ET-China.com International Holdings Ltd v Cheung

1. [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. [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. [3]

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

4. [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. [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. [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. [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. [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. [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. [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. [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. [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. [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. [14]

    Those matters or events are:

    1. (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. (2)

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

    3. (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. (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. [15]

    Mr Ng alleges that:

    1. (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. (2)

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

    3. (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. (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

1. [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”.

2. [17]

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

3. [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.

4. [19]

   The corporate structure is depicted by the following diagram:

5. [20]

   Thus:

The issues

1. [21]

   The following issues arise.

2. [22]

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

3. [23]

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

4. [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.

5. [25]

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

6. [26]

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

Decision

1. [27]

   It is competent for Mr Ng to bring these proceedings.

2. [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.

3. [29]

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

4. [30]

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

5. [31]

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

Are the proceedings competent?

1. [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.

2. [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.

3. [34]

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

4. [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.

5. [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.

6. [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.

7. [38]

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

8. [39]

   For that reason, the requisition was not effective.

9. [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.

10. [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.

11. [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.

12. [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.

13. [44]

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

14. [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).

15. [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).

16. [47]

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

17. [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).

18. [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.

19. [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:

20. [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.

21. [52]

    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.

22. [53]

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

Choice of law

1. [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.

2. [55]

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

3. [56]

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

4. [57]

   The law to be applied is the law of Jersey.

5. [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:

6. [59]

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

7. [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).

8. [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.

9. [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.

10. [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

1. [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.

2. [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.

3. [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).

4. [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.

5. [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.

6. [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.

7. [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

1. [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.

2. [72]

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

3. [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.

4. [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”.

5. [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”.

6. [76]

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

7. [77]

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

8. [78]

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

9. [79]

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

10. [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:

11. [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.

12. [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.

13. [83]

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

14. [84]

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

15. [85]

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

16. [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.

17. [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.

18. [88]

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

19. [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.

20. [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:

21. [91]

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

22. [92]

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

23. [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:

Further involvement of Madam Cheung

1. [94]

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

2. [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.

3. [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.

4. [97]

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

5. [98]

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

6. [99]

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

7. [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:

8. [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.

9. [102]

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

10. [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).

11. [104]

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

12. [105]

    In his affidavit, Mr Marcou said:

13. [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]”.

14. [107]

    Mr Simeon and Ms Ng reported to Mr Leser.

15. [108]

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

16. [109]

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

17. [110]

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

18. [111]

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

19. [112]

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

20. [113]

    The Sale Agreement recited that:

21. [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.

22. [115]

    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”.

23. [116]

    One of those “Conditions Precedent” provided that:

24. [117]

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

25. [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).

26. [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”.

27. [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.

28. [121]

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

29. [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”.

30. [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.

31. [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.

32. [125]

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

33. [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.

34. [127]

    The Court held that Mr Ng was:

35. [128]

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

36. [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.

37. [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

1. [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.

2. [132]

   Thus, on 12 March 2012, Mr Marcou reported to the board that:

3. [133]

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

4. [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.

5. [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.

6. [136]

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

7. [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”).

8. [138]

   Mr Marcou passed this on to the ETCI board.

9. [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”.

10. [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”.

11. [141]

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

12. [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”.

13. [143]

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

14. [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.

15. [145]

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

16. [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:

17. [147]

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

18. [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.

19. [149]

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

20. [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”

1. [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:

2. [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.

3. [153]

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

4. [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.

5. [155]

   The minutes of that meeting include:

6. [156]

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

7. [157]

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

8. [158]

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

9. [159]

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

10. [160]

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

11. [161]

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

12. [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.

13. [163]

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

14. [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.

15. [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.

16. [166]

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

17. [167]

    The minutes record that:

18. [168]

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

19. [169]

    Mr Rose is recorded as saying that:

20. [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”.

21. [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.

22. [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”.

23. [173]

    On 8 June 2012, Mr Marcou wrote to a representative of Lingnan, Mr Tang Xin as follows:

24. [174]

    On 13 June 2012, Mr Tang replied:

25. [175]

    On 14 June 2012, Mr Marcou responded:

26. [176]

    On 17 June 2012, Ms Ng met Ms Tracy Luo, from Lingnan, at an international trade expo.

27. [177]

    Ms Ng reported her discussions with Ms Luo at the ETCI board meeting of 18 June 2012.

28. [178]

    The minutes record:

29. [179]

    The minutes continued:

30. [180]

    On 21 June 2012, Mr Marcou sent Mr Tang a “proposed agenda for your consideration targeting the week beginning July 2”.

31. [181]

    On 27 June 2012, Mr Marcou wrote to Mr Tang:

Madam Cheung makes further contact

1. [182]

   In the meantime, in early June 2012, Mr Marcou and Mr Rose met Madam Cheung in Hong Kong.

2. [183]

   Evidently, Madam Cheung had heard that ETCI was having discussions with Lingnan. Madam Cheung told Mr Marcou that she continued to be interested in acquiring ETCH.

3. [184]

   In his evidence in chief, Mr Marcou said that Madam Cheung said:

4. [185]

   In his affidavit, Mr Marcou said that Madam Cheung also said “I will do a better deal than Lingnan. You can’t trust Lingnan. They’re bad people”.

5. [186]

   Madam Cheung’s point was, it seems, that ETCI would not solve the problems associated with its interest in GZL by direct discussions with Lingnan and that the matter should be dealt with “in a Chinese manner”.

6. [187]

   Mr Marcou said that Madam Cheung then said “I would like to make an offer for the company”. Mr Marcou asked “how much?” and Madam Cheung replied “13 million USD”.

7. [188]

   Evidently for that reason, on 10 June 2012, Mr Marcou sent Madam Cheung an email attaching “[a]s discussed” a “Term Sheet regarding [ETCH] purchase for your review/comments”. The term sheet identified Vision Capital as the purchaser, a “down-payment” of USD 500,000 within 4 weeks and a further payment within 16 weeks of USD 12.5 million. I will return to other provisions in the term sheet (see [231231]ff below).

8. [189]

   On 27 June 2012, Mr Rose sent an email to Mr Simeon, Ms Ng and Mr Drummond attaching the term sheet and stating:

9. [190]

   The proposal “currently before the board” was the sale of ETCI’s interest in GZL to Lingnan.

10. [191]

    Because of the prospect of an arrangement with Madam Cheung, on 28 June 2012, Mr Marcou emailed the ETCI Board:

11. [192]

    On the same day, Mr Drummond replied:

12. [193]

    Mr Simeon also replied on the same day stating:

13. [194]

    On 29 June 2012, Mr Rose:

14. [195]

    Each of Mr Simeon, Ms Ng and Mr Drummond expressed the opinion that the board should consider both the offers made by Lingnan and Vision Capital.

15. [196]

    Mr Drummond proposed, and the board resolved that:

    1. (1)

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

    2. (2)

       Vision Capital should be asked to pay a non-refundable deposit of USD 1 million in cash “at signing of the term sheet” and “outside China”; and

    3. (3)

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

16. [197]

    The board also 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 July”.

17. [198]

    The meeting with Lingnan was then scheduled to commence on the following Monday 2 July 2012, and possibly continue until Friday 6 July 2012 (see [179] above). The board’s proposed postponement was until the Tuesday of the following week, 10 July 2012.

Final communication with Lingnan

1. [199]

   Mr Marcou wrote to Lingnan on 30 June 2012, the day after the board meeting.

2. [200]

   Mr Marcou did not suggest a postponement of the meeting in the terms specified by the board. Rather, he wrote (with copies to each board member):

3. [201]

   Thus Mr Marcou made no mention of ETCI needing “more time to make documents ready”. Rather he referred simply to “unforeseen circumstances”. Nor did he suggest that the meeting take place “sometime after 10 July 2012”. He did not suggest any date for further discussions. Rather he said he would revert once able to “confirm future dates”.

4. [202]

   Evidently, this enraged Lingnan.

5. [203]

   Thus Lingnan sent this chilly response on 4 July 2012:

6. [204]

   Mr Marcou described this as a “scary” email.

7. [205]

   Lingnan did indeed take the foreshadowed legal measures.

8. [206]

   The very next day, 5 July 2012, it commenced the proceedings in the Guangzhou Tianhe District People’s Court to which I have referred. One of the ETC Subsidiaries, ETIC PRC, was named as defendant in those proceedings. As I discuss below, on 7 February 2013, the Court ruled that ETIC PRC had “no right to hold” shares in GZL.

9. [207]

   This was the end of negotiations between ETCI and Lingnan concerning the possible purchase by Lingnan of the ETC Subsidiaries’ shares in GZL. There is no evidence of any further discussions between ETCI and Lingnan about the matter. Evidently, Lingnan determined to pursue the question of its acquisition of GZL through the court process.

10. [208]

    Thus Mr Marcou gave this evidence in response to questions from me:

11. [209]

    In this context, Mr White referred to an email between Mr Rose and Mr Drummond on 4 December 2012 which noted that the Kuoni representatives would “see [Lingnan] next week to discuss a deal”. I will return to that email. It does not bespeak resumption or continuation of the negotiations abruptly brought to an end by Lingnan on 4 July 2012.

12. [210]

    This is a critical point.

13. [211]

    It suggests that it was on this date, 4 July 2012, that ETCI lost the opportunity to sell its interest in GZL to Lingnan; and that the opportunity was lost either because of the fact that ETCI postponed the meeting with Lingnan at short notice or because of the manner in which Mr Marcou conveyed ETCI’s desire for a postponement of the proposed meeting; or a combination of both.

14. [212]

    In his closing submissions, Mr White submitted that Mr Rose and Mr Marcou “encouraged the ETCI Board” to “abruptly terminate negotiations with Lingnan”. In oral submissions in reply, Mr White submitted that “derailing the Lingnan negotiations is part of how they [Mr Rose and Mr Marcou] effected the transaction [with Vision Capital]”.

15. [213]

    I see no basis in the evidence for these submissions. Mr Rose and Mr Marcou did not “encourage” the Board to terminate negotiations with Lingnan. It was not put to Mr Rose or Mr Marcou that they sought to “derail” those negotiations.

