Swallow Kingdom Holdings Ltd v. Lo Kok Shing Leo and Others
Read the full judgment text of HCA 2260/2016 on BabelCite. This High Court CFI judgment was delivered on 17 September 2020.
1. This case concerns the acquisition of a Hong Kong company by the plaintiff (“P”) from the defendants (“D1”, “D2”, “D3” and “D4”, collectively “Ds”). Several disputes stemmed from the acquisition, and these disputes have to be resolved by this court eventually.
Cited by 3 cases · Cites 10 cases
|
HCA 2260/2016 [2020] HKCFI 2396 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 2260 OF 2016 ________________________ BETWEEN
________________________ Before: Deputy High Court Judge MK Liu in Court Date of Hearing: 10 – 14 & 17 August & 3 September 2020 Date of Judgment: 17 September 2020 ________________________ J U D G M E N T ________________________ 1.This case concerns the acquisition of a Hong Kong company by the plaintiff (“P”) from the defendants (“D1”, “D2”, “D3” and “D4”, collectively “Ds”). Several disputes stemmed from the acquisition, and these disputes have to be resolved by this court eventually. BACKGROUND 2.I would first set out the background facts which are either agreed or indisputable. 3.P is a company incorporated under the laws of British Virgin Islands having registered in Hong Kong as a registered non-Hong Kong company. Mr Wong Tang Yiu (“Wong”) is P’s director. 4.Legendtoonland Limited (傳奇動畫科技有限公司) is a company incorporated in Hong Kong (“Legend HK”) and it has a wholly-owned subsidiary, namely珠海傳奇動畫科技有限公司 (Legendtoonland Limited (Zhuhai)) (“Legend ZH”) which is a company incorporated in Zhuhai, China. At the material time, Legend ZH was the sole legal and beneficial owner of a piece of land at廣東省珠海市斗門區黃楊大道1901號， Zhuhai (“the Land”). 5.D1 to D4 were shareholders and directors of Legend HK holding 24%, 24%, 26.28%, and 11.42% shareholding thereof respectively in December 2013. The remaining 14.3% shareholding of Legend HK was and is held by China Hoto (HK) Capital Co Ltd (“China Hoto”). 6.On 16 & 17 December 2013, P met with D1&D2 for discussions in Hong Kong and Zhuhai. 7.On 18 December 2013, P and Ds executed an agreement for sale and purchase (“the SPA”), by which the parties agreed that P would acquire Ds’ shares in Legend HK in accordance with the terms set out in the SPA. The material terms of the 1st SPA are as follows:
8.Subsequently, P and Ds executed a supplemental agreement (“the Supplemental Agreement”) dated 24 December 2013. The terms of the Supplemental Agreement are as follows:
9.D1&D2 resigned as directors of Legend HK on 27 December 2013, whereas D3&D4 resigned as directors of Legend HK on 18 December 2013. By instruments of transfer executed by Ds, all the shares of Legend HK held by them were transferred to P on 24 December 2013. 10.On 26 November 2014, a declaration and undertaking agreement (“the Undertaking Agreement”) was executed between P on the one hand and D1&D2 on the other hand. The terms of the Undertaking Agreement are as follows:
11.After the execution of the SPA and the Supplemental Agreement in December 2013 and until at least the signing of the Undertaking Agreement in November 2014, Wong and D1&D2 were on good terms and they were having some other business joint ventures. 12.The disputes in these proceedings are related to the aforesaid agreements and the discussions leading to the agreements. P’s CASE 13.On or about 16 December, Ms Loretta Yeung (“Yeung”) of Synthesis Financial Partners Limited (“Synthesis”) introduced D1&D2 to Wong in a meeting (“the 1st Meeting”) held at P’s office in Lippo Centre, Hong Kong (“P’s Office”). 14.P claims that at all material times, D1&D2 represented that they were authorized by D3&D4 to discuss and negotiate with P any matters regarding Legend HK and Legend ZH including but not limited to settling the two companies’ debts and liabilities, any sale and purchase of the shares of the two companies, any potential financial investment and any business opportunities. 15.At the 1st Meeting, D1&D2 on behalf of themselves and also on behalf of D3&D4 expressed to Wong that Legend HK and Legend ZH were in critical financial difficulties and hence Ds were seeking for financial assistance from P. D1&D2 told Wong that Legend HK and Legend ZH were heavily in debt to, amongst other debtors, the Bank of East Asia (“BEA”) and the Bank of Communications (“BC”), and Legend HK and Legend ZH had been unable to pay their employees’ salaries for a few months. D1&D2 had given personal guarantees to guarantee the debts owed by Legend HK and Legend ZH to the banks. 16.During the 1st Meeting, D1 and D2 (on behalf of all Ds) expressly represented to Wong that:
17.On 17 December 2013, another meeting between P and D1&D2 (on behalf of all Ds) was held at P’s Office for further discussion and negotiation (“the 2nd Meeting”). Eventually, the parties reached a consensus in the 2nd Meeting:
18.On 17 December 2013, after the 2nd Meeting, Wong followed D1&D2 to Zhuhai to inspect the Land. 19.On 18 December 2013, P and Ds signed the SPA. According to P, the SPA contains attachments 1 to 4, and copies of these attachments can be found in the trial bundles[1]. 20.P claims that the SPA contains the following implied terms:
21.On 18 December 2013, upon the request of D1&D2 (on behalf of all Ds), P transferred a sum of RMB 250,000 to Legend ZH (who received for and on behalf of the Ds) in compliance with clause 2.2(1) of the SPA. 22.The consideration from P as provided in the SPA is for the acquisition of 100% shareholding of Legend HK, not only 85.7%. 23.The parties agreed that outstanding and updated accounting documents including but not limited to balance sheets of Legend HK and Legend ZH, account receivable records thereof, and account payable records thereof, would be given by the D1&D2 (on behalf of all Ds) after the signing of the SPA. 24.On or about 24 December 2013, after receiving all outstanding and updated accounting documents of Legend HK and Legend ZH from Ds, P on the one hand and the D1&D2 (on behalf of all Ds) on the other hand verified the accounts of Legend HK and Legend ZH (“the Verification Exercise”) so as to determine the actual amount to be paid by P after taking into account all the liabilities which P had to settle after acquiring the Shares. The final account of Legend HK and Legend ZH was then reduced into writing and recorded in a statement of account (對帳表) (“the Statement of Account”)[2]. D1&D2 have signed the Statement of Account 25.At the end of the Verification Exercise, D1&D2 (on behalf of all Ds) produced two payables tables (“the Final Payable Tables”)[3] and two receivables tables (“the Final Receivables Tables”)[4] to Wong. D1&D2 have signed these tables. D1&D2 told Wong that apart from the sums set out in the Final Payables Tables, there was no other debt payable by Legend HK and Legend ZH (“the 3rd Representation”). 26.On 24 December 2013, after having the Statement of Account, P and Ds signed the Supplemental Agreement. 27.During the Verification Exercise, Wong on behalf of P and D1&D2 on behalf of Ds orally agreed that all the other debts not recorded in the Statement of Account should be borne by Ds, and Ds undertook to pay off the same (“1st Oral Agreement”). P claims that further or alternatively, there is an implied term in the Supplemental Agreement that all the other debts not recorded in the Statement of Account should be settled by Ds (“Implied Term C”). 28.In the course of the Verification Exercise, the parties orally agreed that (“the 2nd Oral Agreement”):
29.On or about 24 December 2013, the Shares were transferred to P. Since then, P has been the majority shareholder of Legend HK. 30.Pursuant to the 2nd Oral Agreement and to give effect the 2nd Oral Agreement, Ds were authorized by P (for and on behalf of Legend HK and Legend ZH) to hold themselves out as agents and/or representatives of Legend HK and Legend ZH to collect the Receivables. Between December 2013 and November 2014, D1&D2 (on behalf of all Ds) had collected part of the Receivables. However, as of November 2014, there were still outstanding receivables which had not yet been collected by the Ds. 31.The 2nd Oral Agreement was reduced into writing and recorded in the Undertaking Agreement in November 2014. 32.P claims that it has discharged all its obligations under the agreements with Ds. However, Ds have not performed all their obligations under the agreements, including the liability to personally pay all the uncollected Receivables to P. 33.P also claims that Ds should compensate the losses suffered by P as a result of two sets of legal proceedings in the Mainland (“RI Litigation”) relating to a Zhuhai Richards Investment Limited (珠海市李察投資有限公司) (“RI”).
34.A further claim made by P is in relation to the losses suffered by P in another set of legal proceedings in the Mainland.
35.P also claims a compensation of HKD 250,000 from Ds as a result of Ds’ failure to acquire the 14.3% shareholding of Legend HK from China Hoto and transfer to the same to P. 36.To sum up, P’s claims are as follows:
37.P has called Wong to give evidence in support of P’s case. 38.In P’s pleadings, P claims that D1&D2 had actual and ostensible authority to represent D3&D4 at all material times. At the beginning of the trial, I asked counsel for P whether any ground in support of the alleged ostensible authority had been pleaded. After some exchanges between the court and counsel, counsel told me that P would only pursue the actual authority point at the trial. 39.While Wong was giving evidence, Wong mentioned that he had never met D3&D4, and had no direct communication with D3&D4 at any time. Wong also said that he had never seen any document by which D3&D4 had authorized D1&D2 to represent them to negotiate any business matter. At the end of the trial, I asked counsel for P to clarify P’s case on actual authority in the light of Wong’s evidence. Having taken instructions, counsel told me that P’s claim against D3&D4 would be based upon the SPA, the Supplemental Agreement and the Undertaking Agreement only. 40.It is not in dispute that D3&D4 have signed the SPA and the Supplemental Agreement, and they shall be bound by the terms therein. As to the Undertaking Agreement, P claims that D1&D2 signed the Undertaking Agreement on behalf of themselves and also on behalf of D3&D4. Ds’ CASE 41.D1&D2 have filed a defence and counterclaim, and D3&D4 have filed a separate defence and counterclaim. D1&D2’s case 42.D1&D2 deny that they have any authority to represent D3&D4 at any time. 43.D1&D2 say that they have given financial documents of Legend HK and Legend ZH to Yeung before the 1st Meeting, for the sole purpose of locating potential lenders. At that time, Legend ZH was indebted to various debtors, including BEA, BC and some employees. 44.At the 1st Meeting, D1&D2 proposed to borrow a sum of RMB 5 million from Wong. However, Wong counter-proposed to purchase the shares of Legend HK and asked D1&D2 to come to P’s Office the next day to discuss the details. 45.At the 2nd Meeting, D1&D2 told Wong the following:
