ET-china.com International Holdings Ltd v Cheung

[2019] NSWSC 1874

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:

ET-China.com International Holdings Ltd v Cheung [2019] NSWSC 1874

Hearing dates:

14 – 18 October, 20 and 28 November 2019

Decision date:

20 December 2019

Jurisdiction:

Equity - Commercial List

Before:

Stevenson J

Decision:

The plaintiffs have not established a breach of duty by the director defendants; proceedings to be dismissed

Catchwords:

CORPORATIONS – shares – transfer – where parent company’s chief executive officer and founding director convicted of corporate crimes in China and imprisoned – where subsidiaries of company had an indirect interest in travel business conducted in China – where Chinese state owned corporation held the balance of the interest the travel business and contended subsidiaries’ interest obtained corruptly – where defendant directors caused shares to be transferred on an allegedly reversible basis so that a Chinese national appeared to control the subsidiary and could use her connections and influence in China to resolve the problem – where first defendant ultimately paid $2 million for the shares – whether shares were transferred for “nil” consideration and as a gift – whether directors subsequently caused a rights issue and special distribution to be effected to disguise these activities

 

CORPORATIONS – directors and officers – directors duties – whether directors in breach of duties concerning rights issue and special distribution to shareholders

  EQUITY – fiduciary duties – whether directors duties said to be breached were fiduciary duties – whether remaining defendants knowingly involved in a breach of those fiduciary duties or knowingly received property through that breach of fiduciary duty

Legislation Cited:

Bankruptcy Act 1966 (Cth)
Companies (Jersey) Law 1991
Convention on the Transfer of Sentenced Persons, opened for signature 21 March 1983, ETS No 112 (entered into force 1 January 2003)
Corporations Act 2001 (Cth)
Evidence Act 1995 (NSW)
Foreign Corporations (Application of Laws) Act 1989 (Cth)
International Transfer of Prisoners Act 1997 (Cth)

Cases Cited:

APX Projects Pty Ltd v The Owners - Strata Plan No 64025 [2015] NSWSC 1250
Australian Securities and Investments Commission v Adler (2002) 168 FLR 253; [2002] NSWSC 171
Barnes v Addy (1874) LR 9 Ch App 244
Breen v Williams (1996) 186 CLR 71; [1996] HCA 57
Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129; [1991] 3 SCR 534
Eastmark Holdings Pty Ltd v Kabraji [2013] NSWSC 1763
Evans v McLean (No 2) [1987] WAR 110
Fitzgerald v Penn (1954) 91 CLR 268; [1954] HCA 74
Foss v Harbottle (1843) 2 Hare 461; (1843) 67 ER 189
Hart Security Australia Pty Ltd v Boucousis (2016) 339 ALR 659; [2016] NSWCA 307
Hewett v Court (1983) 149 CLR 639; [1983] HCA 7
Leary v Federal Commissioner of Taxation (1980) 47 FLR 414
Mackreth v Symmons (1808) 15 Ves Jun 329; (1808) 33 ER 778
Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23
March v E & MH Stramare Pty Ltd (1991) 171 CLR 506; [1991] HCA 12
Neilson v Overseas Projects Corporation of Victoria Ltd (2005) 223 CLR 331; [2005] HCA 54
O’Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262
Oates v Consolidated Capital Services Ltd (2009) 76 NSWLR 69; [2009] NSWCA 183
Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187
R v Heilbronn (1999) 30 ACSR 488
Ramsay v BigTinCan Pty Ltd [2014] NSWCA 324
Regentcrest plc (in liq) v Cohen [2000] All ER (D) 747; [2001] 2 BCLC 80
Sellars v Adelaide Petroleum NL; Poseidon Ltd v Adelaide Petroleum NL (1994) 179 CLR 332; [1994] HCA 4
Tan v The Owners - Strata Plan No 22014 (No 2) [2015] NSWSC 1920
Target Holdings Ltd v Redferns [1996] 1 AC 421
Troulis v Vamvoukakis [1998] NSWCA 237
Virgtel Ltd v Zabusky [2006] 2 Qd R 81; [2006] QSC 066
Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; [2012] WASCA 157

Texts Cited:

R P Austin and I M Ramsay, Ford, Austin & Ramsay’s Principles of Corporations Law (17th ed, 2018, LexisNexis Butterworths)
T F Bathurst and S Merope “It tolls for thee: Accessorial liability after Bell v Westpac” (2013) 87 Australian Law Journal 831

Category:

Principal judgment

Parties:

ET-China.com International Holdings Ltd (First Plaintiff)
Matthew Chik-hui Ng (Second Plaintiff)
Freada Kwan Cheung (First Defendant)
Vision Capital (Asia) Ltd (Second Defendant)
Financial International Holdings Ltd (Third Defendant)
Christopher Peter Rose (Fourth Defendant)
Marco Marcou (Fifth Defendant)
Pyma Pty Ltd (Sixth Defendant)
MAP ET-China Holdings Pty Ltd (Seventh Defendant)

Representation:

Counsel:
M S White SC with B D Kaplan (Plaintiffs)
J Entwisle (First to Third Defendants)
F Corsaro SC with H Pintos-Lopez (Fourth to Seventh Defendants)

  Solicitors:
HBA Legal (Plaintiffs)
Victoria & Hancock (First to Third Defendants)
Herman Legal (Fourth to Seventh Defendants)

File Number(s):

SC 2018/227514

TABLE OF CONTENTS

Judgment

The corporate structure

The issues

Decision

Are the proceedings competent?

Choice of law

Credit

The events leading to the share transfer to Vision Capital

Further involvement of Madam Cheung

Mr Ng’s trial

The Wealthy Capital transaction

Criminal Judgment of the Intermediate People’s Court of Guangzhou

Madam Cheung’s attempts to broker a solution

The Guangdong High Court Judgment – Lingnan civil action foreshadowed

Kuoni retainer of Mr Mao

Discussions with Hui Qiang

Lingnan – the “lost opportunity”

The 5 June 2012 meeting with Lingnan

Lingnan demands GZL institute proceedings

The 8 June 2012 board meeting

ETCI’s counter offer

Lingnan suggests a further meeting

Madam Cheung makes further contact

The 29 June 2012 board meeting

Final communication with Lingnan

The 4 July 2012 board meeting

The 5 July 2012 term sheet

The draft Sale of Shares Agreement

The ETCH Share Transfer

Events following the ETCH Share Transfer

The 12 September 2012 board meeting

Mr Rose executes a Personal Insolvency Agreement

The Civil Judgment

Further discussions with Madam Cheung

The Rights Issue

The Kuoni directors resign

Final negotiations with Vision Capital

The 21 June 2013 “Paper of Civil Mediation”

The 7 June 2013 Sale of Shares Agreement

Receipt of the $2 million from Vision Capital

The 20 September 2013 board meeting

The Special Distribution

Principles concerning directors’ duties

Duty to act honestly and in good faith in the interests of the company as a whole

Duty to exercise powers conferred on the directors for a proper purpose

Duty not to misappropriate the company’s property for their own or a third party’s benefit

A duty to act with due care, skill and diligence

Are these duties fiduciary duties?

