Wang Sheng v. Sin Yuk Ling

DCMP 760/2020

[2021] HKDC 1068

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO 760 OF 2020

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BETWEEN

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Before: Deputy District Judge Charles Wong in Court

Date of Hearing: 8 February 2021

Date of Judgement: 8 September 2021

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JUDGMENT

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INTRODUCTION

1.The Originating Summons dated 16 March 2020 concerns the failed sale and purchase of shares in the company, China Happy Corporation Limited (the “Company”), which owns a property known as Flat D, 20^th Floor of Tower 8, “LARVOTTO” No 8 Ap Lei Chau Praya Road, Hong Kong (“the Property”). The plaintiff, the purchaser, claims against the defendant, the vendor, for:-

(a) the return of the total deposit in the sum of HK$1,350,000 (the “Deposit”) paid under a provisional agreement for the sale and purchase; and

(b) liquidated damages in the sum of HK$1,350,000.

2.By counter notice filed on 10 July 2020, the defendant counterclaims for (i) an order that the Deposit, which is currently stake held by the defendant’s solicitors Messrs Kenneth C C Man & Co Solicitors (“KCCMC”), be forfeited by the defendant; and (ii) a declaration that the defendant is entitled to give a good receipt for the Deposit forfeited.

BACKGROUND

3.The Company is a holding company of the Property^[1]. The present dispute has arisen out of a transaction under the Provisional Sale and Purchase Agreement (“PSPA”) of the entire issued share capital of the Company.^[2] The only asset held by the Company was the Property, of which the defendant was the sole shareholder and director^[3].

4.The plaintiff and the defendant entered into the PSPA on 10 December 2019[4] to be completed on 25 February 2020 (“Completion Date”)[5]. The agreed consideration was HK$13.5 million.[6] The plaintiff duly paid the Deposit in the sum of HK$1.35 million.[7] Since then, the Deposit has been stake held by KCCMC as stakeholder.[8]

5.On about 8 January 2020, KCCMC delivered the title deeds and documents relating to the Property to the plaintiff’s solicitors, Messrs Terry Yeung & Lai, Solicitors (“TYL”) for due diligence investigation.[9]

6.The title deeds and documents showed that the Property was subject to a Legal Charge dated 10 December 2018[10] and the Legal Charge was registered in the Land Registry with Memorial No 18122100400070 (“Legal Charge”).[11]

7.The Legal Charge is a tripartite charge.[12] It was made between: (i) the Company as the mortgagor; (ii) Goodwill Incorporation Limited as the borrower (“Goodwill”); and (iii) OCBC, Wing Hang Bank Limited (“OCBC”) as the lender.

8.The Company charged the Property:-

“… as security for the due payment of all moneys payable or which may at any time hereafter or from time to time become payable by [Goodwill] to [OCBC] or which may be or become payable to [OCBC] by [the Company] or [Goodwill] under any of the agreements covenants and conditions contained in [the Legal Charge] and interest thereon”[13] (Emphasis added).

9.The land search shows that the Property was subject to a deed of assignment of rental income also dated 10 December 2018 in favour of OCBC and registered in the Land Registry with Memorial No 18122100400080.

TYL’s requisitions and correspondence between TYL and KCCMC

10.On 15 January 2020, TYL raised requisitions requesting the defendant to either (i) have the Legal Charge discharged by way of a receipt on discharge of a charge; or (ii) have the Property and the Company altogether released by way of a Deed of Release duly executed by OCBC.[14]

11.On 31 January 2020, KCCMC replied that on completion, a Deed of Release would be arranged to be executed by OCBC discharging/releasing the Property to the Company.[15] KCCMC remarked that:-

“… the release of [the Property] by [OCBC] to the Company by execution of the said Deed of Release in favour of the Company shall have the effect that [the Property] as well as the Company is released/discharged from all indebtedness and liabilities due and payable under [the Legal Charge] and [the Deed of Assignment of Rental Income].” (Emphasis added)

12.On 4 February 2020, TYL indicated its disagreement with KCCMC’s remarks and repeated its requisitions as stated on 15 January 2020.^[16] TYL also stated that it was inconceivable how the release of the said property by OCBC to the Company could have the effect of the Property as well as the Company being released/discharged from all indebtedness and liabilities due and payable under the Legal Charge and Assignment of Rental Income.

