So Man Kuen and Another v. Wong Man Hon Frederick and Another

HCMP 1875/2019

[2020] HKCFI 2757

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1875 OF 2019

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JUDGMENT

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1.This is the trial of the Originating Summons issued by the 1^st and 2^nd Plaintiffs on 22 October 2019 (“Originating Summons”).

The Facts

2.This dispute concerns the aborted sale and purchase of all the issued shares in Win Double Limited (“Company”), the corporate vehicle that holds the property known as House No 112 and three car parking spaces, Boulevard du Palais, The Beverly Hills, No 23 Sam Mun Tsai Road, Tai Po, New Territories (“Property”). The 1^st and 2^nd Defendants are the shareholders of the Company.

3.By a “Provisional Agreement for sale and purchase of the entire issued share capital of the Company” dated 7 April 2019 (“PSPA”), the Defendants as vendors agreed to sell and the Plaintiffs as purchasers agreed to buy all the issued shares in the Company for HK$31 million. The estate agent who acted for both parties, Skarloey Property Limited (“Estate Agent”), was also a party to the PSPA.

4.It is common ground that this was the only agreement the parties have entered into, and they are bound by the terms of the PSPA.

5.The PSPA contains the following terms which are relevant for present purposes:-

(1)     The Property is the Company’s only asset (recital (C)).

(2)     The purchase price of HK$31 million would be paid in 3 tranches – (i) HK$1 million as initial deposit upon signing of the PSPA; (ii) HK$2.1 million as further deposit on or before 10 May 2019; and (iii) the balance of HK$27.9 million on completion, which should take place by 5pm on 8 November 2019 (clause 2).

(3)     The parties shall negotiate in good faith and use all reasonable endeavours to enter into a sale and purchase agreement by 10 May 2019, but in the event that no formal agreement be reached by then, the PSPA shall remain valid and in full force and effect (clause 3).

(4)     Completion is conditional upon (inter alia) (i) the vendors procuring the Company to prove and give good title to the Property in accordance with sections 13 and 13A of the Conveyancing and Property Ordinance (Cap 219) (clause 4(b)); and (ii) all representations undertakings and warranties given by the Defendants under the PSPA are and shall remain true, accurate, correct and complete and not misleading in all respects up to completion (clause 4(c)), and if any of these conditions is not fulfilled or waived by the Plaintiffs on or before completion date the Plaintiffs shall be entitled to cancel the transaction under the PSPA whereupon the Defendants shall return all the deposit paid to the Plaintiffs forthwith (clause 4).

(5)     The representations and warranties given by the Defendants are set out in clause 10, and include (inter alia) the representation that “the Company is and shall not be involved in any legal proceedings and no such proceedings are threatened or pending” (clause 10(j)).

(6)     The Defendants may utilize the balance of the purchase price or part thereof to redeem the existing mortgage of the Property on completion, and the Defendants shall procure repayment of all sums owed by the Company under the existing mortgages (if any) on or before completion date and shall procure their solicitors to deliver to the Plaintiffs’ solicitors a valid release in respect of the same within 21 days of completion (clause 7).

(7)     Each of the parties shall pay their legal costs and expenses incidental to the PSPA and all transactions in connection therewith, and all stamp duty payable on the transfer of the shares in the Company shall be borne by the Plaintiffs absolutely (clause 15).

(8)     Should the Defendants after receiving the deposits paid failed to complete the sale and purchase in accordance with the terms of the PSPA, the Defendants should immediately refund the deposits paid and compensate the Plaintiffs with a sum equivalent to the amount of the deposits as liquidated damages and the Plaintiffs shall not take any further action to claim for damages or enforce specific performance (clause 16(b)).

(9)     The Estate Agent shall after the signing of the PSPA be entitled to receive commission of HK$310,000 from the Defendants and HK$105,000 from the Plaintiffs, and if completion does not take place due to default of either party, the defaulting party shall forthwith compensate the Estate Agent the total amount of commission payable by both parties (clause 17(a)-(b)).

