Mr Justice Lightman:
PART I
INTRODUCTION
OVERVIEW
2.
Pursuant to a Subscription Agreement dated the 13
th March 1997 ("the Subscription Agreement") the Claimants and the China Fund Inc ("CFI") (thereinafter together referred to as "the Investors") subscribed $50 million for shares in Shanghai Links Executive Community Limited ("SLEC") a company incorporated in the Turks and Caicos Islands ("the TCI"). They subscribed $5 million for 5 million (representing 40% of the issued) Common Shares ("the Common Shares") and $45 million for 45 million (representing 100%) of the redeemable (preference) Class A Shares ("the A Shares"). CFI, which is not a party to the proceedings, as such subscriber subscribed $100,000 for 100,000 Common Shares and $900,000 for 900,000 A Shares. The Claimants aggregate subscription price accordingly was $49 million. (Where in this judgment I refer to dollars, I refer to US dollars). I shall refer to the shares for which the Claimants subscribed as "the Subscription Shares". The First Defendant Sealand Housing Corporation ("Sealand"), which is also incorporated in the TCI and has at all times been owned and controlled by the Second Defendant Mr Barry Hansen, subscribed or agreed to subscribe $20,906,489 for 60% of the Common Shares and $20 million for 100% of the redeemable (subordinated preference) Class B Shares ("the B Shares"). In the Subscription Agreement the Defendants represented and warranted to the Claimants that Sealand paid the total subscription price of $40,906,489 by releasing (in consideration of its allotment of shares) a loan of $40,906,489 originally owed by SLEC to Shanghai Links Golf and Country Club Limited ("SLGCC") and assigned by SLGCC to Sealand for this purpose. The Subscription Agreement was completed on the 31
st March 1997 ("the Closing Date"). On the same day the Investors, Sealand and SLEC entered into a Unanimous Shareholders Agreement ("the USA") regulating the management structure and the rights of the three classes of shareholders in SLEC.
3.
The project for which SLEC was financed in this manner was the development of certain housing land ("the Housing Land") and (in association with SLGCC) a golf course ("the Golf Course Land") in Shanghai China which SLEC had contracted to purchase from Shanghai Pudong Huaxia Industry and Commerce Corporation ("Huaxia") under two land use rights transfer contracts which I shall call respectively "the Housing Contract" and "the Golf Course Contract" and together "the Land Contracts". (I shall refer to the development project in respect of the Housing Land as the Housing Project and the development project in respect of the Golf Course as the Golf Course Project and the two projects together as "the Projects"). The purchase price for the Housing Land was $19,969,375 and for the Golf Course Land was $17,614,994. Under the Land Contracts the purchase price was payable by seven instalments and by the Closing Date five instalments in respect of each contract had accrued due totalling $33,596,096 made up as to $17,850,278 in respect of the Housing Land and $15,745,728 in respect of the Golf Course Land. In order to induce the Claimants to enter into the Subscription Agreement, the Defendants falsely represented and warranted that all the five instalments ("the Five Instalments") had been paid in full, and that SLGCC (as part of the loan of $40,906,489) had advanced the sum to SLEC to enable SLEC to pay (and that SLEC had paid) the same sum to Huaxia. No such advance or payment has been made.
5.
Prior to the appointment of the receivers the Hansens dealt with SLEC's assets and administered its affairs with regard only to their own interests and treated its assets as their own. Amongst their acts of maladministration unlawfully they transferred the Golf Course Land from SLEC to SLGCC, a company wholly owned by Mr Barry Hansen. The Hansens also unlawfully caused SPNA to enter into a series of four loans secured by mortgages over the assets of SLEC, the majority of the proceeds of which they diverted to themselves and to Shanghai Huaxia Trip International Country Club Company ("SHTI"), a company they control. After the appointment of the receivers the Hansens were able to retain a role barring the receivers from exercising their powers in full by Mr Barry Hansen refusing to resign as SPNA's registered legal representative in China and by successfully resisting proceedings brought by the receivers in the TCI in effect to remove him from office. The Claimants have at all times had to finance the receivership out of their own pockets.
7.
After a trial on the issue of liability alone ("the First Trial"), by a judgment given on the 1
st November 2001 ("the Judgment") and a consequent order dated the 2
nd November 2001 I declared that the Claimants were entitled to damages (as against all the Defendants) for breach of warranty and misrepresentation and (as against the first three Defendants) for fraud. I directed an Inquiry as to Damages ("the Inquiry") and an expedited hearing of the Inquiry. I ordered the Defendants to pay the costs of the action on an indemnity basis and to make an interim payment in respect of costs of £1 million. I also directed that the papers in the case be referred to the Director of Public Prosecutions.
8.
The Defendants in their Amended Response to the Claimants' Revised Schedule of Loss re-served on the 13
th December 2001, after initially maintaining that damages should be assessed at the Closing Date as contended for by the Claimants, in its place contended that the assessment should be at the date of the Inquiry. On the 16
th January 2001 I directed the trial of a preliminary issue as to the proper date for the assessment of damages. The trial however proved unnecessary, for after a short hearing the parties agreed the terms of a consent order dated the 5
th March 2002 ("the Consent Order") by which it was ordered that the date for the valuation of the Subscription Shares was to be the Closing Date, but without prejudice to the Defendants' entitlement at the Inquiry to contend that matters taking place after the Closing Date particularised by the Defendants in their Points of Defence should be taken into account in the assessment of the Claimants' loss. On the 2
nd November 2001 I granted the Claimants a world-wide freezing injunction securing payment of the £1 million costs order. On the 16
th May 2002 in order to secure the sum claimed on the Inquiry I increased the figure to £45.5 million. The hearing of the Inquiry commenced on Thursday the 11
th July 2002, and this is my judgment on the Inquiry.
9.
A constant theme of the proceedings brought by the Claimants against the Defendants in this country and in the TCI has been the wholesale failure of the Defendants to comply with court orders. The Claimants have prepared a valuable schedule of breaches of orders and failures to comply with disclosure obligations. Not one penny of the £1 million or the sums due under any other order for costs has been voluntarily paid. The Claimants took steps to enforce the £1 million judgment debt against Sealand, the Hansens and the Fourth Defendant Drewson Capital Corporation Limited ("Drewson"). On their applications in the TCI: (a) on the 23
rd August 2002 Sealand was placed in insolvent compulsory liquidation. Counsel and solicitors thereupon ceased to act for Sealand on the Inquiry. On the 22
nd October 2002, the liquidator of Sealand wrote to this court stating that he would abide by the decision of this court and would make no submissions in the matter; (b) a like winding up order against Drewson was made on the 31
st October 2002. Counsel and solicitors thereupon ceased to act for Drewson on the Inquiry and by letter dated the 1
st November 2002 the liquidator of Drewson wrote to this court stating that he adopted the same position as the liquidator of Sealand; (c) on the 21
st October 2002 the Claimants applied for the appointment of a receiver of the shares held by Mr Barry Hansen in SLGCC, judgment was reserved; and (d) summary judgment was given on or about the 28
th October 2002 holding that the liquidation of Sealand constituted Sealand for the purposes of Article 7.1 of the USA Sealand an Inactive Shareholder, triggering the provisions of that Article.
10.
The First Trial was protracted and heavily fought. The Second Defendant, Mr Barry Hansen, has at all times owned and controlled Drewson as well as Sealand and has been the driving force behind all the Defendants' activities under consideration at the First Trial and on the Inquiry. Belatedly Mr Barry Hansen some days after the First Trial had commenced provided a witness statement and subsequently gave evidence. He only did so after I had repeatedly warned that I might draw adverse inferences from his failure to give evidence. Likewise his brother the third Defendant Mr Stuart Hansen gave evidence. (Where in this judgment I refer to the Hansens, I refer to Mr Barry Hansen and Mr Stuart Hansen together). Both proved to be unscrupulous and dishonest as well as totally unsatisfactory witnesses. A large number of other witnesses of fact were called on both sides, as were expert witnesses in a number of disciplines. The Judgment sets out in detail the factual background, the relevant provisions of the various agreements entered into by the parties, the rival contentions of the parties and my findings at the trial. In paragraphs 211-215 of the Judgment I detailed the breaches of warranty and misrepresentation which the Claimants had established. They centred upon the non-payment of the five instalments of the purchase price which had accrued due and payable under the Land Contracts at the date of the Subscription Agreement. To avoid the need to recount again the contents of the Judgment in this necessarily lengthy judgment (which is concerned only with the issues raised at the Inquiry) I adopt as the background to this judgment the contents of the Judgment.
11.
The two central issues on the Inquiry are the dates on which the Subscription Shares should be valued and the value at that date of the Subscription Shares. The Claimants contend that on general principles of law and upon the true construction of the Consent Order the value of the shares as purchased should be determined as at the Closing Date. The Defendants contend that it should be determined as at the date of the Inquiry. The Claimants say the value of the Shares was nil or practically nil at both dates. The Defendants say that it exceeded or at least equalled the $49 million paid. This issue is addressed in reports of experts called by the parties. It is common ground that credit must then be given for the proceeds of sale of certain of these shares subsequently sold by the Claimants. The Defendants go on to maintain that for a whole series of reasons, and most particularly by reason of the Claimants' failure to mitigate damage the Claimants have no entitlement to recovery of damages.
12.
The Defendants have raised a large number of issues of fact as well as of valuation on the Inquiry. Both parties have served witness statements and Civil Evidence Act notices, and both parties have served expert evidence on the issues of valuation of the land owned by SLEC in China and of the Subscription Shares. The Defendants initially sought and obtained permission to serve expert evidence directed to the issue raised by them whether they had a defence of limitation under Chinese Law. (The Defendants had previously raised that issue unsuccessfully at the trial on liability). After the experts had served their reports on this issue and met to agree a further joint report, the Defendants abandoned this defence. There is accordingly now no provision or scope for any expert evidence as to Chinese law.
LIST OF ISSUES BETWEEN THE PARTIES
(1) what is the amount of the loss suffered by the Claimants as the result of their investment in SLEC?
(2) what was the actual value at the date of valuation of the Subscription Shares, that is to say:
a)
the 44,100,000 A Shares; and
b)
the 4,900,000 Common Shares
(3) are there any matters subsequent to the date of valuation which have any material impact on the amount of the Claimants' loss?
(4) have the Claimants in any way acted unreasonably and failed to mitigate their loss?
(1) whether the Claimants' loss in relation to the Subscription Shares is to be assessed by reference to the difference between the price paid for such shares (being the value of such shares on the basis that the representations and warranties provided had been true) and their true value as at the Closing Date or at the date of the Inquiry.
(2) (on the assumption that the relevant date is the Closing Date) whether and to what extent in assessing the value of the Subscription Shares as at the Closing Date the court should have regard to:
(a) the indication that Huaxia is now prepared to settle its claims in relation to the outstanding Land Transfer Fees for the consideration set out in the 4
th April 2002 Agreement, namely a cash sum of $13 million, the provision of 200 golf course memberships and the sale of its holding in SHTI for $2.9 million and waiver of its obligation under the Agreement of Principles to invest $11.7 million in the Golf Course Project;
(b) the rights and remedies of the Claimants under the Shareholders Agreement;
(c) the availability in practical terms of any other legal remedies under the laws of the TCI;
(3) (on the same assumption) whether as at the Closing Date there was any reasonable prospect of SLEC being able to redeem the A Shares in accordance with their terms in the light of the proven fraud;
(4) (on the same assumption) whether SLEC was at any time subsequent to the Closing Date in a position to redeem the A Shares;
(5) whether (on the same assumption) as at the Closing Date there was in reality no real prospect of Huaxia bringing a claim against SLEC for the outstanding monies due in respect of the Land Transfer Contracts;
(6) whether the only credits which the Claimants are required to give are in respect of:
(a) $3,250,000 received by APGF from New York Life Insurance Company Limited ("NYLI"); and
(b) US$1 received by Wardley on the sale of its shares in SLEC to GFI.
(7) whether Article 7.4 of the Subscription Agreement provides SLEC with an indemnity from the Defendants in relation to their breaches of warranty and fraudulent misrepresentations;
(8) whether as a matter of construction paragraph 10.6 of the Long Term Occupancy Agreement ("LTOA") provides an unlimited indemnity from SLGCC in relation to the obligation to pay the purchase price payable under the Golf Course Contract to Huaxia;
(9) whether the LTOA is tainted by fraud and therefore void and unenforceable as part of the bundle of agreements made in March 1997 which were signed by Mr Barry Hansen on behalf of the various companies as part and parcel of the fraudulent scheme whereby the Defendants misrepresented that SLEC had paid the Five Instalments in relation to the Land Use Rights;
(10) whether and to what extent the court should have regard to the present day value of the Subscription Shares (agreed to be that as at the 31
st May 2002);
(11) whether Sealand is liable to contribute $33 million to SLEC and is able to meet that obligation?
(12) whether the expert evidence as to share valuation provided by Mr Best on behalf of the Claimants or Mr Caldwell on behalf of the Defendants should be preferred and to what extent;
(13) whether the expert evidence as to property valuation provided by Mr Wong on behalf of the Claimants or Mr Brooke on behalf of the Defendants should be preferred and to what extent;
(14) whether or not the Claimants have acted unreasonably and have failed to mitigate their loss. In particular:
(a) whether they acted unreasonably in failing themselves to conclude a settlement with Huaxia prior to the commencement of the First Trial in respect of SLEC's liability to Huaxia in relation to the Land Use Rights fees;
(b) whether they acted unreasonably in rejecting the offer made by the Hansens through Richards Butler in March and April 2000;
(c) whether they acted in bad faith in their dealings with Mr Keith Darby ("Mr Darby") in January 2001 and in 2002 by failing to agree to sell their shares to the parties allegedly introduced by him (this is not a pleaded issue);
(d) whether the Claimants acted unreasonably in relation to their dealings with Shanghai Xing Ye Housing Corporation ("Xing Ye") in failing to conclude and complete an agreement for the sale of the Subscription Shares and their claims in this litigation;
(e) whether the Claimants have acted unreasonably in seeking to pursue these proceedings against the Defendants;
(f) whether the First and Fifth Claimants sought to interfere with the Defendants' property valuer, Mr Brooke, for the improper purpose of influencing his expert evidence and in order that they might obtain an unjustified level of damages in the Inquiry.
PART II
ISSUES OF LAW
NON-ISSUE OF MEASURE OF DAMAGES
18.
There is no issue on the Inquiry as to the measure of damages recoverable by the Claimants. It is common ground that the Claimants are entitled as against all the Defendants as damages for breach of warranty to the difference between the value of the Subscription Shares as at the Closing Date on the basis that the warranties were true (which the expert share valuers agreed was the $49 million subscribed) and the actual value of the Subscription Shares (according to the Claimants) at the Closing Date or (according to the Defendants) at the date of the Inquiry. In both cases the shares must of course be valued together with all rights attached to them by the Articles of SLEC and the USA. Since the general principle for the assessment of damages is compensatory, the Claimants are to be placed (so far as money can do so) in the same position as if the terms of the Subscription Agreement had been performed. It is likewise common ground that the Claimants are entitled as against all the four Defendants as damages for misrepresentation and (as against the first three Defendants) for fraud to the difference between the amount subscribed and the actual value of the Subscription Shares again (according to the Claimants) at the Closing Date or (according to the Defendants) at the date of the Inquiry ("the diminution in value measure"). Accordingly on the Inquiry all three causes of action require the same exercise to be undertaken, namely the valuation of the Subscription Shares at the appropriate date, and the starting point is that the Claimants are entitled to the difference between the $49 million paid and the valuation as at that date. No distinction is to be drawn between the Defendants by reason of the fact that there is no claim or finding of fraud against Drewson. Once the difference is ascertained, logically the first step to decide is what adjustments should be made to reflect the sale of SLEC shares by the Claimants. The second step is then to consider each of the matters particularised by the Defendants and determine whether they should be taken into account and (if so) their impact. But convenience requires a rather different process in this judgment. For the valuations require account to be taken (or not to be taken) of a multitude of facts which are in issue between the parties, and the convenient course is to resolve those issues before proceeding with the valuation. In this way the valuation exercise can be approached more directly and expeditiously on the basis of findings on those issues.