16. [214]

    What happened was that Mr Marcou suggested the possibility of postponing the Lingnan meeting (see [191] above). Mr Drummond agreed (see [192] above). Initially, Mr Simeon did not (see [193] above). And then the board agreed that Mr Marcou write to Lingnan as I have set out at [197] above. There is no suggestion in the evidence that any board member, all of whom were copied in on the email Mr Marcou sent Lingnan, protested to Mr Marcou about its terms. ETCI makes no complaint in these proceedings about the manner in which Mr Marcou expressed himself in his 30 June 2012 email.

17. [215]

    I will return to this when considering the question of causation (see [557]ff below).

The 4 July 2012 board meeting

1. [216]

   The ETCI board considered the matter further on 4 July 2012.

2. [217]

   There are a number of different versions of the minutes of this meeting. The version of the minutes signed by Mr Rose as Chair and acting CEO includes amendments suggested by Mr Marcou, several weeks later, to the original draft as prepared by Mr Daniel Tse. Mr Tse was an employee of Kuoni who regularly attended board meetings by telephone for the purposes of taking notes.

3. [218]

   As it was not suggested to Mr Rose in cross-examination that the minutes that he signed did not accurately record what occurred at the meeting, I propose to accept them as accurate.

4. [219]

   In those minutes, it is recorded:

5. [220]

   The minutes record Mr Rose saying that Vision Capital would pay the down payment “within four weeks”. The minutes do not record Mr Rose saying, or the board resolving, that the down payment be payable on execution of the term sheet.

6. [221]

   Indeed, Mr Tse’s draft does not record anyone saying the down payment should be payable on execution of the term sheet. Mr Tse’s draft recorded that it was to be “in cash within two weeks”, rather than “four weeks” as recorded in the minutes signed by Mr Rose.

7. [222]

   Nonetheless, Mr Rose accepted in cross-examination, albeit without being taken to the words of the minute he signed, that the board agreed that the term sheet would be amended and recirculated to the board members before being signed, and that “the purpose of that was to ensure that the $500,000 down payment would be agreed to be paid upon execution of the term sheet”.

8. [223]

   There is no dispute that Mr Rose accurately conveyed to the meeting that Vision Capital (i.e. Madam Cheung) had refused to vary the term sheet to provide for an initial down payment of USD 1 million.

9. [224]

   As signed by Mr Rose, the minutes record that the board resolved to:

   1. (1)

      “execute the Term Sheet as agreed and fulfil its requirements”; and

   2. (2)

      “[s]ecure as a matter of priority the non-refundable down payment of USD $0.5 million is contemplated in the Term Sheet”.

10. [225]

    In his affidavit, Mr Marcou said of this meeting:

11. [226]

    Although the detail of this was not recorded in the minutes, the minutes did conclude by stating:

12. [227]

    The fact that the minutes record that Vision Capital, that is Madam Cheung, would “start to contact people in China” suggests, consistently with Mr Rose’s and Mr Marcou’s evidence, that the board was told that at least one aspect of the proposed transaction with Vision Capital was to facilitate communication by Madam Cheung with her contacts in the PRC.

13. [228]

    The minutes record that the position with Lingnan was also discussed. Thus the minutes state:

14. [229]

    Nonetheless, as I have mentioned, there is no evidence of the resumption of any negotiations between ETCI and Lingnan concerning GZL.

15. [230]

    In relation to this meeting, Mr Marcou gave this evidence in response to questions from me:

The 5 July 2012 term sheet

1. [231]

   On 5 July 2012, Mr Marcou and Mr Rose executed a term sheet.

2. [232]

   Like the term sheet that Mr Rose had circulated to the board on 27 June 2012, this term sheet provided for a “non-refundable deposit” of USD 500,000 “within 4 weeks of execution of a Sale Agreement” between ETCH and Vision Capital.

3. [233]

   Mr Rose accepted in cross-examination that it had not been amended as required by the board on 4 July 2012 to provide that the USD 500,000 be paid on execution of the term sheet.

4. [234]

   It also provided that the balance of USD 12.5 million be paid “within 12 weeks after the deposit has been received”.

5. [235]

   The term sheet stated that “Completion of the Transaction” would be subject to a number of conditions including:

6. [236]

   Mr Marcou sent the executed term sheet to Madam Cheung that day with a request that Madam Cheung sign the term sheet on behalf of Vision Capital. The email concluded:

7. [237]

   The executed term sheet was not approved by the board prior to its execution by Mr Rose and Mr Marcou.

8. [238]

   Mr Rose sent a copy to Mr Simeon on 12 July 2012.

9. [239]

   Mr Simeon replied:

The draft Sale of Shares Agreement

1. [240]

   On 6 July 2012, Mr Marcou sent Madam Cheung a draft Sale of Shares Agreement.

2. [241]

   It appears that this document was drafted by a solicitor, Mr Thomas Lennox. Mr Lennox was retained by Mr Rose from time to time to provide advice to ETCI in relation to commercial matters. In about 1998, he became a shareholder in ETCI.

3. [242]

   On 12 July 2012, Madam Cheung’s associate, Mr Wong, emailed Mr Marcou saying that he had briefed a lawyer to consider the document on behalf of Madam Cheung.

4. [243]

   Mr Wong concluded:

5. [244]

   This enquiry was evidently made so that Madam Cheung could contact Ms Chow, who was ETCI’s main contact in the PRC, to see if she could start to resolve the company’s legal issues in the PRC.

6. [245]

   On 25 July 2012, Mr Lennox sent Mr Rose a revised “marked up and clean version of the Sale of Shares Agreement” and a “Share Transfer”.

7. [246]

   On or about that day, Mr Rose signed that version of the Sale of Shares Agreement on behalf of ETCI.

8. [247]

   It provided for a purchase price of ETCI’s shares in ETCH of USD 13 million with the USD 500,000 “down-payment” payable “within 4 weeks from the date of this Agreement”.

9. [248]

   This was consistent with the term sheet but not with what Mr Rose accepted to be the board’s resolution.

10. [249]

    The Sale of Shares Agreement also provided that:

11. [250]

    That is, no transfer was required by the agreement until after payment.

12. [251]

    The Sale of Shares Agreement also provided that the balance of USD 12.5 million was payable on fulfilment of the “Conditions Precedent”. The conditions precedent included:

13. [252]

    This was the same condition precedent as foreshadowed in the term sheet. In substance, it gave Vision Capital a discretion as to completion.

14. [253]

    Vision Capital did not ever sign this agreement.

The ETCH Share Transfer

1. [254]

   Nonetheless, on 25 July 2012, Mr Rose on behalf of ETCI executed the ETCH Share Transfer and delivered it to Madam Cheung.

2. [255]

   The next year, on 22 March 2013, ETCH lodged an annual return with the Hong Kong Companies Registry which recorded ETCI’s shares in ETCH as having been transferred to Vision Capital on 26 July 2012.

3. [256]

   Also on 26 July 2012, Vision Capital was appointed as Corporate Director of ETCH and another company associated with Madam Cheung, Pan Pacific Consultants Ltd, was appointed Corporate Secretary.

4. [257]

   Why did Mr Rose do this?

5. [258]

   He gave this evidence in response to questions from me:

6. [259]

   A short time later, Mr Rose said in answer to a question from Mr White:

7. [260]

   Mr Marcou said that all these steps were taken at the request of Madam Cheung.

8. [261]

   Mr Marcou said that Madam Cheung had said to him:

9. [262]

   Mr Marcou gave this evidence:

10. [263]

    A short time later, Mr Marcou gave this evidence in response to my question:

11. [264]

    Thus the evidence of Mr Rose and Mr Marcou is that 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.

12. [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.

13. [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.

14. [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.

15. [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.

16. [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.

Events following the ETCH Share Transfer

1. [270]

   On 28 July 2012, Mr Rose wrote to Mr Ng, then still incarcerated in the PRC:

2. [271]

   On 30 July 2012, Ms Chow emailed Mr Marcou stating:

3. [272]

   On 1 August 2012, Mr Lennox sent an email to Mr Marcou enquiring:

4. [273]

   Mr Marcou replied:

5. [274]

   On 2 August 2012, Mr Rose wrote to Mr Simeon and Ms Ng:

6. [275]

   Ms Ng replied the same day:

7. [276]

   Similarly, on 3 August 2012, Mr Drummond wrote:

8. [277]

   These emails suggest that Ms Ng and Mr Drummond did not know that the share transfer had been delivered to Vision Capital without any consideration being paid.

9. [278]

   Although by now a transfer of ETCI’s shares in ETCH had been delivered to Vision Capital, on or about 8 August 2012, Madam Cheung requested changes be made to the Sale of Shares Agreement so that the purchase price would decrease from USD 13 million to USD 12,763,400.

10. [279]

    This deduction was evidently intended to reflect Madam Cheung’s interest in ETCI. Thus, on 8 August 2012, Mr Marcou wrote to Madam Cheung:

11. [280]

    Thus it appears that Madam Cheung wished to reduce the amount that Vision Capital would pay for ETCI’s shares in ETCH to reflect the fact that she had the 1.82% interest in ETCI to which Mr Marcou referred.

12. [281]

    Sometime between 9 and 13 August 2012, Mr Rose executed another Sale of Shares Agreement between ETCI and Vision Capital which reflected those communications and reduced the purchase price from USD 13 million to USD 12,763,400.

13. [282]

    On 10 August 2012, Mr Marcou wrote to Madam Cheung confirming those matters and concluded:

14. [283]

    On 14 August 2012, Mr Simeon wrote to Mr Marcou:

15. [284]

    This email suggests Mr Simeon did not know that Mr Rose had caused the share transfer to be delivered to Vision Capital.

16. [285]

    On 15 August 2012, Mr Marcou wrote to Madam Cheung:

17. [286]

    On 17 August 2012, Mr Marcou wrote to Madam Cheung:

18. [287]

    On 20 August 2012, a document was lodged at the Hong Kong Companies Registry that recorded that Mr Ng, Mr Marcou, Mr Rose, Mr Simeon and Ms Ng had been removed as directors of ETCH.