13.On 10 February 2020, KCCMC maintained its previous stance on 31 January 2020 and provided TYL with the following documents[17]:-

(1) KCCMC’s letter to OCBC dated 12 December 2019 in which they stated that “they [had] instructions … to redeem the [Property]”[18], and requested OCBC to “… send [KCCMC] the title deeds of [the Property] as soon as possible and for [KCCMC’s] preparation of the discharge and advise on the balance of principal and interest outstanding to release the existing charge in [OCBC’s] favour calculated up to 26 February 2020”;

(2) OCBC’s letter to KCCMC dated 7 January 2020^[19], whereby OCBC sent KCCMC the title deeds of the Property. OCBC also informed KCCMC that they would let KCCMC have the amount payable on redemption in due course; and

(3) A draft deed of release (“Draft Release”).^[20]

14.On 14 February 2020, TYL demanded the defendant to confirm on or before 20 February 2020 whether the defendant was willing and prepared to procure the discharge of the Legal Charge instead of merely releasing the Property from the Legal Charge. TYL stated that if the answer was in the negative, the plaintiff would have no alternative but to take the defendant to be in wrongful repudiation by having evinced an intention not to be bound by the PSPA, and the plaintiff would exercise his right to terminate the PSPA and claim loss and damages according to the PSPA.[21]

15.On 17 February 2020, KCCMC replied that the defendant was prepared, willing and able to procure the discharge of the Legal Charge. KCCMC nevertheless insisted on releasing the Property by executing a deed of release in the form of the Draft Release.^[22]

16.On 20 February 2020, TYL maintained its stance and on behalf of the plaintiff accepted the defendant’s repudiation and terminated the PSPA.^[23] The plaintiff demanded the defendant to return the Deposit on or before 24 February 2020 together with a sum of HK$1.35 million as liquidated damages in accordance with Clause 16(b) of the PSPA.

17.On 21 February 2020, KCCMC reiterated that it had complied with the defendant’s obligation under Clause 7 of the PSPA and further noted the repudiatory breach by the plaintiff in evincing a clear and definite intention to no longer complete the purchase of the Company’s shares and therefore had amounted to wrongful repudiation.^[24] KCCMC then demanded the plaintiff to complete the purchase at or before 1:00 pm on 25 February 2020 in accordance with the PSPA. Failing which, the defendant would exercise her rights in the PSPA.

18.On the same date, KCCMC by a second letter informed TYL that OCBC had advised that the amount of principal and interest payable on redemption is HK$7,738,402.64 (“Sum Payable on Redemption”).[25]

19.In TYL’s reply dated 24 February 2020, TYL once again emphasized that execution of a deed of release in the form of the Draft Release would only release the Property from the Legal Charge, and would not be a valid discharge of the Legal Charge.[26] Also, TYL reiterated the plaintiff’s demand for the return of the Deposit and liquidated damages.

20.On 25 February 2020, KCCMC gave notice to the plaintiff that the repudiation of the PSPA by the plaintiff was accepted by the defendant.[27] Accordingly, the defendant stated that she terminated the PSPA and forfeited the Deposit.

The issues

21.In gist, the plaintiff’s solicitors did not accept that the execution of the Draft Release would be a valid discharge of the Legal Charge for the purpose of the PSPA. The defendant’s solicitor, on the other hand, was adamant that the procurement of the execution of the Draft Release was adequate. Both parties allege the other side of committing repudiatory breach of the PSPA and thereby terminated the agreement.

22.The plaintiff commenced these proceedings seeking the return of the Deposit plus liquidated damages and the defendant seeks forfeiture of the Deposit paid by the plaintiff under the PSPA.

23.The affirmations before this Court include 1) the affirmation of the plaintiff; 2) the affirmation of the defendant and 3) the affirmation of Hung Chun Leung (filed for the plaintiff).

24.The dispute between the parties is narrowed down to the following issues:-

(a) whether the defendant is obligated to procure the discharge of the Company’s obligation under the Legal Charge under the PSPA.

(b) if the PSPA does provide for such obligation, whether the execution of a deed of release in the form of the Draft Release is a valid discharge of the Legal Charge for the purpose of the PSPA.

The relevant clauses of the PSPA

25.The following are the relevant clauses of the PSPA:-

“Clause 4: Completion is conditional upon the following:

(a) the Purchaser having completed his due diligence investigation on the business, financial, legal and all other aspects of the Company and reasonably satisfied with the results thereof;

(b) the Vendor, shall at the Vendor’s own cost, procure the Company to prove and give a good title to the Property in accordance with Sections 13 and 13A of the Conveyancing and Property Ordinance (Cap. 219 of the Laws of Hong Kong); and

all the representations, undertakings and warranties given by the Vendor under this [PSPA]…are and shall remain true, accurate, correct and complete and not misleading in all material respects up to the Completion.