THE VALUATION DATE
19.
The Claimants' case is that the Subscription Shares must be valued at the Closing Date for two independent reasons: (1) that is in accordance with ordinary principles; and (2) that is what is provided for in the Consent Order. The Defendants' case is that, whilst ordinary principles require valuation at the Closing Date, general principles do not require damages to be assessed as at the date of breach where assessment at some other date is necessary to place the claimant in the same position as if he had not sustained the wrong for which he is claiming compensation, and that such necessity in this case requires a valuation at the date of the Inquiry, a date agreed for practical purposes as the 31
st May 2002. The Defendants go on to contend that the Consent Order can and should be construed as requiring adoption of that date for valuation purposes.
GENERAL PRINCIPLES
21.
Guidance on the application of the general principle is to be found in the speeches of Lord Browne-Wilkinson and Lord Steyn in
Smith New Court Ltd v. Scrimgeour Vickers [1997] AC 254 ("Smith New Court"). In that case the House of Lords held that the diminution in value measure would not compensate the claimants for their loss since, having bought the shares at above market price with a view to holding them as a market making risk, the claimants could not have sold the shares on the same date and were effectively locked in. The House of Lords held that in the circumstances a different measure of damages would give better effect to the compensatory object of damages, the measure being the difference between the price the claimants paid for the shares in July 1989 and the amount they subsequently realised on the sale of the shares between November 1989 and April 1990. Selection of this measure involved departing from the usual rule that damages are assessed at the date of breach. This approach did not involve imposing on the valuer the task of valuing the shares at a date after the transaction, but of ignoring those factors which have influenced the price which are collateral and have nothing to do with the defendants' fraud. Lord Browne-Wilkinson said (at pages 265-268):
"Turning for a moment away from damages for deceit, the general rule in other areas of the law has been that damages are to be assessed as at the date the wrong was committed. But recent decisions have emphasised that this is only a general rule: where it is necessary in order adequately to compensate the plaintiff for the damage suffered by reason of the defendant's wrong a different date of assessment can be selected....
In many cases, even in deceit, it will be appropriate to value the asset acquired as at the transaction date if that truly reflects the value of what the plaintiff has obtained. Thus, if the asset acquired is a readily marketable asset and there is no special feature (such as a continuing misrepresentation or the purchases being locked into a business that he has acquired) the transaction date rule may well produce a fair result. The plaintiff has acquired the asset and what he does with it thereafter is entirely up to him, freed from any continuing adverse impact of the defendant's wrongful act. The transaction date rule has one manifest advantage, namely that it avoid any question of causation. One of the difficulties of either valuing the asset at a later date or treating the actual receipt on realisation as being the value obtained is that difficult questions of causation are bound to arise. In the period between the transaction date and the date of valuation or resale other factors will have influenced the value or resale price of the asset. It was the desire to avoid these difficulties of causation which led to the adoption of the transaction date rule. But in cases where property has been acquired in reliance on a fraudulent misrepresentation there are likely to be many cases where the general rule has to be departed from in order to give adequate compensation for the wrong done to the plaintiff, in particular where the fraud continues to influence the conduct of the plaintiff after the transaction is complete or where the result of the transaction induced by fraud is to lock the plaintiff into continuing to hold the asset acquired...
In sum, in my judgment the following principles apply in assessing the damages payable where the plaintiff has been induced by a fraudulent misrepresentation to buy property: (1) the defendant is bound to make reparation for all the damage directly flowing from the transaction; (2) although such damage need not have been foreseeable, it must have been directly caused by the transaction; (3) in assessing such damage, the plaintiff is entitled to recover by way of damages the full price paid by him, but he must give credit for any benefits which he has received as a result of the transaction; (4) as a general rule, the benefits received by him include the market value of the property acquired as at the date of acquisition; but such general rule is not to be inflexibly applied where to do so would prevent him obtaining full compensation for the wrong suffered; (5) although the circumstances in which the general rule should not apply cannot be comprehensively stated, it will normally not apply where either (a) the misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset or (b) the circumstances of the case are such that the plaintiff is, by reason of the fraud, locked into the property; (6) in addition, the plaintiff is entitled to recover consequential losses caused by the transaction; (7) the plaintiff must take all reasonable steps to mitigate his loss once he has discovered the fraud....
In the circumstances, it would not in my judgment compensate Smith for the actual loss they have suffered (i.e. the difference between the contract price and the resale price eventually realised) if Smith were required to give credit for the shares having a value of 78p on 21 July 1989. Having acquired the shares at 82¼p for stock Smith could not commercially have sold on that date at 78p.. It is not realistic to treat Smith as having received shares worth 78p each when in fact, in real life, they could not commercially have sold or realised the shares at that price on the date. In my judgment, this is one of those cases where to give full reparation to Smith, the benefit which Smith ought to bring into account to be set against its loss for the total purchase price paid should be the actual resale price achieved by Smith when eventually the shares were sold."
22.
Lord Steyn said (at page 283):
"It is right that the normal method of calculating the loss caused by the deceit is the price paid less the real value of the subject matter of the sale. To the extent that this method is adopted, the selection of a date of valuation is necessary. Andy generally the date of the transaction would be a practical and just date to adopt. But is not always so. It is only prima facie the right date. It may be appropriate to select a later date. That follows from the fact that the valuation method is only a means of trying to give effect to the overall compensatory rule: Potts v Miller 64 CLR 282, 299 per Dixon J and County Personnel (Employment Agency) Ltd v Alan R Pulver & Co [1987] 1 WLR 916, 925-926, per Bingham LJ. Moreover, and more importantly, the date of the transaction is simply a second order rule applicable where the valuation method is employed. If that method is inapposite, the court is entitled to assess the loss flowing directly from the transaction without any reference to the date of the transaction or indeed any particular date. Such a course will be appropriate whenever the overriding compensatory rule requires it."
23.
A vivid example of circumstances requiring a valuation at a later date is furnished by the decision of the Court of Appeal (given shortly before the hearing in the House of Lords in
Smith New Court) in
Kennedy v. Van Emden 74 P&CR 19 ("
Kennedy"). In that case between 1982 and 1987 the claimants purchased leases for substantial premiums. Their solicitors failed to advise them that by reason of Part IX of the Rent Act 1977 the premiums which they had paid were unlawful and that they were themselves prohibited from assigning their leases for a premium. Section 127 of the Housing Act 1988 however as from the 15
th January 1989 changed the law and allowed assignments of the leases at a premium. The claimants brought actions against their solicitors for negligence. The critical issue was whether the valuation of the leases should be made at the date of the solicitors' breach of duty (i.e. completion of the purchases) or at the date of judgment in the action for negligence. The Court of Appeal held that: (1) whilst at the date of the solicitors' breach of duty the claimants had suffered substantial damage and loss, by the date of trial the blot on the claimants' title of the consequence of the defendant's negligence had been totally cured; and (2) in those circumstances the overriding compensatory rule required that damages should be assessed at the date of judgment, and since at that date they suffered no loss the claimants were entitled to nominal damages only. In short as by a windfall the claimants after their purchases had got what they had wanted and all previous loss was wiped out. Accordingly they were not entitled to damages.
"(1) Where a plaintiff has been induced by a fraudulent representation to acquire shares, the object of an award of damages in tort is to compensate him for what he has lost by making the acquisition into which he has been tricked. The basic rule is that his loss will be measured by the difference between what he paid and the true value of what he acquired at the time of the acquisition. To this may be added consequential loss (if any) flowing directly from the acquisition; for example, commissions, brokerage and carrying costs.
(2) If the plaintiff has not resold the shares he will not have to give credit for what he might have obtained on a resale; unless, in choosing to retain the shares, he has acted unreasonably or imprudently....
(4) In ascertaining the plaintiff's loss under the basic rule events subsequent to the acquisition can be taken into account only if, and insofar as, they are relevant for the purpose of ascertaining the true value of the shares at the time of the acquisition. A subsequent depreciation in the value of the shares caused by events which have no natural or proximate connection with the circumstances existing at the time of the acquisition must be disregarded....
(6) Events subsequent to the acquisition may be relevant for one or both of two purposes... Secondly, subsequent events may assist, positively, in ascertaining what the true value of the shares was at the time of the acquisition."
"Date for assessment of damages
Damages for tort or breach of contract are to be assessed at the date of the breach unless the circumstances are such that the selection of a different date would more justly give effect to the overriding compensatory rule. See
County Personnel (Employment Agency) Ltd v. Allan R. Pulver & Co., [1987] 1 WLR 916 at pp. 925-926, cited with approval by Lord Browne-Wilkinson in
Smith New Court Ltd v. Scrimgeour Vickers (Asset Management) Ltd.,
[1997] AC 254 at p. 266.
In assessing the damages, credit must be given for benefits received arising out of the transaction for which damages are claimed. Where the benefits received take the form of property or an interest in property, in many cases it will be just to take the value of the interest at the date of its acquisition. It will normally be just to do so where there is an available market of which the plaintiff has a fair opportunity, if so minded, to take advantage.
Where a person who has been fraudulently induced to buy property thereafter freely decides to retain it, he will have adopted the transaction and so the fair measure of his loss will ordinarily be the excess which he has paid over market value at the date of its acquisition, plus any consequential expenses. If he does not wish to retain the property, whether it is fair that he should give credit for its 'market' value at that date or some other date must depend in particular on its marketability and on his state of knowledge. As to marketability, the reference to a plaintiff who is 'by reason of the fraud locked into the property' is not to be taken as if it were a statutory test but as a vivid description of a person who does not have access to an available market."
a) the Claimants acquired the Subscription Shares as an investment;
b) on learning of the fraud, the Claimants decided to adopt the purchase and (besides commencing these proceedings for damages) to retain their investment, to cultivate it and salvage what they could from it. To this end they pursued proceedings for the appointment of receivers of SLEC and to enforce provisions of the USA;
c) every step that the Claimants took both in England and the TCI has met with a concerted and unprincipled opposition by the Defendants. The cost to the Claimants has been very substantial. The Claimants should shortly be able to take management control of SLEC, (though Mr Barry Hansen retains a role in SPNA's affairs as its registered representative in China) and should shortly be entitled to purchase Sealand's shares in SLEC. These actions may afford a possibility for SLEC once refinanced to have a future;
d) the matters of complaint made by the Claimants in the action (and in particular the non-payment of the instalments of purchase price and the default in respect of Paid-Up Investment) remain unremedied and continue to have the most substantial depreciatory effect on the value of the Subscription Shares; and
e) any continuing value of/or accretion in value to the Subscription Shares must in whole or at least in part be attributable to the efforts made by the Claimants to protect SLEC and their investment and (as Mr Jacob fairly argued in his submissions leading to the making of the Consent Order: see below) fluctuations in the property market.
CONSENT ORDER
"23. It is not possible to take the simple approach taken in Kennedy v. Emden in this case, because there are two representations in respect of which the claimant seeks compensation. It cannot be right to take the date of valuation as at the date of assessment, because the value will have been affected over the 5 years between the Closing Date and the date of assessment by the fluctuations in the market in the intervening period. The fluctuations are not related to the contract between the parties and the misrepresentation, and it would be inappropriate for one party or the other to gain or lose by reason of them.
24. The date of valuation (on the basis of various hypothetical assumptions) must therefore be the Closing Date. It is the hypothetical assumptions that must be adjusted to take account of the change in circumstances by the date of assessment."
"It is ordered by consent that the date for the valuation of the Subscription Shares is the Closing Date, 31
st March 1997, without prejudice to the Defendants' entitlement at trial of the Inquiry to contend that matters subsequent to the Closing Date which have been fully particularised in their Points of Defence shall be taken into account in the assessment of the Claimants' loss.
IT IS DIRECTED that:
1. The Claimants and the Defendants each have permission to adduce expert evidence on property valuation and on share valuation limited to one expert in relation to each of the two disciplines on each side ....
5. The Defendants do within 28 days of the service of the Points of Claim:
Serve and file Points of Defence:
to give full particulars of each and every matter subsequent to the Closing Date upon which they rely as a factor to be taken into account in the assessment of the Claimants' loss ....
state the effect of each such factor on the valuation of the Subscription Shares at the Closing Date ..."
"The company must be valued in the light of facts which existed at [the date of valuation] ... But regard may be had to later events for the purpose only of deciding what forecasts for the future could reasonably have been made on [the valuation date]"
MITIGATION
38.
The Defendants have contended that the Claimants have unreasonably failed to mitigate their loss by selling their shares, doing a deal with the Defendants and with Xing Ye and concluding a settlement with Huaxia. I deal with each of these issues and their factual bases later in this judgment. The law merely imposes on the Claimants the responsibility to act reasonably and prudently and take steps to avoid loss which are reasonably available to them. If the Claimants could reasonably and prudently have taken action to avoid the loss claimed in this action, the loss will not be held to be caused or attributable to the Defendants' wrongdoing. The question whether the Claimants have acted reasonably is a question of fact. This applies in respect of the Claimants availing themselves of opportunities for resale and negotiating a deal. The onus is on the Defendants to establish that the Claimants having adopted their purchase rejected an opportunity to conclude an available sale which considerations of prudence require them to conclude. The onus is not a light one in particular in a case such as the present where the Claimants were induced by fraud to make the original purchase, but the authorities show that the circumstances may justify this conclusion: see e.g.
Patel v. Hooper [1999] 1 WLR 1792. The facts in that case were exceptional. As the passages which I have cited in the judgment of Chadwick J and Toulson J make clear, the path of the Defendants is not an easy one. The onus of establishing that the Claimants could and should have concluded a deal is likewise not lightly discharged. The argument that the Claimants should as reasonable claimants have done a deal with Huaxia and paid Huaxia appears to me to extend the obligation of the Claimants to mitigate damages beyond its permissible legal limits, since the Claimants had no power to commit SLEC to a contract and to impute an obligation on a claimant by way of mitigation to make a substantial payment to a third party (let alone as in the circumstances of this case a sum of some $13 million) must be totally exceptional, if ever justifiable.
PLEADING "ALL OR NOTHING"
39.
Mr Jacob's Closing Submissions for the 2
nd to 4
th Defendants raised for the first time a pleading point relating to valuation which I should address at this stage. He says that the Claimants' plea is that the value of the Subscription Shares is nil, that evidence was not addressed to any more modest quantum, and that in consequence, if I am not convinced by Mr Best's evidence that the value is nil, I have no option but to hold that the Claimants have failed to prove their loss and that they are entitled to nominal damages only. This is a remarkable submission. No hint was ever given at any earlier stage (let alone in his original skeleton argument) that any such line was intended to be or might be taken. The Claimants' case throughout has been that they are entitled to the difference between the subscription price of $49 million and the value of the Subscription Shares at the Closing Date whatever that might be. All parties at all times proceeded on this basis throughout the trial until this point was taken on the 14
th October 2002. The submission lacks any merit and would produce a grossly unjust result. I would only accede to the submission if compelled by authority to do so and even then only if this obstacle to justice could not be overcome by any other means e.g. by recalling the expert witnesses.