The delivery of the ETCH Share Transfer to Vision Capital for “nil consideration”

The problem confronting the board

Was the ETCH Share Transfer made for “nil” consideration?

Did Mr Rose, Mr Marcou and Madam Cheung concurrently intend that there would be a negotiation?

The breaches of duty alleged

Breach of duty to act in honestly and in good faith in the interests of the company as a whole

Breach of duty to exercise powers conferred on the directors for a proper purpose

Breach of duty not to misappropriate the company’s property for their own or a third party’s benefit

Breach of duty to act with due care skill and diligence

When did any breach occur?

Did any breach cause loss to ETCI?

Damage

The 7 June Sale of Shares Agreement and the 20 September 2013 ratification of the sale

Gross undervalue

Mr Rose’s personal insolvency agreement

The 20 September 2013 board meeting

The Rights Issue

The Special Distribution

Paper of Civil Mediation

Mr Ng’s claim fails

Judgment

1. The first plaintiff, ET-China.com International Holdings Ltd (“ETCI”), was incorporated on 29 May 2007 in the Bailiwick of Jersey. The second plaintiff, Mr Matthew Ng, was its founding director and chief executive officer.

2. ETCI was listed in the Alternative Investment Market on the London Stock Exchange in August 2007. Mr Ng has at all times been a shareholder of ETCI. ETCI was primarily engaged in the provision of travel related services in the People’s Republic of China (the “PRC”). Through a corporate structure that I describe below, ETCI indirectly held a 54.43% interest in a company incorporated in the PRC known as Guangzhou GZL International Travel Services Ltd (“GZL”).

3. GZL was, and may still be, one of the largest group leisure travel companies in South China.

4. On 15 November 2010, Mr Ng was detained by Chinese authorities. He was arrested a short time later. At around the same time, the finance director of ETCI, Ms Xiaoping (known as “Kitty”) Yang was also detained and arrested.

5. Mr Ng was charged with various offences for which he was tried in the Intermediate People’s Court of Guangzhou Municipality in August 2011.

6. On 6 December 2011, that Court convicted Mr Ng of the charges he faced. Mr Ng was sentenced to imprisonment for 14½ years. On appeal, the sentence was reduced to 11½ years.

7. Pursuant to the Convention on the Transfer of Sentenced Persons, opened for signature 21 March 1983, ETS No 112 (entered into force 1 January 2003), and the International Transfer of Prisoners Act 1997 (Cth), Mr Ng was released to Australia in November 2014. He served the balance of his term of imprisonment at the St Heliers Correctional Centre in Muswellbrook. He was released on 15 June 2016.

8. 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 and involved allegations of dishonesty on Mr Ng’s part.

9. Mr Ng has at all times denied that he committed the crimes of which he was accused and convicted. No party in these proceedings contends that he did.

10. Throughout his period of incarceration Mr Ng was unable to participate in the management of ETCI. He was formally removed as a director on 25 November 2011. He claims to have been reinstated as a director at an Extraordinary General Meeting held on 21 October 2016, shortly after his release from custody. I will return to this.

11. In his absence, the directors of ETCI were the fourth defendant, Mr Christopher Rose, and the fifth defendant, Mr Marco Marcou together with an independent non-executive director, Mr Robert Drummond, and two directors appointed by a major shareholder in ETCI, Kuoni Travel Holding Ltd. Kuoni is a large Swiss-based travel company. Its nominated directors were Ms Maria Ng (no relation to Mr Ng) and Mr Martin Simeon. In Mr Ng’s absence, Mr Rose acted as chief executive officer.

12. Mr Rose had been a non-executive director of ETCI since March 2009 and assumed an executive function after Mr Ng’s detention. Mr Marcou was engaged as a consultant shortly after Mr Ng’s detention and appointed as a director shortly thereafter, in May 2011.

13. Mr Ng brings these proceedings, purportedly on behalf of ETCI, against Mr Rose and Mr Marcou, and two related companies, seeking equitable compensation in relation to four matters or events which occurred during Mr Ng’s incarceration.

14. Those matters or events are:

1. the transfer on 25 July 2012 by ETCI for “nil consideration” of the shares in its wholly owned subsidiary, ET-China Holdings Ltd (“ETCH”), a company incorporated in Hong Kong, to the second defendant, Vision Capital (Asia) Ltd, a company associated with the first defendant, Freada Kwan Cheung (“Madam Cheung”) (the “ETCH Share Transfer”);

2. the approval in March 2013 by Mr Rose and Mr Marcou of a rights issue in ETCI (the “Rights Issue”) ;

3. the approval in September 2013 by Mr Rose and Mr Marcou of a special dividend (the “Special Distribution”) to those shareholders of ETCI who participated in the Rights Issue; and

4. the alleged receipt by Madam Cheung, or companies controlled by her, of the benefit of a “Civil Judgment” issued by the Guangzhou Tianhe District People’s Court on 7 February 2013 and the subject of “Paper of Civil Mediation” purportedly “affirmed” by that Court on 21 June 2013.

15. Mr Ng alleges that:

1. in relation to each of these matters, Mr Rose and Mr Marcou acted in breach of their duties to ETCI and engaged in a dishonest and fraudulent design;

2. the sixth defendant, Pyma Pty Ltd, a company associated with Mr Marcou, knowingly received property through that breach of fiduciary duty;

3. the seventh defendant, MAP ET-China Holdings Pty Ltd, another company associated with Mr Marcou, knowingly assisted Mr Rose and/or Mr Marcou in that dishonest or fraudulent design; and

4. Madam Cheung and Vision Capital knowingly received property, including the shares in ETCH, through those breaches of fiduciary duty and knowingly assisted Mr Rose and Mr Marcou in that dishonest and fraudulent design.

The corporate structure

16. In 2005, GZL was a PRC state owned instrumentality. The state’s interest in GZL was held by, ultimately, Guangzhou Lingnan International Enterprise Group Co Ltd, together with a number of PRC state entities. The detail of the PRC state ownership is not relevant. I will refer simply to “Lingnan”.

17. By 2008, ETCI had acquired its indirect 54.43% interest in GZL.

18. There were many shareholders in ETCI. Kuoni was the largest shareholder with some 30% of ETCI shares. Interests associated with Mr Ng, Mr Rose, Mr Marcou and Madam Cheung also held shares in ETCI.

