Tang Tso & Lau (A Firm) v. Pinpal Tech Co., Ltd and Others

HCMP 1040/2023

[2024] HKCFI 905

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1040 OF 2023

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J U D G M E N T

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Introduction

1.This is an interpleader by way of an originating summons. The property at stake is the stakeheld money in the sum of US$1,025,000 (HK$8,000,000 equivalent) (the “Sum”) which was paid into court by the Applicant (the “Firm”) on 7 September 2023 by consent.

2.The contest is now between the 1^st Claimant (the “Buyer”) on the one hand and the 2^nd – 5^th Claimants (the “Vendors”) on the other hand, each laying claim to the entirety of the Sum.

Factual background

3.The Sum was originally paid by the Buyer to the Firm pursuant to a memorandum of understanding (the “MOU”) entered into between the Buyer and the Vendors on 3 January 2023 for a possible sale of 402,550,665 shares (the “Shares”) of a listed company, Speedy Global Holdings Limited (“Listco”) held by the Vendors (the “Possible Transaction”). The Possible Transaction was subject to further negotiation and execution of a formal sale and purchase agreement. The Firm acted for the Vendors in relation to the Possible Transaction.

4.Under the MOU:

1)  the Vendors agreed not to directly or indirectly negotiate or agree with any other party relating to the Possible Transaction for a period commencing from the date of the MOU up to and including 30 April 2023 (the “Exclusive Period”), which date was subsequently extended;

2)  the Buyer is required to pay the Sum into an account designated by the Vendors as earnest money;

3)  the Buyer is entitled to carry out due diligence of Listco of its assets, business and compliance issues (the “Due Diligence”). The deadline for the Due Diligence was originally set on 6 February 2023. If the Buyer was dissatisfied with the outcome from the Due Diligence and served a written notice to discontinue the Possible Transaction (the “Written Notice”), the Sum would be returned to the Buyer.

5.On 18 January 2023, the Buyer paid the Sum into the designated account accordingly.

6.On 31 January 2023, the Buyer raised concerns of the tax liability of a subsidiary of Listco. As a result, a supplemental MOU dated 6 February 2023 was entered into, which extended the deadline of the Due Diligence to 20 February 2023.

7.Subsequent negotiations between the parties had led to various supplemental MOUs having been entered into which extended the Exclusive Period 3 times:

Date of Extension	Original Exclusive Period Deadline	New Exclusive Period Deadline
27 April 2023	30 April 2023	19 May 2023
19 May 2023	19 May 2023	2 June 2023
2 June 2023	2 June 2023	16 June 2023

8.Despite the Exclusive Period having been extended for 3 times, the deadline for the Due Diligence had not been similarly extended after 20 February 2023.

9.It is not disputed that no Written Notice was served by the Buyer to discontinue the Possible Transaction before 20 February 2023, the revised deadline for the Due Diligence.

The MOU

10.The relevant terms of the MOU in its final form are as follows:

“指示性條款

2. 盡職調查

…我司會對目標集團…進行盡職調査，此調査將包括但不限於財務、稅務盡職調査及法律盡職調査…我司會盡力在本函日期起約一個月內完成盡職調査，最遲不超2023年2月20日完成。

…

具法律約束力的條款

I 專有性

(i) …各賣方…應在簽署本函起至2023年6月16日（含首尾兩天）（或雙方書面約定延長的日期）（“專有期”）內禁止直接或間接與任何第三方進行任何此等商談或任何形式的推介或簽訂任何協議、備忘錄或意向書。

(ii) 本函所載之收購意向應於以下情況終止，以較早者為準：

…

(iv) 買方於2023年2月20 日或之前書面確認對目標集團的盡職調査結果不滿意及決定停止此收購行動；或

…

…

III 誠意金

… 如在專有期屆滿時買賣雙方因下述原因仍未簽訂買賣協議，誠意金將退還買方：

…

(iii) 買方於2023 年2 月20 日或之前書面確認對目標集團的盡職調査結果不滿意及決定停止此收購行動；

…

(v) 就目標公司向銀行就其現有附屬公司的債務作出的擔保，各賣方未能促使目標公司主席黃志深先生同意就該擔保向目標公司作出反擔保及彌償。(the “Cross Indemnity Clause”)

如在專有期屆滿時買賣雙方因除上述五種情形之外的其他原因仍未簽訂買賣協議的，各賣方有權沒收全數誠意金。”

11.Thus, under the MOU, one of the scenarios where the Sum will be returned to the Buyer would be:

1)  The Buyer confirms in writing on or before 20 February 2023 that it is not satisfied with the results of the Due Diligence of the Listco group and decides to terminate the Possible Transaction by serving the Written Notice; or

2)  The Vendors failed to procure 黃志深, the Chairman of Listco, to agree to counter-guarantee and indemnify Listco in respect of the guarantee given by Listco to the banks for the debts of its existing subsidiaries (the “Cross Indemnity”).

