FACV No. 5 of 2005 IN THE COURT OF FINAL APPEAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION FINAL APPEAL NO. 5 OF 2005 (CIVIL) (ON APPEAL FROM CACV NO. 43 OF 2004) _____________________ Between: TRIPOLE TRADING LIMITED 1st Defendant/Appellant ZHENG LIE LIE 2nd Defendant/Appellant DING PENG 4th Defendant/Appellant - and - PROSPERFIELD VENTURES LIMITED Plaintiff/Respondent _____________________ FACV No. 6 of 2005 IN THE COURT OF FINAL APPEAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION FINAL APPEAL NO. 6 OF 2005 (CIVIL) (ON APPEAL FROM CACV NO. 35 OF 2004) _____________________ Between: DING PENG 1st Defendant/Appellant ZHENG LIE LIE 2nd Defendant/Appellant CHINA PROJECTS LIMITED 5th Defendant/Appellant - and - PANCO INDUSTRIAL HOLDINGS LIMITED Plaintiff/Respondent _____________________ - 2 - Court: Mr Justice Bokhary PJ, Mr Justice Chan PJ, Mr Justice Ribeiro PJ, Mr Justice Litton NPJ and Lord Hoffmann NPJ Dates of Hearing: 7, 8 and 9 December 2005 Date of Judgment: 5 January 2006 J U D G M E N T Mr Justice Bokhary PJ and Mr Justice Chan PJ : 1. We would allow both appeals and make the orders proposed by Mr Justice Ribeiro PJ and Mr Justice Litton NPJ in their joint judgment, doing so for the reasons given in that joint judgment and in Lord Hoffmann NPJ’s judgment. Mr Justice Ribeiro PJ and Mr Justice Litton NPJ : Introduction 2. These two appeals (heard together) concern the equitable remedies that might properly flow from admitted breaches of fiduciary duties on the part of company directors. 3. There are two plaintiffs. One is Prosperfield Ventures Ltd (“Prosperfield”); the other is Panco Industrial Holdings Ltd (“Panco”). The complaint of these companies, in bare outline, is that two of their directors Ding Peng (“Madam Ding”) and Zheng Lie Lie (“Mr Zheng”) acted in - 3 - breach of their fiduciary duties as directors, to their personal benefit, causing loss to the companies. 4. In each case the duties of the directors, as pleaded in the statement of claim, were in essence these : (a) to act honestly, in good faith and in the best interests of the companies; (b) not to enter into arrangements where his or her personal interest conflicted with those of the companies, unless with the companies’ consent. Prosperfield’s pleaded case against Tripole 5. In the case of Prosperfield the wrongful act as pleaded was this : By an agreement dated 11 June 1993, Madam Ding and Mr Zheng , as directors of Prosperfield, caused Prosperfield to (a) sell to a Hong Kong company, Tripole Trading Limited (“Tripole”) the entire share capital of Crofton Profits Limited (“Crofton”), a company registered in the British Virgin Islands, and one share in Panco and (b) assign to Tripole a debt of $160.5 million owed allegedly by Shenzhen Champaign Industrial Corporation Limited (“SCIC”), a company incorporated and registered in Shenzhen. Madam Ding and Mr Zheng had (indirectly) a considerable beneficial interest in Tripole. They were two of its directors. 6. The entire shares in Crofton, the one share in Panco and the SCIC debt constituted the whole of Prosperfield’s assets. 7. Crofton in turn held all but one share in Panco (the remaining one share being the one registered in Prosperfield’s name). Panco was the - 4 - registered owner of 45,661,500 SCIC shares constituting 50.735% of SCIC’s issued shares (the bulk of which had apparently been pledged by Panco as security for bank loans made to SCIC). Accordingly, this sale would on its face (subject to certain important qualifications discussed below) give Tripole control of SCIC. 8. Under the agreement, Tripole was not actually to pay anything for either the shares or the assignment: Prosperfield was to lend Tripole the money to pay the purchase price. Completion of this agreement would result in Prosperfield having parted with its shares in Crofton and Panco and having assigned away its alleged SCIC debt. In their place would be debts in the respective sums of $450 million and $160.5 million owing by Tripole. 9. However, by the terms of the agreement, the $450 million debt would be wholly waived (without the Crofton shares or the SCIC debt reverting to Prosperfield) unless all SCIC shares pledged to banks were released and the share certificates returned to Panco within two years of the agreement, and also unless Panco’s rights as registered owner remained unaffected by any measures taken by mainland governmental authorities. The debt of $160.5 million was only to be repayable if and when Tripole fully recovered the debt allegedly owing by SCIC. 10. In the circumstances, such consideration for the sale and assignment was obviously, as Prosperfield pleads, “illusory”: The terms of the agreement made it almost certain that the loan would never have to be repaid by Tripole. In causing Prosperfield to enter into such an agreement, the directors, particularly Madam Ding and Mr Zheng, were effectively misappropriating all of Prosperfield’s assets by transferring them for nothing - 5 - to Tripole, a company in which they were interested. If all this was proved, the directors would clearly have been in breach of their fiduciary duty to Prosperfield. 