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China Alarm Holdings Acquisition Llc And Another v Ing Alexander Yim Leung And Others

Judgment Cited authorities 8 Cited in Precedent Map Related
Vincent
Judgment Date24 March 2016
Year2016
Judgement NumberHCA503/2012
Subject MatterCivil Action
CourtHigh Court (Hong Kong)
HCA503/2012 CHINA ALARM HOLDINGS ACQUISITION LLC AND ANOTHER v. ING ALEXANDER YIM LEUNG AND OTHERS

HCA 503/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 503 of 2012

__________________

BETWEEN
(1) CHINA ALARM HOLDINGS ACQUISITION LLC Plaintiffs
(2) POPE INVESTMENTS LLC

and
(1) ING ALEXANDER YIM LEUNG Defendants
(also known as ING YIM LUNG, ALEXANDER)
(2) HOWARD BALLOCH
(3) SAMUEL A. STERN
(4) KWOK SIU TONG
(also known as KWOK SIU TONG STEVEN)

__________________

Before: Deputy High Court Judge Keith in Court
Dates of Hearing: 18-22, 25-26 January, 26 February and 3 March 2016
Date of Handing Down Judgment: 24 March 2016

__________________

J U D G M E N T

__________________

Index

A. INTRODUCTION
B. THE BACKGROUND
B.1 The original business in the PRC
B.2 The Safe City Project
B.3 CAHL’s role
B.4 The search for investors
B.5 The confidential memorandum
B.6 Due diligence on CAHL
B.7 The memorandum of understanding
B.8 Protection from excessive payments
B.9 The first subscription agreement
B.10 Mr Wells joins CAHL’s board
B.11 Mr Wang’s advisory role
B.12 The financial information provided to Mr Wells in 2005
B.13 The second subscription agreement
B.14 The financial information provided to Mr Wells thereafter
B.15 The 2006 shareholders’ report
B.16 Audited financial statements
B.17 Mr Wells’ resignation from the Board
B.18 The Citadel and UBS investments
B.19 The events leading to the appointment of the liquidators
B.20 The restructuring of CAHL and its subsidiaries
C. CAHL’S AGREEMENTS WITH WCL AND STORNAWAY
C.1 The services agreement with WCL
C.2 The application to amend
C.3 The employment agreement with Stornaway
D. THE REPRESENTATIONS ON WHICH THE PLAINTIFFS RELY
D.1 The representations in the memorandum
D.2 The representations in the two subscription agreements
E. WERE THE SERVICES AND EMPLOYMENT AGREEMENTS DISCLOSED TO MR WELLS?
E.1 How were they disclosed and to whom?
E.2 Miscellaneous points
E.3 No mention of the employment agreement
E.4 No mention of the services agreement
E.5 No confirming e‑mail
E.6 No other references
E.7 Disclosure to Citadel and UBS
E.8 The knowledge of CAHL’s directors
F. THE NATURE OF THE REPRESENTATIONS
F.1 The law
F.2 What the plaintiffs have to prove
G. THE FALSITY OF THE REPRESENTATIONS
G.1 The law
G.2 The compensation clause
G.3 The use of proceeds clause and clause 4.1 of each of the two subscription agreements
G.3.1 Were any genuine services provided under the services agreement?
G.3.2 The special consultants
G.4 Clauses 8.1(1), 9.1(4) and 9.1(9) of Schedule 2 to the subscription agreements
G.4.1 The employment agreement
G.4.2 The services agreement
G.5 Clause 13.1 of Schedule 2 to the subscription agreements
G.6 An idea floated by Mr Wells
H. WERE THE REPRESENTATIONS MADE FRAUDULENTLY?
H.1 The law
H.2 The unlikelihood of fraud
H.3 The compensation clause
H.4 The use of proceeds clauses
H.5 Clauses 8.1(1), 9.1(4) and 9.1(9) of Schedule 2 to the subscription agreements
H.6 Clause 13.1 of Schedule 2 to the subscription agreements
I. INDUCEMENT
I.1 The law
I.2 The memorandum
I.3 The compensation clause
I.4 The use of proceeds clause
I.5 Clause 4.1 of the subscription agreements
I.6 Clauses 8.1(1), 9.1(4) and 9.1(9) of Schedule 2 to the subscription agreements
I.7 Clause 13.1 of Schedule 2 to the subscription agreements
J. LIMITATION
K. THE PLAINTIFFS’ LOSS
L. CONCLUSION