12.The Cross Indemnity Clause and the requirement for an agreement to offer the Cross Indemnity were only added to the MOU by way of the supplemental MOU dated 20 February 2023.

The Escrow Agreement

13.On the same day as the MOU was entered into, an escrow agreement was also entered into between the Buyer, the Vendors and the Firm which governed how the Sum, as earnest money, would be released (the “Escrow Agreement”).

14.The Escrow Agreement was amended 3 times:

1)  on 17 January 2023 to provide details of the designated bank account for the deposit of the Sum;

2)  on 6 February 2023 to extend the deadline for Due Diligence to 20 February 2023; and

3)  on 20 February 2023 to amend the original Clause 2.2 and insert conditions of release of the Sum.

15.The relevant terms governing the release of the Sum in their final form are as follows:

“2.2 The Firm needs to release the Sum as provided hereinbelow:

(a) If the Buyer issues a notice that it is not happy with the Due Diligence and serve a Written Notice on or before 20 February 2023, the Firm needs to release the Sum to the buyer within 3 working days;

(b) If the Buyer and the Vendors jointly issue a written instruction for the release of the Sum to the Buyer, the Firm shall release the Sum accordingly;

(c) In the absence of the above written notice from either the Buyer or jointly from the Buyer and the Vendors as provided in (a) or (b) above, if, before the expiry of the Exclusive Period:

aa) the Firm has not received a confirmation from the Vendors as prescribed in Appendix 2 of the Escrow Agreement (confirming that they have not sold the shares to any other third party); or

bb) …;

cc) …; or

dd) the Firm has not received the agreement from [黃志深] to provide a cross indemnity in the prescribed form in Appendix 3 of the Escrow Agreement [the Cross Indemnity],

the Firm needs to release the Sum to the Buyer within 3 working days after the expiry of the Exclusive Period; or

(d) Unless the Firm has already released the Sum in accordance with (a), (b) or (c) above, the Firm must release the Sum to the Vendors within 3 working days after the expiry of the Exclusive Period.”

16.Clause 2.2 (c)(dd), i.e. the lack of an agreement from 黃志深to provide the Cross Indemnity being a condition of release of the Sum to the Buyer, was inserted into the Escrow Agreement on 20 February 2023 by way of a 3^rd supplemental agreement.

Events after 16 June 2023

17.No formal sale and purchase agreement in respect of the Possible Transaction was entered into at the end of the Exclusive Period on 16 June 2023.

18.On 16 June 2023, The Vendors sent to the Firm:

1)  a confirmation in the prescribed form of Appendix 2 to the Escrow Agreement to the effect that they have not sold the Shares to any other third party; and

2)  a letter from 黃志深 agreeing to provide a cross indemnity to Listco in the prescribed form of Appendix 3 of the Escrow Agreement (the “Cross Indemnity Letter”).

This is an attempt to eliminate the triggering events as set out in Clauses 2.2 (c)(aa) and (dd) of the Escrow Agreement for the release of the Sum to the Buyer.

19.Upon receipt of such documents from the Vendors, the Firm informed the Buyer of its intention to release the Sum by way of 3 emails, dated 16 June 2023 at 17:37, 19 June 2023 at 16:03 and 21 June 2023 at 17:45 respectively.

20.The Buyer objected and sent a written notice to request the return of the Sum by email at 19:09 on 16 June 2023.

21.The Buyer then sent two emails on 16 June 2023 at 19:38 and on 19 June 2023 at 19:12 respectively that it objected to the release of the Sum in accordance with Clause 2.2 (d) of the Escrow Agreement, on the basis that all deadlines had been extended to 16 June 2023 and no agreement had been reached in relation to the sale and purchase of the Shares. The Buyer’s objection was reiterated by another email on 28 June 2023 at 20:22.

22.The Firm then commenced the present interpleader application.

