IpsofactoJ.com: International Cases [2006] Part 11 Case 9 [CFA]



Tripole Trading Ltd

- vs -

Prosperfield Ventures Ltd






5 JANUARY 2006


Justice Bokhary PJ & 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.

    Justice Ribeiro PJ & Justice Litton NPJ


  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 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 :

    1. to act honestly, in good faith and in the best interests of the companies;

    2. 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 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 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 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 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”.

  21. The breach of fiduciary duty is based on an alleged misappropriation of Panco’s SCIC shares by its directors. The unexplained twist in the pleadings is as to how the target of the constructive trust became the SFC shares in place of the 45,661,500 SCIC shares allegedly transferred from Panco to China Projects.

    The significance of the Prosperfield claim

  22. As indicated above, Panco’s pleaded case (leaving aside for the moment the assigned SCIC debt) is that about a week after the 11 June agreement, Tripole was itself dispossessed of any meaningful assets in the shape of its indirect holding of shares in Panco. Madam Ding and Mr Zheng, this time as fiduciaries of Panco, are said to have caused Panco to divest itself of its 45,661,500 SCIC shares (the subject of the Panco action) in favour of China Projects. If this divestiture was successfully achieved, it would leave Tripole holding shares in Crofton which would be a company without any assets other than a debt from China Projects which would never have to be repaid. The single share in Panco held by Tripole would not have any significant value.

  23. Accordingly, the assigned SCIC debt apart, no commercial benefit accrues to Prosperfield in having the 11 June agreement rescinded and in having a constructive trust imposed on the Crofton shares (and the single Panco share): Crofton and Panco having been stripped of assets.

  24. The value of the Prosperfield claim therefore depends on whether Panco succeeds in its action against China Projects. If Panco does succeed, it would in theory be entitled to have restored to itself the asset represented by the SCIC shares (leaving aside for now (i) the fact of their having been pledged and (ii) the status of such shares after the restructuring). But if Panco were still controlled by Tripole, the plaintiffs would get no real redress: Hence the significance of the Prosperfield action.

  25. Unlike in the Panco claim where a major issue arises as to whether the 17 June agreement was ever completed, there appears to have been no impediment to completion of the Prosperfield agreement with Tripole: There is no reason why Prosperfield could not transfer its shares in Crofton (a private BVI company with its share register kept in Hong Kong), or its one share in Panco (a Hong Kong company) to Tripole (another Hong Kong company). Nor was there any reason why it could not likewise assign away the alleged debt. The Statement of Claim says that these acts were done. Assuming that was established, and if nothing further had happened, a proprietary claim against Tripole in respect of those shares would have been perfectly feasible.

    The Prosperfield debt

  26. Turning to the assigned debt, if Prosperfield established its claim, the 11 June agreement and the deed of assignment would be rescinded, enabling Prosperfield to bring a claim against SCIC for repayment of that debt, for what that was worth.


  27. SCIC was, as referred to earlier, a company incorporated and registered in Shenzhen, PRC. It was a creature of Mr James Peng, a resourceful young entrepreneur who, from humble beginnings had, by about January 1990, built SCIC into a seemingly wealthy company. In March 1990 it was listed on the then new Shenzhen Stock Exchange; the first Sino-Foreign company to do so. The “foreign company” element in SCIC was Panco, a Hong Kong company. Under the laws of the People’s Republic of China as applicable in the Shenzhen Special Economic Zone all shares held by a foreign entity (here it was Panco) are designated “legal person shares”: Dealings in them are restricted: They are subject to approval by the Shenzhen Securities Management Office and the Shenzhen Stock Exchange.

  28. Mr Peng held his controlling interest in SCIC through a web of companies, including Prosperfield, Crofton and Panco (in that order).

    Proceedings in the courts below

  29. The judge (Deputy High Court Judge Carlson) focussed on the question whether entering into the June 1993 agreements had been authorized by an oral agreement between Mr Peng and Madam Ding made on 18 March 1993. Having found (at §83) that there was no such agreement, he held (at §89), by reference to the June 1993 agreements, that Madam Ding and Mr Zheng “had wrongfully .... divested Mr Peng of his interest in his companies down to Panco and SCIC”. Mr Peng is not a party to the proceedings; the judge no doubt meant that it was Prosperfield and Panco who were so divested of their interests in SCIC as he held (at §92) that they had “authority to bring the actions”. He therefore evidently found (by what route is not clear) that the June 1993 agreements had been completed and that the Crofton shares had indeed been transferred out of Prosperfield to Tripole, and the relevant assets from Panco to China Projects (see §94). In the Prosperfield action, he ordered rescission of the 11 June agreement and of the assignment and declared that the Crofton shares and the debt were held by Tripole as constructive trustee for Prosperfield.