19. The corporate structure is depicted by the following diagram:

20. Thus:

1. Kuoni and interests associated with Mr Ng, Mr Rose, Mr Marcou and Madam Cheung held shares in ETCI;

2. ETCI held 100% of the shares in ETCH;

3. ETCH held 99% of the shares in the company shown on the chart as “ETC PRC”, being a company incorporated in the PRC known as ET-China.com Ltd; and

4. by means of various 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 the PRC as a “Variable Interest Entity” structure), ETC had effective control of:

1. Guangzhou ET-China Investments Consulting Ltd (shown in the diagram as “ETIC PRC”);

2. Guangzhou Xinzhiye Commerce and Trade Development Co Ltd (shown in the diagram as “Xinzhiye PRC”); and

3. Guangzhou ET-China Commerce and Trade Development Co Ltd (shown in the diagram as “ETCCT PRC”) (together “the ETC Subsidiaries”); and

5. the ETC Subsidiaries, together, held 54.43% of the shares in GZL; and

6. Lingnan held the remaining 45.57% shares in GZL.

The issues

21. The following issues arise.

22. First, whether it is competent for Mr Ng to bring these proceedings in the interest of ETCI.

23. Second, what system of law governs such rights as ETCI has?

24. Third, whether Mr Ng has established that Mr Rose and Mr Marcou acted in breach of their duties to ETCI and engaged in a dishonest and fraudulent design in relation to ETCI’s affairs.

25. Fourth, whether the remaining defendants, Madam Cheung in particular, are accessorily liable in the manner I have described.

26. Fifth, whether ETCI has suffered damage as a result of the conduct complained of.

Decision

27. It is competent for Mr Ng to bring these proceedings.

28. The proceedings must be determined in accordance with the law of Jersey which, it is agreed, I should assume to be the same as that of Australia.

29. Mr Ng has failed to establish any relevant breach of duty by Mr Rose or Mr Marcou.

30. Mr Ng has failed to show that ETCI has suffered any loss by reason of Mr Rose’s or Mr Marcou’s conduct.

31. The claims for accessorial liability against the remaining defendants, and Madam Cheung in particular, fail.

Are the proceedings competent?

32. On 7 March 2017, Mr Ng and four others, all of whom purported then to be directors of ETCI (the “Purported Directors”), purported to pass a resolution authorising Mr Ng to commence and prosecute these proceedings.

33. The authority of the Purported Directors to pass that resolution depends upon whether they were validly appointed as directors of ETCI at what purported to be an Extraordinary General Meeting of ETCI held on 21 October 2016.

34. Whether that resolution was effective depends on whether there was an effective requisition for that meeting.

35. The Articles of Association of ETCI and Art 89(1) of the Companies (Jersey) Law 1991 provide that an Extraordinary General Meeting of ETCI could only be requisitioned by members holding more than 1/10th of the total voting rights in ETCI.

36. Mr Ng purported to requisition the meeting by a document dated 6 September 2016 which he executed on behalf of himself and also, purportedly, on behalf of two other shareholders in ETCI, Goldman Sachs International and James Capel (Nominees) Ltd.

37. Between them, and on the assumption that the Rights Issue was not effective, Mr Ng, Goldman Sachs and James Capel held the requisite 1/10th of the voting rights in ETCI. If the Rights Issue was effective they did not.

38. For the reasons I set out at [620]-[646] below, I am satisfied that the Rights Issue was effective.

39. For that reason, the requisition was not effective.

40. The only evidence of Mr Ng’s authority to execute the requisition on behalf of Goldman Sachs and James Capel is that of Mr Thomas Lennox, the solicitor who prepared the requisition. Mr Lennox deposed that he drafted the document “on instruction from the Relevant Shareholders”. That evidence was neither objected to nor challenged in cross-examination.

41. The requisition was delivered to Crestbridge Ltd, the former corporate services provider to ETCI. It was, however, returned unopened on 20 October 2016 under cover of a letter from a Jersey solicitor stating that Crestbridge had not been the corporate services provider for ETCI since March 2013.

42. In those circumstances, I am not satisfied that Mr Ng has proved that he, and the Purported Directors, were validly appointed as directors of ETCI or that the purported resolution of 7 March 2017 was effective.

43. Mr White SC, who appeared with Mr Kaplan for Mr Ng, submitted that, if that were my conclusion, I should, nunc pro tunc, give Mr Ng leave to bring the proceedings on behalf of ETCI by reason of the principles recognised in Foss v Harbottle (1843) 2 Hare 461; (1843) 67 ER 189.

44. In support of that submission, Mr White made the following submissions about which there was no dispute.

45. The question of whether a derivative proceeding in respect of a foreign country has been duly commenced as a question of procedure, not substance, and is to be determined in accordance with the lex fori: Virgtel Ltd v Zabusky [2006] 2 Qd R 81; [2006] QSC 066 at [44]-[58] (de Jersey CJ).

46. An unregistered foreign company such as ETCI is not a “company” for the purposes of s 236 of the Corporations Act 2001 (Cth): Oates v Consolidated Capital Services Ltd (2009) 76 NSWLR 69; [2009] NSWCA 183 at [21] and [23] (Campbell JA).

47. Because s 236 of the Corporations Act does not apply, Mr Ng’s derivative action is brought under the general law.

48. Under the general law, there is no requirement that leave be obtained before a plaintiff commences such an action: Oates at [105] (Campbell JA); APX Projects Pty Ltd v The Owners - Strata Plan No 64025 [2015] NSWSC 1250 at [46] (Slattery J); Tan v The Owners - Strata Plan No 22014 (No 2) [2015] NSWSC 1920 at [96] (Robb J).

49. A derivative action may be brought under the general law by members to enforce the right of a corporation if exceptional circumstances of a kind recognised in Foss v Harbottle exist. Those circumstances include where the interests of justice require that the member be permitted to commence the suit.

50. In Eastmark Holdings Pty Ltd v Kabraji [2013] NSWSC 1763, Darke J held, at [89], that the following factors (which his Honour listed at [79]) were relevant to the question of whether a plaintiff can invoke the interests of justice exception to the rule in Foss v Harbottle:

1. the party brings the derivative action bona fide in the interests of the company and not for an ulterior purpose;

2. normal corporate procedures have failed to achieve the justice sought;

3. there is no other remedy to address the alleged wrong; and

4. serious injustice would arise if the party was precluded from pursuing the derivative action.

51. I am satisfied that each of these factors is present in this case. I see no reason to doubt that Mr Ng brings these proceedings bona fide in the interests of the company. Unless Mr Ng is able to agitate the issues raised in these proceedings they will not be determined. If Mr Ng’s contentions are well founded, a serious injustice may well be occasioned to ETCI. Normal corporate procedures have failed to achieve resolution of the matters in contention.

51. Although I have come to the conclusion that Mr Ng has not made out his claims, they were not fanciful or so lacking in merit that the leave sought should not be granted.

52. Accordingly, I am not prepared to dismiss the proceedings on this basis.

Choice of law

54. As ETCI is incorporated in Jersey, the question arises as to the law to be applied in relation to ETCI’s claim against Mr Rose and Mr Marcou as directors, and the accessorial liability claims made against Madam Cheung and the corporate defendants.

55. Section 7 of the Foreign Corporations (Application of Laws) Act 1989 (Cth) relevantly provides:

“7    Law applied in place of incorporation applicable law in determining questions relating to status of foreign corporation etc.