19. [288]

    On 21 August 2012, Mr Marcou wrote to Madam Cheung:

20. [289]

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

21. [290]

    Mr Rose did not mention the ETCH Share Transfer.

22. [291]

    On its face, the email directs attention to difficulties concerning Vision Capital’s due diligence of ETCH.

23. [292]

    On the other hand, Mr Rose’s references to “Wealthy Capital” are consistent with his evidence that he saw no distinction, in substance, between the Wealthy Capital transaction and the Vision Capital transaction and that both were, as he saw it, in effect “reversible”.

24. [293]

    On 5 September 2012, Mr Simeon replied:

25. [294]

    This email suggests that Mr Simeon did not know that the shares had been transferred. In cross-examination, Mr Rose agreed that he had not told Mr Simeon about this.

26. [295]

    Mr Rose gave this evidence about his communications with his fellow board members concerning the share transfer:

27. [296]

    In relation to Mr Simeon’s 5 September 2012 email, Mr Rose gave this evidence:

28. [297]

    I find Mr Rose’s assertion that he told Mr Leser of the ETCH Share Transfer share difficult to accept. The documents to which I have referred suggest that Mr Simeon and Ms Ng did not know of the share transfer. As Mr White put to Mr Rose, had Mr Rose told their superior, Mr Leser, of the transfer it is hard to see why he would not pass this vital matter on to his subordinates.

29. [298]

    Mr Rose replied to Mr Simeon’s 5 September 2012 email the next day (with copies to each board member):

30. [299]

    Mr Rose confirmed in that email that the board had agreed on 4 July 2012 that, after the term sheet was signed, “Vision Capital will start to contact people in China”.

31. [300]

    Mr Rose referred to “our problematic position in relation to the completion of this sale” and sought to “highlight the two key items that are occupying our attention”:

    1. (1)

       “We currently have 11 court actions against the Company in process in Guangzhou, being bought by Lingnan, Dept of Commerce, former staff and GZL”; and

    2. (2)

       it was necessary that Mr Ng and Ms Yang sign documents “to transfer the legal persons status on all our PRC subsidiaries” but that “[u]nfortunately, Matthew [Ng] is showing reluctance to agree”.

32. [301]

    Mr Rose concluded:

33. [302]

    Again, Mr Rose did not mention that the ETCH Share Transfer.

34. [303]

    On the same day, Mr Rose wrote to Mr Ng confirming that shares in ETCH have “been sold” to Vision Capital and directing Mr Ng “to execute all necessary documentation to assist with the change of representative that is required for the completion of the transaction”.

35. [304]

    On 11 September 2012, Mr Simeon wrote to Mr Rose and Mr Marcou seeking “[c]larification of facts” and reiterating his view that Mr Rose had executed the term sheet without consultation with the board.

36. [305]

    Mr Simeon also said:

37. [306]

    Mr Simeon’s comments about the possibility of “pursuing an alternative transaction with Lingnan” did not take account of the circumstances in which Lingnan had brought negotiations to an end.

The 12 September 2012 board meeting

1. [307]

   In his affidavit, Mr Rose said:

2. [308]

   However the minutes of the board meeting of 12 September 2012 contain no reference to the transfer of “apparent legal ownership” to Vision Capital or to the fact that the share transfer had been delivered.

3. [309]

   The minutes record:

4. [310]

   On 21 October 2012, Mr Rose wrote to Mr Marcou:

5. [311]

   On the same day, Mr Marcou wrote to Madam Cheung’s associate Mr Wong:

6. [312]

   On 25 October 2012, Mr Rose emailed Mr Marcou:

7. [313]

   On 9 November 2012, Mr Simeon sent an email to Mr Marcou in which he asked:

8. [314]

   Mr Marcou replied:

9. [315]

   Mr Simeon also asked:

10. [316]

    Mr Marcou replied:

11. [317]

    In cross-examination, Mr Marcou gave this evidence about that comment:

12. [318]

    Mr White drew this passage to Mr Rose’s attention in cross-examination. Mr Rose said:

13. [319]

    On 19 November 2012, Mr Simeon asked Mr Marcou to “please clarify exactly what steps had been taken that would need to be unwound”.

14. [320]

    Mr Marcou agreed that one step that would need to be taken to “unwind” the transaction would be to address the fact that a share transfer had been delivered.

15. [321]

    In that regard, Mr Marcou gave this evidence:

16. [322]

    Mr Simeon then asked Mr Marcou to clarify his comment concerning pursuing discussions with Lingnan.

17. [323]

    Mr Simeon said:

18. [324]

    On 22 November 2012, Mr Drummond wrote to Mr Ranjit Murugason. Mr Murugason was a former chairman of the ETCI board and a shareholder in ETCI.

19. [325]

    Mr Drummond’s email gives an interesting insight into the position at board level at ETCI.

20. [326]

    I will set the email out in full:

21. [327]

    Mr Drummond’s reference, in his final paragraph, to Mr Rose turning “to someone that he knows” was obviously a reference to Madam Cheung.

22. [328]

    In his final sentence, Mr Drummond was expressing the view that it was of no concern to the ETCI board what Vision Capital did with the ETCH shares acquisition “as long as they pay a price”.

23. [329]

    That suggests that Mr Drummond understood that, notwithstanding the form of the Sale of Shares Agreement, there was not yet then any agreement between ETCI and Vision Capital as to the “price” at which Vision Capital would ultimately acquire ETI’s shares in ETCH.

24. [330]

    On 4 December 2012, Mr Rose wrote to Mr Lennox:

25. [331]

    Mr White suggested that this email bespoke a continuing interest on Lingnan’s part in negotiating with ETCI concerning the shareholding in GZL.

26. [332]

    I do not agree. Mr Rose is in this email speaking of a proposal that the Kuoni representatives evidently discussed with him concerning the possible sale by Kuoni and Mintpine (a company associated with Mr Rose) of their shareholding in ETCI to Lingnan which would, according to this email, give Lingnan “control of ETCH”. That is, the discussion was about the possible sale to Lingnan of shares in ETCI; not the sale of ETCI’s shares in ETCH.

27. [333]

    There is no evidence that this proposal proceeded any further.

Mr Rose executes a Personal Insolvency Agreement

1. [334]

   In or around January 2013, Mr Rose executed a Personal Insolvency Agreement for the purposes of Pt 10 of the Bankruptcy Act 1966 (Cth).

2. [335]

   Mr White submitted that it followed that, by reason of Art 99 of ETCI’s Articles of Association, Mr Rose thereby ceased to be a director.

3. [336]

   Mr Corsaro SC, who appeared with Mr Pintos-Lopez for Mr Rose and Mr Marcou, did not dispute the proposition but pointed to Art 131 which provides that all acts done by any person “acting as a director” will be valid “notwithstanding that it is afterwards discovered that there was some defect in the appointment of any person…or that they…were…disqualified from holding office”.

The Civil Judgment

1. [337]

   On 7 February 2013, the Guangzhou Tianhe District People’s Court delivered a Civil Judgment in the proceedings commenced the previous June.

2. [338]

   The Court determined that ETIC PRC was “not a shareholder” of GZL, had “no right to hold” 28.5% and was “not entitled to shareholder’s rights and interests”.

3. [339]

   While the judgment related to ETIC PRC’s 28.5% interest in GZL, 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). Mr Mao had opined that the interests of ETIC PRC appeared to be the most secure of those of the ETC Subsidiaries (see [146(b)] above).

4. [340]

   The judgment was a major blow for ETIC. Its effect was that ETIC no longer had any indirect interest in GZL through ETIC PRC. Its implication was that ETCI no longer had an indirect interest in GZL at all.

5. [341]

   As Mr Corsaro submitted, this judgment “fundamentally undermined the value of ETCH in the PRC and was a major blow to any prospect of recovering value for shareholders”.

6. [342]

   Mr White submitted that the judgment “did not deal with the compensation to be awarded to ETIC for its shareholding having been declared void”. But the orders made by the Court made no reference to compensation and made no suggestion that there might be a further hearing to determine compensation.

7. [343]

   The final page of the judgment referred to the possibility of an appeal to the Guangzhou Intermediate People’s Court of Guangdong.

8. [344]

   However Mr Rose said, and I accept:

Further discussions with Madam Cheung

1. [345]

   Evidently, Madam Cheung soon learned of the judgment.

2. [346]

   Thus four days later, on 11 February 2013, Madam Cheung’s associate Mr Wong contacted Mr Marcou and they had this conversation:

3. [347]

   On 12 February 2013, Mr Wong wrote Mr Marcou:

4. [348]

   I infer that this revision in the purchase price was because Madam Cheung had become aware of the February 2013 Judgment.

5. [349]

   On 27 February 2013, Mr Marcou notified the other directors of ETCI of the February judgment:

6. [350]

   Ultimately Madam Cheung agreed to pay $2 million for ETCI’s shares in ETCH. I return to this below.

The Rights Issue

1. [351]

   By this time, ETCI’s financial position was parlous.

2. [352]

   On 14 March 2013, Mr Marcou sent an email to Mr Rose stating “[w]e need circa $300k to clean everything up”.

3. [353]

   He proposed:

4. [354]

   The matter was considered at a board meeting on 22 March 2013.

5. [355]

   Mr Simeon and Ms Ng were not present at this meeting. Only Messrs Rose, Marcou and Drummond were present. As ETCI’s Articles of Association required that four directors be present at a board meeting, this meeting was inquorate.

6. [356]

   Thus the minutes record:

7. [357]

   The minutes continue:

8. [358]

   The minutes conclude:

9. [359]

   This resolution purportedly authorised the Rights Issue.

10. [360]

    ETCI’s financial position was summarised in an attachment to the board minutes:

11. [361]

    There is no suggestion in the evidence that this was not an accurate summary of ETCI’s financial position at this time.

12. [362]

    Many years later, on 3 August 2016, Mr Drummond wrote to Mr Ng, who had recently been released from custody and said:

13. [363]

    Although Mr Simeon and Ms Ng were not present at the 22 March 2013 board meeting, they learned of the Rights Issue. In a letter they wrote on 8 April 2013 notifying ETCI of their resignation as directors of ETCI, they asserted that they did “not believe the rights issue is being validly conducted as a matter of law”. Nonetheless, Kuoni participated in the Rights Issue.