  30. It is now common ground that no action was ever taken to give effect to the 11 June agreement. Mr Peng had custody of the share register of Crofton at all times. No attempt was made to register Prosperfield’s shares in Tripole’s name. As regards the debt, no notice of assignment was ever given to SCIC. On 23 June 1993 an ex parte injunction was made by Leonard J restraining Tripole from dealing in Prosperfield’s shares in Crofton. That was how things remained until the trial nearly 10 years later.

  31. We would add here in parenthesis that at trial, it was admitted that the averment of an assignment of a debt of $160.5 million purportedly owed by SCIC to Panco was a mistake: There was only one debt of HK$160.5 million owed by SCIC to Prosperfield. None to Panco.

  32. The Court of Appeal (Rogers VP, Le Pichon JA and Sakhrani J) was concerned almost entirely with relief in the Panco action. In relation to the Prosperfield claim, Rogers VP upheld the judge’s decision, adding that (§45):

    The amount that the plaintiff in that action may succeed in establishing its claim to any monetary compensation may depend on whether Panco recovers all that is due to it.

  33. This is consistent with the view taken above as to the significance of the Prosperfield action. However, as previously noted, whether relief awarded to Prosperfield is to have any commercial reality depends largely on the outcome of the Panco appeal.

    Difficulties facing the Panco claim

  34. Panco’s pleaded case and the relief it claims require Panco to prove that its assets in the form of the 45,661,500 SCIC shares of which it was registered owner were in fact transferred to China Projects. It is only by such a transfer that Madam Ding and Mr Zheng are said in the pleadings to have “stripped” Panco of assets in breach of their fiduciary duty, causing Panco loss. Likewise, it is only if such a transfer had taken place that China Project’s holding of SFC shares might be said to be the traceable proceeds of the directors’ breach of duty and impressed with a trust in Panco’s favour.

  35. In this regard, Panco faces two fundamental difficulties: By the time of the 17 June agreement, (i) the bulk of Panco’s 45,661,500 shares had been pledged to banks; (ii) the Shenzhen courts and governmental authorities had intervened so that dealings in SCIC shares by financial institutions had been suspended (on 7 April 1992); SCIC had been de-listed (on 7 July 1992); SCIC’s management had been taken over by a restructuring committee (on 19 March 1993); and the Higher People’s Court had ordered all SCIC shares held by financial institutions by way of security to be placed under the custody of the Securities Management Bureau of Shenzhen City (on 7 May 1993).

  36. Given this background, it is quite impossible to see how Panco could ever have effected transfer of its 45,661,500 shares in SCIC to China Projects, whatever might have been agreed under the 17 June agreement.

  37. In fact, the evidence clearly shows that there was no such transfer, undermining both the personal claims against the directors and the proprietary claim against China Projects.

  38. As mentioned earlier, SCIC was first listed in the Shenzhen Stock Exchange in March 1990 as a Sino-Foreign company; the shares registered in Panco’s name were “legal person shares”, with restrictions on dealing. Transfers were subject to the approval of two authorities.

  39. Within two years of its public listing, dealings in SCIC shares by financial institutions were suspended and its books seized by the authorities for investigation. This shadow cast over the first of its listed companies must have grievously darkened the reputation of the burgeoning Shenzhen Stock Exchange. A report made by an investigating group of the People’s Bank of China to the Shenzhen Intermediate People’s Court dated 9 September 1992 concluded that there were massive frauds from the beginning: Panco “never injected any capital into SCIC” and allocation of shares from appreciation of fixed assets was “fictitious and illegal”.

  40. In December 1992, the Shenzhen Intermediate People’s Court held that loans between the Bank of China and SCIC and Panco were null and void on the basis that Panco’s SCIC shares given as security were invalid, having been illegally allocated. Although this judgment was, in May 1993, reversed in part by the Higher People’s Court of Guangdong Province (on the basis that the charging agreements were in themselves valid), the finding that the shares were illegally obtained was varied only to this extent: That a finding of illegality was a matter to be dealt with by the Shenzhen regulatory authorities, not the court.

  41. By mid-1992, as the judge found, Mr James Peng was “persona non grata” in Shenzhen: The object of the restructuring exercise was plainly to purge SCIC of Mr James Peng’s interest and influence (through Panco) in the company: Hence, as the judge found, “Mr Peng’s holding in SCIC [was] .... totally extinguished”; it was “inconceivable that the regulatory authorities in Shenzhen would countenance the prospect of Mr Peng getting back, by virtue of an order of this court, what was so comprehensively removed from him in 1993 following a most thorough enquiry into his activities”.

  42. On 9 August 1993, the Restructuring Report made by the Reorganization Leading Group to the Shenzhen Municipal Government (“the Leading Group”) was issued. It was damning of Panco and found, among other things, that SCIC needed to make provision for bad debts totalling RMB 270,206,000, including a debt of RMB 96,284,000 from Panco; that Panco had purported to increase SCIC’s share capital by RMB 2.7 million without the necessary approvals and therefore had acted unlawfully; that Panco had extracted RMB 23 million from SCIC based on an inflated revaluation of SCIC’s assets which it then converted into 23,128,594 SCIC shares prior to SCIC’s listing; and that Panco and its affiliated companies, in violation of exchange control regulations, had “transferred and intercepted RMB 135,080,000 of [SCIC] overseas under the pretext of payment for goods and .... equipment”.