(1)    The section applies in relation to the determination of a question arising under Australian law (including a question arising in a proceeding in an Australian court) where it is necessary to determine the question by reference to a system of law other than Australian law.

…

(3)    Any question relating to:

…

(e)    the rights and liabilities of the members or officers of a foreign corporation…in relation to the corporation…

…

is to be determined by reference to the law applied by the people in the place in which the foreign corporation was incorporated.”

56. ETCI is a “foreign corporation” and Mr Rose and Mr Marcou were “officers” of ETCI for the purpose of that section.

57. The law to be applied is the law of Jersey.

58. Pursuant to s 174 of the Evidence Act 1995 (NSW), I received a copy of Art 74(1) of the Companies (Jersey) Law 1991 which, at the relevant time, relevantly provided:

“74   Duties of directors

(1)   A director, in exercising the director’s powers and discharging the director’s duties, shall –

(a)   act honestly and in good faith with a view to the best interests of the company; and

(b)   exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”

59. I refused to receive copies of reported and unreported decisions of the Royal Court of Jersey.

60. In the absence of evidence of a foreign law, I must presume that the applicable law is the same as the lex fori: Neilson v Overseas Projects Corporation of Victoria Ltd (2005) 223 CLR 331; [2005] HCA 54 at [125] (Gummow and Hayne JJ).

61. No party suggested that the Australian law concerning the duties of directors was, in substance, different from that set out in Art 74(1) of the Jersey legislation.

62. Argument before me as to Mr Marcou’s and Mr Rose’s duties proceeded upon the basis that Jersey law was the same as that of Australia. Argument thus proceeded by reference to Australian authorities.

63. It was common ground that the law applicable to the determination of ETCI’s accessorial liability claims was to be determined in accordance with the lex fori; that is the law of Australia.

Credit

64. Mr White submitted that I should find Mr Marcou to be an untruthful and unreliable witness and that I should reject his evidence unless it can be safely corroborated by other probative, credible and independent evidence.

65. Mr Marcou certainly presented as a combative witness. As Mr White submitted, Mr Marcou regularly interrupted Mr White in cross-examination and frequently gave non-responsive answers to questions. He also accepted that his recollection of some matters of detail was poor; hardly surprising bearing in mind that the events in question occurred in 2012 and 2013. However, I am not persuaded that Mr Marcou was an untruthful witness.

66. Mr White accepted that Mr Rose “answered questions in a less expansive and obscure way” than did Mr Marcou. Mr Rose impressed me as a calm and measured witness who was doing his best to recollect accurately the events in question, although there is one aspect of Mr Rose’s evidence that I find hard to accept (see [297] below).

67. Only Mr Marcou and Mr Rose were able to give evidence about the events in question. Mr Ng was imprisoned at all relevant times. Mr Ng did not call any of Mr Simeon, Ms Ng or Mr Drummond. Mr Entwisle, who appeared for Madam Cheung, did not call her to give evidence.

68. Many documents prepared by Mr Simeon, Ms Ng and Mr Drummond are in evidence. Those documents give some insight into their role in the events with which these proceedings are concerned. However, as they were not called as witnesses, they were not able to be tested in relation to those documents.

69. There are also some documents prepared by or on behalf of Madam Cheung in evidence. Again, Madam Cheung was not available to answer questions about those documents.

70. In the circumstances, I must do the best I can to reach a conclusion as to what happened and why it happened, bearing in mind the evidence given by Mr Marcou and Mr Rose, the documentary record and, perhaps most significantly, the logic of events.

The events leading to the share transfer to Vision Capital

71. In about May 2010, Kuoni made an offer to purchase all the shares in ETCI by way of a scheme of arrangement. The proposed scheme was conditional on there being no threatened or actual proceedings or investigations by PRC authorities that could result in material losses to the ETCI group or loss of ETCI’s control of the ETC Subsidiaries.

72. On 2 June 2010, Kuoni and ETCI made a public announcement:

“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.”

73. Evidently, it was this announcement that caused Lingnan to raise concerns about the circumstances in which ETCI had acquired its indirect controlling interest in GZL.

74. On 18 June 2010, Lingnan wrote to ETCI and, according to Mr Ng, “demanded that it explain how it had gained control of GZL”.

75. On 7 July 2010, Lingnan wrote “an urgent letter” to Kuoni in which, according to Mr Ng, Lingnan demanded that Kuoni not proceed with the takeover of ETCI. The letter alleged that ETCI had “illegally taken control of GZL” and “has acted illegally when acquiring control of GZL i.e. corrupt practice”.

76. As a result of this letter, Kuoni suspended the proposed takeover of ETCI. Kuoni withdrew its offer on 20 December 2010.

77. On 23 August 2010, two senior employees of the ETC Subsidiaries, including Ms Kitty Yang, were detained by Chinese authorities for 30 days.

78. On 5 September 2010, Mr Ng’s lawyer told him to “[l]eave China now because …they’re going to catch you tomorrow”.

79. Mr Ng left the PRC the next day, on 6 September 2010.

80. In October 2010, Mr Ng approached Madam Cheung to see if she could assist ETCI with its problems. In cross-examination Mr Ng said that:

“That was the Chinese way, to try to find people who are connected to find out what’s going on behind the scene.”

81. Thus, Mr Ng appreciated the difficulties facing ETCI in the PRC and sought Madam Cheung’s assistance as a person who might have some insight into a way in which to meet those difficulties and who may have influence and connections in the PRC.

82. Mr Ng returned to the PRC 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.

83. Mr Ng was arrested on 16 November 2010. As I have said, he was not released until 15 June 2016.

84. Mr Ng’s arrest was a serious problem for ETCI.

85. The board of ETCI then comprised Mr Ng, Mr Rose, Ms Ng and Mr Drummond.

86. Other than Mr Ng, none of those directors had had any direct involvement in the conduct of ETCI’s business in the PRC. Furthermore, senior staff of the PRC businesses had by then been detained or arrested, bank accounts had been frozen and financial records confiscated.

87. This caused Mr Rose, who hitherto had been a non-executive director of ETCI, to contact Mr Marcou to ask whether he would agree to assist in the management of ETCI. Mr Rose knew Mr Marcou as an investor in ETCI.

88. In early 2011, Mr Rose had a conversation with Mr Marcou to this effect:

“[Mr Rose]:   [Mr Marcou], we would like to appoint you as a director of [ETCI]…to facilitate the sale of the ET-China Group. I’m afraid that if I go to China I will end up like [Mr Ng] and will be thrown in a Chinese prison cell.

[Mr Marcou]:   Yes. That is wise. I am a cleanskin in China. I will facilitate the sale for the shareholders. Don’t worry, I will remain in constant contract [sic: contact] with you and any stakeholders in Australia.”

89. Shortly thereafter, ETCI engaged Mr Marcou as a consultant to make an “[a]ssessment of [the] current situation” and to develop a plan “to best position [the] company for exit”. Mr Marcou was appointed as a director of ETCI in May 2011.

