China Ludao Technology Co Ltd and Another v. Perfect Century Group Ltd

HCA 1856/2020

[2021] HKCFI 3855

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1856 OF 2020

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BETWEEN

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REASONS FOR DECISION

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INTRODUCTION

1.The Plaintiffs, by a summons dated 10 November 2021, apply for default judgment against the Defendant.

2.The relevant facts as set out in the Statement of Claim (“SOC”)  are:  

(a)  The Plaintiffs entered into a sale and purchase agreement on 29 November 2017 (“Agreement”)  in respect of the shareholding of Ever Clever Group Limited with D (“Target Company”): see SOC at §2.

(b)  Under the Agreement (which was varied by two supplemental agreements), the 2^nd Plaintiff agreed to purchase and the Defendant agreed to sell 25% of the shares in the Target Company for a consideration of RMB 160 million (“Consideration”): see SOC at §§3-4.

(c)  On top of a cash payment of RMB 112 million, the rest of the Consideration was paid via the issue of the 1^st Plaintiff’s shares and convertible bonds (“CBs”)  equivalent to RMB 16 million and RMB 32 million respectively: see SOC at §6.

(d)  The Plaintiffs duly discharged their obligations under the Agreement and paid the Consideration in full in accordance with the terms of the Agreement: see SOC at §14.

(e)  The Target Company holds a 80% equity interest in Huailai Xian Hengji Heat Supply Limited Company (“HGRL”), a company incorporated in the PRC: see SOC at §1(e).

(f)  Under the Agreement:-

(i)  The Defendant guaranteed to the Plaintiffs that the audited net profit after tax of HGRL for each of the three twelve-month periods ending 31 March 2018, 2019 and 2020 shall not be less than the set amounts (“Profit Guarantees”): see SOC at §7.

(ii)  The Defendant is also under an obligation to procure HGRL to complete the audit of HGRL within 90 days from the end of each of the said twelve month periods and submit the audited financial statements to Ps: see SOC at §8.

(iii)  If HGRL’s profits do not meet the levels stipulated under the Profit Guarantees, the Defendant shall pay the 2^nd Plaintiff amounts calculated by reference to the shortfall multiplied by a factor of 14.5 (“Profit Compensation”): see SOC at §§9, 10, 11.

(iv)  The Plaintiffs have the absolute discretion to choose between various forms of compensation including but not limited to the cancellation of the CBs issued by the 1^st Plaintiff to the Defendant: see SOC at §§9(c)(iii), 10(c)(iii), 11(c)(iii), and 12.

(g)  In breach of the Agreement, the Defendant has failed and/or refused to procure HGRL to deliver to the Plaintiffs the audited financial statements of HGRL in respect of each of the three twelve-month periods ending respectively 31 March 2018, 2019 and 2020: see SOC at §15.

(h)  The Plaintiffs were and still are unable to assess whether the Profit Guarantees have been met and the amount of compensation which the Defendant is liable to pay by reason of the Defendant’s failure to provide the audited financial statements of HGRL: see SOC at §§16-17.

(i)  Thus, the Plaintiffs claim for, inter alia, an order for specific performance that the Defendant deliver up the relevant audited financial statements of HGRL, a sum representing the compensation payable under the Agreement (calculated on the basis that HGRL was not profitable during the relevant periods), and a declaration that the Plaintiffs are entitled to cancel the CBs to the extent of any sums awarded to them.

3.The Plaintiffs have served the writ together with the SOC on the Defendant on 12 January 2021 pursuant to Master Dick Ho’s order dated 16 December 2020.

4.However, as of this day, the Defendant has not acknowledged service and/or filed any defence and did not take any steps in this action.  In the circumstances, the Plaintiffs now seek to enter default judgment against the Defendant.

APPLICABLE LEGAL PRINCIPLES

Legal Principles relevant to a default judgment application

5.In an application for judgment in default of defence, the Court will assume that the SOC has been impliedly admitted and will give judgment according to the SOC alone without receiving any evidence: see Wu Ka v Wu Kuo Cheng [2003] 3 HKLRD 658 at §6 per Deputy Judge Wong SC.

