High Route Ltd v. Wong Chung Kai
Read the full judgment text of HCA 320/2019 on BabelCite. This High Court CFI judgment was delivered on 12 January 2024.
1. In this action, the Plaintiff, qua purchaser, seeks a return of HK$24 million (the “Deposit’) from the Defendant, qua vendor arising out of the sale and purchase of the entire shareholding (the “Sale Share”) in Keen Day International Limited (“Keen Day”), pursuant to a Provisional Agreement for Sale and Purchase dated 30 August 2018 (the “Provisional Agreement”).
Cited by 2 cases · Cites 9 cases
|
HCA 320/2019 [2024] HKCFI 75 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 320 OF 2019 ____________
____________
_______________ J U D G M E N T _______________ A. The plaintiff’s claims 1.In this action, the Plaintiff, qua purchaser, seeks a return of HK$24 million (the “Deposit’) from the Defendant, qua vendor arising out of the sale and purchase of the entire shareholding (the “Sale Share”) in Keen Day International Limited (“Keen Day”), pursuant to a Provisional Agreement for Sale and Purchase dated 30 August 2018 (the “Provisional Agreement”). 2.Keen Day is and was at all material times the registered owner of Section A of Tuen Mun Town Lot No. 216 which consists of a car parking building known as Siu On Court Carpark which is a building with 256 (or 255) car parking spaces and 20 motorcycle parking spaces on 7 levels, at No. 2 Tuen Hing Road, Tuen Mun (the “Property”). 3.In essence, the present disputed issues are akin to those in a vendor and purchaser summons albeit that the sale and purchase of the Property were to be effected through the sale and purchase of the Sale Share. 4.The Plaintiff says that it was entitled to refuse to complete the sale and purchase of the Sale Share because:
B. Material facts 5.The material facts in the present case are largely undisputed and this Court does not consider that the determination of the issues depends materially on the resolution of material facts. 6.As far as the Property is concerned, it is undisputed that by a letter dated 29 April 2016 from District Lands Office Tuen Mun (“the DLO”) to Moonlight Shadow Holdings Limited (“Moonlight”), Keen Day’s predecessor in title, (“the DLO 29/4/2016 Letter”), the DLO noted that there was a contravention of the Government Lease in that the existing number and layout of parking spaces at the Property deviated from the car park layout plan as registered (the “Layout Plan”), and required Moonlight to remedy the breach. 7.Keen Day acquired the Property from Moonlight by an assignment dated 31 May 2017 at a price of HK$91.1 million. After Keen Day became the registered owner of the Property, the DLO issued a letter dated 8 March 2018 to Keen Day (the “DLO 8/3/2018 Letter”). It referred to the DLO 29/4/2016 letter and stated that the existing number and layout of the parking spaces in the Property still deviated from the Layout Plan (“the Defect”), and similarly required Keen Day to remedy the breach. 8.The Defendant was and is the sole shareholder and director of Keen Day. 9.The Plaintiff, as purchaser of the Sale Share, is a limited company incorporated in Hong Kong on 15 June 2018, only about two months before the Provisional Agreement. Ms Wong Ho Wan (“Ms Wong”) who was responsible for handling property matters including the transaction with the Defendant admitted that the Plaintiff was and is a corporate vehicle incorporated for the purpose of the transaction. At the material times, she worked mainly for one Choy Park Nang (“Mr Choy”), a seasoned property investor in the market. It is to be noted that it is Ms Wong’s evidence that this is not Mr Choy’s first experience in acquiring properties through the acquisition of the entire shareholding of the company which owns targeted properties. 10.On or about 25 June 2018, Mr Choy was appointed as sole director of the Plaintiff. The Plaintiff has three initial shareholders including Mr Choy. The other shareholders were also investors in the acquisition of the Sale Share. 11.The Plaintiff and the Defendant entered into the Provisional Agreement on 30 August 2018 with Savills (Hong Kong) Limited (“Savills”) as the agent. The total price is $240M. Pursuant to the Provisional Agreement, the Plaintiff had paid deposits in the total sum of $24M (“the Deposit”). 12.A formal agreement was to be signed on or before 28 September 2018 and the further deposit of $19M was also to be paid on or before 28 September 2018. Between 3 September and 9 November 2018, Messrs Kok and Ha (“KH”) acting for the Plaintiff and Messrs. T.H. Koo & Co. (“THK”) acting for the Defendant had several exchanges relating to the drafting of the formal sale and purchase agreement. As it turned out, no formal agreement was signed, but the Plaintiff paid the further deposit by a cheque of its solicitors, namely, KH. 13.By a letter dated 3 September 2018 from KH to THK, KH asked for draft formal agreement, corporate documents and title documents. By a letter dated 11 September 2018 from THK to KH, THK informed KH that the Defendant was preparing the audited financial statements and management accounts and would send them over as soon as they were available. The position was acknowledged by KH in its letter dated 5 October 2018 to THK in which KH said it understood that the Defendant was finalizing the accounts. KH did not chase for the accounts and company documents of the Defendant. 