proposal involves ETC selling Et-China Holdings Limited – Hong Kong (ETCHK) to a Hong Kong Company controlled by Madam Kwan Cheung (Wealthy Capital Enterprises Inc). The sole purpose of this sale (on paper at least) is for the resolution of all legal issues associated with the clear title of equity in GZL”;

• “The proposed Share Sale Agreement contains Condition Precedent pertaining to the legal issue resolution around the GZL equity together with an Option Agreement or ‘Call Option’ to purchase ETCHK for the same agreed consideration value that is to be held in escrow. There is specified time period of 6 months to these agreements. The agreed consideration or purchase price for this sale will also remain in escrow”;

• “On achievement of the legal issue resolution around GZL, ETC will negotiate to sell the entire GZL stake which it will back to back in conjunction with the Call Option”;

• “The consideration to Madam Kwan Cheung will be up to US$8m payable at completion of the sale of the GZL stake. Note that during the process of the legal issue resolution, liabilities and potential fines that may be imposed on the ETC China subsidiaries will be paid by Madam Kwan Cheung prior to the Call Option being exercised”;

• “If Madam Kwan Cheung is unable to achieve legal issue resolution then on exercise of the Call Option no consideration will be due”.

63. Of particular significance for reasons that will become clear, under the “Summary” section describing the proposed share sale agreement, it was noted that:

“Upon signing of the Sale Agreement, all right title and benefit in the ETC HK Shares will pass from ETC Jersey to the Buyer. The Purchase Price will not be payable upon Signing of the Sale Agreement, but will be payable in two instalments as described below.” (bold and underlining in original)

64. This, together with the Call Option Agreement, made the proposed sale transaction reversible. That it could, however, be executed with right, title and benefit passing upon signing meant that the “Buyer” would be armed to present as the owner of the relevant shares. The “optics” of this picked up what had been alluded to in the board minutes of 7 September 2011 (see [58] above). Mr Drummond’s email to Mr Marcou of 9 November 2011 expressed, in perhaps blunter terms, what was being sought to be achieved:

“I am very supportive of a deal that gives the incentive for a PRC citizen with the wealth, connections and skill to tackle the untangling of the mess that we are in. A reversible sale of the Hong Kong company removes the ‘out of China illegally’ threat and allows Chinese methods to be applied to find and implement a sensible result. However it all depends on whether a Lingyan/Kuoni deal is possible. I can see why both sides would want to come to a compromise since both have a lot to gain as long as Kuoni is happy with a minority stake in GZL.” (emphasis added)

Mr Drummond indicated that he had not at that stage seen the draft agreement but that in principle he would support it.

65. The Wealthy Capital Transaction was approved by the Board, over the objections of the two Kuoni directors, Mr Simeon and Ms Ng, in minutes dated 19 December 2011 and a share transfer was executed for an apparent consideration of US$10,000,000 on 20 December 2011.

66. The primary judge found that Madam Cheung did attempt to broker a solution to what was euphemistically referred to in the Wealthy Capital Transaction documents as the “Legal Complication”, albeit without success (PJ [131]), and noted that, on 12 March 2012, Mr Marcou reported to the board that:

“... Wealth[y] Capital has contacted some people but did not receive any response. The company is still trying to put through the process but the situation now is very difficult and therefore no substantial progress has been made so far. One of the reasons is Kitty [Yang] is not willing to sign the required legal documents. [Mr Marcou] will try to identify if anything can be done next week. However, he is of the opinion that the board should consider terminating the transaction if the transaction cannot be concluded before Easter.”

67. On 25 May 2012, ETCI exercised its Call Option in relation to the ETCH shares and, in effect, brought the Wealthy Capital Transaction to an end. This had been foreshadowed at a board meeting held three days prior.

68. The minutes of this meeting also make reference to a proposal that had been circulated by Mr Simeon to engage a Mr Mao as a Chinese-speaking adviser to assist in building a bridge between ETCI and Lingnan in a context where “a quick solution is needed before the [ET-China] Group is declared to be insolvent”. Mr Mao was also acting as a consultant or adviser to Kuoni. The minutes recorded that Mr Simeon would get Mr Mao to arrange a meeting between ETCI, Lingnan and Kuoni whilst Messrs Rose and Marcou would discuss between themselves any further future role for Mr Mao on behalf of ETCH

Negotiations with Lingnan — 5 June 2012 meeting and cancellation of proposed July meeting

69. At PJ [139]–[142], the primary judge noted that, in a briefing paper for the ETCI board meeting scheduled for 2 April 2012, Mr Marcou reported that it was “[h]ighly likely that Lingnan will now move on the disputed GZL holdings” and that ETCI should “consider engagement with Lingnan or related entity to facilitate exit from disputed equity holdings in GZL ... at best possible price”. Mr Rose reported to the same meeting that it was “highly likely that Lingnan will now move into a civil case on the disputed GZL holdings”.

70. The board authorised Mr Marcou to contact Lingnan to pursue options “with Lingnan for the disposing of equity holding of [ETCH] in GZL at the best price that the group would accept”. The board minutes of 24 May 2012 made reference to Mr Marcou’s attempts to arrange a meeting with Lingnan.

71. A meeting was ultimately arranged to occur on 5 June 2012 in Hong Kong between Mr Rose, Mr Marcou, Mr Simeon, Ms Ng and Mr Leser (an employee of Kuoni superior to Mr Simeon and Ms Ng) with representatives of Lingnan.

72. According to the minutes of that meeting:

“The opinions expressed by Lingnan are: (1) Lingnan should be part of any solution for solving the issues of the shareholding of GZL. (2) The shares of GZL owned directly by ETIC, ETCCT and Xinzhiye are obtained either illegally or with legal defect. (3) Lingnan has the intention to sort out the shareholding issue of GZL through negotiation. However, the subject of asset transaction is limited only to the shares of GZL. (4) After confirming the intention of ETIC, ETCCT and Xinzhiye for disposing all their shares of GZL, Lingnan intends to offer the amount of not more than RMB 70,000,000 as a consideration for purchasing the aforesaid shares. (5) If Lingnan can reach the agreement with ETIC, ETCCT and Xinzhiye on the proposed transaction of the shareholding of GZL, Lingnan will negotiate with other shareholders of GZL according to the article of association of GZL.”