6.The Court’s practice in relation to the grant of declaratory relief in a default judgment application is summarised under Hong Kong Civil Procedure (2022), §19/7/20:-

(a)  It is not the normal practice of the Court to make a declaration without a trial, particularly where the declaration is that the defendant in default of defence has acted fraudulently.

(b)  However, this is only a rule of practice which should not be followed when the plaintiff has a genuine need for the declaratory relief and justice will not be done if such relief are denied.

(c)  Where declaratory relief is sought, the Court will scrutinise the application for default judgment carefully and does not hastily grant the relief sought.

(d)  The declaratory relief to be granted should not be in terms wider than what the plaintiffs are entitled to and what is necessary to do justice to them.

Analysis

7.The main reliefs sought are (i) an order for specific performance that the Defendant deliver up the relevant audited financial statements of HGRL, (ii) a sum representing the compensation payable under the Agreement (calculated on the basis that HGRL was not profitable during the relevant periods), and (iii) a declaration that the Plaintiffs are entitled to cancel the CBs to the extent of any sums awarded in their favour. 

8.I am of the view that an order should be made in favour of the Plaintiffs in terms of the draft orders as submitted to this Court save and except that no order should be made in terms of paragraph 3(3)  and 5 on the basis that the Court will not make an order which is academic. I now give my reasons.

9.First, I am of the view that the Plaintiffs are entitled to have the audited financial statements of HGRL for each of the three twelve-month periods ending 31 March 2018, 31 March 2019 and 31 March 2020 under Clause 6.2 of the Agreement.  They have a contractual right to the same.  There is no strong reason why the same should not be delivered to the Plaintiffs.

10.The relevant principles in relation to specific performance was set out in Pacific Harbor Advisors Pte Ltd v Winson Federal Ltd, unreported HCA 1257/2013, 19 November 2015 at §§55-59, per DHCJ R Ismail SC at §§55-59:-

(a)  The elements for the relief of specific performance are (a)  that there is a complete, binding and valid contract (b)  that the contractual terms are sufficiently certain and (c)  that damages are not an adequate remedy.

(b)  There has been a growing tendency by the courts not to treat the adequacy of damages as a necessary threshold to surpass, but rather to ask the ultimate question of whether it would be more just to grant specific performance than to award damages.

(c)  Where there is a risk that the defendant will be unable to satisfy an order for damages (e.g. the defendant has an unknown financial status), that would in and of itself be enough to justify the conclusion that damages are inadequate.

11.Applying the above principles to the facts of the present case, I am of the view that:-

(a)  There is a complete, binding and valid contract between the Plaintiffs and the Defendant in the form of the Agreement.  Further, the Defendant is under a specific obligation under Clause 6.2 of the Agreement to procure the completion of the audit of the relevant financial statements and to submit the same to the Plaintiffs.

(b)  The Plaintiffs have an indirect interest in HGRL by reason of their 25% interest in the Target Company.  They plainly have an interest to obtain a copy of the relevant audited financial statements of HGRL so that they can understand how HGRL is doing financially.

(c)  It is also difficult to put a monetary value on the Defendant’s obligation under Clause 6.2 of the Agreement to procure the completion of the audit of the relevant financial statements and to submit the said financial statements to the Plaintiffs.

12.There is nothing objectionable to order the Defendant to perform its contractual obligations.

13.Secondly, the 2^nd Plaintiff seeks a liquidated sum representing the compensation payable (calculated on the basis that HGRL was not profitable during the relevant periods).

14.I note the Plaintiffs’ case that the Defendant has failed and/or refused to procure HGRL to deliver to the Plaintiffs the relevant audited financial statements of HGRL such that it is difficult for the Plaintiffs to know precisely whether the Profit Guarantees have been met and, if so, the amount of compensation which the Defendant is liable to pay under the Agreement.

15.Nonetheless, the 2^nd Plaintiff does claim a sum in the amount of the Cash Compensation payable by the Defendant representing the profit compensation in respect of the years ended 31 March 2018, 31 March 2019 and 31 March 2020 under Clauses 6.3.2, 6.4.2 and 6.5.2 of the Agreement.   

