Dragon Access Holdings Ltd v. Lo Chu Hung
Read the full judgment text of HCMP 1355/2019 on BabelCite. This High Court CFI judgment was delivered on 13 November 2020.
1. By an Originating Summons dated 28 August 2019, the Plaintiff seeks:
Cited by 9 cases · Cites 11 cases
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HCMP 1355/2019 [2020] HKCFI 2895 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 1355 OF 2019 ____________
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____________ Before: Hon Au-Yeung J in Court Date of Hearing: 12 August 2020 Date of Judgment: 13 November 2020 ______________ J U D G M E N T ______________ A. INTRODUCTION 1.By an Originating Summons dated 28 August 2019, the Plaintiff seeks:
B. BACKGROUND 2.Acme Development and Planning Company Limited (“the Company”) was incorporated on 21 May 2015. Its only asset was a property known as the Whole of the Ground Floor, Lead On Industrial Building, No 18 Ng Fong Street, Kowloon, Hong Kong (“the Property”). The Company only had 1 issued share and it was wholly owned by the Defendant. 3.The Defendant also owned and controlled two other companies, Telecom Generation Company Limited (“Telecom”) and Estate Generation Company Limited (“Estate”). 4.On 22 February 2019, the Plaintiff and the Defendant entered into the PSPA under which the Plaintiff agreed to purchase the Property by buying (i) the entire issued share capital of the Company (“the Sale Share”); and (ii) the loan advanced by the Defendant to the Company and due and owing by the Company to the Defendant as at completion (“the Shareholder’s Loan”). The consideration was HK$92,000,000, of which the Deposit paid was HK$18,400,000. The balance that remained unpaid was HK$73,600,000 (“Balance of Purchase Price”). 5.The PSPA contained the following material terms (and all references below to Clauses shall be to the PSPA unless otherwise specified; underline added):
6.The parties were unable to enter into a formal agreement, and the sale proceeded on the basis of the PSPA. It is undisputed that the Plaintiff duly paid the Deposit pursuant to the PSPA. 7.Completion never took place due to various alleged defaults of the Defendant. 8.Essentially, the Plaintiff’s complaints can be classified as follows:
9.The Defendant denied the allegations. He denied his obligation to provide the documents that the Plaintiff sought. Time was of the essence but the Plaintiff had allegedly waived the strict compliance with the time. The alleged delay in delivery of documents did not support “a right to repudiate the contract” by the Plaintiff. The Defendant had tried to resolve issues raised by the Plaintiff but it required cooperation from the Plaintiff, which was not forthcoming. The land title complaint was misconceived. The alleged false representations were trivial, did not affect any rights, and any breach did not give rise to any “right of repudiation” of the contract. 10.The Defendant further asserted that if the Plaintiff was not satisfied by the due diligence investigation, and/or that Defendant was in breach, all that the Plaintiff was entitled to was the return of the Deposit and, in the case of breach, for damages to be assessed (if any). 11.The complaints set out in paragraph 8 thus form the issues in this case. C. ISSUE 1: FAILURE TO PROVIDE DOCUMENTS 12.There were 3 classes of documents that the Defendant failed to deliver under Clauses 5 and 8(k):
13.With regard to class (1), the Company itself was not a borrower but it had executed a mortgage over the Property (“BOC Mortgage”) to secure Telecom’s indebtedness. The exact amount of indebtedness was not stated in the BOC Mortgage but was contained in a facility letter (“BOC Facility Letter”). 14.The Defendant only provided a copy of BOC Facility Letter, with the amount of the facilities granted redacted, at 6:00 pm on the Completion Date. No other documents such as updated mortgage repayment schedule or indebtedness were provided. As a result, the Plaintiff had no way to ascertain the extent of the Company’s liability to BOC. 15.The Defendant submits that the BOC Facility Letter was not a document “relating to” the Company for the purpose of Clause 5, but sensitive information relating to Telecom itself. Similarly, the phrase “such further documents reasonably requested by the Purchaser” did not extend the class of documents “relating to” the Company to cover documents of third parties. 