46.At the 2nd Meeting, Wong and D1&D2 reached a consensus that P would purchase the 85.7% shareholding in Legend HK collectively owned by Ds at the price of RMB 23 million. Wong and D1&D2 went to Zhuhai to see the Land on the same day. 47.D1&D2 deny that they made the 1st Representation or the 2nd Representation to Wong in the 2nd Meeting. 48.D1&D2 claims that under the SPA, the consideration to be paid by P is for the purchase of 85.7% shareholding in Legend HK only. D1 and D2 deny that the SPA contains Implied Term A or Implied Term B. D1&D2 further claims that the RMB 250,000 advanced by P to Legend ZH is a loan and not the deposit stipulated in the SPA. 49.D1&D2 rely upon clause 9.3 of the SPA and claim that any representation or oral agreement made prior to the signing of the SPA would have been superseded by the SPA. The terms of SPA have only been varied by the Supplemental Agreement. D1&D2 accept that the Supplemental Agreement signed by P and by all Ds is binding upon them. 50.D1 admitted that he has a contractual obligation to purchase the 14.3% shareholding of Legend HK from China Hoto within a reasonable time. However, that should be done at P’s expense. D1 claims by issuing a letter dated 17 January 2014 to China Hoto, offering to purchase the 14.3% shareholding from China Hoto at HK$250,000, he has discharged his contractual obligation. There has never been any reply from China Hoto. 51.D1&D2 allege that there was an oral agreement between them and P regarding the shareholders’ loan owed by Legend HK to them (“the SL Oral Agreement”):
52.It is D1&D2’s case that:
53.In relation to the RI Litigation, D1&D2 claims that the matters relating to RI had been disclosed to P before the SPA, and they should not be liable to P in respect of those matters. 54.In relation to the SH Litigation, before entering into the Supplemental Agreement, D1&D2 informed P that Legend HK and Legend ZH succeeded in the appeal against the first instance judgment. As a result, Legend HK and Legend ZH did not suffer any loss in the litigation at that time. D1&D2 did not know the development of the litigation after that time and should not be liable to the Losses in the SH Litigation as a result of the final appeal judgment in that litigation. 55.Originally, D1&D2 lodged a counterclaim for the purchase price as set out in the SPA. At the beginning of the trial, I asked counsel for Ds to clarify why D1&D2 might pursue this counterclaim, while they had accepted that they should be bound by the Supplemental Agreement. After taking instructions, counsel told me that D1&D2 would not pursue this counterclaim at the trial. 56.D1&D2 are saying that they are not liable to P. They counterclaim on the SL based upon the SL Oral Agreement. 57.D1&D2 have given evidence in support of their case. D3&D4’s case 58.D3&D4’s case is that D1&D2 did not have any authority to represent them in all the negotiations with P. They have never had any meeting or discussion with P. They only signed the SPA and the Supplemental Agreement. They accept that these two agreements are binding upon them. Save that, the representations, the oral agreements and the Undertaking Agreement pleaded in P’s case should not be binding upon them. They deny that they are liable to P in any respect under the SPA and the Supplemental Agreement. 59.Originally, D3&D4 raised a counterclaim for the purchase price as set out in the SPA. I asked counsel for Ds a question similar to the one set out in [55] above. Having taken instructions, counsel confirmed with me that D3&D4 would not pursue this counterclaim at the trial. 60.D3&D4 have given evidence in the trial. LATE DISCOVERY OF DOCUMENTS 61.At the beginning of the trial, I have dealt with two applications, one made by P and the other made by Ds. 62.By a summons filed on 7 August 2020, P seeks leave to rely upon the documents set out in its 2nd supplemental list of documents filed on 3 August 2020. The application is not opposed. I therefore allow the application. 63.Without issuing any summons, Ds seek leave to rely upon the documents set out in their 2nd supplemental list of documents filed on 7 August 2020. The application is opposed by P. Counsel for P submits that Ds’ application is a very late application, and no satisfactory explanation has been provided to justify the lateness. The new documents introduced by Ds are mainly WeChat or SMS messages in about 2014. The documents do not appear to be a complete set of records. Some of the messages involve persons who are not parties in these proceedings. There is also a document, which allegedly is a record of a meeting held on 27 December 2013. These documents are introduced at the eleventh hour. Counsel for P submits if these documents are introduced in these proceedings, P would need time to conduct investigation and to prepare evidence to meet these new documents, including finding a new witness to give evidence at the trial. The trial would have to be adjourned in these circumstances, which is most undesirable. 64.In my view, all the criticism made by P are valid points. Ds’ application is a very late application, and there is no justification for the lateness. As said by DHCJ Marlene Ng (as she then was) in Liu Chen v Chan Poon Wing[6]:
65.In view of the unjustified delay in taking out the application and the prejudice to P, I dismiss Ds’ application. MY FACTUAL FINDINGS 66.I have carefully considered the evidence given by the witnesses in the trial. In respect of evaluating the evidence given by witnesses, a valuable guidance can be found in Hui Cheung Fai and another v Daiwa Development Limited[7], in which DHCJ Eugene Fung SC said:-
67.See also Lee Fu Wing v Yau Po Ting Paul [2009] 5 HKLRD 513, in which DHCJ Au (as he then was) said: -
68.If a witness has told lies on a central issue, that may have a significant adverse impact on the credibility of his or her evidence as a whole. As said by Sir John Dyson in MA (Somalia) v Secretary of State for the Home Department[8]:
Wong 69.Having seen and heard Wong’s evidence, I am of the view that Wong’s evidence is credible and reliable. On all the key issues, Wong’s evidence is consistent with the documents and in accordance with common and commercial sense. I accept Wong’s evidence and attach full weight to his evidence. 70.Wong said that at the 1st Meeting, D1&D2 provided some Legend HK’s and Legend ZH’s financial statements to him, but he was told that the documents were not trustworthy as they were prepared for submitting to the Mainland tax authority. He could not recall what exactly the financial documents were. Those financial documents were returned to D1&D2 at the end of the meeting. 71.There can be no doubt that Legend HK and Legend ZH were in financial difficulties at that time, and D1&D2 were seeking financial assistance from P. Both D1&D2 had provided personal guarantees to the banks in respect of the loans owed by Legend HK and Legend ZH to the banks. There is every reason to believe that D1&D2 would have tried their very best to persuade P to give them financial assistance in this meeting. Naturally, D1&D2 would have mentioned the Land in this meeting, for the Land would be the most valuable asset owned by Legend HK through Legend ZH. I accept that D1&D2 did make the 1st Representation and the 2nd Representation to Wong in this meeting. 72.Wong said that at the 2nd Meeting, he was given some internal documents of Legend ZH. He accepted and agreed that the consensus reached in the 2nd Meeting, ie P would acquire Legend HK subject to the conditions discussed in the meeting, was not a legally binding agreement. At that time, P had an intent to acquire the 100% shareholding of Legend HK, for P was very much interested in obtaining the Land. That is why on that date, after the 2nd Meeting, Wong followed D1& D2 to Zhuhai to inspect the Land. 73.I accept Wong’s evidence in relation to the 2nd Meeting, including the consensus reached in the meeting is that P would acquire 100% shareholding of Legend HK, not only 85.7%. It is clear that P was intending to have complete control of the Land after the acquisition, and that task could only be satisfactorily achieved by acquiring 100% shareholding of Legend HK. Further, P was prepared to take up the debts of Legend HK and Legend ZH disclosed by D1&D2. There would be no reason for P to take up 100% of those debts if P was not going to acquire 100% shareholding of Legend HK. 74.On 18 December 2013, P entered into the SPA. Wong said that although Legend HK’s financial documents were not available to him and he only had limited information from D1&D2 (ie the documents mentioned in [72] above) at that time, Wong regarded that P’s risk was not high, for the Land was a valuable asset, and Legend HK was the de facto owner of the Land. Further, the deposit to be paid by P as specified in the SPA was only HKD 250,000, which was not a huge amount. Wong’s evidence is consistent with common and commercial sense. I accept his evidence. 75.According to Wong, at the time of the execution of the SPA, D1&D2 told him that they needed cash on an urgent basis to pay salaries to the employees in the Mainland and some utilities expenses. D1&D2 requested Wong to provide RMB 250,000 to Legend ZH instead of paying the deposit of HKD 250,000 to Ds. Wong considered that RMB 250,000 would be more or less equivalent to HKD 250,000 and acceded to the request. There is documentary evidence showing that P did provide RMB 250,000 to Legend ZH on 18 December 2013, and the fund was recorded as a loan from P to Legend ZH[9]. 76.Wong said that after signing the SPA, Ds did not provide the undertaking mentioned in Clause 3.1(d) to P. However, before the execution of the Supplemental Agreement, there were discussions between him on the one hand and D1&D2 on the other hand to verify the accounts of Legend HK and Legend ZH (ie, the Verification Exercise). In the course of those discussions, D1&D2 provided two draft payables tables to him (“the Draft Payables Tables”)[10], in which the payables of Legend HK and Legend ZH were shown. Wong went through the draft items with D1&D2 and found out that some items in the drafts in fact were not the payables of the two companies, and hence those items were deleted from the drafts. A debt owed to RI was among the items deleted. Wong was told by D1&D2 that the debt was owed to RI by D1 personally and not owed by Legend ZH. At the end of the Verification Exercise, Wong and D1&D2 agreed on all the figures as recorded in the Statement of Account, in the Final Receivables Tables, and in the Final Payables Tables. I accept Wong’s evidence and find that the 3rd Representation and the 4th Representation pleaded by P in its Re-Amended Statement of Claim are true.
77.According to Wong, the parties signed the Supplemental Agreement on 24 December 2014. In the light of Clause 3 of the Supplemental Agreement, it is clear that the parties treat the figures in the Statement of Account as the fundamental basis of the transaction. After acquiring Legend HK, P would be responsible for all the payables of Legend HK Group (including Legend ZH) as set out in Clause 3 of the Supplemental Agreement, no more and no less. I am of the view that D1&D2 did make the 1st Oral Agreement with Wong. 78.All Ds disagree that the Supplemental Agreement was signed on 24 December 2013. According to them, the Supplemental Agreement had only been executed by all Ds by about 31 December 2013. I note that neither P nor Ds have produced any documentary evidence shedding any light on the exact execution date of the Supplemental Agreement. I tend to agree with P that the Supplemental Agreement was executed on 24 December 2013, as this is the date as shown on the agreement. In any event, this is a minor issue and would not affect the outcome of these proceedings in any way. It would be sufficient to say that there is no dispute that the Supplemental Agreement was signed by P and all Ds in late December 2013. 79.As to the 2nd Oral Agreement pleaded in P’s case, I find that there were discussions concerning the receivables before the execution of the Supplemental Agreement. In the light of clause 3 of the Undertaking Agreement signed by D1&D2, I also accept that D1&D2 have agreed to be responsible for those receivables in those discussions. In my view, being responsible for the receivables in clause 3 of the Undertaking Agreement should mean being personally liable to pay those receivables to P.