73. The ETCI board minutes of the same day recorded that Lingnan’s final offer of RMB 70 million was arrived at after:

(a)   Lingnan made an initial offer of RMB 62 million;

(b)   Mr Rose and Mr Marcou made a counter offer of RMB 100 million;

(c)   “[a]fter a few rounds of negotiation” Mr Rose and Mr Marcou revised their counter-offer to RMB 75 million; and

(d)   Lingnan then increased its offer to RMB 70 million.

74. In his affidavit, Mr Marcou gave this account of the meeting:

“Soon after the commencement of this meeting I formed the view that a number of the Lingnan representatives present were quite affected by alcohol. This was because, to varying degrees, their faces were flushed, their speech was loud and I could smell alcohol when I was close to them. Mr Lesser [sic] was also quite disappointed and agitated as to the behaviour of the Lingnan representatives.

During this meeting, the following statements were made, including by one or more representatives of Lingnan, the precise identity of whom I cannot recall:

Lingnan:    We are open to discussing price. The funds ultimately paid will only be net of all fines and court case outcomes, taxes and any payment would only be made in China and in Yuan.

Mr Rose:   You are not willing to negotiate on any of that, only price?

Lingnan:    That’s right.

Mr Rose:   What does that leave us? That doesn’t work. We’re going to be left in the negative.

Lingnan:    Why are you afraid to come to Guangzhou?

Mr Rose:   Don’t you dare threaten me.”

75. In cross-examination, Mr Marcou said of the meeting:

“It started at about 11 in the morning and then we broke for lunch and before we came back Stefan Leser stopped us and he said, ‘They're all drunk at the table. I don't know why their military mates came and they've been drinking heavy liquor and they're all drunk’, and he was agitated; he was very upset, right, and I - and [Mr Rose] and I, you know, we sat down with them and that's when the threats started and we walked out. [Mr Rose] was - I had to restrain [Mr Rose].”

76. In his affidavit, Mr Rose gave this account of the meeting:

“The Lingnan representatives arrived very late to the meeting. Shortly after the meeting commenced I formed the view that the Lingnan representatives were intoxicated. I thought that because I could smell alcohol on thei[r] breath, and because of their manner.

I cannot now recall the detail of the discussions but I can recall their effect. I recall that one of the Lingnan representatives said during the meeting words to the effect that ‘Matthew [Ng] has set up the business illegally. We are going to get a significant judgment against you. The business is basically worthless.’

I responded by questioning the claim of illegality. In response one of the representatives said: ‘Why don’t you come to Guangzhou and have a chat about it?’

I took that response to be a threat that if I travelled to Guangzhou I would be arrested. I formed the view because of the context of the words said and the tone in which they were said.”

77. In his evidence-in-chief, Mr Rose gave this further account of what the Lingnan representatives said of the RMB 70 million:

“He said that whatever price was ultimately paid, though, it would have to be after deducting fines, penalties and possibly claw back for dividends that have been paid illegally, and that he couldn't give an exact number as to how much they were at the moment, but it would be a net figure once all those were taken into account.”

78. The primary judge accepted Messrs Rose and Marcou’s account of what had transpired at this meeting (PJ [161]). That conclusion is challenged in the Appellants’ Rule 51.36 Statement at [6]. None of the other attendees at the meeting gave evidence in the proceedings at first instance.

79. It is also relevant to note that, unbeknown to ETCI, on the very same day as the meeting with Lingnan, Lingnan wrote to GZL requesting that it commence legal proceedings against Mr Ng, Ms Yang and the ETC Subsidiaries, such proceedings obviously being separate to the criminal proceedings against Mr Ng and Ms Yang which had already been finalised: see PJ [163]–[165].

80. On 8 June 2012, the ETCI Board met with the minutes recording that:

“[Mr Simeon] reminded the board that the shareholders should be informed that Lingnan is in a stronger position, [ETCI] has nearly no liquidity and the Group may become insolvent very soon. In addition, the licences of the [ETC Subsidiaries] in China cannot be renewed because [ETCI] does not have resources in China to handle renewal of licences. These entities may be deregistered in 2012 finally. [Mr Simeon] also reminded the board that Lingnan may not want to continue the discussion and the shareholders may end up lose [sic] everything because Lingnan is the only buyer [ETCI] has at the moment and no deals can be transacted without the consent of Lingnan.”

81. On the same day, Mr Marcou wrote to a representative of Lingnan, Mr Tang Xin as follows:

“As promised, the Board of [ETCI] has met today and is formerly [sic] requesting Lingnan to reconsider their offer of RMB 70 million. As stated in the meeting, after consultation with shareholders we would like Lingnan to consider increasing the offer to RMB 73 million, that being closer to the cost to acquire the GZL shares over time which we the Board of Directors and key shareholders see as a fair price.”

82. On 13 June 2012, Mr Tang replied:

“Based on your side’s willingness to sell 54.43% of GZL shares to us, our intention is to acquire these shares in accordance with relevant laws and regulations of the People’s Republic of China.

As to your proposed selling price for you 54.43% shares of GZL, we think that the gap between two sides’ expectations have been significantly reduced. We believe that for the possible future transactions, the price is unlikely to constitute a substantial obstacle; [sic] At the same time we believe that, the final price and the final transaction, is closely related or dependent on, the nature and status/quality of the shares and detailed terms and conditions of the transaction[.]

We would like to propose that we arrange to meet within two weeks’ time to discuss more concretely about the detailed terms and all the issues connecting to the share transfer.

I hope that you can work with us and reach a consensus: to resolve the GZL equity issues. Working in common cooperation of both sides, relative to other means, towards a solution is more active and in good faith.” (emphasis added)

There was no disclosure in this conversation of Lingnan’s encouragement of GZL to commence proceedings in the PRC against Mr Ng, Ms Yang and the ETC Subsidiaries (see [79] above).

83. A meeting with Lingnan representatives was scheduled for the week beginning 2 July 2012 with the meeting potentially to run for the entire week.

84. In June 2012, Madam Cheung re-emerged, evidently cognisant of ETCI’s discussions with Lingnan, and, as the primary judge found, told Mr Marcou that she continued to be interested in acquiring ETCH: PJ [183]. According to Mr Marcou’s evidence, Madam Cheung wanted to make an offer to acquire ETCH for US$13 million. This “offer” resulted in a term sheet which was sent to Mr Simeon, Ms Ng and Mr Drummond on 27 June 2012 by Mr Rose (PJ [189]) under cover of an email which stated:

“Please see attached new offer for [ETCH] by a party related to Wealthy Capital Limited. I would like to call an urgent board meeting in the next 24-48 hours to discuss this offer as I believe it to be a genuine alternative to the current proposal currently before the Board.”