16.Further, the Defendant contends that the surer guide to interpretation is context: Fully Profit (Asia) Ltd v Secretary for Justice(2013) 16 HKCFAR 351, §15, Ma CJ. 17.The context included the factual matrix prevailing at the time when the PSAP was signed and which were known to the parties. The Defendant contends that the Plaintiff was unaware of Telecom and the Company’s liability to BOC at the time. As such, the BOC Mortgage could not be part of the factual matrix when construing Clause 5. 18.I reject the Defendant’s contentions. Clause 5 was to enable the Plaintiff, a stranger to the Company, to conduct due diligence investigation before Completion. It would be wholly contrary to the purpose of that Clause if the Defendant was only required to produce documents that were within the knowledge of the Plaintiff. To the contrary, the Defendant should provide documents that show the true financial picture of the Company. 19.The BOC Facility Letter aroused concerns of the Plaintiff. From the unredacted part, it could be seen that there were different types of loans granted to such aggregate unknown amount that BOC required the same to be secured by mortgages of 6 properties, of which the Property was one. 20.Under the BOC Mortgage, Telecom and the Company jointly and severally covenanted to pay “all monies” owing by Telecom on demand (Cl.2.01 of the BOC Mortgage). As between BOC and the Company, the Company shall be deemed the principal debtor (Cl.15.02(a) of the BOC Mortgage). 21.The BOC Facility Letter was plainly a document “relating to the Company” which would have shown the extent of potential liability of the Company to BOC. I hold that the Defendant was in breach of Clause 5 in failing to provide an unredacted version of the BOC Facility Letter or proof of outstanding indebtedness under the BOC Mortgage. 22.With regard to class (2), the Defendant failed to deliver any of the Company’s audited financial statements until 20 May 2019, about 2 months after the deadline. That delivery did not include the audited financial statements for the period up to 31 December 2018, which were delivered only on 24 July 2019. 23.With regard to class (3), it was not provided on the due date. 24.Time was of the essence under the PSPA. Failure to provide any of the 3 classes of documents on the due date(s) was sufficient to establish the Defendant’s breach under Clause 5 or 8(k). 25.The failure to provide or lateness to provide was no small matter. It deprived the Plaintiff of the opportunity/sufficient time to consider the documents and, if needs be, to raise further requisitions. D. ISSUE 2: DELAY IN PROVISION OF DOCUMENTS 26.The Defendant contends that even if he was in breach of Clauses 5 and 8(k), the Plaintiff had affirmed the PSPA by pressing on with completion. 27.The applicable legal principles have been summarized in Castle Global Limited v Ip Tai Hoi Paul[2020] HKCFI 1106, at §§35-36, following Prism Technology Ltd v Topwin & Companies Ltd, HCA 1190/2011, 30 March 2015, §§102-103, Ng J:
28.In Castle Global, the Court, at §35, held that the purchaser’s letters did not amount to an unequivocal act of affirmation because “it stated that ‘…time is hereby made of the essence of the [Agreement]’ and more importantly ‘Meanwhile, all our client’s right under the [Agreement] are hereby expressly reserved’. Rather, the position was that the Plaintiff was considering its options.” 29.Mr Chiu disputes the proposition in paragraph 27(2). He submits that this proposition appears to have been derived from Prism Technology, §102, which in turn appears to have relied on the case of Yukong Line Ltd of Korea v Rendsburg Investments Corp Ltd of Liberia [1996] 2 Lloyd’s Report 604. However, Yukong Line does not appear to support the proposition. 30.I am unable to agree with Mr Chiu. Although the principle in paragraph 27(2) was not copied word by word from Yukon Line, it was completely in line with the 8 principles set out by Moore-Bick J on page 607 after reviewing a line of authorities. In particular, Moore-Bick J guarded against “an unduly technical approach to deciding whether the injured party has affirmed the contract and should not be willing to hold that the contract has been affirmed without very clear evidence that the injured party has indeed chosen to go on with the contract notwithstanding the other party’s repudiation.” 