6.The Plaintiffs have paid (i) initial deposit of HK$1 million upon signing the PSPA; and (ii) further deposit of HK$2.1 million on 10 May 2019.  The total amount of deposit paid is thus HK$3.1 million (“Deposit”).

7.Subsequent to the signing of the PSPA, solicitors for the Defendants provided to the Plaintiffs’ former solicitors various documents relating to the Company and the Property pursuant to the terms of the PSPA. Among the documents provided on 4 June 2019 was a writ of summons issued by The One Credit Limited (“TOCL”) against the Company in HCA No. 2169 of 2018.

8.It transpired that:-

(1)     TOCL was the lender of HK$1.5 million and HK7.5 million respectively in favour of the Company, as well as the chargee of a second legal charge and a third legal charge over the Property.

(2)     TOCL had commenced 2 sets of proceedings against the Company on the outstanding loans and sought possession of the Property in HCA Nos. 2169 and 2170 of 2018 (“TOCL Proceedings”) in 2018.

(3)     TOCL had obtained default judgment against the Company in the TOCL Proceedings.

(4)     TOCL also obtained a writ of possession against the Property on 3 May 2019, with possession of the Property be delivered to TOCL by 3 June 2019.

The writs in the TOCL Proceedings were not registered as lis pendens in is the Land Registry and could not be seen from the land search on the Property conducted on behalf of the Plaintiffs on 7 April 2019.

9.The Plaintiffs were notified of the writ of possession (which was found to be affixed at the entrance of the Property) by the Estate Agent on 8 June 2019.

10.Upon taking legal advice, on 3 July 2019 former solicitors for the Plaintiffs wrote to the Defendants’ solicitors referring to the existence of the TOCL Proceedings and complaining about breach of the representation in clause 10(j) of the PSPA, stating that the Plaintiffs had terminated the PSPA by reason thereof, and demanding the return of the Deposit.

11.Thereafter there were correspondence between the parties’ solicitors. In essence the Defendants’ solicitors maintained that (i) the Defendants had disclosed the existence of the TOCL Proceedings to the Estate Agent and given the Estate Agent represented both parties, the Plaintiffs “had full knowledge through [the] Agent of the legal proceedings”; (ii) TOCL was aware of the PSPA and had taken no further steps since, it being only interested in recovering its loans; and (iii) in the premises, the Defendants could proceed with completion.

12.Meanwhile, on 17 July 2019, TOCL obtained possession of the Property.

13.On 20 August 2019, the Defendants obtained a letter from solicitors for TOCL stating that TOCL had no objection to the parties completing the PSPA, and provided the same to the Plaintiffs. The Defendants’ solicitors then pressed for completion of the PSPA.

14.On 11 September 2019, the Plaintiffs’ current solicitors wrote to the Defendants’ solicitors restating the Plaintiffs’ position that the Defendants had breached clause 10(j) of the PSPA and the PSPA had already been terminated. In this letter, in addition to the return of the Deposit, the Plaintiffs’ solicitors raised for the first time the Plaintiffs’ claim for HK$3.1 million under clause 16(b) of the PSPA.

15.There followed some further correspondence between the solicitors, with the Defendants’ solicitors continuing to press for completion, and asserting on 19 September 2019 that the Plaintiffs were in repudiatory breach of the PSPA which breach the Defendants have accepted and as a result the Deposit had been forfeited.

16.This led to the issuance of the Originating Summons by the Plaintiffs on 22 October 2019.

Plaintiffs’ Claims

17.In the Originating Summons, the Plaintiffs claimed:-

(1)     a declaration that the Plaintiffs have validly rescinded the PSPA;

(2)     an order that the Defendants return the Deposit to the Plaintiffs;

(3)     an order that the Defendants do compensate the Plaintiffs HK$3.1 million pursuant to clause 16(b) of the PSPA as liquidated damages, alternatively damages to be assessed;

(4)     an order that the Defendants do indemnify the Plaintiffs the stamp duty found payable by the Plaintiffs under the PSPA;

(5)     an order that the Defendants do indemnify the Plaintiffs the estate agent’s commission paid by the Plaintiffs (if any) and insofar as the same becomes payable by the Plaintiffs; and

(6)     interest and costs.