14.On 13 September 2018, THK sent over the title deeds of the Property to KH. 15.On 19 September 2018, having received the title deeds, KH asked for a certified copy of the Deed Poll. The requisition had been answered by THK by a letter dated 19 September 2018. Thereafter, KH had raised no further and other requisition on the title of the Property until close to completion about the Defect. 16.On 26 September 2018, KH sent a cheque drawn by KH in favour of THK in the sum of $19,000,000 as further deposit. The initial deposit of $5M and the further deposit of $19M made up the Deposit of $24M. 17.The Defendant had invested in some bonds which were held through Keen Day. In September 2018, in anticipation of the sale of the Property through Keen Day, the Defendant sold all the bonds held by Keen Day so that the only asset held by Keen Day would be the Property. 18.On 28 December 2018, THK by letter (“THK 28/12/2018 letter”) sent over Keen Day’s documents to KH, including the audited report of Keen Day for the year ended on 31 March 2018 (the “2018 Audited Report”) and the audited report of Keen Day for the period from 27 March 2014 (i.e. the date of incorporation) to 31 March 2017 (the “2014-2017 Audited Report”) (collectively the “Audited Reports”) the articles of association, the certificate of incorporation of Keen Day and other company documents (collectively “28/12/2018 Documents”). 19.On the same date, KH also wrote to the DLO about the Defect. In the letter, KH enclosed the DLO 8/3/2018 letter and asked for confirmation from DLO as to whether the contravention had been remedied. 20.On 24 January 2019, KH by letter dated 24 January 2019 to THK raised various questions and observations in relation to the 28/12/2018 Documents (“KH 24/01/2019 Letter”). 21.In the KH 24/01/2019 Letter, it was also said that, because there had only been 1 single audit for the entire 3-year period, there was a clear breach of clause 3(g) of the Provisional Agreement. Also because of this, Keen Day’s auditor had qualified its opinion in the 2014-2017 Audited Report. 22.KH received the DLO’s reply by letter dated 24 January 2019 (“the DLO 24/1/2019 Letter”). The letter referred to a phone conversation between the DLO and one Miss Tang of KH. The letter mentioned there were subsequent correspondences between Keen Day and DLO after the DLO 8/3/2018 letter, and Keen Day had informed the DLO that they had (a) written to the tenant to cease any act which constituted breach of Government Lease and (b) written to the Housing Authority on relocation works for the entrance to the Property. DLO said they had made enquiry by letter dated 27 June 2018 (“the DLO 27/6/2018 letter”) but no response was heard and DLO’s rights on the matter were reserved. 23.On 31 January 2019, THK replied by letter to KH’s questions (“THK 31/01/2019 Letter”) and provided additional documents of Keen Day (“31/01/2019 Documents”). 24.On 12 February 2019, THK by letter (“THK 12/02/2019 Letter”) also sent over the latest unaudited profit and loss account and the unaudited balance sheet, both from 1 January 2019 to 15 February 2019 to KH (“12/02/2019 Documents”), and asked KH for the draft completion documents. 25.On 13 February 2019, two days before the completion, KH sent another letter to THK raising another series of questions and observations about Keen Day (“KH 13/02/2019 Letter”). 26.On 15 February 2019, i.e. the completion date, various correspondence were exchanged:
27.Completion did not take place on 15 February 2019. On the next day, THK by a letter to KH accepted the Plaintiff’s repudiation of the Provisional Agreement for and on behalf of the Defendant. 28.On 18 February 2019, KH by letters warned THK not to release the Deposit to the Defendant and objected to such release. THK replied on the same day that the Plaintiff had repudiated the Provisional Agreement and the Defendant was entitled to forfeit the Deposit so THK was entitled to release the Deposit to the Defendant. C. The provisional agreement 29.The Provisional Agreement contained the following relevant clauses and provisions:-
30.Importantly, 1st Clause (3)[1] of附件（二）(“1st Clause 3, Schedule 2”) provides that:
31.Pertinently, Clause (4) of附件（二）(“Clause 4, Schedule 2”) provides that:
32.P’s claims are set out in Statement of Claim dated 1 March 2019. The Defendant’s case, as pleaded in the Amended Defence and Amended Counterclaim dated 8 April 2019 (as amended on 10 March 2020) (“AD&CC”), is that:-