31.In Yukon Line, a fax of 23 January 1996 from brokers of the charterers (D) stated that the charterers were unable to perform any further. The owners (P) responded on the 24th, giving 20 days’ notice of delivery, stating that the charterers’ cancellation of the charterparty was totally unacceptable and the charterers were strongly requested to honour their contractual obligations according to the charterparty; and in case of non-performance, all damages were to be for the charterers’ responsibility. On 25 January, the charterers’ brokers responded, regretting non-performance by the charters. On 29 January, the owners gave 12 days’ notice of delivery of the vessel. Having heard no further from the charterers, the owners advised the charterers that they were accepting the repudiation on 1 February. 32.D conceded that the 23 January fax amounted to repudiation of the charter and that P’s fax on the 24th was insufficient on its own to constitute an affirmation of the contract. Moore-Bick J found that to be a right concession and in that context effectively applied the principle in paragraph 27(2) above (at p 608). He held that P had not affirmed the contract. The 24 January response meant that the owners were asking the charterers to withdraw their repudiation and confirm their willingness to perform. It was impossible to find in that message an unequivocal statement by P that P would proceed with the contract and await performance in due course regardless of the position adopted by D (at p 609). 33.Mr Chiu further submits that paragraph 27(2) above was against established authorities. He relies on Buckland v Farmer & Moody [1979] 1 WLR 221, English CA, which followed Webb v Hughes(1870) LR 10 Eq 218. At p 286 of Webb v Hughes, Malins VC held that:
34.However, it has to be noted that in Webb v Hughes, Malins VC found that the contract did not make time of the essence, unlike the PSPA. His remarks were obiter and there was no discussion as to what sort of negotiations would amount to affirmation. 35.Buckland v Farmer went on to consider the case of Luck v White, 26 P & CR 89 and Mr Chiu relies on this passage (at p 230 A-D):
Goulding J encapsulated the principles in these terms, at p 96:
36.Goff LJ considered both Webb and Luck and concluded (at p 236):
37.In the present case, in the face of continued breaches by the Defendant, the Plaintiff’s solicitors had all along been expressly reserving the Plaintiff’s rights to accept the Defendant’s repudiation and/or disclaimed any waiver of rights. The letters accompanying payment of the 2nd to 4th instalments of the Deposit and the letters issued by the Plaintiff’s solicitors on the Completion Date contained words to similar effect. 38.In the light of such correspondence, there was no sufficiently unequivocal act of the Plaintiff from which one could infer waiver on its part. 39.Even applying Buckland v Farmer and the authorities cited therein, the Plaintiff had on numerous occasions pointed out the breaches and fixed a period(s) at which the business was to be transacted (Webb v Hughes). There was no suggestion that the extension(s) fixed by the Plaintiff was unreasonable (Luck v White). The Plaintiff had not encouraged the Defendant to think that he would be given indefinite time to perform (Buckland v Farmer). 40.Even if the Plaintiff had waived the prior breaches, on the Completion Date, the Defendant had still failed to provide the unredacted BOC Facility Letter. 41.Immediately after the Completion Date, the Plaintiff’s solicitors set out in a letter the various breaches of the Defendant and lost no time in exercising the right to accept the Defendant’s repudiation (paragraph 27(4) above). 42.Further, whether there was acceptance of repudiation was, strictly speaking, irrelevant to the Plaintiff’s claim for Liquidated Damages. Clause 16(b) was triggered when the Defendant failed to “complete in accordance with the terms” of the PSPA. That was wide enough to cover any act which the vendor was required to do under the agreement leading to the final act of completion: Castle Global, at§39. 43.In light of the matters discussed under Issues 1 and 2 above, I find that the Defendant had failed to provide documents and his delay was not waived by the Plaintiff. His failure (individually or collectively) amounted to a failure to complete in accordance with the terms of the PSPA. E. ISSUE 3: FAILURE TO RESOLVE OUTSTANDING PROBLEMS ARISING OUT OF THE PLAINTIFF’S DUE DILIGENCE INVESTIGATION 44.There were 2 outstanding problems which the Defendant allegedly failed to remedy:
45.The Defendant submits that Clause 5 did not require him to guarantee the satisfaction of the Plaintiff in the due diligence investigation. Instead, Clause 5 should be construed to only require the Defendant to use reasonable efforts to do so. Further, the Defendant was only obliged to provide documents relating to the Company but not a third party. 46.This construction is untenable and contradicts the plain wording of Clause 4 that completion was conditional upon the Plaintiff being satisfied with the results of his due diligence investigation; and Clause 5 which imposed a duty on the Defendant to deliver to the Plaintiff’s solicitors all documents relating to the Company and such further documents reasonably requested by the Plaintiff. If it was discovered during the due diligence investigation that there was any problem, the Defendant shall remedy the same as soon as possible before the Completion Date. 47.The Company was supposed to be a property holding company with no businesses or other liabilities. It was not unreasonable for the parties to expect that the outstanding issues were to be remedied. As will be demonstrated in the remaining parts of Section E, the documents which the Plaintiff requested for were the Company’s, not third party’s, documents. E1. The Company’s liabilities to BOC 48.The Company’s liability under the BOC Mortgage was prima facie contrary to the Defendant’s representations under Clauses 10(d) and (e)(i) of the PSPA. 49.The Defendant submits that he had resolved this issue. Clause 7 permitted him to use the Balance of Purchase Price to redeem the Mortgage on Completion. At 6 pm on the Completion Date, the Defendant’s solicitors, So, Ho, and Co (“SH”), sent a draft form of discharge to the Plaintiff. The draft form provided that BOC acknowledged receipt of all moneys secured by the BOC Mortgage. SH undertook that BOC would sign the form of discharge within 21 days of Completion. 50.However, the draft form of discharge was insufficient to remedy the issue. 51.First, the draft was only sent to the Plaintiff at 6 pm on the Completion Date. Under Clause 5, the Plaintiff would have been entitled to confirm in writing, within 14 days thereafter, whether it was reasonably satisfied with the results of its due diligence investigation. There was plainly insufficient time for the Plaintiff to consider the contents. 52.Second, the Defendant would still be in breach of Clause 10(d) and (e)(i) since, on the face of the draft form of discharge, the BOC Mortgage would only be discharged after Completion. 53.Third, it was not clear if the Company would still owe money to BOC, and how much, after the BOC Mortgage was discharged.
E2. Loans owed to Telecom and Estate 54.According to the Company’s audited financial statements made up to 31 December 2018, the Company owed the Defendant over $13 million, Telecom over $63 million, and Estate $188,005.80. That was on its face in breach of Clauses 10(d) and (e)(i). 55.The Defendant submits that it had come up with various proposals to resolve this problem. In essence,
(“the Defendant’s Proposals”). 56.Pursuant to the Defendant’s Proposals, the Defendant gave a Draft Deed of Assignment to the Plaintiff on 12 August 2019 and 2 Draft Loan Assignments on 22 August 2019. 57.Mr Chiu described the Defendant’s Proposals as a matter of passing money from the Defendant’s left hand to his right hand but Mr Chiu conceded that it was not clear why they were not communicated to the Plaintiff before the Completion Date. 58.Despite the Defendant’s efforts, I find that this issue was not remedied before the Completion Date. 59.Firstly, there was considerable confusion over the exact amount of the Telecom and Estate Loans. At least 4 sets of figures have been provided to the Plaintiff in the month leading up to the Completion Date, ranging from about $62.28 million to $63.68 million. 60.The Defendant now claimed in §27 of his affirmation that the differences represented interest accruing on those 2 Loans. However, there was no documentary proof or computation of the changing amounts. In any event the Defendant never explained the discrepancies to the Plaintiff before the Completion Date. 61.Secondly, there was considerable confusion over when the Telecom and Estate Loans were or were to be assigned to the Defendant. In the draft Deed of Assignment, it appeared that the assignment of the 2 Loans would take place just before Completion. However, in the Company’s 12 August 2019 balance sheet, the Company had no liabilities due to Telecom and Estate, indicating that assignment had already taken place. The Defendant only revealed for the first time in §23 of his Affirmation that the Telecom and Estate Loans were assigned to him in escrow on 12 August 2019 but the escrow agreement was not produced. 