If any of the forgoing conditions is not fulfilled (or not waived by the Purchaser) on or before the Completion Date, the Purchaser shall be entitled to cancel the transaction under this [PSPA] whereupon the Vendor shall return all the deposit paid to the Purchaser forthwith without interest costs or compensation…[28]

Clause 5: To facilitate the carrying out of the due diligence investigation by the Purchaser, the Vendor hereby undertakes to deliver to the Purchaser or the Purchaser’s solicitors all documents relating to the Company within 14 days from the date of this [PSPA]. The Purchaser shall carry out the due diligence investigation and raise requisitions to the Vendor or its solicitors within 21 days after the date of receipt of such documents delivered by the Vendor or its solicitors. The Vendor shall use its best endeavor to answer the requisitions and remedy the relevant problems.[29]

Clause 7: The Purchaser agrees that the Vendor may utilize the Balance of Purchase Price or part thereof to redeem the existing mortgage of the Property on completion. The Vendor shall procure repayment of all amounts owing by the Company under the existing mortgage (if any) on or before the Completion Date and shall procure the Vendor’s solicitors to undertake to deliver to the Purchaser’s solicitors a valid discharge in respect of the said mortgage (together with the ancillary documents and registration fees for registration of the same with the Land Registry and the Companies Registry) within 21 days from the Completion Date.[30] (Emphasis added)

Clause 16(a): Should the Purchaser fail to complete (other than due to default or breach of this [PSPA] on the part of the Vendor) the purchase in accordance with the terms of this [PSPA], the Vendor shall be entitled to forfeit the deposits paid absolutely as liquidated damages and terminate this [PSPA] and then sell the Sale Share and the Shareholders’/Directors’ Loan to anyone he thinks fit and the Vendor shall not take any action to claim against the Purchaser for any further liabilities and/or damages nor for specific performance of this [PSPA].[31]

Clause 16(b): Should the Vendor after receiving the deposits paid hereunder fail to complete (other than due to default or breach of this [PSPA] on the part of the Purchaser) the sale in accordance with the terms of this [PSPA], the Vendor shall immediately refund the deposits paid to the Purchaser and compensate the Purchaser with a sum equivalent to the amount of the deposits as liquidated damages and the Purchaser shall not take any further action to claim for damages or enforce specific performance.[32]

Clause 21: Unless otherwise specified herein, time shall in every respect be of the essence of this [PSPA].[33]

Clause 25: The Chinese version of this [PSPA] is for reference only and in case of any conflict between the English version and the Chinese version, the English version shall prevail.[34]” (Emphasis added)

(i) To utilize the balance of purchase price to redeem the Legal Charge on completion to redeem the existing mortgage of the Property on completion. D shall procure repayment of all amounts owing by the Company under the existing mortgage on or before the Completion Date and shall procure the Vendor’s solicitors to undertake to deliver to the Purchaser’s solicitors a valid discharge in respect of the said mortgage within 21 days from the Completion Date.; and

(ii) Clause 10(e) – The Defendant represents and warrants to the Plaintiff, and shall be deemed to have represented and warranted to the Plaintiff and the Company respectively on Completion, that the Company shall on completion have no outstanding borrowing or indebtedness (whether actual or contingent) other than the Shareholders’ Directors’ Loan (which shall be assigned to P or its nominee upon completion[35]. (Emphasis added)

The Legal Charge

26.It is not disputed that at the time of the PSPA, the Property and the Company are subject to a tripartite legal charge (“Legal Charge”)[36] dated 10 December 2018 by which the Company had mortgaged the Property to OCBC Wing Hang Bank (“OCBC”)[37].

27.The defendant was the sole director of Goodwill. She signed the Legal Charge for and on behalf of Goodwill.[38]

28.The relevant provisions of the Legal Charge are as follows:[39]-

“The Borrower through the Mortgagor has applied to the Lender to grant or continue to grant to the Borrower general banking facilities and the Lender has agreed to grant or continue to grant or consider granting or continuing to grant the same to such extent and upon and subject to such terms and conditions as the Lender shall at its absolute discretion from time to time think fit (hereinafter called “the Facilities”) and upon the Mortgagor and the Borrower entering into the covenants and obligations hereinafter contained and upon the Mortgagor charging the Property … as security for the due payment of all moneys payable or which may at any time hereafter or from time to time become payable by the Borrower to the Lender or which may be or become payable to the Lender by the Mortgagor or the Borrower under any of the agreements covenants and conditions contained in this Charge and interest thereon as hereinafter provided.” (Emphasis added)