80.According to Wong, the purpose of the Supplemental Agreement is to clarify a few points, including:
81.Under cross-examination, Wong was asked why the Statement of Account, the Final Receivables Tables and the Final Payables Tables had only been signed by D1&D2, and not by all the parties as contemplated in clause 3 of the Supplemental Agreement. Wong explained that all the figures in the tables had been incorporated in the Statement of Account, and the conclusion of the Statement of Account had been reproduced in the Supplemental Agreement. Since the Supplemental Agreement had been signed by all the parties, he did not think that it would be necessary for P and D3&D4 to also sign the Statement of Account and the relevant tables. I am of the view that Wong’s explanation is logical and sensible. I accept his answer. 82.Wong mentioned that after signing the SPA and the Supplemental Agreement, P has paid off the debts owed by Legend HK and Legend ZH to BEA, BC and other creditors. Ds have not put forward any evidence to contradict this. I accept Wong’s evidence. After P discharging the debts owed by Legend HK and Legend ZH to the banks, D1&D2 would have been released from their personal guarantees given to the banks in relation to those debts. 83.After signing the Supplemental Agreement, P discovered the matters as set out in [33] above in relation to RI. As a result of those matters, P has suffered losses in the RI litigation. The details of the Losses in RI Litigation pleaded in P’s Re-Amended Statement of Claim are as follows:
84.Wong said that D1&D2 made the 4th Representation to him in the Verification Exercise, and that representation was untrue. Wong was of the view that Ds should compensate P the losses suffered by P in the RI Litigation. That is why there is a clause dealing with the RI Litigation in the Undertaking Agreement, ie clause 2 of that agreement. Wong’s evidence is consistent with and supported by the documentary evidence. I accept Wong’s evidence. 85.In relation to the SH Litigation, Wong accepted that D1&D2 did not conceal anything before P and Ds entered into the Supplemental Agreement. Before the execution of the Supplemental Agreement, D1&D2 showed Wong a copy of the appeal decision, in which the appeal court held that Legend HK and Legend ZH were not liable to the SH Directors. The situation changed because the final appeal court overruled the appeal court’s decision and held that Legend HK and Legend ZH were liable to pay RMB 150,000 to the SH Directors. Details of the Losses in SH Litigation suffered by P are as follows:
86.Wong’s evidence in relation to the SH Litigation is not disputed. As to whether Ds or any of them are liable to P in respect of those losses, that would depend upon the true meaning of the contract between P and Ds, which will be discussed later in this judgment. 87.Wong said that eventually, D1 could not acquire the 14.3% shareholding of Legend HK from China Hoto. This is not disputed by Ds. Wong claimed that Ds should pay a compensation of HK$250,000 to P as a result of this failure. The merit of this claim will be analyzed later in this judgment. 88.Wong agreed that he had discussed the Dilution with D1&D2 in or about September 2014, and D1&D2 did transfer the SL to P. However, P did not implement the Dilution as planned. Wong denied the existence of the SL Oral Agreement as alleged by D1&D2. Wong said that D1&D2 should not be entitled to demand any payment from P in respect of transferring the SL to P. I accept Wong’s evidence. The consideration to be paid by P has been fully set out in the SPA and the Supplemental Agreement. The SL is not a payable of Legend HK as evidenced in the Statement of Account and the Final Payables Table concerning Legend HK. Obviously, the acquisition of Legend HK by P as set out in the SPA and in the Supplemental Agreement would include the acquisition of all the shareholders’ loans owed by Legend HK to Ds. Apart from performing the obligations as set out in the SPA and in the Supplemental Agreement, P has no contractual obligation to pay anything else to any Ds in order to get those shareholders’ loans. D2 89.D2 was in charge of the financial matters in Legend HK and Legend ZH before selling her shares in Legend HK to P. I am of the view that D2 is not a truthful and reliable witness. Her answers under cross-examination are always evasive and argumentative. Her evidence is inconsistent with her pleaded case and the documents on various material aspects, and is inconsistent with common and commercial sense. I refuse to accept her evidence. 90.Under cross-examination, D2 at first refused to accept that Legend HK and Legend ZH were in critical financial condition in late 2013. She did not agree that Legend HK and Legend ZH were urgently in need of funds at that time. However, when being further pressed, D2 finally agreed that Legend HK and legend ZH had financial problems at that time, and hence she and D1 had to approach P to discuss those problems. She said that in her understanding, “urgent” would mean the necessity of having funds in one or two days. She did not think the situation was so critical, and hence she denied that Legend HK and Legend ZH needed fund urgently. In my view, this is an example showing the evasiveness and the argumentative attitude of D2 while she was giving evidence. 91.D2 also tried to say that the subject matter of the SPA was only the 85.7% shareholding of Legend HK, and Legend ZH would not be transferred to P in the transaction. D2 was asked to read the SPA and was required to explain how this interpretation would be possible in the light of the wording of the SPA. D2 was further required to explain why P would purchase Legend HK only and not to acquire Legend ZH at the same time, bearing in mind that Legend ZH was the owner of the Land and P was interested in the Land. P’s interest in the Land was shown by the site visit conducted by Wong on 17 December 2013, before the execution of the SPA. Facing all these, D2 finally conceded that the subject matter of the SPA would include the transfer of the control of Legend ZH to P. This is another example showing that D2 is an evasive witness who is unwilling to tell the truth. 92.D2 claimed that before the 1st Meeting, she had provided financial documents of Legend HK and Legend ZH to P through Yeung and Mr Albert Pang (“Pang”) of Synthesis, and P should know the details of the financial situation of the two companies from those documents. However, as to what documents were provided to Yeung and Pang, and when and by what means the documents were provided to Yeung and Pang, D2’s evidence on all these are unclear. Further, D2 has not provided any documentary evidence in support of her claim, for example, copies of email exchanges between her on the one hand and Yeung and Pang on the other hand, or any document from Yeung and Pang acknowledging receipt of the alleged financial documents from D2. I doubt the veracity of D2’s claim. 93.D2 also claimed that when she and D1 signed the SPA in P’s Office on 18 December 2013, all the attachments mentioned in the SPA were missing. They did not know what were the attachments. In my view, this is inherently improbable. The information in attachments 1-4 constitutes an important basis of the transaction. In clause 3.1(a) of the SPA, all Ds have guaranteed that the information in attachments 2-4 is true and correct. Further, in clause 6.1 of the SPA, all Ds have given a warranty that all the representations made by Ds (that would certainly include the representations made by Ds in attachments 1-4) are true and correct. It is contrary to common and commercial sense that D2 or any defendant would sign the SPA without knowing what are the attachments mentioned in the SPA. 94.As to the Verification Exercise, D2 claimed that no verification of accounts had been taken place. According to D2, the Draft Payable Tables were prepared and provided by Wong. Wong only asked D1&D2 what items in the tables would have to be paid urgently, and what items were not urgent. In respect of the matters which did not require urgent payments, Wong have deleted those items. D2 alleged that the debt due from Legend HK to RI had been disclosed to Wong, and P had full knowledge of this. Since that item was not an item requiring urgent payment, Wong deleted the same from the table. D2 claimed that Wong showed the Statement of Account, the Final Payables Tables and the Final Receivables Tables to her and D1. Wong asked them to sign the same, simply and solely for the purpose of calculating stamp duty. D2 denied the existence of the 3rd Representation, the 4th Representation, the 1st Oral Agreement, and the 2nd Oral Agreement. I refuse to accept D2’s evidence.