The “current proposal currently before the Board” was, of course, the possible transaction with Lingnan. The “party related to Wealthy Capital Limited” was Vision Capital.

85. The “new offer” was set out in a term sheet which specified a total consideration comprising:

“A US$500,000 down-payment within 4 weeks of execution of Sale Agreement between the Vendor and the Purchaser;

[a] further US$12,500 ,000 within 16 weeks after the down-payment has been received by the Vendor; and

[t]he Purchaser will grant the Vendor a 15% interest on the net amount determined by deducting the purchase price and sale price on any future transaction that may result in the disposal of the Company or its assets by the Purchaser. The net amount will exclude reasonable outgoing expenses incurred.”

86. A significant condition precedent specified in the term sheet was the Purchaser’s completion, to its satisfaction, of due diligence investigations, including “in its absolute discretion being satisfied that the findings of those investigations do not reveal any reason why it would not wish to proceed with the Transaction”.

87. On the following day, Mr Marcou emailed the ETCI board, suggesting, in light of this development, that a postponement of the proposed meeting with Lingnan the following week be requested, and seeking “everyone’s view in relation to that”. Mr Drummond agreed with the suggestion of a postponement but cautioned that Lingnan not be given:

“any idea that they are in a competitive situation at this stage. We may be unable to bring another bidder up to a level of certainty before Lingnan start to realise that they may be out bid at which stage they will use their considerable powers once again”.

Mr Drummond also expressed a concern about security and safe communications. Mr Simeon expressed the view that both the Lingnan and Madam Cheung proposals should be considered but that negotiations with Lingnan should not be postponed.

88. On 29 June 2012, the board of ETCI resolved that:

1. Vision Capital be asked to sign a term sheet within two weeks;

2. Vision Capital be asked to pay a non-refundable deposit of US$1 million in cash “at signing of the term sheet” and “paid outside China”; and

3. the balance of the purchase price of US$12 million “should be paid at signing/execution of the sale agreement”.

Mr Marcou was not at this meeting.

89. The minutes of this meeting also record that the board resolved that Mr Rose “will ask [Mr Marcou] to make a request to Lingnan that [ETCI] needs more time to make the documents ready and would like to postpone the meeting sometime after 10th of July”.

90. The following day, Mr Marcou wrote to Mr Tang, a representative of Lingnan, as follows:

“Our apologies, but we would like to postpone the proposed meeting next week due to some unforeseen circumstances. I will be back to you soon once we are able to confirm future dates.”

91. At some time on or prior to 4 July 2012 (when Ms Ng supplied an English translation to fellow ETCI board members), Lingnan responded:

“Mr Marco We confirmed receipt of your email dated June 30, 2012. Without proper communication and explanation, you have arbitrarily canceled [sic] the talks (meeting) which (both parties) have agreed. We deeply regret this irresponsible and lack of good faith behavior. We will take legal and all other measures to resolutely safeguard our legitimate rights and interests. We ask you to carefully consider the serious consequences arising therefrom.” (emphasis added)

92. On 5 July 2012, Lingnan commenced proceedings in the Guangzhou Tianhe District People’s Court against one of the ETC Subsidiaries, ETIC PRC. Those proceedings ultimately resulted in the judgment referred to at [122]–[126] below. These proceedings had been planned for at least a month as was recorded in the judgment (see [79] above).

93. The primary judge held that this was “the end of negotiations between ETCI and Lingnan concerning the possible purchase by Lingnan of the ETC Subsidiaries’ shares in GZL” and observed that there was no evidence of any further discussions between ETCI and Lingnan about the matter. His Honour said that “[e]vidently, Lingnan determined to pursue the question of its acquisition of GZL through the court process”: PJ [207].

4 July 2012 board meeting

94. Following receipt of Lingnan’s response to Mr Marcou’s email postponing the meeting that was to have commenced two days earlier (see [91] above), the board of ETCI met.

95. As the primary judge noted at PJ [217], there are competing versions of the minutes of this meeting. The primary judge relied upon and accepted as accurate the version of the minutes signed by Mr Rose as accurately recording what transpired at that meeting as it was not suggested to him in cross-examination that they did not accurately record what had occurred: PJ [218]. The Appellants challenge his Honour’s reliance on these minutes as accurate in their Rule 51.36 Statement at [2] and detailed submissions were made on appeal in this respect. These submissions are considered further at [196]–[203] below.

96. Aspects of the competing versions of the minutes were not, however, controversial. Both versions made reference to the need for Vision Capital to supply a term sheet. As reported to the board, Vision Capital’s then current proposal involved a non-refundable cash down payment of US$500,000 to be paid within two or four weeks with the balance to be paid within 12 weeks of the execution of the sale agreement. Both versions of the minutes also made reference to the previous Wealthy Capital Transaction being “called back by us in May 2012”, plainly a reference to the exercise of the Call Option referred to at [67] above and the reversible nature of that transaction.

97. The primary judge recorded the following evidence of Mr Marcou in relation to this meeting (PJ [225]):

“I recall that leading up to and at this meeting the board discussed the reversible transfer of shares to Vision Capital (Vision Capital Arrangement). I cannot now recall the words said but I recall their effect, which was that:

(a)   Vision Capital would need to assume registered ownership and management control of the Hong Kong Company and the various PRC Domestic Companies;

(b)   that apparent assumption of ownership would allow Madam Cheung to resolve the disputes in PRC and realise the value in the Jersey Company’s interest in GZL.

I do not know why that discussion was not recorded in the minutes. I do recall that the Vision Capital Arrangement was discussed again at a subsequent Board meeting.

That was from my point of view no different to the earlier Wealthy Capital Transaction, except that the earlier transaction was to involve payments of money and an option back to the Jersey Company. The Vision Capital transaction would instead involve these things occurring before the sale terms were finalised, with the Jersey Company [ETCI] being able to unwind these steps should basic matters such as a price ultimately not be agreed or paid.” (emphasis in original)

98. The next piece of the factual puzzle concerns the transfer of ETCI’s shares in ETCH to Vision Capital in July 2012.

The ETCH Share Transfer

99. On 5 July 2012, Mr Marcou and Mr Rose executed a term sheet in respect of the proposed acquisition of ETCI’s shares in ETCH by Vision Capital, in terms similar to those of the “new offer” described at [84]–[86] above. This term sheet provided for a “non-refundable deposit” of US$500,000 “within 4 weeks of execution of a Sale Agreement” between ETCI and Vision Capital. This arguably differed from what had been contemplated at the meeting of the previous day.