Clause 1.01(xii):-

“ “Secured Indebtedness” means all sums from time to time advanced by the Lender to the Borrower and outstanding in respect of the Facilities and all interest thereon and all other moneys and obligations in respect of moneys which the Mortgagor and the Borrower covenant to pay to the Lender under the provisions of Clause 2 hereof and/or all sums of moneys or banking facilities from time to time advanced or granted by the Lender to the Mortgagor or to other persons at the request of the Mortgagor and all interest thereon or otherwise owing by the Mortgagor and/or the Borrower to the Lender under the terms of this Charge.”[40]

Clause 2 - Covenant for repayment.[41]

Clause 2.01 states:-

“In consideration of the Lender, at the request of the Mortgagor, agreeing to consider granting to or entering into with, or granting to or entering into with, or agreeing to grant to or enter into with, or continuing to grant to or enter into with, or agreeing to consider continuing to grant to or enter into with the Borrower the Facilities, or otherwise granting forbearance, indulgence or other accommodation or entering into any arrangement or transactions whatsoever to or for the account of, or at the request of, the Borrower, the Mortgagor and the Borrower HEREBY JOINTLY AND SEVERALLY COVENANT with the Lender that, subject as hereinafter provided, they will ON DEMAND, by notice in writing of the Lender made to the Mortgagor and/or the Borrower as hereinafter provided, PAY make good and discharge to the Lender all sums of moneys, obligations and liabilities, whether past, present or future, actual or contingent, which are now or may at any time hereafter be or become from time to time due, owing or incurred to the Lender anywhere by the Mortgagor and/or the Borrower (in each and every case, whether alone or jointly with any other person, in whatever style or form, and whether as principal or surety) including, but not limited to:-

(i) all sums of money which at the date of such demand may be outstanding and according to the books of the Lender, payable by the Mortgagor and/or the Borrower to the Lender in respect of any account whatsoever between the Borrower and the Lender; and

…

(viii) all principal, interest and any other moneys which are now or may from time to time become due and payable by the Borrower to the Lender in respect of any loan facility from time to time advanced by the Lender to the Borrower pursuant to the terms and conditions of any facility letter or any agreement between the Lender and the Borrower relating to such loan facility as amended or supplemented from time to time; and

…

(x) all costs, charges and expenses (including all legal expenses calculated on full indemnity basis) which may be incurred under or in connection with any other matter arising under or in consequence of this Charge or in connection with the Property; and

…

(xii) all moneys for the time being owing to the Lender in respect of any liability (whether contingent or otherwise) whatsoever of the Borrower to the Lender which may be incurred or arise in any manner howsoever, whether the actual conditions under which such liability may be incurred or arise have or have not been specifically mentioned and provided for by the agreements covenants and conditions in this Charge and whether such liability shall be a liability incurred or arising:-

(a) under circumstances or conditions incidental to any form of contractual relationship between the Borrower and the Lender which comes properly and strictly within the meaning of the term “general banking facilities”; or

(b) under circumstances or conditions incidental to any other form of contractual relationship whatsoever; or

(c) through the tort or fraud of the Borrower or of any of the Borrower's constituents, agents or correspondents and whether such tort or fraud shall be connected with or dependent upon, or unconnected with and independent of, any contractual relationship between the Borrower or of any of the Borrower's constituents, agents or correspondents, and the Lender…” (Emphasis added)

Clause 3[42] Charge of Property:-

“3.01 In consideration of the premises and with the object and intention of affording to the Lender a security for the Secured Indebtedness and the due fulfilment by the Mortgagor and the Borrower of the agreements covenants and conditions contained in this Charge:-

(i) (in so far as the Mortgagor's interest in the Property is a legal estate) the Mortgagor as Beneficial Owner HEREBY CHARGES by way of legal charge the Property to the Lender SUBJECT as is more particularly specified in the Schedule hereto and to and with the benefit of all rights, covenants, conditions and other incidents of tenure affecting the Property; …

SUBJECT nevertheless to the proviso for redemption hereinafter contained.

3.02 The charge herein contained shall be a legal charge in so far as the Property is a legal estate.” (Emphasis added)

Clause 4[43] Proviso for redemption:-

“4.01 If the Mortgagor and/or the Borrower shall on demand as aforesaid or otherwise pay to the Lender the Secured Indebtedness and shall have duly performed and observed all the terms covenants and agreements herein provided THEN THE LENDER SHALL at the request, cost and charge of the Mortgagor execute a receipt or otherwise discharge the security hereby constituted.” (Emphasis added)

Clause 16[44] PERSONAL LIABILITY

16.01 The obligations, responsibility and liability on the part of the Mortgagor and the Borrower under this Charge shall be personal to the Mortgagor and the Borrower and shall not be affected, diminished or prejudiced by the release, discharge, surrender, variation, substitution or dissipation of all or any part of the Property, or the terms and conditions under which it is held from the Government or other competent authority.

