Hong Kong internet tycoon in £40m legal action against C&W

Richard Li, the son of Hong Kong's richest man, Li Ka-shing, is suing the troubled telecoms group Cable & Wireless for £40m over alleged unpaid fees.

The 35-year-old has launched the lawsuit through Reach Network, a joint venture between Mr Li's Pacific Century CyberWorks (PCCW) and Australia's Telstra.

The legal action centres on Digital Island, the American internet company which C&W bought last year for £240m.

In 1999 and 2000 Digital Island and Reach entered into 20 five-year contracts to provide leased telecoms services. However, it is alleged that Digital Island pulled out of eight contracts but did not pay the cancellation fees.

C&W and PCCW are no strangers to each other. In 2000, C&W sold its majority stake in Hong Kong Telecom to Mr Li's firm for £10.4bn in a cash and share deal. Earlier this year, David Price, who was in charge of the finances at PCCW, moved to C&W to become chief financial officer.

C&W refused to comment, but it is understood that the company doesn't regard the writ as "material", which would require a London Stock Exchange announcement.

Nevertheless, it is yet another blow to chief executive Graham Wallace's plans to transform C&W into an internet-focused business by expanding its loss-making Global division.

The acquisition of Nasdaq-listed Digital Island was one of the first steps in building Global.

While Mr Wallace won praise for selling Hong Kong Telecom at the top of the market, his subsequent deals have angered some shareholders who believed that C&W should conserve cash. When Mr Wallace bought Digital Island, the company had £7bn in cash; today this has been whittled down to £2.6bn.

Under pressure from the City and following last week's credit downgrade by Moody's, C&W is understood to be planning to scale back its expenditure at Global.