  43. The Leading Group proposed a complete restructuring of SCIC’s capital, renaming the corporation SFC and redistributing its shares away from Panco.

  44. The findings and recommendations of the Leading Group were accepted by the Shenzhen Municipal Government and implemented by Decree 355 (1993) issued on 20 August 1993.

  45. China Projects was allotted a total of 34,411,500 SFC shares representing 38.23% of SFC’s capital, of which it had to subscribe for 17,258,800 SFC shares at the price of RMB 3 per share. A government corporation known as Shenzhen Urban Construction Development (Group) Ltd was allotted 11.5m shares representing 12.5% and the general public held 44,338,500 shares representing 49.27%.

  46. On 29 December 1993, as the judge found, “the Shenzhen Government issued its Directive 918/1993 .... assenting to the creation of a new company SFC to succeed SCIC and the redistribution of SCIC’s shares to this new company. This represented the final nail in the coffin for Mr Peng’s holdings in SCIC. They were totally extinguished and redistributed. Madam Ding’s company China Projects were as a result given 38.235% in SFC”.

  47. It was by this restructuring process, and not through completion of the 17 June agreement, that China Projects became holder of its SFC shares. This is why there is an unexplained gap between Panco’s pleadings setting up the breach of fiduciary duty relied on and the proprietary remedy sought in relation to China Projects’ SFC shares.

    Analysis in the courts below

  48. The judge did not analyse the evidence to see if there had been an actual transfer of the SCIC shares from Panco to China Projects pursuant to the unlawful agreement of 17 June. He found China Projects and the individual defendants liable for breach of fiduciary duty, stating merely that he was satisfied that Mr Peng was “divested of his interest in his companies down to Panco and SCIC” (§89). However, he refused to make an order requiring China Projects to deliver up the shares; he also refused an injunction against China Projects restraining it from dealing with them, holding that he could not grant such relief without cutting across a jurisdiction properly to be exercised by the Shenzhen court (§98).

  49. The learned judge did not permit himself to be troubled by the issue of “causation”: He treated it as a point of “last resort”: Namely whether any breaches of duty on the part of Madam Ding and Mr Zheng caused any loss or damage. He concluded that “but for” their unlawful acts (the making of the bogus agreements) they “would not have been in a position to demonstrate to Shenzhen that their company China Projects was the owner, through Panco, of over 50% of SCIC’s shares.” He said that it was their “wrongdoing which enabled that authority to allocate a proportion of Panco’s shares in the restructured company....” (emphasis added)

  50. In other words, in the context of the causation argument (but not otherwise), the learned judge was apparently adopting a fresh theory. He was not saying that, through acts done pursuant to the 17 June agreement, ownership in the 45,661,500 SCIC shares passed from Panco to China Project: He was now saying that the piece of paper evidencing the agreement was used by Ding and Zheng to “demonstrate” to the Shenzhen authorities that China Projects had become the owner of those shares, which thus enabled those authorities to allocate some SFC shares in the restructured company to China Projects. How precisely this enabling took place was not explained.

  51. This was, of course, not the case as pleaded by Panco and as examined at the trial. Whether any basis exists for treating this as a viable alternative claim is discussed below.

    The Court of Appeal’s decision

  52. Oddly, it was not the defendants who appealed.

  53. Dissatisfied with the judge’s order, Panco lodged an appeal to the Court of Appeal, arguing that the judge:

    .... should have gone further and should have granted relief to the plaintiffs that not only included an order directing the return of the shares which had been wrongfully taken but should have allowed the plaintiffs to trace the proceeds of those shares and to seek compensation based on the fact that the plaintiffs had been wrongfully deprived of the shares and loan.

  54. Panco was therefore returning in the Court of Appeal to the pleaded theory that the 45,661,500 shares had “been wrongfully taken”, and that somehow the SFC shares now held by China Projects represent their traceable proceeds.

  55. Rogers VP accepted that theory, stating that Madam Ding “secured all the shares of SCIC that had previously been in the name of Panco to be fraudulently transferred into the names of a company, China Projects Ltd, which she and Mr Zheng owned and controlled” (§18). After examining the Report and Decree 355, he stated (§34):

    .... it is clear from the documents that [SFC] was the same company as SCIC although there had been a considerable restructuring particularly of the shareholding. That restructuring did not affect the shareholders who were members of the general public and it would seem that the restructuring proposals were designed to maintain the interests of the public shareholders in the proportion to which they should have been entitled. Importantly, also, a considerable part of the shareholding which Panco held in SCIC was transferred to [China Projects] and was so recognised. [China Projects] quite simply retained more than 17 million shares when the company was called [SFC]. In addition, those shares had attracted a 1 for 3 bonus issue. In respect of the remaining part of the shareholding which [China Projects] held in [SFC] after the restructuring, these were clearly part of the approved shares which had been originally held by Panco and had been held to have been not paid for. In respect of these [China Projects] was permitted to pay for those shares and retain them.