Clause 17 PARTIAL RELEASE

17.01 The Lender shall have absolute discretion in releasing or discharging the whole or any part of this security without receiving any payment or on payment of an amount less than the total amount of the Secured Indebtedness or the value of the security released or discharged. In any such event, the Mortgagor and the Borrower shall remain fully liable for the full Secured Indebtedness, or the balance thereof.”

The Analysis

29.Mr Chan, counsel for the defendant, submits that Clause 7 of the PSAP only provides that the defendant shall procure repayment of all monies owing by the Company on or before completion and procure “a valid discharge in respect of the mortgage together with the ancillary documents and registration fees for registration of the discharge with the Land Registry and the Companies Registry”. Thus, the defendant’s obligation under clause 7 of the PSAP is to repay the secured indebtedness for discharge of the Company’s liabilities and covenant to repay to OCBC secured under the mortgage and to obtain a release of the Property by the Deed of Release in the form drafted by the defendant’s solicitors.

30.Mr Chan further submits that the words “the said mortgage” under Clause 7 of the PSAP were followed by “(together with the ancillary documents and registration fees for registration of the same with the Land Registry and the Companies Registry)”. The entire clause 7 of PSAP was therefore dealing with the release of the Property from the mortgage and the subsequent steps to be taken at the Land Registry.

31.As to Clause 10(e) of the PSPA, Mr Chan submits that it was not meant to cover the entire Legal Charge under Clause 7 and if Clause 7 was meant to cover the entire Legal Charge, then there would not be any outstanding borrowing or indebtedness on the Completion Date when the Legal Charge is discharged. There would not be any need to insert Clause 10(e) as part of the representation/warranty. The arrangement of the PSPA also suggests that Clause 7 intended to deal with only the Property. Mr Chan further submits that it is noteworthy that the obligations and affairs in respect of the Company and its shares (as opposed to the Property) were contained in Clauses 8(a) to (o) of PSAP. If the parties intended for there to be an obligation to obtain a separate discharge for the Company, there is no explanation why there is no such express obligation stated in Clause 8.

32.The legal principles on the interpretation of contract were laid down by the Court of Final Appeal as per Ribeiro PJ and Lord Collins NPJ in Eminent Investments (Asia Pacific Ltd) v DIO Corp [2020] HKCFA 38, where it was stated at paragraphs 43 and 44 that the starting point is the ordinary and natural meaning of the words used, but textualism and contextualism need to be considered:-

“ It is a truism that the starting point is the ordinary and natural meaning of the words of the contract, and of course in the vast majority of cases that is the ending point also. But, as Ma CJ pointed out in Fully Profit (Asia) Ltd v Secretary for Justice, in more difficult cases it is not particularly helpful to refer to the ‘ordinary and natural meaning’ of words because in such cases there can be much debate over exactly what is the ordinary or natural meaning of words; and in those cases the surer guide to interpretation is context.

“ In Wood v Capita Insurance Services Ltd, Lord Hodge JSC reviewed the many cases on interpretation and emphasized that interpretation was a unitary exercise. That is why, where there are conflicting interpretations, account should be taken of the natural and ordinary meaning of the provision in question, the purpose of the contract and of the provision, other relevant provisions, the facts and circumstances known or assumed by the parties at the time that the contract was executed, the qualify of the drafting of the instrument, and commercial common sense.” (Emphasis added)

33.In Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279, Lord Hoffmann NPJ held at 296 D-I that:-

“The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well. Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended. In ordinary life people often express themselves infelicitously without leaving any doubt about what they meant. Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words. If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other. The court is not privy to the negotiation of the agreement - evidence of such negotiations is inadmissible - and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession. Or one of the parties may simply have made a bad bargain. The only escape from the language is an action for rectification, in which the previous negotiations can be examined. But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail.” (Emphasis added)

34.In the present case, the parties have entered an agreement for the sale and purchase of the Company with the property as its only asset. The purpose of this purchase, in the absence of evidence to the contrary, was clearly for the purchase of the Property as opposed to any business or other assets of the Company. It makes perfect commercial sense for the purchaser to expect the Company to be free of all liabilities by the time of the Completion Date. The clauses of the PSAP, for instance, Clause 10(e) shows that the plaintiff intended to purchase and the defendant agreed to sell the Company to the plaintiff free of all liabilities.