Steps Taken in These Proceedings

18.Following the issuance of the Originating Summons, the parties filed 3 rounds of evidence, which closed on 13 January 2020. Essentially the Defendants maintain the position in their solicitors’ correspondence, namely they had informed a person who accompanied the Estate Agent to the site visit of the Plaintiffs of the TOCL Proceedings, and the Plaintiffs should be aware of the same prior to entering into the PSPA. The Plaintiffs dispute that, and adduce (inter alia) the evidence of a representative from the Estate Agent to support their claim.

19.On 23 March 2020, Madam Justice Au-Yeung directed that the Originating Summons be set down for substantive argument. The trial of the Originating Summons was fixed to be heard on 27 October 2020.

Latest Developments

20.On 14 October 2020 (just under 2 weeks before the trial of the Originating Summons), the Plaintiffs issued a summons, returnable before this court on 27 September 2020, for leave to adduce a further (3^rd) affirmation of the 2^nd Plaintiff, essentially to adduce further evidence of loss and damage in the form of legal costs due to their former solicitors in the sum of HK$50,000 (“Summons”).

21.Mr Smith SC, counsel for the Defendants, stated at the hearing that the Defendants do not take issue with the lateness of the Summons or this evidence, and they accept that they are liable for the HK$50,000 being wasted expenditure incurred in the preparation of the PSPA.

22.In light of the position taken by the Defendants, I would allow the Summons with costs to the Defendants.

23.By letter dated 19 October 2020, the Defendants’ solicitors confirmed that the Defendants no longer contest the first and second reliefs sought in the Originating Summons, namely (i) declaration and (ii) return of the Deposit.

24.On 20 October 2020:-

(1)     The Plaintiffs first indicated that they continued to seek the third and fifth reliefs in the Originating Summons (namely liquidated damages of HK$3.1 million alternatively damages for HK$50,000, and indemnity for Estate Agent’s commission), but abandoned the fourth relief (indemnity for stamp duty).

(2)     In a supplemental skeleton filed on behalf of the Plaintiffs, the Plaintiffs abandoned the third relief in the Originating Summons as well, but continued to maintain a claim for HK$50,000 legal costs and the fifth relief.

(3)     The Plaintiffs also issued an open letter to the Defendants inviting them to consent to an order in terms of the first, second and fifth reliefs together with interest and costs in favour of the Plaintiffs, and vacating this hearing. That offer was not accepted by the Defendants.

Determination

25.In light of the positions now taken by the parties, the issues remain to be resolved are:-

(1)     Whether the Plaintiffs are entitled to the fifth relief, being an indemnity for the Estate Agent’s commission; and

(2)     Whether the Plaintiffs have any basis to maintain the third relief, which goes to the question of costs.

26.On the first issue:-

(1)     Both Ms Leung, counsel for the Plaintiffs, and Mr Smith submitted that the Estate Agent may be able to rely on either clause 17(a) or clause 17(b) of the PSPA. I do not consider that to be correct, for these clauses are directed at different scenarios – clause 17(a) addresses the situation when the transaction does progress to completion, and expressly provides that the Defendants’ share of the commission payable should be paid out of the balance of purchase price; whereas clause 17(b) deals with the situation where completion does not take place due to default of the parties. I find that the operative clause in the present case should be clause 17(b).

(2)     Ms Leung submitted that since there will not be a finding on who is the “defaulting party” for the purpose of clause 17(b) in this case, there is a risk that the Estate Agent may claim against the Plaintiffs under clause 17(b), and an indemnity would be appropriate in these circumstances.

(3)     Mr Smith’s position is that (i) he could not say who is the “defaulting party” vis-à-vis the Estate Agent, and (ii) he accepted that there may be a liability on the part of the Plaintiffs to the Estate Agent that may become due.

(4)     In light of the position taken by Mr Smith, I find that the Plaintiffs are entitled to an indemnity from the Defendants for estate agent’s commission, insofar as the same becomes payable and has been paid by the Plaintiffs.