Applicable Legal Principles

23.Interpleader is a proceeding by which a person, from whom two or more parties claim the same property or debt, but who does not himself claim the property or dispute the debt, can protect himself from legal proceedings by calling upon the two claimants to interplead, so that the title to the property or debt may be decided by the court[1]. The court may summarily determine the question at issue between the claimants and make an order accordingly on such terms as may be just.[2]

24.In Nanyang Commercial Bank Ltd v Personal Representative of Vannee Nativivat[3], the principles applicable to an interpleader proceeding are set out[4] by To J.:

“10. In DLA Piper v China Property [2010] 1 HKLRD 903, the Court of Appeal endorsed the following principles applicable to an interpleader proceeding as correct:

(1) where two or more persons claim the same thing or fund, the holder of the thing or fund does not claim any interest in the property, and not knowing to which of the claimants he ought to deliver the property, and he is sued or fears that he may be sued by some of them, he may apply for interpleader relief against the claimants;

(2) the relief is discretionary and it will not be granted unless there appears to be some real foundation that the applicant may be sued;

(3) the applicant does not in any manner collude with any claimant, or has not voluntarily put himself into the situation from which he calls on the court to extricate him;

(4) he is ready to bring into court, or to pay to dispose of the subject matter of the action in such manner as the court may direct;

(5) the test for a real foundation of being sued is whether a prima facie case exists (see Chan King Sheen v KC Tsang & Co [2002] 3 HKC 209 (CA) at 221I); and

(6) the test is whether each of the rival claimants has a prima facie case against the interpleading party, but not whether the adverse claimant has a claim against each other (see de La Rue v Henru, Peron & Stockwell Ltd [1936] KB 164 per Greene LJ at 170‑173, Tsun Fat Finance Co Ltd v Commissioner for Police [2002] 3 HKC 232 at 246).

The first four of these “principles” are prerequisites. The remaining two are the test and the standard of the test to be applied in ascertaining whether the interpleading party has a real foundation that he will be sued by the claimants.

11. On hearing the application, the court has wide discretion, including dismissing the application on grounds that the prerequisites in rule 1 or the formal requirements in rule 3 are not satisfied; making a summary determination of the claim; and giving direction as to the further conduct of the proceedings: rule 5 and Hong Kong Civil Procedure 2012 paragraphs 17/5/2 to 17/5/9. Summary determination is the course most commonly taken in straightforward cases, particularly where expedition is desirable. But if the subject matter is of considerable value and difficult questions of law may arise, summary determination is not appropriate, even if the parties so consent: Fredericks and Pelhams Timber Buidings v Wilkins, Read (Claimant) [1971] 1 WLR 1197; [1971] 3 All ER 545 (CA).

12. A summary determination, being summary in nature, is only appropriate for clear cases to which summary judgment under Order 14 is applicable. The legal principles applicable to summary judgment under that order are also applicable to a summary determination under Order 17. Summary determination is therefore appropriate for cases in which there is no material factual dispute and if there is a legal issue, then no more than a crisp legal question as well decided summarily as otherwise. The court must not embark on a mini trial on affidavits.”

Stance of the parties

25.The Vendors put forward a straightforward argument and lay claim to the Sum on the strength of the Escrow Agreement: as none of the triggering events set out in Clauses 2.2 (a) to (c) of the Escrow Agreement happened before 16 June 2023, it is contended that the Sum shall be released to the Vendors under Clause 2.2 (d) of the Escrow Agreement.

26.The Buyer on the other hand contends that there was a breach of the MOU and that the Vendors are estopped from relying on the Escrow Agreement because:

1)  the MOU was breached as the Vendors had failed to procure黃志深 to provide a legally valid undertaking to indemnify Listco; and

2)  the deadline of the Due Diligence was extended from 20 February 2023 to 16 June 2023 by the parties’ conducts. By the Written Notice delivered on 16 June 2023, the Buyer has invoked the triggering event under the Clause 2.2 (a) of the Escrow Agreement (as amended).

27.In order to consider the merits of the Buyer’s arguments, it is necessary to set out the history of parties’ dealings and nature of the Buyer’s complaint, which had arisen this way:

1)  After paying the Sum to the Firm on 18 January 2023, the Buyer engaged Draco Capital Limited (“Draco”) and Messrs Patrick Mak & Tse (“PMT”) to conduct due diligence on Listco. On 18 January 2023, Draco interviewed Gary Yu (“Yu”), the CFO of Listco.

2)  On 31 January 2023, PMT discovered that Agile Sweater (Cambodia) Co Ltd (“Agile”), a subsidiary of Listco was subject to potential tax liabilities (the “Tax Issue”).

3)  On 31 January 2023, PMT informed Yu of the Tax Issue, and Yu’s response seemed to suggest that he was unaware of such Tax Issue.

4)  Parties then began negotiations over the Tax Issue, which lasted past the original Due Diligence deadline of 6 February 2023. The Due Diligence deadline was extended to 20 February 2023.