"50. A plaintiff must plead the damage claimed and set out the method by which he arrives at the claim. An alternative approach should also be pleaded. In
Anglo-Cyprian Trade Agencies v. Paphos Wind Industries [1951] 1 All ER 873 ["Anglo-Cyprian"] at 875 G-H Devlin J said
'...in my view the special damage which is pleaded should make quite clear to the other side what measure of damage is being relied on. If the plaintiff wishes to say that the goods are valueless, the special damage will be pleaded in the way in which it was done in this case, but, if he also wishes to say that, if they are not valueless, they have depreciated substantially in value, then it is his duty, I think, to plead in the alternative that they have depreciated in value, and to set out the method of calculation by which he arrives at the figure claimed in the alternative, so as to enable the defendant to know what is the case against him and to obtain evidence for his defence.'
and:
'54. ... while we sympathise with the judge's view that having found that there was a breach of warranty and thinking that some modest loss should be attributed to it, he was anxious not to send the plaintiff away empty handed, we think that he should have resisted the temptation to do so. The plaintiff deliberately adopted a high risk policy of aiming at jackpot damages. We have little doubt that it was part of that policy not to offer the judge a much more modest alternative."
PART III
CRITICAL DOCUMENTS
THE USA
46.
The Terms and Conditions of the A Shares and B Shares are set out in Schedule 5 to the USA. The B Shares carry no right to dividends or voting. The only rights arise on redemption and redemption can only take place after the A Shares have been redeemed in full; and if the holders of the A Shares have not received the aggregate amount of $45 million by the end of the 60
th Month after the Closing Date, 50% of the B Shares are to be redeemed for the aggregate sum of $1; and if the holders of the A Shares have not received that sum by the end of the 72
nd month after the Closing Date, the remaining B Shares are to be redeemed for the aggregate sum of $1.
"5.7
Voting Rights. In the event that the Class A Shares are not redeemed in their entirety by the end of the 72
nd month after the Date of Funding, Sealand agrees to transfer to the holders of the Class A Shares, in accordance with their Proportionate Class A Interest, all voting right appertaining to the Common Shares then held by Sealand, to be exercisable by the holders of the Class A Shares for so long as any Class Shares remain outstanding and shall do all such things as are necessary to ensure that, during such period, such voting rights are exercised by the holders of Class A Shares as aforesaid. Upon redemption in full of the Class A Shares, the voting rights appertaining to the Common Shares registered in the name of Sealand shall revert to Sealand."
"7.1
Inactive Shareholders
(1) A Shareholder shall be deemed to be an Inactive Shareholder immediately following the occurrence of any of the following events (each a 'Triggering Event"):
...
(c) if the Shareholder is declared bankrupt or makes a proposal in bankruptcy or becomes the subject of bankruptcy or other similar proceedings;
(d) if the Shareholder makes an assignment for the benefit of creditors or otherwise acknowledges its insolvency;
(e) if a Shareholder suffers its Shares to be liable to seizure; and
(f) if a Shareholder ceases paying its debts as they mature (other than those being contested in good faith and by appropriate proceedings).
(2) Each Shareholder shall give notice in writing to the Company promptly following the occurrence of a Triggering Event.
(3) From and after the date that a Shareholder becomes an Inactive Shareholder, the right of such Shareholder to appoint any Directors shall be suspended and any appointed Director of such Inactive Shareholder shall resign from the Board of Directors; and the votes of such Shareholder or its appointed Directors or both of them, as the case may be, shall be excluded for purposes of determining whether a decision, action or matter has been approved and the other Shareholders should be entitled to increase the number of Directors appointed by them proportionately as may best reasonably be done to maintain the rights and representation of the other Shareholders.
7.2
Irrevocable Option to Purchase Shares of Inactive Shareholder
(1) Each Shareholder hereby grants to the other Shareholders an irrevocable option (which option shall not be revoked by the death of such Shareholder or a Sponsor) (the 'Purchase Option'), exercisable in the event that it becomes an Inactive Shareholder, to purchase all but not less than all of the Shares held by it, directly or indirectly (the 'Purchased Shares')....
7.3
Purchase Price for Shares
The purchase price (the 'Purchase Price') for the Purchased Shares of the Inactive Shareholder (the 'Vendor') shall be the product obtained by multiplying the number of Purchased Shares by the Fair Market Value of the Shares determined in accordance with the provisions of Article 10....
7.6
Material Breach by Sponsors
(1) The Sponsors shall be deemed to be Defaulting Sponsors for the purposes of Section 7.6(3) immediately following the occurrence of any of the following events (each a 'Material Breach'):
(a) a breach of (i) Section 3.1, 3.2, 3.4, 3.6, 3.7 or 7.6(2) of this Agreement or (ii) Section 5, 6, 7.3 or 7.4 of the Subscription Agreement giving rise to a claim under the Subscription Agreement, which has an adverse economic effect on the interests of the Shareholder in the Company and, in either case, such breach (if capable of cure) is not cured or any claim resulting from such breach is not paid or otherwise satisfied within a period of sixty (60) Business Days after the Sponsors receive notice of such breach from the Company or otherwise becomes aware of such breach; and
(b) a breach of a Management [i.e. Employment] Contract by any of the Sponsors which has a material adverse effect on the Company.
(2) The Company shall give notice in writing to the Sponsors and/or the Sponsors shall give notice to the Company and the other Shareholders promptly following the occurrence of a Material Breach.
(3) During such time that the Sponsors are Defaulting Sponsors, and have not redeemed or paid compensation agreed to or assessed in judicial or arbitration proceedings in respect of the relevant material breach, the Directors appointed by the Qualifying Shareholders, if any, shall be entitled to increase the number of Directors of the Company and to nominate such additional Directors such that the Directors nominated by the Qualifying Shareholders shall control the Board of Directors."
50.
Schedule 4 to the USA provides for SLEC to enter into five year employment agreements with Mr Barry Hansen and Mr Stuart Hansen commencing on the 24
th March 1997 as respectively President and Vice President. Such contracts were duly entered into.
LAND CONTRACTS
51.
By the Land Contracts Huaxia agreed to transfer the Land Use Rights in respect of the Housing Land for the term of 70 years and the Golf Course Land for the term of 40 years to SLEC (described as the subsidiary of Sealand). The consideration payable in respect of the Golf Course Land was $17,615,082 and in respect of the Housing Land was $19,936,375. Both Contracts provided that the purchase price was payable by seven instalments on dates which were the same in the case of both Contracts. The instalments and their dates of payment were as follows:
Date Golf Course Land Housing Land
(1) Before 17
th
February 1995 $194,182 $1,800,000
(2) 15 June 1995 $8,613,359 $8,184,689
(3) 15 December 1995 $2,309,093.75 $2,617,708
(4) 15 June 1996 $2,309,093,75 $2,616,708
(5) 15 December 1996 $2,320,089 $2,617,708
(6) 15 June 1997 $934,633.18 $1,059,548
(7) 15 December 1997 $934,633.18 $1,059,549.
Articles 19 of both the contracts provide as follows:
"If the transferee shall assign the land use right of the land, on the same conditions as are contained herein the transferor has the priority over any third parties."
"Delay in Payment.
If the transferee cannot pay the land transfer fee according to the schedule, the transferor will be required to provide the transferee a Payment Default Notice. The Transferee will be allowed six months to cure any default, provided that the Transferee pay the Transferor 24% annual interest on the outstanding payment calculated for each day late, payable quarterly or upon curing the default. If the default is not cured within six months, the Transferor has the right to demand that the Transferee sell the Grant of Land Use Rights with priority payment given to monies, and interest and liquidated damages owed to [Huaxia], with any residual applied to repayment of [SLEC's] total investment."
This provision affords Huaxia a form of hypothec.
PART IV
EVIDENCE
WITNESSES OF FACT
(1) Claimants' Witnesses of Fact
Mr Roeloffs is now the managing director of DB (Tokyo Branch). He was previously employed by Bankers Trust, who acted for a considerable period as advisers to Sealand in attempting to raise capital for the Housing Project. He was an important witness at the First Trial. In his witness statement Mr Roeloffs explained the circumstances in which the Claimants had invested in SLEC. He pointed out that the Class A shares had not been redeemed for the simple reason that SLEC was (and remains) close to insolvency. It has always lacked the cash resources to redeem the shares and had never made a profit. Mr Roeloffs emphasised that there is no basis for the Defendants' allegation that there has been no attempt on the part of the Claimants to conclude a settlement of the claim by Huaxia. Whilst he was not personally involved in the detailed negotiations carried out on behalf of the Claimants with Xing Ye, he confirmed that these had never resulted in any binding agreement of sale owing to the inability of Xing Ye to show it had the necessary funds.
60.
Mr Roeloffs was asked about the agreements in April 2001 referred to in paragraph 6 of this judgment whereby H&Q (through AGPF) and DB (through Firstee) purchased from GFI and Wardley (in effect from HSBC) their shares purchased in SLEC for $2. He explained that the reason the consideration paid was nominal, with a promise to share the ultimate proceeds of the litigation and realisation, was that the current value of the Housing Project was largely offset by the liabilities and was completely uncertain. He testified that he considered that few, if any, persons would actually wish to buy the interests of the Claimants as they would simply be inheriting the same predicament as faced the Claimants with the same difficulties regarding the Hansens. Had the true facts been known at the Closing Date he was convinced that the Claimants would have walked away from the deal because an essential feature of a start-up company in a venture capital setting is the character and perceived ability of management. (Similar evidence was later provided by Mr Best and Mr Caldwell). Moreover, the Claimants would have appreciated that the quantum of the required investment was much greater than envisaged. Mr Jacob challenged his evidence in this regard as inconsistent with the view which he both took and expressed to the other Investors prior to the Closing Date and in particular the view that the Housing Project had its own internal momentum. Mr Roeloffs convincingly explained that his view prior to the Closing Date was attributable to the false picture painted by the Defendants and that his earlier view could not survive the emergence of the true picture and the disclosure of the true facts and most particularly the failure of the Defendants to have made the expenditure which they had represented that they had made.
Mr Wang, who was also a witness at the First Trial, is the Senior Vice President and the representative of H&Q based in Beijing, China. He gave evidence in his witness statement of the discussions that had taken place with Xing Ye for the possible sale of the Claimants' interests in SLEC and the present litigation since September 2001. He explained that a critical factor in the discussions was the need to satisfy the Claimants that the intended purchaser had the financial capability to effect the payment of the purchase price. It later emerged in late 2001 and early 2002 that Xing Ye was in serious financial difficulties and would have difficulties in completing any purchase of a substantive nature. The parties were therefore unable to come to any agreement on the date for a payment of a deposit or a date for completion.
Mr Morrison is a Managing Director of DBTC. He joined Bankers Trust in 1965 and has been involved in the funding of property investments since the late 1970s. Mr Morrison, who does not speak Chinese, gave an account in his witness statement of the settlement negotiations between the Claimants and Huaxia in April and May 2001. He referred to the difficulties that the Claimants had experienced in trying to resolve matters with the Hansens by means of conciliation and of the assurance given to Huaxia that, while the Claimants would pursue a course of litigation, they were willing to look at other means of settling the dispute. Mr Morrison also referred in outline to the discussions with Xing Ye and the eventual failure in or about February 2002 of Xing Ye and its nominated purchaser, Hoh Bond Oil Limited, to prove that they had the financial capability to complete the transaction. In the witness box he confirmed that further discussions had taken place in May 2002 with Xing Ye but to no avail. He explained that he had not mentioned these later discussions in his witness statement because they had been entered into on the understanding that the mere existence of the meetings, the discussions and what was discussed were agreed to be entirely confidential.
Mr Goodwin is a vice president of DB's Real Estate Opportunities Group based in Hong Kong. The Defendants at a late stage in the trial raised the allegation that, in the course of a telephone call on the 10
th June 2001, Mr Goodwin "lent on" Mr Brooke, the Defendants' expert on property values, and threatened to withhold work from Insignia Brooke ("IB"), the firm which he founded and to which Mr Brooke is now a consultant, if he supported the Defendants with his expert evidence. I deal with this issue in Part V of this judgment, but I should make it clear at once that I accept his evidence without any qualification. Mr Goodwin at all times acted in respect of Mr Brooke with total propriety: and the charge made against him was groundless. It was one of the several examples in this litigation of recourse by the Defendants to foul tactics where success could not be achieved by recourse only to fair tactics.
In addition, the Claimants served and filed witness statements from Mr Patrick Cowley of KPMG and Mr James DeFrancia of Lowe accompanied by Civil Evidence Act notices.
Mr Cowley is a manager of KPMG resident in Hong Kong. He worked for the First Receivers until their release and discharge on the 4
th April 2001. Mr Cowley's evidence was largely directed to establishing Huaxia's continuing assertion of its right to full payment of the outstanding purchase price under the Land Transfer Contracts in respect of which the Defendants raised an issue, only to drop it at a very late stage. Mr Cowley confirmed that, as evidenced by the Joint Receivers' reports to the TCI Court, there was no point at which SLEC was in the financial position where it could have redeemed the A Shares.
Mr DeFrancia is one of the Second Receivers. His witness statement confirms that, in his dealings with Huaxia, Huaxia have insisted that they were still owed monies under the Land Contracts. He also confirms that, during the period that the Receivers have managed SLEC, it has never been in a financial position to redeem the A Shares, and is not now in such a position.
(2) Defendants' Witnesses of Fact
a)
Mr Zhang Ning, a lawyer acting for Shanghai Agricultural Investment Corporation ("SAIC");
b)
Mr Alex Qing Cai, a lawyer acting for Xing Ye ;
c)
Mr Jeffrey Palmer, the acting manager of the Golf Course; and
d)
Mr Darby.
Mr Barry Hansen, the principal protagonist in the case and the primary witness on all issues of fact, has neither appeared nor served any witness statement nor provided any satisfactory explanation for his absence. I reminded Mr Jacob on the first day of the hearing of the manner in which evidence had been produced by Mr Barry Hansen at the First Trial, with a witness statement being produced during the course of the Trial. I asked whether he was proposing to give evidence as Mr Stuart Hansen's witness statement mainly gave hearsay evidence in relation to matters on which his brother could give first hand testimony. Mr Jacob replied that Mr Barry Hansen would not be coming because he was his brother's "only relative in Shanghai" and "He [Stuart Hansen] does not want to be left on his own with Mr Barry Hansen over here". Another reason put forward was that Mr Barry Hansen needed to stay in China with his brother because he was needed to liaise in Chinese with the various medical authorities in respect of his brother's ill-health. In fact, Mr Barry Hansen had previously informed this court at the First Trial that he could not speak Chinese. This issue, when raised by Eversheds in correspondence, was left unanswered. Mr Jacob summarised his position in his Reply to the Claimants' Closing Submissions on Mr Barry Hansen's non-attendance as follows:
"It is for the Claimants to prove their case on their evidence. Mr Hansen is not the only witness supporting the Defendants' case and their case does not rest on his testimony."
a)
Mr Barry Hansen is not prepared to stand by and support the case pleaded in the Defence where he himself is the only competent witness;
b)
there is no substance to the claims concerning the alleged provision of finance for SLEC and the project by the Dino Moretti ceramics business in China;
c)
there is no substance in the claim that $18 million was defrayed in land tax;
d)
there is no substantive evidence to support the claim that $7.5 million was actually spent on engineering and administration for SLEC; and
e)
the Richards Butler Offer made on the 7
th April 2000 on the instructions of Mr Barry Hansen was contrived and worthless and merely a tactical device to divert the attention of the court at the resumed hearing of the Claimants' application in the TCI for the appointment of receivers of SLEC which was due to commence on the 10
th April 2000.