95.In my view, the Verification Exercise is a key event in this case. D2’s evidence in relation to this event is utterly untrue. In my judgment, this has a significant impact on the credibility of D2’s evidence as a whole. 96.As to the SL Oral Agreement, for the reasons set out in [88] above, I do not accept D2’s allegation. In my judgment, there is no SL Oral Agreement as alleged by D2. D1 97.D1 was in charge of production in Legend HK and Legend ZH before selling his shares in Legend HK to P. I am of the view that D1 is also not a truthful and reliable witness. His evidence is untrue on various aspects. I refuse to accept his evidence. 98.D1 accompanied D2 in all the meetings with Wong. He confirmed the matters said by D2 in D2’s witness statements. For the reasons set out in the above in relation to D2’s evidence, I also reject D1’s evidence. 99.In relation to the Draft Payables Tables and the Verification Exercise, D1’s evidence is more or less same as D2’s evidence. For the reasons set out in [94] above, I refuse to accept D1’s evidence concerning the Draft Payables Tables and the Verification Exercise. Further, as said in the above, the Verification Exercise is a key matter in this case. D1’s evidence on this matter is untrue, and this has a significant impact on the credibility of D1’s evidence as a whole. 100.D1 claimed that the deal between P and Ds was that P would pay RMB 23 million to acquire the 85.7% shareholding of Legend HK owned by Ds, not 100%. Accordingly, P would have to pay an extra sum to purchase the 14.3% shareholding held by China Hoto. D1’s assertion is not supported by the documents, and indeed is contradicted by clause 2 of the SPA. 101.While D1 was giving evidence, he claimed:
102.At the beginning of the trial, I drew counsel’s attention to what Ribeiro PJ had said in in Ming Shiu Chung & Others v Ming Shiu Sum & Others[12]. I asked counsel for Ds to explain whether Ds would accept that the Supplemental Agreement should be binding upon them since they had signed the same. After taking instructions, counsel told me that Ds accepted that the Supplemental Agreement should be binding upon them. Ds further withdrew their counterclaim against P for payment of the purchase price specified in the SPA[13]. 103.In view of these exchanges, it was a complete surprise to hear D1 to say that he was forced to sign the Supplemental Agreement or the Undertaking Agreement. No recognized legal basis for vitiating the Supplemental Agreement or the Undertaking Agreement has ever been pleaded in D1’s pleadings. Further, no event relating to the duress or threat alleged by D1 has been mentioned in D1’s witness statement. In my view, the matters said by D1 as summarized in [101] above are matters invented by him in the witness box and are untrue. D3&D4 104.D3&D4 are brothers. They were mere investors in Legend HK and they did not participate in the daily operation of Legend HK and Legend ZH. It is not in dispute that they have not attended all the meetings with Wong, and they have never had any direct communication with Wong. Both of them say that D1&D2 had no authority to represent them in all the negotiations with Wong. They would personally examine the draft contractual documents between P and Ds, and would only sign the same if they agree to the contents thereof. They have never seen the Undertaking Agreement before the commencement of these proceedings. D1&D2 did not have the authority to represent them to agree to the Undertaking Agreement at any time. 105.I accept D3&D4’s evidence as summarized in the aforesaid paragraph. Both the SPA and the Supplemental Agreement have been signed by all Ds. This is a clear evidence showing that D1&D2 did not have the authority to represent D3&D4 to make any deal with P. Whether D3&D4 would agree to any proposed deal is matter to be decided by them and not by anyone else. As the Undertaking Agreement has not been signed by D3&D4, this agreement should not be binding upon them. 106.Both D3&D4 have adopted the matters set out in D2’s witness statements as part of their own evidence. I attach no weight to this part of their evidence. As said in the above, D3&D4 have no participation in all the meetings between Wong and D1&D2. As to those meetings and the communication between Wong and D1&D2, D3&D4 would have no personal knowledge. MY RULING 107.Counsel for P and counsel for Ds have put forward many arguments in their respective submissions. Counsel have also prepared a list of agreed issues. With no disrespect to counsel, I am not prepared to deal with each and every argument raised by counsel, and I would not go through each and every issue as set out in the agreed list. Some issues raised by counsel have been overtaken by events, and some arguments put forward would no longer be relevant in the light of my factual findings set out in the above. I would set out my ruling on the items claimed in P’s case, my ruling on D1&D2’s counterclaim, and reasons for the rulings in the paragraphs below. Receivables 108.I have found that the 2nd Oral Agreement is true. The 2nd Oral Agreement is an agreement between P on the one hand and D1&D2 on the other hand. I have also found that D1&D2 had agreed to personally pay the uncollected receivables to P in the Undertaking Agreement. See Clause 3 of the Undertaking Agreement. 109.However, as a matter of law, P has an insurmountable hurdle in this claim. The Receivables are debts owed to Legend HK and Legend ZH by their customers. As to how these debts can be transformed to liabilities due from Ds or any of them to P, there is no answer in P’s case. 110.I would take a receivable of Legend HK as an example to illustrate the point. The receivable would be a debt owed by a customer to Legend HK. In order to transform this debt to a liability owed by Ds to P, the following have to be done as a matter of law:
111.It is clear that according to P’s pleadings, all the agreements pleaded are agreements between P and Ds, and all the representations are representations made by Ds to P. P has never pleaded that in relation to the Receivables, there has been any consent from Legend HK, Legend ZH, and the relevant customers in relation to the assignment and the novation mentioned in the aforesaid paragraph. That being the case, the Receivables would remain as debts owed by the customers to Legend HK and Legend ZH, and would not become debts owed by Ds to P. 112.Further, P is only the majority shareholder and not the sole shareholder of Legend HK. China Hoto still has an interest in Legend HK, and in turn an interest in Legend ZH. It would not be right to say that all the assets of the two companies (including the Receivables) can be deemed to be P’s assets. In these circumstances, I doubt whether P may properly cause Legend HK and Legend ZH to assign all the Receivables to P, for that would be depriving China Hoto of their interest in the Receivables. 113.I would dismiss P’s claim under this head. Losses in RI Litigation 114.Clause 6.6 of the SPA reads as follows:
115.In my judgment, D1&D2 have concealed the matters relating to the RI Litigation before the execution of the Supplemental Agreement. The RI Litigation has caused losses to P. Those losses are debts discovered by P after the completion of the acquisition, which fall within the scope of clause 6.6 of the SPA. Pursuant to clause 6.6, P is entitled to require Ds to compensate P in respect of those losses. 116.Counsel for Ds submits that clause 6.6 of the SPA has been superseded by the Supplemental Agreement. In his submissions, the parties have agreed that everything, including past, present and future debts of Legend HK and Legend ZH, has been taken into consideration before the parties entering into the Supplemental Agreement, and the final figures have been set out in clause 3 of the Supplemental Agreement. The calculation as set out in clause 3 of the Supplemental Agreement is final and conclusive and is binding upon all the parties. Clause 6.6 of the SPA has been effectively superseded by the Supplemental Agreement, and P is not entitled to demand Ds to pay anything by relying upon clause 6.6 of the SPA. 117.With respect, I do not accept these submissions. In my view, the matter to be dealt with in clauses 2 and 3 of the Supplemental Agreement is the purchase price to be paid by P to Ds. In clause 2 of the SPA, the parties agreed that the purchase price to be paid by P for acquiring 100% shareholding of Legend HK should be the balance after deducting all the liabilities from RMB 23 million. The purpose of clause 2 of the Supplemental Agreement is to clarify what are those liabilities. In clause 3 of the Supplemental Agreement, the parties set out their agreement that after taking the liabilities into account, the purchase price to be paid by P in fact should only be nominal. Obviously, the liabilities discussed before the execution of the Supplemental Agreement would be the liabilities disclosed by D1&D2 and would not include anything not disclosed by them. The purpose of clause 6.6 of the SPA is to protect P in respect of anything not disclosed by D1&D2 but discovered by P after the acquisition of the shareholding from Ds. There is no valid reason to say that clause 6.6 of the SPA has been superseded by the Supplemental Agreement. 118.Clause 6.6 of the SPA is binding upon all Ds, for the SPA has been signed by all of them. That being the case, all Ds would be liable to P in respect of the losses in the RI Litigation. 119.I note that the losses in the RI Litigation should primarily be the losses of Legend HK and Legend ZH. P’s losses in this matter may well be reflective loss. The principle concerning reflective loss is trite and has been succinctly summarized by the Court of Appeal recently in Topping Chance Development Ltd v CCIF CPA Ltd[15], in which Kwan VP said:
120.In my view, the losses claimed by P in relation to the RI Litigation fall within the exception mentioned by the Court of Appeal in [20(2)] of Topping Chance Development. Legend HK and Legend ZH do not have any cause of action against Ds to recover the said losses. Only P has a cause of action to do so by relying upon clause 6.6 of the SPA. I hold that the reflective loss principle would not prevent P from suing Ds in respect of the said losses. 121.According to Wong’s evidence which has been accepted by this court, all the sums incurred in relation to the RI Litigation in fact have been borne by P[16]. Subject to the following, I allow P’s claim in relation to the losses in the RI Litigation:
Losses in the SH Litigation 122.Although the final appeal judgment in SH Litigation was handed down on 28 December 2015, according to that judgment, Legend HK and Legend ZH’s liability to pay the outstanding consultancy fee accrued in 2010. I am of the view that the outstanding consultancy fee is within the scope of clause 6.6 of the SPA. The legal cost incurred by P in the SH Litigation is a matter relating to the said consultancy fee. I am of the view that the said legal cost is also within the scope of Clause 6.6 of the SPA. 123.I am aware of the fact that in relation to the SH Litigation, D1&D2 have disclosed the appeal judgment to Wong before the execution of the Supplemental Agreement. In December 2013, both P and all Ds were under an impression that Legend HK and Legend ZH did not have any liability in the SH Litigation. However, the situation changed as a result of the final appeal judgment handed down on 28 December 2015. 