Re R.E. Daver & Co Ltd (in Liquidation)

HCCW 23/2021

[2023] HKCFI 1657

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) PROCEEDINGS NO 23 OF 2021

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JUDGMENT

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1.This is an ex parte application by the Liquidators of the Company for the Court’s sanction of an alleged compromise said to have been reached with Southern Height Enterprises Ltd (“Southern”) and TSK Enterprises Ltd (“TSK”) and to accept the offer of Southern and TSK to purchase the Company’s 1/3 share (held indirectly by the Company) of 24/F, Fortis Tower, 77-79 Gloucester Road, Wanchai, Hong Kong (“Property”) at the price of HK$25,000,000.

2.The Company was incorporated in the BVI and was wound up on 14 April 2021 upon the petition of one of its 2 shareholders viz Mandil Ltd on the ground that it was carrying on business only for the purpose of winding up its affairs. It is said to be solvent.

3.The Company is one of the three shareholders of Tri-Union Management Limited (“TMC”), holding 33.33% of its shares. Southern and TSK are the remaining two shareholders of TMC. TMC owns all the shares in DCK Property Investment Limited (“DCK”). DCK in turn owns the Property and three car parking spaces.

4.In early 2022, the Liquidators, Southern and TSK held several meetings to discuss the partition of the Property into 3 portions for distribution to the 3 shareholders of TMC. However, the Contemplated Partition did not materialise. The Liquidators said Southern and TSK were to blame and subsequently obtained leave to commence legal proceedings in the name and on behalf of the Company against Southern, TSK and TMC.

5.To cut the long story short, on 29 December 2022, by a letter marked “WITHOUT PREJUDICE AND SUBJECT TO CONTRACT” to Raymond Siu & Lawyers (“RSL”), solicitors acting for the Company, Messrs. T.H. Koo & Associates (“THK”), solicitors for Southern and TSK, stated that:

“As promised, we are instructed to set out below our clients’ proposal on the splitting of [the Property]…

…

As an alternative to the above, our client’s offer to pay a sum of HK$25,000,000 for your client’s 1/3 share of [the Property] remains on the table for your client’s consideration, and shall be open for acceptance within the next 14 days.” (emphasis added)

6.The part emphasised is described by Mr Ng as the “Offer”.

7.By letter dated 11 January 2023 marked “Subject to Contract”, RSL, having taken instructions from the 2 contributories, wrote back to THK. In that letter, RSL stated:

“We refer to your without prejudice letter dated 29^th December 2022. We are pleased to confirm by return that the Company accepts the offer stated in your said letter for your clients to pay HK$25,000,000 for buying out of the 1/3^rd share of 24^th Floor, Fortis Tower of the Company, with the terms of the agreement and payment to be completed within the next 3 months from the date hereof (i.e. 11^th April 2023) and subject to an order of leave being granted by the Court pursuant to Section 199 and Part 1 of Schedule 25 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32).

…

Since DCK holds both the Fortis Property and the 3 Car Parking Spaces, the settlement of the Company’s stake in DCK should encompass the resolution of both the Fortis Property and the 3 Car Parking Spaces.

Since the 3 Car Parking Spaces can be readily distributed to the 3 shareholders, we are instructed to propose that each shareholder be distributed one car parking space. 1 of the 3 Car Parking Spaces will be assigned to the Company (or person or company designated by the Company)…”(emphasis added)

8.In his skeleton, Mr Ng submits that letter constituted “Acceptance” of the Offer, notwithstanding the addition of a term regarding a carparking space in it.

9.On 15 February 2023, THK wrote back to RSL again marked “WITHOUT PREJUDICE AND SUBJECT TO CONTRACT”. The first 2 paras stated:

“We refer to your “Subject to Contract” letter dated 11^th January 2023, upon which we have taken our clients’ instructions…

We are afraid your client’s proposal is not acceptable to our clients. Instead, our client proposes to buy out RED BVI’s[1] 1/3 shareholdings of and in DCK Properties Investment Ltd. (“DCK”) for the price of HK$25,000,000, upon acceptance of which your client shall have no interest or claim in any of the assets held by DCK, including 24/F Fortis Bank Tower and the three carparking spaces it holds…”

10.Mr Ng describes the above as the “New Offer”.

11.Then by letter dated 17 February 2023 again marked “Subject to Contract”, RSL wrote back to THK. In that letter, RSL stated:

“We have to highlight that an assignment of one of the 3 Car Parking Spaces to our client mentioned in our letter dated 11^th January 2023 is not a condition of our client’s acceptance of your clients’ offer of buying out RED BVI’s one-third share of 24^th Floor of Fortis Tower.

We put on record that your clients’ offer of buying out our client’s one-third share of 24^th Floor of Fortis Tower at HK$25,000,000 remained open for our client’s acceptance within the next 14 days from 29^th December 2022 (“Binding Offer”). On 11^th January 2023, which fell within the next 14 days from 29^th December 2022, our client expressly accepted your clients’ Binding Offer via our letter, without attaching any condition.”

12.At para 14.2 of Mr Ng’s skeleton, he describes the above letter as constituting a “Binding Agreement”. As para 15 of his skeleton, Mr Ng submits it is the terms of the Binding Agreement i.e. Southern and TSK to pay a sum of HK$25,000,000 for the Company’s 1/3 share of the Property which the Liquidators are now seeking the Court’s sanction.

13.While that may well be the stance of the Liquidators and RSL, THK obviously disagreed. By their letter dated 23 February 2023 again marked “WITHOUT PREJUDICE AND SUBJECT TO CONTRACT”, the 1^st 3 paras said this:

“We refer to your “Subject to Contract” letter dated 17^th February 2023. While your said letter made no reference to our “Without Prejudice and Subject to Contract” letter dated 15^th February 2023, the timing and contents of your said letter appeared to be a response to it. In case we are mistaken, a copy of our “Without Prejudice and Subject to Contract” letter dated 15^th February 2023 (with fax result report) is attached for your reference.