14. [364]

    On 25 March 2013, Mr Rose and Mr Marcou wrote to the shareholders of ETCI stating that ETCI would conduct a Rights Issue to shareholders of a pre-emptive basis, seeking to raise USD 300,000 by the issue of 126,673,600 shares on the basis of three additional shares for every one currently held. The shares were to be issued at a price of “US$2.37/1,000 shares”.

15. [365]

    The letter stated:

16. [366]

    The letter explained that the Rights Issue was conducted pursuant to an identified article of ETCI’s Articles of Association and explained “under the terms of the Articles of Association, shareholders are able to subscribe for their entitlement and to apply for over-entitlements from any shortfall in subscriptions”.

17. [367]

    The letter did not refer to the recent negotiations with Madam Cheung, nor to the fact that the shares in ETCH were now registered in the name of Vision Capital.

18. [368]

    Each of Mr Rose, Mr Marcou, Madam Cheung and Kuoni, through associated corporations, participated in the Rights Issue.

19. [369]

    A further meeting of ETCI’s board took place on 27 May 2013.

20. [370]

    Only Mr Rose and Mr Marcou attended this meeting. As I discuss below, by now Mr Simeon and Ms Ng had resigned as directors. Mr Drummond was an apology. The meeting was thus inquorate.

21. [371]

    The minutes of the meeting record that Mr Marcou reported to ETCI that the “Rights Issue has been fully subscribed” and that some USD 305,000 had been raised.

22. [372]

    Almost the entire amount raised was a result of subscriptions by interests associated with Mr Rose, Mr Marcou, Madam Cheung and Kuoni. A further 128,762,305 shares in ETCI were issued, primarily to entities associated with those persons, as a result of the Rights Issue.

23. [373]

    Mr Rose and Mr Marcou resolved to “accept all Rights Issue applications”.

24. [374]

    The minutes record that Mr Marcou provided an “update on [the] status of discussions and negotiations with all ETCH creditors”.

25. [375]

    The minutes record that “ETC (non-China)” liabilities to 27 May 2013 for the Hong Kong office were in the order of USD 45,000 and for the UK/Jersey office in the order of USD 1.38 million. The minutes also record that estimated future expenses were in the order of USD 251,000.

26. [376]

    The minutes record that Mr Marcou:

27. [377]

    In an “Update to Shareholders” sent on 20 September 2013 it was stated that the proceeds of the Rights Issue:

28. [378]

    There is no evidence that these statements were not correct.

29. [379]

    The Corporate structure following the Rights Issue is depicted by the following diagram:

30. [380]

    A comparison between the diagram at [19] with that at [379] shows that the effect of the Rights Issue was that:

    1. (1)

       Madam’s Cheung’s indirect in ETCI increased from 1.84% to 40.76%;

    2. (2)

       Mr Rose’s indirect interest increased from 3.93% to 5.87%;

    3. (3)

       Mr Marcou’s indirect interest increased from 0.02% to 9.84%;

    4. (4)

       Kuoni’s indirect interest decreased from 30.27% to 7.64%; and

    5. (5)

       Mr Ng’s indirect interest decreased from 11.42% to 2.78%.

31. [381]

    There was a suggestion in cross-examination and closing submissions that the purpose of the Rights Issue was to give Madam Cheung, together with Mr Rose and Mr Marcou, control of ETCI. That allegation is not pleaded. What is pleaded is that the effect of the Rights Issue was as I have set out. There is no allegation on the pleading that Mr Rose and Mr Marcou were motivated to achieve this result.

32. [382]

    In any event, the larger point so far as concerns Madam Cheung is that notwithstanding the fact that Vision Capital was registered as a sole shareholder of ETCI’s only asset, ETCH, Madam Cheung caused an associated company (not Vision Capital) to expend some USD 160,000 to acquire further shares in ETCI. That points powerfully to the conclusion that Madam Cheung did not see Vision Capital as being the beneficial owner of the shares in ETCH. I will return to this below.

33. [383]

    The minutes of the 27 May 2013 board meeting also stated:

34. [384]

    As foreshadowed in that extract from the minutes, discussions with Vision Capital did continue (see [388]ff below).

The Kuoni directors resign

1. [385]

   In the meantime, on 8 April 2013, Mr Simeon and Ms Ng resigned as directors of ETCI.

2. [386]

   As I have mentioned, in their letter of resignation, Mr Simeon and Ms Ng stated that:

3. [387]

   Nonetheless, as I have said, Kuoni participated in the Rights Issue.

Final negotiations with Vision Capital

1. [388]

   The minutes of the 27 May 2013 board meeting record that:

2. [389]

   On about 3 or 4 June 2018, Mr Marcou received a call from Madam Cheung asking him to travel to Hong Kong to discuss further the sale to Vision Capital.

3. [390]

   On 7 June 2013, Mr Marcou travelled to Hong Kong and met with Madam Cheung.

4. [391]

   His account in cross-examination of that meeting was:

5. [392]

   In his affidavit, Mr Marcou gave this account of those matters:

6. [393]

   Thus it was agreed that ETCI should sell its shares in ETCH to Vision Capital for $2 million.

7. [394]

   Mr White submitted that $2 million was a gross undervalue of ETCI at this time.

8. [395]

   In fact the plaintiffs’ expert witness, Mr Tony Samuel, whose evidence I will return to below, opined that if no payment was made to ETCI as a result of the “Paper of Civil Mediation”, to which I refer at [405] below, the value of ETCI as at June 2012 was negative $2.12 million.

9. [396]

   Mr Entwisle submitted that the offer of $2 million was, in the circumstances, “generous”.

10. [397]

    Mr Drummond was not present at the 27 May 2013 board meeting. As I have set out, Mr Marcou said in his affidavit that, following his discussions with Madam Cheung, he telephoned Mr Drummond who agreed that “we should take $2 million”.

11. [398]

    Three years later, on 15 July 2016, shortly after Mr Ng’s release from custody, Mr Drummond wrote to Mr Ng stating that “I had no idea that ETCH was sold for $A 2 million”.

12. [399]

    However Mr Marcou was adamant that he did speak to Mr Drummond as he deposed in his affidavit.

13. [400]

    Mr Rose was also clear that Mr Drummond knew about the sale price of $2 million. He said:

14. [401]

    Mr Rose was speaking about the email Mr Drummond sent Mr Rose and Mr Marcou on 10 August 2016 in which he said:

15. [402]

    In these circumstances, my conclusion is that it is more likely than not that Mr Marcou did speak to Mr Drummond as he deposed.

16. [403]

    Mr Marcou and Madam Cheung executed a Sale of Shares Agreement recording ETCI’s agreement to sell and Vision Capital’s agreement to buy ETCI’s shares in ETCH for $2 million. That agreement is dated 7 June 2012.

17. [404]

    Because of a submission made by Mr White that this agreement was backdated by Mr Marcou for reasons associated with what Mr White referred to as the “2013 PRC Judgment” (in fact the Paper of Civil Mediation), I will deal now with that matter.

The 21 June 2013 “Paper of Civil Mediation”

1. [405]

   There is in evidence copies of seven documents dated 21 June 2013, each entitled “Paper of Civil Mediation”.

2. [406]

   These documents purport to record a settlement of the ETC Subsidiaries’ appeal from the 7 February 2013 Civil Judgment of the Guangzhou Tianhe District People’s Court referred to at [337]ff above.

3. [407]

   The settlement described in the documents purports to be an agreement by a number of Guangzhou state owned corporations to pay some RMB 80 million to the ETC Subsidiaries in respect of their interests in GZL.

4. [408]

   The documents appear to have been “affirmed by” three judges of the Guangdong Province Guangzhou City Intermediate People’s Court.

5. [409]

   Assuming these documents accurately record a settlement of an appeal from the 7 February 2013 judgment, there is no evidence that the Guangzhou state owned corporations paid the RMB 80 million, or any sum at all, to the ETC Subsidiaries.

6. [410]

   ETCI administered interrogatories to Madam Cheung asking whether she, or any person or corporation at her nomination or direction received the RMB 80 million.

7. [411]

   Mr Corsaro tendered Madam Cheung’s answers to those interrogatories in which she denied such receipt.

8. [412]

   Mr Marcou initially said he first learned of the settlement in March 2014. However his attention was drawn to an affidavit he swore in proceedings in Jersey on 24 July 2017 in which he said that the ETCI board was, in October 2013, informed a “settlement had been reached” between Lingnan and ETCH.

9. [413]

   Mr Rose was adamant that he had not heard of any settlement of the PRC proceedings until sometime in 2014 or 2015.

The 7 June 2013 Sale of Shares Agreement

1. [414]

   The Sale of Shares Agreement bearing the date 7 June 2013 provided that the consideration for the transfer by ETCI to Vision Capital of ETCI’s shares in ETCH was $2 million payable within “three business days”.

2. [415]

   The agreement did not refer to the ETCH Share Transfer.

3. [416]

   It also used language difficult to reconcile with the fact of the ETCH Share Transfer in that it provided that:

4. [417]

   However, I see no reason to doubt that this document reflected the final agreement between ETCI and Vision Capital, as Vision Capital paid the $2 million referred to in the agreement, albeit not within three business days. The funds were paid in two instalments on 6 and 9 September 2013.

5. [418]

   In closing, Mr White made the very serious allegation that the agreement was not entered into on the date it bears, 7 June 2013, but was “invented” by Mr Rose and Mr Marcou “after the event” to “justify and explain” why the proceeds of the 21 June 2013 Paper of Civil Mediation “had not been secured for the benefit of ETCI but left for [Madam] Cheung to collect through her control of ETCH and the downstream companies”.

6. [419]

   Mr White also submitted that the Sale of Shares Agreement “was intended [by Mr Rose and Mr Marcou] to conceal [their] derogation of duty” concerning the 21 June 2013 Paper of Civil Mediation and was entered “to avoid or minimise any criticism from shareholders in ETCI as to why its sole asset was sold for $2 million following discovery of the [21 June 2013 Paper of Civil Mediation]”.