35.The Legal Charge was the only instrument for the charge of the Property to OCBC. There is no separate mortgage deed of the Property. The Company in this case was not a borrower but it had a mortgage over the Property to secure the general banking facilities and Goodwill’s indebtedness. To facilitate this commercial transaction, it was therefore in my judgment essential that the defendant would sell the Company free of any borrowings or indebtedness.

36.In Dragon Access Holdings Limited v Lo Chu Hung [2020] HKCFI 2895 Acme Development had executed a mortgage over its property in favour of Bank of China (“BOC Mortgage”) to secure the indebtedness of Telecom Generation Company Limited (“Telecom”), which was another company controlled by the defendant. The exact amount of indebtedness was not stated in the BOC Mortgage but was contained in a facility letter (“BOC Facility Letter”)[45]. Clause 10(e) (i) in that case[46] is almost identical to that of Clause 10(e) of the PSPA in the present case. On the completion date, the defendant’s solicitors 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. The defendant’s solicitors undertook that Bank of China would sign the form of discharge within 21 days of completion. The Court found that it was not clear from the draft form of discharge if Acme Development would still owe money to BOC, and how much, after the BOC Mortgage was discharged.

37.Accordingly, Hon Au-Yeung J found that the liability of Acme Development under the BOC Mortgage was prima facie contrary to the defendant’s representation under, inter alia, Clause 10(e) (i) of the Provisional Sale and Purchase Agreement in that case that the company had “no outstanding borrowing or indebtedness (whether actual or contingent)” other than the relevant shareholder’s loan (of the Judgment).

38.The defendant submits that the Dragon Access case is distinguishable as it was not stated anywhere in the judgment that any step was taken by the defendant therein to ascertain the outstanding sum owed to BOC. Further, the court made these observations for, according to the audited financial statements, the Company owed the defendant and other creditors money and the defendant’s proposals to resolve the problems were not communicated to the plaintiff and remedied before the completion date.

39.Clause 5 of the PSAP in the present case is similar to Clause 5 contained in the Dragon Access case. The effect of Clause 5 was well summarized by Hon Au Yeung J at 18:-

“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 the 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.”

40.The defendant in that case was found to be in breach of Clause 5 of the Provisional Sale and Purchase Agreement in failing to remedy the Company’s liabilities to BOC.

41.In my Judgment it is crucial that the defendant satisfies the plaintiff that the Company was free from liability by the time of the Completion Date. I agree entirely with the judgment of Hon Au-Yeung J and I find that it was the obligation of the defendant as seller to procure discharge of the Company’s obligation under the Legal Charge pursuant to the PSPA.

42.Clause 7 makes reference to the phrase “the existing mortgage”. Mr Lo, counsel for the plaintiff, submits that this phrase is to be construed to cover the entire Legal Charge, and not just the charging provision in respect of the Property under Clause 3.[47] This is particularly so because the charging provision itself creates no liability to repay any monetary sum. Instead, it is other provisions of the Legal Charge, particularly the covenants to repay under Clause 2.01 that create such repayment obligations. This is reinforced by the warranty given by the defendant under Clause 10(e) of the PSAP that “the Company shall on completion have no outstanding borrowing or indebtedness (whether actual or contingent)…”. In particular, given the presence of other provisions under the Legal Charge imposing various liabilities on the Company (apart from Clause 3), the entire Legal Charge must be discharged in order for Clause 10(e) to be complied with. I accept Mr Lo’s submission and find this to be a reasonable interpretation of the phrase.

The Draft Release

43.It is stated in the Draft Release[48] that:-

“NOW THIS DEED WITNESSETH that the Lender hereby:-

(i) DISCHARGES [the Property]; and/or (as the circumstances require)

(ii) ASSIGNS as mortgagee unto the Mortgagor the said [the Property] TO HOLD the same unto the Mortgagor absolutely or (as the case may be) for the residue(s) of the term(s) of years created by the Government Lease, as referred to in the relevant Schedule to the said Deed subject as therein mentioned; and/or (as the circumstances require)

(iii) RELEASES AND ASSIGNS as mortgagee unto the Mortgagor all rights and benefits of and relating to [the Property] charged or assigned unto the Lender under the said Deed TO HOLD the same unto the Mortgagor absolutely

Freed and absolutely discharged of and from [the Legal Charge] and of and from all principal, interest and other monies thereby secured and all claims and demands for or in respect of the same or in anywise relating thereto…” (Emphasis added)

44.OCBC and the Company are the only two parties to the Draft Release.[49] Goodwill is not a party to the Draft Release. As the Legal Charge involves three parties[50], execution of a deed of release in the form of the Draft Release does not have the effect of discharging the whole tripartite Legal Charge.