100. The term sheet also provided that the balance of US$12.5 million be paid “within 12 weeks after the deposit has been received” and contained a number of conditions precedent to completion including that:

“... the Purchaser completing its due diligence investigations of [ETCH] to its satisfaction, and in its absolute discretion being satisfied that the findings of those investigations do not reveal any reason why it would not wish to proceed with the Transaction”.

101. The term sheet as executed was not approved by the board of ETCI prior to its execution but equally was not concealed from board members following execution. Thus, on 12 July 2012, Mr Rose sent an executed copy of it to Mr Simeon, who duly protested that:

“[T]his is clearly against what we agreed in the board, in particular that the non-refundable deposit is payable upon execution of the term sheet. [C]an we see a copy of the receipt of the monies? [B]esides it was agreed that the execution version be shared with the board members before execution.”

102. On 6 July 2012, Mr Marcou sent Madam Cheung a draft Sale of Shares Agreement (the draft SSA), providing, in accordance with the executed term sheet, for a purchase price of US$13 million with a $500,000 “down-payment” payable “on the date of this Agreement”. The draft SSA did not contemplate a transfer of the ETCH shares until receipt of the purchase price. Thus cl 4.4 provided that “[u]pon the Purchaser paying the Balance to the Seller, the Seller shall deliver a transfer of the Shares to the Purchaser”. The draft SSA also contained a condition precedent at cl 5.1(c) to the same effect as that that had been contained in the term sheet as noted at [86] and [100] above.

103. Although a slightly amended version of the draft SSA dated 25 July 2012 was executed on behalf of ETCI, which had added to cl 4.4 the words “[i]f the Purchaser does not pay the balance, the Purchaser will not be entitled to any transfer of the Shares”, no copy of the SSA executed by Vision Capital was in evidence although an email sent by Mr Marcou on 1 August 2012 suggested a belief on his part that it had been signed by Vision Capital on 26 July 2012. Mr Rose was also of that understanding, confirming as much to Mr Simeon and Mr Ng on 2 August 2012 although noting that he was yet to receive a signed copy. The primary judge proceeded on the basis that Vision Capital never in fact executed a copy of this agreement.

104. It was certainly the case that no monies, either by way of deposit or the balance of the purchase price pursuant to the draft SSA or term sheet that had preceded it, were ever received by ETCI. Notwithstanding this, on 25 July 2012, Mr Rose, on behalf of ETCI, executed the ETCH Share Transfer and caused it to be delivered to Madam Cheung. On the following day, according to an annual return lodged with the Hong Kong Companies Registry on 22 March 2013, the ETCH Shares were transferred to Vision Capital.

105. On 26 July 2012, a notification of change of director appointing Vision Capital as a director of ETCH was also lodged with the Hong Kong Companies Registry. This was signed by Mr Marcou.

106. The corporate documents that were in evidence recorded that the transfer was for a consideration of US$13 million however, as already noted, it was not in dispute that consideration in that amount was never paid.

107. As shall be seen, notwithstanding and contrary to the fact of the ETCH Share Transfer and what it implied about ownership of the ETCH Shares, the 2013 Share Sale Agreement entered into between ETCI and Vision Capital almost a year later (see [10] above) contained the following recitals:

“2.1   ET-China Holdings Limited formerly known as ET-China.com Holdings Limited (the ‘Company’) is a limited liability company incorporated under the laws of Hong Kong and having its registered office at Level 19, IFC II No 8 Finance St, Central, Hong Kong, with Company No. 709454.

2.2   The Seller [ETCI] owns 100% shares of 493,074,247 of HK$0.0001 each representing the entire issued share capital of the Company.

2.3   The Company has a number of wholly and partially owned subsidiaries company registered in PRC under the laws of PRC.

2.4   In the circumstances and given the existence of the Legal Complication, the Seller agrees to sell and the Purchaser agrees to purchase the Shares at the Purchaser Price, which the Seller and the Purchaser agrees that the Purchase Price is a proper, fair and reasonable market value of the Shares.” (emphasis added)

108. Furthermore, cl 3.1 of the 2013 Share Sale Agreement described ETCI as the “absolute owner” of the ETCH shares.

109. As noted below, notwithstanding the ETCH Share Transfer in July 2012, Messrs Rose and Marcou continued to engage in negotiations with Madam Cheung and Vision Capital in relation to the latter’s possible acquisition of the ETCH shares, and to report to the board in relation to such negotiations.

110. The apparent paradox of this position in circumstances where the ETCH Share Transfer had already been effected was a central aspect of the factual and legal dispute between the parties both at first instance and in this Court.

111. At a factual level, the primary judge set out key evidence given by Messrs Rose and Marcou as to why they transferred the ETCH shares to Vision Capital on or about 25 July 2012 without ETCI receiving payment for that transfer. His Honour’s summary of this evidence (at P [264]–[267]) was that:

“264   … they agreed to provide Madam Cheung with the ETCH Share Transfer so as to create the ‘optics’ of Madam Cheung having control of ETCH so that she could ‘make the necessary arrangements’ and progress the transaction in the PRC.

265   The transaction was said to be intended as one whereby ETCI could achieve some return for the benefit of its shareholders from its investment in GZL.

266   Mr Rose and Mr Marcou both said they understood that the transaction was ‘reversible’ and that there was an understanding with Madam Cheung that ‘if things didn’t progress’ the shares would be returned.

267   Like Wealthy Capital, Vision Capital was incorporated in the British Virgin Islands and would doubtless be seen as ‘foreign’ by PRC State interests. But Madam Cheung was a Chinese national.”

112. The primary judge then observed at (PJ [268]–[269]) as follows:

“268   There is no witness available to contradict this evidence. Madam Cheung was not called, and the submissions made on her behalf are congruent with this evidence.

269   Mr Rose and Mr Marcou cannot be mistaken about these matters. They were either telling the truth about the understanding they had with Madam Cheng about the share transfer, or they were giving evidence knowing it to be false.”