16.Mr Tai for the Plaintiffs referred this Court to the case of Armory v Delamirie (1722)  1 Str 505.  Mr Tai submitted that if a claimant’s proof has been made more difficult by the defendant’s wrong, the principle “raises an evidential presumption in favour of the claimant which gives him the benefit of any relevant doubt”: see Chitty on Contracts (34^th Edn)  at §29-019, Footnote 118; Fearns v Anglo-Dutch Paint & Chemical Co Ltd [2010] EWHC 1708 (Ch)  at §70 per G Leggatt QC (as he then was);  Morris-Garner v One Step (Support)  Ltd [2018] UKSC 20 at §38 per Lord Reed.

17.Mr Tai for the Plaintiffs submitted that in light of the Defendant’s repeated failure to procedure the relevant audited financial statements of HGRL, this Court is entitled to resolve this uncertainty against the Defendant and to proceed on the basis that HGRL did not make any profit for the years ended 31 March 2018, 31 March 2019 and 31 March 2020.  Mr Tai’s point is that if the Defendant has reached the contractual profit targets, the Defendant would have voluntarily disclosed the relevant financial statements. Its failure to do so points to the fact that the relevant profit targets have not been reached. I agree.

18.Hence, I am of the view that the 2^nd Plaintiff is entitled to claim the sums of:-

(a)  RMB 797.5 million[1], calculated by reference to the formula under Clause 6.3.2 of the Agreement, which represents the 1^st Year Profit Compensation as defined at §9(b)  of the SOC.

(b)  RMB 942.5 million[2], calculated by reference to the formula under Clause 6.4.2 of the Agreement, which represents the 2^nd Year Profit Compensation as defined at §10(b)  of the SOC.

(c)  RMB 1087.5 million[3], calculated by reference to the formula under 6.5.2 of the Agreement, which represents the 3^rd Year Profit Compensation as defined at §11(b)  of the SOC.

19.Thirdly, the Plaintiffs seek a declaration that they are entitled to cancel and avoid and/or procure the cancellation and avoidance of the CBs to the extent of any sums and/or damages awarded in their favour.

20.It is explained in the 3^rd Affirmation of Ho Ka Wai dated 14 December 2021 that the 1^st Plaintiff was informed by its auditors that they would only accept the cancellation of the CBs if there was a court order to that effect.  Accordingly, without a court order, the auditors would not remove the references to the CBs from the financial statements of the 1^st Plaintiff.

21.This Court is agreeable to render assistance so that clarity can be provided to the 1^st Plaintiff’s auditors and will enable any set off of the CBs issued to the Defendant to be properly reflected in the 1^st Plaintiff’s financial statements.  I agree that this is of material importance to the 1^st Plaintiff as it is a company listed on the Main Board of the Stock Exchange of Hong Kong Limited.

SERVICE

22.Mr Tai also submitted that given that the Defendant has not acknowledged service, strictly speaking, the Summons does not have to be served on the Defendant by reason of RHC O.65, r.9.  Out of an abundance of caution, the Plaintiffs served the Summons on the Defendant at its registered office in the British Virgin Islands. However, leave of this Court is required before the Summons could be served on the Defendant out of jurisdiction under RHC O.11, r.9(4). 

23.In the circumstances, Mr Tai for the Plaintiffs invited this Court to grant retrospective leave for the service of the Summons and all other or further documents of these proceedings on the Defendant at its registered address or elsewhere in the British Virgin Islands: see e.g. Re Dragon Concept HK Ltd [2020] HKCFI 2535 at §2 per G Lam J (as he then was); Sham Wai Bun v Net Effect Limited [2021] HKCFI 2409 at §12 per DHCJ Raymond Leung SC; Hong Kong Civil Procedure (2022)  at §11/9/13.

DISPOSITION

24.For all the reasons stated above, I made an order in terms of the draft orders as submitted to this Court save and except that this Court does not find it necessary to grant any order in relation to any damages to be assessed as Mr Tai quite rightly submitted that the same will be rather academic.

25.I also make an order that the Plaintiff is entitled to costs of and occasioned by this application and the same is to be taxed on party to party basis if the parties cannot reach any agreement.

26.Finally, it remains for this Court to thank Mr Tai for the Plaintiffs for his helpful assistance.

Mr Terrence Tai, instructed by Ma Tang & Co., for the Plaintiffs

The Defendant was not represented and did not appear