90. In the meantime, on 23 February 2011, Mr Ng’s then wife, Ms Nicki Chow (who appears to have been the only direct contact that Mr Rose and Mr Marcou had in the PRC) emailed Mr Rose and Mr Marcou:

“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 their money and reputation. The government could play time game with us before they put Matthew [Ng] to court.”

91. In March 2011, Ms Chow sent Mr Rose and Mr Marcou a further email:

“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.”

92. After Mr Ng’s arrest, Kuoni remained interested in acquiring control of GZL.

93. Thus the minutes of the 25 May 2011 board meeting of ETCI record Mr Simeon, who by now had been appointed by Kuoni as an additional director, as saying:

“Kuoni’s strategic intention is to get 100% of the 54.4% ownership [that the ETC Subsidiaries had] of GZL.

Kuoni would now take a parallel run approach that a talk will be continued between Lingnan…and Kuoni on one hand while further work on acquiring the remaining shares of [ETCI] will also be considered on the other hand.”

Further involvement of Madam Cheung

94. On 8 June 2011, Madam Cheung wrote to Mr Rose:

“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 gave some suggestions, but somehow in the end it was not used. I feel that the best moment of solving the problem had [sic] passed so that the situation is getting worse. Now it seems that besides having commercial and political assisting method [sic], 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 interest of all shareholders.

Hope the board will consider my suggestion carefully.

Please give me a reply at your earliest convenience.” (Emphasis added.)

95. The “problem” to which Madam Cheung was referring was, clearly enough, that caused by Mr Ng’s detention and Lingnan’s contentions that ETCI through Mr Ng had acted “illegally” and had engaged in “corrupt practice” in acquiring control of GZL.

96. As the passages I have emphasised reveal, Madam Cheung contended that she had “the ability and techniques to help” get ETCI “out of trouble” and offered to use her “personal influence and energy” to seek a solution to the problem. The fact that Mr Ng had in October of the previous year approached Madam Cheung as a person who was “connected” and could “find out “what’s going on behind the scenes” and try to solve problems “the Chinese way” (see [80] above) shows that he had confidence in Madam Cheung’s capacity to assist ETCI in the troubled circumstance in which it found itself.

97. Mr Rose passed on Madam Cheung’s email to Mr Marcou.

98. On 9 July 2011, Mr Marcou travelled to Hong Kong to meet Madam Cheung.

99. After the meeting, on 11 July 2011, Mr Marcou wrote to Madam Cheung and to her associate, Mr Terrance Wong:

“I would like to thank you both for your time and advice on Friday [9 July 2011]. I have spoken to the Chairman of the Board, Chris Rose regarding your offer of assistance which has been gratefully received.

I look forward to communicating with you both during this week to discuss our current strategy in relation to [ETCI] and Lingnan.”

100. In late July 2011, Mr Marcou travelled to Guangzhou. Mr Marcou reported to the board that the “court indictment” had been presented against Mr Ng and Ms Yang and that their trial was fixed for 9 August 2011. Mr Marcou attached a copy of the indictment and continued:

“As you can see, there is a risk to the ownership of the shares in GZL by [ETCI] with some of the charges against them.

Whilst I was there I continued my discussions with Lingnan, which amounted to nothing at this stage.”

101. The “risk of ownership” to which Mr Marcou referred was, I infer, the risk that ETCI’s interest in GZL was under challenge by reason of or in association with the charges pending against Mr Ng and Ms Yang.

Mr Ng’s trial

102. Mr Ng’s trial before the Intermediate People’s Court of Guangzhou took place between 9 and 11 August 2011.

103. The judgment delivered by the Court on 6 December 2011 made clear that the circumstances in which ETCI, through the ETC Subsidiaries, acquired its 54% interest in GZL was at the heart of the charges against Mr Ng (see [127] below).

The Wealthy Capital transaction

104. On 28 October 2011, Mr Marcou had a further meeting with Madam Cheung. They had the following conversation:

“Madam Cheung:   Whilst I understand that the ET-china business is under considerable difficulty at the moment, I am interested in charting a path forward that could prove beneficial for all.

[Mr Marcou]:   The Board [of ETCI] currently have a number of tentative offers that are being assessed.

Madam Cheung:   Given that situation, I would like the Board to consider my offer of assistance and would ask you to liaise with Mr Wong for the details.

[Mr Marcou]:   I will inform the Board and liaise with Mr Wong to progress the matter”.

105. In his affidavit, Mr Marcou said:

“My view was that Madam Cheung’s influence and connections in the PRC would allow her to resolve the various disputes involving the ET China Business more effectively than I or the [ETCI] board. I considered that it would be advantageous if it appeared that [ETCH] and the ET China Business was no longer controlled by foreigners but by Madam Cheung, a PRC national.

The rationale of the arrangement, as I understood it, was that the shares in [ETCH] would be transferred to Madam Cheung but on the basis that they could be recovered by [ETCI] at will”.

106. On 9 November 2011, Mr Marcou wrote to Mr Stefan Leser, a senior executive at Kuoni, attaching a “Proposal for the establishment of clear title of equity in [GZL]”.

107. Mr Simeon and Ms Ng reported to Mr Leser.

108. In an “Overview” to that proposal, Mr Marcou described the “Current Status” as follows:

“•   As a result of the detention of the CEO Matthew Ng and Finance Director Kitty Yang the China operations of [ETCI] 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 [Mr Ng] and [Ms Yang] which has yet to occur.

•   The court case has alluded to issues or irregularities associated with the transaction process during the acquisition of [GZL] equity by [the ETC Subsidiaries].

…

•   Kuoni continues to be interested in concluding a transaction with [ETCI] that will see it acquire (up to) 54.43% of GZL currently held via [the ETC Subsidiaries].

•   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 [ETCI] 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.”

109. Mr Marcou set out the “Proposal” in the following terms:

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

•   At a high level the proposal involves [ETCI] selling [ETCH] 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 [ETCH] for the same agreed consideration value that is to be held in escrow. There is [a] 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, [ETCI] 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 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.” (Emphasis added.)

110. Mr Drummond appeared to be of the same mind as, on 9 November 2011, he wrote to Mr Marcou:

“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 Lingnan /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.

I have not seen the draft agreement yet but in principle will support it.” (Emphasis added.)

111. On 24 November 2011, Mr Rose executed a “Sale Agreement” and an “Option Agreement” on behalf of ETCI.

112. The board of ETCI ratified execution by ETCI of those documents at a meeting held on 19 December 2011.

113. The Sale Agreement recited that:

“2.5   [The ETC Subsidiaries] collectively holds 54.43% shares in [GZL]. The seller declares that [the ETC Subsidiaries] are involved in certain legal processes which in turn hampered their full operation and value of [ETCI’s shareholding in ETCH] (the ‘Legal Complication’);

2.6   Due to the Legal Complication, the marketable value of the Shares of [ETCH] is being adversely and substantially affected.”