7. [420]

   That is an allegation of fraud on the part of Mr Rose and Mr Marcou. There is no suggestion of any such allegation in ETCI’s List Statement. The allegations of dishonesty in the List Statement are directed to the ETCH Share Transfer, the approval of the Rights Issue, the purported ratification in September 2013 of the sale of the ETCH shares and the purported approval of the Special Distribution. For that reason alone, I would not entertain the allegation.

8. [421]

   In any event, none of the matters relied upon to justify the allegation does so.

9. [422]

   There were five such matters.

10. [423]

    The first was that the Sale of Shares Agreement did not refer to the ETCH Share Transfer and that some of the clauses were inconsistent with that fact. But that does not point to the conclusion that the agreement was backdated.

11. [424]

    Second, it was submitted that Mr Marcou did not send a copy of the agreement to the other directors, although Mr Marcou said he “must have” sent a copy to Mr Rose. There was only one other director, Mr Drummond. Even if a copy was not sent to Mr Drummond, this does not bespeak backdating.

12. [425]

    Third, it was pointed out that Mr Rose and Mr Marcou signed letters of resignation from the ETCH board dated 7 June 2013. The implication seemed to be that these documents were created as part of the “after the event” invention.

13. [426]

    Mr White pointed to Mr Marcou’s agreement, in cross-examination, that “evidence of a resignation by you and Mr Rose from the [ETCH] board on 7 June 2013 would be consistent with a sale transaction of the shares in ETCH on that day”.

14. [427]

    But Mr Marcou did not accept the proposition, which then followed, which was that he was “laying a paper trail”. Mr Marcou said “I was tidying up”.

15. [428]

    Mr Rose said that he thought that Madam Cheung would want a document “to confirm that we definitely weren’t trying to come back to her with the reversible trust arrangement”.

16. [429]

    I see no reason why I should not accept these explanations.

17. [430]

    Fourth, reference is made to an email Mr Drummond sent to Mr Ng several years later, on 3 August 2016, in which he said that the one thing he regretted was believing Mr Rose and Mr Marcou when they stated that “there was no hope of settlement”. But Mr Drummond was not available to be asked to what he was referring. He could have been referring to statements made by Mr Rose and Mr Marcou concerning a settlement with Lingnan.

18. [431]

    Fifth, reference was made to what was said to be a “telling” email from Mr Rose to Mr Lennox dated 29 July 2013 in which he said:

19. [432]

    Mr White submitted that Mr Rose’s reference to the “deal” was a reference to the arrangement between ETCI and Vision Capital. The first difficulty is that this was not put to Mr Rose in cross-examination. In any event, a more likely explanation is that Mr Marcou was referring to a potential deal by Madam Cheung, having now acquired the shares in ETCH to sell its indirect interest in the GZL business, possibly to Lingnan.

20. [433]

    For those reasons, I do not find that the Sale of Shares Agreement was back dated, let alone back dated for any reason associated with the Paper of Civil Mediation.

Receipt of the $2 million from Vision Capital

1. [434]

   Vision Capital paid the $2 million called for by the Sale of Shares Agreement in two tranches on 6 and 9 September 2013.

2. [435]

   The funds were paid into the account of a company associated with Mr Marcou, as ETCI had no bank account at that time.

3. [436]

   Mr Marcou then caused that money to be distributed to shareholders via the Special Distribution.

The 20 September 2013 board meeting

1. [437]

   Only Mr Rose and Mr Marcou were present at this purported board meeting; Mr Drummond was noted as an apology.

2. [438]

   The minutes purport to record resolutions:

   1. (1)

      “to ratify the sale of [ETCH] to Wealthy Capital [sic: Vision Capital] on an as is, where is basis for AUD$2 million”; and

   2. (2)

      “to declare a special distribution to shareholders of A$9.36/1,000 shares”.

The Special Distribution

1. [439]

   Also on 20 September 2013, ETCI sent an “Update to Shareholders” stating:

2. [440]

   The total amount returned to shareholders by the Special Distribution was some $1,534,000. It was funded by the $2 million received from Vision Capital.

3. [441]

   There is no direct evidence of how the balance of the $2 million was used. There is, however, no suggestion it was not used to discharge obligations of ETCI. There is certainly no suggestion that either Mr Marcou or Mr Rose obtained any benefit from the balance. Indeed, Mr Rose gave unchallenged evidence that the “amount I received through the special distribution was the only benefit I received from the sale of [ETCH]”.

Principles concerning directors’ duties

1. [442]

   It was common ground before me that there are four relevant duties of directors.

2. [443]

   A director must act bona fide in the interests of a company as a whole.

3. [444]

   In Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; [2012] WASCA 157, Drummond AJA said (at [1988]):

4. [445]

   See also Hart Security Australia Pty Ltd v Boucousis (2016) 339 ALR 659; [2016] NSWCA 307 at [75] (Meagher JA, Bathurst CJ and Beazley P agreeing).

5. [446]

   Second, a director must not exercise his or her power for any collateral or improper purpose, but only for the purposes for which they were conferred.

6. [447]

   In that regard, I can do no better than cite the familiar statement of Ipp J (as his Honour then was) in Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 at 218:

7. [448]

   An assessment of whether a director has exercised his or her powers for an improper purpose involves a two-step process:

8. [449]

   This question is to be determined objectively.

9. [450]

   It was on this duty that Mr White placed most emphasis in his closing submissions.

10. [451]

    The power in question in these proceedings is the power to sell assets, here ETCI’s shares in ETCH.

11. [452]

    Mr White submitted that the substantial purpose for which Mr Rose and Mr Marcou purported to exercise that power was improper in that it was not for the benefit of ETCI but rather for the benefit of Madam Cheung and her associated entities. I will return to this.

12. [453]

    There is limited authority as to the scope and application of this duty.

13. [454]

    It is referred to in R P Austin and I M Ramsay, Ford, Austin & Ramsay’s Principles of Corporations Law (17th ed, 2018, LexisNexis Butterworths) at [9.200] as follows:

14. [455]

    The “misappropriation rule” is probably best understood as a particular expression of the best interests and proper purpose rules. That is, if a director exercises his or her powers for the purposes of applying company property for their own benefit or for the benefit of another person, and not for the benefit of the company, then this constitutes a breach of their duty to act in the best interests of the company or for a proper purpose.

15. [456]

    Again, the focus of Mr White’s submissions was on the proposition that Mr Rose and Mr Marcou breached this duty by misappropriating ETCI’s property, namely its shares in ETCH, for the benefit of Madam Cheung.

16. [457]

    A director must exercise a reasonable degree of care, diligence and skill in the exercise of his or her powers and a discharge of his or her duties: for example, see Permanent Building Society v Wheeler at 239ff.

17. [458]

    Whether a director has exercised reasonable care and diligence depends on what “an ordinary person, with the knowledge and experience of the Defendant might be expected to have done in the circumstances if he or she was acting on their own behalf”: Australian Securities and Investments Commission v Adler (2002) 168 FLR 253; [2002] NSWSC 171 at [372(4)] (Santow J).

18. [459]

    The duties that Mr Ng alleges were breached by Mr Rose and Mr Marcou are prescriptive duties.

19. [460]

    There was debate before me as to whether these duties are fiduciary in nature.

20. [461]

    Mr Ng alleges that each of those prescriptive duties, especially the duty to act in good faith in the interests of ETCI and to exercise their powers for a proper purpose, was a fiduciary duty.

21. [462]

    That allegation was an essential element of the accessorial liability claims that Mr Ng sought to make against Madam Cheung and others as there was no dispute before me that the Barnes v Addy (1874) LR 9 Ch App 244 principles upon which Mr Ng relies in that regard only apply to breaches of trust or fiduciary duties. Thus, to make out the claim that Mr Ng sought to bring on ETCI’s behalf against Madam Cheung and the other parties said to be accessorily liable in respect of Mr Rose’s and Mr Marcou’s alleged breaches of duty, it was necessary for Mr Ng to establish that those breaches of duty were breaches of fiduciary duty.

22. [463]

    In Westpac Banking Corporation v Bell Group Ltd (in liq) (see [444] above) the Western Australian Court of Appeal found that the obligation of directors to exercise their powers bona fide for the benefit of a company was a fiduciary obligation: see Lee AJA at [897]-[899]; Drummond AJA [1949]-[1956]; Carr AJA [2721]-[2733].

23. [464]

    It has been said that, prior to the decision in Westpac v Bell Group:

24. [465]

    The following passage from Mr Entwisle’s submissions reveals the gist of the dispute:

25. [466]

    As I have concluded that Mr Ng has not established any relevant breach by Mr Rose or Mr Marcou of their prescriptive duties, I do not need to resolve that debate.

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

1. [467]

   Mr White submitted that, by making the ETCH Share Transfer, Mr Rose and Mr Marcou “permitted to be transferred to Vision Capital all of ETCI’s shares in ETCH for nil consideration” and in so doing, amongst other things:

2. [468]

   Before considering that submission, I will set out the context in which the ETCH Share Transfer was made.

The problem confronting the board

1. [469]

   As I have mentioned, in mid-2012, ETCI was in a parlous position.

2. [470]

   Its Chinese operations had ceased to operate. Its bank accounts had been frozen. Its staff had been depleted.

3. [471]

   As Mr Simeon stated at the board meeting on 8 June 2012, ETCI had “nearly no liquidity”, the Group “may become insolvent very soon” and the licences of the ETC Subsidiaries could not be renewed as ETCI did not have the requisite resources in the PRC (see [167] above).

4. [472]

   Its only asset, its shareholding in ETCH, was at risk.

5. [473]

   Since as early as July 2010, Lingnan had contended that ETCI had “illegally taken control” of GZL (see [75] above).

6. [474]

   Mr Ng had been convicted and found to have procured that ETCI obtain that indirect interest through embezzlement, bribery and other allegedly corrupt activities.

7. [475]

   From shortly after the determination of Mr Ng’s appeal against his conviction, Lingnan took steps to acquire ETCI’s interest in GZL (see [137] above).