113. His Honour accepted the veracity of their evidence. That conclusion attracts some further support from the terms of the amended cl 4.4 of the draft SSA to which reference has been made at [102] above.

Events following the ETCH Share Transfer

114. The primary judge held, based upon his analysis of emails and board minutes, that the ETCH Share Transfer was not known to and thus inferentially at least had not been disclosed to the other members of the board of ETCI by either of Messrs Rose or Marcou following the execution of the transfer. Mr Bagley, who appeared on behalf of Messrs Rose and Marcou on the hearing of the appeal, did not submit otherwise.

115. In addition, the primary judge rejected Mr Rose’s evidence that he had disclosed the details of the ETCH Share Transfer to Mr Leser (a superior of Mr Simeon and Ms Ng) of Kuoni: PJ [297]. Indeed, the documentary record disclosed that Messrs Rose and Marcou reported to the board that they were still in negotiations with Madam Cheung in relation to completion of the sale of the ETCH Shares, implicit in which was the fact that a transfer of those shares had not yet occurred.

116. In the course of August 2012, Mr Marcou unsuccessfully sought from Madam Cheung an executed copy of an amended version of the draft SSA (to reflect a minor adjustment in the purchase price to take into account Madam Cheung’s small existing interest in ETCH) together with payment of the deposit.

117. On 29 August 2012, Mr Rose sent an email to Mr Simeon, Ms Ng and Mr Drummond as follows:

“Dear Board Members, I just wanted to give an update of how the Wealthy Capital [sic: Vision Capital] transaction is progressing.

As tasked by the Board, I am endeavouring to progress the transaction under extremely difficult circumstances. There have been [a] number of issues that I have had to work through with Wealthy Capital [sic: Vision Capital] particularly in relation to their adverse due diligence findings relating to the company operations in China. This has created a reluctance to move forward on their part …

Nevertheless, as a show of our intent to effect this transaction, I have been working with [Mr Marcou] and our staff in China to provide information and engage in dialogue to Wealth[y] Capital [sic: Vision Capital] on various matters such as court cases involving the company and providing access to key people from [the ETC Subsidiaries]. Whilst our position is very problematic and our negotiating position is quite weak, I have been able to keep them at the table and hope to complete the transaction in due course in accordance with the agreed timetable. I will be in contact once I have a [sic] something more definitive to report.” (emphasis added)

118. Mr Rose’s references in this email to Wealthy Capital were plainly intended to be to Vision Capital (both companies being associated with Madam Cheung, with Wealthy Capital being the vehicle utilised in the attempted but terminated sale in 2011).

119. The board of ETCI met next on 12 September 2012. Extracts from the minutes include the following:

“[Mr Rose] reported that the only outstanding matter that concerns Vision Capital for the acquisition of [ETCH] is to change the legal representatives of all entities to them from [Mr Ng] and [Ms Yang]. In this regard, [Mr Rose] reported that [Mr Ng] has clearly communicated that he would not agree to sign any documents relating to the disposal of [ETCH] to Lingnan. For the transaction with Vision Capital, [Mr Ng] would agree to sign the documents provided that the board agreed unanimously for the disposal of [ETCH] to Vision Capital and he would not be sued by the group for the transaction as the consideration that is offered is considered low or for any other reasons. …

…

[Mr Marcou] also reported that Lingnan has currently brought eleven charges against [ETCI] and the charges can be classified into three categories. … The final category is pertaining to the disposal of [ETCI] because it may involve the GZL shares illegally bought by [ETCI]. …

…

In response to the questions of [Mr Simeon] about Vision Capital failing to pay the deposit for the acquisition of [ETCH] as agreed in the term sheet [Mr Rose] said that we have no other alternative if we do not proceed with the transaction with Vision Capital.

[Mr Simeon] comments that [ETCI] does not have any protection at the moment in the transaction dealing with Vision Capital and therefore the sale of shares agreement should be amended after [Mr Ng] has signed the documents. … [Mr Rose] said that he, once [Mr Ng] has signed the documents and the revised Sales of Shares Agreement is ready, would discuss with Vision Capital and convene another board meeting to report to the board about the result of the discussion. He would try to push a very early full cash settlement which is by the end of October.”

120. In November 2012, in response to an inquiry by Mr Simeon as to the status of the proposed sale to Vision Capital (although Mr Simeon also mistakenly referred to Wealthy Capital), Mr Marcou replied:

“Transaction still in process as agreed from Board meeting on July 4.

If we believe that this transaction will not progress, the process to un-wind from Vision Capital should begin”. (emphasis added)

121. The primary judge extracted the contents of an email from ETCI’s independent director, Mr Drummond, to Mr Ranjit Murugason, a former Chair of the board of ETCI and a shareholder in the company, on 22 November 2012, no doubt in recognition of the likely reliability of this document as accurately capturing the true position in which ETCI and its directors found themselves at that time. It was in the following terms (PJ [326]):

“The situation in China remains very difficult.

The minority shareholder in GZL (which now remains by far the most valuable asset of the group) continues to act in ways which appear designed to acquire our stake for a very low price. As you know their actions have resulted in untold damage to the group, to shareholders and to Matthew [Ng], Kitty [Yang] and many other people involved. If there is no resolution relatively soon their actions will result in an extremely bad outcome for the shareholders.

The parent company has been attempting to find an alternative solution which would result in a sale of its interests at a higher price. This would not be anywhere near ‘market value’ but would result in shareholders receiving a modest return. This has been hampered by two main factors both connected.

Firstly that the power of the minority shareholder who seems able to ‘persuade’ people not to co-operate with the board. Matthew [Ng] himself is refusing to sign documents to give the board control over the assets even though he has no right to do so and is in direct breach of his corporate responsibilities. He could be avoided by certain processes but these too remain difficult in the environment in which we have to operate. If he co-operated there would be a good chance of a reasonable outcome for shareholders. Matthew [Ng] does not appear to be acting rationally but I can imagine that in his situation it is not easy to see things clearly and discussions can only be carried out through intermediaries. If you have any influence or simply just good communications with Matthew [Ng] it [m]ight help resolve his dilemma. This situation is complicated by changes in the government at all levels connected with the new National leader.

Secondly I perceive that the board is not fully united in the way that we should attempt to resolve the situation. Two of the board members represent Kuoni who have an interest in the leisure sector which might be seen as conflicting with their duties as representing other shareholders. The other two represent a block of Australian shareholders. So far this has not resulted in any shift in strategy or decision making but it has to be watched carefully and I am probably acting as the independent balance between the different shareholder groups.