114. The oblique reference to the “certain legal processes” comprising the “Legal Complication” was to the criminal proceedings in respect of which Mr Ng had recently stood trial. The “Legal Complication” was the alleged illegality of ETCI’s indirect interest, through ETCH and the ETC Subsidiaries, in GZL.

114. The Sale Agreement provided for the sale by ETCI of its shares in ETCH to Wealthy Capital for USD 10 million with USD 10,000 to be paid to a stakeholder pending satisfaction of specified “Conditions Precedent”.

115. One of those “Conditions Precedent” provided that:

“The Legal Complications be fully, effectively and absolutely resolved in that legal processes and/or investigations be withdrawn and/or decisively determined.”

117. Under the Option Agreement, Wealthy Capital granted ETCI an option to call for the shares.

118. These documents purported to have the effect of selling ETCI’s shares in ETCH to Madam Cheung’s company, Wealthy Capital Enterprises Inc, for USD 10 million. However, by reason of the Option Agreement, ETCI was, in effect, able to “reverse” the transaction at will. That in fact occurred the following May (see [134] below).

119. The intention behind these documents was to create a reversible transaction which would give the appearance of a sale by ETCI of its shares in ETCH to Wealthy Capital, in order to give Madam Cheung, a PRC national, an opportunity to seek a solution to ETCI’s problems “the Chinese way”.

120. Although Wealthy Capital, as a company incorporated in the British Virgin Islands, was doubtless a “foreign company” from the perspective of the PRC authorities, Madam Cheung herself was a PRC national. It was this fact that was evidently thought by Mr Rose and Mr Marcou as giving Madam Cheung potential access to PRC insiders.

121. In closing submissions, no criticism was made on behalf of Mr Ng of this transaction; save that it was a “failure”.

122. In particular, Mr White did not suggest that Mr Rose’s and Mr Marcou’s intention in causing ETCI to enter the Wealthy Capital transaction was otherwise than I have set out at [118]-[119]; nor that they did not genuinely believe that creating such a “reversible” transaction was in ETCI’s interests because it might afford a means by which Madam Cheung could in “the Chinese way” broker a solution to the “Legal Complication”.

123. A point that Mr White did emphasise was that, unlike the Wealthy Capital transaction, the later transaction with Vision Capital did not document a means by which it could be “reversed”. I will return to this.

Criminal Judgment of the Intermediate People’s Court of Guangzhou

124. On 6 December 2011, the Intermediate People’s Court of Guangzhou published its “Criminal Judgment” in respect of Mr Ng and Ms Yang (and another defendant) following the August 2011 trial.

125. The English translation of the judgment occupies more than 300 pages in the Court Book.

126. The reasons provide extensive details of Mr Ng’s alleged crimes of “bribery”, “misappropriation of funds”, “misstatement of registered capital”, “official embezzlement” and “organizational bribery” concerning the circumstances in which the ETC Subsidiaries acquired their interest in GZL.

127. The Court held that Mr Ng was:

“…guilty of misappropriation of funds and is sentenced to imprisonment for a fixed term of eight (8) years; he is guilty of misstatement of registered capital and is sentenced to imprisonment for a fixed term of two (2) years and six (6) months; he is guilty of official embezzlement and is sentenced to imprisonment for a fixed term of two (2) years; he is guilty of organizational bribery and is sentenced to imprisonment for a fixed term of two (2) years; all his sentences aggregate to be imprisonment for a fixed term of fourteen (14) years and six (6) months. This court decides to execute the sentence of imprisonment for a fixed term of thirteen (13) years.”

128. Ms Yang was also found guilty of “misappropriation of funds” and was sentenced to imprisonment for three years.

129. As I have said, Mr Ng has at all times denied his guilt in relation to these charges. No party made a contrary suggestion in these proceedings.

130. However, the fact that these findings were made about the circumstances in which ETCI acquired its indirect interest in GZL provides a vital backdrop to the case now brought by Mr Ng against Mr Rose, Mr Marcou and Madam Cheung.

Madam Cheung’s attempts to broker a solution

131. The evidence suggests that Madam Cheung did attempt to broker a solution to the “Legal Complication” referred to in the Sale Agreement, albeit without success.

132. Thus, 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.”

133. Mr Marcou gave this evidence about the situation at this point:

“Q. So this is now some months after the Wealthy Capital transaction had been put in place and Madame Cheung had been, I presume, as a result of that transaction, taking steps in China on behalf of ETCI but nothing had been achieved.

A. Well, I think what had been achieved is that, I believe, when I asked her at one point she said, ‘Matthew [Ng] has no friends in China and it is very, very difficult for me’.”

134. 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.

The Guangdong High Court Judgment – Lingnan civil action foreshadowed

135. In the meantime, the Guangdong High Court gave judgment in relation to Mr Ng’s appeal from his December 2011 conviction. The Court reduced Mr Ng’s sentence slightly. According to the board minute of 2 April 2012, this occurred on 31 March 2012.

136. Also on 31 March 2012, Ms Chow wrote to Mr Marcou:

“He gets 11.5 years.

… What could our lady friend do? What I heard is they will proceed on civil lawsuits right after this, then get the stakes at cost price. If this happens, is lady friend appointing a lawyer for this? …

… If [Lingnan] proceeds their plan soon, the chances to have the seals back is very thin.

We lost very badly on the two civil lawsuits and this one today and I hope something could be done soon on the stakes. Even if we get back the cost, the money cannot be brought out as this case is very sensitive and under local government control.”

137. Ms Chow was making three points. First, that she had heard that Lingnan proposed to commence civil proceedings with a view to acquiring the interests of the ETC Subsidiaries in GZL “at cost price”. Second, Ms Chow enquired as to whether Madam Cheung was able to assist (“[w]hat could our lady friend do?”). Third, Ms Chow expressed the opinion that even if ETCI could secure its investment in GZL, the proceeds would not be able to be removed from the PRC (“the money cannot be brought out”).

138. Mr Marcou passed this on to the ETCI board.

139. Thus 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”.

140. At the 2 April 2012 board meeting, Mr Rose reported that it was “highly likely that Lingnan will now move into a civil case on the disputed GZL holdings”.

141. Mr Marcou “suggested that the board should consider engagement with Lingnan or related entity to facilitate exit from disputed equity holdings in GZL”.

142. 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”.

Kuoni retainer of Mr Mao

143. In May 2012, Kuoni retained a Mr Jianhe Mao to provide advice.

144. At the board meeting on 22 May 2012, Mr Simeon explained that Mr Mao was an independent advisor of Chinese background who now lived in Switzerland and who had been providing consultancy advice to European companies doing business in the PRC for the past 20 years.