62.Thirdly, the 2 Draft Loan Assignments were worded as “agreements” to assign instead of assignments. 63.That aside, I find that the purported assignment would violate the definition in Clause 1, in that the Telecom and Estate Loans were not “money advanced by way of loan by the [Defendant] to the Company” and hence should not form part of the Shareholder’s Loan. 64.If the Balance of Purchase Price were used to redeem the Mortgage as suggested in paragraph 55(4) above, the Company would be indebted to the Defendant after Completion at least to the extent of the Telecom and Estate Loans. 65.Fourthly, the Defendant’s Proposals gave rise to a risk of the arrangement being set aside on the ground of unfair preference under s.266 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance (“Cap 32”) if Telecom is wound up. 66.The Defendant was a guarantor for any of Telecom’s debts under the BOC Facility Letter. He was the sole shareholder and director of Telecom and hence an “associate” and “a person connected with” Telecom: s.265A(3)(b) of Cap 32. If Telecom were wound up within 2 years of the PSPA, the assignment of the Telecom Loan may be set aside. The Plaintiff thus requested, pursuant to Clause 5, for copies of the latest audited financial statements of Telecom to ascertain if Telecom was unable to pay its debts and/or whether Telecom would become unable to do so in consequence of the transaction with the Defendant. The Defendant refused to provide those documents. 67.Fifthly, the Defendant’s Proposals gave rise to a risk of the loan assignments being set aside on the ground of being at undervalue under s.265D of Cap 32.
68.Mr Chiu maintains that the Plaintiff’s request for the financial or other documents of Telecom and Estate was not for documents “relating to the Company” but third parties. 69.Mr Chiu may well be right. However, if the Defendant would not procure Telecom or Estate to produce evidence of solvency, he still has to provide evidence of consideration for the assignments of the 2 Loans. 70.I hold that the Defendant was in breach of Clause 5 in failing to remedy the Company’s liabilities to BOC and the Telcom and Estate Loans. F. ISSUE 4: TITLE BEING DEFECTIVE 71.The Plaintiff says that the Defendant failed to satisfactorily answer 2 requisitions relating to: (1) the release of a previous mortgage to HSBC; and (2) 2 earlier tenancy agreements (“the Tenancy Agreements”). 72.The legal principles are not in dispute. The vendor must prove, beyond reasonable doubt, that he has good title to the property and that the purchaser will not be at risk of a successful assertion against him of an encumbrance. The vendor discharges his obligation if he shows to that standard that he is in a position to convey the estate or interest contracted to be sold without any blot or possibility of litigation to the purchaser: Chi Kit Co Ltd v Lucky Health International Enterprise Ltd (2000) 3 HKCFAR 268. 73.A good title need not be a perfect title. Whether there is any real problem in the title should be approached from the standpoint of a willing purchaser and a willing vendor with reasonably robust common sense, both intending to see the transaction through to completion in terms of their own bargain: Kingdom Miles Ltd v Ever Crystal Ltd [2019] 1 HKLRD 643 (CA), at §68, citing Mexon Holdings Ltd v Silver Bay Intl Ltd (2000) 3 HKCFAR 109, at 117D-E. F1. Release of the HSBC Mortgage 74.The Company had previously executed a mortgage over the Property in favour of HSBC. HSBC’s release of the mortgage, which was registered, described the Property released as the “Whole of the Ground Floor”, Lead On Industrial Building”, ie the Property. 75.However, in the original release, the description of the property released was amended by deleting the words “Whole of” and substituting it with the words “Workshop on”. The amendment was initialled by a “Ngan Siu Lun”, who verified the signature of one Kelly Poon Ka Yee, who signed the release as “Attorney and Agent for and on behalf of the Lender”. 76.The Plaintiff submits that the amendment was invalid because there was no evidence that Ngan Siu Lun acted as the lawful attorney of HSBC. There was therefore a defect in the Company’s title in the Property. 