45.Further, the execution of a deed of release in the form of the Draft Release only has the effect of discharging and/or releasing the Property to the Company.

46.Under Clause 2.01 of the Legal Charge, The Company’s covenant for repayment and its obligation subsists irrespective of the release/discharge of the Property, the covenant.[51]

47.Under Clause 16 of the Legal Charge, the Company’s obligations, responsibility and liability as the Mortgagor are personal, and would not be affected, diminished or prejudiced by the release/discharge of the Property.

48.Under Clause 17 of the Legal Charge[52], OCBC shall have absolute discretion in releasing/discharging the Property even without receiving any payment or on payment of an amount less than the total amount of the Secured Indebtedness. Under such circumstances, the Company shall remain fully liable for the full Secured Indebtedness, or any balance thereof.

49.It follows that under Clauses 2.01, 16 and 17 of the Legal Charge, despite the release of the Property, the Company is still bound by the Legal Charge. In the event that subsequent to the release of the Property, the Company and/or Goodwill still owed money to OCBC, the Company shall remain fully liable for the unpaid amount.[53]

50.The defendant submits that on the Completion Date there would not be any outstanding liability (actual or contingent) for the reason that:-

(1) the defendant had ascertained from OCBC all of the sums that had to be paid under the Legal Charge to fully redeem the Property as provided under the defendant’s Solicitors’ letter on 21 February 2020.[54]

(2) Clause 4.01[55] of the Legal Charge provides that a receipt or discharge of the Property would only be provided if the “Secured Indebtedness” were paid and all the terms and covenants have been performed by the defendant or the Borrower; and

(3) The amount stated by OCBC to be owing is conclusive under Clause 19.01 of the Legal Charge[56]. Hence, it is submitted on behalf of the defendant that the amount outstanding as informed by OCBC to the defendant at HK$7,738,402.64 (“Outstanding Sum”) is the conclusive evidence of all the sums that would be outstanding on the Completion Date. Once the Outstanding Sum is paid off on the Completion Date, the outstanding balance would be zero. There would not be any outstanding liability (actual or contingent) under the Legal Charge to be paid off by the Company.

No documentary proof from OCBC of full redemption amount of the mortgage

51.The defendant may well have indicated that they had ascertained from OCBC that the amount of principal and interest payable would be HK$7,738,402.64 to fully redeem the Property as provided under KCCMC’s letter on 21 February 2020. Nevertheless, KCCMC did not disclose any letter from OCBC confirming this assertion. This is a rather unusual feature as there must have been some communication in writing between KCCMC and OCBC on this subject to enable KCCMC to make that assertion. No reasonable explanation was proffered for the absence of such written confirmation from OCBC. In my judgment, it was clearly the obligation of the seller to satisfy the purchaser by providing documentary proof of what was asserted in regard to the amount of principal and interest payable.

52.The Draft Release in the present case contains no provision as to OCBC’s acknowledgement of receipt of all moneys secured by the Legal Charge. I find that in the absence of documentary confirmation from OCBC on the full discharge of indebtedness of the company, it remains uncertain as to whether the Company and Goodwill would still owe money to OCBC despite the charge over the Property is released.

53.Further, there are no documents to confirm that the Sum Payable on Redemption is equivalent to the Secured Indebtedness owed by the Company and/or Goodwill to OCBC up to 26 February 2020. In OCBC’s letter to KCCMC dated 7 January 2020[57], OCBC only informed KCCMC that it would let KCCMC have “the amount payable on redemption in due course”. In light of Clause 17 of the Legal Charge, this sum may not necessarily cover the whole Secured Indebtedness owed by the Company and/or Goodwill. The plaintiff is not assured that the Company was under no contingent borrowing or indebtedness on completion. The discharge of the Property is simply not equivalent to a discharge of the Tripartite Legal Charge. I reject the defendant’s submission as stated in paragraph 50 hereinabove.

54.In my judgment, the defendant ought to have had the Legal Charge discharged by way of a Receipt on Discharge of the Charge; or to have both the Company and the Property discharged and released from the Legal Charge.

55.I accordingly find that the Draft Release did not and would not release and/or discharge the Company from all borrowings and indebtedness (actual or contingent) under the Legal Charge. The Company could remain subject to actual or contingent borrowings and indebtedness. It follows that the execution of a deed of release in the form of the Draft Release cannot be a valid discharge of the Legal Charge for the purpose of the PSPA. Accordingly, I find the defendant in breach of Clause 5 of the PSPA.