145. Mr Simeon tabled a report prepared by Mr Mao on 8 May 2012.

146. In that report Mr Mao stated that he had “contacted Lingnan’s top management and lawyer, established a workable personal relationship with Lingnan’s team” and that:

1. “The Chinese law prohibits any equity investment by non-Chinese investor, directly or indirectly, in business fields like media, internet and outbound tourism. [ETCI] is in both internet and outbound tourism”;

2. he understood that ETIC PRC’s 28.57% interest in GZL was not disputed but that the 19.43% interest of Xinzhiye PRC and the 6.43% interest of ETCCT PRC were disputed “since the crimes happened before the transaction and the shares shall be understood as stolen goods according to Chinese law”;

3. “Lingnan is a state holding with mission to manage the state assets in Guangdong tourism industry. The managers of Lingnan are typically risk aversive, bureaucratic and harmony driven. But once cornered by the fact that the majority of GZL has been secretly controlled by a foreign company…Lingnan’s management has no other choice than to act politically correctly. Otherwise they will also be suspected [of] being corrupted. Lingnan is part of the state interest”;

4. “Lingnan will try to achieve a return of shares of GZL held by those three companies, either by a buying back or by challenging the legality of the original sales of the shares within a civil suit against those defenceless companies”;

5. “In the dialogue, I could feel that Lingnan could be willing to pay the original price for the 28.57% and some reasonable price for the disputed 19.47% and 4.35%, if [ETCI] will cooperate in solving the problems smoothly”;

6. “None can sell or buy the GZL shares legally…without full support of the Guangzhou government”; and

7. “Only Lingnan can buy GZL shareholding and Lingnan seems to be willing to pay a reasonably [sic] price”.

147. Mr Mao proposed that a “dialogue…be established” between Lingnan and ETCI “for searching a solution”.

Discussions with Hui Qiang

148. Between April and June 2012, Mr Marcou, primarily through Ms Chow, had communications with an entity known as Hui Qiang about the possible purchase by Hui Qiang of ETCI’s indirect interest in GZL.

149. The email correspondence shows that discussions were at a very preliminary stage and at a very high level.

150. In final submissions, Mr White did not suggest that I should conclude from the nature of those communications that ETCI had an opportunity to sell its interests in GZL to Hui Qiang, which could be said to have been lost by reason of the alleged breaches by Mr Rose and Mr Marcou of their duties to ETCI.

Lingnan – the “lost opportunity”

151. In final submissions, Mr White confined ETCI’s 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:

1. a claim for equitable compensation (as opposed to an account of profits);

2. 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).

152. Accordingly, it is necessary to pay careful attention to the progress of negotiations between ETCI and Lingnan, and to the circumstances in which those negotiations ceased.

The 5 June 2012 meeting with Lingnan

153. The minutes of the ETCI 22 May 2012 board meeting record that:

“[Mr Marcou] said that he has three to four times of communication [sic] with the representative of Lingnan. He is now trying to schedule a meeting in next week or the week after.”

154. That led to a meeting in Hong Kong on 5 June 2012 between Mr Rose, Mr Marcou, Mr Leser, Mr Simeon and Ms Ng with representatives of Lingnan.

155. The minutes of that meeting include:

“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.”

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

1. Lingnan made an initial offer of RMB 62 million;

2. Mr Rose and Mr Marcou made a counter offer of RMB 100 million;

3. “After a few rounds of negotiation” Mr Rose and Mr Marcou revised their counter offer to RMB 75 million; and

4. Lingnan then increased its offer to RMB 70 million.

157. 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.”

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

“A. ... 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].”

159. 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 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.”

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

“A. ... 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.”

161. I see no reason to doubt the accuracy of Mr Marcou’s and Mr Rose’s recollection of the meeting.

162. The minutes of the ETCI board meeting on 5 June 2012 record that Mr Simeon and Ms Ng were in favour of accepting Lingnan’s offer whereas Mr Rose and Mr Marcou wanted a few days to think about the matter.

Lingnan demands GZL institute proceedings

163. Evidently, the Lingnan representatives were not content to rely simply on the outcome of the negotiations commenced at the 5 June 2012 meeting.

164. On that very day, Lingnan wrote to GZL requesting it to commence legal proceedings against Mr Ng, Ms Yang, the ETC Subsidiaries and others.

165. This is recorded in a “Civil Judgment” handed down by the Guangzhou Tianhe District People’s Court in the following year, on 7 February 2013, in proceedings that Lingnan commenced against GZL on 5 July 2012. I will return to this.

The 8 June 2012 board meeting

166. Lingnan’s offer of RMB 70 million was discussed further at an ETCI board meeting held on 8 June 2012.

167. The minutes record 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”.

168. Different views were expressed as to the value of Lingnan’s offer.

169. Mr Rose is recorded as saying that:

“If RMB 70 million is accepted, after paying the creditors, [ETCI] will almost have nothing for distributing to shareholders.”

170. Mr Simeon is recorded as saying that “based on the information that [Mr Marcou] provided to the board” were ETCI to accept Lingnan’s offer “about 4.5 million pound [sic] will be available for distribution to shareholders”.

171. Mr Marcou is recorded as, in effect, agreeing with Mr Simeon’s observation and suggesting that “the distribution for the shareholders may be even higher” if an unrelated transaction were also to take place.

172. Ultimately the board resolved to make a counter offer of RMB 73 million on a number of conditions including that “[ETCI] will not request a dividend from GZL for 2011”.

ETCI’s counter offer

173. On 8 June 2012, 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.”

Lingnan suggests a further meeting

174. 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.

627. As to the 27 May 2013 meeting, Mr Drummond was not present but, as I have set out at [362] above, Mr Drummond was in favour of the Rights Issue.

628. In the circumstances, I find that the want of quorum at these two meetings caused no substantial injustice and did not have the effect of invalidating what occurred at those two meetings.

629. Mr White submitted that there had been a breach of ETCI’s Articles of Association in relation to the Rights Issue. Mr White referred to Arts 6.2 and 171 but did not develop any submission about how those articles had been breached or what the consequence of any such breach might be.

630. Article 6.2(1) of the Articles of Association of ETCI provided that, subject to Art 6.2(9), the directors of ETCI could not exercise any power of ETCI to allot shares. Article 6.2(9) authorised the board to issue up to 50 million shares.

631. The effect of the Rights Issue was that some 129 million shares were issued.

632. On the face of it, it was beyond the power of the board to ratify that share issue.

633. The effect of ss 1322(4)(a) and (6) of the Corporations Act is that the Court may make an order declaring that an act purporting to have been done in contravention of a provision of the constitution of a corporation is not invalid provided that:

1. the matter in question is essentially of a procedural nature;

2. the persons concerned acted honestly; and

3. it is just and equitable to make the order.

644. I doubt that it could be said that the board’s decision to ratify the issue of shares beyond the 50 million limit specified in Art 6.2 could be said to involve an “essentially procedural” matter.

645. However, I cannot see what harm was done to ETCI by the Rights Issue. ETCI needed to raise funds to deal with its financial position. There is no evidence the shares were issued at otherwise than an appropriate price. There is no evidence the amount raised was not used for the stated purpose of retiring debt.

646. Article 171.1(a) provided that a person could not acquire shares in ETCI with voting rights of 33% or more unless as a result of a “Permitted Acquisition”; that is one to which the board consented (Arts 171.2 and 171.4(a)). The effect of the Rights Issue was that Madam Cheung acquired voting rights of more than 33%. But the board ratified this and thereby consented to it. It was a “Permitted Acquisition”.