Mr Stuart Hansen gave evidence in his witness statement on selected topics, omitting topics on which quite obviously he could give first hand evidence if he wished. Mr Stuart Hansen in his statement is merely acting as the mouthpiece for his brother and (in particular having regard to his performance as a witness at the First Trial) untested by cross-examination his evidence can carry no weight unless corroborated. On the alleged issue of 100 golf club memberships given to Huaxia, Mr Stuart Hansen referred to a conversation with Mr Twa of that firm on the 18
th June 2002 about this matter. It is to be noted that Mr Hansen gave no explanation as to why Mr Twa has been so uncooperative in meeting the court's request made in October 2001 and repeated in March 2002 for details of the SLGCC trust account administered by his firm, though Mr Twa is prepared to assist the Defendants when it suits him and them.
Of the Defendants four witnesses of fact, the first was Mr Zhang Ning, a recently qualified Chinese lawyer with very little experience. He was appointed at the end of 2000 by his firm Jin Mao to act as Legal Counsel to SAIC, a 10% shareholder in Shanghai Pudong Lubo Industrial Company ("Lubo"), the Chinese Government owned organisation responsible for the reclamation of the Housing and Golf Course Land. The other two shareholders are Shanghai Water Works Bureau ("SWWB") (a 50% shareholder) and Huaxia (a 40% shareholder). He only became in any way involved in January 2001. The thrust of his evidence was to the effect that Lubo owned the whole project, that only Lubo could sue or make the decision to sue SLEC for payment of the outstanding instalments of the purchase price under the Land Contracts and that Huaxia could not do so without the consent of the other two shareholders which would not be forthcoming. I found his evidence practically worthless. It was a cocktail of three inadmissible constituents, namely opinion evidence on matters of Chinese law, opinion evidence on the meaning of various documents and conclusions drawn from conversations and discussions with unnamed and unidentified company executives. He never attended a Lubo board meeting. He had no direct knowledge of the events prior to 2000 and any indirect knowledge was exiguous and of no assistance in this case. His attempted interpretation of Lubo board minutes was totally unconvincing and was inadmissible. He had not read the Judgment and knew nothing of the critically important Assignment Agreement to which I must later refer. His questionable source of information was Mr Stuart Hansen. He told me that SAIC was happy that SLEC should pay the outstanding instalments so long as they were paid to Lubo and not Huaxia. Yet the sole and exclusive beneficial entitlement of Huaxia to the purchase price payable under the Land Contracts is spelt out clearly and unequivocally in those contracts. I reject the suggestion that Huaxia is not solely and exclusively entitled to the instalments and cannot at its own will enforce that entitlement. (The Defendants served a Civil Evidence Statement of Mr Yang Gao Qing, a general manager of SAIC no doubt intended to support the message in Mr Zhang Ning's witness statement. It likewise contains no admissible evidence of any value).
The Defendants' second witness was Mr Alex Cai, an experienced lawyer and a senior partner in the law firm Concord & Partners. Since 2002 he has acted as outside legal counsel for Xing Ye. From April 1995 until the removal of the Hansens from management of SLEC in August 1999, he acted for SLEC and SPNA. He acted for the Hansens at the time of the Subscription Agreement. The thrust of his evidence was directed at the course of negotiations involving Xing Ye in 2002. Whilst professing a neutral stance, he plainly aligned himself in the litigation with the Hansens: he helped them with the choice of expert, Professor Jerome Cohen and Professor Cohen's assistant Professor Donald Clarke, the instruction of the expert and preparation of the expert report. He told me that, as Xing Ye was not a party to the proceedings, he could be selective in the evidence that he gave, and this he was. He deliberately gave the false impression that, when Xing Ye entered into the April 4
th 2002 Letter of Undertaking (to which again I must subsequently refer), Xing Ye was doing so on its own account and paid out of its own resources the deposit of $500,000. He concealed the existence of the Assignment Agreement (though he had himself prepared it) and the fact that SLGCC had provided the $500,000. He was evasive in his evidence about the sole agency agreement of November 2001 whereby Xing Ye agreed to instruct Mr Darby. He at first insisted that Xing Ye had the resources to pay $70 million for the interest of the Claimants in SLEC and only under persistent questioning did he concede that Xing Ye had financial difficulties. His selective and misleading evidence added nothing of value in this case. His part in the Global Capital Markets Inc ("GCMI") transaction to which I must subsequently refer throws a further cloud over his character and evidence.
The Defendants' third witness was Mr Jeffrey Palmer who was appointed manager of the Golf Club in 1998. His evidence was directed at establishing the truth of facts and matters which formed the basis for the grossly misleading ILC Report. He explained that the ILC Report had been prepared to attract future investors in SLGCC. Transparently an honest witness, in cross-examination he established the false factual basis and assumption on which the ILC Report was based and which undermined its value. He told me that Mr Stuart Hansen had checked the Report but not corrected the patent errors. Perhaps the most significant false statement in the ILC Report was to the effect that each house on the Housing Project paid a monthly charge of $500 and each apartment a monthly charge of $250 producing an annual income for SLGCC of $5 million. There has never been any such payment or any agreement or provision for such payment. Mr Palmer told me that the Golf Club breaks even for eight months a year and incurs losses in the other four. It is not a profit making venture. He knew nothing of the transfer of the Golf Course Land in December 2001 from SLGCC to SHTI: he was kept in the dark.
The Defendants' fourth witness was Mr Darby, formerly of CB Richard Ellis ("Ellis") and now self employed. I made clear to the Defendants before Mr Darby left Shanghai to give evidence here that Mr Darby should bring with him his full file relating to his instructions and settlement proposals. The only documents he brought with him however were a few pages of correspondence produced as evidence of an alleged offer currently available for acceptance from an unnamed third party but rejected (it was said unreasonably). The explanation proffered for this failure was that the Defendants' solicitors had been unable to make contact with him to pass on my direction before his flight. This explanation is totally inadequate. I am not satisfied any real effort was made to pass on my direction to him: the Hansens could have ensured that he received it. In any event any responsible professional man in the position of Mr Darby called to give evidence would have brought his file with him, or at least sought confirmation from the solicitors whether he should do so. No effort was made at any time thereafter to send the file or any further documents after his flight had left Shanghai or after he had concluded his evidence. The documents which he did bring were quite inadequate to support the evidence he gave.
Mr Brooke was the Defendants' expert land valuer. I consider the unsatisfactory character of his expert evidence when I turn to expert witnesses and when I deal with the valuation issues. He was also a witness of fact in respect of a dispute with Mr Wong, the Claimants' expert on land values, as to what was said at a meeting between them. I will later consider that dispute in the context of their expert evidence. I unreservedly prefer the evidence of Mr Wong on this issue: it appears to me that Mr Brooke's evidence on this issue is an effort at self-justification. More importantly Mr Brooke was the central witness on the issue of contempt, maintaining that Mr Goodwin in a telephone conversation on the 10
th June 2002 tried to lean on him. I deal with this issue in Part VI of this judgment, but at this stage it is sufficient to say that I found him a profoundly unsatisfactory witness. A fundamental part of the case made by him and the Defendants was that his expert report was private work undertaken by him in respect of which IB had no role, input or interest. It is quite clear from any examination of the Report that it was prepared and presented as a report by him as a consultant to IB, and it is equally clear that his wife (the CEO of IB) and Mr David Faulkner of IB provided substantial input into the report; and Mr Brooke finally conceded in answer to a question from me the previously concealed and obviously embarrassing fact that prior to the engagement he entered into an agreement with IB to share his fee with IB, giving IB one third of the fee. The Report was in law and fact a joint venture between Mr Brooke and IB. Mr Brooke was casual in the preparation and swearing of his affidavit, and his performance as a witness was highly unsatisfactory.
Other factual witnesses of the Defendants
94.
The Defendants adduced Civil Evidence Act statements from a number of witnesses besides Mr Stuart Hansen. I have carefully studied them. I do not think that they advance the Defendants' case in any material respect, most particularly in the absence of the primary witness Mr Barry Hansen.
EXPERT WITNESSES
95.
Both parties called expert witnesses on the issues of the value of the Subscription Shares and the value of the Housing Land and (in the case of the Defendants' expert) of the Golf Course Land. The Claimants' expert on share valuation was Mr Best and the Defendants' expert was Mr Caldwell. The Claimants' expert on land valuation was Mr Wong and the Defendants' expert was Mr Brooke.
DEFENDANTS' APPROACH TO THIS LITIGATION
PART V
THE INDIVIDUAL ISSUES
CONTEMPT - INTERFERENCE WITH MR BROOKE
98.
A telephone conversation took place between Mr Goodwin (of DB) and Mr Brooke, the Defendants' land valuation expert on the 10
th June 2002, four days after Mr Brooke had given his final report. It is the Defendants' contention that in the course of this telephone conversation Mr Goodwin said that DB might not instruct IB, the firm to which Mr Brooke is a consultant on future assignments if Mr Brooke continued to act for the Hansens in this action and by so doing "lent on" Mr Brooke to cease to act. Mr Goodwin's account of this conversation is at odds with that of Mr Brooke. On the first day of the Inquiry Mr Jacob told me that the Defendants intended to commence proceedings for contempt against GFI, Firstee, DB and Mr Goodwin in respect of the alleged attempt to interfere with Mr Brooke's evidence. I directed that, if this was so, the Defendants should issue the application by 4 p.m. on the 14
th July 2002 and serve it with the supporting evidence. Mr Brooke swore a skeletal affidavit in support of the application on the 11
th July 2002, but the Defendants did not issue the application until the 17
th July 2002. On the 17
th July 2002, but before the application was issued, the question was raised what course should be followed in respect of this alleged contempt. Mr Jacob pressed that I allow him to ventilate the issues in the proposed contempt proceedings during the trial and in particular in the cross-examination of the Claimants' witnesses (who did not include Mr Goodwin). I ruled that I would not allow the merits of the dispute to be pursued by cross-examination or otherwise investigated on this Inquiry: the proper forum was the impending committal application. Mr Jacob objected to this ruling on the ground that the cross-examination and investigation might throw light on the good faith of the Claimants (a factor relevant on the issue of mitigation) and their credibility. I did not think that the cross-examination and investigation which Mr Jacob wished to pursue would do so or afford any assistance on the multitude of issues already raised on the Inquiry: and I was firmly of the view that even if (contrary to my view) a flicker of light might be provided it would not be sufficient to justify the requested preliminary run of the contempt proceedings (with the consequent cost and delay and possible prejudice to the respondents to the application). The seriousness of the incident (at least as perceived by Mr Brooke) may be measured by the fact that he took no action between the 10
th June 2002 and the 2
nd July 2002 even to mention the incident to the Defendants or their solicitors. I directed that the committal proceedings be heard as soon as practicable after I have given judgment on the Inquiry. Mr Jacob appealed and the appeal was allowed on the 25
th July 2002. The Court of Appeal held that the Defendants should be allowed to call Mr Brooke to give evidence on this issue and to cross-examine the Claimants' witnesses on this topic as it went to the Claimants' good faith.
99.
At the end of July 2002 immediately after the decision of the Court of Appeal I gave directions for the resumed hearing setting down a timetable for this further evidence. This included a direction that Mr Brooke should give evidence on the 24
th October 2002, his evidence to be immediately followed by that of the Claimants' witnesses. The Defendants' solicitors waited ten days until the 9
th August 2002 when they wrote to Mr Brooke requesting him to keep the 21
st and 22
nd October 2002 "provisionally free" and made no further contact with Mr Brooke until early October 2002. The most generous interpretation of the terms of the letter and lack of further contact with Mr Brooke is that the solicitors were grossly incompetent. Perhaps equally remarkably Mr Brooke on receipt of the solicitors' letter did not acknowledge it and without any prior or subsequent notice to the solicitors undertook commitments which precluded his attendance here during the week commencing the 21
st October 2002. The result was that, when the Claimants sought confirmation from the Defendants' solicitors that he would be attending, the Defendants' solicitors learnt from Mr Brooke that he would not be available until the 4
th November 2002. The Defendants thereupon applied to me for an order to adjourn the resumed hearing of the Inquiry. This would have disrupted the arrangements for the resumed hearing. The Claimants reluctantly but generously agreed that the Defendants should have the indulgence of allowing Mr Brooke to give his evidence on the 4
th November 2002 and accordingly on the 11
th October 2002 I made an order to this effect. I directed that Mr Roeloffs give evidence on the date fixed namely the 22
nd October 2002 (later changed to the 24
th October 2002) and Mr Brooke (together with Mr Goodwin whom DB made available for this purpose in view of the seriousness of the allegation) attend on the 4
th November 2002 to give evidence. The Defendants did not require the attendance of Mr Morrison who also gave a witness statement to the effect that he had no responsibility for the critical telephone call.
102.
The sequence of events leading to the critical telephone call cannot be in doubt. On Friday the 31
st May 2002 Mr Brooke sent his draft report to the Defendants' solicitors, who served it on the Claimants' solicitors. On or about Thursday the 6
th June 2002 Mr Montelibano of DB (who was concerned about a potential conflict of interest) asked their solicitors Messrs Johnson Stokes & Masters ("JSM") whether it would be alright for DB to instruct IB for market research work on two projects in China, and JSM replied that it would. On the 6
th June 2002 Mr Montelibano asked Mr Roeloffs his opinion whether he could use IB for the projects, pointing out that Mr Brooke would not be involved, but a small team (including Mr Faulkner) would be. The same day Mr Montelibano asked Mr Faulkner whether IB had done since 1995, or were doing, any work on Shanghai Links. Mr Faulkner said that Mr Brooke was appearing in court as an expert witness, but that it was a personal appointment. Remarkably (if not disturbingly) he did not disclose that Mr Faulkner and Mr Brooke's wife, the CEO of IB, had assisted with the report or that Mr Brooke had entered into an agreement to share with IB the fee for the work, one third for IB and two thirds for Mr Brooke. Mr Faulkner stressed that the team working on the projects would be kept separate from any work Mr Brooke was doing on Shanghai Links. On the same day Mr Brooke's final report was sent to Eversheds, DB's Hong Kong office and Mr Roeloffs in Japan.
105.
On Monday the 10
th June 2002 at the Conference Mr Goodwin met Mr Roeloffs. He did not mention his telephone message to Mr Brooke. Whilst they were talking they saw in the distance Mr Faulkner, and Mr Roeloffs expressed to Mr Goodwin his poor view of the quality of the report. Later the same day Mr Goodwin had the critical telephone conversation with Mr Brooke. Mr Goodwin later passed on to Mr Montelibano the "clarification" which he received from Mr Brooke in the course of that call that his work in relation to SLEC was carried on by him in his personal capacity and not on behalf of IB. Mr Goodwin did not however report on this telephone conversation to Mr Roeloffs. At lunch time that day Mr Roeloffs told Mr Faulkner that he was not inclined to hire IB until the Inquiry was completed and judgment had been given.