124.Clause 6.6 of the SPA does not make Ds only liable to the debts concealed by Ds or by any of them before completion of the acquisition. In my view, that clause covers all the liabilities incurred by Legend HK and Legend ZH before completion of the acquisition and discovered by P after completion. The is the plain and natural meaning of the clause. That clause would be applicable in P’s claim against Ds in respect of the Losses in the SH Litigation. 125.As said in the above, I do not accept Ds’ argument that clause 6.6 of the SPA has been superseded by the Supplemental Agreement. I am also of the view that P’s claim under this head would not be defeated by the reflective loss principle. Legend HK and Legend ZH would not have any cause of action against Ds in relation to the Losses in the SH Litigation. Only P may sue Ds for such losses by relying upon clause 6.6 of the SPA. 126.The losses pleaded in the Re-Amended Statement of Claim under this head are:
127.These items are supported by the evidence. According to Wong’s evidence which is accepted by this court, these expenses have been borne by P[19]. I allow P’s claim under this head in full. 14.3% shareholding of Legend HK 128.As set out in clause 1 of the Supplemental Agreement, D1 would acquire the 14.3% shareholding of Legend HK from China Hoto and transfer the same to P. In my view, D1 has to do so at his own expense. I am of the view that from the RMB 23 million (subject to the deductions as set out in the SPA and in the Supplemental Agreement), P has no obligation to pay any extra sum to acquire all the shareholding of Legend HK. 129.However, in my view, P cannot say that D1 has breach his contractual duty in this respect. It is not in dispute that D1 has sent the letter dated 17 January 2014 to China Hoto, offering to purchase the 14.3% shareholding of Legend HK from China Hoto at HK$250,000. There is no reply from China Hoto. D1 has approached China Hoto to try to buy the shares from them. However, it seems that China Hoto is not interested in the matter. Whether China Hoto is willing to sell the shares is a matter to be decided by China Hoto and is beyond the control of D1. After all, D1 has done his job in this matter. 130.Even assuming D1 or any Ds has breached a contractual obligation owed to P by failing to acquire the 14.3% shareholding of Legend HK from China Hoto and transfer the same to P, there is no valid basis for P to claim that Ds have to pay HK$250,000 to P as a result. Counsel for P explains to me that P claims HK$250,000 under this head, because D1 has tried to acquire the 14.3% shareholding from China Hoto at HK$250,000. With respect, this cannot be a valid basis in support of the claim. P can only have compensation as a result of Ds’ breach of their contractual obligation. This is no evidence showing what loss P has suffered as a result of the non-acquisition of the 14.3% shareholding from China Hoto. 131.I would dismiss P’s claim under this head. D1 and D2’s counterclaim 132.The only issue in D1 and D2’s counterclaim is the SL Oral Agreement. I have ruled that the alleged SL Oral Agreement is untrue. Accordingly, this counterclaim must be dismissed. DISPOSITION 133.For the reasons above, I allow P’s claim in relation to the Losses in the RI Litigation and the Losses in the SH Litigation. I order that Ds shall pay the relevant sums as set out in the above to P forthwith. There is no dispute that interest on the sums awarded by the court should be 1% above the best lending rate of Hong Kong HSBC from the date of the writ to the date of this judgment, and thereafter at the judgment rate until full payment of those sums. I so order. 134.P’s other claims are dismissed. 135.D1 and D2’s counterclaim based upon the SL Oral Agreement is dismissed. 136.Ds have raised a counterclaim for the purchase price in the SPA but did not pursue this claim at the trial. I make an order dismissing this claim. 137.Costs should follow the event. P has succeeded on its claim in relation to the RI Litigation and the SH Litigation, but has failed on its claim in relation to the Receivables and the HK$250,000 mentioned in [128] – [131] above. Ds have failed on all their counterclaims. I am of the view that the majority of the time in these proceedings has been spent on the issues in which P has succeeded. Taking a broad-brush approach, I make an order nisi that 65% of the costs of these proceedings (including all costs reserved, if any) be paid by Ds to P, to be taxed if not agreed. 138.I thank counsel for the assistance provided to the court.
Mr Matthew Cheung, instructed by Christine F. L. Ip & Young, for the plaintiff Mr Ken Cheng, instructed by Y. W. Lo & Associates for the 1st to 4th defendants [1] Attachment 1 mentioned in Preamble (A) to the SPA – B2/326-329; Attachment 2 mentioned in Clause 3.1(a) of the SPA – B2/270-271; Attachment 3 mentioned in the same clause – B2/273; Attachment 4 mentioned in the same clause – B2/272 [2] B3/336 [3] B3/339-340 [4] B3/337-338 [5] It is not clear if the Requirement is satisfied, why Legend HK can sell 30% shareholding in Legend ZH to RI, for there has already been a purchaser intending to purchase all the shareholding in Legend ZH. [6] HCPI 779/2006, 7 October 2009 [7] HCA 1734/2009, 8 April 2014 [8] [2011] 2 All ER 65 [9] B4/691 [10] B2/220-221 [11] Trial Bundle 3, pp.339-340 [12] (2006) 9 HKCFAR 334, [84] – [86] [13] By Clause 3 of the Supplemental Agreement, the purchase price payable by P to Ds in the transaction has been varied to HK$1 only. [14] (2008) 11 HKCFAR 455 [16] Wong’s 2nd supplemental witness statement, [18] [17] Re-Amended Statement of Claim, [19(c)] [18] Trial Bundle 3, p.477 [19] Wong’s 2nd supplemental witness statement, [18] |
Cases cited in this judgment
Other judgments that cite this case