The Special Distribution

647. Mr White said that ETCI did not take issue with the Special Distribution but called “into question the motivation or purpose” of it.

648. As I have set out above (see [621]) Mr White submitted that, along with the ETCH Share Transfer and the Rights Issue, the Special Distribution was “an adjunct to [Mr] Rose and [Mr] Marcou’s dishonesty in relation to ETCI” and, together with those other two transactions, was “a means of nullifying any inquiries that may be made by the innocent shareholders in ETCI if and when they discovered that its sole asset, ETCH, had been given to Vision Capital in July 2012 for nil consideration”.

649. As I said in relation to the Rights Issue, my conclusion that Mr Rose and Mr Marcou did not intend or purport to cause ETCI to “give” ETCH to Vision Capital is itself a reason to reject this submission.

650. On 22 September 2013, Mr Rose and Mr Marcou resolved to declare a special distribution to shareholders in ETCI on the basis of $9.36 per 1000 shares held. This resulted in a distribution to shareholders in the order of $1.5 million.

651. This was the means by which ETCI’s only asset, the $2 million proceeds of sale of ETCH to Vision Capital, was returned to shareholders.

652. There is no evidence that the balance of the $2 million paid by Vision Capital was used otherwise than for ETCI’s benefit.

653. Mr White submitted that the result was a fourfold return for those who participated in the Rights Issue. That may be so, in which case Kuoni, who also participated in the Rights Issue obtain this benefit.

654. But it is no part of Mr Ng’s case that Mr Marcou or Mr Rose were motivated, when proposing the Rights Issue, to achieve this result.

655. The 22 September 2013 meeting was inquorate but, as I have set out at [618] above, that was, in my opinion, a “procedural irregularity” of the kind to which s 1322 of the Corporations Act refers. I am not persuaded that any substantial injustice has been caused by that procedural irregularity.

Paper of Civil Mediation

656. As developed in final submissions, Mr Ng’s case concerning the Paper of Civil Mediation was that:

1. “the funds…were received by the ETC Subsidiaries at a time when [Madam] Cheung or companies that she controlled owned and controlled the ETC Subsidiaries”; and

2. Mr Rose and Mr Marcou “failed to take any steps to prevent the [RMB] 83 million judgment sum being received for the benefit of ETCI and its innocent shareholders”.

657. The short answer to this aspect of Mr Ng’s case is that, as I said at [409] above, there is no evidence that the parties to that so called mediation, the Guangzhou State Owned Corporations, paid the RMB 80 million referred to in those documents to the ETC Subsidiaries; or at all.

658. There is no evidence that these funds were paid to Madam Cheung or any entity with which she was associated. Madam Cheung denied receiving any such funds (see [411] above).

659. This conclusion renders irrelevant the opinions purportedly expressed by an expert in Chinese law called in Mr Ng’s case, Mr Chen.

660. I admitted Mr Chen’s reports provisionally in circumstances where he had not been provided with a copy of the Expert Witness Code of Conduct in a language that he could understand at the time he prepared his reports. Instead, it appears that the Code was read out to him by a colleague, the English language proficiency of whom is unknown.

661. Mr Chen then gave this evidence through an interpreter, in answer to questions from me:

“Q. Can you explain to me the process that you and that gentleman went through whereby he translated the expert code of conduct for you?

A. INTERPRETER: The lawyer verbally interpreted the contents to me.

Q. Did that lawyer have a copy of the English language expert code of conduct with him as he did that?

A. INTERPRETER: Well in relation to that I did not pay specific attention to that.

Q. What do you understand to be your duties to this Court as an expert witness?

A. INTERPRETER: Well my understanding of my role in these proceedings is in accordance with my legal knowledge and the documents that are received by email combining the questions that I received, I make a judgment on that basis.

Q. Do you have any understanding of what your duty is to the Court in giving your opinion?

A. INTERPRETER: My responsibility to this Court is to provide an opinion based on the material and questions that have been provided.”

662. Mr Chen did not mention his “paramount duty, overriding any duty to the party to the proceedings…to assist the court impartially on matters relevant to the area of expertise of the witness” as required by the Expert Witness Code of Conduct.

663. Mr Chen was provided with a translated of the Code and provided a further report in which he stated that the Code had been properly translated to him when he prepared his earlier reports.

664. He then gave this evidence in response to questions from Mr Entwisle:

“Q. What do you understand your role in these proceedings to be?

A. INTERPRETER: My job was in relation to this proceeding was in accordance with the questions asked by Ms Yen Tan, and applying my legal expertise and I'll give my expert opinions.

Q. Is that all?

A. INTERPRETER: That's right.”

665. Later, Mr Chen gave this evidence in answer to another question from me:

“Q. … Having had the code read out to you, what did you understand to be the nature of your duty to the Court?

A. INTERPRETER: I must be impartial and - and in accordance with the information provided by Yen Tan, I - I need to provide my independent opinion.”

666. In my opinion, this evidence fell a long way short of an acknowledgment of the kind required by the Expert Witness Code of Conduct.

667. This is significant because Mr Chen is not an independent witness. He was Mr Ng’s lawyer in his criminal proceedings in the PRC. He had acted for Mr Ng since his detention in 2010. He was referred to in the ETCI board minutes of 18 June 2012 as being “our current lawyer in China”.

668. For those reasons, were it relevant for me to do so, I would reject Mr Chen’s report.

669. In any event, and as Mr Entwisle submitted:

“Mr Chen expressed a number of opinions in his report without any proper basis. …in his first report he expressed the opinion that ETC PRC would be entitled to the claim any judgment sum received by the PRC Subsidiaries because it was entitled to a ‘management fee’ pursuant to a ‘management agreement’. In his second report, he went further and said that the charging of the ‘management fee’ was entirely within the ETC PRC’s discretion. As Mr Chen admitted in cross-examination, at the time he expressed these opinions he had not seen a copy of the ‘management agreement’ and he did not ask to see it. He expressed his expert legal opinion solely on the summary of these agreements in the recital to two other agreements. All those recitals said was that ‘Pursuant to the Management Agreement, Party B shall make certain payments to Party A in consideration of certain services provided by Party A under the Management Agreement’. As Mr Chen admitted, this did not tell him when the management fees were payable or how much was payable.”

670. These matters provide a further reason to not accept Mr Chen’s report.

Mr Ng’s claim fails

671. For these reasons, I am not satisfied that Mr Ng has established any of the breaches of duty by Mr Rose and Mr Marcou for which he contended.

672. It follows that his claims against Mr Rose and Mr Marcou fail.

673. It must also follow that his claims against Madam Cheung also fail as those claims depended on establishing his anterior claims against Mr Rose and Mr Marcou.

674. The proceedings should be dismissed.

675. I will hear the parties as to costs.

**********

Decision last updated: 20 December 2019