8. [476]

   In April 2012, Mr Rose and Mr Marcou heard that Lingnan was about to commence civil proceedings to recover ETCI’s indirect interest in GZL (see [140] above).

9. [477]

   There was no open market into which ETCI could sell its interest in GZL. The advice that Kuoni had received from Mr Mao and that Kuoni passed on to the board of ETCI on 22 May 2012 was that Lingnan was the only prospective purchaser of ETCI’s interest in GZL (see [146(g)] above).

10. [478]

    Lingnan had conducted its negotiations with ETCI as I have set out, including what Mr Rose and Mr Marcou saw as the aggressive and intoxicated confrontation on 5 June 2012 (see [153]ff above).

11. [479]

    One thing that Lingnan evidently made clear during those negotiations was that, assuming a figure could be agreed as the price at which Lingnan would acquire ETCI’s interest in GZL, that amount would be payable in the PRC, thus imposing on ETCI whatever difficulties that might involve in the remitting of funds out of the PRC.

12. [480]

    Lingnan terminated negotiations on 4 July 2012 in the circumstances that I have set out.

13. [481]

    At the same time, Madam Cheung, the person to whom Mr Ng had turned in October 2010 (see [80] above), said that Lingnan were “bad people” who could not be trusted (see [184] above).

14. [482]

    There is no dispute that:

15. [483]

    Unexplained, and devoid of context, these circumstances may well point to the conclusion that the ETCH Share Transfer was made for “nil” consideration.

16. [484]

    However, Mr Ng’s case that the ETCH Share Transfer was made for “nil” consideration necessarily involves the proposition that each of Mr Rose, Mr Marcou and Madam Cheung understood and intended that, on the date of the ETCH Share Transfer, 25 July 2012, ETCI make a gift to Vision Capital of the ETCH shares.

17. [485]

    That is Mr Ng’s case. As I have set out, Mr White submitted that Mr Rose and Mr Marcou caused ETCI to give ETCH to Madam Cheung and Vision Capital.

18. [486]

    But, as Mr Entwisle submitted, a transfer of property for “nil consideration” will only be a legally binding disposal of the beneficial interest in the property if the transfer is accompanied by an intention to transfer the beneficial interest for no return: Leary v Federal Commissioner of Taxation (1980) 47 FLR 414 at 431 (Brennan J). It is not possible to unintentionally transfer the beneficial interest in property. As has been said in the context of an unpaid vendor’s lien, “a person, having got the estate of another, shall not, as between them, keep it, and not pay the consideration”: Hewett v Court (1983) 149 CLR 639 at 645; [1983] HCA 7 (Gibbs CJ), citing Mackreth v Symmons (1808) 15 Ves Jun 329 at 340; (1808) 33 ER 778 at 782. This principle applies equally to choses in action such as shares: see Evans v McLean (No 2) [1987] WAR 110 at 115 (Wallace J).

19. [487]

    And here, the evidence of each of Mr Rose and Mr Marcou is that neither they, nor Madam Cheung, intended to make a gift to Vision Capital of the ETCH shares.

20. [488]

    As I have set out at [258]-[266] above, Mr Rose and Mr Marcou said that they delivered the ETCH Share Transfer to Madam Cheung to create the appearance (Mr Rose referred to the “optics”) that Madam Cheung, as a Chinese national, was in control of ETCH; and that this was done so that Madam Cheung could use such influence and connections that she had within the PRC to negotiate a solution to the problem with which ETCI was confronted in relation to GZL.

21. [489]

    Both Mr Rose and Mr Marcou said that they understood that the transaction was “reversible” and that there was an understanding with Madam Cheung that the ETCH shares would be returned “if things didn’t progress” (see [266] above).

22. [490]

    No witness has been called to contradict this evidence. Madam Cheung was not called but the submissions made on her behalf do not suggest that Madam Cheung had a different view about the matter. On the contrary.

23. [491]

    As I have said at [269] above, Mr Rose and Mr Marcou cannot be mistaken about these matters. Acceptance of Mr Ng’s case that, on 25 July 2012, Mr Rose and Mr Marcou agreed unconditionally to give ETCH to Madam Cheung and Vision Capital necessarily involves the proposition that Mr Rose and Mr Marcou gave evidence about this matter that they must have known to be untrue.

24. [492]

    In that regard, Mr White pointed to the fact that although Mr Rose disclosed to Mr Simeon that he had signed the 5 July 2012 term sheet (see [238] above), neither he nor Mr Rose disclosed the fact of the ETCH Share Transfer to either Mr Simeon or Ms Ng.

25. [493]

    That does seem to be the case. Both Mr Rose and Mr Marcou asserted that the matter had been discussed at board meetings. However there is no suggestion in any of the minutes of the board meetings, each of which was signed by Mr Rose, of any such disclosure. Mr Rose also asserted that he had disclosed the ETCH Share Transfer to Mr Leser. I am cautious about accepting that evidence. There is no document recording any such disclosure and Mr Rose made no mention of it in his affidavit.

26. [494]

    However, despite this, there are a number of objective matters that point to the conclusion that the ETCH Share Transfer was made for the purposes described by Mr Rose and Mr Marcou and was not intended by them (or Madam Cheung) to be a gift.

27. [495]

    The first of those matters is that the ETCH Share Transfer to Vision Capital occurred very shortly after the Wealthy Capital transaction.

28. [496]

    Mr Rose and Mr Marcou said that, like the Vision Capital transaction, the Wealthy Capital transaction was entered into in order to create the appearance that Madam Cheung was in control of ETCH so that resolution to the problems associated with GZL could be achieved by her in “the Chinese way”.

29. [497]

    Mr White did not suggest that Mr Rose’s and Mr Marcou’s motivation in causing ETCI to enter to the Wealthy Capital transaction was not truly to create that impression.

30. [498]

    As I set out, Mr Drummond is recorded as agreeing in terms to the transaction proceeding on this basis (see [110] above).

31. [499]

    It is true, as I have pointed out, that the Wealthy Capital transaction was documented upon the express basis that it could be reversed, whereas the Vision Capital transaction was not.

32. [500]

    But the fact that during the latter half of 2012 Mr Rose and Mr Marcou regularly referred to Vision Capital as “Wealthy Capital” (see [289], [310], [383] and [388] above) suggests that they saw each transaction as being, in substance, the same.

33. [501]

    There are other factors pointing to that conclusion including:

34. [502]

    There are also a number of indications in the evidence that Madam Cheung did not understand that ETCI had given Vision Capital its shares in ETCH.

35. [503]

    The first is that although Madam Cheung appears to have arranged for Mr Rose, Mr Marcou, Ms Ng and Mr Simeon to be removed as directors of ETCH and to be replaced by corporate directors under her control, there is no suggestion in the evidence that Madam Cheung sought to assume control of the day to day conduct of ETCH’s affairs.

36. [504]

    The second is Madam Cheung’s participation in the March 2013 Rights Issue.

37. [505]

    As I have set out at [382], through an associated company Madam Cheung exercised her right as a shareholder in ETCI to purchase some 70 million additional shares in ETCI for which it paid some USD 160,000.

38. [506]

    ETCH is the only asset of ETCI.

39. [507]

    If Madam Cheung understood that, through Vision Capital, she was the beneficial owner of ETCH, there was no reason for her to participate in the Rights Issue.

40. [508]

    The fact that Madam Cheung did participate in the Rights Issue can only be explained on the basis that she did not believe that, through Vision Capital, she was the beneficial owner of ETCH.

41. [509]

    In closing submissions, Mr White suggested that Madam Cheung’s motivation may have been to achieve control of ETCI. However, as I have said at [381] that matter is not pleaded.

42. [510]

    Mr White also suggested in closing submissions that “in terms of the figures that were being bandied about in this case” the amount of FIH’s subscription was “not that much”.

43. [511]

    But the question is why would Madam Cheung cause an associated company to pay anything for further shares in ETCI if she understood that, through Vision Capital, she was the beneficial owner of ETCI’s only asset?

44. [512]

    Third, the fact is that during 2013 Madam Cheung did negotiate to pay $2 million for the ETCH shares. If Madam Cheung believed that, through Vision Capital she was already the beneficial owner of those shares, why would she offer to pay one cent, let alone $2 million, for them?

45. [513]

    I am not in these circumstances persuaded that Mr Rose, Mr Marcou and Madam Cheung intended that the ETCH Share Transfer was a gift to Vision Capital.

46. [514]

    As Mr Entwisle accepted, had ETCI demanded that Madam Cheng return the ETCH shares, she would have been obliged to cause Vision Capital to do so. Had she refused, ETCI could have brought proceedings in Hong Kong for the return of the legal title to the shares.

47. [515]

    That is consistent with Mr Rose’s evidence that:

48. [516]

    Mr Rose and Mr Marcou did not cause ETCI to demand that the shares be returned.

49. [517]

    Instead, and notwithstanding the ETCH Share Transfer, Mr Rose and Mr Marcou dealt with Madam Cheung, and with each other, as if negotiation of the terms on which Vision Capital might purchase the ETCH shares was continuing.

50. [518]

    Thus:

51. [519]

    Mr White did not submit that any of these negotiations was a sham. The highest that it was put was that delivery of the ETCH Share Transfer weakened ETCI’s bargaining position.

52. [520]

    I think Mr Entwisle was in these circumstances correct to submit that the “true position” was that:

The breaches of duty alleged

1. [521]

   Mr White submitted that:

   1. (1)

      Mr Rose and Mr Marcou acted in breach of this duty by “disposal of ETCI’s sole asset, rendering its shareholding worthless, for nil consideration, despite having received offers in excess of US$10 million”; and

   2. (2)

      for Mr Rose and Mr Marcou “to have done so without informing any of the other directors even after other relevant transactions (such as the Rights Issue) took place evinces not merely a breach of this duty, but dishonest conduct on their part”.

2. [522]

   For the reasons I have outlined, I do not accept that Mr Rose and Mr Marcou disposed of ETCI’s sole asset, its shares in ETCH “for nil consideration”.