11. This is precisely what the Prosperfield Statement of Claim alleges did happen. Paragraph 11 pleads that there was completion of the 11 June agreement by execution of bought and sold notes for the Crofton shares (although no mention is made of the Panco share) and by execution of a deed of assignment in relation to the debt. And paragraph 19 pleads that Tripole obtained transfer of the shares and of the debt and is accordingly liable for knowing receipt of property transferred in breach of fiduciary duty. 12. A proprietary remedy is claimed against Tripole by way of a constructive trust imposed on the shares and the debt. Personal remedies by way of “damages” are sought against the directors, alleging loss to Prosperfield of its assets. An account is sought against the directors of “any benefit received by them in relation to the Agreement” (§23). 13. The pleaded breach of fiduciary duty is therefore simple. Prosperfield’s directors are alleged, by acts performed under the 11 June agreement, to have deprived Prosperfield of its assets, giving them to Tripole, a company in which they were personally interested, effectively in return for nothing. Panco’s pleaded case against China Projects 14. Panco’s pleaded case is similar although the circumstances make its resolution much more complicated. It centres on an agreement which its directors Madam Ding and Mr Zheng caused to be made with - 6 - China Projects Limited (a Hong Kong company) dated 17 June 1993, about a week after the Prosperfield agreement. 15. As noted above, Panco was then the registered owner of 45,661,500 shares constituting 50.735% of SCIC. It is alleged that Panco was also owed $160.5 million by SCIC. By the agreement of 17 June, Panco was to sell to China Projects all its SCIC shares for $450 million; and to assign to China Projects its SCIC debt for the sum of $60 million. Again, China Projects did not need actually to pay anything, but would be “lent” the means to pay the purchase price by Panco. Yet again, the money so borrowed (totalling $510 million) would only need to be repaid if Panco’s rights as registered owner of the SCIC shares remained unaffected by governmental action in Shenzhen and if those SCIC shares pledged to banks had been wholly released within two years. Such consideration was again plainly illusory, as the statement of claim alleged : If completed, the agreement would have deprived Panco of its 45,661,500 shares and its alleged SCIC debt, leaving it merely with a debt of $510 million owing by China Projects which, in the circumstances, would never need to be repaid. 16. China Projects was owned as to 50% (indirectly) by Madam Ding and Mr Zheng. They were two of its directors. 17. Panco’s board, comprising Madam Ding, Mr Zheng and two others, purportedly authorized the agreement (§12). 18. Causing Panco to enter into this agreement is pleaded to be a breach of fiduciary duty. Once again, a proprietary remedy is claimed against China Projects on the footing that it knowingly received property - 7 - transferred to it in breach of fiduciary duty (§17) constituting it constructive trustee of the property so received. However, the Amended Statement of Claim also pleads as follows: “Under the terms of a Restructuring of SCIC on 5 September 1995 [a typographical error for 1993], SCIC became known as Shenzhen Fountain Corporation (“SFC”) and [China Projects] became the holder of 38.25% of the shares in SFC ...” 19. The statement of claim is silent as to the significance of the “Restructuring of SCIC” and of the date “5 September 1993”. Without any explanation, the claim shifts to a proprietary claim against those SFC shares. On the facts as emerged at the trial these shares (38.25% of the issued capital of SFC) were obviously not transferred to China Projects under the 17 June agreement since they only came into existence pursuant to a restructuring exercise in Shenzhen occurring some two and a half months later (as will be explained below). They also represent a different percentage holding in the company. Panco’s claim simply elides the two parcels of shares, asserting that SFC is the same corporation as SCIC, having merely undergone a name change : Hence, it is assumed that the SFC shares must somehow represent the original SCIC shares. 20. Personal remedies are sought against Madam Ding and Mr Zheng as directors in respect of loss allegedly caused to Panco by depriving it of its assets and also for an account “of all profits received [by them] arising from such purported sale under the [17 June] Agreement”.