107.
I turn now to the telephone conversation of the 10
th June 2002 when Mr Brooke telephoned back. According to Mr Brooke's affidavit (which he stated had been prepared in a rush): (1) Mr Brooke told Mr Goodwin that he had been instructed by a firm of London solicitors to prepare on behalf of SLEC (plainly a careless mistake as the reference should have been to the Hansens) a report as to the value of the assets of that company and had undertaken, if necessary, to attend court in London to give expert evidence and that he could not see how or why his appointment should in any way affect the consideration of IB for another assignment; (2) Mr Goodwin replied that he and his colleagues might view things differently and Mr Brooke's involvement could well affect the decision whether or not to appoint IB for the assignment under consideration and indeed future work for the Bank; (3) Mr Brooke reiterated that he did not think that this was not fair and reasonable; (4) Mr Brooke obtained the clear impression that the purpose of Mr Goodwin's call was to try and persuade Mr Brooke to cease to be involved in the London litigation; and (5) Mr Brooke's delay in reporting the episode to his solicitors or clients was because this kind of approach was not unusual in the geographical area in which he worked.
DEFAULT OF DIRECTORS AND RECEIVERS REGARDING REDEMPTION OF THE A SHARES
112.
The Claimants at an early stage of the Inquiry applied to strike out paragraph 11(2) of the Amended Points of Defence on the ground that it was vexatious and it failed to disclose a reasonable ground of defence. The application was occasioned by the Defendants' manifested intention to seek to require the court to undertake a protracted investigation in the course of the Inquiry into the good faith of the Second Receivers. After full and detailed argument I acceded to the Claimants' application. I said that I would set out my reasons in this judgment and this I now propose to do.
"(1) As appears from the shareholders agreement, 90% of the moneys paid by the minority shareholders was by way of investment in SLEC, priority redeemable preference shares, entitling the holders only to the return of their principal and interest at a fixed rate from a date. There was no purchase of shares from the Hansens or any Hansen entity. There was no payment to the Hansens of any moneys. These shares gave no right to any dividends or share in the equity of SLEC at any time. There was a right only to the return of the principal and interest on redemption. In this respect the transaction really resembles a loan which (in accordance with the findings of Lightman J.) was procured by fraud. In such case there is no loss unless and until there has been no repayment of the loan.
(2) Accordingly a question is why the Class A shares have not been redeemed. It is for the Claimants to prove that the Class A shares have not been redeemed by reason of the Defendants breach of contract or misrepresentation. At no stage was any payment made to Huaxia by SLEC or any reserves of funds in SLEC created which impacted upon the ability of SLEC to redeem shares. The failure to redeem was unconnected with any possible legal claim by Huaxia (the likelihood of which was minimal). Further the Defendants aver that the Company through its receivers has failed to use all reasonable efforts to redeem the Class A Shares on the Scheduled Redemption Date in accordance with its obligations under Condition 7(a) of the Class A Share Conditions. The Defendants further aver by reference to the valuations of the land as at the Closing Date that the likelihood as at the Closing Date was that the Company's assets would be sufficient to enable it to redeem the Class A shares on the Scheduled Redemption Date. In this respect the Defendants will assert (in reliance upon paragraph 9. of a report of Charles Nicholas Brooke dated June 6, 2002) that the value of the Housing land as at the Closing Date on the basis that the five instalments had been paid was $150,000,000 and on the basis that they were unpaid, $125,000,000 and that loans to fund the ongoing construction of the Project could have been raised against the Housing Project which was saleable at the time. The Company failed to use all reasonable efforts to redeem the Class A Shares on the Scheduled Redemption Date in accordance with its obligations under Condition 7(a) of the Class A share conditions. The Defendants assert that the following (possibly among other) reasons led to the failure to redeem:
(a) Boardroom disputes involving matters unrelated to Huaxia's claim which paralysed the Company;
(b) the appointment of Receivers for reasons unrelated to Huaxia's claim;
(c) the New Joint Receivers and Managers, appointed in March 2001, have allied themselves with the interest of the Claimants.
PARTICULARS
(i) the JRMs have a personal interest in the project.
(ii) They have put themselves into a position of conflict
(iii) They have concealed their personal interest and indeed have lied, and lied upon oath, about its existence.
(iv) The JRMs have used coercion or improper pressure to obtain a statement from Ricky Tang in an attempt to refute the Defendants' evidence. The JRMs are using company property for purposes unconnected with the company's business.
(v) The JRMs are not being even-handed in the way they deal with the Defendants and the Minority Shareholders.
(vi) The JRMs' reports to the TCI Court have been extreme in their language, and actuated by bias.
Reliance will be placed on the affidavits filed on behalf of the Defendants in support of their application to change the receivers in the TCI proceedings and served on Messrs Misick and Stanbrook, the Claimants' TCI lawyers.
(d) The strategy adopted by the Claimants and referred to in paragraph 23 below."
117.
The proposition advanced in paragraph 11(1) of the Amended Points of Defence is that the A Shares, though securities, and not a debt, have resemblances to a debt, and that there was no loss occasioned by the Defendants' fraud unless and until there has been no repayment of the loan. I do not think the drawing of analogies with or resemblances to debt are of any assistance. The A Shares are an equity investment, not a debt. The critical issue for valuation purposes is the value of the A Shares and for this purpose to assess the prospect of their redemption in whole or in part.
118.
The substance of the complaint in paragraph 11(2), as expressed, not once but twice, is that SLEC through its receivers failed to use all reasonable efforts to redeem the Class A Shares on the Scheduled Redemption Date (i.e. the 31
st March 2000) in accordance with its obligations under Condition 7(a) of the Class A Share Conditions. The allegation is a nonsense. The Hansens were in control of SLEC until May 2000, when their gross ill-management and apprehended (and later proved) fraud compelled the Claimants to apply for and obtain from the Supreme Court of the TCI an order for the appointment of the First Receivers. Accordingly any "default" in redeeming on the Scheduled Redemption Date was a default by the Hansens: there was no receiver at the time. For the first time in the course of Mr Kosmin's opening, Mr Jacob told the court that the words "on the Scheduled Redemption Date" in subparagraph (2) were a mistake for "after the Redemption Date" and he had only just noticed it. I find this observation incredible: it is to be noted that the formula in the pleading is "on the Scheduled Redemption Date in accordance with its obligations under Condition 7(a) of the Class A Share conditions". If there was a mistake, it was a gross and inexplicable one. Mr Jacob went on to say that he has no complaint against the First Receivers: his complaint is against the Second Receivers appointed to replace them on the 5
th March 2001 and (without ever amending the pleading) he proceeded with his case on the basis that the complaint be treated as one that there was a default by the Second Receivers in failing to redeem after the 5
th March 2001.
121.
In my judgment paragraph 11(2) of the Amended Points of Defence discloses no reasonable ground of defence and is an abuse of process for a multitude of reasons: (1) I cannot see how the alleged misconduct of the Second Receivers (who are not agents of the Claimants but are officers of the TCI Court) can be relevant on this Inquiry. If the Second Receivers have been in breach of duty, a claim may be available against them at the instance of SLEC in the TCI: it cannot prejudice the entitlement of the Claimants on this application; (2) there is no conceivable basis on which it can be maintained that the Second Receivers (whether biased or not) could have possibly redeemed the A Shares at any date after their appointment. As the annual reports and evidence of the First and Second Receivers makes plain, at all times since the appointment of the First Receivers SLEC have never had the means to redeem the A Shares. In nowise could SLEC have surmounted the legal and financial hurdles to redemption of the A Shares (i.e. the existence of the available profits and the solvency of SLEC after redemption). The Business Plan and evidence before me indicated that SLEC should have been able to redeem on the due date if the Defendants' representations and warranties were true and (most particularly) the Five Instalments had been paid. The falsity (and in particular the non-payment) made the default practically inevitable. Mr Jacob made a half hearted effort to argue that the Housing Project had an independent momentum of its own such that it could have produced the necessary funds. He relied for this purpose on a letter dated the 14
th November 1996 from Bankers Trust to the Claimants when prospective investors. The letter bears no such weight, not least because it was premised on the truth of the Defendants' representation (now shown to be false) that at that date Sealand had expended $26 million since the beginning of reclamation in early 1995, excluding all soft development costs i.e. the fees of engineers, architects, planners and designers and that it exaggerated the works already completed. The optimistic picture painted by the letter must be entirely discounted in the light of the true facts now revealed. Mr Jacob also relied on an ambiguous passage in Mr Brooke's Report to the effect that loans could be raised on the security of the Housing Land, but Mr Brooke under cross-examination made plain that he was referring to the possibility of loans being obtained by purchasers of the Housing Land and not by or on behalf of SLEC. It may be noted that at no time did the Defendants ever suggest to the Second Receivers that they could or should redeem, let alone prior to the pleading on the Inquiry. In the circumstances I held that it was unnecessary to investigate the allegation of alliance with the Claimants (which in any event appeared on the evidence before me to lack substance) and I directed that paragraph 11(2) of the Amended Points of Defence be struck out.
REDEMPTION OF THE A AND B SHARES
ADVANCE OF $7 MILLION
123.
I have already said that an issue raised at the First Trial was whether SLGCC advanced the sum of $33,596,096 to SLEC to put SLEC in funds to pay Huaxia the Five instalments, and I held that it did not do so. It was not relevant at the First Trial whether SLGCC had advanced the balance of the alleged loan of $40,906,489 and if so how it was expended. The Defendants had represented and warranted that this sum of $7,310,393 had been lent by SLGCC to SLEC to enable SLEC to pay for "pre-development and development activities". Whether SLGCC did make the advance is relevant on the Inquiry. There is a dispute between the parties whether the onus is on the Claimants or the Defendants on this issue. In my view the onus is upon the Defendants to establish this loan and how it was applied. But the outcome on this issue cannot turn on onus. If the balance was loaned and applied in development of the Housing Land, the Hansens would know and be able to explain and document the transactions. Neither Hansen has attended the Inquiry. The Defendants have adduced no evidence of any value or substance of the loan of $40 million or any part of it or of the application of the monies. The Hansens and Mr Twa could provide the relevant evidence if it supported the Defendants' case, but they have deliberately refrained from doing so. The SLEC 1997 Business Plan (warranted by the Defendants as being complete and accurate in all respects) provided that the total cost of construction of the golf course was budgeted at $12.1 million, approximately $3.1 million for phase 1 of the club house and that only $4 million additional funds needed to be raised; that the cost should be funded entirely through membership sales (see paragraph 4) and that (as at the 1
st December 1996) 110 memberships had been sold raising total funds of approximately $8 million (paragraph 3). The ubiquitous TCS certified that as at the 18
th November 1996 some $7-8 million received in membership fees were held in a trust account for the sole benefit of SLGCC for the construction of the golf course. Yet as appears from the evidence of Mr Roeloffs (Day 4/58/18-67/3) and the accounts for SLGCC for the year ended 31.12.96, SLGCC in fact only had $134,000 in cash at the end of 1996, and accordingly totally insufficient to pay for construction of the golf course. The compelling inference is that recourse was made to the $50 million paid by the Investors for the Subscription Shares. I am satisfied that, if and so far as moneys were "advanced" by SLGCC to SLEC, the moneys were part of these trust moneys: they could not lawfully be so advanced by SLGCC, let alone assigned to Sealand or released by Sealand. If they were so advanced, they were repayable by SLEC to SLGCC with interest. I am not satisfied that there was any such advance, assignment or release.
PAID UP INVESTMENT
124.
In paragraphs 211-2 of the Judgment I included amongst the misrepresentations and breaches of warranty which I held to be established a misrepresentation and breach of warranty contrary to Article 9(c) of the Subscription Agreement that the actual paid up investment in the Group net of any appraisal surplus as at the Closing Date was at least $40,900,000 as stated in the Investment Statement: there was such a misrepresentation and breach of warranty by reason of the fact that SLGCC had not advanced any part of the sum of $33,596,096 to SLEC in relation to the Land Use Rights. In respect of this breach of warranty on the Inquiry the Defendants contended that the paid up investment included three elements which did not involve investment of actual cash. The Claimants do not rely on this misrepresentation or breach of warranty as adding to the other claims for damages for fraud, breach of warranty and misrepresentation. The Claimants do however submit that the existence of this misrepresentation and breach of warranty is relevant on the issue of date of valuation of the Subscription Shares, for these wrongs have never been rectified as was the wrong the subject of the claim in
Kennedy v. Van Emden (above). For the reasons already given I am satisfied that the date of valuation is the Closing Date without any need for recourse to this argument, but I accept that this matter does provide further support, if (contrary to my view) further support is necessary. In the circumstances I think that I should deal briefly with the issues raised.
DISCHARGE OF TAX LIABILITY
126.
The Defendants have claimed that SLEC paid and discharged a liability for tax by transferring part of the Housing Land to the Pudong Government. There is no evidence which supports this contention though the evidence must be available to the Hansens and TCS if it exists. (A passage in Mr Stuart Hansen's witness statement on this topic is uninformative). The available evidence establishes that any liability for the tax in question rested on Huaxia alone, and Huaxia's Land Use Right Certificate expressly provided that 15% of the land use area shall be submitted (i.e. surrendered) by Huaxia to the Government. Clause 10(c) of Agreement of Principles dated the 4
th November 1994 made between Huaxia and Sealand provided for written confirmation by the Government that Sealand would not have to pay any additional Land Transfer fees and that the Government had accepted the transfer of 161 Mou in lieu of all Land Use Right Transfer fees and (when read with Clause 1) that the 161 Mou to be transferred to the Government was distinct from the 2136 Mou to be transferred to SLEC. It should be noted that SLEC's 1995 and 1996 audited financial statements make no reference to the payment of tax through a donation of land. I reject the Defendants' suggestion that SLEC made any contribution to the Housing Project in this manner and that there was any paid up investment arising in this manner. In his closing submissions Mr Jacob submitted as follows:
"There is no dispute but that land tax was paid by Huaxia by way of transfer of land. Whether this was on their own behalf or on behalf of the Defendants is a matter of construction. The Defendants accept that there was no valuation of the land transferred at any particular price."
It is quite plain that Huaxia made the transfer to discharge its own liability. There is no basis for saying that it was made on behalf of SLEC.
EXPENDITURE ON ENGINEERING AND ADMINISTRATION
127.
Paragraph 10 of the Amended Point of Defence pleads that $7.5 million was spent on engineering and administration, the money coming from golf club membership sales and funds from the Dino Moretti ceramics business in China. This allegation is supported by Mr Stuart Hansen's evidence. There is a certificate from TCS that they held $7-8 million representing the proceeds of the sale of club memberships on trust to apply to complete the construction of the Golf Club. This can only be the money referred to. Indeed in his written response to my observations dated the 21
st October 2002 Mr Jacob stated that about $7.5 million came from Golf Course memberships. If and so far as this money was applied as alleged, it was in flagrant and deliberate breach of trust denuding SLGCC of the monies required to construct the Golf Course. As Mr Jacob acknowledges, there is no evidence (beyond the uncorroborated word of Mr Stuart Hansen) of any contribution of Dino Moretti and no documentation showing any disbursement to contractors. I had to consider the alleged channelling of $7.5 million to China and the phantom presence of Dino Moretti in the First Judgment. I accept that the Hansens wrongfully applied the SLGCC trust monies or part of them for their own purposes and purposes connected with SLEC, but (in the absence of supporting documentation and evidence) I am unwilling and unable to find what (if any) part was spent on the Housing Project. Monies misapplied in breach of trust in this way cannot constitute paid up investment and must in any event be repayable to SLGCC.