3. [523]

   I am not persuaded that Mr Rose and Mr Marcou intended to give the ETCH shares to Vision Capital, nor that Madam Cheung understood the shares had been given to Vision Capital.

4. [524]

   I accept that Mr Rose and Mr Marcou believed that the ETCH Share Transfer was in the interests of ETCI as it would give Madam Cheung such opportunity as was available to her to seek a solution to the impasse concerning GZL “the Chinese way”.

5. [525]

   The reference to “offers in excess of US$10 million” is evidently a reference to the offer made by Lingnan on 5 July 2012. In that regard, I accept that Mr Rose and Mr Marcou genuinely believed that, so far as concerns ETCI’s indirect interest in GZL, ETCI was “completely at the mercy of the Chinese government”; see Mr Rose’s response to my question recorded at [258] above.

6. [526]

   Faced with Madam Cheung’s advice that Lingnan could not be trusted (see [184]-[185] above) and the prospect that any settlement with Lingnan would result in funds being made available only within the PRC (see [137] above), I am persuaded that Mr Rose and Mr Marcou genuinely believed that, as Mr Rose said, Madam Cheung “was our best chance for a resolution”.

7. [527]

   Further, for the reasons I have set out above at [213]-[214], I do not accept that Mr Rose or Mr Marcou persuaded ETCI to “abruptly terminate negotiations with Lingnan”.

8. [528]

   Mr Rose’s and Mr Marcou’s failure to inform Mr Simeon and Ms Ng of the ETCH Share Transfer was doubtless a breach of their duty to keep their fellow board members informed of vital developments. But, as Mr White accepted in closing submissions, that breach of duty, alone, is not sufficient in these circumstances to impose liability on them.

9. [529]

   Mr White submitted that Mr Rose and Mr Marcou acted in breach of this duty because they “exercised their duties as directors for collateral purposes (namely, the disposal of ETCI’s sole asset and the transfer to [Madam] Cheung and Vision Capital of control of ETCH and all of its downstream companies for the purpose of [Madam] Cheng and/or companies that she controlled making a profit)”.

10. [530]

    I see no basis to conclude that, in effecting the ETCH Share Transfer, Mr Rose and Mr Marcou were motivated by a purpose of enabling Madam Cheung or Vision Capital to make a profit.

11. [531]

    Both Mr Rose and Mr Marcou were, indirectly, shareholders in ETCI. Neither had any reason to wish to confer a benefit on Madam Cheung at the expense of ETCI. To do so would be inimical to their own interests.

12. [532]

    Mr Ng’s case that Mr Rose and Mr Marcou were motivated by a desire to benefit Madam Cheng is evidently based on this passage of Mr White’s cross-examination of Mr Marcou:

13. [533]

    However, a fair reading of this passage is that when Mr Marcou said that he would “hope” that Madam Cheung, once in control of ETCH, would make a profit, he was speaking about the overall transaction contemplated with Vision Capital and assuming that agreement was ultimately reached on a price at which Vision Capital would purchase from ETCI the shares in ETCH; as opposed to holding those shares to create the “optics” that Madam Cheung was in control of ETCH.

14. [534]

    It was that overall “Vision Capital transaction” that Mr Marcou agreed may well involve Vision Capital making a profit. As he said “well, why would they buy it in the first place?”.

15. [535]

    That was a view shared by Mr Drummond. As I have said (see [326] above), on 22 November 2012, Mr Drummond wrote to Mr Murugason:

16. [536]

    Mr White submitted that Mr Rose and Mr Marcou breached this duty because they “misappropriated the sole asset of ETCI for the benefit of [Madam] Cheung and Vision Capital”.

17. [537]

    I see this as a reiteration of Mr Ng’s improper purpose submission.

18. [538]

    In support of the submission, Mr White referred to the observations of McMurdo P, McPherson JA and Mackenzie J in R v Heilbronn (1999) 30 ACSR 488 where their Honours said that “[t]ransferring the only assets of an entity without effectively providing for the discharge of its liabilities is a form of misappropriation that, by any standard, is a misuse of corporate power” (at 492).

19. [539]

    That case involved criminal charges for contraventions of the then Corporations Law, in circumstances where it was alleged that a director had defeated creditors by transferring property of the company without properly providing for payment of the company’s liabilities.

20. [540]

    I see no analogy between circumstances in that case and those here. In this case, my finding is that the ETCH Share Transfer was made on the understanding that Mr Rose and Mr Marcou wished to give Madam Cheung the appearance of legal ownership of ETCH so that she could take steps to resolve the legal problems and find a potential buyer in the PRC.

21. [541]

    I do not see this as “misappropriation”.

22. [542]

    Mr White submitted that Mr Rose and Mr Marcou breached this duty because they “failed to exercise the care and diligence that a reasonably prudent director would have exercised at July 2012”.

23. [543]

    As developed in final submissions, the alleged failure by Mr Rose and Mr Marcou to exercise care and diligence was that, by making the ETCH Share Transfer, they placed ETCI in a weak bargaining or negotiating position vis-a-vis Madam Cheung.

24. [544]

    That case has not been pleaded. The pleaded case is directed to the ETCH Share Transfer itself being for “nil” consideration.

25. [545]

    For these reasons, my conclusion is that Mr Ng has failed to establish that Mr Rose and Mr Marcou breached their directors’ duties by reason of the ETCH Share Transfer.

26. [546]

    However, assuming that that conclusion is wrong, the question arises as to when any such breach occurred. That question is relevant to the further question of whether any breach of duty by Mr Rose and Mr Marcou has caused any loss to ETCI.

27. [547]

    Any such breach occurred no later than 25 July 2012, the date of the ETCH Share Transfer.

28. [548]

    In closing submissions, Mr White submitted that the breach must have occurred sometime before that.

29. [549]

    But there is no evidence as to when Mr Rose (or Mr Marcou) decided to deliver to ETCH Share Transfer to Madam Cheung.

30. [550]

    Neither Mr Rose nor Mr Marcou were asked about this in cross-examination.

31. [551]

    In closing submissions, Mr White submitted that “the transaction being entered into for nil consideration involves not simply the transfer of the shares”, but the evidence of the circumstances leading to the ETCH Share Transfer including the evidence of the board meetings on 29 June 2012 and 4 July 2012.

32. [552]

    But there is no indication in the evidence of when, during that process, Mr Rose or Mr Marcou decided to deliver the ETCH Share Transfer without receiving any contemporaneous payment in return.

33. [553]

    That decision may well have been made as late as 25 July 2012.

34. [554]

    In particular, there is no evidence that Mr Rose or Mr Marcou had made this decision prior to Mr Marcou sending his email of 30 June 2012 which led to Lingnan’s email of 4 July 2012 which, as I have discussed at [200]-[205] brought to an end negotiations between ETCI and Lingnan.

35. [555]

    In those circumstances, the conclusion to which I can come is that if, contrary to my findings, Mr Rose and Mr Marcou did breach their duties as directors to ETCI in connection with the ETCH Share Transfer, that breach of duty occurred on or about 25 July 2012.

36. [556]

    I am not able to come to any conclusion as to whether any such breach of duty occurred prior to 25 July 2012. In particular, I am not able to conclude that any breach of duty occurred prior to 30 June 2012.

37. [557]

    As developed in final submissions, Mr White put Mr Ng’s case against Mr Rose and Mr Marcou as a claim for equitable compensation by ETCI for the loss of the opportunity to sell the shares of the ETC Subsidiaries in GZL to Lingnan.

38. [558]

    Mr Ng must show that ETCI lost the opportunity to sell its interest in GZL to Lingnan by reason of the breaches of duty contended for.

39. [559]

    There is no dispute that the power of a director to deal with the assets of a company as a fiduciary power which must not be exercised for improper purposes.

40. [560]

    The authorities establish that where such a power has been exercised for improper purposes and a claim for equitable compensation made, causation should be determined by enquiring whether the loss would have happened if there had been no breach: see O’Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 278E.

41. [561]

    In O’Halloran, at 273C-D, Spigelman CJ cited with approval the following statement by McLachlin J in Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129 at 163E-G; [1991] 3 SCR 534 at 556:

42. [562]

    Spigelman CJ, at 275E-F, also cited the following passage of Lord Browne-Wilkinson in Target Holdings Ltd v Redferns [1996] 1 AC 421 at 434D-G:

43. [563]

    In Maguire v Makaronis (1997) 188 CLR 449 at 470; [1997] HCA 23, the High Court cited with approval part of that statement and concluded:

44. [564]

    The question is whether the wrongdoer’s breaches were a cause of the loss in question, rather than the cause of such loss: Ramsay v BigTinCan Pty Ltd [2014] NSWCA 324 at [62] (Macfarlan JA with whom McColl and Gleeson JJA agreed), citing such cases as Fitzgerald v Penn (1954) 91 CLR 268; [1954] HCA 74 and March v E & MH Stramare Pty Ltd (1991) 171 CLR 506; [1991] HCA 12.

45. [565]

    Thus the question is, assuming that by making the ETCH Share Transfer Mr Rose and Mr Marcou acted in breach of their duty to ETCI and misused their fiduciary power to deal with ETCI’s assets, was that a cause of such loss as ETCI suffered by reason of losing the opportunity to sell its interest in GZL to Lingnan.

46. [566]

    That is, but for such a breach or misuse of power, would that opportunity have remained available?

47. [567]

    In my opinion, the answer to this question is very clearly “no”.

48. [568]

    The reason ETCI lost its opportunity to sell its interest in GZL to Lingnan was a combination of, first, its decision to postpone the discussions with Lingnan scheduled for the first week of July 2012, and, second, the manner in which that decision was communicated to Lingnan.

49. [569]

    I have set out the detail of those matters at [194]-[214].

50. [570]

    The decision to postpone the meeting with Lingnan was made by the ETCI board (see [197] above).

51. [571]

    The decision to communicate that decision in the terms of Mr Marcou’s email of 30 June 2012 (at [200] above) rather than in the terms resolved by the board was evidently made by Mr Marcou.

52. [572]

    But the board knew of the form of Mr Marcou’s communication. And Mr Ng makes no complaint about it in these proceedings.