27.On the second issue, Mr Smith’s position for the Defendants is two-fold:-

(1)     First, they submitted that clause 16(b) is simply not engaged, and the operative provision is clause 4.

(2)     Second, they submitted that if, contrary to their submissions above, clause 16(b) is engaged, the same is not enforceable as it is a penalty clause, relying on Chan Yuen Ka Crystal v Chu Cheong Kit Raymond, HCA 1459/2009 (unrep, 14 October 2009).

28.Ms Leung made no submissions on the same in her written submissions and confirmed at the hearing that she would not take issue with the accuracy of the Defendants’ submissions above.

29.In any event I accept Mr Smith’s submissions as accurate. The PSPA has made separate and express provision for the situation where there is a breach of the vendors’ warranties (clause 4), which gives the purchasers the right to elect to terminate. In accordance with that the Plaintiffs through their former solicitors exercised their right to terminate the PSPA on 3 July 2019. Clause 16(b) deals with a different situation, namely there being no default on the part of the vendors but the vendors wanted to get out of the PSPA – this is referred to as the “escape clause” in See To Keung v Sunny Way Ltd [2009] 5 HKLRD 300, §4(c). I also find that, on the authority of Chan Yuen Ka Crystal, that had clause 16(b) been engaged, the purchasers cannot seek to enforce the same as it would be a penalty clause.

30.Accordingly I will make the following orders:-

(1)     I grant leave to the Plaintiffs to file and serve the 3^rd Affirmation of Cheng Hsiao Shue dated 14 October 2020, with costs of the Summons to be paid by the Plaintiffs to the Defendants, to be taxed if not agreed.

(2)     Judgment be entered against the Defendants on the first and second paragraphs in the Originating Summons.

(3)     The Defendants do pay the Plaintiffs damages in the sum of HK$50,000.

(4)     There be an order that the Defendants do indemnify the Plaintiffs for estate agent’s commission, insofar as the same becomes payable and has been paid by the Plaintiffs.

(5)     No order be made on the third and fourth paragraphs in the Originating Summons.

(6)     Interest be payable on the Deposit, at 1% above the Best Lending Rate published by The Hongkong and Shanghai Banking Corporation Limited from time to time[1], from 3 July 2019 to the date of this Judgment.

31.As to costs (which is the most significant live issue between the parties for the purpose of this hearing):-

(1)     The Plaintiffs invited me to award costs to them, on the basis that they have to issue the Originating Summons to obtain the declaration and the return of the Deposit, which were only conceded by the Defendants on 19 October 2020, while the Defendants invited me to make no order as to costs, on the basis that the Plaintiffs have unreasonably maintained the claim for liquidated damages, in the same amount of the Deposit, and only conceded the same on 20 October 2020 by which time all the costs have already been incurred for the hearing.

(2)     Taking into account:-

(a)     the Plaintiffs have to issue the Originating Summons and pursue the same until 19 October 2020 before the Defendants conceded the first and second reliefs;

(b)     although the evidence filed by the parties did not pertain to the liquidated damages issue, the Plaintiffs have continued to maintain that claim, which is substantial, up to 20 October 2020 in circumstances where I have found that it is clearly not sustainable (and the Plaintiffs have effectively conceded as much at the hearing);

(c)     the Defendants’ position with respect to wasted legal costs of HK$50,000 was unclear (given the inconsistent position taken in 2 paragraphs in their first set of written submissions) until this hearing and the Plaintiffs obtained relief on the same; and

(d)     the Defendants resisted the fifth relief and the Plaintiffs are ultimately successful given the position taken by the Defendants at the hearing,

I consider that an appropriate costs order would be for the Defendants to bear 75% of the Plaintiffs’ costs in these proceedings, to be taxed if not agreed.

Ms Shannon Leung, instructed by Cheung & Choy, for the Plaintiffs

Mr Clifford Smith SC leading Mr Raymond Lau, instructed by Bough & Co, for the Defendants