Introductory Notes:

The Democratic Party received the Report from the Target Link Issue Investigation Panel on June 30, 2005.  The Panel wishes to draw to the attention of the Central Committee and the Party that those who provided evidence to the Panel voluntarily may reasonably object to their evidence and material provided by them being published without their consent. There may be other legal issues surrounding the publication of this report. After considering the advice of the Panel related to the legal issues that may arise from the publication of the report and the requests for protection of personal anonymity from some of the individuals who were interviewed by the panel but not subjects of the inquiry, the Central Committee decides to issue this Extract for public scrutiny. The text of this Extract is a direct copy of the Report with no change in wordings whatsoever, and it contains a substantial part of the Full Report[1]

Background

1. A Panel was set up by the Party after press reports appeared during the campaign for the Legco Elections in August 2004 alleging that James To, a Legco member and a candidate for the Kowloon West Constituency, had on his election to Legco in 1998 failed to declare his interest in the Target Link Limited (Company) to the Legco Secretariat. The majority of Panel members are non-Party members. Its members are:
2.  

Ms. Gladys Li, S.C. (Non-Party member),Past Chairman of the Bar Association Mr. Selwyn Mar (Non-Party member), Past President of the Hong Kong Institute of Certified Public Accountants Mr. Szeto Wah, a senior member of the Party and former Legislative Councillor

1. The terms of reference of the Panel are:

(1)  To examine the James To/Target Link Limited incident including the acquisition and rental issues of the property in issue and to identify the lessons to learn. (2)  To identify and recommend policies and procedures in dealing with the renting of premises using public resources that would promote best practice in this area.

1. The Panel held its first meeting on October 18, 2004 and Mr. Selwyn Mar was duly elected as the Convener. The Panel has held 8 sessions and has interviewed 13 persons to ascertain the facts.
2.  

The Panel has not had the benefit of hearing full explanations from James To and Stanley Ng.

1. James To, Stanley Ng and Chan Ka Wai were invited to attend for interviews but declined to attend. Stanley Ng and Chan Ka Wai both wrote to the Panel declining to attend on legal advice.
2.  

1. The Panel’s findings and conclusions in the Report must be read bearing in mind that the Panel has not had the benefit of hearing full explanations from them.
2.  

1. The Panel subsequently received short statements from James To and Stanley Ng In his statement, James To states that he at no time benefited from Target Link’s rental income, Target Link did not provide directors with any remuneration nor did Target Link distribute any of its profit to shareholders at any time. Stanley Ng similarly states that he never received any money/profit/dividend from Target Link directly or indirectly.
2.  

1. While the Panel was preparing the report, James To then indicated that as it appeared the Panel desired to meet him, he could attend at a date mutually convenient but might decline to answer a question on legal advice.  Given the stage that the investigation had reached, the Panel decided not to take up this offer but to make available the draft report to him for his comment which the Panel has done.  The Panel has also extended this courtesy to Stanley Ng.  The Panel has received comments from Stanley Ng and James To on the draft Report and the Panel has noted their comments. The Panel does not consider it necessary to make any changes to the Report arising out of their comments.
2.  

Findings relating to Target Link and the Purchase of the Property

1. The Panel has noted the following facts:

Contributions to the purchase of the Property

1. The balance of the purchase price including the sums paid by way of deposit and part payment was provided by a number of individuals. From the documents, it would appear that Stanley Ng and James To did contribute towards the balance of the purchase price. Further, it would also appear that James To paid for some or all of the expenses associated with the purchase of the Property.
2.  

1. On the basis of the evidence given by 5 contributors, the Panel has concluded that they each contributed HK$50,000.00 towards the deposit and part payment of the purchase price of the property. Although it appears that the Panel’s interviews of the abovementioned 5 contributors that at the end of 1996 or early 1997, there was a discussion within the Branch of purchasing a property as an office, none of the contributors could recall events exactly. There is no written record of any discussion or decision by the Branch of such a proposal.
2.  

1. In the proposal presented to the Central Committee by James To on 15 May 1997, the Property would be held by Target Link which would allot 40%-50% of its shares to investors in the Company with the share capital raised being used as a down-payment and the balance of the purchase price being paid by mortgaging the Property. The Panel notes that the proposal explicitly sets out that the mortgage payments would be settled by rental income when councilors rented the Property so that the shareholders would not need to make any further monthly payments. If this proposal had been carried through, the “contributors” were to be shareholders of the Company and the Party was to have a maximum of 30 out of the 100 shares on certain conditions. Although the Party’s shares were to be held in trust, it was not proposed that the Party should be the beneficiary of 100% of the shareholdings.
2.  