The Anticipatory Breach

56.The defendant argues that in the event that the court find the defendant to have breached Clause 10(e), this would at best allow the plaintiff to terminate pursuant to Clause 4(c) of the PSPA. The consequence for termination on such ground only provided for the return of the Deposit without any payment of liquidated damages.

57.Insofar as such consequence under Clause 4 is in conflict with Clause 16(b) of the PSPA, the defendant submits that Clause 4 should prevail. It is trite that where a contract contains general provisions and specific provisions, the specific provisions will have greater weight than the general provisions where the facts fall within the scope of the special provision.[58] As Clause 4 specifically refers to and deals with the representations made by the defendant (under Clause 10) whereas Clause 16 concerns the PSPA in general, Clause 4 would prevail in the event of conflict.

58.In the Court of Appeal case of Chao Keh Lung v Don Xia [2004] 2 HKLRD 11, Cheung JA succinctly summarized the legal principles in relation to anticipatory breach at 16H-18D, §26 as follows:-

“It is sufficient for the purpose of this appeal to state the following principles on renunciation, impossibility of performance and anticipatory breach.

(1) A renunciation of a contract occurs when one party by words or conduct evinces an intention not to perform, or expressly declares that he is or will be unable to perform his obligations under the contract in some essential respect.

(2) The renunciation may occur before (an anticipatory breach) or at the time fixed for performance (actual breach). An absolute refusal by one party to perform his side of the contract will entitle the other party to treat himself as discharged, as will also a clear and unambiguous assertion by one party that he will be unable to perform when the time for performance should arrive.

(3) Short of such an express refusal or declaration, however, the test is to ascertain whether the action or actions of the party in default are such as to lead a reasonable person to conclude that he no longer intends to be bound by its provisions.

Chitty on Contract: 28th Ed. Vol. 1 para. 25-017.

(4) If, before the time arrives at which a party is bound to perform a contract, he expresses an intention to break it, or acts in such a way as to lead a reasonable person to the conclusion that he does not intend to fulfil his part, this constitutes an “anticipatory breach” of the contract: Chitty, para. 25-020….” (Emphasis added)

59.For reasons stated, I find that the undertaking to be given by KCCMC would only be amount to an undertaking to deliver to TYL a discharge/release of the Property within 21 days from completion as opposed to a valid discharge of the Legal Charge within 21 days from completion. It was reasonable for the plaintiff to conclude on 20 February 2020 that the defendant did not intend to be bound by her contractual obligations under Clause 7, namely to procure KCCMC to undertake on completion to deliver to TYL a valid discharge of the Legal Charge within 21 days from the Completion Date.

60.Further, under Clause 10(e) of the PSPA, the defendant represented and warranted to the plaintiff that the Company shall on completion have no outstanding borrowing or indebtedness (whether actual or contingent) other than the Shareholders’/Directors’ Loan. By insisting on the execution of a deed of release in the form of the Draft Release only, it was apparent that even on 20 February 2020, on completion of the transaction, the Company may still have actual and/or contingent liabilities to OCBC. The defendant thus did not intend to be bound by the representation and warranty under Clause 10(e) of the PSPA and have committed an anticipatory breach of Clause 10(e) of the PSPA.

61.In the Dragon Access case, the defendant also sought to argue that under Clause 4(4) the plaintiff was entitled to cancel the transaction and return the deposit and if the plaintiff was not satisfied with the due diligence investigation and/or that the 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).[59] The court held that the defendant was in breach of Clause 5 and must pay the compensation.[60]

62.For reasons stated and as a result of the breaches, in particular Clause 5 and 10(e), I find that the plaintiff is entitled to invoke Clause 16(b). Pursuant to Clause 16(b) of the PSPA, the defendant should return to the plaintiff the Deposit paid, and compensate the plaintiff with a sum equivalent to the amount of the Deposit at HK$1.35 million.

Orders

(1) The defendant shall return to the plaintiff the total deposit in the sum of HK$1,350,000.00;

(2) The defendant shall pay the plaintiff liquidated damages in the sum of HK$1,350,000.00;

(3) The defendant do pay the plaintiff interest on the sum of HK$2,700,000.00 at HSBC HKD prime rate plus 1% pa from 25 February 2020 until judgment and thereafter at judgment rate until full payment;

(4) The defendant’s Counter Notice filed on 17 July 2020 be dismissed; and

(5) The costs of this action be paid by the defendant on a nisi basis to be taxed if not agreed, with certificate for two counsel for the hearing on 8 February 2021.

63.I thank counsel for their assistance.

Mr Benny Lo and Mr Victor Chan, instructed by Terry Yeung & Lai, for the plaintiff

Mr Avery Chan, instructed by Kenneth C C Man & Co, for the defendant