[Mr Rose] has been desperately trying to find a buyer who has the resources, the power and the willingness to offer an alternative solution. It is only natural that he has turned to someone that he knows who appears to have all three of these attributes. What they do with the GZL shareholding after the acquisition is of no concern to the board as long as they pay a price, delivered into the parent company’s control that is in the view of the board of the parent company the best outcome for its shareholders.” (emphasis added)

The person to whom Mr Rose had “turned” was, of course, Madam Cheung.

The February 2013 Civil Judgment

122. As recorded at PJ [337]–[338], “[o]n 7 February 2013, the Guangzhou Tianhe District People’s Court delivered a Civil Judgment in the proceedings commenced the previous June. The Court determined that ETIC PRC (one of the three ETC Subsidiaries) was ‘not a shareholder’ of GZL, had ‘no right to hold’ 28.5% and was ‘not entitled to shareholder’s rights and interests’.”

123. While the judgment related to ETIC PRC’s 28.5% interest in GZL, the primary judge recorded that there was other litigation on foot in relation to the remaining interests of the ETC Subsidiaries in GZL (that is the shareholding of Xinzhiye PRC and ETCCT PRC). No judgment was in evidence in relation to the outcome of this other litigation.

Ground 12 — the 2013 Share Sale Agreement and the Papers of Civil Mediation

251. This ground of appeal (as amended in the course of the hearing of the appeal and indicated by the underlining) was as follows:

12.   The trial judge should have found that the breaches of directors’ duties by Rose and Marcou included their conduct in:

a.   setting up the Vision Capital transaction;

b.   misleading the ETCI Board about the nature and terms of that transaction;

c.   persuading the ETCI Board to postpone the negotiations for sale of ETCI’s shares in ETCH to Guangzhou Lingnan International Enterprise Group Co Ltd (Lingnan);

d.   de-railing those negotiations (as put to Marcou at T340.17-26);

e.   the execution of the transfer of ETCI’s shares in ETCH to Vision Capital on 25 July 2012;

f.   entering into and purporting to ratify the transaction the subject of the purported agreement dated 7 June 2013; and

g.   not ensuring that ETCI received the benefit of proceeds of a ‘Paper of Civil Mediation’ issued in June 2013 by a court in the People’s Republic of China (PRC) in proceedings involving Lingnan and the interest held in Guangzhou GZL International Travel Services Limited by subsidiaries of ETCI operating in the PRC (June 2013 Paper of Civil Mediation).”

252. Of the various sub-paragraphs of this ground, (a), (b) and (e) have already been dealt with in substance. Subparagraphs (c) and (d) relate to unpleaded allegations which have already been held not to be open to be raised on appeal: see [162] and [168]–[169] above.

253. Subparagraphs (f) and (g) are contentious and were objected to by the Respondents, in particular Madam Cheung and Vision Capital on the basis that the knowing assistance and/or knowing receipt case advanced against them at first instance was confined to a case in respect of the ETCH Share Transfer.

254. Subparagraph (f) represented the Appellants’ attempt to formulate a ground of appeal in relation to the allegation that the 2013 Share Sale Agreement (in consideration of AU$2 million) represented the sale of shares at a gross undervalue. This argument had been advanced in writing in appeal submissions but was not reflected in the Notice of Appeal as originally formulated. It had been rejected by the primary judge: see [165]–[166] above.

255. There was force in Mr Entwisle’s objection on behalf of Madam Cheung and Vision Capital as follows:

“The fundamental point is that no case was ever advanced below that Cheung entered into the 7 June 2013 agreement with knowledge that it was a breach of the directors’ duties for them to agree to the $2 million sale. It certainly was not alleged that she did so with knowledge that the agreement was back-dated or was being entered into to cover up some other wrongdoing. That case cannot be raised against her for the first time on appeal.”

256. Whilst the Court permitted the amendments and received argument in relation to them, they must fail. The allegation in (g) is premised on the illegitimate “backdating” argument as Messrs Rose and Marcou can scarcely have been in breach of their duties in circumstances where, prior to having any knowledge of the “settlement”, they had already caused ETCI’s shares in ETCH (and hence any indirect interest in GZL) to be sold. After that date, namely 7 June 2013, ETCI had no interest in ETCH and thus no ability to obtain the benefit of any settlement, even assuming that such a settlement was in truth payable and the funds represented by it were not to be set off against any other fines or penalties and could be transmitted out of the PRC.

Sale at gross undervalue

257. Reference had been made at [148] above to CLS [67] and the pleading that the sale of the ETCH shares for AU$2 million pursuant to the 2013 Share Sale Agreement was at a gross undervalue. The primary judge’s consideration of that matter has been referred to at [165]–[166] above.

258. ETCH’s value lay solely in its indirect interests in the ETC Subsidiaries which had been the subject of a wholly adverse judgment in the PRC in February 2013. The impact of that judgment was recorded in contemporaneous correspondence at the time, as referred to in [125] above.

259. As at the date of sale, namely 7 June 2013, Mr Rose had an utterly pessimistic view about any appeal prospects (see [126] above) and, on all of the evidence, was entirely justified in holding this view. Mr Marcou’s perception, shared with Mr Rose, that “we’ve been screwed in China”, has also been noted at [125] above.

260. The Appellants’ “gross undervalue” case sought to place reliance on the original Lingnan “offer” as well as the $13 million referred to in the Vision Capital Term Sheet and the draft SSA in mid-2012. That reliance was quite misplaced. The former “offer” was subject to deductions for fines, penalties and possibly any illegally-paid dividends: see [74] and [77] above. It was also made long before the February 2013 Civil Judgment which completely and dramatically changed the landscape, as the board of ETCI recognised. The Vision Capital offer of $13 million was conditional upon due diligence. That due diligence resulted in the offer being reduced drastically. It was an offer that was also made well before the February 2013 Civil Judgment.

261. The assessment of whether or not the sale was at a gross undervalue and whether that was or ought to have been known to Messrs Rose and Marcou must be by reference to the date of sale.

262. At that point in time, with ETCI on the brink of insolvency and with no other assets, and subject to a powerful adverse judgment in the PRC, there is no basis for concluding that the sale was at a gross undervalue.