1. As noted above, shares were allotted to James To and Stanley Ng; the proposal was not carried out.  None of the other contributors were allotted or issued shares at any time.
2.  

Valuations of the Monthly Rental of the Property

1. The Panel was authorized by the Party to engage a surveyor or surveyors to provide a valuation or valuations of market rental of the Property at the Party’s expense. The Panel therefore commissioned Sallmanns and Chesterton Petty to provide a report giving their opinion of the market rent for the Property as at January 1, 2000.  The date was selected by the Panel as being the date at which the total reimbursement claimed by those renting the Premises as District and Legislative Councillors was at its highest.  Having regard to the opinions of Sallmanns[2] and Chesterton Petty[3] as to the market rental as at 1 January 2000, the Panel finds that the monthly rental actually received by Target Link for the Property, namely, HK$13,800[4] was substantially in excess of the market rental at the relevant date.
2.  

The Declarations of Trust

1. 4 documents have been put before the Panel. All are undated. They are respectively a declaration signed by James To that one share held by him in the Company “stand trust” for the Party (document 1), a similar declaration signed by Stanley Ng (document 2), a declaration signed by James To that the 50 shares (that is 50% of all the issued and paid up shares) held by him in the Company “stand trust for the Democratic Party” and which is signed by Dr. Law Chi Kwong as a witness (document 3) and a similar declaration signed by Stanley Ng and similarly signed by Dr. Law Chi Kwong as witness (document 4).
2.  

1. The Panel notes according to Dr. Law Chi Kwong, he personally had never seen the document 1 and document 2 prior to the afternoon of 23 August 2004. Further he has clarified with all members of the Party who had been Chairmen, Vice-Chairmen, Secretary-Generals and Honorary Treasurers of the Central Committee during the period from May 1997 to August 2004 that they had no knowledge of the existence of any declaration of trust document in respect of the shares of the Company nor any knowledge, report or allegation that the Party was the beneficial owner of the Property.

1. The Panel notes five substantial inconsistencies between the case which James To puts forward and the material before the Panels as follows:
2.  

1)      According to the proposal put forward by James To which was approved by the Central Committee on 15 May 1997 under which the Party would have held 30 shares in the Company through a nominee. Although this was not implemented, it is inconsistent with the Party being the beneficial owner of all the shares in the Company or even of the 50 shares held by James To. 2)      James To cannot speak for all of the contributors. Some regarded their contribution as a donation albeit not properly receipted and with the Party apparently unaware that it was the recipient of such donation. Others regarded their contribution as repayable. 3)      The document produced by one of the contributors is inconsistent with the Party being the beneficial owner of all shares in the Company or of the Property. It shows the Party owning 30% whether this refers to the Property or the Company is unclear. 4)      On 4 March 2004, the Executive Committee of the Party considered a proposal put forward by Stanley Ng which the Executive Committee transferred to the Party’s Finance Committee for its consideration. At the time, Stanley Ng was himself a member of the Executive Committee. Essentially, the proposal was that the Party should purchase the Property. The contents of the proposal are inconsistent with the Party holding the beneficial interest in the shares or the Property particularly as there is no mention whatsoever that either of the registered shareholders held their shares on trust for the Party[5]. 5)      The audited account of the Party for the year ended 31 March 1998 did not reflect any shareholding in the Company nor any interest in the Property. The accounts were prepared by the Central Committee of the Party. James To was a member of the Central Committee at the relevant time and the Panel would have expected that if indeed he and Stanley Ng held their respective shares in the Company on trust for the Party at that time, beneficial ownership by the Party would or should have been reflected in these accounts.

1. Neither James To nor Stanley Ng has taken advantage of the opportunity offered by the Panel to clear up the doubts which surround the issue of whether any of the shares in Target Link were or are held on trust for the Party. In particular, the suspicion that the undated documents produced to the press on 23 August 2004 (document 1 & 2) were only prepared shortly beforehand in response to the press revelations of and as a cover for James To’s failure to declare his interest in the Company remains.
2.  

The legal position of the Property

1. In the absence of James To and Stanley Ng’s comments, it would be wrong for the Panel to do anything other than to express doubt that the Party has been the beneficial owner of all the shares and of the Property since May 1997. The legal position is highly complex and it is not the task of the Panel to sort out for the Party what the answer is. The Party has already been supplied with its own legal advice as to the validity of the Declarations of Trust.
2.  