53. [573]

    For the reasons I have set out at [545]-[556] above, I am not able to conclude that any breach of duty by Mr Rose or Mr Marcou had occurred at or before the time Mr Marcou sent his 30 June 2012 email to Lingnan.

54. [574]

    For these reasons, my conclusion is that any breach of duty by Mr Rose and Mr Marcou was not a cause, let alone the cause, of the loss of such opportunity as ETCI might otherwise have had to sell its interest in GZL to Lingnan.

55. [575]

    There is, in any event, no evidence enabling me to form any view about what the value of any such loss of opportunity may have been.

56. [576]

    Mr Ng adduced expert forensic accounting evidence from Mr Tony Samuel from Sapere Forensic.

57. [577]

    Mr Samuel was only able to provide a limited report.

58. [578]

    Mr Samuel said:

59. [579]

    Mr Samuel was instructed that ETCI, and its subsidiaries “ceased operation around July 2011 and became dormant”.

60. [580]

    Mr Samuel also agreed that he had not had access to any financial statements of ETCI.

61. [581]

    Accordingly, the only basis upon which Mr Samuel could value ETCH was to use a “market value” approach that looked at the amount that would be negotiated “in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm’s length”.

62. [582]

    Mr Samuel accepted in cross-examination that “knowledgeable” in this context meant “the knowledge that would be acquired from a thorough due diligence”.

63. [583]

    Mr Samuel also accepted that actual transactions provide a better valuation evidence than intended transactions, and that an offer without due diligence would be “indicative of a perception of the value of the shares at that point” and “more an indicative value”.

64. [584]

    Mr Samuel based his “market based approach” on:

65. [585]

    Mr Samuel then expressed opinions on the value of the ETCH shares in July 2012 and June 2013 based on those transactions.

66. [586]

    In closing written submissions, Mr White said:

67. [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.

68. [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.

69. [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.

70. [590]

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

71. [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”.

72. [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”.

73. [593]

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

74. [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:

75. [595]

    Neither the Lingnan nor Vision Capital “offers” could be said to represent offers by a “knowledgeable” or “willing buyer”.

76. [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.

77. [597]

    The assessment of such damages involves a two stage process. The first is whether, on the balance of probabilities, it has been shown that there is a chance or opportunity that has been lost. Second, if that is established, an assessment must be made of the value of that lost chance or opportunity.

78. [598]

    The matter was summarised by Meagher JA (with whom Bathurst CJ and Beazley P agreed) in Hart Security Australia Pty Ltd v Boucousis at [131]-[134] as follows:

79. [599]

    In this case, I have found that it has not been established that, on the balance of probabilities, there was lost to ETCI a commercial opportunity which had some, not negligible, value.

80. [600]

    In any event, even if I were to able to come to that conclusion, an assessment of the “degree of probabilities or possibilities” of the opportunity being realised would involve a high degree of speculation about such matters as whether, following Mr Marcou’s 30 June 2012 email and Lingnan’s hostile response to it and immediate commencement of proceedings, there was any prospect of Lingnan coming back to the table to resume discussions.

81. [601]

    That task is not to be carried out on the probabilities but on the basis that an assessment is to be made of the possibility that the opportunity in question would have realised. But 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).

82. [602]

    In my opinion, in this case, to arrive at the figure for the value of the lost opportunity would amount to plucking a figure out of the air.

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

1. [603]

   I have dealt with, and rejected, the submissions made by Mr White to the effect that the 7 June 2013 Sale of Shares Agreement was an invention.

2. [604]

   Otherwise the criticisms made by Mr White concerning the 7 June 2013 agreement were that:

3. [605]

   Mr White submitted that each of Mr Rose and Mr Marcou:

4. [606]

   I see no basis for this submission.

5. [607]

   I have discussed the problematic nature of the Lingnan offer.

6. [608]

   That offer was made 12 months before the date of the 7 June 2013 Sale of Shares Agreement.

7. [609]

   In the meantime the Guangzhou Tianhe District People’s Court had published its Civil Judgment on 7 February 2013 which, as I have said, was a major blow for ETCI; its implication being that ETCI no longer had any indirect interest in GZL at all (see [337]-[340] above).

8. [610]

   As I have recorded at [409] above there is no evidence that the RMB 80 million referred to in the 21 June 2013 Paper of Civil Mediation was paid to the ETC Subsidiaries, or to anyone else.

9. [611]

   Absent such payments made to ETCI, Mr Samuel opined that the net assets of ETCI were negative $2.12 million (see [395] above).

10. [612]

    In those circumstances, I see no basis upon which I could conclude that the price at which ETCI ultimately agreed to sell its interests in ETCH to Vision Capital was at a “gross undervalue”.

11. [613]

    I have referred to Art 131 of ETCI’s Articles of Associate at [336] above. The effect of that Article is that, notwithstanding the fact that Mr Rose may have not been a director of ETCI on 7 June 2013, his act of signing that document as a director was nonetheless valid.

12. [614]

    It was at this board meeting that Mr Rose and Mr Marcou resolved to ratify the entry by ETCI into the 7 June 2013 Sale of Shares Agreement.

13. [615]

    There is no dispute that the meeting was inquorate.

14. [616]

    As I must presume that the applicable law is the same as the lex fori (see [63] above) I presume that in Jersey law there is an equivalent to s 1322(2) of the Corporations Act.

15. [617]

    Section 1322(2) provides that a proceeding under the Corporations Act is not invalidated by a “procedural irregularity” (defined in s 1322(1)(a)(i) to include the absence of a quorum at a meeting of directors) unless the irregularity has caused substantial injustice.

16. [618]

    In my opinion the want of a quorum at the 20 September 2013 meeting was a “procedural irregularity” of the kind to which s 1322 refers.

17. [619]

    In the circumstances in which the 7 June 2013 Sale of Shares Agreement was entered, I am not persuaded that any substantial injustice was caused by that procedural irregularity.

The Rights Issue

1. [620]

   In his closing, Mr White submitted:

2. [621]

   As to the “motivation or purpose” of the Rights Issue, Mr White submitted that, together with entry into the 7 June 2013 Sale of Shares Agreement, and the making of the Special Distribution, the Rights Issue “was an adjunct to [Mr] Rose and [Mr] Marcou’s dishonesty in relation to ETCI” and 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”.

3. [622]

   I do not accept that submission.

4. [623]

   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 the submission.

5. [624]

   The Rights Issue was proposed by Mr Rose and Mr Marcou at a board meeting held on 22 March 2013 and ratified at a board meeting held on 27 May 2013.

6. [625]

   The reasons that Mr Rose and Mr Marcou gave for the making of the Rights Issue were set out in the attachment to the 22 March 2013 board minutes (set out at [360] above) and in the letter sent to shareholders on 25 March 2013 (set out at [365] above).

7. [626]

   In his affidavit, Mr Marcou said:

8. [627]

   Mr White did not challenge Mr Marcou about this evidence and did not suggest to either Mr Rose or Mr Marcou that the reasons set out in their 25 March 2013 letter to the ETCI shareholders were not their honestly held opinion.

9. [628]

   I see no reason to doubt that Mr Rose’s and Mr Marcou’s reasons for proposing the Rights Issue were as set out in that letter.

10. [629]

    It is true that Mr Rose and Mr Marcou did not mention the ETCH Share Transfer in the letter to shareholders. They did make the statements that I have emphasised at [365] above. Those statements were literally true but, it must be said, not a complete statement of the position, as the fact of the ETCH Share Transfer, and Mr Rose’s and Mr Marcou’s reasons for effecting the ETCH Share Transfer were not disclosed.

11. [630]

    However, as Mr Marcou said at that time, he and Mr Rose were still hoping to procure a sale by ETCI of ETCH to Vision Capital. As I have set out above, discussions with Madam Cheung had resumed in the wake of the 7 February 2012 Civil Judgment (see [346] above).

12. [631]

    The larger point is that at this time ETCI was in a parlous financial position. The amount raised by the Rights Issue was some $305,000. There is no suggestion that that money was not used to discharge the liabilities of ETCI or ETCH.

13. [632]

    The result was, as I have set out, that Madam Cheung acquired control of ETCI through her associated companies. But it is no part of Mr Ng’s pleaded case, nor was it put by Mr White in closing submissions, that Mr Rose or Mr Marcou were motivated to achieve this result. In any event, Madam Cheung only achieved that position by investing some USD 160,000 into ETCI.

14. [633]

    The shares in the Rights Issue were issued at the price of “US$2.37/1000 shares” (see [364] above).

15. [634]

    Mr White submitted that this was “less than their true value”. But there is no evidence that this is so. As I have said, Mr Samuel opined that if no payment was made to ETCI as a result of the “Paper of Civil Mediation” (and there is no evidence of any such payment) the value of ETCI as at June 2012 was negative $2.12 million.

16. [635]

    Both the 22 March 2013 and 27 May 2013 board meetings were inquorate.

17. [636]

    The Kuoni directors, Mr Simeon and Ms Ng were not available to attend the 22 March 2013 board meeting. However, they learned about the Rights Issue and, in due course, despite the protestations made by Mr Simeon and Ms Ng in their letter of resignation of 8 April 2013 (see [386] above), Kuoni, through an associated company, participated in the Rights Issue.

18. [637]

    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.

19. [638]

    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.

20. [639]

    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.

21. [640]

    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.

22. [641]

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

23. [642]

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

24. [643]

    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:

25. [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.

26. [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.

27. [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

1. [647]

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

2. [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”.

3. [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.

4. [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.

5. [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.

6. [652]

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

7. [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.

8. [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.

9. [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

1. [656]

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

2. [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.

3. [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).

4. [659]

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

5. [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.

6. [661]

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

7. [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.

8. [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.

9. [664]

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

10. [665]

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

11. [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.

12. [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”.

13. [668]

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

14. [669]

    In any event, and as Mr Entwisle submitted:

15. [670]

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

Mr Ng’s claim fails

1. [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.

2. [672]

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

3. [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.

4. [674]

   The proceedings should be dismissed.

5. [675]

   I will hear the parties as to costs.