263. As ETCI’s independent director Mr Drummond described in a draft email to Mr Ng, which he sent to Messrs Rose and Marcou on 3 August 2016:

“The board had realised that the authorities would not deal with the ‘foreign’ controlled company because we had attempted to sell a controlling interest in GZL to Kuoni illegally rather than find a deal with Lingyan which would keep GZL under Chinese control. It struck me that they were also of the view that the earlier set up was also illegal even though we had received legal opinion that it worked. So we turned to Madam Chung [sic] and agreed to sell HK to her for A2 million in the expectation that she could make something out of a deal with the authorities. We did not expect her to buy the HK shares unless she thought she could make money from the deal but had no idea how much that would be, when it might be possible and how it would work. Clearly she did well and very fast although I believe she was not really involved in the negotiations which were principally between the Guanghou authorities and Lingyan. My guess is that Lingyan wanted the whole matter cleared up so that they were legal owners of GZL and could manage it without risk. I guess they had good friends in high places who would support a deal. None of the news regarding the ‘settlement’ was passed on to members of the Jersey board until October 2013 by which time I had resigned following the rights issue. As you know I never heard about the ‘settlement’ until last month.” 

264. Ground 12 should be rejected.

Grounds 13–14 — damages

265. Grounds 13–14 were as follows:

“13.   The trial judge erred in fact and law by not judicially assessing the damages caused to ETCI by the breaches of directors’ duties by Rose and Marcou, in particular:

a.   in rejecting the valuation evidence of the appellants’ valuation expert, Tony Samuel (Samuel), at J [587]-[588] and [594]-[595], on the basis that he had not taken into account that the Vision Capital offer was subject to due diligence, when he had taken that into account as he stated in his evidence at T182.6-10 and 21-22, and that valuation methodology was not disputed and reliance on such an offer was in accordance with authority;

b.   in finding, at J [395] and [611], that Samuel had given evidence that, if no payment was made to ETCI as a result of the ‘June 2013 Paper of Civil Mediation’, the value of ETCI as at June 2012 was negative $2.12 million, when his evidence was that ‘it [wa]s reasonable to assume that the net asset position of ETCI as at the date of the June 2013 [Paper of Civil Mediation] (and prior to the assumed inflow of RMB 83 million) was around negative US$2 million’ (at [107] of his report dated 13 February 2019; see also T183.37-42, 194.16-18 and 199.30-200.5);

c.   failing to take into account on this issue in his reasoning the fact of the agreed settlement of RMB 83 million in the June 2013 Paper of Civil Mediation;

d.   failing to take into account or address in his reasoning the evidence of the ETCI Board’s valuation of the ETCI interest in ETCH at the Board meeting on 8 June 2012 (J [169]-[171]);

e.   failing to take into account or address in his reasoning the evidence of the advice received by ETCI from Jianhe Mao to which the trial judge referred at J [146];

f.   in finding, at J [599]-[602], that it had not been established that ETCI lost an opportunity which had more than negligible value, and that to assess the possibility of realising that value was to be required to ‘pluc[k] a figure out of the air’; and

g.   failing judicially to assess the value of ETCI’s lost opportunity in accordance with the principles enunciated by this Court in O’Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 and Ramsay v BigTinCan Pty Ltd (2014) 101 ACSR 415 or to address those principles.

14.   The trial judge should have found that:

a.   the breaches of directors’ duties by Rose and Marcou caused ETCI to lose a commercial opportunity to sell its shares in ETCH to Lingnan or to another purchaser which had a value of at least US$12 million, or more than a negligible value; and

b.   after making appropriate adjustments to reflect the fact that the loss of the ETCH shares to Vision Capital caused ETCI to lose the opportunity to sell those shares to Lingnan in 2012 or early 2013, ETCI suffered a loss of more than AU$2 million.”

266. The core of the primary judge’s reasoning on the question of damages is set out at PJ [586]–[596] as follows:

“586   In closing written submissions, Mr White said:

‘ETCI’s loss should be valued according to Mr Samuel’s valuation of the market value of ETCH in July 2012 (being $11,973,636 to $12,957,477), discounted for contingencies by 25 to 30 per cent.’

587   But these figures do not represent Mr Samuel’s opinion as to the value of ETCH. These are the figures that he has recorded as being the Australian dollar equivalent of the Lingnan 5 June 2012 offer and the figure in 5 July 2012 term sheet between ETCI and Vision Capital.

588   Thus, although this loss calculation is purportedly based upon Mr Samuel’s evidence, it is really no more than an assertion that ETCI is entitled to recover as damages the amount that the plaintiffs contend Lingnan and Vision Capital offered for the ETCI shares in July 2012, subject to a discount for contingencies.

589   My attention has not been drawn to anything in Mr Samuel’s report that would justify the 25% to 30% discount for which Mr White contended. The implicit assertion in that discount figure is that there was a 70% to 75% chance that Lingnan or Vision Capital would actually purchase ETCI’s shares in ETCH for those figures.

590   I see no basis upon which I could come to that conclusion.

591 So far as concerns the Lingnan 5 July 2012 offer, it was never confirmed in writing although, as I have set out at [174] above Mr Tang wrote to Mr Marcou on 13 June 2012 stating that ‘the price is unlikely to constitute a substantial obstacle’.

592   However Mr Tang also proposed a meeting ‘to discuss more concretely about the detailed terms and all the issues connecting to the share transfer’.

593   Negotiations did not get to the point where any term sheet was signed between ETCI and Lingnan.

594   So far as concerns Vision Capital’s ‘offer’, it was contained in a term sheet which was expressed to be non-binding. The figure was repeated in the Sale of Shares Agreement that Mr Rose signed but which Vision Capital did not sign. Both the term sheet and that Sale of Shares Agreement were expressed to be subject to due diligence and:

‘... in [Vision Capital’s] absolute discretion being satisfied that the findings of those investigations do not reveal any reason why it would not wish to proceed ...’.

595   Neither the Lingnan nor Vision Capital ‘offers’ could be said to represent offers by a ‘knowledgeable’ or ‘willing buyer’.

596   In any event, an assessment of the value of a lost opportunity involves considerations beyond the asserted value of the subject of the lost opportunity.”

267. In my opinion, the primary judge was justified in his conclusion at PJ [575] that there was “no evidence enabling [him] to form any view about what the value of any such loss of opportunity may have been”.