MANAGEMENT
"The Defendants do not seek to allege that the items referred to ... amount to paid up investment, but that amount in value in the hands of the Company which must be reflected in the value of the Company's assets and therefore in the value of the shares."
ARTICLE 7.4 OF THE SUBSCRIPTION AGREEMENT
132.
It is common ground that the amounts stated in the Reviewed Statements are the same as those stated in the Investment Statement and Completion Liability Statement due to the fraud by the Hansens and Sealand, and accordingly since the indemnity only required the Defendants as warrantors to provide the difference between the two figures and there was no difference, the provision for the indemnity gave rise to no liability on the part of the Defendants. The Defendants submit however that the remedy for inaccuracy set out in Article 7.4 still applies and that it is SLEC, and not the Claimants, that is entitled to be paid the shortfall, and that the Claimants have accordingly suffered no loss by reason of the misrepresentations and breaches of warranty relating to the inaccuracy of the Completion Liability Statement and Investment Statement. In my view this proposition cannot stand for a series of reasons. First of all by reason of the fraud, misrepresentations and breaches of warranty, the Claimants (as is and must be common ground) are entitled to be placed in the same financial position as if they had not entered into the Subscription Agreement. The rights (if any) of SLEC under Article 7.4 are relevant and only relevant (if at all) to the value of the Claimants' shares: the provisions cannot detract from their entitlement to the difference between the price paid and the market value of those shares. Secondly the value of the right was a matter for the experts. It is however clear that any claim against the Defendants was valueless for the reasons that the Defendants' fraud frustrated the operation of the provision and the Defendants had no assets of any value, leaving aside the fact that they were until the appointment of the receivers in management control. This is confirmed by the fact that the Defendants have made no payment or offer of payment to SLEC.
ARTICLE 9.4 OF THE SUBSCRIPTION AGREEMENT AND THE PAYMENT OF THE SUBSCRIPTION MONIES
INDEMNITY FROM SLGCC
134.
Under the Land Contracts SLEC was liable for the purchase price for the land use rights in respect of the Housing Land and the Golf Course Land. The Defendants submit that under the provisions of the LTOA under which SLEC granted to SLGCC a right of occupation of the Golf Course Land, SLEC agreed to indemnify SLEC in respect of the full liability of SLEC under the Golf Course Contract in respect of the payment of the instalments of purchase price due to Huaxia. The construction of the LTOA must be approached in the light of the terms of the contemporaneous 2 Party Assumption Agreement made between SLEC and SLGCC, 3 Party Assumption Agreement between SLEC, SLGCC and Huaxia, and the terms (and in particular paragraphs 200-204) of the Judgment when I considered the questions of the validity and construction of the 2 Party and 3 Party Assumption Agreements.
"WHEREAS
A. SLEC entered into agreements (Contract No. 27 and Contract No. 28) on December 19, 1994 with Shanghai Pudong Huaxia Development Co., Ltd. ("Huaxia") for the transfer of certain land use rights from Huaxia to SLEC (the 'Huaxia Agreements');
B. Pursuant to the Huaxia Agreements, SLEC agreed to pay Huaxia an aggregate consideration of $37,584,459 as land use transfer fees for the transfer of the said Land Use Rights;
C. As of December 31, 1996, SLEC has paid Huaxia a total of $33,596,096 pursuant to the Huaxia Agreements and Huaxia has acknowledged the receipt of the same;
D. For financing purposes, SLEC has entered into a lease agreement with SLGCC for the lease and possible transfer of the land use rights transferred under said Contract No. 27 to SLGCC for nominal consideration (the 'Lease Agreement') [i.e. the LTOA];
E. In consideration of the Lease Agreement, SLGCC undertakes, among other things, to assume the obligations of paying Huaxia the outstanding land use transfer fees under the Huaxia Agreements being $3,988,363.
IN CONSIDERATION OF mutual promises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
1.1 In this Agreement, the following definitions apply:
...(c) 'Obligations' means the obligations to pay the balance of the land use transfer fees to Huaxia under the Huaxia Agreements in accordance with the following schedules and amounts:
Time
Amount
On or before June 15, 1997 $1,994,181
On or before December 15, 1997 $1,994,182
...
ARTICLE 2
ASSUMPTION OF THE OBLIGATIONS
2.1 Subject to the terms and conditions of this Agreement, SLGCC hereby assumes the performance of the Obligations of SLEC and releases SLEC from the performance of the Obligations to Huaxia."
136.
The 3 Party Assumption Agreement made between SLEC, SLGCC and Huaxia recited that under the 2 Party Assumption Agreement SLGCC had agreed to assume all obligation to Huaxia under the Land Contracts and on this basis Huaxia agreed to the novation of the obligations to pay transferring the liability from SLEC to SLGCC.
138.
Paragraphs 10.6 and 10.8 of the LTOA read as follows:
"10.6 HUAXIA AGREEMENT
The Grantee [SLGCC] shall, during the Term [of the LTOA] perform all obligations of the Grantor [SLEC] under the Huaxia Agreement which have not already been performed, with respect to the construction and operation of the Golf and Country Club and shall indemnify the Grantor in respect of all obligations arising under the Huaxia Agreement in respect of the Property [the Golf Course Land] and the operation of the Golf and Country Club....
10.8 ... the parties hereby acknowledge that the Grantor [SLEC] is not, by this Agreement, transferring, assigning or otherwise disposing the Land Use Rights to the Grantee [SLGCC]...."
139.
The Defendants claim that the indemnity granted by Clause 10.6 of the LTOA extends to all the obligations of SLEC under the Golf Course Contract to pay the instalments of purchase price for the Golf Course Land. This is totally untenable. It was no part of the LTOA to deal with payment of the instalments: the LTOA was drafted on the basis that all but the final two instalments had been paid and the rights of SLEC and SLGCC were governed by the 2 and 3 Party Assumption Agreements and paragraph 10.8 makes clear that the land use rights are to remain vested in SLEC. The 2 and 3 Party Assumption Agreements and the LTOA were all executed by Mr Barry Hansen on behalf of SLEC, SPNA and SLGCC on the same day and as part of the same transaction. The language of the LTOA is plainly directed at limiting the indemnity to the performance by SLGCC of the obligations assumed by SLEC in respect of the construction and operation of the Golf Course. In any event the execution of the LTOA was the consideration for the entry into the 2 Party Assumption Agreement (see recitals D and E), it was (as Mr Kosmin submitted) part of the fraudulent scheme designed to deceive and which did deceive the Claimants, and in accordance with the findings in the Judgment it is plainly (like the 3 Party Assumption Agreement) illegal and void under Chinese Law.
ATTITUDE OF HUAXIA
"188. Huaxia have not served a default notice under the Contracts or taken steps to commence arbitration proceedings as provided for in the Contracts as they are entitled to do in case of default of payment of the Five Instalments (or indeed the Two Instalments). But Huaxia has however throughout insisted on its right to full payment; until shortly before this action the Hansens acknowledged to Huaxia the liability of SLEC to pay and promised to pay; and since the due date for payment of the first instalment Huaxia have made repeated demands for payment and maintained and reserved their right to take remedial action against SLEC by reason of the failure to pay and therefore under the Contracts (unless Chinese law otherwise provides) SLEC's primary asset is at risk."
I held in the Judgment that Chinese law does not otherwise provide.
MITIGATION
RICHARDS BUTLER OFFER
RESALE TO XING YE
154.
This agreement is significant in three regards: (1) the agreement on any fair reading according to English law (and there is no expert evidence on Chinese law in this regard) is merely an agreement to enter into negotiations for a concluded legal agreement: it has no legal effect on the rights of Huaxia to payment; (2) the agreement stated in its recital that the Claimants had agreed to the proposed sale. This was a reference to the October Agreement; and (3) by a collateral Assignment Agreement ("the Assignment Agreement") between Xing Ye and SLGCC and dated the 8
th April 2002, Xing Ye agreed to confirm to Huaxia acceptance of the April Agreement, to pay to Huaxia the sum of $500,000 provided by SLGCC as the required deposit and to assign the benefit of the April Agreement to SLGCC, and in return SLGCC agreed to provide the $500,000 and indemnify Xing Ye against all liability under the April Agreement. It is quite plain from the documents themselves (and the Defendants have provided no disclosure or evidence relating to this remarkable transaction) that the substance of the transactions was that Xing Ye agreed to act as a front for the Hansens. The negotiations and proposed deal floundered (as it necessarily would flounder) when it became apparent that Xing Ye did not have the financial resources or recourse to resources to proceed with the purchase. Mr Darby, who acted for Xing Ye, acknowledged that Xing Ye was not in the financial position to complete a purchase itself unless the Chinese Government put it in funds and it never did so. The evidence before me establishes that Xing Ye was in financial difficulties. Mr Best carried out a credit check which revealed that according to its balance sheet Xing Ye did not have much in cash and its current liabilities significantly exceeded its current assets. Mr Roeloffs in his evidence emphasises the importance of the fact that Xing Ye and its subsidiary Hohbond Oil Ltd were not able to prove to the Claimants that they had the financial capability to complete the transaction (they needed to obtain it from SLGCC) and hence the negotiations between the parties ceased in February 2002. There is no basis for any complaint that the Claimants acted otherwise than fairly and responsibly in respect of this possible route for mitigating the Claimants' damages.
GOOD FAITH IN DEALINGS WITH MR DARBY
155.
Mr Darby first became involved in the dispute during 2000. Mr Darby (on behalf of Ellis) attempted to broker in return for a success fee a deal between the Claimants and the Defendants enabling the Housing and Golf Projects to proceed freed from the constraints imposed by the existing state of affairs. He secured a degree of interest from three investors and disclosed the names of two of them to the Claimants. Both of these dropped their interest shortly thereafter. Mr Darby refused to disclose the identity of the third investor, apparently on the ground that a confidentiality obligation precluded him from doing so. The Hansens informed him of what they wanted as the price for selling out. Mr Darby did not think it necessary or prudent to pass on this information to the Claimants.
156.
At a meeting between Mr Roeloffs, Mr Morrison and Mr Wang on the 19
th January 2001 in the course of tough negotiations Mr Darby said that the Hansens would settle on the basis of receiving $20 million, a large plot of housing land and 100 golf club memberships. In response to this exaggerated demand and as a counter offer at one point of the meeting the Claimants stated that they would settle on terms that the Hansens gave up their interests in the Projects in return for $1 and the Claimants dropped their claims in this litigation. This was clearly not the Claimants' final position and Mr Darby knew this. The parties could not surmount the differences between them. The Claimants by now perfectly reasonably adopted the view that Mr Darby's efforts as broker were of no assistance (he represented no-one who was prepared to do a deal), and so informed Mr Darby. Mr Darby's efforts as a broker thereupon ceased.
FAILURE TO SETTLE WITH HUAXIA IN RELATION TO OUTSTANDING INSTALMENTS
"24. There has been no attempt to conclude a settlement of any claim by Huaxia. The Minority Shareholders have used the potential claim by Huaxia to try to gain control of the company and as the foundation for their claim to damages instead of agreeing to settle or negotiate with Huaxia as would have been in the best interests of the company."
CREDITS TO BE GIVEN BY CLAIMANTS
164.
It is common ground that in respect of their claim for damages the Claimants must give credit for the price received on sales of shares forming part of the Subscription Shares and that account should be taken of the value of securities held in respect of the Defendants' liabilities. Accordingly it is common ground that APGF must give credit for the $3,250,000 consideration received on the transfer of part of its shareholding in SLEC to NYLI one day after the Closing Date. The transfer took place with the approval of Sealand and Mr Barry Hansen. It is also common ground that account must be taken of the value of the B Shares the subject of a mortgage dated March 1997 whereby the Defendants secured all liabilities the subject of the Inquiry on the B Shares. But the B Shares were at the Closing Date and are today valueless. Accordingly the value of the security is nil and no credit need be given in respect of the mortgage. The position regarding the sale of Wardley shares to GFI requires some elaboration.
PART VI
VALUATION
PRELIMINARIES
FACTS IN ISSUE RELEVANT TO VALUATION
(a) The financial condition of SLEC, SLGCC, Mr Barry Hansen and Mr Stuart Hansen.
(b) The rights and remedies available on discovering the Defendants' Fraud.
174.
The Claimants had a series of courses available to them. Firstly the Claimants could have sought rescission and repayment by SLEC of the purchase price paid. It is to my view plain that SLEC could not and would not have made any substantial repayment: instead the Claimants decided to adopt their purchase of the Subscription Shares. Secondly, in view of the decision to adopt the purchase, the primary remedy available to the Claimants was the commencement of proceedings for damages for fraud, misrepresentation and breach of warranty. The Claimants availed themselves of this remedy. Thirdly the Claimants as "Qualifying Shareholders" could seek to take control of the Board under Article 7.6 on the ground that the Hansens were "Defaulting Sponsors". Fourthly the Claimants could seek to invoke the Inactive Shareholders Provisions of Article 7.1. The Claimants by way of counterclaim in the proceedings commenced by Sealand in the TCI invoked the provisions of both Articles, though the counterclaim could be expected to be and was protracted and expensive. Fifthly the Claimants (subject to the hurdle of the need for compliance with the pre-emption provisions in favour of Sealand contained in Articles 5.1, 5.2 and 6) could resell their holding if an adequate offer to purchase was received: the offer could not reflect any entitlement of a purchaser to the protection afforded to the Claimants alone as Qualifying Shareholders under Articles 3 and 7.6. The Hansens could be expected to spare no effort to prevent the Claimants surmounting the hurdle arising under the pre-emption provisions save on terms satisfactory to themselves. If it could be surmounted, (as the evidence and common sense make plain) the Claimants as reputable financial institutions in respect of any proposed sale could only deal with persons whom they could identify in order to ensure that they were dealing with legitimate parties and not becoming involved in money laundering and (as a matter of prudence) in order to ensure that the parties with whom they were engaged were capable of completing the transaction. Those conditions were never satisfied. Sixthly the Claimants could have sought an agreement with Sealand for the sale of the entire shareholding in SLEC. Meaningful co-operation from the Hansens and a fair and proper deal (having regard to the Hansens' history of deception and disregard for the law) could not reasonably be expected. Seventhly the Claimants could apply in the TCI for the appointment of a receiver of SLEC. The Claimants did so apply. The proceedings were protracted and vigorously and unscrupulously defended, though eventually successful. Eighthly the Claimants and any purchaser from them could have petitioned in the TCI Court for the winding up of SLEC on just and equitable grounds of SLEC. (The TCI Companies Ordinance does not provide any "unfair prejudice remedy"). This is a notoriously lengthy and expensive form of proceeding, most particularly when the defendants are as tenacious and unscrupulous as the Hansens and in particular in a jurisdiction such as the TCI where there is a single permanent judge available to conduct judicial business. No criticism is made in their pleadings by the Defendants of the Claimants for taking the courses which they did or for failing to petition to wind up though Mr Jacob did make a criticism in his submissions of the failure to petition to wind up SLEC: on no basis could such failure have constituted a failure to mitigate. In summary the options available to the Claimants were uninviting on any common sense basis, most particularly because the Defendants could be expected to cause as much trouble as they could, to litigate at the cost of using funds of SLEC and to default on any judgment and in particular on any order for costs. For an informed reputable purchaser invited to pay any sum to share a bed with established fraudsters such as the Hansens and undertake expensive and protracted litigation in order to preserve or extract value from the minority holding, such a prospect must be wholly unattractive, indeed daunting, if not totally forbidding prospect.