D. Analysis and determination 33.In terms of analysis, I am of the view that the single most important issue is whether the Plaintiff can rely on its pleaded implied terms. If not, that is the end of the analysis. Mr Li SC for the Defendant agrees that in such scenario, there is no need to decide whether the Defendant can rely on its implied terms. 34.In terms of evidence, the parties have called factual witnesses to testify in court and have adduced expert evidence. I explained during the trial that I do not consider the expert evidence to be of assistance to the Court. Ultimately, whether questions in relation to due diligence had been properly raised or answered must depend on the particular facts of each case. This is a factual issue for the Court to determine. I am not aware of any expertise which can set out a standard benchmark insofar as due diligence is concerned. The parties agree with this Court’s observations and as a result the experts were not called upon to testify in court. 35.In terms of the issue of implied terms, the law in this area is quite settled. As stated in Kensland Realty Ltd v Whale View Investment Ltd & Another (2001) 4 HKCFAR 381 at §23, for a term to be implied into a contract:-
36.In Nazir Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2, Lord Hughes (with whom Lord Neuberger, Lord Clarke and Lord Carnwath agreed) summarized the law at [7]:
37.Of course, it is also trite that terms to be implied must be formulated with sufficient precision and they must not be inconsistent with an express term. 38.Ms Cheung for the Plaintiff submitted that context is very important on the interpretation of contract (See Eminent Investments (Asia Pacific Ltd) v DIO Corp (2020) 23 HKCFAR 487 at §§43 and 44. I agree. In Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279, Lord Hoffmann NPJ at 296D-F said:
D1. Implied Terms on Due Diligence 39.An important context in this case is that both the Plaintiff’s ultimate shareholder, Mr Choy and the Defendant are experienced in property transactions. They knew what they were doing. I have duly considered both parties’ very comprehensive and learned opening and closing submissions. I am of the view that the Plaintiff’s Implied Terms on Due Diligence cannot be implied into the Provisional Agreement. 40.First, the net effect of the Plaintiff’s Implied Terms on Due Diligence, would be that the Plaintiff could walk away from the transaction insofar as it not satisfied with the results of its due diligence exercise. Whether the Plaintiff satisfies with its own due diligence exercise is a matter beyond the Defendant’s control. It is not the Plaintiff’s pleaded case that its satisfaction of the due diligence exercise is subject to some reasonableness requirement applying an objective test. I am of the view that the parties could not have intended that a party of the transaction, here, the Plaintiff could walk away from the transaction if it was not satisfied with its due diligence exercise. 41.Secondly, the net effect of the Implied Terms on Due Diligence is inconsistent with Clause 8 of the Provisional Agreement. If the Plaintiff could walk away from the transaction so long as it is not satisfied or the Defendant has not satisfied the Plaintiff on due diligence, then Clause 8 is otiose. It is no answer that there are other situations the Defendant might invoke Clause 8. For instances, the Plaintiff’s failure to pay further deposits and/or balance of the purchase price. The key is that if the Plaintiff enjoys such a right, the Plaintiff could always exercise such a right prior to the Defendant’s attempt to invoke its right under Clause 8. In reality, it is practically unlikely that the Defendant, qua vendor, could invoke Clause 8 of the Provisional Agreement. In the present case, before the payment of the balance of the purchase price, the Plaintiff attempted to walk away from the Provisional Agreement precisely on the basis of the Implied Terms on Due Diligence. 42.Thirdly, again as a matter of context in the present case, the parties only started to negotiate the scope and extent of the due diligence exercise in the draft formal agreement which the parties ultimately could not agree upon after the conclusion of the Provisional Agreement. This shows that by the time of the Provisional Agreement, it was envisaged that the scope and extent of the due diligence exercise had to be further negotiated and agreed upon. In such circumstances, it is inherently improbable for the parties to impliedly agree that the Plaintiff could terminate the Provisional Agreement so long as it is not satisfied with its due diligence without reference to the scope and depth of the same. 43.Fourthly, I agree that the Plaintiff’s Implied Terms on Due Diligence are vague and incapable of being formulated with precision. There is no yardstick as to when and how the Plaintiff could be said to have completed its due diligence exercise or what are the criteria for the Plaintiff being “satisfied” with the results of its due diligence exercise. 