    He added (§35):

    In effect, Madam Ding and Mr Zheng had taken Panco’s shares in SCIC and transferred them to [China Projects] for no consideration and the fact that such interest as [China Projects] received, namely an interest in SCIC, is now given a new name does not assist the defendants.

    He concluded (§43):

    The plaintiffs are clearly entitled to trace the proceeds of what has been wrongly taken from [them]. The fact that SCIC is now named as [SFC] cannot affect the entitlement of the plaintiffs.

  56. In consequence, the Court of Appeal upheld the orders made by the judge and decided moreover that orders aimed at securing the “return” of the “proceeds” of Panco’s SCIC shares should be made against China Projects in the following terms:


    The 5th Defendant do take all steps necessary to and do use best endeavour to cause the transfer 34,411,500 shares in the capital of Shenzhen Fountain Corporation (“SFC”), [formerly known as Shenzhen Champaign Industrial Company Limited (“SCIC”)] to the Plaintiff in the following manner:-


    as for 17,152,606 shares, forthwith;


    as for 17,258,894 shares, after completion of the assessment of damages or taking of account previously ordered by Deputy Judge Carlson on 27 January 2004 and the inquiry hereinafter mentioned;


    such further shares as shall be found to be held by the 5th defendant under paragraph 2(1) [in] SFC hereinbelow, after completion of the assessment of damages or taking of account previously ordered by Deputy Judge Carlson on 27 January 2004 and the inquiry hereinafter mentioned.


    There be inquiry into


    what the 5th Defendant’s current shareholding in SFC is,


    what shares in SFC currently held by or registered in the names of the 5th Defendant in addition to the shares in subparagraphs (1) and (2) of paragraph 1 hereinabove are derived from, or obtained by reason of, the 1st and 2nd Defendants’ breach of fiduciary duty to the Plaintiff and


    what money the 5th Defendant has paid to SFC to acquire or subscribe for the SFC Shares within paragraphs 1(2) and 2(ii) hereinabove.


    There be a declaration that the 5th Defendant holds the SFC Shares falling within paragraph 1 hereinabove as constructive trustee for the Plaintiff.


    That the following question be remitted to the judge hearing the assessment of damages or taking of account and conducting the inquiry as aforesaid the amount of money which the Plaintiff should pay or reimburse the 5th Defendant for the 17,258,894 shares in SFC ordered to be transferred to the Plaintiff under paragraph 1(2) above and how this amount is to be paid.


    The 5th Defendant do transfer to the Plaintiff the full benefit and advantage of the debt of HK$160,500,000 referred to in the agreement dated 17 June 1993 made between the Plaintiff and the 5th Defendant.

  57. The Court of Appeal therefore decided that Panco is entitled to trace its 45,661,500 shares in SCIC into China Projects’ hands, as represented by the 34,411,500 SFC shares acquired by China Projects in the restructuring exercise. In our view, the Court of Appeal’s decision cannot be sustained.

  58. As previously indicated, the evidence does not show that any transfer of Panco’s 45,661,500 shares in SCIC to China Projects ever took place, whether pursuant to the 17 June agreement or at all. No basis therefore exists for contending that China Projects’ SFC shares represent the traceable proceeds of such shares.

  59. The terms of the Court of Appeal’s order also give rise to serious difficulties:

    1. The requirement in paragraph 1 that China Projects should “use its best endeavours” to cause the 34,411,500 SFC shares to be transferred to Panco is highly uncertain and therefore difficult to enforce; particularly given the extreme improbability of the Shenzhen authorities being persuaded to approve Panco, controlled by Mr Peng, as a significant shareholder in SFC in the light of the findings of criminal misconduct made against him;

    2. Paragraph 3 purports to impose a constructive trust on all 34,411,500 SFC shares held by China Projects even though on the evidence, China Projects purchased 17,258,894 of those shares at RMB 3 per share (coming to RMB 51,776,682). The order recants to the extent that it orders (by §4) a remitter of the question whether China Projects did in fact pay for those shares and if so, for Panco to “pay or reimburse” China Projects for those shares. It is hard to imagine what jurisdiction the court has to make such an order forcing a sale of shares properly purchased.

    3. As to the 17,152,606 shares in paragraph 1(1) the evidence indicates that their allocation to China Projects had strings attached: China Projects had to indemnify SCIC for debts owed by Panco so that these shares also appear to have been acquired by China Projects for good consideration.

  60. The ultimate point is that on the pleadings and the evidence, the 34,411,500 SFC shares constituted China Projects’ property, to which Panco has established no title of any sort, legal or equitable.

