Invest Gain Ltd v. Novel Good Ltd
Read the full judgment text of HCA 939/2013 on BabelCite. This High Court CFI judgment was delivered on 28 June 2019.
1. The present action arose out of the agreement for the sale and purchase of shares in a company now known as Shanghai Industrial Urban Development Group Limited (formerly Neo-China Land Group (Holdings) Ltd), which is listed on the Hong Kong Stock Exchange (stock code: 563) (“ Target Company ”).
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HCA 939/2013 [2019] HKCFI 1633 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 939 OF 2013 ________________________
________________________ Before: Hon B Chu J in Court Dates of Hearing: 29-31 May, 1 June, 4-7 June, 1-3 August, 19 November 2018 Date of Judgment: 28 June 2019 ________________ J U D G M E N T ________________ _____________________ Table of Contents _____________________
Introduction 1.The present action arose out of the agreement for the sale and purchase of shares in a company now known as Shanghai Industrial Urban Development Group Limited (formerly Neo-China Land Group (Holdings) Ltd), which is listed on the Hong Kong Stock Exchange (stock code: 563) (“Target Company”). 2.Shortly prior to the Pre-Trial Review before this Court on 1 March 2018, D had issued two summonses, the first one for leave to file a supplemental expert report of D’s expert Mr John Robert Lees and a second one for D to file voluntary particulars of the amended defence. The two summonses were opposed by P and were adjourned for argument. 3.Subsequent thereto, the parties consented to an order, for amongst other things, leave to D to file the two summonses and for a split trial, namely the issue of the liability as between the parties on the claim and the counterclaim in this action be tried first and subject to the determination of the issue of liability in favour of D on the counterclaim, the issue of damages be tried subsequently. 4.This judgment is on the issue of liability in respect of P’s claim and D’s counterclaim. 5.At the trial, Counsel Mr William Wong SC and Mr Michael Lok appeared for P and Ms Eva Sit and Mr Danny Tang appeared for D. 6.Pursuant to the order made by this Court at the Pre-Trial Review, the parties had lodged an agreed Scott Schedule stating the relevant issues (“Scott Schedule”) and a list of agreed facts (“Agreed Facts”). B. The Agreed Facts 7.The plaintiff (“P”) and the defendant (“D”) are and were at all material times BVI limited companies. D is a wholly owned subsidiary of Shanghai Industrial Holdings Limited (上海實業控股有限公司), a publicly listed company in Hong Kong (Stock Code 363) (“SIHL”). 8.Mr Li Songxiao (驪松校) (“Mr Li”) is the sole legal and beneficial owner and sole director of P. Mr Li was the Executive Director of the Target Company and the Chairman of its Board of Directors until his resignation on 22 August 2009. 9.As at 19 January 2010, P was the registered owner of 1,051,762,995 ordinary shares in the Target Company, representing approximately 54.06% of the Target Company’s then issued share capital. 10.On 19 January 2010, P as vendor and D as purchaser and Mr Li as P’s guarantor entered into an agreement relating to the sale and purchase of the shares in the Target Company (“SPA”), which was later amended and varied by an agreement dated 11 May 2010 (collectively referred to as the “Acquisition Agreement”). Under the Acquisition Agreement, P agreed to sell and D agreed to purchase 500,000,000 shares (“Sale Shares”) in the Target Company at a consideration of HK$1,160,000,000 (equivalent to HK$2.32 per Share). 11.Further, on 19 January 2010, the Target Company entered into a subscription agreement with D whereby D agreed to subscribe for 683,692,000 ordinary shares of the Target Company to be allotted at a total of HK$1,586,165,440 (“Subscription Agreement”). Completion of the Subscription Agreement was conditional upon completion of the Acquisition Agreement and would take place immediately thereafter (“Completion”). 12.Through the Acquisition Agreement and the Subscription Agreement, D would acquire a controlling stake in the Target Company. 13.On 27 August 2010, P granted a charge (“Share Charge”) over all its rights, title and interest in and to another 50,000,000 shares in the Target Company owned by P (“Charged Shares”) in favour of D as continuing security for the payment and discharge of the “Secured Obligations”. 14.The parties agreed that Clause 6.04 of the SPA did not accurately reflect parties’ agreement and should have read as follows:
15.On 24 June 2010, P transferred the Sale Shares to D and D paid HK$1,160,000,000 to P. C. Background 16.The principal business of the Target Company was real estate development in Mainland China and its main assets consisted of its real estate property projects in Mainland China. 17.P became the majority shareholder of the Target Company in 2003. 18.Mr Jia Liqun (賈立群) (“Mr Jia”) was/is the Vice President of P at all material times. Mr Jia was appointed by P to join the Target Company in 2005 and left as Vice President of the Finance Department of the Target Company in 2010 and his role in the Target Company focused on capital operations and investor relations. 19.On 22 January 2008, the shares of the Target Company were suspended from trading as a result of office searches conducted by the Independent Commission Against Corruption. 20.It was during the trading suspension, and according to P, in around July 2008, that P began negotiations with representatives of SIHL for the sale of P’s interest in the Target Company. According to Mr Jia, the SIHL’s representatives involved in the negotiations were (i) Mr Ni Jian Tat (倪建達) (“Mr Ni”), (ii) Mr Cheng Guo Min (“Mr Cheng”) and (iii) Mr Chong Tao. On P’s side, the representatives were Mr Li, Mr Jia, and 3 Executive Directors of the Target Company at the time, namely Mr Jia Bo Wei (賈伯偉), the then Chief Executive Officer, Mr Yuan Kun (元崑), the then Chief Operations Officer, and Ms Bao Jing Tiao (鮑景桃) (“Ms Bao”), the then Chief Financial Director. 21.It was not disputed that in the course of the negotiations, SIHL/D had engaged the following professionals:
22.According to P, SIHL also appointed UBS AG and Nomura International (Hong Kong) Limited as joint financial experts to provide expert opinion on the financial risks in relation to the takeover of the Target Company. 23.On 22 August 2009, not long after negotiation started, Mr Li resigned from his position as Chairman and Executive Director of the Target Company. 24.As said earlier, on 19 January 2010, the parties entered into the SPA and the Subscription Agreement. 25.The SPA contained a detailed list of warranties (“Warranties”) set out in Schedule 2 of the SPA (“Schedule 2”)[1] which P had, amongst other things, warranted to be true, accurate and not misleading as at date of the SPA and to continue to be so on the Completion Date (as defined below). It is provided in Clause 8.05 of the SPA, amongst other things, that P shall not be liable under any of the Warranties unless notice of a claim has been received by P not later than the expiry of the period of 1 year following the Completion Date. As seen later in this judgment, the construction and effect of Clause 8.05 is a matter of dispute between the parties. 26.The Completion of the Acquisition Agreement and the Subscription Agreement took place on 24 June 2010 (“Completion Date”). Of the former management, according to Mr Jia, he left the Target Company sometime after Completion and Mr Yuan Kun also resigned but Mr Jia Bo Wei and Ms Bao had remained with the Target Company for awhile after Completion. According to Mr Ni, Mr Jia Bo Wei remained an executive director of the Target Company until February 2012 and Ms Bao remained executive director until July 2010[2]. After Completion, the Target Company became a subsidiary of D and the new management and directors came on board of the Target Company and its subsidiaries (“New Management”). 27.The Share Charge was granted by P to D pursuant to a deed executed by the parties on the Completion Date[3]. P granted the Share Charge to D over the Charged Shares on 27 August 2010 and P unconditionally and irrevocably covenanted to pay and discharge in full the secured obligations as defined therein (“Secured Obligations”)[4] when due or on demand by D at any time. It is provided in the Share Charge, amongst other things, that in the case where no claim has been made by D against P in accordance with the SPA, D shall at the request and cost of P, discharge the security created by the Share Charge. 28.On 21 June 2011, D through its former solicitors, Messrs Mayer Brown JSM (“MBJSM”) issued a letter to P (“MBJSM Letter”)[5]. The MBJSM Letter consisted of a one-page letter in English attaching a 4-page letter in Chinese (“Chinese Attachment”) which set out 6 alleged instances of breaches of contract and/or Warranties on the part of P. 29.P denied any such breaches and by a letter dated 5 July 2011, P requested D to release the Charged Shares pursuant to the terms of the Share Charge. D refused to do so. 30.P issued the writ herein on 29 May 2013 and in its statement of claim essentially sought a declaration that P had duly complied with the conditions set out in the Acquisition Agreement and the Share Charge and to seek the return of the Charged Shares. 31.As set out in its amended defence and counterclaim, D’s defence was that P had no basis to demand the release of the Charged Shares, and D counterclaimed, amongst other things, for damages for P’s breach of the Acquisition Agreement (“Counterclaim”). D. The Scott Schedule (Liability) 32.There were 12 issues set out in the Scott Schedule (Liability)[6], 9 of which concerned breaches alleged by D which formed the basis of the Counterclaim and were referred to therein respectively as E1–E9[7]. The 9 issues, respectively Issue 1 – Issue 9, were in respect of the following matters:
33.Apart from the above, there were 3 other issues:
34.Both Mr Wong and Ms Sit have dealt with Issue 10 in their respective Closing Submissions as the first issue. I will follow this order in this judgment. E. Witnesses 35.Although Mr Li was at all material times and is the sole director and shareholder of P, and was involved in the negotiations of the sale of the Target Company and the projects/matters which are now subject to dispute, he had not provided any witness statement for P and did not attend the trial. 36.As mentioned earlier, apart from Mr Li and Mr Jia, there were 3 other Executive Directors or senior management officers involved in the negotiations of the sale of the Target Company on P’s side, but none of those former senior management officers were called to give evidence on behalf of P. 37.Mr Jia was in fact the only factual witness who gave evidence on behalf of P. As said earlier, he was involved in the capital operations and investor relations side of the Target Company and he admitted that he was not involved in any of the real estate projects in the disputed issues, nor in any accounts or finance of the subsidiaries. His evidence is thus to be seen in this regard. 38.D’s factual witnesses were :
39.P only instructed one expert witness, namely Mr Norman Kwan who is a certified public accountant and Managing Director of East Asia of Matson, Driscoll & Damico Limited in Hong Kong. 40.D instructed two expert witnesses:
F. Preliminary matters 41.There were two preliminary matters raised by Ms Sit. Ms Sit submitted that as P had essentially pleaded non-admissions to D’s pleaded case on breach of warranties, it was not open for P to then run an unpleaded case at the trial on the following two matters :
F.1 Knowledge derived from due diligence 42.This matter arose when it was submitted by Mr Wong in his Opening Submissions of 4 May 2018 that it was open for P to contend that actual or constructive knowledge of matters complained of would preclude a claim for breach, or would mean that no loss was suffered[8]. Further on 24 May 2018, P filed a supplemental list of documents (“Supplemental List”), 3 items of which were emails between P and D’s Mainland lawyer Ms Julia Zhu of Allbright (“Ms Zhu”) during the due diligence process. 43.D had opposed the late production of those emails. In the end, I allowed those contemporaneous emails between Ms Bao on P’s side and Ms Zhu and handed down my reasons on 4 June 2018. 44.During the trial, Mr Wong had further cross examined D’s factual witnesses about the documents that were made available to D/SIHL at the due diligence stage. It was submitted on behalf of D by Ms Sit that as P had not pleaded any knowledge estoppel or disclosure of information during due diligence as a defence to D’s counterclaim, P should not be allowed to run this as a defence. 45.I had allowed Mr Wong to cross examine or challenge D’s witnesses on what was known or disclosed to D during due diligence and/or in the course of negotiation as I was of the view that as this would go to the credibility of D’s factual witnesses. F.2 Causation 46.During the trial, Mr Wong had also cross examined or put to D’s witnesses that even if there was a breach of the Warranties, the breach had not resulted in any loss. In relation to this line of cross-examination, at the end of Day 7 of the trial, ie 6 June 2018, Ms Sit brought up the issue that as there had been an order for split trial for quantum, any issue as to whether any breach had resulted in any loss would be a “causation” issue and such should be dealt with at the trial for quantum. Mr Wong however submitted that this should be part of the trial on liability, in that if it were found that there had been no causation between the alleged breach and the loss, then there would be no need for the claim to go to the trial on quantum even if there was found to be a breach on P’s part. 47.The parties made further submissions on this issue on Day 8 of the trial, ie 7 June 2018. After hearing submissions from both parties, I allowed Mr Wong to continue his cross-examination on whether, even if there was a breach, such breach had resulted in any loss and directed that this issue was to be dealt with at the trial on liability. 48.Matters leading to the split trial, the parties’ arguments and my reasons are set out below:
49.Eventually, the trial resumed on 1 August 2018. D had issued a summons for leave to appeal against this Court’s above decision, but the application was later adjourned by consent. G. Issue 10 – whether effective notice was given under Clause 8.05 of the SPA prior to 24 June 2011 of all D’s present counterclaims G.1 Clause 8.05 of the SPA 50.Clause 8.05 of the SPA provides as follows:
G.2 The MBJSM Letter 51.It was D’s case that proper and effective notice was given pursuant to Clause 8.05 by way of the MBJSB Letter. 52.It was not disputed that the MBJSM Letter was issued within the stipulated period in Clause 8.05 (a) and (b) (“Stipulated Period”). Paragraph 3 of the Chinese Attachment had set out 6 incidents of alleged breaches of contractual terms (“6 Incidents”). Paragraph 4 thereof expressly stated that apart from the breaches mentioned, there were other breaches discovered by D and which D reserved its right to pursue them. Paragraph 5 stated that the 6 Incidents were clearly breaches also of the Warranties. Paragraph 6 then expressly stated that the notice was to be regarded as a notice of claim pursuant to Clause 8.05 of the SPA. G.3 The parties’ respective case 53.P’s case was divided into a “primary case” and a “secondary case”, which can be summarised as follows:
54.On the other hand, D’s case was :
G.4 The legal principles on construction of notice clauses 55.Ms Sit submitted that as seen from the authorities, there are two broad types of notice clauses that have the effect of limiting or excluding liability: -
56.As has been said and as seen in RWE Nukem Ltd v AEA Technology plc [2005] EWHC (Comm) 78, the first proposition on the legal principles on notification clauses distilled by Mrs Justice Gloster from the authorities is that every notification clause turns on its own individual wording[10]. As further observed by Ward LJ in Forrest and Glasser, this is the only true principle to be derived from the authorities[11]. 57.In Forrest and Glasser , Ward LJ had also referred to the well known principles elucidated by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, at 912/913, by which contractual documents are construed. Ward LJ set out the following essential points for the case before him[12]:
58.In Nobahar-Cookson v The Hut Group Ltd [2016] EWCA Civ 128, an appeal which is in relation to a point of construction relating to a contractual time limit for the making of warranty claims pursuant to a share purchase agreement, Briggs LJ had said although there were dicta in some cases which appeared at first sight to be broadly supportive of the submission that the contra proferentem principle was not then regarded as of any significant weight for the purpose of construing commercial contracts, and that it was a principle of interpretation of last resort, none of those cases were about exclusion clauses, and the contra proferentem rule in its classic form was by no means limited to, or even mainly about, exclusion clauses[13]. 59.Briggs LJ further went on to say at paragraph 18:
60.Briggs LJ, had however also observed in paragraph 19 that:
61.Biggs LJ then summarised in paragraph 21 that for those legal reasons set out by him, he approached the issue as to the construction of the relevant clause in the case before him upon the basis that there remains a principle that any ambiguity in its meaning may have to be resolved by a preference for the narrower construction, if linguistic, contextual and purposive analysis do not disclose an answer to the question with sufficient clarity (emphasis added). 62.With the above general principles in mind, I turn to the present case. G.5 Whether Clause 8.05 was a limitation clause 63.Mr Wong had submitted that Clause 8.05 was to be interpreted as a type of limitation clause rather than an exclusion clause and that strict and exacting standards which are applied to interpreting exclusion and indemnity clauses do not apply, referring the Court to what was said by Lord Fraser in Ailsa Craig Fishing v Malvern Fishing [1983] 1 WLR 964[14]. 64.As pointed out by Ms Sit, in the above case, the relevant clause limited liability to specific monetary caps and there was no dispute that the relevant clause was a limitation clause. Ms Sit further pointed out that it was also Mr Wong’s own submission that Clause 8.05 operated as a contractual time bar. 65.In the present case, the effect of Clause 8.05 is clearly not of limiting P’s liability to any monetary caps or to any extent and it was excluding P’s liability. In fact, there was a specifically “Limitation of Liability” clause in the SPA, namely under Clause 8A, limiting the liability of the Vendor(P) for any breach of Clause 8.01 or any breach of the Warranties. 66.Having considered the wording and the context of Clause 8.05, I accept Ms Sit’s submissions that Clause 8.05 is an exclusion clause.