44.Fifthly, as the experts jointly agree, any due diligence exercise is to be carried out on a case by case basis, and largely depends on the purposes of the purchaser, the nature of the transaction and the nature and size of the subject company and that due diligence exercise focuses on the deal, the scope which could vary widely and depends on the client’s specification and what the transaction process allowed. For example, the due diligence exercise for the purpose of an initial public offering will be very different in scope and in depth than a due diligence for the purchase of a single asset company with minimum transactions history. I agree that it is inherently improbable for such a fluid exercise to be implied without any prior discussion and agreement, and without any express provision to govern its scope and consequences. 45.Sixthly, I agree that the protection of the purchaser, under the Provisional Agreement, is achieved by the warranties, undertakings and indemnity given by the vendor and guarantor in Clause 3. If it is subsequently discovered that any of the warranties were untrue, the purchaser’s remedy is to sue for breach of warranty and to seek indemnification. This was evidently the bargain that was reached and accepted by the parties under the Provisional Agreement. 46.I also agree that it is clear from Clause 4 of the Provisional Agreement, and also the first sentences of Clause 8 of the Provisional Agreement, that the question of what should constitute condition precedent for completion had been considered – the only circumstance which would entitle the Plaintiff to cancel the transaction altogether is where the Defendant cannot show good title. 47.To introduce, by implication, an entitlement to a right to due diligence, coupled with a right to refuse to complete if the purchaser was not satisfied with the results is to re-write the bargain for the parties. The Court cannot do that. 48.In fact, the case of La Rosa v MacEnnovy Trust Ltd (2010) 11 NZCPR 930 shows precisely what the parties could have agreed upon under the doctrine of freedom of contract. In that case, there was an express clause that the agreement was subject to the purchaser being satisfied with a due diligence investigation and the purchaser could cancel the transaction without giving reason and with the term said to be inserted for the sole benefit of the purchaser. There was no such express term here. This Court cannot rewrite the contract for the parties. 49.Seventhly, I agree with Mr Li SC for the Defendant that the Plaintiff’s Implied Terms on Due Diligence is marred with difficulties as it case that (a) there is no limit to what matters the Plaintiff can take into account in its due diligence; (b) the due diligence exercise also no temporal limit and (c) importantly, whether the Plaintiff was satisfied with its due diligence exercise was to be decided subjectively by the Plaintiff alone. Hence, the terms if implied would give the Plaintiff a carte blanche to walk away from the transaction at any time it sees fit, under the purported reason that it was “not satisfied” with the due diligence. This cannot be right. 50.Ms Cheung for the Plaintiff submitted that, first, there cannot be any doubt, in the circumstances of the present case, that some form of due diligence investigation must be within the contemplation of the parties and be implied into the Provisional Agreement by reason of obviousness and/or business necessity. The conduct of the parties show that the implied terms are “so obvious” and “goes without saying” that neither party considered it necessary to spell out expressly in the Provisional Agreement, and that the implied terms give effect to the reasonable expectation of the parties. I agree up with a certain extent. It can be said that the parties did envisage some form of due diligence to be carried out but it is materially different from if the Plaintiff was subjectively not satisfied with its due diligence exercise, the Plaintiff could simply walk away from the transaction. I find it hard to believe that the Defendant would entertain any such expectation and/or understanding. 51.The need to carry out some form of due diligence and the extent and scope of such due diligence exercise and its legal consequences are different concepts. One must bear in mind that Mr Choy was and is a very seasoned investor and if it was considered that the Plaintiff’s satisfaction of its due diligence exercise is a condition for the performance of the Provisional, there is no reason why the same should not and had not be stated clearly in the Provisional Agreement. 52.I find it against commercial and commonsense that in the absence of any express contractual provisions, the Court should imply the terms as proposed by the Plaintiff so that one party could walk away from the transaction if he or she were not subjectively satisfied with its due diligence exercise. The basic rule of law is that the parties are entitled to enter into whatever commercial terms they could agree upon. In the present context, it is perfectly normal and commercially workable for the parties to enter into the Provisional Agreement without the Plaintiff’s Implied Terms on Due Diligence. 