G H Property Holdings Ltd v. Able Profit Investment Ltd
Read the full judgment text of HCA 878/2017 on BabelCite. This High Court CFI judgment was delivered on 9 November 2018.
1. The plaintiff submitted the following questions for the Court’s determination under Order 14A of the Rules of the High Court:
Cited by 2 cases · Cites 3 cases
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HCA 878/2017 [2018] HKCFI 2480 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 878 OF 2017 _________
_________ Before: Deputy High Court Judge Dawes SC in Chambers Date of Hearing: 15 October 2018 Date of Decision: 9 November 2018 ___________________________ DECISION ___________________________ 1.The plaintiff submitted the following questions for the Court’s determination under Order 14A of the Rules of the High Court:
2.The application was heard by Master Phillis Loh on 30 July 2018 and she allowed the plaintiff’s application answering First and Second Questions in the negative and the Third Question in the affirmative. This is the hearing of the defendant’s appeal against that decision. BACKGROUND 3.The factual background is largely undisputed. 4.The plaintiff and the defendant are both BVI companies and they, together with a Hong Kong company known as Gold Dragon Investments Limited (“Gold Dragon”), were the shareholders of Golden Horse Development (HK) Company Limited (“the Company”). The plaintiff held 63 shares (39.62%), the defendant held 66 shares (41.51%) and Gold Dragon held 30 shares (18.87%). Each of them advanced a shareholder’s loan to the Company. 5.The defendant suggested that it is a subsidiary of Guangzhou Vanlead Group Co (廣州萬力集團有限公司), a state-owned enterprise authorised by the Guangzhou Municipal People’s Government to manage state-owned assets. This suggestion is not accepted by the plaintiff. 6.The only substantial asset of the Company is its interest in a Golf Club in Guangzhou (廣州九龍潭高爾夫球俱樂部有限公司). 7.Pursuant to an agreement in Chinese dated 8 December 2003 entitled “關於金馬發展 (香港) 有限公司的買賣股份及股東貸款協議” (“Agreement”), the defendant agreed to sell its shares (“Sale Shares”) in the Company and its shareholder’s loan (“SH Loan”) to the plaintiff. In addition the parties also entered into the following agreement on the same date:
8.The governing law under the contractual documents is Hong Kong law. Put briefly, the effect of the Agreement is for the plaintiff to pay a total of RMB 54,670,000 for the Sale Shares and the SH Loan, to be paid over a period of 16½ years from 30 June 2004 to 31 December 2020 by instalments. Payments were to be paid every 6 months as per the schedule in clause 2.03. 9.The performance of the Agreement is dependent upon payments to be made every 6 months. The defendant was obliged to: (i) transfer a certain number of Sale Shares to the plaintiff and provide the “Completion Documents” within 7 days from the date of payment; and (ii) release a certain portion of the Charged Shares and Pledged Loans. The discharge and release were to take place once a year. 10.There are also provisions for acceleration of the sale and purchase of all the Sale Shares and SH Loan and the defendant is obliged to agree to this if the plaintiff so request. 11.From 29 June 2004 to 26 December 2014, the plaintiff made 22 payments in the total sum of RMB 22,500,000. The payments were made in the PRC between “onshore companies” authorised by the parties and this represents 41.61% of the total consideration. However, the defendant has failed to transfer any of the Sale Shares or SH Loan to the plaintiff. Further, no attempt was made to release any portion of the Charged Shares and the Pledged Loans. 12.On 30 June 2015, the plaintiff demanded the defendant to complete the sale and transfer for payments made and refused to make any further payment until the defendant has done so. It is unclear as to why the plaintiff did not make any demand for transfers since 2004. 13.On 16 August 2017, the defendant attempted to terminate the Agreement under clause 5.01(c)(ii) on the ground that the plaintiff had failed to pay 4 consecutive instalments. THE PLAINTIFF’S CLAIM 14.The plaintiff’s claim is straightforward. In light of the RMB 22,500,000 paid, the plaintiff sought the transfer of the corresponding portion of the Sale Shares (27 Shares) and the SH Loan (HK$23,850,000). It also sought the release of the corresponding portion of the Charged Sharesand Pledged Loans. Further, by reason of the defendant’s failure to effectthe transfer and release, the plaintiff also sought compensation for its loss of interest income in the sum of RMB 8,462,393.40 arising from the loss of use of the RMB 22,500,000 paid. In addition, the plaintiff further seeks toaccelerate the sale and purchase of the remaining Sale Shares and SH Loan. THE DEFENDANT’S CASE 15.The defendant contended that the Agreement is unenforceable because the transfer the Sale Shares and SH Loan to the plaintiff “would involve serious breaches of PRC law” and would result in loss of state-owned assets attracting civil and criminal liabilities of a serious nature. In particular, the following matters are pleaded:
16.Further, it is said that the plaintiff’s claim is time barred undersection 4(1) of the LO or by doctrine of laches. They contended that thereis no obligation to transfer the 27 Sale Shares or the SH Loan by either 2 or 7 January 2015. Alternatively, the obligation was no longer enforceable as the completion date for each payment is within 7 days thereof. 17.Thirdly, the right to accelerate the sale and purchase of the remaining Sale Shares and SH Loan was lost since the plaintiff had acted inbreach of the Agreement by failing to make 4 consecutive payments. Further, the defendant has in any event terminated the Agreement on 16 August 2017. 18.The 3 questions framed by the plaintiff address the 3 issues raised by the defendant as summarized above. DISCUSSION 19.Principles in respect of application under Order 14A is trite and not in dispute. The procedure is not suitable if issues of facts are interwoven with the legal issues to be determined and the question of law or construction of document cannot be dealt with on assumed or hypothetical facts. See Shell Hong Kong Ltd v Yeung Wai Man Kiu Yip Co Ltd & Another (2003) 6 HKCFAR 222 at paragraph 24 per Chan PJ. 20.As explained by Recorder Ma SC (as Ma CJ then was) in Rockwin Enterprises Ltd v Shui Yee Ltd & Ors [2003] 3 HKC 174, once seized of an application under Order 14A, the court’s approach is essentially a three-step approach:
(A) First Question 21.Resolution of the First Question requires application of the principle of foreign illegality and foreign public policy as exceptions to the proper law as summarized by Lord Collins NPJ in Ryder Industries Ltd v Chan Shui Woo (2015) 18 HKCFAR 544. In particular, reliance is placed on what is referred to as the second and fourth principles set out in paragraph 39 of the judgment where Lord Collins quoted from Johnston, Conflict of Laws in Hong Kong (2nded, 2012) at paragraph 5-012:
The defendant’s case 22.Mr Pao SC (leading Mr Roger Phang) for the defendant argued that the First Question is not suitable for determination under Order 14A because of the serious disputes over PRC law. He referred to the provisionsunder PRC law suggesting that the obligation to transfer the Sale Shares and the SH Loan under the Agreement is unenforceable. 23.He explained that the basis of the plea is based on the fourth principle and that it is a residual category of foreign illegality under which the courts have a discretion to refuse the enforcement of a contract where its actual performance involves serious breaches of foreign law. 24.Mr Pao places reliance on the fact that the payment of the 22 instalments were all made in the PRC. According to the expert evidence on PRC law placed before me, the consideration for the transfer of state-owned assets must in principle be settled by a one-off payment. Although payment by instalment is permissible where the purchaser has difficulty in making one-off payment in full, the longest period for settlement must not exceed 3 years, and no transfer can take place until full consideration has been paid. 25.In addition, he also submitted that the transfer of the Sale Shares would, in substance, be a divestment of interest in the Golf Club, the contested evidence on PRC suggested that the transfer would be a violation amounting to a serious breach. 26.As the PRC law pleaded by the defendant is disputed by the plaintiff, the plaintiff is plainly disputing the applicability and/or force of the foreign law. The Court cannot determine this application on assumed facts and would need to resolve the expert evidence before the court can decide, as a matter of public policy, to enforce the Agreement in Hong Kong. The First Question is therefore not suitable for determination by Order 14A. The plaintiff’s case 27.Mr Lui for the plaintiff contended that the disputed PRC legalopinion is irrelevant for the purpose of resolving this Order 14A application. He relied on the second principle and argued that a contract is invalid or unenforceable where its performance is unlawful by the law of the country where it is to be performed: see Ralli Brothers v Compañia Naviera Sota Y Aznar [1920] 2 KB 287 at 291, 300. The principle is applicable if the relevant obligation is, as a matter of proper interpretation, unlawful by the law of the foreign country where that obligation must be performed. The Agreement does not require the defendant to perform in the PRC. None of the clauses suggests or mandates the defendant to perform its completion obligations in the PRC and none of the parties to the Agreement are incorporated in the PRC or has its office in the PRC. The Agreement in fact provides for completion of each instalment of the sale and transfer of the Sales Shares and SH Loan to take place at the defendant’s office or other mutually agreed time and location. The parties therefore intended the completion to take place outside the PRC. 28.Mr Lui criticised the plaintiff for misreading Ryder and contended that application of the fourth principle submitted by Mr Pao would create an inconsistency or contradiction between the second and fourth principles:
29.In respect of the reliance on the fact that the payments were made in the PRC, Mr Lui complained that this was not a point pleaded in the D&C and the relevant paragraph on breaches of PRC law (paragraph 13) did not alleged that the act of payment and receipt of funds in the PRC forms part of the illegality. In particular, paragraph 13 of the D&C simply alleged that the defendant’s “obligation to transfer the Sale Shares and SH Loan under the Agreement” was unenforceable. Discussion 30.Despite the persuasive argument of Mr Lui, I am of the view that the present situation is caught by the fourth principle. The disputed PRC law are relevant and the matter is unsuitable for resolution by Order 14A. 31.Although it is common ground that nothing in the Agreement mandates any performance in the PRC, it is accepted that the 22 paymentsin question were all made in the PRC. Therefore it cannot be disputed that the only obligations under the Agreement that were actually performed all took place within the PRC and there are PRC legal opinion supporting the defendant’s case on illegality. 32.The situation is also very different from what was discussed in Kleinwort, Sons & Co where the English Court of Appeal was considering a case where the proper law of the contract was English law and the performance of the contract was in England. The Court enforce the contract despite the possibility a breach by defendants of the law of Hungary. 33.If Mr Lui is correct, serious breaches in the actual performance(not required or initially intended) are irrelevant once the Court is satisfiedthat performance in the PRC is not mandatory on the face of the Agreement. This cannot be correct. I accept Mr Pao’s submissions that the fourth principle is a residual category of foreign illegality under which the courtshave a discretion to refuse enforcement where actual performance involvesserious breaches of foreign law and the narrow reading supported by Mr Lui is not supported by anything in Ryder or public policy and comity considerations. 34.Further Lord Collins went on to explain in paragraph 56 of Ryder that the obiter suggestion in Barros Mattos Junior v MacDaniels Ltd [2005] 1 WLR 247, [30] that “a contract which is valid by the governing law of the forum … may be refused enforcement if it has been performed in such way that one party (or both parties) commits a legal wrong” states the principle much too widely. At paragraph 57, he said:
35.Whether the breaches alleged in this case is sufficiently serious and the relevant public policy consideration involved are in dispute. The court will have to form a view on this but given the disagreement on the nature and effect of the PRC law in question, this is a matter that will have to be considered at trial. 36.As to the pleading point raised by Mr Lui (see paragraph 29 above), I agree with the defendant that the payment is part of the relevant transaction under the Agreement and paragraph 13.1.6 of the D&C where Article 3 of 《广东省人民政府办公厅关于加强国有企业产权转让管理的通知》 was pleaded dealt specifically with the payment for transfer of state-owned assets. I have also been taken to the PRC law evidence where the issue of payment was specifically address. I am therefore satisfied that the issue was raised properly and covered by the expert evidence. The pleading point is not an answer. 37.In addition, as submitted by Mr Pao, the learned Master proceeded to order specific performance once she was satisfied that the Agreement ought to be enforced. No consideration was given as to whether specific performance is the appropriate remedy when damages was pleaded as an additional or alternative remedy. This is to ignore the third step in the three- step approach explained in paragraph 18 of Rockwin. Mr Lui suggested that it is not open to the defendant to take this point as it is not pleaded but I accept Mr Pao’s submission that paragraph 19 of the D&C (repeating paragraphs 13 to 18 thereof) makes this sufficiently clear. The court will in any event have to be satisfied that specific performance is the appropriate remedy and the defendant is entitled to raise this as a matter of argument. (B) Third Question 38.The Third Question is a question of law and/or construction and is, on the face of the it, suitable for determination by the Order 14A procedure. However, my ability to resolve the Third Question is linked to the conclusion I reached on the First Question. The plaintiff seeks an order that it is entitled to exercise the option under clause 2.05 to accelerate the sale and purchase of the remaining 39 Sale Shares and the remaining SH Loan. As the option to accelerate is premised upon the enforceability of the Agreement, the matter cannot be resolved summarily given the conclusion I reached on the First Question. (C) Second Question 39.The main battle between the parties is on the First Question. The resolution of the Second Question (involving limitation/laches) is unnecessary if the defendant is successful on the First Question at trial. The question is one that is not determinative of the action and which may at the end of the day be an academic. In the circumstances, despite the strong arguments advanced by the plaintiff, I decline to determine the Second Question. ORDER 40.In light of my conclusions on the three questions, I will allowthe defendant’s appeal. The Order of the learned Master dated 30 July 2018 is set aside and I also make an order nisi that the defendant is to have the costs of the appeal and below with certificate for two counsel.
Mr Mike Lui, instructed by MinterEllison LLP, for the plaintiff Mr Jin Pao SC, leading Mr Roger Phang, instructed by Chiu & Partners, for the defendant | ||||||||||||||||
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