67.Ms Sit had referred the Court to the relevant notification clauses in the 4 cases cited earlier, namely the Senate Electrical case, the RWE Nukem case, the Teoco UK case, and also in the case Ipsos SA and Dentsu Aegis Network Limited [2015] EWHC 1171 (Comm). In those 4 cases, the notification clauses had invariably used words to the effect that “the Vendor would be under no liability in respect of any Claim unless written particulars of such Claim (giving details of the specific matter as are available to the Purchaser in respect of which such Claim is made) have been given to the Vendor within a period of …”. 68.Ms Sit submitted that the correct and grammatical understanding of those notification clauses in the above 4 cases was that the invoking party could not make a claim unless notice of that very claim was given. Ms Sit however distinguished the wording of those clauses from the present wording of Clause 8.05 and submitted that the use of the phrase “notice of a claim under the Warranties” made it clear that what Clause 8.5 required was a generic claim (“a claim”) without the need to tie to any specific warranty. Ms Sit thus submitted that Clause 8.05 was a “bald notification” clause, as in Forrest v Glasser. 69.Mr Wong on the other hand argued that taking into account the need for certainty in business transactions, Clause 8.05 clearly required, at the very least, the identification of the potential claim being advanced and details were required to render Clause 8.05 meaningful, and further the very fact that the MBJSM Letter did contain particulars on the 6 Incidents would go to confirm the parties’ understanding that some particulars and identification of the relevant allegations would be required, and that this accorded with Mr Ni’s own understanding and evidence. 70.It was further Mr Wong’s s submission that a true example of a “bald notice” clause indicating parties’ intention to dispense with particulars of claim could be found in the case of Odebrecht Oil & Gas Services Ltd v North Sea Production Co Ltd, New Hampshire Insurance Co TCC 1999 No 37, 1999 WL 478200 where the clause provided clear words to the effect that only the nature of the breach was to be specified not its detail, and it was held in that case a general notice of claim was compliant with the clause. 71.Whether a notice clause is a “bald notification” clause and whether the notice is sufficient really depends on the wording of the clause. As cited earlier, Briggs LJ had said in Nobahar-Cookson, the court must use all its tools of linguistic, contextual, purposive and common-sense analysis to discern what the clause really means. 72.Clause 8.05 can be divided into two parts, the 1st part being “The Vendor will not be liable under any of the Warranties” and then the 2nd part being “unless notice of a claim under the Warranties has been received by the Vendor not later than: [the Stipulated Period]”. The 1st part of the sentence does not in fact state in respect of what the Vendor will not be liable for and only the 2nd part contains the words “a claim”. 73.There is no definition of the word “claim” in the SPA or in Schedule 2. There is a definition of “Warranties” in Clause 1.01, and it means the representations, warranties and undertakings set out in Schedule 2. 74.There are no particular requirements specified in Clause 8 for the notice in Clause 8.05, save that Clause 16.01 of the SPA provides that every notice or communication under the SPA must be in writing. 75.The SPA was prepared contemporaneously as the Share Charge (a copy of which was attached as Schedule 4 of the SPA) and the Subscription Agreement. 76.Ms Sit had referred to the Subscription Agreement which contains a Clause 7 on “Warranties and Indemnities”, and a Clause 7.05 in similar terms to Clause 8.05 of the SPA. However, there is a Clause 7.09 in the Subscription Agreement which imposes an obligation on the Subscriber that if any matter which will or can reasonably be expected to give rise to a claim under any of the warranties therein comes to the notice of the Subscriber, the Subscriber shall as soon as reasonably possible (and in any event within the following 30 Days) notify the [Target Company] in writing of the matter and make available to it all information and documents in the possession or under the control of the Subscriber in so far as such information and documents relate to that matter[15]. 77.Under Clause 8 of the SPA, there is no clause similar to Clause 7.09 of the Subscription Agreement. There is no provision under Clause 8 of the SPA for the Purchaser to make available to the Vendor any information or documents relating to the matters which give rise to a claim. Ms Sit submitted that the draftsman was plainly aware of the need to be specific when specificity was required. 78.In any event, on my reading of Clause 8.05 and the face of it, the natural and ordinary meaning of Clause 8.05 is that all it requires is for P to receive a notice of a claim under the Warranties without the notice having to specify the claim or identify which of the Warranties or on what basis the claim is made or to be made, or having to provide any particulars or information or documents. G.7 Whether the natural and ordinary meaning of Clause 8.05 flouts business common sense 79.In Forrest v Glasser, having found that the natural and ordinary meaning of the words was that a bald notice of claim was sufficient to satisfy the relevant clause 6.3.1 in that case, Ward LJ then went on to ask himself two question: (i) whether that was a conclusion that would flout business common sense; (ii) whether there was something in the background which would drive one to a different interpretation[16]. 80.The relevant clause 6.3.1 in Forrest v Glasser was in conjunction with clause 6.3.2 which provided that court proceedings, if had not been issued, would have to be issued and served on the warrantors within 12 months of the date of notification of the claim[17]. Ward LJ had said that the most that could be said for clause 6.3.1 was that it was intended to meet the sensible commercial purpose of providing a cut-off point for liability for breach of warranty after the expiration of three years from completion and that the subscribers/purchasers then had a further 12 months, ample time for negotiation and settlement of the claim, before the second time barrier fell if proceedings had not been issued by then. He went on to say that the very fact that proceedings were contemplated with all the formality of pleadings and particularity at that second stage itself militated against the argument that the same degree of particularity should have been given at the first stage twelve months earlier when the claim was notified. 81.I accept Mr Wong’s submission that it was in light of the two stage time barrier and the circumstances of that case that Ward LJ had found in Forrest v Glasser that the bald notification clause 6.3.1 therein was consistent with commercial sense. In the present case, there is no second stage or second time barrier, namely there is no further clause in the SPA which provides for a deadline for any particularised claim to be made by D. 82.Mr Wong had emphasised on the commercial context in which Clause 8.05 arose, in that the purpose was to impose a contractual time-bar and to allow P sufficient time to assess and deal with claims put forward by D with certainty and to ensure that D could not maintain an open position by giving a general notice of claims at the end of the Stipulated Period. Mr Wong submitted that if D’s construction was correct, all D needed to do was to take one simple step of submitting a general notice of claim to wholly eliminate the contractual time-bar. 83.Mr Wong had further referred to the evidence of D’s own witness Mr Ni who had participated in the negotiations. In his witness statement, Mr Ni had said that his understanding of Clause 8.05 only required SIHL to notify P of the existence of a claim for breach of Warranties within a year of Completion and SIHL was not required to state exhaustively all the claims or their particulars and certainly that was not their understanding of Clause 8.05 when it was negotiated[18]. However, notwithstanding his evidence in his witness statement, Mr Ni had agreed during cross examination that D had to put forward details of the breaches of the Warranties to P and that Mr Ni had agreed that the reason why the details were required included that it would give P a right to verify and also to remedy the breach and if P was not able to remedy, that P could then know the amount of loss and damage to be paid for the purpose of having the Charged Shares released[19]. Mr Wong further pointed out that D’s own understanding of Clause 8.05 and further its intention to provide details of the breaches could be seen in the MBJSM Letter when details of the 6 Incidents were set out. 84.On the other hand, Ms Sit had submitted that Mr Ni’s evidence in this regard was not relevant as it had been well–established that the evidence of the parties’ subjective intent or understanding of the relevant clause would be irrelevant and inadmissible. 85.Ms Sit submitted that Clause 8.05 plainly served a legitimate commercial purpose by providing a temporal cut-off point, so that the P would know with certainty whether he would be called upon to answer for the Warranties given and there would be peace of mind to P if no notice was given within the Stipulated Period and that he would know that the Charged Shares could be released. 86.Ms Sit further set out 7 reasons for the parties to have opted for Clause 8.05 to be a “bald notice” clause, namely: (i) The Target Company was a massive conglomerate with many subsidiaries; (ii) D was the “new comer” who had no previous involvement in the Target Company and no clear knowledge about its business, finances, operations and affairs other than what could be gleaned from public documents; (iii) Although some due diligence had been carried out, it was nowhere close to an audit of the Target Company and its subsidiaries, and the results were limited by what the Target Company/Mr Li chose or were willing to disclose; (iv) Further, management transition was intended to be gradual and not immediate, and given the size of the Target Company, investigation into the affairs of the Target Company and its subsidiaries would clearly take time; (v) The time limit was only one year, which seen in light of the above was clearly a short period; (vi) The effect of notification under Clause 8.05 was simply to ensure that D would remain protected by the Share Charge for any loss that it was entitled to recover pending the determination of D’s claim. It did not allow D to foreclose on the security, nor is liability presumed. 87.It was not really disputed that negotiations for the sale first started in around July 2008 although Mr Ni’s evidence in his witness statement was that due to the market fluctuations in 2008, there were changes to Mr Li’s intention to sell and negotiations were conducted intermittently and that Mr Li became interested in the sale again when the market recovered in 2009 and the parties resumed negotiation discussions. 88.It was also not disputed that there had been due diligence or valuation conducted by professionals as set out earlier prior to the execution of the SPA and the Subscription Agreement in January 2010, although D’s other witness Mr Cheng’s evidence was that the due diligence work was limited by the level of disclosure made by P. 89.Under Clause 5.02 of the SPA, P undertook to use its reasonable endeavours to cause that, pending Completion the Target Company and its subsidiaries would make good the defects as agreed between the parties discovered during the due diligence exercise. Further, by proceeding to Completion, pursuant to Clause 2.01(h) of the SPA, D must have accepted that due diligence on the financial, legal and business affairs of the Target Company and its subsidiaries had been completed and D was satisfied with the results of such due diligence in all respects under Clause 2.01(h) of the SPA. 90.Thus, although the Stipulated Period under Clause 8.05 for the giving of notice was a short period, it was clearly accepted by D and D is itself part of a conglomerate or a publicly listed company in Hong Kong with a team of professionals assisting them. 91.Looking at the contemporaneous documents, as mentioned earlier, the Share Charge was also prepared at the same time as the SPA and the Subscription Agreement although it was actually executed some 5 months later. Clause 3.3(b) of the Share Charge provides that in the case where no claim has been made by D against P in accordance with the SPA, D shall, at the request and cost of P, discharge the security created by the Share Charge. There were however no provisions in the SPA in relation to how or by when a claim had to be made by D, after giving a notice of the claim. Thus, as submitted by Mr Wong, if D’s interpretation were right, that once a “bald” notice was given, the matter would then become open-ended with P not knowing what the claim was or going to be and not knowing when D would make the claim. 92.In Forrest and Glasser, Ward LJ had referred to the observation made by the Court of Appeal (of which he was a member) in Senate Electrical that “certainty is a crucial foundation for commercial activity”. However, he had also said that the observation was made in the context of that case and the relevant clause therein. 93.In ROK Plc (in Administration) v S Harrision Group Ltd [2011] EWHC 270 (Comm), the notice clause in that case was “The Vendor is not liable for a Claim … unless the Purchaser has given the Vendor notice in writing of the Claim … specifying in reasonable detail the nature of the Claim … and the amount claimed (based in each case on the information then available to the Purchaser) …”[20]. The parties in the ROK case were at odds as to the proper construction of the notice clause. 94.The notice clause in the ROK case was submitted to be a relatively “low threshold” notice clause in that the parties had chosen an expression of “the nature of the Claim” which was more general and less prescriptive as recognised by Dyson J in the Odebrecht case[21]. 95.Deputy Judge Mr Richard Siberry QC had said in ROK that clauses requiring written notice of a warranty claim to be given by a specified deadline are a common feature of share purchase agreements and they are often as in that case, accompanied by a requirement that proceedings in respect of any such claim be commenced within a limited time following service of such a notice or by another specified deadline[22]. It was further said that such clauses must be construed in accordance with normal principles of contractual interpretation and the construction of notices given thereunder must be approached objectively, the question in each case being how a reasonable recipient would have understood the notice. 96.As said earlier, Mr Wong had referred to Mr Ni’s evidence at the trial to argue that Mr Ni’s own evidence must carry substantial weight in demonstrating how a “reasonable recipient” would have understood the notice. In this respect, I agree with Ms Sit’s submission that subjective evidence of any party’s intentions is not relevant. 97.Ms Sit submitted that that at the end of the day, the respective levels of protection the parties bargained for in a commercial transaction is a matter for them, and the court should not lightly interfere to change the bargain unless there is very compelling evidence that such represents the true intention of the parties objectively understood. 98.It would appear from a copy of the draft “Term Sheet” of 20 October 2009 and its covering email produced by Mr Cheng in his witness statement that D’s solicitors at that time were JSM (later MBJSM) and that P’s/ the Target Company’s solicitors were Mallesons, and that the provisions of the “Term Sheet” were in both English and simplified Chinese. Even though Clause 8.05 had not yet appeared at that stage, it was clear that the parties were legally represented throughout the negotiations and drafting of the relevant agreements. 99.I agree with Ms Sit that there was no reason why the parties would not have adopted wordings for Clause 8.05 similar to those for Clause 7.09, in the Subscription Agreement, which were quite detailed, had that been their true intention at the time. It is therefore clear to this Court that the parties had intended Clause 8.05 to be of a very low threshold. 100.On its natural and ordinary meaning, Clause 8.05 cannot be said to serve no commercial purpose. I agree with Ms Sit that it was to provide a temporal cut-off point, and the effect of Clause 8.05 is to ensure that D is to remain protected by the Share Charge upon giving of a notice of a claim within the Stipulated Period. 101.It was submitted on behalf of P that, alternatively, that since on D’s case, the commercial purpose of Clause 8.05 was to give one year for D to investigate into the affairs of the Target Company, it would follow that the MBJSM Letter purported to notify P of any potential claims which had been discovered during the one year period, and that this was consistent with Mr Ni’s evidence that the MBJSM Letter was concerned with problems which were discovered/revealed within Stipulated Period. Further, if the MBJSM Letter had the effect of extending the contractual time-bar for claims which were revealed after the Stipulated Period, then this would completely defeat the purpose of Clause 8.05 even on D’s case. 102.The Stipulated Period in Clause 8.05 was not simply one year. Under Clause 8.05(b), the one year period could be extended to a later date if the Target Company’s audited financial results for the financial period ending 31 December 2010 were not ready or if the Target Company was not able to make a preliminary announcement of the said financial results within the one year period. Further, it was D’s intention to change auditors of the Target Company, after Completion, to one of the big 4 accounting firms, as can be seen in Clause 6.03 of the SPA where P had undertaken to use its reasonable endeavours to cause the change. 103.There was no dispute that 24 June 2011 was the expiration of the Stipulated Period under Clause 8.05, and it would seem that by then the audited financial results for the year ending 31 December 2010 had been prepared and the Target Company was able to make a preliminary announcement based thereon prior to 24 June 2011. In my view, this would further confirm that the Stipulated Period was accepted by D or both parties at the time of signing of the SPA was sufficient for the notice of claim. 104.As it was D’s own case that the commercial purpose of Clause 8.05 was to provide a temporal cut-off point, I am prepared to accept Mr Wong’s submission on its secondary case, that Clause 8.05 if held to require only a bald notification, would only be effective in relation to matters or incidents that had already come to the knowledge of D or revealed to or discovered by D at the date of the MBJSM Letter. 105.Mr Ni’s evidence in his witness statement was that the Share Charge was provided by P to protect SIHL against losses that might arise from a breach of Warranties and/or the Acquisition Agreement by P including losses arising from litigation or other issues which were not disclosed to SIHL prior to Completion and the intention of SIHL was to return the Charged Shares to Ms Li if no such issues were revealed within a year of Completion[23]. This was also consistent with Mr Ni’s evidence during the trial[24]. In any event, in paragraph 4 of the Chinese Attachment, D clearly only expressly reserved its right to pursue other breaches discovered by D. I am further of the view that if the MBJSM Letter had the effect of extending the contractual time-bar for claims revealed after the Stipulated Period and for any potential claim, this would defeat the commercial purpose of having the contractual time-bar. G.8 Proper Construction of Clause 8.05 106.In light of what is said above, on my construction, a “bald” notice under Clause 8.05 is sufficient, namely without having to identify which of the Warranties the claim is in respect of and without having to set out any information, particulars or details of the claim, save that such notice is only effective in relation to a claim or claims that have already come to the knowledge of or revealed to or discovered by D at the time of the giving of notice. G.9 The effect of the MBJSM Letter 107.In connection with P’s primary case on the construction of Clause 8.05, Mr Wong had submitted that even though the incidents in Issue 1 and Issue 2 were mentioned in the MBJSM Letter, there was no proper and effective notice given in respect of those 2 issues. Although I am not with Mr Wong on P’s primary case, I will set out my views on the effect of the MBJSM Letter in relation to Issues 1 and 2. 108.Only 2 out of the 6 Incidents complained of in the MBJSM Letter eventually formed the basis of a claim in the Counterclaim and these were Issue 1 on the Yingtong Recovery and Issue 2 on the Xian Project. 109.In so far as Issue 1 was concerned, paragraph 3(1) of the Chinese Attachment stated that P had an obligation under Clause 6.04 of the SPA to use its best endeavours to liaise with the relevant authorities to recover what was owed by Yingtong to the Target Company, of an amount of not less than RMB 60m and that by then, the Target Company had not yet recovered any of the receivables of the “Group” (ie the Target Company and its subsidiaries) from Yingtong. What was stated was only the then factual situation as at 21 June 2011 (date of the MBJSM Letter). In fact, the deadline for recovery pursuant to Clause 6.04 only expired on 24 June 2011. There was no breach of Clause 6.04 yet as at the date of the MBJSM Letter and Mr Wong submitted that no reasonable recipient of the MBJSM Letter would consider it as being a notice of claim in respect of the recovery of the RMB 60m. 110.First of all, a notice of claim was required under Clause 8.05 only in respect of “a claim under the Warranties”. Paragraph 3(1) of the Chinese Attachment referred to the alleged breach of Clause 6.04. D’s pleaded case was only that P was in breach of Clause 6.04 and there was no breach of any of the Warranties pleaded in respect of the Yingtong Recovery. I am therefore of the view that Clause 8.05 did not come into play in so far as Issue 1 (E1) was concerned. 111.In any event, Ms Zhao had accepted during cross examination that there was no breach of the SPA on 21 June 2011 as the deadline had not expired, but she had tried to justify what was stated in the letter MBJSM Letter by saying that according to her understanding, Mr Li never provided assistance for the Yingtong Recovery from beginning to end. However, what she said about Mr Li never providing assistance was inconsistent with her witness statement in which she had said that Mr Li introduced Mr Gong to D to assist the New Management in the recovery and it was not D’s ultimate case anyway. I find, which was also accepted by Ms Zhao, that the MBJSM Letter was issued before the expiry of the stipulated period in Clause 6.04. 112.In my view, the MBJSM Letter was premature in so far as Issue 1/the Yingtong Recovery was concerned as it was before the deadline and there was no breach yet in respect of Clause 6.04 or of any of the Warranties. If a notice is required for Issue 1, then in my view the MBJSM Letter was not proper or effective notice as the breach had not yet arisen. 113.In so far as Issue 2 was concerned, the alleged breach of contract stated in item 3(3) of the Chinese Attachment was that P had failed to carry out detailed checks on the construction work undertaken by the Target Company’s subsidiaries. As it turns out, the allegation in the Counterclaim was that the statements in the Litigation Warranty (as defined later) were untrue, inaccurate and misleading as at 19 January 2010 or 24 June 2010. 114.However, in light of my construction of Clause 8.05, a bald notice of a claim in relation to the Xian Project would be sufficient, without having to provide particulars of the claim or to identify which of the Warranties the claim was in respect of. I am thus of the view that the MBJSM Letter was a proper and effective notice given under Clause 8.05 of D’s claim in relation to Issue 2. 115.Insofar as Issues 3-9 were concerned, it was submitted on behalf of P that on its “secondary case”, no proper or effective notice could have be given by the MBJSM Letter under Clause 8.05 in relation to the Issues 5, 6, 7, 8 as no breach was revealed prior to the MBJSM Letter. 116.P relied on the following:-