53.Secondly, Ms Cheung for the Plaintiff submitted that if some form of due diligence exercise was envisaged, the next question is the scope of the due diligence exercise. She further submitted that the scope must be the business, financial, legal and all other aspects of Keen Day. As a matter of common sense, this must be right. A purchase is assuming the entire affairs of Keen Day and should therefore be entitled to look into its entire affairs as part of the due diligence. There is certain truth in Ms Cheung’s submission. However, the question is the depth of the due diligence exercise. For example, how many years back could the Plaintiff demanded for the corporate documents? Should it cover all documents since the company’s incorporation or for the last 6 or 7 years? Is it correct that a minor mismatch between vouchers and ledgers, albeit the amount involve might be negligible, is sufficient to invoke the Plaintiff’s Implied Terms on Due Diligence. 54.Insofar as the Plaintiff seeks to rely on the Defendant’s formulation is concerned, I agree with Mr Li, SC that the Defendant’s Implied Terms are not on due diligence. In fact, as pleaded, the Plaintiff denies the Defendant’s Implied Terms on Due Diligence. 55.Thirdly, Ms Cheung also relied on the case of Pacific Dunlop Garments Ltd v Fundamental Global Ltd [2013] 4 HKLRD 292 to suggest that the Court could always further imply a qualification that the purchaser may only raise complaints about unacceptable risk while acting bona fide. It is simply not the case that the purchaser may walk away at any time it wants, making Clause 8 otiose. I disagree. First, the further implied term does not form part of the Plaintiff’s case. Secondly, each case depends on its own facts. For example, Dragon Access Holdings Limited v Lo Chu Hung [2020] HKCFI 2895, HCMP1355/2019, 13 November 2020, has an express due diligence clause. It is not apposite to transport certain rulings from facts of cases which are very different from the present case. 56.In fact, I notice that the Plaintiff’s Opening Submissions took the position that it is not sensible for the Defendant to introduce a temporal limit on when due diligence questions can be raised, i.e., they should be raised “within reasonable time” after receipt of documents from Keen Day or before completion. As such, the Plaintiff could have raised its due diligence questions, technically, like the present case, two days before the completion and leaving no time for the Defendant to address the same. This is against commonsense and I do not consider it to be within the parties’ contemplation at the time of the Provisional Agreement. 57.For the sake of completeness, Mr Li SC for the Defendant also took the point that the Plaintiff’s Implied Terms on Due Diligence were pleaded to be implied as a matter of law. Terms implied by law is different from terms implied by facts, as terms implied by law refer to the general rule of law applicable to contracts of a defined type. The Plaintiff has simply failed to prove that its Implied Terms on Due Diligence could be implied as a matter of law. The Plaintiff changed its case in its Amended Reply to one of business efficacy and obvious intention. Mr Li SC took the correct legal point that one does not plead a case in the Reply. However, this Court is not going to influenced by this technical objection. I remind myself that the duty of the court is to resolve disputes and the ultimate test is fairness, namely, whether the Defendant knows the Plaintiff’s case and has a sufficient chance to deal with it. I am of the view that the Plaintiff could run the point of implied terms by reason of business efficacy and obvious intention. Though, for all the reasons stated above, I reject the Plaintiff’s case on its Implied Terms on Due Diligence. 58.As such, it is not necessary for this Court to deal with the Defendant’s Implied Terms. Save it suffices for this Court to mention that had it become necessary to determine the same, this Court will find no difficulties in implying that due diligence questions must be raised within reasonable time. What constitute reasonable time is to be determined according to the facts of each individual case. For example, the agreed timeframe for completion is a relevant factor. D2. Implied Terms on Title and the effect of the Defect 59.I am of the view that the determination of this issue turns on the proper construction of the 1st Clause 3, Schedule 2 and Clause 4 of Schedule 2 of the Provisional Agreement. I agree that the question is whether those clauses, on their proper construction, preclude the Plaintiff from relying on the Defect as a reason to not complete the transaction under the Provisional Agreement. If the answer is in the affirmative, then it follows that the Plaintiff’s Implied Terms on Title cannot be implied as it would inconsistent with those express clauses; and therefore the Plaintiff cannot rescind the Provisional Agreement by relying on the Defect. 