(c) Mr Roeloffs' Advice to Investors
175.
The Defendants seek to deduce from Mr Roeloffs upbeat advice to the prospective investors prior to their investment that the Projects today are highly valuable. The advice given at the time was indeed to the effect that the Projects had the prospects of making substantial profits; that the Housing Project should be self financing through a securitisation process involving raising on the security of leases money which could be used for further building; and that finance was needed as an accelerator, and not an initiator, to bring forward the dates when profits could be made. This contention lacks any substance or reality. It was apparent that by the summer of 1996 the securitisation process could not proceed and the finance required needed to be raised by an equity financing with financial institutions: see paragraph 116 of the Judgement. As Mr Roeloffs explained in his evidence (and in any event as is totally obvious) the advice given by Mr Roeloffs was based on the dishonest information directly and indirectly furnished to Mr Roeloffs by the Hansens.
(d) Mr Morrison's "Offer".
RIGHTS TO BE VALUED
177.
The valuation exercise required to be undertaken as at the Closing Date is of the minority holding of 40% of the Common Shares and the holding of all the A Shares and the rights attaching to both those shares. Accordingly: (1) the A Shares have to be valued together with the rights attached by Article 5.7 in default of redemption of the A Shares by the end of 72 months after the Date of Funding, namely the voting rights appertaining to the Common Shares then held by Sealand; (2) the Common Shares had to be valued together with the rights conferred by Article 7(1) to appoint directors and under Article 7(2) to purchase Sealand's shares upon Sealand being deemed to be an Inactive Shareholder; (3) the Common Shares should be valued together with the rights conferred on "Qualifying Shareholders" (in effect the Claimants, but not purchasers from them) by Article 7(6) in case of the Defendants becoming "Defaulting Sponsors" to take control of the Board. Rightly or wrongly and without protest by either side both experts proceeded on the basis that the valuation should take into account the rights conferred by Article 7(6) notwithstanding a purchaser who could not take advantage of those rights would not take those rights (which are in effect personal to the Claimants) into account in the purchase price which he would be willing to pay. Mr Jacob referred to this matter in his closing submissions, but he did not request that the experts (and in particular Mr Best) be recalled to reconsider their evidence in the light of this factor. The nature of this complaint and the thrust of the evidence as a whole make crystal clear that the existence of the personal right of the Claimants under Article 7.6 cannot sensibly materially affect the valuation.
EXERCISE TO BE UNDERTAKEN
VALUERS' REPORTS
Share Valuation
Course of hearing
a)
on the basis that if the warranties and representations had been true; and
b)
on the basis that the warranties and representations were false and that the Claimants learnt that they were false immediately after the Closing Date.
Value of the Subscription Shares as at the Closing Date
a)
the Housing Project and the Golf Course Project were at risk of a forced sale by reason of the non-payment of the instalments due under Land Contracts;
b)
the funds injected into SLEC by the Investors were specifically to be applied as to US$43 million for the construction of the infrastructure and the first 100 houses at the Housing Project, the balance being allocated to general purposes;
c)
if the first 100 houses could not be built in accordance with the Business Plan, SLEC would not therefore generate the revenues and cashflows projected in the Business Plan;
d)
SLEC had to pay US$33 million to US$45 million to secure the Land Use Rights and did not have sufficient cash to make such payments;
e)
the Hansens comprised the key management of SLEC and had behaved fraudulently;
f)
the detection of fraudulent acts by management, fraudulent misrepresentations and breaches of warranty would deter any investor from acquiring a minority 40% interest, in particular whilst the fraudsters maintained 60% of the share capital;
g)
in the circumstances, there was no prospect of the Housing Project having a viable future or being completed owing to the lack of resources and therefore there was no prospect of SLEC generating sufficient cash flows to enable SLEC to redeem the A Shares being redeemed within the three year period or at all;
h)
there would therefore not have been any investor willing to acquire the Subscription Shares in SLEC at any price had the true position been known.
"The Claimants' case is that they would have not acquired the Subscribed Shares at all had they known the true position. It is inconceivable to me that any financial investor considering the acquisition of the Subscribed Shares, in their right mind, would have concluded otherwise. There would therefore not have been any financial investor willing to acquire the Subscribed Shares and the market value of the Subscribed Shares is nil."
"My Lord, the issue here is what would the market place pay for a 40 percent interest in the shares that were held by the claimants, both the Class A shares and the common shares combined. Mr Caldwell has ultimately adopted an approach of determining what cash could be derived from those shares if the company was put into liquidation, and in doing so he has made a number of assumptions, and he has ultimately derived a value for the business which is actually higher than the final figure he ascribes to the value of the shares, and if I may just refer to his report.
I wanted to refer, first of all, to paragraph 977 on page 20. Effectively what he says is when you go through his calculation, the value of the company is 98.2 million, or the value that is attributable to the Class A shares and to the common shares is 98 million, but he then restricts his value of those shares to 44.1 and whatever the balance - 4.9 million shares for each class of share.
Now, the position I have taken is that - I am comfortable with the approaches that Mr Caldwell talks about. You either value a company using an earnings basis, an asset basis or a liquidation basis, but at the end of the day what you are trying to assess is what is the - what would anybody in the market place pay for those shares, and what I have effectively said is that there must be - once you have gone through these calculations, and these are nothing more than mathematical calculations, there must be some form of reality check, and when I went through this process myself, the reality check that I made was, well, let us just look at what is being placed on offer here. We have a company which - where the management and controlling directors, controlling shareholders, have been found to be fraudulent.
If you were to offer those shares in the market place, a prospective purchaser of those shares is going to ask - is going to go through a process, and the primary process is to understand and evaluate the risks associated with the - a potential acquisition, and then measure that against the benefits. The benefits, I do not think there is any question about, they have been defined in the business plan. It is the risks that need to be addressed, and it is the risks I look at. The-”first of all, you have the normal business risks associated with the business, and those business risks were accepted by the claimants when they entered into the contract. But above and beyond that, when it is determined that the defendants had committed fraud, there is a raft of new risks which appear.
The first risk is that the fraud that has been identified is not the only fraud. The next risk is that once the fraud has been identified, that the Hansens will deny the fraud. You then have risks associated with the fact that the Hansens are also key management of SLEC, and they are also controlling directors of SLEC. So you start with that set of risks.
In addition to that, there are the risks of future fraud. I acknowledge that the money that has been paid into the company has been paid into a controlled bank account which requires joint signatures, and so it would be reasonable to anticipate that there is a small amount of risk associated with that, but there is always the potential for the risk of forgery in order to obtain those funds. I have no idea how large or small that risk might be. More importantly though, as management of the company, as directors of the company, and also with regard to SPNA, the legal representative and the holders of the company chops, the Hansens are in a position to be able to commit the company to liabilities, so you have a basic layer of risk.
Now, on top of that, if you then did proceed to acquire the company, there are further risks involved because you then have to make two choices - I am sorry, I did not mean acquire the company, I means acquire the 40 per cent shareholding, but you then have two choices: do you proceed- let the company proceed in accordance with its business plan? If you do that, there are a number of consequences of that decision. The first is the company needs more money. So as a prospective investor, the additional prospect is to inject further money into the business. However, you would not want to inject further money into the business whilst the Hansens were managing the business in key management positions. You would not want to invest where management is fraudulent, and so you would have to embark on the task of removing the Hansens from management. You certainly would prefer not to have them as directors of the company, because directors themselves are in a position to commit the company, and so you would want to embark upon the task of removing them as directors.
Finally, you would not contemplate injecting money into the business whilst they were still holding 60 per cent of the equity of the business. They would be - ultimately therefore be rewarded by 60 percent of the profits, having not put any of the equity into the business at all, and so there would be a need to renegotiate the shareholding of the company.
So this is another additional layer of risk and issue that one would have to take into account. The alternative scenario to proceeding with the business is liquidating the business. The liquidation of the company, however, requires a resolution, a special resolution, I understand, of the shareholders, and therefore there is a risk that that special resolution would not be forthcoming, and therefore your only recourse from a liquidation prospective would be to sit back and wait six years to March 31
st, 2003, at which time the shareholders agreement permits you to, or gives you the right to, control the voting rights of the common shares held by the Hansens. There, of course, at that point in time would be a risk that they might challenge your right to exercise their voting rights, and so yet a further risk, and so the potential, from a liquidation prospective, is that you might have to wait a substantial amount of time before you were able to liquidate the company.
So my conclusion fundamentally is that would be nobody in the market place who would be prepared to take on all of those risks, and therefore I just do not think that anybody would be prepared to buy the shares, or alternatively, given that we are talking about fair market value, they would probably be prepared to offer a dollar to take the shares off the claimants' hands, and the dollar being the amount to, I presume, enter into an enforceable contract to do so.
Lightman J. The whole of that exercise involves no substantive consideration of the underlying assets, or very limited
The exercise is effectively a measure of the risks versus the rewards, my Lord."
"would consider it highly unlikely that somebody holding the share capital of the Claimants at that time would have considered the market value of their investment to be nil."
Under cross-examination however, he accepted that the proper test is:
"what price would be achieved in the open market between a willing vendor and a willing purchaser."
a)
continue with the Housing Project as originally envisaged; or
b)
consider a realisation of the assets and to provide for a return by way of liquidation, partial or otherwise.
a)
the Claimants themselves;
b)
Sealand;
c)
Third party investors;
d)
providers of debt, such as banks.
a)
the Claimants would have been reluctant as they would be providing all the funds but only holding a minority state;
b)
Sealand did not have the capacity to inject additional funds;
c)
third party investors would not invest once they had been made aware of the fraud;
d)
SLEC had no assets of substance that it could provide as security to providers of debt.
"without knowing precisely what such rights would be and how the funding would be achieved, it is not possible to put a precise value upon the interest of the Claimant in those circumstances."
"Well, rather like the question posed, I mean, without knowing the liability or how it has to be discharged or how the funding might be provided, it is very difficult to say."
a)
that shareholders' funds as at the 31
st March 1997 were in fact in excess of US$221,000,000 when it has been determined by the court that the 1997 audited accounts were false, inaccurate and failed to show a true and fair view of the Company at the time;
b)
that SLEC was entitled to reclaim from SLGCC US$22,915,764 in respect of the Golf Course Land under the alleged indemnity in the LTOA. In fact, for the reasons set out above, no such indemnity existed;
c)
that Mr Brooke's valuation of the Housing Land at US$125,000,000, should be adopted, a valuation which is greatly exaggerated for the reasons set out below;
d)
that the Claimants would obtain control on the Board and them embark on a realisation of assets before SLEC was put into liquidation.
203.
A number of issues reflect the differences between the figures arrived at between Mr Best and Mr Caldwell on a liquidation. I shall consider the relevant differences in turn. (a) The first is the valuation of the Housing Land. For the reasons already given I accept the valuation figure provided by Mr Wong (on which Mr Best relies) and do not accept that provided by Mr Brooke (on which Mr Caldwell relies); (b) the second is the entitlement of SLEC to recover the purchase price for the Golf Course Land payable to Huaxia from SLGCC an entitlement relied on by Mr Caldwell. I have already held that there is no right of recovery; (c) the third was the right of SLEC to recover from Sealand the (unpaid) subscription price of $33.6 million for its shares another entitlement relied on by Mr Caldwell. For reasons already given I am not satisfied that Sealand was good for any sum at all; (d) the fourth is the total liability of SLEC to Huaxia under the Land Use Contract. Contrary to Mr Caldwell's assumption Huaxia was (as I held in the Judgment and the evidence of the receivers confirms) insistent on full payment. An investor would have proceeded on this basis.
VALUATION OF HOUSING AND GOLF COURSE LAND
206.
My acceptance of Mr Best's evidence makes it unnecessary to examine the expert evidence on the value of the Housing and Golf Course Land. It could only be relevant if I adopted Mr Caldwell's view and assumed that there was a purchaser for the Subscription Shares who wished to assess what he would receive from the assets of SLEC in the event of the assets being realised and SLEC being subsequently placed in liquidation. But in view of the time and effort expended on this issue, and the fact that the conclusion to be drawn on this issue supports my conclusion on the value of the Subscription Shares, I shall turn to that evidence.
"A method of determining the value of a property which has potential for development, redevelopment or refurbishment. The estimated total costs of the work, including fees and other associated expenditure, plus an allowance for interest, developer's risk and profits, is deducted from the gross value of the completed project. The resultant figure is then adjusted back to the date of valuation to give the residual value."
209.
Mr Wong is a Professional Associate Member of the Royal Institute of Chartered Surveyors and an Associate Member of the Hong Kong Institute of Surveyors. He has had over 14 years valuation experience in Hong Kong and over 11 years of property valuations in PRC. In 1994 he was the first ever non-mainland valuer appointed by the Shanghai Municipal Government to carry out valuations of the historic buildings on the Bund in Shanghai for disposal purposes. He was a most impressive witness who had taken every care to investigate the available sources of information so as to provide a full and reliable report. I have complete confidence in his balanced and informed judgment and skill.
210.
Mr Brooke is a Fellow of the Royal Institution of Chartered Surveyors and founder and former Chairman of Brooke International and is currently a consultant to its successor IB. This firm (but not Mr Brooke personally) has provided advice to SLEC and potential investors. He is a leading member of the Surveying profession and has had wide experience of the projects in Shanghai.
211.
Mr Brooke was ill when he prepared his report and this fact no doubt contributed to its serious (indeed fundamental) deficiencies which he acknowledged in his cross-examination. The deficiencies were repeated in the Joint Memorandum. Mr Brooke plainly prepared himself to justify in his oral evidence what he said in his report and in the Joint Memorandum and to overcome the deficiencies exposed in the course of the Inquiry. In the course of such evidence he raised a multitude of new matters not previously disclosed and which were not raised at the Joint Meeting of experts or put to Mr Wong in cross-examination. I regret to say that I found the exercise unconvincing as well as unprofessional, unsatisfactory and unfair.
a)
Mr Brooke did not either in the substantive part of his report or in Appendix E to his Report (which lists the documents relied on in his Report) refer to the ILC Report. Mr Brooke was present in court when Mr Palmer was cross-examined and the false assumption was revealed in the ILC Report to which I refer in the next paragraph. At the commencement of his cross-examination he showed a remarkable reluctance to accept that in his valuation of the Golf Course Land he had relied on the contents of the ILC Report, even after he was shown a fax which he had sent which clearly and unequivocally stated that he had done so. Only when pressed with the language of the fax did he finally accept that this was so.
b)
Paragraph 8.5.1.18 of his Report reads:
"[SLEC] is under an obligation to contribute financial support to the Golf Course Project in recognition of the value to [SLEC] of the use of the clubhouse facilities by residents of the villas. This support should amount to $500 per unit per month: however, due to the shareholders dispute, this contribution is currently not being paid."
In fact there has never been any such obligation or payment. Mr Brooke took this statement on trust from the ILC Report without any attribution of source or any inquiry as to its truth, and set out the passage cited as though it was a verified fact and treated it as such in his valuation.
c)
His report made no allowance for Developers Profit. The explanation which he gave for this in a Joint Memorandum of the 19
th July 2002 was as follows:
"Mr Brooke has made no specific allowance for Developer's Profit on the basis that as at 31
st March 1997, having secured the land, the Land Use Rights, approval of the Master Plan and significant pre-lease interest together with completion of the land formation and part of the associated infrastructure, the only inherent risk remaining was that of construction risk and market absorption, both of which he had allowed for in the adoption of a high construction cost and a phased programme of development."