    A possible alternative basis for liability?

  61. Clearly, the pleaded case, based on proof of a transfer of Panco’s 45,661,500 SCIC shares to China Projects pursuant to the 17 June agreement, fails. But, given the unchallenged conclusion that, in causing Panco to enter into that agreement, the directors committed a breach of fiduciary duty, might Panco salvage its position by adhering to a claim which does not depend on a completed transfer of the 45,661,500 shares?

  62. Such a claim was, as earlier mentioned, touched on by the judge when dealing with the argument on causation. His approach was approved by Rogers VP although, as we have seen, the Court of Appeal based its decision on the pleaded primary case. The possible alternative case runs along the following lines :

    1. In breach of fiduciary duty, Madam Ding and Mr Zheng caused Panco to sign the 17 June agreement purporting to transfer its entire holding of SCIC shares (and its SCIC debt) to China Projects.

    2. This agreement was then utilised by them to persuade the Shenzhen authorities that China Projects, the innocent and bona fide holder of those SCIC shares, should be given replacement shares in SFC upon the restructuring.

    3. This was in fact the basis upon which China Projects was allotted 17,152,606 shares in SFC without having to pay for them. It was also the basis upon which they were allowed to subscribe for an additional 17,258,894 shares.

  63. Rogers VP appears to have considered that such a claim was supported by the restructuring committee’s report of 9 August 1993. That report regarded China Projects as having acquired the 45,661,500 shares, leading to the following recommendation:

    By the restructuring of the share equity, China Projects Ltd should yield up 28,508,800 shares of its 45,661,500 shares, and bought back another 17,258,800 shares with RMB 51.776m to keep 34,411,500 shares, comprising 38.23% of the total shares.

  64. This might form the basis for arguing that the directors obtained profits (in the form of at least those 17,152,606 SFC shares that they were allotted without having to make any payment) which flowed directly from their breach of fiduciary duty, making them personally liable to account for them.

    Regal (Hastings) Ltd v Gulliver

  65. A case along the lines outlined above was urged upon the Court by the respondents on the basis of Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 (later reported at [1967] 2 AC 134). The House of Lords related this form of liability to the Keech v Sandford principle. Lord Russell of Killowen explained it as follows (144-145):

    The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.

    According to Lord Macmillan (153):

    The plaintiff company has to establish two things:


    that what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in utilisation of their opportunities and special knowledge as directors; and


    that what they did resulted in a profit to themselves.

  66. However, there are fundamental objections to holding Ding and Zheng accountable for profits based upon Regal (Hastings) v Gulliver principles and the suggested alternative case must be rejected:

    1. A case based upon an abuse of a corporate opportunity by a director who profits personally from such abuse is very different from the pleaded case based upon the misappropriation and equitable tracing of the company’s property.

    2. There is no pleading that the SFC shares were obtained by proffering the 17 June agreement to the Shenzhen authorities as a demonstration of China Projects’ ownership of the SCIC shares; nor is there any pleading that the Shenzhen authorities acted on this so as to provide the causal link between the breach and the SFC shares. Not having been pleaded, this line was not investigated at the trial.

    3. If this approach had been pleaded, China Projects might well have been able to give a plausible explanation for the Shenzhen authorities’ willingness to allocate the restructured SFC shares to them. China Projects was owned as to 50% by China Weal Limited, a large conglomerate with substantial assets in Hong Kong.

    4. When Mr Peng first encountered financial difficulties in 1992 he sought China Weal’s assistance and, on 12 June 1992, China Weal had invested $60 million through a subsidiary to acquire a 49% stake in Prosperfield and so a 49% stake in Panco which held the 45,661,500 shares in SCIC. China Weal had also made an advance of RMB 148 million to SCIC directly as bridging finance to help it clear pledges on some of its pledged shares. It might therefore have made good commercial sense for China Projects (as China Weal’s 49% subsidiary) to be treated favourably in the restructuring.

    5. The Shenzhen authorities were plainly concerned to restore public confidence in SCIC, the public listing of the shares having been suspended since July 1992. The restructured company required new investment and management: China Projects fulfilled this role.

    6. Shortly after the two June 1993 agreements were concocted, the injunction in the Prosperfield action was ordered by Leonard J. This was made known to the Shenzhen authorities by Panco. In August 1993 (before Decree 355 was made) Panco had written to the Shenzhen Securities Regulatory Commission protesting against the defendants’ “attempt to illegally appropriate Panco’s assets”. This was followed by a letter dated 18 August 1993 to the Mayor of Shenzhen in the same vein. On 23 August 1993 Messrs Baker and McKenzie, on Panco’s behalf, wrote again to the Mayor, stating in full Panco’s position. The final decree which, according to the judge, “extinguished” Mr James Peng’s interest was not made until 29 December 1993 when the new articles of association were approved and authority was given for the re-listing of the shares. The Shenzhen authorities therefore had plainly acted with full knowledge of Panco’s position: The judge’s conclusion that the defendants’ wrongdoing enabled the authorities “to allocate a proportion of Panco’s shares in the restructured company” was wide of the mark.