Whether Stanley Ng and James To benefited from the rentals

1. The Panel accepts that none of the directors of the Company received any remuneration and that no dividends were declared. However, it is not possible to accept that neither benefited from the lettings. Rentals received clearly went to repaying the mortgage on the Property, Stanley Ng and James To being the guarantors of the loan. They therefore assumed a personal liability which rentals received by the Company went towards discharging. As these rentals were reimbursed from public funds, both benefited from these arrangements.
2.  

1. Further, the Company did make a profit on the rentals earned and at least, on paper, James To and Stanley Ng were the sole legal and beneficial shareholders. Without hearing from the individuals concerned and in particular, their answers as to why the scheme approved by the Party at the meeting on 15 May 1997 was not followed, it is not possible for the Panel to conclude either way whether the subsequent arrangements for setting of the rentals were intended by James To and Stanley Ng to be for their own personal benefits.
2.  

Propriety of the arrangements for the purchase of the Property

1. Members of the Panel are agreed that the matter of the purchase of the Property was not satisfactorily handled by the Party or the Branch. Purely from an organizational perspective, a decision approved by the Central Committee on 15 May 1997 was not followed up. Had it been, it is likely that some of the problems and uncertainties which surround the purchase and the ownership of the shares in the Company would have been avoided.
2.  

1. Mr. Martin Lee was the Chairman of the Party at the material time when the Property was purchased. He told the Panel that at the time, the Party was experiencing a lot of difficulties in finding premises to rent and he recalled an occasion when the Party was looking to expand its office premises and a prospective landlord refused to let premises when he learned the tenant was to be the Party. As the handover approached, any way of resolving this problem would have met with approval. He personally would be against making use of public funds to purchase a property for the Party and would not dream of claiming reimbursement of rentals where he used his own property for the purposes of his Legislative Council work or office. However, he understood that others within the Party who were not so financially well off as himself would do so.
2.  

1. Members of the Panel are divided in their view as to the propriety of the purchase of a property, whether for the Party, Branch or individual party members through the use of reimbursement of rental expenses claimed by District Councilors and Legislative Councilors. The majority of the Panel consider that so long as the rental paid and claimed for reimbursement is by way of market rental, independently ascertained on professional advice or opinion, there is nothing objectionable about a District Councilor or Legislative Councilor renting a property which is wholly or partly owned by himself provided that his interest in the property is declared.
2.  

Conclusions and Recommendations

1. The Party should review its guidelines for the handling of donations and contributions and for the keeping of accurate and full records of them. The same guidelines should apply to the Party’s Branches. The Party should also establish guidelines on the handling of claims made by District and Legislative Councilors for reimbursement of expenses from the public purse. How the Party is run as an organization and in particular, whether it is run on the same principles of transparency, efficiency and accountability as the Party expects from government inevitably reflects on the Party’s public image and credibility. The fact that the Party has had to obtain legal advice as to whether it has any beneficial interest in the Property or the Company is testament to the failure of the organization in handling such matters correctly.

1. The Panel recommends that where premises are rented from individuals who are Party members or from companies who are controlled by or connected with the Party and a claim will be made for reimbursement of rental expenses from the public purse, an independent surveyors’ report as to market rental be obtained before signing of the lease or entry into the tenancy and the appropriate declaration of interest be made.
2.  

1. Basic good management and administration requires establishment and implementation of systems including record-keeping, the keeping of proper accounts, the engagement of independent professionals whose value is precisely that they are independent and can be relied upon to point out weaknesses and failures. While the Panel recognizes that the Party faced difficulties particularly in 1997 which led individuals to be wary of keeping records and also met with a reluctance on the part of landlords to let properties to them for the purposes of the Party’s activities or from professionals to provide services to them, the Panel does not consider that these difficulties justify poor management and administration and bad record-keeping.

End

Central Committee Democratic Party July 16, 2005.

[1] There are 55 paragraphs in the Report.  This Extraction contains 25 paragraphs.  All conclusions and recommendations of the Panel are included in this Extract. [2] HK$7,100 per month [3] HK$5,400 per month [4] The period concerned was between January 2000 and July 2001 (i.e. for 18 months excluding April 2001 when the total rent reimbursement claimed was $12,600). [5] According to the response from Stanley Ng to the draft report of the Panel, the proposal was referring to the transfer of the Property from the Kowloon West Branch to the Democratic Party central.