117.I accept in so far as Issues 5, 6 and 8 that the evidence indicated that the alleged breaches under those respective Issues were only revealed/discovered after the MBJSM Letter. However, for Issue 7, although HK Changyi issued a letter of demand to Mr Ni on 30 June 2011[25], the letter had referred to the first letter from HK Changyi to the Target Company of 4 June 2011. In fact, as seen later under Issue 7, on 4 June 2011 and 14 June on 2011, HK Changyi had chased for payment and further sent another email on 17 June 2011 denying the payment alleged by New China Infrastructure was received. I find that the breach had been revealed or discovered prior to the MBJSM Letter. 118.For Issues 3-9, on P’s secondary case, I find the MBJSM Letter could not have been a proper or effective notice in relation to Issues 5, 6 and 8 which were revealed/discovered only after the MBJSM Letter. In other words, it is my view that claims under Issues 5, 6 and 8 have been contractually time barred. G.10 Conclusion on Issue 10 119.In light of what was said above, and on my construction of Clause 8.05, I find proper and effective notice was given through the MBJSM Letter in respect of Issues 2, 3, 4, 7 and 9. 120.Notwithstanding my construction of Clause 8.05, I shall nevertheless consider each of the Issues raised by D in the Counterclaim and set out my findings hereunder. H. Issue 1 (E1) - The Yingtong Recovery H.1 Background 121.The facts were not really disputed. Yingtong was a company incorporated in Mainland China and was interested in a real estate development project in Tongzhou (“Yingtong Project”). The only other party interested in the Yingtong Project was the local government in Tongzhou who invested an amount of RMB 63,063,535 in the Tongzhou Project. 122.The Target Company became the majority shareholder of Yingtong on about 5 November 2007 after acquiring Yingtong through a subsidiary for RMB 63,267,762. 123.Due to a change in government policy, the Yingtong Project could not be proceeded with and Yingtong was invited to withdraw from it. At the material time, it was anticipated that the Tongzhou authorities would provide monetary compensation to Yingtong. 124.The consolidated accounts and records of the Target Company had accounted for its interest in the Yingtong Project (held through Yingtong), which was valued at RMB 126,000,000 as at 30 April 2009. 125.Clause 6.04 of the SPA states as follows:
126.As seen in the Statement of Agreed Facts and as set out earlier, the parties agreed that there was a common mistake in Clause 6.04, in that the amount of RMB 126,000,000 was not an account receivable and the agreement between the parties was that P would use its best endeavours to liaise with the relevant parties to recover for Yingtong the sum of RMB 126m and that P undertook to recover for Yingtong no less than RMB 60m during the stipulated period, which expired on 25 June 2011 (“Deadline”). 127.D’s pleaded case was that P was in breach of its obligations under Clause 6.04 of the SPA, in that prior to the Deadline, neither Yingtong nor the Target Company had recovered the sums due and payable to Yingtong, nor had any payment of no less than RMB 60m been made by Yingtong to the Target Company. 128.P’s defence was that it had complied with its obligations under Clause 6.04. 129.P’s case was that as early as July 2010 it had arranged for a Mr Gong Xiangmin (鞏向民) (“Mr Gong”) to liaise with the relevant parties including the Beijing City Tongzhou District Municipal Government to assist the Target Company in receiving no less than RMB 60m. It was not disputed that Mr Li introduced Mr Gong to D’s representatives and recommended Mr Gong to assist the New Management with the Yingtong Recovery. Mr Gong was in charge of Yingtong prior to March 2010 and he was said to have the necessary knowledge of the Yingtong Project and the relationship with the Tongzhou Authorities. 130.On 10 October 2010 a power of attorney was executed by the Target Company and Yingtong in favour of Mr Gong giving him full power to handle all the residuary problems (遺留問題)arising out of the Yingtong Project[26]. The power of attorney was for a period of about 8½ months, from 10 October 2010 until 25 June 2011 (“Authorisation Period”). On 12 October 2010, P signed a letter of consent to the Target Company and Yingtong indicating P’s consent to the power of attorney being given to Mr Gong and confirming P’s acceptance of all consequences of Mr Gong’s handling of the authorised matters during the Authorisation Period. 131.On 31 December 2010, Yingtong received a letter from the Tongzhou Branch of the Beijing City Land Resources Bureau (“Land Resources Bureau”) confirming that its report submitted to the Special Committee of the District Government in relation to the residuary problems of the Yingtong Project had been approved on 29 December 2010 and that, amongst other things, a compensation of RMB 90m would be paid by the relevant authority to Yingtong[27] and that the Land Reserve Sub Centre of the Land Resources Bureau (“Land Reserve Centre”) would be discussing with Yingtong the details of a compensation agreement shortly. 132.Subsequently on 23 June 2011, an agreement executed by the Land Reserve Centre was forwarded to Yingtong (“June Agreement”)[28]. According to the June Agreement, the first instalment of RMB 60m of the agreed compensation of RMB 90m would be paid within 40 days from the signing date, and the remaining RMB 30m would be paid within 3 months subject to the conditions therein. 133.It was P’s case that Yingtong, under the New Management, wrongfully and unreasonably did not agree to some of the conditions precedent in the June Agreement and refused to execute it. 134.It was not disputed that the June Agreement was not signed by Yingtong. According to Ms Zhao, thereafter Mr Gong continued to negotiate with the authorities , and Yingtong eventually signed another agreement with the Land Reserve Centre on 14 September 2011 (“September Agreement”)[29]. 135.It was also not disputed that eventually Yingtong received (i) RMB 60m on 15 December 2011, (ii) RMB 28m on 29 September 2012, and (iii) RMB 2m on 16 October 2012. 136.According to the September Agreement, D should have received the 2nd instalment within 60 days after the 1st instalment, ie in mid February 2012. Notwithstanding the agreement, after receiving the 1st RMB 60m on 15 December 2011, D did not receive the 2nd and 3rd instalments until respectively 29 September 2012 and 16 October 2012. During the period, according to Ms Zhao, the New Management instructed Mr Gong and a Mr Zhu Bei of Han Ding United Lawyers (“Han Ding”) on numerous occasions to demand payment from the Land Reserve Centre. In fact, Ms Zhao’s evidence was that on Mr Gong’s recommendation, Yingtong entered into a one-year service agreement with Han Ding on 1 September 2011[30] pursuant to which Han Ding was to help Yingtong to liaise with the authorities in connection with the recovery, and that Mr Zhu, together with Mr Gong, and others had attended various meetings with the authorities which led to the execution of the September Agreement. 137.Further, due to the delay in the Land Reserve Centre paying the 2nd instalment, Yingtong had to enter into a supplemental agreement with Hand Ding to extend the services period from 1 September 2012[31], and that on or around 7 December 2012, Yingtong paid a fee of RMB 2,151,320.55 to Han Ding which included fees payable to Mr Gong[32]. H.2 D’s claim 138.D’s claim in the Counterclaim was for loss and damage as a result of P’s breach of Clause 6.04 namely (1) recovery of interests on the RMB 60m and (2) costs of recovery. As for the costs of recovery, these were:
H.3 Sub-issues H.3.1 Whether RMB 60m was recovered within the stipulated time 139.As submitted by Ms Sit, the ordinary meaning of “recover” is to receive cash, not just receiving a chose of action to enforce or sue for RMB 60m. There was no real dispute by Mr Wong over the meaning of “recover”. 140.During the course of cross-examination, Ms Zhao had said that according to her then senior manager Mr Jiang Chao’s[33] experience and her experience, it would be really difficult for the payment of the first RMB 60m to be made within 40 days of the signing of the June Agreement even had it been signed and in any event, the payment could not have been made before the Deadline. Ms Zhao had explained that this was impossible due to the need for government approval on multiple levels from the Land Reserve Centre to the elementary level payment office of the Finance Department of the Tongzhou district and to the Chief of Finance Department, and that it was impossible for such process to be completed within one day. 141.Ms Zhao only joined the Target Company in April 2011 and would not have direct personal knowledge of matters prior thereto. Mr Wong submitted that it was not right for Ms Zhao to make speculation, in that there was no sufficient proof to substantiate the assertion that the payment of RMB 60m could not have been made before the Deadline. 142.However, as seen earlier, the Land Resources Bureau had already confirmed their agreement in principle to provide compensation in the sum of RMB 90m to Yingtong by end of December/January 2011. Yet, it seemed to have taken some 5 months before the Land Reserve Centre signed version of the June Agreement was sent to Yingtong on 23 June 2011. I find that such delay would be consistent with Ms Zhou’s evidence that the process would take time. One can also see that, even though in the September Agreement it was stated that the Land Reserve Centre was to pay the 1st instalment of RMB 60m within 60 days from 14 September 2011, the amount was only received by Yingtong on 15 December 2011, namely it took some 3 months for the Land Reserve Centre to arrange payment. 143.There was no sufficient evidence from P that upon signing by Yingtong on 23 June 2011, the sum of RMB 60m would be made forthwith or received by Yingtong before the Deadline. Having considered the actual time taken between agreement and receipt, I accept Ms Zhao’s evidence at the trial and find it more probable than not that even had the June Agreement been signed by Yingtong on 23 June 2011, it was not possible for the sum of RMB 60m to be received or recovered by D/Yingtong the next day or before the Deadline. H.3.2 “Shifting the goalposts” 144.It was P’s allegation that D “shifted its goalposts” in that D changed its instruction to pursue recovery for RMB 90m instead of RMB 60m and as D had failed to cooperate and/or prevented P from enabling Yingtong to recover the sum of RMB 60m before the Deadline, D should be precluded from making any claim against P[34]. 145.Mr Wong argued that it was clear that the June Agreement would have been signed if the New Management was only concerned with the recovery of RMB 60m but by then the New Management was not content with RMB 60m and thus the goal-posts had shifted, and that as a result of this change of heart, the New Management or D had prevented P from having the opportunity to satisfy the requirement of recovering RMB 60m for Yingtong before the Deadline. In other words, D’s refusal to execute the June Agreement deprived P of the opportunity to recover RMB 60m. 146.As said earlier, notwithstanding there was an agreement to pay Yingtong compensation of RMB 90m by January 2011, it was not until 23 June 2011 that the signed June Agreement by the Land Reserve Centre was forwarded to Yingtong. Although the payment of RMB 60m was unconditional, the payment of RMB 30m would only be made within 3 months of all issues arising out of the Yingtong Project (including but not limited to the handing over etc of all relevant documents and agreements) being dealt with satisfactorily. Further, clause 3 of the June Agreement stated that within 30 days, Yingtong had to hand over relevant documents relating to the Yingtong Project to the Land Reserve Centre upon its request and to provide necessary answers and explanations on related questions raised by the Land Reserve Centre. 147.As seen in the September Agreement, the payment of the balance of RMB 30m was unconditional and further for clause 3, there was an agreed list of relevant documents attached to the September Agreement, rather than merely unspecified relevant documents. 148.The consolidated value of the Target Company’s investment through Yingtong in the Tongzhou Development was RMB 126m. As mentioned earlier, the Land Resources Bureau had already approved as early as 31 December 2010 for a compensation of RMB 90m to be paid to Yingtong. Further, pursuant to Clause 6.04, P had also agreed to use its best endeavours to recover RMB 126m and P’s obligation was not simply to recover RMB 60m. In light of all this, and also as said earlier, I accept Ms Zhao’s evidence that it was not possible that the first RMB 60m could be received by Yingtong before the Deadline even had the June Agreement been signed by Yingtong, I do not find D was “shifting its goalposts” nor was D being unreasonable in trying to further negotiate with the Land Reserve Centre in relation to the payment of the balance of RMB 30m to be without conditions. H.3.3 “Prevention Principle” 149.It was also submitted on behalf of P that D would be precluded by the “Prevention Principle” from making any claim against P for the apparent failure to recover the RMB 60m within the stipulated period. 150.As said by our Court of Final Appeal in Kensland Realty Ltd and Whale View Investment Ltd & Anor (2001) 4 HKCFAR 381, the “Prevention Principle” is a long-established legal principle that a person is not permitted to take advantage of his own wrong[35], and that in refining the principle’s operation in the contractual context, the authorities have stressed two limitations, or requirements. First, it is necessary to show the relevant party’s “wrong” involves his breach of the contract in respect of an obligation owed to the other party[36]. The second limitation/requirement is a causation requirement, and it is necessary to show that the contractual rights or benefits which the party in question is seeking to assert or claim arise as a direct consequence of that party’s prior breach[37]. 151.For the 1st requirement, as pointed out by Ms Sit, P had never pleaded the term which D had breached. As for the 2nd requirement, in light of my earlier findings, P had failed to demonstrate that had the June Agreement been signed on 23 June 2011, payment of RMB 60m would have taken place by the Deadline. Thus, the Deadline would have been missed anyway. 152.I accept Ms Sit’s submissions and find that P was not able to demonstrate that the two requirements of the “Prevention Principle” had been satisfied. H.3.4 Whether any breach 153.In light of the above, as the sum of RMB 60m was not recovered before the Deadline, I find that P was in breach of Clause 6.04 of the SPA. H.3.5 Causation 154.As said earlier, D sought (i) recovery of interests on the RMB 60m and (ii) costs of recovery. 155.As for (i) above, P had not advanced any “causation” argument in so far as interests were concerned. However, P’s case was that had D signed the June Agreement, even if the sum of RMB 60m was not received before the Deadline, the parties only needed to wait for the payment for 40 days at no additional cost, and that if that were the only issue, P could have paid interests for the 40 day period. Thus, it was P’s position that even if it were held to be in breach of Clause 6.04, it should not pay interests for more than 40 days. 156.A seen earlier, even though the Land Reserve Centre had agreed in the September Agreement to pay the 1st sum of RMB 60m within 60 days, it was not until some 3 months later that the amount was received by Yingtong. I have earlier said that there was no sufficient evidence that had the June Agreement been signed, the RMB 60m would be received before the Deadline. In fact, there was also no sufficient evidence that had the June Agreement been signed, the RMB 60m would be received by Yingtong within 40 days. 157.I am of the view that P is liable to pay the interests on the RMB 60m from the expiry of the Deadline until the date of actual receipt by Yingtong, namely 15 December 2011. 158.As for the costs of recovery, Clause 6.04 is silent on who should be liable for the costs of recovery of RMB 60m. Ms Sit submitted that on a proper construction of Clause 6.04, as P had undertaken that the Target Company would receive the sum of RMB 60m before the Deadline, if P had chosen to achieve that by engaging third party agents, that would be a matter for P and that any expenses incurred should be borne by P. I agree. 159.According to Ms Zhao, the engagement of Han Ding was on Mr Gong’s recommendation, and the amount of RMB 2.15m paid to Handing[38] included the fees for Mr Gong’s work. As to what part of the amount was attributable to the work in connection with the recovery of RMB 60m, and what part was attributable to the balance of RMB 30m, I am of the view that this should be a matter for the trial on quantum. H.4 Conclusion on Issue 1 160.As said earlier, I find that P was in breach of its obligation under Clause 6.04 of the SPA. I further find such breach had resulted in loss and damage to D. I. Issue 2 – Xian Project I.1 Background 161.Between February 2008 and June 2010, six of the Target Company’s Mainland subsidiaries (“Developers”) entered into construction contracts and supplemental construction contracts with various builders (“Builders”) in relation to a residential development in Chanba in Xian (“Xian Project”). On about 23 August 2010, it was first exposed in public that there had been use of substandard reinforced steel bars in the construction of the residential buildings in the Xian Project. Various purchasers of the units in the Xian Project reacted aggressively and expressed their concerns to the Mainland Government. 162.It was then revealed that the steel bars used in the load-bearing walls were over-lengthened and failed to meet the safety standard prescribed by the Mainland authorities (“Steel Bar Issue”). 163.This led to rectification works being carried out by the Developers to strengthen the building structure and to remedy the defects. It was D’s case that the Steel Bar Issue led to delay in completion of the Xian Project as the local authorities would not give the necessary approvals until rectification had been done to its satisfaction and claims by purchasers who had entered into pre-sale contracts were resolved. 164.It was D’s pleaded case that P was in breach of Clause 8.01 of the SPA and also breach of the Warranty under “VII. Litigation” in paragraph 5 of Schedule 2 (“Litigation Warranty”). 165.The Litigation Warranty states as follows:
I.2 D’s claim 166.In the Counterclaim, D pleaded that the Developers were liable for a total sum of approximately RMB 180,000,000, and the particulars were as follows:
167.In addition to the above, the Developers further claimed legal costs of RMB 500,000 in defending the claims brought by the purchasers of the units. 168.The reinforcement works of RMB 42m had been paid by the Builders. As seen in the minutes of the meetings of 21 September 2011 (“2011 Meeting”) and 29 November 2012 (“2012 Meeting”) between the Developers and the Builders, the Builders had agreed to bear a sum of RMB 107m. 169.D’s claim was for items (i) to (iv) plus legal costs, less the sum of RMB 107m. I.3 The sub-issues 170.It was P’s defence that there were no indications nor facts and/or circumstances suggesting that the Xian Project contained structural defects until this was first exposed by the media on in August 2010 and that there was no fact or circumstances which were likely to give rise to any litigation or other proceedings as at 19 January 2010 (date of the SPA) or at 24 June 2010 (Completion Date). P denied any breach of the Litigation Warranty as pleaded by D. 171.The sub-issues were essentially :-
I.3.1 Whether P’s knowledge relevant 172.The Litigation Warranty is in respect of any (i) litigation or (ii) arbitration, (iii) administrative or (iv) criminal or (v) other proceedings (collectively “Proceedings”). What the Vendor (P) had warranted under the Litigation Warranty were as follows:
173.In relation to (i) and (ii), there were no Proceedings, and there were no Proceedings pending on the Completion Date. As for (iii) above, Ms Sit submitted that P’s knowledge was irrelevant in that P was warranting a factual state of affairs in (iii), and that the Litigation Warranty was not qualified by words such as “to the best of the knowledge, information and belief of P”. 174.On the other hand, Mr Wong had referred the Court to Sinclair on Warranties and Indemnities on Share and Asset Sales (10th Ed) and paragraph 4-19 therein states that[39] :
175.Mr Wong thus argued that it is not necessary for the words “to the best of my knowledge” to be there, even though if there is a duty on the vendor to make disclosure, a vendor’s statement that he is not aware of something implies that he has made such investigation as might reasonably be expected to be made by or under the guidance of a prudent vendor. 176.Having considered the Sinclair case, and even though the words “to the best of P’s knowledge” was not there in the Litigation Warranty, I am of the view that P’s knowledge is relevant or required for breach of the Litigation Warranty. I.3.2 Whether P had actual knowledge 177.As pointed out by Mr Wong, D’s own witnesses, namely Mr Ni and Ms Zhao had accepted that there was no “actual knowledge” on the part of P/Mr Li of the Steel Bar Issue. 178.Mr Ni had in re-examination stated that the defect in the steel bars was unknown to them in the beginning and it was only discovered by one of the owners (purchasers) when he was carrying out decoration works and he then made a report to the government authorities. This was then reported by CCTV and the publicity in the matter later led to the reforms undertaken by the relevant government department. Mr Ni said what Mr Li was most concerned with at the time was he being arrested as the Steel Bar Issue would affect the life and safety of ordinary people. 179.Further, according to Mr Ni, Mr Li had told him that the Builders were all his own people and therefore he had thought his own people would not have allowed him to be exposed to the pressure of a sub-standard construction project and that Mr Li had said that he never expected the Builders to do such a thing. Mr Ni in fact said he could “responsibly” say that Mr Li did not realise that the construction work was so inferior. Further, Mr Ni’s evidence was that Mr Li had told him that as Mr Li had trusted his family and relatives, there was no supervision from him and this had led to the case and that he had to bear criminal liability and that was why he told Mr Ni that he felt that his family members had 陷害/ “betrayed” him. Also according to Mr Ni, that was why Mr Li was willing to co-operate with the government and the Target Company’s New Management and their technical experts in Shanghai went to discuss with the Xian technical experts to try and resolve the matter. The matter was ultimately resolved by all the parties reaching an agreement but it had cost D several billions in loss[40]. 180.I find Mr Ni’s own evidence clearly indicated that Mr Li had no actual personal knowledge of the steel bars being defective. Ms Zhao had also accepted that she had no basis to say that P actually knew of the steel bars being defective[41]. I.3.3 Whether P/Li ought to have known and whether the Steel Bar Issue was outside reasonable P’s control 181.I will consider the above two sub-issues together. It was submitted on behalf of D that Li/P ought to have known, or had constructive knowledge of the Steel Bar Issue by reason of the following:
182.It was not really disputed that Mr Zhou is Mr Li’s brother-in-law or a family member. Ms Zhao’s evidence was that Mr Zhou was in control of all the 4 Builders as when the Builders were negotiating the settlement agreement with the Target Company, all 4 of them acted together and that money was deducted from only one of the Builders but with that money deducted it was considered that all the other 3 had settled and satisfied their obligations. 183.A mentioned earlier, there were two meetings between the New Management of the Target Company and/or Developers and the Builders over the Steel Bar Issue, namely the 2011 Meeting and the 2012 Meeting. 184.The minutes of the 2011 Meeting indicated that the Target Company was present and represented by members of the New Management and there were 4 persons representing the 4 Builders, including Mr Zhou and a Mr Chen Liang. According to Ms Zhao, the New Management “demanded” Mr Li to attend the 2011 Meeting to help resolve the problem in light of the relationship between Mr Zhou and Mr Li[43]. As seen in the minutes, Mr Li did attend the meeting. 185.During the 2011 Meeting, the Builders admitted liability of the Steel Bar Issue and 2 of the Builders, which I shall simply call Dongfang and Wanda, authorised Mr Chen Liang to have full power to deal with all remedial matters arising out of the Steel Bar Issue. 186.Further the 2 Builders Dongfang and Wanda indicated that they were willing to bear the “direct loss” of the Target Company (Developers) and also the “corresponding portion”/相應部分of the ex gratia compensation and penalties/compensation paid by D to the purchasers for late handover of units. As for any loss caused to the Developers for damage to reputation and the delayed sales, the parties were to discuss separately. 187.As seen in the minutes, the Builders had indicated that the construction of the works on 4 of the sites, ie A10, A15, A13, A14 would be completed before end of 2011 and the works on A4 would be completed before April 2012 which would not affect the handing over of the units, and to meet the targeted deadlines, the Developers should arrange to pay the construction fees of RMB 400m before end of 2011. As for site A11, the Builders would need further instructions from the Developers as to whether to continue the construction. 188.Mr Li had indicated during the 2011 Meeting that he was prepared to raise RMB 100m and to assist the Target Company in arranging a mortgage loan of RMB 150m for the ongoing construction costs. Mr Li further requested the Builders to advance RMB 50,000,000 for ongoing construction needs and that the Target Company to raise the balance of RMB 100m themselves. 189.The Developers acknowledged during the 2011 Meeting that to proceed with the construction of the project, it would require funds but explained that due to the Steel Bar Issue, the sales of the units had been affected and the banks also tightened on their credit facilities. The Developers indicated that they had already paid RMB 100m as initial compensation and due to the tightening of their capital, they were also actively raising funds for the ongoing construction. The Developers expressed their wish that the Builders to try and lower their demands for funds so that the parties could overcome the then difficult situation together. 190.Subsequently in January 2012, Mr Li (through a Mainland company) did arrange for a loan of RMB 100m to be provided to the New Management of the Target Company/Developers for construction costs, although in the end, the Target Company/Developers seemed to have only draw a loan of RMB 80m and according to Ms Zhao, the loan was repaid by the Target Company in January 2013 together with interests in the sum of RMB 85,575,777.78[44]. 191.Then there was the 2102 Meeting between the Target Company (and two Developers) and the Builders. This time, Mr Zhou and Mr Chen Liang were authorised by all 4 Builders to attend the meeting. Mr Li did not attend the 2012 Meeting. 192.As seen in the minutes of the 2012 Meeting, the Developers and the Builders agreed that the Steel Bar Issue resulted in the delay of the construction timetable of 6 sites, ie A10, A15, A14, A13, A4 and A11 and in the delay in handing over of the units. It can be seen that the Builders had already carried out remedial/reinforcement works by then and Dongfang had agreed to bear the costs of such works of RMB 42m. The Developers and the Builders then further agreed to a settlement in relation to 5 of the sites, A10, A15, A14, A13 and A4 and Dongfang agreed to be responsible for a sum of RMB 107m towards the penalties/compensation paid to the purchasers. The Developers agreed to be responsible for all other losses. The sum of RMB 107m was agreed by Dongfang to be deducted from outstanding balance of construction costs payable by the Developers to Dongfang in respect of the 5 sites. Further the sum of RMB 107m was to be appointed over the constructions costs among the 5 sites and such appointment was to be subject to further agreement between Dongfang and other project companies of 5 sites. 193.Even though it would appear that that the 4 Builders acted together and that the settlement sum of RMB 107m undertaken by Dongfang was accepted by the Target Company to be a settlement on behalf of all 4 Builders, since there was no actual payment of RMB 107m in that it was a sum to be deducted from outstanding construction costs payable by the Developers to the Builders and apportioned among 5 sites, it was not clear as to how the amount was eventually apportioned between Dongfang and others. 194.On the face of it, the 4 Builders were each a limited company, and they were 4 separate legal entities under the Mainland law. 195.During the 2011 Meeting, as seen in the minutes, Dongfang and Wanda were the only 2 Builders who were taking the active role in discussing the settlement with the Developer but there were 2 other representatives of the Builders also present apart from Mr Zhou and Mr Chen. It was not clear which of the Builders they represented. However, the company chops of all 4 Builders were affixed to the signing part of the last page of minutes of the 2011 Meeting and there were signatures of 4 different persons, including those of Mr Zhou and Mr Chen Liang. 196.The minutes of the 2012 Meeting indicated that Mr Zhou and Mr Chen Liang were stated to be authorised representatives of the 4 Builders. According to Ms Zhao, on one occasion, Mr Chen Liang had referred to Mr Zhou as “boss” and that it was her evidence that Mr Zhou was the person in charge of all the Builders. 197.Mr Ni’s evidence in fact was different from that of Ms Zhao’s, as he had said during the trial that all 4 Builders were owned by Mr Li’s relatives and were controlled by Mr Li (not Mr Zhou) and that Mr Li was in charge of the Builders. There was however no mention of this in his witness statement, nor was this Ms Zhao’s evidence. 198.I do not find that there was sufficient evidence that the Builders were all owned and controlled by Mr Zhou or family members of Mr Zhou. In any event, even if the 4 Builders were all related companies and owned and/or controlled by Mr Zhou, or family members of Mr Zhou or Mr Li, I do not find that there was sufficient evidence that Mr Li was in de facto or ultimate control of all the 4 Builders. 199.There were independent supervisors appointed for the Xian Project, including 杭州中慶工程建設監理有限公司/Zhongqing, who were contractually engaged by the Developers to supervise the construction works at the sites, as seen from the (i) supervision contract dated 8 April 2008 for a period of 24 months, (ii) the supplemental contract extending the period from April 2010 to October 2010, and (iii) another supplemental contract dated 9 August 2011 in relation to the 2nd stage of the Xian Project extending it to 30 January 2012, after expiration of the initial 24 months of the 2nd stage[45]. 200.The duties and obligations of the independent supervisors were set out in Appendix 2 of the contract in (i) above[46]. There were also standard approval forms[47]. In particular, as seen in the form submitted on 20 July 2010 in relation to Building No 1 on the site A10[48], 4 separate entities including the independent supervisor Zhongqing and one of the Builders had confirmed that all technical information of the construction was complete, and the quality of construction was in compliance with the design plans and the standards of the completion inspection and the independent supervisor had signed and agreed to the handover of the building[49]. 201.During cross examination, Ms Zhao had agreed that the approval form demonstrated that approval had been obtained from various separate divisions and that the report from the independent supervisor Zhongqing indicated that they had no idea of the defects in the steel bars, although she had said as the Developers had assigned specific individuals to carry out management work on site and that with the independent supervisor, they should have knowledge of the defects. However, Ms Zhao confirmed that no legal action had been commenced against the independent supervisors/ because there was not enough evidence of negligence on the part of the supervisors. 202.Ms Sit had referred to one of the construction contracts for the Xian Project, in relation to Land A10[50] and the provisions and terms therein. Party A of the contract was the Target Company’s subsidiary (one of the Developers) and Party B was the Builder Dongfang. 203.It was a term of the construction contract that Party A was to appoint a representative who would be on site and who had the authority to deal with all notifications, instructions, consents, approvals, certifications and decisions and Party A’s representative was a person named Li Bing[51]. There was also a project manager who was to be appointed by Party B with Party A’s agreement. 204.Under the terms of the contract, the project manager was to commence construction work in accordance with the plans of the “construction unit” approved by Party A’s representative and in accordance with instructions from Party A’s representative and the independent supervisor. According to Mr Jia, the independent supervisor would not be involved in giving instructions and instructions to the project manager would only be given by Party A’s representative. 205.It was also provided that the buildings materials must be purchased from those approved of by Party A and that Party A could take random sample checks. 206.Further, under the terms of the contact, the quality of the materials, semi-finished products, and final products used, must been checked by Party A and the supervisor. 207.Thus, Ms Sit submitted that, and agreed by Mr Jia, this would mean that the steel bars had to be checked before processing and after processing. 208.Under clause 21.5, apart from those materials agreed by Party A in the contract that Party B had in principle the liberty to purchase, all other materials and equipment to be purchased in the project had to be purchased from those qualified suppliers approved by Party A and must past the inspection and acceptance by Party A’s representative and the independent supervisor. It was also provided that Party B had to, amongst other things, provide the information of not less than 3 suppliers to Party A’s representative and supervisor and that after purchase, Party A had the right to carry out sample checks of purchased materials[52]. 209.However, notwithstanding all the above provisions in the construction contract, under clause 21.1 of the contract, the obligation was clearly on Party B to arrange for all the construction materials to be checked in accordance with the Government regulations and the provisions of the contract, and that all expenses in connection therewith had to be borne by Party B. In particular, under clause 21.3, Party B’s fixed/designated professional person, in accordance with regulations, had to provide the steel bar testing samples and cement testing samples to a qualified eligible laboratory for testing and all such work was to be responsible by Party B, namely: “乙方須由固定的專業人員按規範要求提供鋼筋焊接試件和砼試件送至有資貭的實驗室進行試驗，與試驗有關的所有工作均由乙方負責”[53]. 210.In the construction contract relating to Land A4, the above wording was slightly different, as follows:
211.It was thus clearly Party B, or the Builders’ responsibility to make sure the steel bars were properly tested. 212.It was Ms Zhao’s assertion that as the machines used for the lengthening of the steel bars were located on site and all lengthening work was done on site and as Li Bing and the representative of Zhongqing were in charge of overseeing the entire construction work, P should therefore have known or been aware of the over lengthening of the bars. It was thus submitted on behalf of D that it was within the reasonable control of the Developers (Target Company’s subsidiaries) to check the quality of the steel bars and they at least ought to have known of the Steel Bar Issue given their supervising duties and control in quality checking. 213.Although Party A was to appoint a representative, such representative would only need to be qualified for the post (“合格稱職”) and the representative was only responsible for giving relevant notifications, instructions, consents, approvals, certifications and decisions on behalf of Party A. As for the independent supervisor, its duties were set out in the contract and as said by Ms Zhao, there was no sufficient evidence that there had been negligence on the part of the independent supervisor/Zhongqing in the Steel Bar Issue. 214.Further, it was provided in clause 23.1.1 that at time of inspection and acceptance, Party B must carry out self-inspection, and if satisfied, Party B was to complete a record of inspection for the quality of each item and time of inspection and inspectors on both sides were to take part in the inspection procedure for acceptance[55]. 215.Having considered the terms of the construction contract, insofar as the quality and standard of the steel bars, this was in my view entirely the responsibility of the Builders. There was no requirement that Party A’s representative, Lee Bing, had to have any technical or professional qualifications. This was in contrast to the “固定的專業人員” or the professional person of Party B appointed under clause 21.3. 216.It was said that Mr Li had a detailed knowledge of and a keen interest in the construction of the Xian Project and that he was willing to raise funds for the remedial work. There was no suggestion, and in any event, no evidence that Mr Li was acting in concert with the Builders in using defective steel bars. Ms Sit had submitted that Mr Jia had accepted that Mr Li was in a position to know of any information about the Xian Project had he wanted to. However, there was no evidence that any alarm or red flag was raised by whatever information whether from the Developers’ representative or the independent supervisors or otherwise which would or should have alerted or led Mr Li/ Developers/P or the then management of the Target Company to make investigation at the material times. Even if the lengthening of the steel bars was done on site, there was no sufficient evidence that the Developers’ representative or the independent supervisor of Mr Li ought to have known that the steel bars were over lengthened. 217.As said earlier, as admitted by D, there was no actual knowledge on the part of Mr Li/P of the defective steel bars. Having considered all the above, I do not find that there was sufficient evidence that Mr Li or P ought to have known of the defects of the steel bars or that Mr Li or P can be said to have constructive knowledge of the defective steel bars, or of any fact or circumstance which was likely to give rise to any of the Proceedings as pleaded by D. I further find that the defects in the steel bars were matters, facts or circumstances that had arisen as a result of events outside the reasonable control the Developers/Mr Li/P and/or the Target Company. I.3.4. Causation 218.It was suggested on behalf of P that the Steel Bar Issue was not the only reason, or there were other reasons which had led to the delay in handing over of the pre-sold units to the purchasers, including the delay in commencement of construction and/or delay. 219.Ms Zhao had explained that the delay was due solely to the government authorities withholding approval for the Xian Project, as:
220.As for the reason put forward by P being the delay in the commencement of the construction, Ms Zhao had explained that this was not the reason because pre-sale of the units could only have been allowed had the foundation work been completed. 221.Anyway, P’s expert Mr Kwan was of the opinion that the receipt confirmation letters by the purchasers stated that the compensation to the purchasers was related to the Steel Bar Issue and it was on this basis that Mr Kwan had included this loss in his calculation of quantum[56]. Although Mr Kwan had said if additional information were to be provided indicating payments to purchasers were not made from these specific accounts for the Steel Bar Issue, then his inclusion of the amount of RMB 210,910,500.17 in his calculations of the quantum of loss would need to be revised after review of the additional information[57]. Thereafter, there had been no additional information provided to Mr Kwan for him to make any revision. 222.Having considered all the above, I find there was no sufficient evidence to contradict Ms Zhao’s evidence, that the delay in handing over the units was caused by anything other than the Steel Bar Issue. 223.P’s case was also that even if P were in breach of the Litigation Warranty, D was not able to establish that any loss was caused by P, as the Builders had accepted their liability for causing the defective steel bars. Mr Wong submitted that the Builders’ obligations were clear under the construction contracts, and Ms Zhao had accepted that the Builders had agreed to compensate the Target Company’s/Developers’ loss caused by the defective steel bars and so far as other losses, they could be pursued against other parties, but no such claims were ever brought by the Target Company or the Developers and they were allowed to lapse under the Mainland limitation laws. 224.According to D, some of the Builders were either wound up or in the course of winding up, and the Builders would not be in a position to pay any more than what was offered. 225.It was also submitted on behalf of P that P was not consulted when the Target Company accepted the figure of RMB 107m from the Builders for compensation and that P was prejudiced by the compromise as it had been deprived of its right to pursue against the Builders by joining them and/or to seek contribution from them. 226.That D or the New Management should have sued the Builders and/or P was not consulted by D over the settlement was never pleaded by P, nor was part of P’s evidence, and in my view, it was too late to make such complaints at the trial. I.4 Conclusion on Issue 2 227.In light of my earlier finding that there was no sufficient evidence that Mr Li or P ought to have known, or had constructive knowledge of the defects of the steel bars prior to 23 August 2010, and that the defects of the steel bars were matters, facts or circumstances that had arisen as a result of events outside the reasonable control of the then management of the Developers/Target Company, I find D had not discharged the burden of proving P’s statements in paragraph 5/VII of the Warranties were untrue, inaccurate and misleading as at 19 January 2010 or 24 June 2010. I thus find P not liable for the breach of Clause 8.01 or the Litigation Warranty. J. Issue 3 – Jinma Tax Rebate J.1 Background 228.It was not disputed that between 2006-2008, tax rebates of 4 payments totalling RMB 27,196,296.46 (“Tax Rebates”) which should have been received by 北京金馬文華園房地產開發有限公司/Jinma, an indirect wholly-owned subsidiary of the Target Company, had been redirected or paid to what P described as related companies, namely 北京和喬興業投資有限公司(“Heqiao”), 北京西華偉業餐飲有限公 (“Xihua Canyin”) and/or 北京安賽通業科技有限公司 (“Ansai”) (collectively “3 Related Companies”). 229.In January 2011, the New Management received a tax inspection notice from the Beijing Tax Bureau demanding inspection of taxation matters pertaining to Jinma for the period from 1 January 2003 to 31 December 2009. According to Ms Zhao, the New Management then reviewed the financial records and books and records of Jinma and located an earlier tax inspection notice dated 21 May 2010 issued to Jinma as well as the records for the payments of the Tax Rebates. This was when Jinma discovered that the Tax Rebates were not deposited into an account of Jinma but were transferred to the 3 Related Companies instead. 230.On 1 March 2011, Mr Li/P arranged for two payments totalling a sum of RMB 27,195,296.46 to be paid to Jinma in the manner described below (“01.03.11 Payments”). 231.According to Ms Zhao, the 01.03.11 Payments were made by Mr Li/P after representatives of Jinma were going to the local Public Security Bureau on 1 March 2011 to make a report and one of them had called Mr Li to inform him. The representatives were then requested by Mr Li to withhold the report, and that several hours later after the call, the 01.03.11 Payments were made. 232.On 29 April 2011, the Tax Bureau issued a tax penalty notice to Jinma (“Tax Penalty Notice”)[58], and on 5 May 2011, Jinma paid a total RMB 18,892,154.46 to the Tax Bureau , being (i) unpaid taxes of RMB 8,875,970.63 in respect of the Tax Rebates (ii) penalties of RMB 4,437,985.32 being 0.5 of the unpaid taxes and (iii) interests of RMB 5,578,198.51 on the unpaid taxes (collectively “Penalties”). Subsequently, on 15 May 2011, Jinma filed a written report with the Beijing Public Security Bureau against 3 former staff of the finance department of Jinma for failing to record the receipts of the Tax Rebates in the accounts of Jinma and transferring the Tax Receipts to the 3 Related Companies, thereby misappropriating the Tax Rebates[59]. 233.Ms Zhao’s evidence at the trial was that the written report was rejected by the Public Security Bureau because the Tax Rebates had by then been repaid. Mr Wong had objected to this part of her evidence as it was not in her witness statement and it was also hearsay. Anyway, it would appear that there had been no follow up on that report. 234.There was no mention of the Jinma Tax Rebates matter in the MBJSM Letter at all. 235.P had admitted that the Tax Rebates were not recorded in Jinma’s accounts and not received by Jinma, but said P had caused more than sufficient funds to be transferred to Jinma (ie the 01.03.11 Payments) to cover the Penalties subsequently. P had put D to strict proof of the alleged breach of the various Warranties. 236.The parties’ respective experts had agreed that there was breach of the accounting–related warranty of paragraph 5 IV(a) in relation to amongst other things, the veracity of the accounts[60]. By failing to record the Tax Rebates payable to Jinma, this would mean clearly that there had been a breach of paragraph 5 IV(a) on the part of P. 237.In D’s Closing Submissions, Ms Sit submitted that P was also in breach of two other specific warranties, namely under paragraph 5 III(c), where P warranted that the Target Company and its subsidiaries had not breached any legislation or regulation affecting it or its business, and under paragraph 5 IV(c) where P warranted that the Target Company and its subsidiaries had no material outstanding tax liability not provided for in its consolidated accounts. This was because P’s own expert had agreed that there was a breach of paragraph 5/IV(a), and it would follow from the facts that P was also in breach of the two warranties under paragraph 5/III(c) and 5/IV(c). J.2 D’s claim 238.D’s pleaded case in the Counterclaim was that P was in breach of the Warranties in paragraphs 4, 5 II(c), 5 III(c), 5 IV(a), 5 IV(c) and 5 VIII(a), in that the Tax Rebates to Jinma were not received by Jinma nor recorded in its accounts, leading to the Penalties. 239.In D’s Closing Submissions, D found it not necessary to rely on the alleged breach of paragraph 4 and D was only relying on breach of paragraphs 5/III(c), 5/IV(a), 5/IV(c) of the Warranties. 240.D’s pleaded case was that it had suffered loss and damage arising out of P’s breaches and appeared to claim the total sum of the Penalties, ie RMB 18,892,154.46 paid by Jinma to the Tax Bureau[61]. J.3 The sub-issues J.3.1 Whether the 01.03.11 Payments were provisional payments of the Penalties 241.The 01.03.11 Payments consisted of two payments, one from Ansai and the other from Xihua Canyin, and were evidenced by two payment notices to Jinma, both dated 1 March 2011, as follows:
242.The total amount of the above two payments was RMB 27,195,296.46, which was RMB 999.99 less than the total amount of the Tax Rebates. 243.P relied on the wording on the Payment Notices, which stated as follows:
244.It was submitted on behalf of P, that as the purpose of the 01.03.11 Payments was stated to be for tax payable ie “应付税款事宜”,and that the payments were expressed to be a “temporary” or “provisional” payments, ie“暂付”, those two payments were in fact provisional payments for the Penalties, and not for return/repayment of the Tax Rebates. 245.Mr Wong pointed out that Ms Zhao’s evidence was that she knew there would be penalties and that she was not sure whether there were other taxes payable although she accepted that on the wording on the two Payment Notices, the payments were made provisionally and that this was also consistent with the evidence of D’s own Mainland expert, Ms Chen, who had agreed that “tax payable”/ “应付税款”would refer to tax payable to the Tax Bureau and would be of the same nature as the Penalties. 246.The words “应付税款” should be read in the context of the entire 1st phrase, “鉴于贵司应付税款事宜”, namely “in light of the matter of the taxes payable by your company…”. I find these words are equivocal and they are also consistent with the purpose of the 01.03.11 Payments being in connection with the repayment or return of the Tax Rebates upon which the taxes/Penalties are payable. 247.In his witness statements, Mr Jia had said that the 01.03.11 Payments were made by Mr Li/P to cover the anticipated amount to be payable to the Tax Bureau and that the amount of the 01.03.11 Payments was calculated by P’s staff based on the estimated penalty level of 1.5 times of the income tax payable on the Tax Rebates of RMB 8,875,879.63, which would come to a sum of RMB 13,313,955.95. What Mr Jia seemed to be saying in his witness statement was that with the tax penalty estimated to be some RMB 13.3m, this plus the tax on the Tax Rebates and the interest would come to about the total amount of the 01.03.11 Payments. 248.However, there was no evidence as to how Mr Li/P/Mr Jia would know that as at 1 March 2011, firstly that the income tax payable on the Tax Rebates would be RMB 8,875,970.63 and secondly, how the rate of 1.5 was arrived at. Under cross examination, Mr Jia said the rate was estimated by a then employee of the Target Company called Wu Xiao Fei. 249.No amounts or rates were mentioned in the Tax Inspection Notice, whether of the tax to be paid on the Tax Rebates or the rate of the penalty. 250.At the trial, Mr Jia accepted that the total amount of the 01.03.11 Payments and the sum of the Tax Rebates were very similar and in fact intended to be the same as the amount of the Tax Rebates. He explained that it was thought that the amount of the Tax Rebates would be a maximum cap value for any tax liabilities/penalties and that the amounts were paid provisionally while efforts were being carried out by the staff of Jinma to try to reduce the amounts payable for the Tax Penalties to the lowest, and that when the 01.03.11 Payments were made, the Tax Bureau had not yet finally decided on the amount of penalties payable by Jinma. 251.Mr Jia’s above evidence was not in his witness statement. 252.It was also Mr Jia’s evidence in his 1st witness statement that Jinma was among a large number of indirect subsidiaries of the Target Company and were many levels removed from P at the relevant time and that P was not aware of the matters alleged by D[64]. However, in his 2nd witness statement, Mr Jia said albeit not recorded in the accounts of Jinma, the redirections of the Tax Rebates to the 3 related companies were “genuine capital arrangement” within the group of the Target Company[65]. His evidence in his two statements was not consistent. 253.It was pointed out to Mr Jia during cross examination that the 3 Related Companies were not within the group of companies of the Target Company set out in Schedule 1 of the SPA or related to the Target Company. Mr Jia’s reply was it would depend on the meaning of “related” and he then said the 3 Related Companies were related to Mr Li. When Mr Jia was asked on what basis he said in his witness statement that the redirections of the Tax Rebates to the 3 Related Companies were “genuine capital arrangement”, Mr Jia replied that this was based on what Wu Xiao Fei had told him and he then also said he was not sure of the reason why the Tax Rebates were paid to the 3 Related Companies. 254.Wu Xiao Fei was not called as a witness. 255.As seen in the Tax Penalty Notice, the failure of Jinma to properly record in the accounts of Jinma the amounts of the transfers/redirections to the 3 Related Companies and the failure of Jinma to make tax declarations on the Tax Rebates were considered to be a “Tax Theft” under the Mainland laws. This was a serious matter. Further, Jinma’s report made to the Public Security Bureau on 15 May 2011 against the 3 employees of the Finance Department indicated that the transfers/redirections were unauthorised by Jinma and the allegations made in the report were serious allegations. 256.The purpose of the redirections to the 3 Related Companies was disputed by D. There was no sufficient evidence from P to support that the redirections were “genuine capital arrangement within the group of the Target Company”. According to Ms Zhao, the books and records of Jinma did not show any business dealings between Jinma and the 3 Related Companies. There was no sufficient evidence that they were related to Jinma or the Target Company or were subsidiaries of the Target Company. In fact, if the payments to the 3 Related Companies were proper expenses of Jinma, they would have been recorded as such in Jinma’s accounts since this would have reduced the income tax payable by Jinma on the Tax Rebates. Whether the so called “capital arrangements” were loans or asset transfers, they should have been properly recorded. I accept Ms Zhao’s evidence. I do not find that there had been any sufficient evidence that the redirections of the Tax Rebates to the 3 Related Companies were “capital arrangements”. 257.As mentioned earlier, it was Mr Jia’s evidence that the 3 Related Companies were related to Mr Li. According to Ms Zhao, during the period from November 2001 until June 2011, Mr Li was the director of Jinma and had control of Jinma, and at the material times, the offices of Jinma were based in Beijing where the Target Company’s headquarters were situated and where Mr Li was primarily based. Further, the accounts of Jinma were managed directly by the finance team of the Target Company and according to members of the finance team, it was Mr Li who gave instructions to effect the redirections of the Tax Rebates to the 3 Related Companies. 258.There was no sufficient evidence to contradict Ms Zhao’s above evidence and I accept her above evidence and find that at the material times, Mr Li was in control of Jinma and the redirections of the Tax Rebates to the 3 Related Companies related to him and that the Tax Rebates were not properly recorded in the books of Jinma were within P/Mr Li’s knowledge and/or control. 259.The amount on the 2nd Payment Notice was exactly the same as the amount redirected or transferred to Xihua Canyin[66], and the amount on the 1st Payment Notice was only a de minimis variation from the exact amounts received by the other 2 Related Companies, Ansai and Heqiao. According to Ms Zhao, as Heqiao was deregistered by 2011, the amount redirected to Heqiao were paid by Ansai. 260.Having considered the almost exact match of the total amounts of the 01.03.11 Payments with the total amounts of the Tax Rebates, and having considered all the evidence, I find it more probable than not that the 01.03.11 Payments were return or repayments of the Tax Rebates to Jinma and I reject P’s case in this regard. 261.Mr Wong had submitted that so far as the Tax Rebates were concerned they could not form part of D’s claim and that it was not part of the Counterclaim for the repayment of the original Tax Rebates. 262.However, as D’s case was that all along the amounts under the 2 Payments Notices were the repayments/return of the Tax Rebates, there was no reason for D to make a claim for repayment in the Counterclaim. In any event, any claim for repayment would have to be made by Jinma against the payees/recipients of the Tax Rebates. J.3.2 Whether any loss 263.It was further argued on behalf of P that D suffered no loss, and in fact there was a “windfall” to D, in that (i) as the Tax Rebates were receivables, the assets of the Target Company were understated when the purchase price of the Sale Shares was negotiated, and (ii) the 01.03.11 Payments exceeded the Penalties. 264.Mr Wong argued that had the Tax Rebates been properly reflected in the accounts of Jinma, it would follow that Jinma’s value would have enjoyed a corresponding increase in value and D would have to pay more to acquire Jinma, and that D had in fact enjoyed a windfall in paying less to acquire Jinma because of the lack of proper record/accounting. There was however no sufficient evidence as to how the Tax Rebates, if properly recorded, would have affected the purchase price of the Target Company. 265.As for the argument that the 01.03.11 Payments exceeded the Penalties, if they were indeed for the Penalties, I find it odd that there was no evidence that P/Mr Li had ever sought the return of any amount overpaid. Anyway, in light of my finding that the 01.03.11 Payment were repayment of the Tax Rebates, D had suffered loss as set out below. J.4 Conclusion on Issue 3 266.In light of what was said above, I find there was a breach of paragraph 5/IV(a), as agreed by the experts. Since there were clearly breaches of the Mainland tax laws as seen earlier as a result of which D had to pay the Penalties, I find that P was also in breach of paragraph 5/III (c) and 5/IV(c). 267.I find P liable for loss and damage caused to D. The experts have agreed that of the Penalties, only the tax penalty of RMB 4,437,985.32 and the interest of RMB5,578,198.51, and a difference of RMB 999.99 between the total amount of the Tax Rebates and the 01.03.11 Payments are recoverable[67]. Any amounts not agreed will be for the trial on quantum. K. Issue 4 – undisclosed litigation concerning Ms Zheng K.1 Background 268.At all material times, 北京中新沃克建築裝修工程有限公司 (“Wo Ke”) was one of the indirect wholly owned subsidiaries of the Target Company. Issue 4 concerns Wo Ke’s acquisition of a company called北京國銳民合投資有限公司 (“Guo Rui”), and Issue 5 concerns Wo Ke’s sale of Guo Rui. 269.Pursuant to an equity transfer agreement and a memorandum dated 1 November 2007 between (i) Ms Zheng Xiangli (“Ms Zheng”); (ii) Ms Dai Rongqin (“Ms Dai”); (iii) a company named 北京世紀中基投資有限公司 (“Shiji Zhongji”) and (iv) Guo Rui, Shiji Zhongji acquired the entire issued share capital of Guo Rui from Ms Zheng (who held 40% shareholding) and Ms Dai (who held 60% shareholding) respectively (“Guo Rui Agreement”). 270.The principal asset of Guo Rui was its 19% equity interest in a company called北京君合百年房地產發有限公司 (“Jun He”) which in turn owned interest in a property project in Tongzhou District, Beijing (通州自由小鎮) (“Tongzhou Project”). 271.By an agreement dated 27 November 2007, all of Shiji Zhongji’s rights and liabilities under the Guo Rui Agreement were acquired by Wo Ke. As at 9 January 2008, Wo Ke had paid an aggregate sum of RMB 340,000,000 to Ms Dai and Ms Zheng as consideration under the Guo Rui Agreement. 272.After acquiring Guo Rui, through agreements with other entities, Wo Ke had further acquired another 25.01% of the issued share capital of Jun He in December 2007 and another 12% later on 28 May 2008. Thus, by end of May 2008, the Target Company, through Wo Ke, owned about 56% of Jun He’s interest in the Tongzhou Project. 273.The acquisition by the Target Company of a controlling interest in Jun He was announced to the public by the Target Company as a disclosable transaction on 19 June 2008[68]. Mr Li was at the time Chairman of the Board of the Target Company. 274.On 11 August 2009, Ms Zheng commenced a claim in the Beijing Intermediate People’s Court (“Zheng Litigation”) against Wo Ke, Shiji Zhongji and Guo Rui alleging breach of the Guo Rui Agreement on the basis that the total consideration should have been RMB 490,000,000, and therefore Wo Ke remained liable for the remaining balance of RMB 60,000,000 to her. On 14 August 2009, an asset preservation order made by the Beijing Intermediate People’s Court was obtained by Ms Zheng against Wo Ke (“Asset Preservation Order”). According to Ms Zheng, Wo Ke was to pay all balance of the consideration within 15 working days after completion of due diligence on 15 December 2007 but Wo Ke failed to pay. 275.Wo Ke lost the Zheng Litigation pursuant to a judgment of the Intermediate People’s Court on 17 June 2011 and had to pay the damages claimed[69]. It can be seen from that judgment the outstanding amount of the purchase price under the Guo Rui Agreement payable to Ms Zheng and Ms Dai was RMB 294,042,781.64, of which RMB117,617,112.66 was payable to Ms Zheng for her 40% share. As Ms Zheng was only claiming RMB 60m, the Intermediate People’s Court held that Ms Zheng had waived her right to claim the remaining amount of about RMB 57.6m and only ordered Wo Ke to pay Ms Zheng RMB60m. 276.Although the above judgment was dated 17 June 2011, there was no mention of the Zheng Litigation in the MBJSM Letter at all. 277.Anyway, Wo Ke and Shiji Zhongji appealed on 2 July 2011 and on 30 May 2014, the Beijing Higher People’s Court ordered a retrial[70]. Eventually, Wo Ke’s liability to pay Ms Zheng RMB 60m was confirmed by the Beijing Higher People’s Court on 11 September 2017[71]. 278.D’s complaint was that P had failed to disclose to D the Zheng Litigation or the claim by Ms Zheng, and correspondingly, the potential of a claim by Ms Dai, whether prior to the execution of the SPA on 19 January 2010 or on Completion Date. P did not advance any positive case in its pleadings, save that there was no admission to D’s complaints. 279.It was further Ms Zhao’s evidence that Wo Ke was managed under the Beijing Headquarters of the Target Company where Mr Li was primarily based and Mr Li was the person who decided to purchase Guo Rui and Mr Li was involved in the dispute over the consideration and conduct of the Zheng Litigation prior to Completion. K.2 D’s claim 280.In the Counterclaim, D alleged that P was in breach of paragraphs 4, 5/II(a), 5/IV(a)(iii), 5/IV(f), 5/VII of the Warranties. In its Closing Submissions, D found it no longer necessary to rely on paragraphs 4 and 5/IV(a)(iii). 281.D claimed loss and damage arising out of P’s breaches, including the amount of RMB 60m which D had to pay Ms Zheng and also legal costs. K.3 Sub-issues 282.The two sub-issues raised by P were (i) whether D was able to prove non-disclosure on the part of P ; and (ii) whether D was able to prove any loss. K.3.1 Whether non-disclosure 283.Ms Zhao’s evidence was that D’s representatives were not informed of the Zheng Litigation prior to Completion Date, and details of the Zheng Litigation were not disclosed in the Acquisition Agreement and further D’s Mainland lawyer Ms Zhu confirmed that no information or documents relating to the Zheng Litigation were disclosed to them prior to the Completion Date. 284.On the other hand, P’s case was that D was unable to prove non-disclosure and P relied on:
K.3.1(a) Ledger Entries 285.D had complained that the Ledger Entries (Exhibits P5 and P6) were only disclosed by P on the 11th day of the trial. However, these were supporting documents which D’s own expert Mr Lees had referred to in his report, save that hard copies of those documents were not included in the trial bundles. I do not see why P could not refer to them. 286.As seen in P5, on page 2 there was an entry item 12267 of a credit (貸) of RMB 60m on 10 August 2009 recorded as “增加長投”/ “increase in long investment” and the company “北京國銳民合有限公司”/Guo Rui appeared in the same item 12267. Item 12267 was under item 12266 referenced “2241.37” for “應付股权款”/ “amount payable for share rights”. 287.Ms Zheng’s writ was dated 11 August 2009, and Mr Wong pointed out that item 12267 did not appear in Wo Ke’s ledger account prior to 10 August 2009, and that the emergence of the entry was consistent with the claim of Mr Zheng. 288.According to Ms Chen, the only Mainland accounting expert and D’s expert, the item 12267 of the credit of RMB 60m in Exhibit P5 had nothing to do with the Zheng Litigation but was related to Issue 5, namely the subsequent sale of Guo Rui to a company called Hua Fu Yi (as seen later). 289.The sale of Guo Rui to Hua Fu Yi took place in 2009. Mr Wong pointed out, however, as seen in P6, the item no 4061 referenced “2241.37” for “應付股权款”/ “amount payable for share rights” of RMB 60m continued to remain in Wo Ke’s ledger accounts up to June 2010 (the end date of P5 and P6) which was after the sale of Guo Rui. 290.Ms Chen confirmed that the item continued to remain in the ledger accounts of Wo Ke notwithstanding the sale of Guo Rui. Ms Chen had explained that there were two possibilities, namely it could be a real liability to pay for the long term investments, or it could simply be an overstatement, and that more information would be required to determine the true nature of the entry. Ms Chen maintained that the entry was recorded an “amount payable”/ “應付款” and not a “provision”/ “預提”. 291.Although there were no supporting documents or no information as to the nature of the “應付股权款”/ the “amount payable for share rights” of RMB60m, the item was clearly in connection with Guo Rui. Moreover, that it had continued to appear in the ledger accounts after the sale of Guo Rui (which took place prior to 31 August 2009)[72] until at least June 2010 (end of the period of P5 and P6) and it would appear to be an amount which had remained to be an amount payable after the sale of Guo Rui. 292.Having said this, however, I accept Ms Chen’s evidence that on the face of P5 and P6, there was no information in the accounts as to whom the amount was payable or that it was in connection with a claim made by Ms Zheng in the Zheng Litigation. There was no sufficient information before this Court as to the nature of that item remaining in the ledger accounts. 293.In so far as the items nos 29428, 29430, and 29424 in P5, these indicated legal costs which were paid to a law firm which was the same law firm acting for D in the Zheng Litigation. Again, on the face of it, there was no information in P5 and P6 which indicated that these were connected to any actual litigation having been commenced or the Zheng Litigation. 294.Having considering the above, I am of the view that the Ledger Entries would not be sufficient evidence to indicate that there had been disclosure of or provision made for the Zheng Litigation or Ms Zheng’s claim. K.3.1(b) Email Communications 295.P had produced emails during the period from 3 July 2009 and 10 September 2009 between Ms Bao on P’s side and Ms Zhu[73]. On 5 August 2008, there was an email from Ms Bao to Ms Zhu attaching a table as at 4 August 2008 in relation to various projects and the amount of payments for the equity in respect of each project, and there was no amount stated to be outstanding in relation to the transfers of 56% shares of the Tongzhou Project (“04.08.08 Table”)[74]. 296.The 04.08.08 Table was then updated by a further table as at 30 June 2009 showing the then situation of unpaid amounts for 5 projects (“30.06.09 Table”)[75]. This table showed 5 projects including the Tongzhou Project, recording an amount of RMB 60m being unpaid. Ms Zhu picked this up and in her email of 7 July 2009 10:09am to Ms Bao, Ms Zhu had asked Ms Bao for explanation and provision of relevant documents in relation to this item pointing out that the information provided by Ms Bao in the previous year had indicated that all amounts for the Tongzhou Project had been fully paid[76]. 297.In her reply of 8 July 2009 4:53pm , Ms Bao explained to Ms Zhu that there was no further agreement in relation to the Tongzhou Project and according to their (ie Ms Bao’s side) understanding, the balance of RMB 60m probably did not need to be paid, but to be on the cautious side, the finance department had made a “provision” of RMB 60m in accordance with the agreement[77]. 298.Subsequently, Ms Zhu in her email of 10 September 2009 asked Ms Bao for an update to 31 August 2009. In reply, on the same day, 10 September 2009, Ms Bao sent a table updated 31 August 2009 (“31.08.09 Table”)[78] which showed only 3 projects and in the “remarks” at the bottom of that table, it was stated that the Tongzhou Project and a Harbin Project had already been sold. In her covering email of 10 September 15:27, Ms Bao explained that 2 of the previous 5 projects, namely the Harbin Project, and also the Tongzhou Project, had been sold/transferred prior to 31 August 2009[79]. 299.Thus, what Ms Zhu was told by Ms Bao in September 2009 was that the Tongzhou Project had been sold/transferred out of Wo Ke prior to 31 August 2009 and no relevant documents/information as requested by Ms Zhu were disclosed to her. By then, the Zheng Litigation had commenced and there was also the Asset Preservation Order obtained by Ms Zheng of which P/Ms Bao should have knowledge of. Yet, there was no mention of the Zheng Litigation in Ms Bao’s email of 10 September 2009 at all. Further, the unpaid amount of RMB 60m under the Tongzhou Project had been removed from the 31.08.09 Table. The Email Communication did not show any disclosure of the Zheng Litigation on P’s part. K.3.1(c) Legal Due Diligence 300.Mr Wong pointed out that there was the Asset Preservation Order made by the Intermediate People’s Court which should have revealed the existence of the Zheng Litigation to Ms Zhu during the Legal Due Diligence. Ms Zhao was cross examined on this issue and she admitted that she did not ask Ms Zhu whether Ms Zhu was aware of the Asset Preservation Order. However, according to Ms Zhao, the Asset Preservation Order was never enforced against Wo Ke as Wo Ke’s basic accounts were in operation at all times. 301.Although Ms Zhu was not asked about whether she was aware of the Asset Preservation Order, there was no sufficient evidence to contradict Ms Zhao’s evidence that the order was not enforced. In this respect, and as seen in P5, there were certainly continuing transactions in Wo Ke’s bank accounts after the date of the Asset Preservation Order (14 August 2009), including the sale of Guo Rui and/or receipts of sale proceeds at end of August 2009, and/or payment of legal fees as pointed out by P’s side. All of this was consistent with Ms Zhao’s evidence in that Wo Ke’s assets were not frozen. 302.Mr Wong then pointed that Ms Zhao had produced in the trial bundles in the present proceedings various court documents including a notice of acceptance of Ms Zheng’s claim issued by the Intermediate People’s Court to Wo Ke on 28 August 2009[80], which Ms Zhao said she got from a colleague working for the legal department of the Beijing office and that she had no idea how the colleague got the documents, whether they were from internal documents or from the Beijing Court. 303.Ms Zhao accepted that the claim issued by Ms Zheng in August 2009 and the judgment of the Intermediate People’s Court of 17 June 2011 could have been in Wo Ke’s files. However, Ms Zhao had also said she had no idea what was disclosed to Ms Zhu during due diligence. Further, Ms Zhu/Allbright acted for D only, and not the Target Company and would not have been able to obtain information about the Zheng Litigation from the Mainland Court which file was only open to parties. 304.Ms Zhu was not called to give evidence. According to Ms Zhao, she had asked Ms Zhu whether she had received any document related to litigation and that Ms Zhu replied she was not aware but nothing was asked about the Zheng Litigation. 305.Even though Ms Zhu was not asked specifically about the Zheng Litigation, there was no sufficient evidence that if the court documents had been in Wo Ke’s files, those files were produced to Ms Zhu during the Legal Due Diligence. 306.As seen earlier in the emails, Ms Zhu did raise a query and sought documents/information in relation to the “unpaid amount” of RMB 60m in relation to the Tongzhou Project, and yet Ms Zhu was informed that the amount was only a “provision” and was probably not payable. If as submitted by Mr Wong, the emails showed that there was disclosure of the RMB 60m due to Ms Zheng, the emails also showed that Ms Zhu was not provided any documents or information in relation to the RMB 60m and in fact the item was then removed from the 31.08.09 Table, which would have led Ms Zhu to believe that the amount was no longer payable due to the sale of Guo Rui. K.3.1(d) Conclusion on disclosure 307.In light of what was said above, I am of the view that D has satisfied this Court that there was no proper disclosure of the Zheng Litigation on P’s part or of Ms Zheng’s claim. 308.It had also been submitted on behalf of P that the Zheng Litigation could have been discovered on the Beijing Court’s website back in 2010. However, there was no sufficient evidence that this was possible. Ms Zhao’s evidence was that the legislation regarding the publication of judgments and online search was only enacted in 2013 and effective from 1 January 2014 and that the Beijing court’s domain was only registered in 2013. K.3.2 Whether D was able to demonstrate any loss 309.It was submitted on behalf of P that D had suffered no relevant loss:
310.So far as (i) was concerned, as said earlier, although according to Ms Bao there had been a provision of an unpaid amount of RMB 60m in the 30.06.09 Table, such item was removed in the 31.08.09 Table which would indicate that even if provision had been made for that amount earlier, there was no further provision as from 31 August 2009 onwards. As the Ledger Entries were only up to June 2010, there was no sufficient information as to the nature of the entry of RMB 60m. As for (ii), as I am satisfied that there had been no proper disclosure of the Zheng Litigation or the claim of Ms Zheng, the result was that D or New Management had suffered at least the legal costs incurred in the Zheng Litigation. 311.It was also argued on behalf of P that whether the RMB 60m outstanding debt was disclosed or not, there would have been no defence to Ms Zheng’s claim in any case and an appeal therefrom should not have been pursued. This was not pleaded and never put to Ms Zhao. In any event, Wo Ke’s defence in the Zheng Litigation was that Ms Zheng had already been fully paid and it can be seen from the judgment of the Higher Court that there was a miscalculation of the amounts by the Beijing Intermediate Court, but such miscalculation did not affect the ultimate amount of RMB 60m ordered. 312.As pointed out by Ms Sit, the decision to defend the Zheng Litigation was made by the former management of the Target Company/Wo Ke and the decision to appeal was made on 2 July 2010, only one week after the Completion and during the start of the transitional period. Having considered all the circumstances, I do not find D was unreasonable in appealing. K.4 Conclusion on Issue 4 313.D has satisfied this Court that there was no proper disclosure on the part of P in relation to the Zheng Litigation or of Ms Zheng’s claim. I accept Ms Zhao’s evidence that Wo Ke was managed under the Beijing Headquarters of the Target Company where Mr Li was primarily based and that Mr Li was all along involved in the dispute with Ms Zheng over the unpaid amount of the consideration. Further Ms Zheng had commenced litigation in August 2009 prior to Mr Li’s resignation as Chairman of the Board of the Target Company. I am satisfied that the Zheng Litigation was/a matter within the knowledge and/or control of Mr Li/P. 314.I find that there was a breach of paragraph 5/VII, namely the Litigation Warranty. I also find that P was in breach of paragraph 5/IV(f) as agreed by the experts. 315.D further complained that there was a breach of paragraph 5/II(a) in that information about the Zheng Litigation had never been disclosed in the Target Company’s public disclosure as per the listing rules. I agree and find there was also a breach of paragraph 5/II(a). 316.I find P’s breach had resulted in loss and damage to D. It would appear from Ms Sit’s Closing Submission, D claims primarily the legal costs incurred in the Zheng Litigation[81]. The experts agreed that legal costs of RMB 1,527,600 should be included in the quantum[82]. Any amounts not agreed will have to be decided in the trial on quantum. L. Issue 5: The Hua Fu Yi Undertaking/Guo Rui Debts L.1 Background 317.Wo Ke first signed an agreement on 17 July 2009 for the sale of its 100% interest in Guo Rui to 深圳華富溢投資有限公司 (“Hua Fu Yi”) at a total consideration of RMB 11.5 billion, of which RMB 2 billion was paid upon execution of the agreement[83]. Thereafter, Wo Ke and Hua Fu Yi executed a further agreement on 31 July 2009 (“31.07.09 Agreement”), pursuant to which Hua Fu Yi was to acquire 100% shares of Guo Rui for RMB 10.3105 billion ( RMB 1,031,050,000)[84] upon, amongst other things, Wo Ke’s undertaking to settle all outstanding amounts/debts due from Guo Rui and Jun He to original shareholders and or their related companies (collectively “Guo Rui Debts”) out of the total consideration. 318.Wo Ke then signed an undertaking to Hua Fu Yi on 4 August 2009 to use RMB 489,105,374.53 out of the total consideration paid by Hua Fu Yi, upon receipt, to discharge the Guo Rui Debts within 90 days (“HFY Undertaking”). Pursuant to clauses 1.4 and 1.5 of the 31.07.09 Agreement, Wo Ke further undertook to provide a guarantee from the Target Company to guarantee Wo Ke’s obligations in relation to the Guo Rui Debts. A guarantee dated 31 July 2009 signed by Mr Li and chopped with the chop of the Target Company (“Guarantee”)[85] was duly provided to Hua Fu Yi. On 4 August 2009, pursuant to the terms of the 31.07.09 Agreement, Hua Fu Yi caused to be paid to Wo Ke the balance of RMB 831,050,000 of the total consideration for the purchase of Guo Rui. 319.The Guarantee stated that the Target Company was willing to provide the guarantee in accordance with clauses 1.4 and 1.5 of the 31.07.09 Agreement. 320.The Guo Rui Debts were due to be discharged by Wo Ke under the 31.07.09 Agreement and/or the HFY Undertaking by 2 November 2009, and as at 4 November 2009, an amount of RMB 90,333,105 remained undischarged. Pursuant to the HFY Undertaking and/or the 31.07.09 Agreement, the undischarged amount would then have to be repaid to Hua Fu Yi within 2 days. 321.RMB 89,614,773 was recorded in the books of Wo Ke as unpaid Guo Rui Debts on 10 August 2009 but the balance of the Guo Rui Debts of RMB 718,327, which was listed in the attachment to the HFY Undertaking as interests or “補記利息” was not recorded[86]. 322.On 19 November 2009, by an agreement, Wo Ke assigned a list of debts totalling RMB 101,019,773, including the unpaid Guo Rui Debts to the extent of RMB 89,614,773[87], to佳展(北京)企業管理有限公司(“Jiazhan”), another subsidiary of the Target Company [88]. 323.On 4 November 2011, Hua Fu Yi issued a claim in the Beijing No 1 Intermediate People’s Court against Wo Ke and the Target Company. The claim against Wo Ke was for breach of the HFY Undertaking and to seek a refund of the sum of RMB 90,333,105 plus RMB 13,188,633, being penalties for late payment and breach of contract calculated up to 4 November 2011, and the claim against the Target Company was for performance of the Guarantee. Hua Fu Yi was later allowed by the No 1 Court to withdraw its claim on 20 February 2012[89], and to issue a fresh claim on 21 March 2012(“HFY Litigation”)[90]. There was a jurisdictional argument raised by the Target Company and subsequently there was a judgment from the Beijing Higher People’s Court on 21 February 2013. The Higher Court found there was jurisdiction and ordered the case to be transferred to the Beijing No 2 Intermediate People’s Court for trial. 324.Wo Ke’s defence to Hua Fu Yi’s claim was based on (i) Hua Fu Yi’s claim was time-barred; and (ii) Hua Fu Yi had to provide evidence to support the amount and penalties claimed. The Target Company denied it was liable under the Guarantee. 325.On 19 December 2014, the No 2 Court handed down its decision. As for the time bar issue in (i) above, the No 2 Court held that as Hua Fu Yi’s claim was first issued on 4 November 2011, the claim was issued within the 2 year statutory time bar and that there was lack of legal basis for Wo Ke’s time-bar defence. So far as (ii) was concerned, the No 2 Court held that the burden of proof that Wo Ke had discharged all the Guo Rui Debts under the HFY Undertaking was on Wo Ke and dismissed Wo Ke’s contention that Hua Fu Yi should provide proof in relation to the RMB 90m odd being unpaid. 326.Further, the No 2 Court held that the HFY Undertaking had the effect of varying the original terms under the 31.07.09 Agreement and formed a further binding agreement between Wo Ke and Hua Fu Yi, and ordered Wo Ke to repay Hua Fu Yi RMB 90,333,105 plus penalties of RMB 13,188,633 (up to 4 November 2011) pursuant to the terms of the HFY Undertaking. The No 2 Court dismissed Hua Fu Yi’s claim against the Target Company and held that the Guarantee did not extend to Wo Ke’s obligations under the HFY Undertaking to repay the part of the consideration paid by Hua Fu Yi for the unpaid Guo Rui Debts as the Target Company was not a contractual party to the agreement between Wo Ke and Hua Fu Yi under the HFY Undertaking[91]. 327.It was D’s pleaded case that the HFY Undertaking or the outstanding Guo Rui Debts were never disclosed to D before Completion and was also not disclosed in the public announcement on 11 August 2009 which only disclosed the 31.07.07 Agreement. L.2 D’s claim 328.According to D’s pleadings, P had breached paragraphs 4, 5/II(a), 5/II(c), 5IV(a), 5/IV(f), 5/VII. In its Closing Submissions, D only relied on breaches of 4 Warranties, namely of paragraphs 4, 5/II(a), 5/IV(f) and 5/VII. 329.D claims loss and damage arising out of P’s breaches. L.3 Sub-issues 330.The sub-issues raised by P were (i) D was unable to prove non-disclosure and (ii) D was unable to prove causation to its loss. L.3.1 Whether non-disclosure 331.It was submitted on behalf of P that there had been disclosure of the RMB 89m of the RMB 90m odd, and that the issue was only whether the amount of interest of RMB 718,327 was disclosed. 332.However, as said earlier, although the amount of RMB 89m was recorded in the books of Wo Ke, it was also recorded that this part of the Guo Rui Debts were assigned to Jiazhan, which meant the amount was no longer payable by Wo Ke. As it was Wo Ke which received the consideration in full and which had given the HFY Undertaking, it was quite clear that based on the HFY Undertaking, the liability to refund to Hua Fu Yi within 2 days in the event of any of the Guo Rui Debts not being discharged, had remained with Wo Ke notwithstanding the assignment. This was later confirmed by the No 2 Court. 333.I thus find Wo Ke should have disclosed the HFY Undertaking and there should have been a continuing record/provision for the RMB 89m odd in the books of Wo Ke notwithstanding the assignment of the debts. Further, the amount of RMB 718,000 odd was clearly not recorded in the books of Wo Ke. It was also not disputed there was no disclosure of the HFY Undertaking in the public announcement in 11 August 2009. 334.I therefore find that D has satisfied this Court that there had been no disclosure of the HFY Undertaking. I am also satisfied that the HFY Undertaking, although signed after the 31.07.09 Agreement and the Guarantee, was a matter within the knowledge and/or control of Mr Li/P in light of my earlier findings in respect of Wo Ke including that it was being managed under Beijing Headquarters of the Target Company where Mr Li was primarily based. L.3.2 Causation 335.It was submitted on behalf of P that even if there had been disclosure, Wo Ke would still have defended HFY Litigation, as (i) even though the amount of RMB 89m odd was not disputed, the New Management went ahead to defend the entire amount claimed by Hua Fu Yi of RMB 90m odd and (ii) the HFY Litigation was defended by the New Management on it being time-barred and that the New Management had produced no Mainland precedents to the No 2 Court in support of its time-bar defence. 336.It was submitted on behalf of D that there were two reasons for Wo Ke’s decision to defend the HFY Litigation, namely (i) the belief that Wo Ke was not under such liability which was confirmed by Hua Fu Yi’s refusal to provide any proof; and (ii) the strength of the time bar defence. 337.Although the No 2 Court held that the burden of proof was on Wo Ke that the quantum claimed had been discharged, in my view, Wo Ke was not unreasonable in trying to defend the HFY Litigation in light of Hua Fu Yi failing to provide proof of the liability. 338.As for Wo Ke’s time-bar defence, I do not find this was unreasonable since Hua Fu Yi’s 1st claim was withdrawn. Ms Sit had also referred the Court to County Ltd and Anor v Girozentrale Securities [1996] 3 All ER 834 where it was held, amongst other things, that the defendant’s breach of contract was an effective cause of the plaintiff bank’s loss, and the fact that another cause also contributed to the occurrence of the loss did not require the judge to choose which was the more effective; it was sufficient that the defendant’s breach was an effective cause, and it remained effective notwithstanding that the plaintiff bank, in making its inquiries, had not done so with sufficient care[92]. 339.Ms Sit submitted that P had produced no Mainland authorities/ judgments to support its case that the limitation defence was without any foundation. I accept Ms Sit’s submission. Whether there was another cause or not, I find that P’s breach of the Warranties an effective cause of D’s loss and I do not find that there was sufficient evidence that Wo Ke’s decision to defend the HFY’s Litigation was so unreasonable or exceptional that it had broken the causal relationship between P’s breach and D’s loss. L.4 Conclusion on Issue 5 340.As mentioned earlier, on 11 August 2009 there was a public announcement (pursuant to Rule 14.06 of the Listing Rules in Hong Kong) in which the Target Company disclosed the 31.07.09 Agreement, and there was no disclosure of the HFY Undertaking. I find P was in breach of paragraph 5/II(a) of the Warranties in that not all relevant information that should have been publicly disclosed had already been disclosed. 341.As a result of what was said above, I find that P was also in breach of paragraph 4 of the Warranties in that not all information material to the financial affairs of the Target Company and its subsidiaries had been disclosed as at Completion Date. As found earlier, the HFY Undertaking was within the knowledge and/or control of Mr Li/P. D’s expert Mr Lees considered that there was also a breach of paragraph 5/IV (f) of the Warranties. P’s expert did not dispute this. I accept what Mr Lees said and find that there was also a breach of paragraph 5/IV(f). 342.As for the Litigation Warranty of paragraph 5/VII, as said earlier, notwithstanding the assignment of the Guo Rui Debts to Jiazhan, Wo Ke had remained liable under the HFY Undertaking, and this was confirmed by the No 2 Court. The HFY Litigation against Wo Ke arose out of the HFY Undertaking, and Wo Ke should be fully aware of its liability thereunder. I find there was breach of the Litigation Warranty in that there was no disclosure of the HFY Undertaking nor of Wo Ke’s obligations of the Guo Rui Debts as at Completion Date, which were facts or circumstances which were likely to give rise to litigation. 343.I am also satisfied that the breaches above were within the knowledge/control of Mr Li/P. Further to what I said earlier that the HFY Undertaking was a matter within the knowledge and/or control of Mr Li/P, the sale of Guo Rui took place while Mr Li was still Chairman of the Board of the Target Company. I have earlier accepted Ms Zhao’s evidence that Mr Li was involved on the purchase of Guo Rui and the Zheng Litigation and Ms Zhao’s evidence was further that Mr Li was also involved in the negotiation of the sale of Guo Rui. There was no evidence to contradict what she said and I accept her evidence. 344.P’s breaches have resulted in loss and damage to D. The experts had agreed that (i) the legal fees incurred of RMB 750,000 and (ii) the liquidated damages ordered to be paid to Hua Fu Yi of RMB 13,188,633 by Wo Ke were recoverable losses. Any loss not agreed will be a matter for the trial on quantum. M. Issue 6 – Failure to maintain proper accounts for Beijing Xinsong Development M.1 Background 345.By a “Debt Transfer Agreement” dated 1 December 2005, 北京新松房地產開發有限公司 (“BJ Xinsong”), an indirect subsidiary of the Target Company, became the owner of a debt of RMB2,183,297.76 from a Beijing Company San Jian (北京市第三建築工程有限公司) (“San Jian Debt”). 346.Since then, the San Jian Debt appeared as an account receivable in BJ Xinsong’s successive accounts, save that in the letter of demand made by BJ Xinsong to San Jian after the Completion Date it appeared that there had been a partial repayment of RMB 459,133 made by San Jian to BJ Xinsong on 12 October 2007, thereby reducing the outstanding amount to RMB 1,724,164.76[93]. 347.Notwithstanding what was said in the letter of demand in relation to the partial repayment, on 27 October 2011 BJ Xinsong issued a claim in the Beijing Xicheng District Civil Court against San Jian for the repayment of the entire amount of about RMB 2,183,298 (“2011 Claim”). 348.San Jian’s defence to the 2011 Claim was that BJ Xinsong had agreed to an arrangement whereby the outstanding San Jian Debt was to be discharged by San Jian transferring 2 Mainland flats of an aggregate value of RMB 2,183,298 respectively to two senior management staff of BJ Xinsong, namely Mr Wu Xiang Dong 吳向東 (the then General Manager) (“Mr Wu”) and Mr Shi Lu Zhong 史呂忠 (the then Deputy General Manager) (“Mr Shi”). In support of this arrangement (“Flat Transfer Arrangement”), San Jian had produced copies of two agreements namely (i) an undated agreement between BJ Xinsong, San Jian and the developer of the 2 flats as evidence that the 3 parties having agreed to the amount of RMB 2,183,298 being discharged by the 2 flats (“Undated Agreement”) and (ii) an agreement dated 27 December 2005 signed by the developer and San Jian as supporting evidence that the 2 flats were to be transferred to San Jian or to any third party at the direction of San Jian (“27.12.05 Agreement”). 349.It was also San Jian’s defence that the 2011 Claim was time- barred, as San Jian’s liability arose on 1 December 2005 and that more than 2 years had passed by the time the 2011 Claim was commenced by BJ Xinsong. 350.On 28 February 2012, the Xicheng Court handed down a judgment dismissing the 2011 Claim[94]. The Xicheng Court accepted the 27.12.05 Agreement and the evidence of Mr Wu, and further held that the Undated Agreement had genuinely existed, but was only binding as between BJ Xinsong and San Jian and not the developer as the developer’s company chop was missing thereon[95]. The Xicheng Court further found that the 2011 Claim was time-barred[96]. 351.BJ Xingsong lodged an appeal and on 18 May 2012, the Beijing No 1 Intermediate People’s Court handed down a judgment dismissing the appeal[97]. The No 1 Court confirmed that the Xicheng Court’s finding that the Undated Agreement had genuinely existed, and that the 2011 Claim was time-barred. 352.Thereafter, BJ Xinsong brought two claims in 2013 respectively against Mr Wu and Mr Shi to try and recover the 2 flats (“2013 Claims”). Mr Wu and Mr Shi provided evidence to show that BJ Xinsong had caused the 2 flats to be transferred to them in settlement of their annual salaries, and that they were entitled to their respective interests in the 2 flats. 353.On 22 April 2013, the Beijing Chaoyang District People’s Court found that Mr Wu and Mr Shi were respectively entitled to each of the 2 flats and dismissed BJ Xinsong’s claims against them[98]. 354.D’s pleaded case was that P had failed to maintain proper accounts for BJ Xinsong in relation to the Flat Transfer Arrangement. M.2 D’s claim 355.D claim was that P was in breach of accounting-related Warranties, namely paras 5/II(c), 5/IV(a) and 5/XII. 356.D’s main head of loss was the legal costs incurred in the 2011 Claim and the 2013 Claim. M.3 Sub-issues 357.It was submitted on P’s behalf that (i) D was unable to prove non-disclosure and further (ii) D was unable to prove causation of any loss. M.3.1 Whether non-disclosure 358.It was submitted on behalf of D that the accounting-related Warranties in paragraphs 5/II(c), 5/IV(a) and 5/XII are disclosure-independent. Since P was warranting a state of affairs, I accept this submission. 359.In so far if disclosure is relevant, P had cast doubt on D’s assertion that it was not aware of the Flat Transfer Arrangement in two aspects. 360.Firstly, Mr Wong pointed out that the Ms Zhao’ evidence in her witness statement was that “Since the San Jian Litigation, the New Management reviewed all the books and records … While various expense claims submitted by Mr Wu and Mr Shi were located, there was no document which had recorded that [Mr Wu] or [Mr Shi] were employees of BJ Xinsong at the relevant time” and further, in D’s pleadings, it was pleaded that Mr Wu and Mr Shi were “allegedly the General Manager and Deputy General Manager of BJ Xingsong”. 361.Mr Wong then pointed out that it was stated in the Xicheng Court’s judgment that San Jian had applied for Mr Wu to attend before the Xicheng Court to give evidence and Mr Wu had attended the Xicheng Court’s questioning although he did not appear at the hearing on 22 February 2012 to be questioned by the parties; notwithstanding this, BJ Xinzong had confirmed acceptance of his identity/status, namely “被告三建公司申請新松房地產原任總經理吳向東作為證人出庭作證，吳向東雖然沒有出庭接受雙方詢問，但其身份在第二次庭審中得到了新松房地產的確認”[99]. 362.I accept that it would appear from the above judgment that during the course of the 2011 Claim, BJ Xinsong had accepted Mr Wu’s status as an employee of BJ Xinsong and/or the General Manager at the relevant time. In any event, the Xicheng Court had in its judgment confirmed the truth of Mr Wu’s evidence[100], and had further found after investigation that Mr Wu was the General Manager of BJ Xinsong in 2005 and at the same time working for BJ Xinsong was a Mr Chen Bo and also 2 Deputy General Managers including Mr Shi[101]. Such finding was also confirmed by No 1 Court on appeal[102]. I therefore agree with Mr Wong that Ms Zhao’s statements in her Witness Statement indicated that she still did not seem to accept the findings of the Beijing Courts in relation to Mr Wu and Mr Shi being employees of BJ Xinsong. 363.Ms Zhao’s explanation in her witness statement as to why BJ Xingsong issued the 2013 Claims against Mr Wu and Mr Shi seemed to further indicate that BJ Xinsong was not prepared to accept the findings of the Xincheng Court and the No 1 Court. In fact, both Mr Wu and Mr Shi had complained that BJ Xinsong knew full well that the 2 flats were transferred to them in settlement of their unpaid salaries and that BJ Xinsong’s claims against them were “suspected malicious litigations”[103]. 364.According to Ms Zhao, it was only during the 2013 Claims there were disclosed (i) a witness statement of Mr Chen Bo, another employee of BJ Xinsong, confirming that Mr Shi/Mr Wu was employed by BJ Xinsong at the relevant time and that the flats were assigned in lieu of salaries, (ii) a written confirmation dated 20 February 2006 given by Party A therein to Party B therein and headed “The Handover Confirmation in relation to the present finances of BJ Xinsong”[104] (“Wu/Shi Confirmation”) and (iii) The title registration certificates of Mr Wu/Mr Shi as owners of the flats. 365.The company chop of BJ Xingsong was applied to the Wu/Shi Confirmation in which the shareholders of BJ Xinsong (Party A therein) had confirmed the acceptance of the 2 flats by BJ Xinsong in settlement of the outstanding annual salaries payable to certain senior management staff of BJ Xinsong. 366.Mr Wong submitted that there were various documents which evinced the Flat Transfer Arrangement, and in particular there was the Wu/Shi Confirmation. There were in fact also minutes of BJ Xinsong management meeting referred to in the Wu/Shi Confirmation. 367.Having considered the above, even though there could be non- accounting documents, the accounting records however did not reflect the Flat Transfer Arrangement. According to Ms Zhao, at the relevant time, Mr Li was the legal representative and director of BJ Xinsong and was in direct control of BJ Xinsong. There was no evidence to contradict Ms Zhao’s evidence. I find the Flat Transfer Arrangement should be within knowledge and/or control of Mr Li/P. I find there was no disclosure of the Flat Transfer Arrangement in the accounting records. M.3.2 Causation 368.Mr Wong had also argued that it was not reasonable for D to pursue the 2 sets of litigations, as:
369.Ms Sit had submitted in Closing that P was trying to run “unpleaded” mitigation arguments “in the guise” of causation. In P’s Opening Submissions, Mr Wong had submitted at the time that it would fall upon D to demonstrate that the two litigations were properly commenced. 370.Anyway, in so far as the 2011 Claim was concerned, in my view, it was not unreasonable for BJ Xinsong to issue its 2011 Claim or pursue its appeal because:-
371.However, I do find that BJ Xinsong was unreasonable to later issue the 2013 Claims after they lost their appeal in the 2011 Claim. Even though the Wu/Shi Confirmation was only produced during the course of the 2013 Claims, I find the New Management of BJ Xinsong could have made enquiries from its former employees or relevant parties and checked its own documents. In any event, in the 2011 Claim, the Xicheng Court had found that the 27.12.05 Agreement and the Undated Agreement existed and consistent with the Flat Transfer Arrangement which was confirmed on appeal. I do not find that P’s breach of Warranties was an effective cause of any loss and damage suffered by D in its 2013 Claims. M.4 Conclusion on Issue 6 372.Under paragraph 5/II (c), what P was warranting was that all the accounts, books, ledgers and financial and other records of the Target Company had been properly kept and that P warranted that there was no material inaccuracies or discrepancies of any kind contained or reflected in such accounts, books, ledgers and financial and other records. “Records” would seem in the context to refer to accounting records. P’s own expert Mr Kwan was of the opinion that the failures to record the Flat Transfer Arrangement and the San Jian Debt properly was not in compliance with accounting rules[106]. 373.As the Flat Transfer Arrangement was omitted from the consolidated accounts and accounting records of the Target Company, and also not properly recorded in the accounts, books, ledgers and financial and other accounting records of BJ Xinsong, I find that there was a breach on the part of P of paragraph 5/II(c). I find that there was also a breach of paragraph 5/IV(a) and paragraph 5/XII as pointed out by Mr Lees. The matters took place when Mr Li was legal representative and director of BJ Xinsong and I am satisfied that it was within P’s/Mr Li’s control to keep proper accounts. 374.I am of the view that the breach had resulted in D incurring loss including its legal costs in the 2011 Claim and the appeal, although not legal costs of the 2013 Claims. N. Issue 7 – Failure to maintain proper records in relation to the Rich Glory transaction N.1 Background 375.Neo-China (Group) Infrastructure Investment Limited (“Neo-China Infrastructure”) is/was at all material times one of the BVI subsidiaries of the Target Company. 376.On 9 September 2007, Neo-China Infrastructure signed an agreement with Hong Kong Changyi Real Estate Development Limited (“HK Changyi”) to acquire HK Changyi’s 100% shareholding in Rich Glory Investments Limited (富譽投資有限公司) (“Rich Glory”) (“1st Rich Glory Agreement”). 377.Rich Glory held a 50% interest in a joint venture company Shenyang Xiangming Changyi Development Limited (沈陽向明長益置業有限公司) (“JV Company”) which held a property development project in Shenyang (“Shenyang Project”). 378.The consideration in the 1st Rich Glory Agreement was stated to be HK $300m[107], payable as follows:
379.The 1st Rich Glory Agreement was terminated by agreement on 19 September 2007. 380.On the same day, ie 19 September 2007, Neo-China Infrastructure entered into another agreement with HK Chanyi for the acquisition of its 100% shareholding in Rich Glory, with the Target Company as guarantor for Neo-China Infrastructure’s due observance and performance of its obligations (“2nd Rich Glory Agreement”)[108]. The consideration in the 2nd Rich Glory Agreement was stated to be HK$50m (“Consideration”). The Consideration was to be payable by Neo-China Infrastructure by (i) a sum of HK$10m by a cashier order in favour of HK Changyi on the “Business Day” (as defined therein) immediately following the date of the issuance of the “Land Use Right Certificate” or within 60 Business Days after the issuance of a fresh business registration licence, whichever was to be earlier; (ii) a sum of HK$40m by a cashier order in favour of HK Changyi for the balance of HK$40m on the “Business Day” immediately following the date of the issuance of the “Superstructure Construction Planning Permit” of the Shenyang Project. 381.According to Neo-China Infrastructure , there was a further supplemental agreement signed by Neo-China Infrastructure and HK Changyi on 12 October 2007 (“Supplemental Agreement”)[109] which provided, amongst other things, as follows: (1) The consideration for the transfer of the shareholding of Rich Glory had not changed and remained to be HK$300m; (2) apart from the HK$250m which had already been paid, the parties agreed that the balance of HK$50m was to be paid by Neo-China Infrastructure by(i) a sum of HK$10m on the date of signing of the Supplemental Agreement, to HK Changyi or an account designated by HK Changyi; (ii) a sum of HK$10m on the 2nd day of the JV Company being granted the “Land Right Use Certificate”, or within 60 days upon the JV Company completing the procedure of effecting the changes in the company’s business registration (whichever was to be the earlier), to HK Changyi or an account designated by HK Changyi; and (iii) the balance of HK$30m on the 2nd day of the JV Company being granted the “Superstructure Construction Planning Permit” for the Shenyang Project, directly to HK Changyi. 382.On 18 July 2011, HK Changyi issued a letter before action through their solicitors to Neo-China Infrastructure and the Target Company alleging that there was an outstanding sum of HK$10m of the Consideration under the 2nd Rich Glory Agreement and demanding payment. In the reply from Neo-China Infrastructure’s solicitors of 3 August 2011, they had referred to the Supplemental Agreement which had supplemented the 2nd Rich Glory Agreement and alleged that the Consideration had been paid in full, namely (i) HK$10m paid by a sum of RMB 10m (which at the time equated to just over HK$10m) on 17 October 2007; (ii) HK$10m paid on 31 December 2007; (iii) HK 10m paid on 25 November 2007; (iv) HK$5m paid on 16 February 2009; and (v) HK$15m paid on 23 July 2009. 383.It was further set out in the above reply that the sum of RMB 10m in (i) was paid by Neo-China Infrastructure to the JV Company at the instruction and direction of a Mr Xu Zhong Ping (“Mr Xu”) who had executed all the relevant documentations on behalf of HK Changyi including the 2nd Rich Glory Agreement. HK Changyi had sought further information on the alleged instruction of Mr Xu, but no information was provided by Neo-China Infrastructure at the time. 384.In the ensuing correspondence between solicitors, it can be seen that at that time HK Changyi denied that (i) it had signed the Supplemental Agreement and (ii) Mr Xu had the authority to give any instructions or directions for the 1st instalment of the Consideration of HK$10m (or RMB 10m) to be made to the JV Company. 385.In September 2011, HK Changyi issued a writ in the Hong Kong under HCA 1576/2011 against Neo-China Infrastructure and the Target Company for the outstanding amount of HK$10m pursuant to the 2nd Rich Glory Agreement (“Rich Glory Action”). The claim against the Target Company was subsequently discontinued on 4 November 2011. 386.In October 2011, HK Changyi had applied for summary judgment. In its affirmation in support, HK Changyi had produced further direct email communications between the parties prior to those letters between solicitors. It would appear that it was on 4 June 2011 that HK Changyi first sent a letter to an Neo-China Infrastructure and later HK Changyi sent an email on 14 June 2011[110] to chase for settlement of the balance of the Consideration. Although Neo-China Infrastructure sent a copy of the bank credit advice of the RMB 10m dated 17 October 2007[111] (“Bank Credit Advice”) as evidence of payment, there was no payment instruction sent. The remitter on the advice was not Neo-China Infrastructure and the recipient on the copy of the advice was illegible but would appear to be the JV Company. HK Changyi in an email of 17 June 2011 had made clear to Neo-China Infrastructure that the amount of HK$10m was never received by them[112]. 387.It would appear that it was not until Neo-China Infrastructure filed its affirmation on 5 March 2012 to oppose the application for summary judgment that a copy of the payment instruction from Mr Xu dated 12 October 2007 (“1st Payment Instruction”)[113] was produced. In fact, in the 1st Payment Instruction, the designated payee bank account was left blank. It would appear that Neo-China Infrastructure through Mr Li, Mr Jia and another had obtained a confirmation letter dated 26 October 2010 by Mr Xu that the sum of HK$250m had been paid prior to the signing of the Supplemental Agreement and that the Consideration of HK50m had been fully paid and that Mr Xu confirmed having given the 1st Payment Instruction (“Confirmation Letter”). 388.Neo-China Infrastructure’s then pleaded case on the 1st payment was that (1) Mr Xu had authority to act on behalf of HK Changyi and gave the 1st Payment Instruction to Neo-China Infrastructure pursuant to which Neo-China Infrastructure had caused its subsidiary in Beijing to transfer RMB 10m to the JV Company on 17 October 2007; (2) to enable the JV Company to repay a loan of RMB 250m, Neo-China had agreed to provide funds to the JV Company of RMB 250m. For such purpose, Neo-China Infrastructure had caused to remit US$31,875,000 (equivalent to about RMB 238,727,812.50) on 21 September 2007 to the JV Company, and that HK Changyi had agreed that the balance of the RMB 250m of about HK$10m should be paid to the JV Company. 389.Thus, Neo-China Infrastructure’s own pleaded case at that time was that the HK$10m was paid to the JV Company as part of the RMB 250m and not the 1st instalment of the Consideration. 390.Anyway, it would appear that there was no summary judgment and the matter proceeded to trial. Parties then exchanged witness statements. 391.As seen in the witness statement filed in December 2012 on behalf of HK Changyi by its director that by then HK Changyi admitted that the Supplemental Agreement was signed. Its case was however that the 1st Payment Instruction was not a valid payment instruction and that it was not plausible that the 1st Payment Instruction was related in any way to the transfer of funds for the Consideration, for the reasons set out in the statement. Further the circumstances of the preparation of the Confirmation Letter were suspicious and that the director of HK Changyi Mr Ip Kin Fan had telephoned Mr Xu in August 2012 to clarify about the Confirmation Letter and Mr Xu denied having written the same. Further, Mr Xu was not willing to be a witness. 392.The trial eventually took place before DHCJ Linda Chan SC on 26 March 2014 and lasted only one day, as Neo-China Infrastructure decided not to call any of its witnesses notwithstanding 4 witness statements were filed on its behalf. Neo-China Infrastructure instructed both senior and junior counsel at the trial. 393.The Deputy Judge handed down a judgment on 8 April 2014 in favour of HK Changyi and ordered Neo-China Infrastructure to pay the sum of HK$10m and interest and costs[114]. 394.It can be seen in the judgment that at the trial, Neo-China Infrastructure was no longer contending that the RMB 10m paid to the JV Company on 17 October 2007 constituted the 1st instalment payment of the Consideration and its argument at the trial was based on a new unpleaded contention that Neo-China Infrastructure was not obliged to pay the Consideration to HK Changyi as certain condition precedent/s had not been satisfied[115]. N.2 D’s claim 395.D alleged P had breached paragraph 5/II(c) in that records in relation to the 1st Payment Instruction were not properly kept, resulting in HK Changyi denying payment and successfully suing Neo-China Infrastructure in Hong Kong. 396.D claimed it had suffered loss and damage as a result of P’s breach. N.3 Sub-issues 397.P raised two sub-issues:
N.3.1 Whether any breach of the Warranties 398.Ms Zhao and Mr Lees had explained that if there had been sufficient supporting documents eg a board resolution from HK Changyi acknowledging the discharge by way of payment to a third party, there would have been no basis for HK Changi to sue. As there had been a written resolution dated 19 September 2007 for HK Changyi to enter into the 2nd Rich Glory Agreement, a board resolution should have been required by Neo-China Infrastructure for the discharge of an amount due by the payment to the JV Company instead. 399.It was however pointed out by Mr Wong that during cross examination Mr Lees had accepted that different companies had different policies. Mr Wong further submitted that even though there was no board resolution, there were some documentary records in the company’s books and records about the payment of HK$10m/RMB 10m. 400.I have earlier mentioned under Issue 4 in relation to the Tongzhou Project an email from Ms Bao to Ms Zhu on 5 August 2008 attaching the 04.08.08 Table. In this table there was a record under the Shenyang Project that there was an amount of RMB 10m was paid on 1 October 2007 to the JV Company for the shortfall of the payment of RMB 250m[116]. There was no record of any payment of RMB 10m on 17 October 2007 to the JV Company. 401.As HK Changyi eventually admitted having signed the Supplemental Agreement and the recital therein stated that the amount of HK$250m had already been paid, this would mean HK Changyi had acknowledged full payment of the HK$250m was made prior to 12 October 2007 (date of the Supplemental Agreement). 402.Anyway, having considered the above, I find there was no evidence that there was any record in the accounting records or documents to show the purpose of the payment of RMB 10m on 17 October 2007 was for the 1st instalment of the Consideration, nor was there any receipt or acknowledgment sought from HK Changyi at the time. 403.In the circumstances, I find that there was a breach of paragraph 5/II(c). This was an acquisition involving a substantial amount and it took place when P was a majority shareholder of the Target Company and the Consideration was said to be paid in full when Mr Li was Chairman of the Board. Further, Ms Zhao’s evidence was that Mr Li and Mr Jia were involved in the obtaining of the Confirmation Letter and that Mr Li was aware of matters pertaining to the 1st Payment Instruction. There was no sufficient evidence to contradict Ms Zhao’s evidence. I am satisfied that the matter was within knowledge/control of Mr Li/P. N.3.2 Whether any loss 404.It was submitted on behalf of P that the case advanced by HK Changyi was that Mr Xu had no authority to issue the 1st Payment Instructions, and that had nothing to do with whether proper records were maintained as regards the payment of the 1st instalment of the Consideration or the 1st Payment Instructions. 405.Further, although Mr Li had tried to assist Neo-China Infrastructure but Mr Xu for unknown reasons refused to testify at the trial. Thus, Mr Wong submitted that in light of HK Changyi’s case and the failure of Mr Xu to testify, even if there had been a receipt from HK Changyi or proper documentation, Neo-China Infrastructure must have appreciated that it would still have been unable to overcome HK Changyi’s arguments that Mr Xu lacked authority to give payment instructions and that any legal expenses incurred by Neo-China Infrastructure resulted from its own unreasonable decision to defend the claim. Thus, even if there had been a breach on P’s part, such would not have caused any loss suffered by Neo-China Infrastructure. 406.I do not agree. What was warranted by P was that there was proper documentation which justified the transactions and in the present case, as the payment was made to a third party instead of HK Changyi there should have been proper documentations/records kept by the then management of Neo-China Infrastructure in relation to this payment which was alleged to be the 1st instalment payment of the Consideration. In my view, it was P’s breach of paragraph 5/II(c) which had caused the loss and damage to D. N.4 Conclusion on Issue 7 407.As said above, I find P was liable for breach of paragraph 5/II(c) and such breach had caused loss and damage to D. According to Mr Lees, the quantum of loss suffered by Neo-China in relation to Rich Glory transaction was HK$15,273,760 (ie RMB 10m plus interest). Further, there were legal expenses set out by Mr Lees in a table, amounting to HK$3,079,787.99[117]. Any matters not agreed will be decided in the trial on quantum. O. Issue 8 – Failure to disclose undertaking allegedly given by the Target Company under the Moral Luck Agreement O.1 Background 408.Neo-China Real Estate (Shanghai) Limited (“Neo-China Real Estate”), a BVI subsidiary in the Target Company’s group entered into a share transfer framework agreement on 24 September 2007 (“Moral Luck Agreement”) with Mr Chan Kin Kay Stanley (“Stanley Chan”) for the acquisition of Stanley Chan’s 100% shareholding in Moral Luck Group Limited (“Moral Luck”) at a consideration of RMB 2,320,000,000. Subsequently in about late 2007, the parties further entered into a supplemental agreement in relation to the transaction (“ML Supplemental Agreement”). 409.Moral Luck was the ultimate owner of 44.44% interest in a development project in Qi Ao on Qi Zhou Island in Zhuhai (“Qi Ao Project”). 410.Pursuant to the Moral Luck Agreement, Neo-China Real Estate was to pay 50% of the consideration, namely RMB 1,160,000,000, within 2 working days upon signing of the agreement and the balance was to be paid within 90 days of the completion of the transfer of the shares and the relevant changes in the business registration. 411.Pursuant to clause 5.5 of the Moral Luck Agreement, Neo-China Real Estate represented and warranted that the Target Company would undertake to be responsible for Neo-China Real Estate’s obligations under the agreement. 412.It was Stanley Chan’s case that in about January 2008, there was an outstanding amount of RMB 730,794,080 unpaid by from Neo-China Real Estate and that Neo-China Real Estate was wrongfully in breach of the Moral Luck Agreement. It was alleged by Stanley Chan that in consideration of him forbearing from taking legal action against Neo-China Real Estate and the Target Company, Neo-China Real Estate delivered an undertaking duly executed on 31 January 2008 by the company and also the Target Company (“Moral Luck Undertaking”)[118]. 413.It was further alleged by Stanley Chan that pursuant to the Moral Luck Undertaking, the Target Company undertook and assumed joint liability with Neo-China Real Estate in the Moral Luck Agreement and the ML Supplemental Agreement and that the Target Company promised to pay to Stanley Chan direct the outstanding sum of RMB 730,794,080 plus the penalty under the ML Supplemental Agreement within 3 years from February 2008 onwards. 414.On the same day of the signing of the alleged Moral Luck Undertaking , there was a written resolution of directors of Neo-China Real Estate dated 31 January 2008 for a Ms Purina Yeung to be appointed director of the company with immediate effect[119]. Ms Yeung was said to be Mr Li’s secretary at the time. 415.The Moral Luck Undertaking was purportedly signed by (i) Ms Purina Yeung “pp” Mr Li on behalf of Neo-China Real Estate for the Target Company on one part; (ii) Ms Purina Yeung on behalf of Neo-China Real Estate on the 2nd part; and (iii) Stanley Chan on the 3rd part. 416.After the Moral Luck Undertaking was signed, there were 6 part payments totalling RMB 602,697,280 made to Stanley Chan between February 2008 and December 2009 and thereafter the payments ceased. Thus, up to December 2009, only RMB 2,191,903,200 had been paid towards the consideration stated in the Moral Luck Agreement, and RMB 128,096,800, or about RMB 128m was outstanding. 417.On 25 July 2012, Stanley Chan commenced proceedings in Hong Kong under HCA 1298/2012 against the Target Company as 1st defendant and Neo-China Real Estate as 2nd defendant seeking recovery of the outstanding consideration of about RMB 128m and liquidated damages in the sum of about RMB 218m (“Chan Litigation”). 418.Subsequently on 28 December 2015, Neo-China Land Group (China) Ltd (“Neo-China Land Group”), a BVI subsidiary said to be the 100% shareholder of Neo-China Real Estate[120], sold Neo-China Real Estate to a Samoan company De Rong Group Limited (“De Rong”)[121]. As part of the deal with De Rong, a settlement arrangement was agreed in respect of the Chan Litigation, in that (i) De Rong promised to settle the Chan Litigation within 3 months after which Neo China Land Group would pay De Rong RMB 64m; and (ii) legal fees in the Chan Litigation before completion were to be borne by Neo-China Land Group (“Settlement Agreement”). 419.On 23 February 2016, pursuant to the Settlement Agreement, the Chan Litigation was dismissed by consent. 420.As De Rong had performed pursuant to the Settlement Agreement, RMB 64m was paid to De Rong by way of set-off against the consideration for the transfer of Neo-China Real Estate. 421.It was Ms Zhao’s evidence that that the purpose of the Settlement Agreement was to free the Target Company under the Chan Litigation and one of the matters the Target Company had taken into consideration in entering into the Settlement Agreement was legal advice received that the risk of losing the Chan Action was high in light of 2 instalments of the repayment were made by the Target Company to Stanley Chan after the alleged date of signing of the Moral Luck Undertaking. O.2 D’s claim 422.D alleged P had breached paragraphs 5/II(c) and 5/VII, in that there was non-disclosure of the Moral Luck Undertaking. 423.D sought two heads of damages:
O.3 Sub-issues 424.P raised two issues:
O.3.1 Whether non-disclosure 425.It was not disputed that the Moral Luck Agreement was the subject of public announcement and circular, and the liability owed by Neo-China Real Estate was also recorded in its management accounts. The real dispute between the parties, was whether the Moral Luck Undertaking, under which the Target Company assumed an independent and unconditional obligation to pay Stanley Chan, was properly recorded in the accounts or disclosed. 426.As stated by Mr Lees, there were no audited financial statements prepared for Ne-China Real Estate as it was a BVI company and only copies of management accounts were provided to him which showed the sum of RMB 128m odd being payable to Stanley Chan as at 31 December 2009 and the amount payable should have been reflected in the consolidated accounts of the Target Company for the years ended 30 April 2008, 30 April 2009 and 31 December 2009[122]. 427.Mr Lees was of the view that the Chan Litigation constituted a breach of paragraph 5/VII, ie the Litigation Warranty. There was however no mention by Mr Lees in his report as to whether there was any breach of paragraph 5/II (c). It was only in his examination-in-chief that he said the liability under the Moral Luck Undertaking ought to have been recorded in the Target Company’s consolidated accounts in one form or another, either as a liability or a contingent liability and that the mere recording of Neo-China Real Estate’s liability under the Moral Luck Agreement in the accounts as opposed to the Target Company’s independent liability was insufficient[123]. 428.Mr Wong had put to Mr Lees during cross examination that if the Target Company did not have possession of the Moral Luck Undertaking prior to Completion, it could not have disclosed/recorded it in the accounts. Mr Lees had answered that if the auditors had not seen it and none of the directors and none of the accounting staff had seen it, he would have to agree and to his mind it was most unlikely[124]. He had also said that he would think it most unlikely that an employee would institute a document such as the Moral Luck Undertaking without instructions from their superior, one of the directors[125]. 429.It was submitted on behalf of P that if the document was never executed or authorised, then it did not exist and it could not have been part of any disclosure by P nor could there be any record of it. 430.However, it was never P’s pleaded case that the Target Company did not have possession of the Moral Luck Undertaking prior to the Completion, or that the document did not exist, or Ms Yeung never signed such a document. 431.In any event, whether the Moral Luck Undertaking existed or not, I agree and accept what Mr Lees said, that if there were to be any liability or contingent liability directly on the part of the Target Company, as opposed to Neo-China Real Estate, such should have been properly recorded. 432.Irrespective of the Moral Luck Undertaking, clause 5.5 of the Moral Luck Agreement stated that the Target Company had joint liability with Neo-China Real Estate over the latter’s obligations under the Moral Luck Agreement (and the ML Supplemental Agreement which formed part of the Moral Luck Agreement). Whether legally clause 5.5 was binding on the Target Company or not, there was no evidence that the former management of the Target Company had ever denied that it was jointly liable with Neo-China Real Estate under the Moral Luck Agreement. Rather, the evidence would tend to show that it had assumed liability to pay. I thus find that the Target Company’s joint liability should have been properly recorded in the accounting documents. I find there was a breach of the accounting-related warranty, ie paragraph 5/II(c) of the Warranties, as there was no proper reflection or record of the direct liability/contingent liability of the Target Company (as opposed to that of Neo-China Real Estate) in the Target Company’s own accounts and/or the consolidated accounts. 433.As for the Litigation Warranty, ie paragraph 5/VII, in my view as the Moral Luck Agreement and the ML Supplemental Agreement had been disclosed, and there was no challenge prior to Completion as to the Target Company’s liability thereunder, D should be aware that the outstanding amount, if unpaid, would lead to litigation. I am not satisfied that there was a breach of paragraph 5/VII. 434.Further, to explain why I said earlier, that the evidence would tend to show that the Target Company had assumed liability to pay was that there was no evidence that Neo-China Real Estate had made any payments directly out of its own bank accounts towards the consideration, or part thereof whether under the Moral Luck Agreement or the ML Supplemental Agreement or after the alleged Moral Luck Undertaking. In the Chan Litigation, Neo-China Real Estate stated in its defence and counterclaim that it had made 6 payments after the alleged Moral Luck Undertaking by authorising the Target Company and the Target Company’s 2 other Mainland subsidiaries to pay. Further, the 04.08.08 Table sent by Ms Bao to Ms Zhu, referred to earlier in this judgment, had also set out the manner in which 5 payments under the Qi Ao Project (or Zhuhai Project) were made, namely they were made by two Mainland subsidiaries of the Target Company and 3 of those payments were stated under the “remarks” to be “代香港支付…” namely the payments were made on behalf of Hong Kong, which would seem to point to the Target Company. These words appeared under “remarks” in relation to other projects held by other subsidiaries as well. In any event, there was no sufficient evidence that any payments for the consideration were made directly by Neo-China Real Estate (a BVI company). Further, the fact that there were payments made by the Target Company after the Moral Luck Undertaking would indicate that the matters was within the knowledge and/or control of Mr Li/P. O.3.2 Causation 435.Ms Zhao accepted that D was aware that there was an outstanding payment to Stanley Chan (at least as owed by Neo-China Real Estate) and this was taken into account when D purchased the Target Company. Further, Ms Zhao had said in her witness statement that in any event, at all material times, the New Management was aware that Neo-China Real Estate had a claim against Stanley Chan for breach of the Moral Luck Agreement and was therefore withholding payment of the outstanding consideration to Stanley Chan, and that any dispute under the Moral Luck Agreement had to be resolved by CIETAC arbitration[126]. 