60.On this issue, I have no hesitation to come to the firm view that the answer to the question must be in the affirmative. First, the language of 1st Clause 3, Schedule 2 and Clause 4, Schedule 2 is crystal clear. Both clauses, other than providing that “no requisition or objection whatsoever shall be raised”, expressly stipulated that “the Purchaser shall not be entitled to withhold or delay but shall complete the purchase”. I agree that it is as plain as a pikestaff that, under the Provisional Agreement, the Plaintiff cannot refuse to complete either because of “unauthorized … additions or alterations” generally, or the Defect specifically. 61.Given such clear language, I reject the Plaintiff’s submission that under the above clauses the Plaintiff was only precluded from raising requisitions about the Defect, and that the Defendant was still obliged to rectify the Defect prior to completion. In other words, the title that is to be given by the Vendor at completion is expressly made subject to the Defect. 62.I reject the Plaintiff’s submission that Clause 4, Schedule 2 “does not identify any specific defect in title”. Clause 4, Schedule 2 specifically identifies the 8/3/2018 DLO Letter which contains the Defect. For practical purposes, the 8/3/2018 DLO Letter is the Defect. I agree it is artificial for the Plaintiff to draw a distinction between the two. 63.The Plaintiff further contends that it could rely on 2nd clause 3, Schedule 2 by saying that the Defendant had failed to comply with request made in the DLO 8/3/2018 Letter and that clause 4, Schedule 2 did not specify it to be an exception to 2nd clause 3, Schedule 2. I disagree. If the Plaintiff is right, it would be mean that clause 4, Schedule 2 is otiose and it is against the established legal principle that “[w]here a contract contains general provisions and specific provisions, the specific provisions will be given greater weight than the general provisions where the facts to which the contract is to be applied fall within the scope of the specific provisions” (Sir Kim Lewison, The Interpretation of Contracts, 7th ed at §7.46). 64.Secondly, as a matter of fact, the Defect had been expressly drawn to the attention of the Plaintiff. The Plaintiff was also shown a copy of the DLO 8/3/2018 Letter (in which the Defect was described); and Savills also provided the Plaintiff with an actual copy of the DLO 8/3/2018 Letter. I reject and disbelieve Ms Wong’s evidence that she had not been given a copy of DLO’s letter dated 29 April 2016 to Moonlight which was enclosed in KH’s letter to DLO dated 28 December 2018. The DLO’s letter to Moonlight is not a public document registered at the Land Registry and could not be obtained by KH on its own. 65.Thirdly, I am of the view that there is force in Mr Li SC’s submission that it is also a relevant fact that KH came to make enquiry with DLO on the DLO 8/3/2018 Letter on 28 December 2018 without ever informing THK about the same. The Plaintiff only produced the letters with DLO and relied on the DLO 8/3/2018 Letter to back out from the transaction in KH’s 2nd letter to THK sent at 16:52 hour on 15 February 2019, the very date of completion. 66.Fourthly, on the giving of title, as said, I agree that the Defect does not render the Defendant to be unable to give title. The Defendant has title to the Property and the Defect can be remedied. This is no different from the unauthorized cockloft as discussed in Join Union Investment Ltd [2016] 2 HKLRD 901at §§107, 108per Chow J. (as he then was). The Defect does not go to the root of title. The Defect is only in the nature of unauthorised alteration in layout of car parking spaces. This is a matter which, but for the extremely late complaint by the Plaintiff on the same, could have been remedied. Further, notwithstanding the deviation from the Layout Plan, Keen Day evidently has title to the Property. It is not a situation where the vendor cannot give title to the property because he does not own it as being either on Government land or being owned and claimed by third party. 67.Additionally, the evidence is that the risk of enforcement action is not strong if not theoretical. The Defect has been brought up by DLO as early as 2016 in the DLO 29/4/2016 Letter. While enforcement action has been threatened, the reality is that apparently nothing has been done for 3 years up to the time when the Provisional Agreement was terminated by the Plaintiff on 15 February 2019. 68.Fifthly, I agree that it is commonplace in conveyancing practice for parties to the sale to expressly identify particular defects (such as the Defect in issue), and to agree for title to be conveyed subject to such defect. This is precisely what the parties had sought to do in the Provisional Agreement in relation to the Defect by virtue of 1st Clause 3, Schedule 2 and Clause 4, Schedule 2. It is trite that parties are free to agree to the sale and purchase of a property with a defective or imperfect title, either with reference to a particular defect, or in relation to unauthorized works generally. (See: Jumbo King Ltd v Faithful Properties Ltd & Others [1999] 3 HKLRD 231 (CA); (1999) 2 HKCFAR 279 (CFA); Ip Kam Wah & Another v Fair City Group Ltd [2005] 4 HKLRD 168 at §§18-24; Hong Kong Conveyancing Law and PracticeVol. 