With respect, your said letter displays a fundamental disregard of the established principles governing negotiations subject to contract.

It is beyond dispute that all the letters issued by our firm since 29^th December 2022 were qualified to be “Without Prejudice and Subject to Contract” and that all the letters issued by you, including the latest one dated 17^th February 2023, were marked “Subject to Contract”.

Your client ought to have been advised that it is settled law that the effect of the words “subject to contract” is that the matter remains in negotiation until a formal contract is executed.”

14.On 28 February 2023, RSL issued a letter to THK with authorities to make the point inter alia that “the mere fact that the words ‘subject to contract’ are used is not conclusive of whether a binding agreement had been reached.”

15.Further correspondence was exchanged between the solicitors but they do not add anything useful for the present purpose.

16.As submitted by Mr Ng in Court, the Liquidators rely on Section 199 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance and Schedule 25, Part 1 para 3 (a)(ii) as the legal basis of the application.[2] Schedule 25, Part 1 para 3 (a)(ii) reads:

“To—

(a) compromise, on such terms as are agreed—

(ii) questions in any way relating to or affecting the assets or the winding up of the company…”

17.It is clear from para 3(a)(ii) that there are 2 pre-requisites: firstly, there must be a compromise on terms which are agreed; and secondly, there are questions relating to or affecting the assets or the winding up of the company. Mr Ng confirms to this court he is relying on the existence of questions relating to the assets of the Company ie the Property.

18.In this court’s view, the application is misconceived as there are at least 2 major problems associated with it.

19.First, the Property is not an asset of the Company, it is an asset of DCK. The Liquidators appear to be under the impression that because the Company is a 1/3 shareholder of TMC, TMC is the 100% shareholder of DCK and DCK owns the Property, the Company therefore indirectly owns 1/3 of the Property. That may be understandable from a layman’s point of view but it is legally untenable.

20.It is trite law that a shareholder does not legally or beneficially own the company’s assets: Macaura v Northern Assurance Company Ltd [1925] AC 619. As stated by Lord Buckmaster at p 626-7:

“…Now, no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up.”

21.What that means is that the Company, as shareholder of TMC, does not even own TMC’s asset ie DCK, let alone DCK’s assets. If so, there are no questions relating to the assets of the Company to speak of. But in any event, it is difficult to see as a matter of law how the Company on the one hand and Southern and TSK on the other could have reached a binding agreement for the purchase of something ie the Property which the Company did not own.

22.Second, and more importantly, it is obvious from the correspondence quoted above that there is no Binding Agreement as described by Mr Ng.

23.As stated by THK in their letter dated 23 February 2023, all the relevant correspondence between THK and RSL up to that point was marked either “WITHOUT PREJUDICE AND SUBJECT TO CONTRACT” or “Subject to Contract”. The meaning of the phrase “Subject to contract” is well-known. It means (i) neither party intends to be bound either in law or in equity unless and until a formal contract is made and (ii) each party reserves the right to withdraw until such time as a binding contract is made: Lewison The Interpretation of Contracts 7^th Ed. at p 846 para 16.20 quoting Generator Developments Ltd v Lidl UK GmbH [2018] EWCA Civ 396.

24.It is true that at the beginning of p 846, the learned editors of Lewison started off with the proposition that “Save in exceptional circumstances, an arrangement made subject to contract means that execution or exchange of a formal written contract is a condition precedent to any legal liability.” But as far as this court can tell whether from the relevant correspondence or otherwise, there are no exceptional circumstances in this case which justify a departure from the ordinary meaning and effect of the phrase “Subject to contract”.

25.At para 28 (b) of his skeleton, Mr Ng makes the point that even if the correspondence between the parties was stated to be “Subject to contract”, it does not necessarily mean that there is no binding contract at all. After all it is “a question of construction whether the parties finally agreed to be bound by the terms, though they were subsequently to have a formal agreement drawn up”: Banco Del Austro SA v Regal Prosper Trading Limited & Ors unrep, HCA 477 of 2015, 1 April 2016, Recorder Linda Chan SC (as she then was) at [29].

26.It is difficult to see how that quotation assists Mr Ng: on what basis can he say in the present case that as a matter of construction, the parties finally agreed to be bound by the terms of the so-called Binding Agreement?

27.At para 28 (c) of his skeleton, Mr Ng makes the bald assertion that “When read in context, the phrase ‘subject to contract’ merely means that there are some further formalities to be fulfilled, lacking of which the parties could still be bound forthwith: see §41 of Re MSB International Ltd.[3]”. If Mr Ng intends by that assertion to mean hypothetically, parties to “subject to contract” negotiations could still be bound forthwith, it does not assist him at all, even if, which this court has its doubts, that assertion is fully supported by para 41 of Re MSB International Ltd.

28.On the other hand, if Mr Ng intends by that assertion to mean when read in context in the present case, the phrase “subject to contract” merely means that there are some further formalities to be fulfilled, the lacking of which the parties are still bound forthwith, this court wholly disagrees. The correspondence in question was exchanged between solicitors and the meaning of the phrase “Subject to contract” must be well-known to them. The phrase was repeated in each and every one of the relevant correspondence. Other than the construction that neither party intended to be bound until a formal contract is made, it is unclear how else one can construe the correspondence.

29.Since there are no Binding Agreement and therefore no terms which are agreed between the Company on the one hand and Southern and TSK on the other, para 3(a) (ii) is not engaged.

30.For these reasons, the application must be dismissed.

Mr Kurt Ng, instructed by M/s Raymond Siu & Lawyers, for the Joint and Several Liquidators of the Company