  67. Panco’s statement of claim (paragraph 22) pleads that by virtue of the defendants’ breaches of duty, Panco had lost “the value of the [45,661,500] shares”: The particulars under that paragraph merely noted that such value was “to be assessed”.

  68. When Mr Whitehead SC was asked the date for such assessment, when the value might be ascertained, he said 1 September 1993: The date of the Shenzhen Securities Registrar’s certificate stating that China Projects was holding 34,411,500 shares in SCIC. But that, on Panco’s case, was not the date of the misappropriation. Counsel was unable to state when misappropriation took place. In reality, as Mr Thomas SC submitted, “nothing happened” pursuant to the 17 June agreement. No action of any kind was taken to give effect to the purported “sale” of the shares.

  69. It follows that no loss of any kind was occasioned by the breaches of duty. No gain was made under the agreements.


  70. In our judgment, the appeals must be allowed, the orders of the Court of Appeal in the two actions discharged, and the defendants relieved of the undertakings given in the courts below. In place of the judge’s orders, there should simply be declarations to the effect that the two agreements are void.

  71. As to costs, we would make an order nisi that the judge’s order stands, but that all costs incurred in the proceedings after 27 January 2004 (the date of the trial judge’s judgment) be awarded to the defendants, including the costs in this Court, the order nisi to be made absolute after 28 days unless a party wishing to contend for a different costs order should lodge written submissions (copied to the opposite party), in which event the opposing party should have 28 days to lodge its reply. The Court will then, if necessary, adjudicate on the matter of costs without hearing the parties further.

    Lord Hoffmann NPJ

  72. This is a dispute about the beneficial ownership of shares in Shenzhen Fountain Corporation (“SFC”) (formerly Shenzhen Champaign Industrial Company Ltd (“SCIC”)), a company incorporated under the laws of the People’s Republic of China which is registered in Shenzhen and listed on its Stock Exchange. I shall call it “the company”. It carries on business in Shenzhen in textiles and real estate.

  73. The plaintiff, Panco Industrial Holdings Ltd (“Panco”), is a Hong Kong company controlled by Mr James Peng which was until 1993 registered as the holder of a majority of the company’s issued share capital. In 1992 the company defaulted on its loans from the People’s Bank of China. Investigating accountants employed by the bank alleged that there had been false accounting which concealed the fact that Panco had not actually paid for its shares. On the contrary, Mr James Peng had used his control of the company to siphon off large sums subscribed by institutional investors and members of the public. The company was threatened with insolvency. But the Shenzhen government decided that in the interests of creditors, private investors and employees, it would organise a rescue operation.

  74. Pursuant to a government decree dated 19 August 1993, there was a reorganisation of the company’s debts and shareholdings. New government and private money was introduced. Panco’s shares were redistributed. The larger part of them, amounting to about38% of the issued share capital of the company, was allotted to another Hong Kong company called China Projects Ltd (“CPL”), partly in return for a capital subscription and partly in consideration of indemnifying the company against a debt alleged to be owing to Panco. CPL is controlled by a mainland businesswoman named Madam Ding and her associate Mr Zheng, but a 49% minority holding belongs to a subsidiary of a substantial mainland company called China Weal.

  75. The main issue in this case arises out of a claim by Panco to be the beneficial owner of the shares registered in the name of CPL. Panco alleges that the circumstances in which CPL acquired these shares gives rise to a constructive trust in its favour. I shall give a brief and broad-brush summary of the facts relied upon, ignoring irrelevant detail. It is said that in March 1993, when the rescue in Shenzhen was under way, Mr Peng enlisted the help of Madam Ding. They made an agreement by which, in return for a salary and an indirect minority interest in Panco, she would negotiate with the Shenzhen authorities to preserve Panco’s shareholding in the company. A complicated structure of holding companies was devised to keep Mr Peng’s continued control of Panco behind a curtain of corporate anonymity while Madam Ding and Mr Zheng were appointed directors of Panco and its British Virgin Islands holding company Prosperfield Ventures Ltd (“Prosperfield”) to arm them with authority to negotiate in Shenzhen.

  76. Panco claims that instead of adhering to this agreement, Madam Ding and Mr Zheng, without any notice to Mr Peng or his representative on the board of Panco, called what purported to be a meeting of the board and executed an agreement by which Panco agreed to sell to CPL

    1. all its shares in the company, for a nominal sum of $450 million, and

    2. a debt of $160.5 million alleged to be owing to Panco by the company, for $60 million.

    But CPL’s liability to pay these sums was subject to conditions so unlikely to be realised as to make the whole consideration illusory. In effect, Panco was agreeing to give away the shares and debt for nothing. Panco says that this was a breach of trust by Madam Ding and Mr Zheng as directors.