1(A) V [20]-[22] [26]-[30]). 69.Sixthly, as no requisition has ever been raised on the Defect, I agree that the allegation of the Defendant failing to “show” good title is a non-starter. In any event, I agree that even if the KH 2nd 15/2/2019 letter itself could be considered as a requisition on the Defect, that requisition is hopelessly late by any standard. It was only on 15 February 2019, by KH’s 2nd letter received at 16:52, that the Plaintiff first alleged that Keen Day’s title to the Property was defective because of the Defect. This was more than 5 months after the delivery of the title deeds and worse still on the actual day of completion. The Defendant has a legitimate complaint that it is difficult to think of a later time to raise the title objection. 70.For all the reasons stated above, I refuse to incorporate the Plaintiff’s Implied Terms on Title into the Provisional Agreement. I rule that the title the Defendant has to show is expressly subject to the Defect, the title which the Defendant has to give is also expressly subject to the Defect; and the Defect therefore does not have to be remedied prior to completion. 71.Again, as such there is no need for this Court to deal with the Defendant’s Implied Terms on Title. D3. Breaches of Clause 3(g) of the Provisional Agreement 72.The Plaintiff’s case is that Section 379(1) of the Companies Ordinance, Cap 622 (the “Ordinance”) mandated that directors must prepare financial statements for each financial year that comply with sections 380 and 383 of the Ordinance. In breach of these provisions, only one single audit had been conducted for the 3 financial years (2014-2017). The 2014-17 financial statements were prepared on 24 December 2018, which was the same day the 2018 financial statements were prepared. This constitutes a breach of Clause 3(g) of the Provisional Agreement, which warranted compliance with all legislation and statutory requirements, including those under the Ordinance. 73.First, I do not agree that a minor technical breach of the Ordinance which resulted in no financial loss goes to the root of the Provisional Agreement as alleged by the Plaintiff. It is at most an intermediate or innominate term of the Provisional Agreement. If the Plaintiff suffered any damages as a result of the said alleged breach, it could seek indemnification from the Defendant. However, it is not a reason to rescind the Provisional Agreement all together. 74.Secondly, there is no evidence that the alleged breach of the Ordinance rendered the financial statements of Keen Day inaccurate. As I said earlier, any legal liability of Keen Day would be covered by the indemnity and guarantee given by the Defendant under the Provisional Agreement. The alleged breach does not have the effect of depriving the Plaintiff of substantially the whole benefit which it was the intention of the parties as expressed in the contract that it should obtain. 75.For the sake of completeness, I should also say that the alleged breaches of Section 380(4) and section 373 of the Ordinance are not pleaded. In any event, for the same reasons as set out above, I do not consider them to go to the root of the Provisional Agreement. D4. Miscellaneous matters 76.First, Ms Cheung for the Plaintiff, in discharge of her duties diligently, submitted that there was an existing liability of HK$101 million as at the date of completion. First, I agree with Mr Li SC that this was not a complaint raised in the pre-completion correspondence. Secondly, as a matter of commonsense, it is unlikely to the extreme that the Defendant would transfer the Sale Share to the Plaintiff with an outstanding shareholder’s loan up to the limit of HK$101 million. 77.I accept Mr Wong’s evidence that anyone would know that in this type of deals all the other assets and liabilities of Keen Day would have to be cleared off. I also accept his evidence that the HK$101 million were either to him or the entities controlled by him. This outstanding liability could be dealt with internally. His lawyers were fully aware of this. He had already instructed his lawyers to deal with the matter of clearing off the HK$101 million debts, and Wendy Chan (his book-keeping staff) and his lawyers had made the necessary preparation for this to be accomplished by completion. 78.I further accept the Defendant’s case that the clearing off of the HK$101 million debts (e.g. by the signing of an assignment of loan) was a step only to be taken on completion. This was not done because, in the last few days leading up to the completion, KH had come up with multiple queries within a very short timeframe indicating that it was not going to complete. I note that it is also Ms Wong’s evidence that at the latest by 13 or 14 February 2019, the Plaintiff had already decided not to purchase the Property via the Provisional Agreement. 