A. INTRODUCTION

1. The Ministry of Security in Beijing has had ambitious plans to turn Beijing into a hi‑tech city with a first class security system fit for the 21st century. The catalyst was the attack on the World Trade Centre in New York in 2001 and China’s impending hosting of the Olympic Games in Beijing in 2008. If the project was a success, the idea was to install similar security systems in other cities in the PRC. The first defendant, Alexander Ing, wanted to be at the forefront of this initiative. His aim was to provide some of the services which would be required for the implementation of this proposal, and to build up, to use his own words, “a global security alarm company”. He needed finance for that. He got it from a number of entities in the US. They say, though, that they were induced to invest in Mr Ing’s projects by a number of fraudulent misrepresentations which were made to them. Two of those entities now seek to recover damages from Mr Ing to put them into the position in which they would have been if they had not made the investments in the first place. This is the court’s judgment following the trial of that claim.

2. The two plaintiffs are US companies incorporated in Delaware and Tennessee respectively. The company which they invested in was China Alarm Holdings Ltd (“CAHL”). Mr Ing was its CEO and its majority shareholder. He was also one of its directors, as were Howard Balloch (the second defendant), Samuel Stern (the third defendant) and Prof Steven Kwok (the fourth defendant). The plaintiffs have discontinued the proceedings against Mr Balloch and Prof Kwok, but on 15 August 2013 they obtained interlocutory judgment against Mr Stern for damages to be assessed. He was not given notice of the trial, and so the trial was limited to the plaintiffs’ claim against Mr Ing.

3. The plaintiffs’ case is that they were induced to invest in CAHL by a number of representations about CAHL’s operations and the intended use of the capital it was seeking to raise for which Mr Ing was responsible. Specifically, he had not disclosed that a company controlled by him had entered into an agreement with CAHL to provide consultancy and management services to CAHL for three years for substantial monthly fees, and that those services included bribes to corrupt officials in the PRC. Nor had he disclosed that another company controlled by him had agreed with CAHL to provide his services to CAHL for three years for substantial remuneration. The plaintiffs contend that Mr Ing knew that this failure to disclose these facts had made the representations false, or at the very least that he turned a blind eye to the possibility that it might have made them false. The plaintiffs claim that they relied on those representations in deciding to invest in CAHL, and they subscribed for a total of some US$15.55 million in convertible notes issued by CAHL in 2005 and 2006. In 2009, CAHL went into insolvent liquidation, and the plaintiffs lost almost the whole of their investment. The two causes of action pleaded against Mr Ing are fraudulent misrepresentation (the tort of deceit) and conspiracy. However, Mr Douglas Lam SC for the plaintiffs acknowledged that the cause of action in conspiracy added nothing to the case if the claim for fraudulent misrepresentation succeeded, and would have to be dismissed if the claim for fraudulent misrepresentation failed. In the circumstances, the plaintiffs did not pursue their claim of conspiracy.

4. There are a number of companies whose names will be cropping up in the course of this judgment. I have included a corporate structure at the end of this judgment for the convenience of a reader of it. It was originally one of the appendices to the first witness statement of Cosimo Borrelli, one of CAHL’s liquidators. There has been no formal agreement that the structure is accurate, but it has not been disputed, and I proceed on the assumption that it is correct. Moreover, in order to understand why the plaintiffs contend that the various representations relied on were false, and that Mr Ing knew that they were false (or turned a blind eye to the possibility that they might have been), it is necessary to set out the background facts to see the context in which the representations relied on by the plaintiffs were made. I trust that I will be forgiven for doing that in some detail, but the exercise is a necessary one. Most of those background facts are not in dispute, but where they are I shall explain what my findings are on them.

5. In the course of this judgment, I have referred at various times to being “sure” of something or not being “in any doubt” about something. That does not mean that I have forgotten that the standard of proof is the normal civil standard of what the probabilities are. It simply reflects the level of certainty I happen to be in on that particular issue. Nor have I overlooked that an allegation of fraud is a grave one, and that this “is a circumstance which has to be weighed in the scale in deciding as to the balance of probabilities”: Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 at p 274C-D.

B. THE BACKGROUND

B.1 The original business in the PRC

6. Mr Ing is an electrical engineer by profession. He has considerable experience in infrastructure projects in the PRC. One of those projects related to the provision of security services using analog technology to banks and...

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