77.I reject the Plaintiff’s submission. Ngan Siu Lun appeared to be the solicitor acting for HSBC in the one-party release. If Ngan Siu Lun acted without authority, then the amendment would simply be invalid and the Whole of the Ground Floor was released under the original release. 78.Applying the test in Mexon Holdings, I find that (a) there was no real prospect that the title of the Property was under threat because the attorney of HSBC did not initial on the amendment but the solicitor of HSBC did; and (b) the property described in the registered release was the same as that in the amended release. F2. The Tenancy Agreements 79.The Tenancy Agreements were discovered during the Plaintiff’s due diligence investigation. The first tenancy was described as “for 2 years from 17.12.90 with option to renew for 2 years”. The second was described as a tenancy “for 2 years from 16.10.1999 to 15.10.2001 with an option to renew for another term of 2 years”. 80.The Plaintiff complained that the Defendant failed to provide the originals of the Tenancy Agreements, and thus failed to show that the Tenancy Agreements have ceased to have effect on the title of the Property. 81.The Plaintiff relies on Wong Bik Ching v Yu Hon Chung & anor [1997] 4 HKC 38, and submits that the Defendant was under a prima facie duty to provide the Tenancy Agreements because they were registered against the Property:
82.However, there were alternative ways by which a vendor could prove the expiry of previous tenancies. In New Jade Enterprises Limited v Jing Ying She Limited, HCA 13764/1997 (unreported, 22 September 2000), §30, DHCJ Gill found that production of the current original tenancy agreement, coupled with the fact that the current tenant was in occupation, was sufficient to show that the earlier tenancies were “dead and buried”. 83.In the present case, according to the land search, the Tenancy Agreements had expired by 2003 at the latest. If they had been further extended, they were not registered and would not bind the Plaintiff: s.3(2) of the Land Registration Ordinance (Cap 128). 84.Additionally, the Defendant produced a current tenancy agreement which covered a portion of the Property, although this said nothing about the remaining portion of the Property. However, there was still some overlap between the current tenancy agreement and the Tenancy Agreements. The facts, taken together with the preceding paragraph, pointed against the possibility that the Tenancy Agreements are still alive. 85.In summary, I find that the Plaintiff’s complaints about the title being defective are unsubstantiated. G. ISSUE 5: FALSE REPRESENTATIONS AND WARRANTIES 86.Based on the above analyses, apart from expressly excluded agreements, the Company had carried on business or “entered into the following contract, agreement or arrangement since its incorporation” in breach of Clause 10(d):
87.The representations and warranties given by the Defendant upon signing the PSPA were not true. The Plaintiff had not waived the falsity on or before the Completion Date. The falsity in relation to the HSBC Mortgage was not substantial as it did not affect title to the Property. The falsity in relation to the other 2 items justified the Plaintiff’s refusal to complete by virtue of Clause 4(c). Mr Chiu makes no submission in opposition in this respect. 88.The Plaintiff further claims that the Defendant had breached the undertaking in Clause 11(h) by:
89.With regard to (a), the Defendant alleged that the changes in figures were pursuant to interest. I do not regard that, in itself, as evidence of the Company “entering into” a new contract or commitment unless interest was imposed after the date of the PSPA. 90.With regard to (b), the purported assignments were proposals only. There was no evidence of the Company participating in the assignments before the Completion Date. 91.In summary, for the reasons given in paragraphs 86 and 87 above, I find that the Defendant was in breach of Clause 10(d). H. RELIEFS H1. Declaration 92.Based on the above analyses, this Court has no difficulty in granting a declaration that the Defendant had repudiated the PSPA, which was accepted by the Plaintiff and duly terminated the PSPA. H2. Return of the Deposit of HK$18,400,000 together with the Compensation 93.The Defendant accepts that under Clause 16(b), he has to return the Deposit to the Plaintiff but disputes the liability to pay the Compensation. Mr Chiu’s arguments are twofold:
94.I can see nothing in Clause 16(b) to suggest that only the Defendant can invoke it. Wong Lai-fan v Li Ha [1992] 1 HKLR 125, at 127 and Castle Global (at §§39-42) contained a clause similar to Clause 16(b) and the Courts had no difficulty enforcing it in favour of the purchasers. As the condition, namely, “fail to complete in accordance with the terms of [the PSPA]” was plainly met here, the Defendant has to pay the Compensation. 95.As for the penalty point, the burden is on the defendant to establish that a clause is a penalty clause: Brio Electronic Commerce Ltd v Tradelink Electronic Commerce Ltd [2016] 2 HKLRD 1449, §14, where the Court of Appeal accepted defence counsel’s concession. 96.In Brio Electronic (not a case of sale of land or shares)§17, Barma JA held that the question of whether a clause was a valid liquidated damaged clause or a penalty should be considered in broad and general terms, from the standpoint of the parties at the time when they entered into the contract. There is no necessity for there to be an accurate assessment of the damages that would have been awarded at common law. To focus on the actual breach that has been found to have taken place and compare that to the damages that might be suffered with the stipulated damages is the wrong approach. (at §§17 and 19) 97.In England, the correct test for a penalty is “whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract” Cavendish Square Holding BV v Makdessi [2015] UKSC 67, [2016] AC 1172, Lord Hodge JSC, at §255. 98.This test was applied in Hong Kong in Bank of China (Hong Kong) Ltd v Eddy Technology Co Ltd [2019] 2 HKLRD 493 at 502, §38, Lam VP. 99.Here, the Defendant only first raised the penalty point in Mr Chiu’s written submission. There was no evidence from the Defendant to show that the Compensation was a penalty in nature and there was no opportunity for the Plaintiff to adduce evidence to show that the Compensation was a genuine pre-estimate of damages. 100.Anyhow, applying Cavendish Square, the Plaintiff had a legitimate interest in the Completion of the PSPA. Having regard to the consideration for the sale and purchase, the uncommon 6-month period for completion, the 20% deposit (which was double the usual deposit amount), the need for the Plaintiff to do due diligence investigation of the Company, the mirror provision in Clause 16(a), the Compensation was neither exorbitant nor unconscionable in nature to justify judicial intervention. I hold that the Defendant must pay the Compensation. H3. Declaration of lien 101.A purchaser has an equitable lien over land in respect of any deposit paid. It is stated in Snell’s Equity (34th ed), §44-014, at p 1095:
102.The equitable lien applies not only to landed properties but also to all properties over which a court of equity would assume jurisdiction, including personal properties such as shares: LY Group Development Ltd v East Canton Ltd [2015] 4 HKLRD 84, §§25-33, To J. 103.The lien even extends to security re payment of damages with interest. The lien exists even though the plaintiff had parted with possession of the shares. In Mandecly Ltd v Hao Wei, HCA 1216/2002, 19 February 2014, the trial judge granted a lien over the shares sold by the plaintiff (§5). Subsequently, upon assessment of damages, G Lam J extended the vendor’s lien to cover damages (at §19):
104.In summary, the lien can be applied to land or personal assets, and covers the purchase price paid, damages, interests and costs. I see no reason why, if unliquidated damages are covered, the Compensation, which is liquidated in nature, is not. 105.The Plaintiff had paid the Deposit. Applying the principles in the preceding paragraph, the Plaintiff is entitled to an equitable lien over the Sale Share and the Shareholders’ Loan, both being subject matter of the PSPA. Although the Defendant has given different versions, the amount of Shareholders’ Loan as appearing on the audited financial statement of the Company, ie HK$13,268,677.00 shall be taken as the amount for the purpose of the lien. I. ORDERS 106.I make orders as set out in paragraph 1 above. 107.On a nisi basis, costs should follow the event and be to the Plaintiff with certificates for 2 counsel. 108.I thank counsel for their assistance.
Mr Lee Tung Ming and Mr Albert Chan, instructed by C.L. Chow & Macksion Chan, for the Plaintiff Mr Simon Chiu and Mr Gilbert Chong, instructed by Y.C. Lee, Pang & Kwok, for the Defendant | ||||||||||||||||||||
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