79.Secondly, Ms Cheung for the Plaintiff relied on the ill drafting of the Provisional Agreement to seek to imply the Plaintiff’s Implied Terms into the Provisional Agreement. I agree that the drafting of the Provisional Agreement could be improved and there are obvious typographical errors. However, that does not mean that the parties’ rights and obligations are not properly and fully set out. This alone is not a reason for the Court to imply the Plaintiff’s Implied Terms into the Provisional Agreement. 80.Thirdly, this case does not turn heavily on the credibility of the factual witnesses. However, although not directly relevant to the issues to be determined, I do find as a matter that the Plaintiff was not ready and willing to complete the transaction on 15 February 2019. I find, on balance, Mr Wong for the Defendant to be a more reliable witness. In particular, I accept his evidence that on 6 November 2018, one Mr. Yeung of Hong Kong Carpark (“Yeung”) informed him that there were fliers advertising the sale of car parks at the Property as well as many estate agents at the Property. 81.On 7 November 2018, Yeung told Mr Wong that there were information pamphlets posted at the Property. Copies of the flier, pamphlets and photos dated 6 November 2018 were given to the Defendant. On the same day, the Defendant also went to the Property and saw the fliers and pamphlets. The fliers named KH as the solicitors in charge of the sale. The Defendant therefore made an anonymous call to KH asking if the car parks at the Property were for sale and KH answered affirmatively. 82.I also accept Mr Wong’s evidence that by the end of November 2018, Savills told the Defendant that the Plaintiff had tried to sell the car parks at the Property but the exercise was not successful as deposits were only received for 3 parking spaces. 83.On the Defendant’s recount of the Plaintiff’s strata sale of the Property, the Plaintiff does not give any positive response of either admitting or denying what the Plaintiff had done so. Ms Wong in her witness statement said that the sale was irrelevant. Under cross-examination, Ms Wong speculated that it might be property agents who on their own volition attempted to sell the car parking spaces on behalf of the Plaintiff. I find that rather incredible. 84.The Plaintiff might have financial resources to complete the transaction although the Defendant contends otherwise. Even assuming that the Plaintiff and its shareholders had the financial resources to complete the transaction, I accept the Defendant’s evidence that by around 13 or 14 February 2019, by reason of the lack of positive response on its attempt sub-sale of the car parking spaces, the Plaintiff decided to back out from the transaction and hence resort to its Implied Terms and the Defect which had already been drawn to its attention prior to and specifically in the Provisional Agreement. 85.Finally, whilst I do not find it necessary to deal with each and every complaints on due diligence by the Plaintiff, as a general overview, the Plaintiff’s approach demonstrates that it is impossible and unfair for the Court to accede to the Plaintiff’s Implied Terms on Due Diligence. Take for instance the discrepancies between descriptions of a certain accounting entry in Keen Day’s particular voucher and its general ledger. Does the existence of one discrepancy in description sufficient to make the Plaintiff dissatisfied with the due diligence exercise? Even for external audit, it is normally done by way of sampling. Does the due diligence exercise involve a full audit of every single entry in Keen Day’s general ledger? It may or may not. It is a matter for the parties to agree upon. It is not a matter for the Court to imply. E. Disposition 86.For all the reasons stated above, I make the following orders:
87.As far as costs is concerned, I make a costs order nisi that the Defendant is entitled to all its costs of and occasioned in the present action, on a party to party basis, if not agreed, with a certificate for two counsel. This costs order nisi will be made absolute within 14 days from the date of this judgment unless the parties take out an application to vary the same within the 14 days period. 88.Finally, it remains for this Court to thank Ms Cheung and Mr Tsang for the Plaintiff and Mr Li SC and Mr Kwong for the Defendant for their helpful assistance.
Ms Prisca Cheung and Mr Johnathan H.Y. Tsang instructed by Kok & Ha for the Plaintiff Mr C.Y. Li, SC and Mr Jeremy Kwong instructed by T.H. Koo & Associates for the Defendant [1] There are 2 clauses in Schedule 2 numbered “(3)” | ||||||||||||||||||||||
Cases cited in this judgment
Other judgments that cite this case
Further hearings and rulings under HCA 320/2019