  77. There is also another appeal in separate proceedings which arise out of the holding company structure. Part of Mr Peng’s scheme was to retain a controlling interest in Panco’s holding company Prosperfield, which held the Panco shares through a wholly-owned subsidiary called Crofton Profits Limited (“Crofton”). To make assurance doubly sure, Madam Ding and Mr Zheng not only agreed to dispose of the underlying shares in the company to CPL but also held a purported board meeting of Prosperfield, at which they purported to sell to a company which they controlled called Tripole Trading Ltd (“Tripole”)

    1. all the shares in Crofton for $450 million and

    2. the benefit of a debt of $160.5 million owed by the company, apparently for its face value.

    Again the conditions upon which the price was to be payable were such as to make it illusory. Panco says that this too was a breach of trust. But the ownership of the shares in Crofton will be of practical importance only if Panco is able to recover shares in the company or damages for loss of those shares. Otherwise Crofton has no assets. I shall say something later about the assignment of Prosperfield’s debt.

  78. At the trial, Madam Ding and Mr Zheng said that they had engineered the share sales because Mr Peng had promised to give them the whole beneficial interest in Panco’s shares in the company and then tricked them into accepting a share structure by which he kept control. So they were only using self-help to take what they had been promised. The judge rejected this defence. He held that there had been no such promise and that they had acted in breach of their duties to Panco and Prosperfield respectively. There is no appeal from these findings.

  79. The question now before the Court is what the consequences should be. The judge made declarations that the agreements were void. That too is not challenged. But the defendants say that no further relief should have been granted because the impugned agreements had no consequences. They were never carried into effect. Panco never transferred its shares in the company to CPL. They remained registered in the name of Panco until the reconstruction. Prosperfield never transferred its shares in Crofton to Tripole. No notice of the assignment of debts was given to the debtor and the debts have never been collected. The whole unfortunate affair was writ in water.

  80. The judge, however, made a declaration that CPL held the assigned debt and the shares in the company which it took under the reconstruction as constructive trustee for Panco. He refused, however, to take the next step and order CPL to transfer the registered title to the shares. This, he considered, would be a breach of comity with the authorities in Shenzhen. Instead, he ordered that CPL account for any profits arising from the transaction and that CPL, Madam Ding and Mr Zheng pay damages for any loss which Panco had suffered. The Court of Appeal was less inhibited. It ordered CPL to use its best endeavours to effect a transfer and refused a stay of execution. In fact CPL has attempted to comply with the order. But the authorities in Shenzhen have refused to register Panco on the ground that, as appears to be the position in Chinese law, a Hong Kong company cannot become a shareholder in a quoted mainland company without government authorisation. Panco was once so authorised but is no longer. However, the order for an account and damages remains.

  81. As for the Prosperfield action, the judge made similar orders which were upheld by the Court of Appeal. He declared that Tripole held the Crofton shares as constructive trustee for Prosperfield (notwithstanding that Prosperfield apparently remains the registered owner). Likewise in respect of the debt alleged to be owing by the company. And he made orders for accounts and inquiries.

  82. The essence of Panco’s claim is that CPL obtained its holding of shares in the company in consequence of the impugned agreement, involving a breach of trust by the directors Madam Ding and Mr Zheng, and that it follows that CPL holds those shares as constructive trustee for Panco. That is how the claim is pleaded. The Amended Statement of Claim says, in para.17, that by reason of the impugned agreement, CPL has “purchased [Panco’s] shares” and debt, “knowing the same to have accrued to it by a breach of trust” by the directors and accordingly holds the shares and debt as constructive trustee. Paragraph 19 then goes on to say that under the terms of the restructuring, CPL became the holder of 38.25% of the shares in the company.

  83. The difficulty with this claim is that the fiduciaries, Madam Ding and Mr Zheng, obtained no property in consequence of the impugned agreement. If anyone obtained property, it was CPL. But CPL cannot simply be identified with Madam Ding and Mr Zheng. It is not, as Russell J said in Jones v Lipman [1962] 1 All ER 442, 445, “a device and a sham, a mask which [the defendant] holds before his face in an attempt to avoid recognition by the eye of equity”: see also Trustor AB v Smallbone (No.2) [2001] 3 All ER 987. CPL is a separate company set up as a joint venture with China Weal. It owes Panco no fiduciary duties. For the same reason, Panco cannot mount a claim that CPL owed a duty not to profit from an opportunity derived from its fiduciary position: see Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378.

  84. Paragraph 17 of the Amended Statement of Claim therefore correctly founds the claim against CPL, not on the ground of any breach of its own fiduciary duty, but upon receipt of the shares with knowledge of the prior breach of fiduciary duty by Madam Ding and Mr Zheng. But here two further difficulties arise. The first is a problem of causation. CPL did not derive title from an impugned transfer by Panco. It took an independent title under the reconstruction, a governmental act valid by the law of Shenzhen, the place where the company was registered and the shares were issued. As Madam Ding summarised the matter in her evidence under cross-examination (Day 16, pp 73-74):

    .... even up to the present moment no one got Panco’s shares in SCIC. The decision made by the restructuring group was that new investments have to be made to the new company. We acted according to the instruction of the Shenzhen Government to inject new investment into the company and then 38.235% shares were obtained.