268. Mr Samuel, the expert called on behalf of the Appellants, acknowledged that he had limited material upon which to base his attempted valuation and purported to adopt a market-based approach. For the reasons given both by the primary judge and in relation to the “sale at a gross undervalue” argument (see [260] above), his “data” did not sustain that approach.

269. Insofar as he sought to make use of the Wealthy Capital and Vision Capital transactions, the “offers” of $10 million and $13 million respectively were highly conditional on the purchaser’s satisfactory due diligence. Plainly the due diligence undertaken did not see either of the “offers” being confirmed or maintained at that headline price. Indeed, as Mr Rose noted in his communication with the other directors on 29 August 2012, Vision Capital’s “adverse due diligence findings relating to the company operations in China” had “created a reluctance to move forward on their part …”

270. As far as the Lingnan “offer” was concerned, that offer was subject to deductions for fines, penalties and possibly any illegally paid dividends, all of which would be set off against any price ultimately negotiated: see [74] and [77] above.

271. It will be recalled that Mr Rose’s account of his discussion with representatives of Lingnan in June 2012 included the following exchange:

“Lingnan:    We are open to discussing price. The funds ultimately paid will only be net of all fines and court case outcomes, taxes and any payment would only be made in China and in Yuan.

Mr Rose:   You are not willing to negotiate on any of that, only price?

Lingnan:    That’s right.

Mr Rose:   What does that leave us? That doesn’t work. We’re going to be left in the negative.”

272. With regard to the proposed sale to Lingnan, there was also, somewhat ironically, the difficulty to which Mr Bagley drew attention in his address, namely that, according to minutes of the ETCI board meeting of 12 September 2012, Mr Ng had “clearly communicated to [Mr Rose] that he would not agree to sign any documents relating to the disposal of [ETCH] to Lingnan”. Mr Ng’s signature was necessary as he was, at the time, the legal representative of all ETC entities; his consent, which he was unwilling to give, was effectively necessary for a sale to Lingnan.

273. Contrary to the Appellants’ ground 13(d), there was no “valuation of the ETCI interest in ETCH at the [b]oard meeting on 8 June 2012”. Rather, various and different opinions were expressed by some board members on the question of value. This was, moreover, prior to the commencement of civil proceedings in the PRC in July 2012 which led to the February 2013 Civil Judgment. The reliance sought to be placed in ground 13(e), based upon a report of Mr Mao in May 2012 as to possible interest from Lingnan, was non-specific as to any price Lingnan may have been prepared to pay and pre-dated the difficult meeting with Lingnan on 5 June 2012 and the subsequent commencement of the Chinese proceedings.

274. Mr Samuel’s assumption as to the negative asset position of ETCI as at 21 June 2013, the date of the Papers of Civil Mediation, supported the primary judge’s reasoning, and there was no evidence to support the assumption Mr Samuel then made as to the inflow of RMB 83 million to the ETC Subsidiaries consequent upon the “settlement” referred to in those Papers. As Mr Entwisle pointed out in his submissions, the only evidence pointed to at first instance in support of any receipt of this amount, and which was to a very large degree speculative, was in fact rejected.

275. Insofar as Mr Samuel had relied upon the “offers” referred to above to establish a valuation in 2013, those “offers”, all of which were made in 2012, did not and could not have had regard to the devastating February 2013 Civil Judgment.

276. Apart from these matters, the primary judge was being asked to calculate the value of the opportunity said to have been lost. Mr Samuel’s flawed exercise was merely a starting point for that. As has been explained, however, it was an insecure foundation. Even if it could have been used as reliable starting point, the primary judge did not have any reliable means of assessing the value of the opportunity said to have been lost; the contingencies were many and complicated by the fact that any assessment would need to take into account the fact that the value of the opportunity was necessarily affected by the underlying allegations, sustained in the February 2013 Civil Judgment, as to the illegal acquisition by the ETC Subsidiaries of their interests in GZL.

277. The primary judge’s conclusion at PJ [601] was that:

“… there must be a basis in the evidence for me to arrive at a figure for the lost opportunity. What I cannot do is take a stab in the dark; ‘[j]ustice does not dictate that, in such a case, a figure should be plucked out of the air’: Troulis v Vamvoukakis [1998] NSWCA 237 at 29 (Gleeson CJ).”

278. That conclusion was open to the primary judge and did not involve any demonstrable error.

Grounds 17–18 — accessorial liability

279. Grounds 17–18 related to accessorial liability. They were the subject of very brief written and oral submissions.

280. In circumstances where the Appellants have clearly failed in establishing primary liability and any entitlement to loss or damage or equitable compensation, it is not necessary to prolong this already lengthy judgment further (Boensch v Pascoe (2019) 375 ALR 15; [2019] HCA 49 at [8] and [101]) save to say, as Mr Entwisle submitted, that the Appellants failed to discharge their onus of proving that Madam Cheung or Vision Capital ever in fact received the proceeds of the purported settlement between the ETC Subsidiaries and Lingnan.

281. A Notice of Contention was filed on behalf of Madam Cheung and Vision Capital to the effect that:

“None of duties that fourth (Rose) and fifth (Marcou) respondent are alleged to have breached (Notice of Appeal (NOA), [10]) are fiduciary duties and/or a breach of those duties could not, as a matter of law, give rise to liability on the part of the Cheung Respondents by reason of their being the knowing recipient of property by, or by being knowingly involved in, a breach of those duties in accordance with the principles in Barnes v Addy (1874) LR 9 Ch App 244.”

282. In circumstances where this Notice of Contention raises issues of some doctrinal controversy, where the oral hearing which ran for three full days did not permit full argument, especially in response, on this point and where, for the reasons given in detail above, the issue does not need to be reached, it is neither necessary nor desirable to engage with it.

Other grounds and further Notice of Contention

283. The Notice of Appeal also contained grounds 19–21 but these grounds were not the subject of either written or oral submissions and must be taken in these circumstances to have been abandoned.

284. A Notice of Contention was filed on behalf of Messrs Rose and Marcou and supported by Madam Cheung and Vision Capital to the effect that the primary judge should not have granted Mr Ng leave to bring the proceedings on behalf of ETCI as an exception to the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189.

283. In light of the conclusions reached which mean that the appeal should be dismissed, it is not necessary to deal with this issue.

Conclusion

286. For all of the above reasons, the appeal should be dismissed with costs.

287. LEEMING JA: I agree with Bell P.

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APPENDIX

Decision last updated: 03 March 2021