In his cross-examination however he told me that the Developers Profit was at all times reflected in his high construction cost and a 10% "large site adjustment". That explanation does not readily accord with the passage in the Joint Memorandum: Mr Brooke acknowledged when pressed (and only when pressed) that risk is not the only ingredient of Developers Profit. Perhaps even more remarkably at no time did Mr Brooke in his Reports or in the course of the joint meetings of experts or the Joint Memorandum give this explanation or indeed (and on this issue I prefer the evidence of Mr Wong to that of Mr Brooke) refer to any "large site adjustment" (which has no place in his Report). I accept the evidence of Mr Wong that "large site adjustment" is a term that does not have any recognised meaning or significance, least of all in context of allowances for developer's profit.
d)
Mr Wong in his expert evidence stated that Investors would be deterred from purchasing the Housing Project by the false representations and breaches of warranty by the Defendants and applied a discount to reflect this in the price obtainable. Mr Brooke's response in the Joint Memorandum was that this factor was "outside his instructions". In his evidence he went further and said that to give a valuation on this basis would place him outside his Professional Indemnity Policy. I cannot understand why an expert valuer should not be competent to express a view on the impact of such considerations on a prospective purchaser and consequently on the price obtainable and why this factor may not significantly affect the price obtainable, as Mr Wong has told me that it would. His judgment is no doubt subjective in the sense that there may be no scientific proof or standard applicable, but it is the informed view of an experienced valuer in China where (according to paragraph 1.13 of Mr Brooke's report) "rational investors and developers frequently allow subjective rather than objective considerations to dominate their thinking".
e)
I am also troubled by a number of errors and omissions in the instructions given to Mr Brooke. For example in paragraph 5.11 he stated as follows:
"On 31
st March 1997, SLEC entered into a lease agreement with SLGCC for the lease and possible transfer of Land Use Rights of the Golf Course Land to SLGCC for a nominal consideration. In consideration for this lease agreement SLGCC undertook to assume the obligations of paying Huaxia the Land Use Right Transfer fee of $3,988,363 which became payable after 31
st March 1997."
The reference to the undertaking by SLGCC is a reference to the Two Party Assumption Agreement which was the subject of detailed argument at the First Trial and detailed consideration in the Judgment. Mr Brooke's valuations reflect the "entitlement" of SLEC under this undertaking (see e.g. paragraph 8.1.10). Mr Brooke assured me that he had carefully studied the Judgment and based his statement of facts upon its contents. If this is true, which I find difficult to credit, his reading must have been selective, for he plainly did not take notice of the holding that the undertaking had no legal effect.
f)
In paragraph 5.12 Mr Brooke refers to the transfer in April 2000 of the Golf Course Land by SLEC to SLGCC. But (no doubt because he was kept in the dark) his Report is nowise reflects the subsequent transfer of the Golf Course Land by SLGCC to SHTI and indeed the subsequent mortgage of the Golf Course Land by SHTI.
g)
I am troubled that Mr Brooke did not investigate the seven sales of villas effected by SLEC and require his clients to afford to him access to all necessary information for this purpose, though he spent a week in Shanghai investigating the Projects.
THE HOUSING LAND
"SUMMARY OF VALUATIONS
NATURE OF INSTRUCTIONS |
MR BROOKE |
MR WONG |
31 May 1997 |
|
|
Housing Land
(assuming full payment of the land use right fees) |
$150 million |
N/A |
Housing Land (assuming non-payment of the land use right fees |
$125 million |
N/A |
Housing Land (assuming representations and warranties were false |
N/A |
$67.40 million |
Housing Land (assuming representations and warranties were true |
N/A |
$23.70 million (subject to further deduction of interest payment and penalties where applicable). |
Golf Course Land (assuming full payment of land use right fees) |
$26 million |
Not Instructed |
31 May 2002 |
|
|
Housing Land (assuming full payment of land use right fees) |
$160 million |
N/A |
Housing Land (assuming non-payment of land use right fees) |
$135 million |
N/A |
Housing Land (assuming representations and warranties were true) |
N/A |
$106 million |
Housing Land (assuming representations and warranties were false) |
N/A |
$60.70 million (subject to further deduction of interest payment and penalties, where applicable) |
Golf Course Land (assuming full payment of land use and right fees) |
US22 million |
Not Instructed |
214.
Mr Wong and Mr Brooke agreed that the assets of the Housing Project as at the 31
st March 1997 were 757,000 square metres of undeveloped land and residential infrastructure only; and as at the 31
st May 2002 the assets were 757,000 square metres of undeveloped land, residential infrastructure and 51 villas, 7 of which had been sold on long leases, 33 were let on short leases and 11 were unlet. The Business Plan provided that the Housing Project would be developed in phases, and the experts agreed that the proposed development should be split into five phases, with the first three comprising the villas and the last two comprising the apartments. Both experts agreed that the most appropriate method of valuation for this case would be the Direct Comparison Method, but in view of the insufficient number of appropriate site transactions, both valuers agreed to resort to the Residual Method of Valuation for valuations at both dates. There have been (as I have said) seven sales of villas, full details must plainly be known to the Hansens, but they have declined to disclose or provide information in respect of these sales. The clear inference is that this is because it would not assist the Defendants' case. Effectively all that has been forthcoming is a schedule relating to four sales, and all that is known and can be said in respect of these sales is that the purchase price in respect of one is overstated 50% and the purchase price in respect of another is not fully paid even today.
"Element of valuation
31 March 1997 31 May2002
(1) Gross Development
Value (psm)
(a) Mr Brooke Villa: $2,700 Villa: $2,200
Flats: $2,295 Flats: $1,760
(b) Mr Wong Villa: $2,400 Villa: $2,100
Flats: $1,680 Flats: $1,500
(2) Construction Cost (psm)
(a) Mr Brooke $1,000 $600
(b) Mr Wong $800 $600
(3) Professional Fees
(a) Mr Brooke 10% 10%
(b) Mr Wong 10% 10%
(4) Interest Rate
(a) Mr Brooke 10.5% 7%
(b) Mr Wong 10.5% 7.5%
(5) Marketing Costs
(a) Mr Brooke inc. in Contingency inc. in Contingency
(b) Mr Wong 3% 3%
(6) Contingency
(a) Mr Brooke 10% 10%
(b) Mr Wong 10% 10%
Element of valuation
31 March 1997 31 May 2002
(7) Developer's Profit
(a) Mr Brooke See below See below
(b) Mr Wong 22.5% 20%
Mr Brooke has made no specific allowance for Developer's Profit on the basis that as at 31 March 1997, having secured the land, the Land Use Rights, approval of the Master Plan and significant pre-lease interest together with completion of the land formation and part of the associated infrastructure, the only inherent risk remaining was that of construction risk and market absorption, both of which he has allowed for in the adoption of a high construction cost and a phased programme of development. As at 31 May 2002, the risk is considered materially less in that all of the infrastructure is complete for the entire development, villas have been constructed and the surrounding golf course and supporting facilities are in place.
(8) Valuation of Surplus Land and Town Centre
(a) Mr Brooke $470 psm $461 psm
(b) Mr Wong $123.9 psm $161.7 psm
(9) Adjustment assuming false representations and breached warranties
(a) Mr Brooke Outside instructions Outside instructions
(b) Mr Wong -50% -30%
(10) Adjustment for payment of Land Use Right Fees
(a) Mr Brooke $25m* $25m*
(b) Mr Wong $19.957m** $19.957m**
·
Assuming commercial settlement
** Assuming levy of interest and liquidated damages (unknown amount)
(10) Adjustment for payment of Land Use Right Fees (Cont'd)
Mr Brooke referred to the possibility of SLEC remaining responsible for the settlement of Land Use Right Fees for both the Housing and Golf Course Projects and for this reason valued the Golf Course Project to demonstrate that the value of the asset covered any outstanding Land Use Right Fee due in respect of the Golf Course Land as at 31 March 1997 and 31 May 2002.
(11) Completed Villas
31 March 1997
31 May 2002
(a) Mr Brooke N/A $27.6m
(b) Mr Wong N/A $26.3m"
Gross Development Value
218.
The average prices of $2,000 achieved at Mandarin reflected one of the most upmarket low-density developments in a highly reputable residential location. After anxious consideration of the full material before me, I have concluded that Mr Wong's figures for villas and flats Gross Development Value ought to be accepted, and that the figures given by Mr Brooke are too high.
Construction Cost
Marketing Costs
220.
Mr Brooke and Mr Wong agreed a 10% contingency allowance. Mr Wong also provided 3% for marketing costs. Mr Brooke has included that 3% in his contingency 10%. It seems to me that a separate sum (distinct from the required 10% contingency) is required, as Mr Wong says, of 3% for marketing.
Developer's Profit
221.
Mr Wong has included a developer's profit of 22½% as one of the crucial elements to be considered in arriving at a property valuation which he regarded as very moderate. This provision cannot and is not seriously challenged by Mr Brooke. Mr Brooke again for the first time in his evidence told me that this element was incorporated in the additional 20% added to construction cost and a 10% "large site adjustment" not referred to previously. I think that Mr Wong's figure is clearly to be accepted.
Surplus Land and Town Centre
222.
According to the Business Plan surplus land with a site area of 41,527 square metres was permitted to be developed with a maximum gross floor area of 41,564 square metres for hotel residential development. There is no information as to the design and development available. There is no planning approval. There are no detailed designs. There is no construction programme. The likelihood of development is remote on this account. Mr Brooke has allowed a 50% discount from the average accommodation value of the Housing Project. Mr Wong considers that, in view of the uncertainties as to development potential, a prospective purchaser would only pay a nominal hope value for the remote development potential and his discount is for this reason 70%. There is a like difference between the experts regarding an area of 27,871 square metres designed for town centre development when for the same reason Mr Brooke suggests a discount of 50% and Mr Wong of 70%. In both cases I think that Mr Wong's more conservative approach is more realistic and should be adopted.
Fraud and Breach of Warranty
223.
Mr Wong in his Report and under cross-examination maintained the view that, if any prospective purchaser was aware of the warranties and representations made by the Defendants and that they were false (and in the case of Sealand and the Hansens) made fraudulently, such a prospective purchaser would almost certainly have refused to consider making an investment in the Housing Project. Any prospective purchaser would under such circumstances have been extremely wary of making an investment where there were likely to be hidden liabilities, risks to the land and risks of litigation which could last for a long time and affect the proper transfer of the land. Owing to these factors the potential purchaser would have either looked for other more secure forms of investment (e.g. the purchase of another development site) or would have demanded a very substantial discount reflecting the inherent risk and uncertainty relating to the Project, which he placed at a minimum of 50%. The view he expressed was subjective, in the sense of being based on his own wide knowledge and experience of the market and investors. Mr Brooke made no provision for any such discount. I have already pointed out that his valuation was made simply on the basis whether or not the instalments of purchase price had been paid, without any reference to the misrepresentations and breaches of warranty. His explanation in the Joint Memorandum for his failure to make any provision was simply that this was outside his instructions. In his cross-examination he maintained this position, but added that he could not estimate the effect of the fraud and breaches because to do so would take him outside the scope of his professional indemnity policy. I therefore get no assistance from Mr Brooke on this element. I am fully satisfied that Mr Wong was fully competent to express an opinion on the impact of the fraud and breaches of warranty on a purchaser in this market in China and his views appeared to me to be well reasoned and convincing. I fully accept his evidence on this matter and his discount.
Adjustment for Payment of Land Use Rights
224.
Mr Wong has allowed the principal due under Housing Land Contracts to which must be added the accrued interest and liquidated damages. From only one source of material, namely the Judgment, Mr Brooke has assumed that a commercial settlement with Huaxia could have been reached in respect of all outstanding payments. I do not think that as at the 31
st March 1997 the prospective purchaser could or would have assumed any such settlement. As I stated in the Judgment, Huaxia throughout the period leading to the First Trial insisted on full payment. That was the relevant scenario at the time, and the purchaser (in accordance with Mr Wong's valuation) would have insisted on full provision of all sums due.
Conclusion on Valuation of Housing Land
225.
In the circumstances without hesitation I adopt Mr Wong's valuation as at the Closing Date of the Housing Land. The value of the Housing Land at the date of the Inquiry is not relevant. After hearing Mr Jacob's final speech, to save the costs of an extra day of the hearing, I did not hear Mr Kosmin on this issue. Nonetheless I may add that, if it were relevant having heard the full evidence and full argument by Mr Jacob and considered carefully the evidence of Mr Brooke, I would unhesitatingly accept Mr Wong's lower valuation as at the date of the Inquiry.
Valuation of Golf Course Land
"Total costs to construct the Golf Course is budgeted at $12.1 million, approximately $3.1 million for Phase 1 of the Clubhouse ... only approximately $4 million additional funds needs to be raised."
The evidence before me is to the effect that the balance of the cost of construction (so far as it existed) was constituted by monies representing pre-paid memberships held in a trust account by TCS. The Defendants' case and Mr Stuart Hansen's evidence is to the effect that the money was paid over to SLEC for its purposes. As Mr Brooke confirmed, the cost figure of $12.1 million was an understatement and (with the misapplication of the trust monies) SLGCC did not on the 31
st March 1997 pay for construction: recourse was necessary to the subscription monies subscribed by the Claimants. Looking at the situation on the 31
st March 2002 regard must be had to the fact that in flagrant breach of an injunction which I granted on the 2
nd November 2001 the Hansens in December 2001 caused SLGCC to transfer the Golf Course Land to SHTI, and SHTI to grant a series of mortgages to a bank and borrow (according to Mr Barry Hansen) approximately $4.25 million on the security of that mortgage. SHTI is only 79.6% owned by SLGCC, some 20.4% of its shares being held by Huaxia ICC, a subsidiary of Huaxia. The only interest of SLGCC in the Golf Club on the 31
st May 2002 was what (if anything) SHTI (controlled by the Hansens) will ever wish and be able to pay to SLGCC in respect of the transfer of the Golf Course Land.
PART VII
CONCLUSION
229.
I accordingly conclude that in general answers to the questions raised in Part I of this judgment that: (1) the Subscription Shares must be valued as at the Closing Date; (2) the value of the Subscription Shares as at the Closing Date was nil; (3) the only credits to be given are by APGF for the $3,250,000 received from New York Life Insurance Company Limited and by Wardley (if anything) of $1; (4) no deduction from or reduction of the net sum arrived at after such credit falls to be made on any of the grounds advanced by the Defendants; (5) in particular the Claimants have not failed to mitigate their damage but have at all times acted entirely reasonably, honestly and properly notwithstanding the gravest provocation by the Defendants; and (6) the First and Fifth Claimants in nowise sought to influence the expert evidence of Mr Brooke or interfere with his acting for the Defendants. The Claimants are accordingly entitled to the damages claimed of $49 million (less the credit of $3,250,001) and interest.
(a) any typographical, syntactical or grammatical errors - a combined list would be appreciated;
(b) any points where I had either misrepresented or not set out or dealt with their principal arguments;
(c) where I had misstated any agreed or obvious facts;
(d) any other points of which they thought that I should be aware.
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