    It was upon the order made by the Government that we participated in the new company by making the new investment. We did not actually take the shares in Panco in SCIC.

  85. The judge rejected this argument on the ground that CPL only obtained the opportunity to participate in the reconstruction because it produced the impugned agreement to the authorities in Shenzhen and represented that it had acquired Panco’s shares in the company. The Court of Appeal agreed.

  86. I am content to assume that as a matter of fact this was correct. It has been so found by both the lower courts. But the question is whether it affects the title which CPL acquired under the reconstruction. And for that purpose it is necessary to consider, not what would have been the position if the reconstruction had taken place in Hong Kong, but whether CPL acquired a good title under the law of Shenzhen. The claim against CPL is, as I have said, a “receipt-based claim”, alleging a constructive trust imposed upon the property on account of the circumstances in which it was obtained. But such a trust must arise under the law of the place where the property was received: see Millett J in El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717, 736 and in Macmillan Inc. v Bishopsgate Investment Trust plc (No.3) [1995] 1 WLR 978 at pp 988-990 and see also Re Harvard Securities [1998] BCC 567, per Neuberger J at p.571: “the issue of the beneficial ownership of [the] shares is to be determined by the law of Australia [where the company was incorporated and the share register kept]”. If the circumstances in which CPL obtained its shares under the reconstruction did not affect its title under the law of Shenzhen, there is no basis for imposing a constructive trust under the law of Hong Kong.

  87. There was no express evidence about the title to the shares under the law of Shenzhen but, as Mr Whitehead SC for the respondents fairly acknowledged, that was because it was assumed by everyone that CPL had obtained a good title. That was why the judge considered that an order requiring CPL to transfer the shares would infringe the sovereign right of the People’s Republic to apply Shenzhen law to the ownership of shares in a Shenzhen company. In my opinion this was based upon sound intuition, but it might have warned the judge that the problem was not merely a question of procedural remedy but cast doubt upon his conclusion that CPL held the shares which it acquired under the law of Shenzhen in trust for Panco.

  88. It may be that the Shenzhen authorities were deceived by the representations of Madam Ding and Mr Zheng that CPL had bought Panco’s shares. But that is a matter for them. If they take no steps to set aside the allocation of shares to CPL, the title remains undisturbed. I rather doubt whether they cared whether CPL had bought the shares or not. What mattered was whether it was willing to put up new money. To stand in the shoes of Panco was a doubtful advantage in Shenzhen, since serious doubt had been cast on its title to the shares and both it and Mr Peng were in bad odour. And when, before the formal allocation of shares to CPL, Panco’s solicitors wrote to the authorities to protest that the impugned transactions had been unlawful, they took no notice.

  89. In my opinion therefore there was no basis for imposing a constructive trust upon CPL in respect of the shares in the company. As for the debt owed by Panco, it turns out to have been a mirage. There was no such debt. There had been a confusion with a debt in the same amount alleged to be owed to Prosperfield. However, even if such a debt had existed, it was property situated in Shenzhen where the debtor resided and was dealt with in the reconstruction. For the same reasons, there is no basis for a constructive trust.

  90. If CPL obtained a good beneficial title to the shares in Shenzhen, there is equally no basis for ordering an account or any other remedy against it. That leaves, in the Panco action, only the order for an account and an inquiry as to damages against Madam Ding and Mr Zheng. But in my opinion, once one accepts that CPL acquired a good title to the shares, there is no evidence that Madam Ding and Mr Zheng made any profit or that Panco suffered any loss in consequence of the impugned transactions. The profits they have made arise out of the lawful title which CPL obtained to the company’s shares in Shenzhen. Similarly, Panco’s failure to realise those profits is not damage caused by the impugned transactions.

  91. As for the Prosperfield action, the orders made by the judge and the Court of Appeal simply beat the air. For what they are worth, Prosperfield may do what it likes with the shares in Crofton. And the debt due from the company was swallowed up in the reconstruction.

  92. It follows that I would allow both appeals and make the orders proposed by Mr Justice Ribeiro PJ and Mr Justice Litton NPJ.

    Justice Bokhary PJ

  93. The Court allows both appeals and makes the orders set out in the last two paragraphs of Mr Justice Ribeiro PJ and Mr Justice Litton NPJ’s joint judgment.


Michael Thomas SC, Barbara Kaplan and Godfrey Lam (instructed by Messrs Wong Poon Chan Law & Co) for the appellants

Robert Whitehead SC and Anderson Chow SC (instructed by Messrs Clifford Chance) for the respondents.

all rights reserved