436.During the trial, Ms Zhao had said that the New Management refused to make any further payment until all “historical problems in this project” were resolved[127]. According to Ms Zhao, they had sent “legal letters” to Stanley Chan to urge him to complete his obligations under the Moral Luck Agreement including the obligation to carry out the demolition work and that they had also launched an arbitration with the Beijing CEITAC under the Moral Luck Agreement. However, Ms Zhao’s evidence was that its case was dismissed since according to the Moral Luck Undertaking, the jurisdiction should be that of Hong Kong[128]. 437.Having considered Ms Zhao’s evidence, I find that even if the Moral Luck Undertaking or the Target Company’s independent liability under the Moral Luck Agreement and/or ML Supplemental had been properly recorded, the Target Company and Neo-China Real Estate would probably still have withheld payment to Stanley Chan and defended the Chan Litigation on his alleged breach of the Moral Luck Agreement. 438.In light of the above, I am thus not satisfied that D had proved that P’s breach was the effective cause of the loss claimed by D. O.4 Conclusion on Issue 8 439.As said earlier, I do not find that there was sufficient evidence that P was in breach of paragraph 5/VII. Even though I find that P was in breach of paragraph 5/II(c), I am not satisfied that such breach was an effective cause of the loss and damage claimed by D. P. Issue 9 – Alleged misstatements concerning Wo Ke’s accounts P.1 Background 440.It was D’s case that shortly after Completion, in the course of the internal audit, the New Management discovered that a total sum of RMB 49m injected as capital contribution by the shareholders of Wo Ke in 2004 were immediately transferred to unrelated third parties on unjustifiable grounds. According to Ms Zhao, at the material times, Wo Ke’s shareholders were Beijing Xinsong Investment Group Co Ltd (北京新松置地投資顧問有限公司) (“XS Group”) and Beijing Xinsong Jianye Investment Co Ltd, later changed to Beijing Hua On Dongfang Investment Development Co Ltd (“Hua On”). Further, according to Ms Zhao, at the material time, Mr Li was the legal representative of the XS Group which held 70% shareholding in Wo Ke. 441.According to Wo Ke’s records, the XS Group injected RMB 22.7m into Wo Ke on 14 October 2004 (“1st Injection”). Subsequently, the XS Group injected RMB 11.6m and Hua On injected RMB 14.7m, totalling RMB 26.3m into Wo Ke on 17 November 2004 (“2nd Injection”). 442.According to the ledger accounts maintained by Wo Ke, the 2nd Injection was on 18 November 2004 transferred out to 3 separate entities as prepayment for purchase of raw materials for the “青年匯” project, and the 1st Injection was transferred out to a company called 北京西華伟偉業建材經貿有限公司 (“Xihua”) on 31 December 2004 as prepayment for purchase of raw materials. 443.Then, according to Ms Zhao, in the audited accounts of Wo Ke for the year ended 31 December 2004, the transfer out of the 1st Injection was recorded under “prepayment” in section 2 for the purchase of raw materials from Xihua, and the transfer out of the 2nd Injection was recorded to be transferred out as part of the construction materials for the “后現代城” or “青年匯” project under “inventory” in section 4, and paid to Xihua. 444.It then turned out during internal audit by D after Completion, the 1st Injection was in fact transferred out earlier, about a week after receipt, in that the supporting documents showed they were actually paid to 2 other entities namely 中電科訊 and 思博匯 respectively on 20 and 22 October 2004 (“October Transfers”). According to D, there were no documents in Wo Ke’s records which showed any commercial dealings or transactions between Wo Ke, Xihua, the two recipients in respect of those payments. 445.As for the 2nd Injection, the payment records showed that they were paid to 3 Mainland entities, 北京長城科泰房地產開發有限公司, 北京正濤偉業科技發展有限公司 and北京名士投資擔保有限公司on 18 November 2004 but the receipts were all issued by Xihua (“November Transfers”). Again, according to D, there were no documents in Wo Ke’s records that suggested any commercial dealings or transactions between Wo Ke, Xihua and the recipients. 446.Xihua was deregistered in September 2007, but the above payments continued to roll over in the 2007 and 2008 audited financial statements. 447.It was Ms Zhao’s evidence that from bank statements obtained by the New Management, the day after the November Transfers were made, the bank account of Wo Ke from which both the October and the November Transfers were made was immediately closed. 448.D did not accept the accounting records and alleged that the October and the November Transfers constituted “抽逃出資” or illegal withdrawal of share capital. In 2013, Wo Ke commenced 2 claims in the Beijing People’s Court (“Beijing Proceedings”). The 1st claim, under no 2381/2013, was issued against the XS Group, Hua On, 3 individuals including Mr Li for the return of the 2nd Injection/November Transfers of RMB 26.3m. The 2nd claim, under no 2382/2913, was issued against the XS Group and the same 3 individuals including Mr Li for the return of the 1st Injection/October Transfers of RMB 22.7m. The Beiijng People’s Court held that there were insufficient documents to conclude there was illegal withdrawal of share capital from Wo Ke and dismissed both claims in 2015[129]. 449.Essentially the Beijing People’s Court found that amongst other things, the business registration records of the recipient/payee companies for both the October and/or November Transfers did not show any overlap situation with Wo Ke, XS Group or Hua On (不存在重合情形), and there was no other evidence to show that the recipients were related to or controlled by Wo Ke, XS Group or Hua On[130]. Further the Beijing Court held that the lack of relevant supporting documents for the transfers would not necessarily mean that the transfers were not proper outflow (or use) of capital. P.2 D’s claim 450.In D’s Closing Submissions, D primarily relied on breach of the accounting-related warranties, ie paragraphs 5/II (c) and 5/IV(a), in that the entries of “prepayment” (for purchase of raw materials) and “inventory” (payment for material costs due) were false and the entries were mis-statements in the accounts, contrary to Mainland and Hong Kong accounting standards, the Listing Rules and Hong Kong statutory requirements. D also relied on the catch-all provision in paragraph 4, that the true nature of the two payments which constituted 68.98% of Wo Ke’s assets had not been disclosed to D. 451.D claimed 2 main heads of loss:
P.3 Sub-issues 452.P raised the following:
P.3.1 Whether any breach 453.It was submitted on behalf of P that D’s assertion that no documents had been maintained was incredible since Wo Ke’s accounts had been externally audited unqualified every year and the two Transfers had been recorded for the years 2004- 2008 and that it was also incredible that no proper documents or records were maintained as the sums involved were substantial and that any auditor would have confirmed the existence of underlying contracts and supporting documentation. 454.Ms Chen said she was not provided with any supporting documents including contracts signed between Wo Ke and Xihua in relation to construction or purchase of materials or agreements signed between Wo Ke and Xihua authorising the recipients to collect payments on behalf of Xihua. 455.Ms Chen had accepted that to comply with the relevant accounting standards, one would need to see the supporting documents. Mr Wong pointed out that in this regard that there had been no complaint or claim had been brought by Wo Ke against the auditors who audited the financial statements for Wo Ke for the relevant years. 456.There did not appear to be enquiries made by D from the then auditors of Wo Ke. 457.Ms Zhao’s evidence was that the units/flats in the two projects were sold to individual purchasers in their “raw state” and that Wo Ke was not a construction company and was a renovation company at the time and it was only involved in small scale renovation which did not require large scale material. 458.It was not clear why the capital increases were necessary if as Ms Zhao said Wo Ke was only involved in small scale renovation at the time. What was not disputed that was that the two Beijing projects “青年匯” ( Beijing Youngman Point) and “后現代城” (Beijing American Rock) did exist and were two of the projects included in “Appendix 5 Cost of Sales -High level review of the Group’s land and construction costs for the year ended 30 April 2009” in the “Forensic Investigation” of the Target Company prior to the signing of the SPA[131]. 459.Wo Ke was incorporated in July 2003 with a registered capital of RMB 1m which had been paid up. As said by the Beijing People’s Court, according to the business registration of Wo Ke, there were indeed two increases of capital of Wo Ke in October 2004 and November 2004 which were approved by the board and after the two increases, the registered capital then became RMB 50m and that the two increases were lawful and valid. As said by the Beijing People’s Court, the increased amounts were injected by the then shareholders into Wo Ke and such amounts and lack of supporting document would not necessarily mean the transfers were not proper outflow of capital. 460.Anyway, in May 2007, the Target Company acquired Mr Li’s interest in Wo Ke (a company then with registered capital of RMB 50m) for only HK$2,020,000[132]. This was disclosed in the Target Company’s 2008 Annual Report (dated 22 August 2008) and D should have been aware of this. In light of the acquisition cost being only was about $2m, I am of the view that D should have realised the time of the acquisition of the Target Company that Wo Ke could not have been worth RMB 50m or held RMB 50m of capital in May 2007. 461.Having considered all the above, I do not find there was sufficient evidence that the entries in the audited accounts were false as alleged by D. Ms Chen had accepted that the auditors should have had sight of supporting documents at the time. The audited accounts as at 31 December 2005 would show that RMB 49m had been withdrawn which, reflected the financial portion of WO Ke as at that date correctly. I find that D has not satisfied this Court that P was in breach of paragraphs 5/II(c) and 5/IV(a), as alleged by D. Although it was also pleaded that P was in breach of paragraph 4 of the Warranties, this was not relied on in D’s Closing Submissions, nor was it stated in the Scott Schedule. P.3.2 Causation 462.Mr Wong had put to Ms Zhao that the New Management knew that the Target Company only paid about HK$2m to acquire 100% interest in Wo Ke and yet it was trying to claim RMB 49m in its two claims and that Wo Ke took a calculated risk to try and gain a benefit. Ms Zhao disagreed and said that an act of crime should not be related to the purchase price. 463.It was further P’s case that the legal costs of the Beijing Proceedings were caused by D’s own unreasonable conduct since Wo Ke did not have sufficient evidence to prove illegal withdrawal of capital and D took a risk in issuing claims which it knew was bound to fail. 464.I accept Mr Wong’s submission in this regard and find that D was unreasonable in launching the two claims in 2013 without sufficient evidence of “抽逃出資”. In any event, even if there was a breach of paragraphs 5/II(c) and 5/IV(a) as alleged by D, I find such breach did not cause the loss and damage suffered by D. P.4 Conclusion on Issue 9 465.As said earlier, Ms Zhao’s evidence was that at the mentioned times in 2004, Mr Li was the legal representative of the XS Group which held 70% shareholding on Wo Ke. I accept her evidence and that the keeping of accounts would be written knowledge and control of Mr Li. However as said earlier, I am of the view that P was not liable for breach of the Warranties alleged by D. Further even if there was, such breach did not cause the loss and damage claimed by D. Q. Issue 11: Limitation of liability –Clause 8A of the SPA 466.It was P’s pleaded case that after Mr Li resigned as the Executive Director and Chairman of the Board of the Target Company on 22 August 2009, he could no longer directly and indirectly control the Target Company and further he was unable to access the Target Company’s records and documents apart from those information made available to the public in accordance with the Listing Rules[133]. It was further pleaded that this was why P insisted on a clause to be specifically laid down in the SPA, namely Clause 8A.01, which was added to clearly define P’s liability[134]. 467.Mr Jia in his witness statement stated as follows:
468.It was then submitted on behalf of P in its Opening that in so far as any of the 9 Issues in the Counterclaim related to matters which occurred at various levels of subsidiaries of the Target Company, this would be caught by the limitation imposed under Clause 8A.01. It would appear from Ps’ Opening and Mr Jia’s witness statement that P was seeking to construe Clause 8A.01 as an “exclusion clause” which effectively excluded all liability arising from the Warranties in that P would only be liable if the subject matter of the Warranty was one which a majority shareholder would be responsible for. 469.In P’s Closing Submissions, Mr Wong however advanced a somewhat different argument, in that Clause 8A.01 means that P’s liability for breach would be limited to those that fell within the control and knowledge of Mr Li, the “directing mind and will” of P. In P’s Closing, P was relying on Clause 8A.01 for 7 of the Issues, namely 2, 4, 5, 6,7, 8 and 9[136]. 470.Clause 8A.01 of the SPA under “Limitation of Liability” states as follows :-
471.Mr Wong had submitted in P’s Closing Submissions that as a matter of law, P could not be under any obligation for breach of any warranty which was (i) unknown to P and/or was (ii) outside its control. 472.Mr Wong had referred to Clause 8.01(a) of the SPA which stated that P warranted that the Warranties were true, accurate and not misleading in all respects as at the date of the SPA subject to any matters facts or circumstances that have arisen as a result of events outside the reasonable control of the Target Company and continued to be so as at Completion Date, with reference to the facts and circumstances subsisting at that time, save as mentioned in Schedule 2 or elsewhere in the SPA. Mr Wong also referred paragraph 4 of the Warranties in Schedule 2 of the SPA which limited P’s disclosure obligations to the best of the knowledge, information and belief of P. 473.As I understand it, what was submitted by Mr Wong was that that P’s liability for breach of the Warranties is limited to the extent of its knowledge and liability as a controlling shareholder of the Target Company. Further, as a company’s knowledge is generally treated as that of its directing mind and will, which are the persons who manage and control its actions, in order to attribute liability to P, Mr Wong submitted that it must be established by D that the alleged breach fell within the control and/or knowledge of Mr Li. 474.In this respect, Mr Wong referred the Court to El Ajou v Dollar Landholdings Plc (No 1) [1994] 1 BCLC 464 where Nourse LJ had said that it is important to emphasise that management and control is not something to be considered generally or in the round and that it is necessary to identify the natural person or persons having management and control in relation to the act or omission in point[137]. 475.Mr Wong had also referred to cases where liability for contractual warranties can be limited by way of qualification of warrantor’s knowledge[138]. Hence, it was submitted on behalf of P that Clause 8A.01 would exclude liability for any matter which P (through Mr Li) would have had no knowledge or control as that of a controlling shareholder, or that in order to attribute liability to P, D had to establish that any of the alleged breach fell within the control and knowledge of Mr Li. 476.However what Clause 8A.01 states is in fact that the liability of P for any breach of Clause 8.01 or any breach of the Warranties shall only be to the extent of :
477.Clause 8A.01 makes no reference to “knowledge” or “control” of Mr Li at all. It deals with P’s liability and not that of Mr Li. As pointed out by Ms Sit, which I accept, the liability of Mr Li is provided separately under Clause 11.01 of the SPA and there is no basis to construe P’s liability under Clause 8A.01 by reference to Mr Li’s liabilities. 478.I therefore do not accept Mr Wong’s submissions on the construction and effect of Clause 8A.01. The natural and ordinary meaning of Clause 8A.01 is that it provides a cap on the extent of P’s liabilities, up to the proportionate share of the Sale Shares, ie 25.07%. I agree with Ms Sit’s submission that this does not mean that (a) would be rendered completely irrelevant or ineffective and that (b) would give extra protection to P, in circumstances where the breach of warranty was brought about by situation beyond its majority shareholding control. 479.Ms Sit had also submitted that only the Warranties under paragraph 5 of Schedule 2 were subject to clause 8A.01, and thus for 4 of the 9 issues, namely Issues 3, 4, 5 and 9, where D had relied on paragraph 4 of Schedule 2, P could not rely on Clause 8A.01 to escape liability. However, as said earlier, D did not in the end find it necessary to rely on breach of paragraph 4 of the Warranties for Issues 3 and 4. 480.Anyway, I am not able to agree with Ms Sit on her above submission. Even though there are no preambles or any express provisos with reference to Clause 8A.01 in paragraphs 1-4 of the Warranties in Schedule 2, Clause 8.01 of the SPA states that it is subject to Clause 8A.01 that P warrants that the statements in the Warranties are true, accurate and not misleading. Further, the words “… any breach of Clause 8.01 or any breach of the Warranties …” in Clause 8A.01 means that Clause 8A.01 will apply to any breach of the Warranties, and is not confined only to paragraph 5 of Schedule 2. 481.In any event, save for Issue 2, for the other Issues, I am satisfied that the subject matters of the breaches were within the knowledge and/or control of Mr Li/P for the reasons set out under each of the Issues. R. Issue 12: Release of the Charged Shares under the Share Charge 482.Clause 3 states that :
483.Clause 3.2 of the Share Charge states that :
484.“Secured Obligations” is in turn defined under Clause 1 to be:
485.Mr Wong had referred to Braganza v BP Shipping Ltd [2015] UKSC 17 and Pa Sam Nang and Others v The Hong Kong and Shanghai Banking Corporation Ltd (unreported) HCA 1020/2015, 7 March 2016, and submitted that although D had been given a contractual discretion under the Share Charge, the exercise of this discretion must not be unreasonable. 486.However, I have found earlier that P was in breach of Clause 6.04 of the SPA under Issue 1. I have also found that P was in breach of the Warranties as set out under Issues 3, 4, 5, 6, 7 and 8 but for Issue 8, I find that P’s breach did not cause any loss to D. I have earlier found claims under Issues 5, 6 and 8 are contractually time-barred on my construction of Clause 8.05. In light of the breaches under Issues 1, 3, 4 and 7, I am not prepared to order the release of the Charged Shares at this stage and the Charged Shares are to be released upon P’s discharge of its Secured Obligations pursuant to the provisions of the Share Charge. S. Conclusion 487.In the Counterclaim, D seeks damages for breach of the SPA and for rectification of Clause 6.04 of the SPA. As the matter of rectification of Clause 6.04 has been agreed, I am prepared to grant such an order if it is still required. Damages have to be assessed for Issues 1, 3, 4 and 7. D has further filed voluntary particulars of the loss and suffered by reason of P’s breaches of the Acquisition Agreement including the difference between the value of the Sale Shares had there been no breach and the actual value at Completion by reference to the Net Asset Value set out in the 2009 audited accounts. For the trial on quantum, the parties are to fix a hearing for directions (estimated length of hearing: one hour) unless agreed. 488.As for costs, the parties are to fix a further hearing for argument, in consultation with counsel’s diaries (estimated length of hearing: half a day).
Mr William Wong SC and Mr Michael Lok, instructed by Huen & Partners, for the plaintiff Ms Eva Sit and Mr Danny Tang, instructed by Linklaters, for the defendant [1] D2:384-393 [2] Para 4.4, B:83 [3] D4:824-848 [4] As defined in the Charge Deed, D4:825-826 [5] D4:892-896 [6] A:137-156 [7] A:44-59 [8] At para 32(b) [9] D2:304 [10] At para 10 [11] At para 24 [12] At para 20 [13] At paras 13, 14 [14] At 970 D-F [15] D2:440 [16] At para 24 [17] See para 8 [18] Para 7.2, B:84 [19] D18:3904-3905 [20] See para 33 [21] At para 61 [22] At para 35 [23] At para 8.3, B:85 [24] At D18:3941 M-O [25] D12:2662 [26] D6:1139 [27] D6:1141 [28] D6:1145-1148 [29] D6:1154-1158 [30] D6:1149-1153 [31] D6:1159-1160 [32] D6:1163-1164 [33] Mr Jiang Chao was said by Ms Zhao to be a team member of the Audit and Legal Department, and that Mr Jiang Chao left in October 2013: see para 2.5 B:34 [34] See para 58 of P’s Opening [35] At para 91 [36] At para 94 [37] At para 95 [38] D6:1163 [39] At page 48 [40] D18:3943, B-O [41] D18: 4028Q-4029A [42] D9:1899-1901 [43] At para 5.21, B:41 [44] See evidence of Ms Zhao, para 5.24, B:41, and copies of loan agreements at D9:1902-1914 [45] D6:1347-D7:1363 [46] D6:1355-1358 [47] D7:1548-1575 [48] D7:1549-1552 [49] At D7:1550 [50] D6:1165-1210 [51] At 5.2, D6:1171 [52] At D6:1183 [53] At D6:1183 [54] D7:1463 [55] At D6:1184 [56] See C1:181, 183 [57] At para 3.3.22, C1:183 [58] D10:2219-2220 [59] D10: 2224-2226 [60] See C4:660 [61] See paras 57 and 120 of the Counterclaim, at A:50 and A:60 [62] D10:2217 [63] D10:2218 [64] At para 47, B:16 [65] At para 7, B:28 [66] Even though the full name of the bank’s credit advice appeared to be the canteen of Xihau Canyin, see D10:2128 [67] See C4: 663-664 [68] D11:2375-2383 [69] D11: 2262-2332 [70] D11:2347-2349 [71] D11:2350-2373 [72] See D17, 3812, email of 10 September 2009 15:27 [73] D 17: 3809-3811 [74] D17: 3626-3627 [75] D17:3814 [76] D17:3810 [77] D17:3810 [78] D17:3815 [79] The date of the agreement for sale was 31 July 2009, see D11:2389-2391 [80] D11:2252 [81] See para 137, D’s Closing Submissions. [82] C4:664 [83] D11:2384-2386 [84] D11:2389-2391 [85] D11:2392 [86] See item 18(3), C1: 113 [87] At item 3.5.10(f), C1:40 [88] Agreement at D11:2405-2406; information on Jiazhan, D2:363 [89] Reasons for withdrawal not clear [90] At 2nd paragraph, D11:2437 [91] See D11:2442 [92] At Holding (2), p 835 [93] D12:2563 [94] D12:2572-2579 [95] At D12:2578 [96] D12:2579 [97] D12:2580-2587 [98] D12:2591-2598 [99] At 2nd paragraph, D12:2575 [100] See 2nd paragraph, D12:2575 [101] 3rd paragraph, D12:2577 [102] 3rd paragraph D12:2583 [103] At 1st para, D12:2593,2601 [104] D12:2484 [105] 2nd paragraph, D12:2574 [106] See para 3.7.13, C2 205 [107] D12:2612-2627 [108] D12:2630 -2646 [109] D12:2653-2655 [110] See D2:2663 referring to letter of 4 January 2011 and D2:2672 for the email of 14 June 2011 [111] D12:2679 [112] D12:2674 [113] D12:2656 [114] D13:2773-2782 [115] See paras 11- 12, at D13: 2778-2779 [116] D17:3626 [117] At 3.7.19, C1:53, Table 18 [118] D13:2792 [119] D13:2793-2794 [120] Cf D2:346, 349, Schedule 1 to SPA where the Target Company was stated to be 100% shareholder of Neo-Chin Land Group and Neo-China Real Estate [121] D17: 3853-3876 [122] At 3.8.10-3.8.12, C1:55 [123] D19: 4259N-4260K [124] At I-J, D19:4284 [125] At N-P, D19: 4283 [126] Para 11.18, B:54 [127] D18:4174 M-V [128] D18: 4175 J-U [129] D14:3085-3112 [130] D14:3098, 3111 [131] D2:238-239 [132] As seen in D17:3656 [133] Para 4, A:64 [134] See para 5, A:64 [135] At para 45, B:15 [136] See paras 74 (b), 101,119,133,148, 180 and 200 of P’s Closing Submission [137] At d-e, at pg 473 [138] Macdonald v The Law Union Fire and Life Insurance Co (1874) LR 9 QB 328, per Luch J at 331; National & General Insurance Co Ltd v Chick [1984] 2 NSWLR 86, per Samuels JA at 109; China Taiping Insurance (HK) Co Ltd v Tang Tze Wai [2013] 2 HKLRD 430, per Chu JA at paras 45-50 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under HCA 939/2013