5)  Despite the expiry of the Due Diligence deadline on 20 February 2023, parties continued to negotiate on the terms of the sale and purchase agreement and the terms of a deed of undertaking by 黃志深.

6)  The draft sale and purchase agreement as at 15 March 2023 included a clause where the Vendors were to pay all Cambodian taxes of Agile.

7)  On 30 March 2023, the Buyer was still chasing for updates on the Tax Issue. Yu indicated that negotiations with a tax auditor were still ongoing.

8)  Parties continued to discuss if the Vendors should settle Agile’s tax liability within a stipulated period. Negotiations continued and included discussions on the Tax Issue and the terms of the Deed of Undertaking.

9)  Further drafts of the sale and purchase agreement and the Deed of Undertaking were produced on 9 May 2023, 22 May 2023, 31 May 2023 and 13 June 2023.

10)  As a result of the ongoing negotiations, the Exclusivity Period was extended 3 times and eventually such period was extended to 16 June 2023.

11)  On 16 June 2023 at 16:16, the Vendors unilaterally filed two notices (Appendices 2 & 3) under the Escrow Agreement, which were required before the Sum could be released under the Escrow Agreement.

12)  The Buyer was taken by surprise and objected to the release of the Sum to the Vendors. It subsequently served a written notice (by email and by post) to terminate the MOU and sought the return of the Sum.

The issues

28.The issues are thus:

1)  Was the MOU breached by reason of a lack of a signed deed of undertaking from 黃志深.

2)  Whether the Vendors were estopped from relying on 20 February 2023 as the Due Diligence deadline, or had the deadline been extended by the parties’ conduct.

Was the MOU breached?

29.The relevant wording of the MOU is:

“III 誠意金

… 如在專有期届滿時買賣雙方因下述原因仍未簽訂買賣協議，誠意金將退還買方：

…

(v) 就目標公司向銀行就其現有附屬公司的債務作出的擔保，各賣方未能促使目標公司主席黃志深先生同意就該擔保向目標公司作出反擔保及彌償。”

(emphasis added)

30.The relevant wording of the body of the prescribed form of an agreement to provide a Cross Indemnity as set out in Appendix 3 of the Escrow Agreement (the “Prescribed Form”) is as follows:

“…

本函為擔保同意書。

本人謹此無條件及不可撤回地向買方保證及承諾，就 [Listco] 向銀行（包括但不限於中國銀行（香港）、恆生銀行及香港滙豐銀行）（如適用）就其對現有附屬公司的債務作出的擔保，於收購完成後與買方共同同意的時期内，向 [Listco] 作出反擔保及彌償。

-------------------

姓名：黃志深 ”

31.Mr Tang, counsel for the Buyer submitted that:

1)  The Cross Indemnity Clause in the MOU imposes a duty on the Vendors to procure the Cross Indemnity from 黃志深.

2)  Parties had begun negotiation on the terms of the Cross Indemnity but eventually, no signed Cross Indemnity was produced as the terms were not finalized. The Cross Indemnity Letter in the Prescribed Form was no longer sufficient or relevant.

3)  The Cross Indemnity Letter in the Prescribed Form cannot be compliant with the Cross Indemnity Clause in the MOU as it lacked certainty and was merely an agreement to agree;

As such, it is argued that the Cross Indemnity Clause in the MOU was breached and Clause 2.2 (c)(dd) of the Escrow Agreement was triggered and the Sum ought to be returned to the Buyer.

32.Mr Cheung, counsel for the Vendors, submitted that the obligations of 黃志深 under the MOU was only to agree to cross indemnify Listco in relation to the guarantee given by Listco to various banks on the debts of Listco or its subsidiaries. The Prescribed Form was the agreed form of an agreement from 黃志深 to cross indemnify Listco. Thus, the Cross Indemnity Letter in the Prescribed Form is compliant with the Cross Indemnity Clause in the MOU.

33.I agree with Mr Tang that it is arguable that the requirement for the Vendors to procure an agreement by 黃志深 to provide a cross indemnity to Listco as set out in the Cross Indemnity Clause in the MOU and the Escrow Agreement has been varied by the parties’ conduct, as analysed below. As such, purported compliance by sending the Cross Indemnity Letter in the Prescribed Form as set out in the Escrow Agreement was no longer sufficient.

Estoppel

34.The Buyer’s case on estoppel is that although on the face of the MOU the Written Notice had to be served on or before 20 February 2023, by virtue of the negotiations between the parties to resolve the Tax Issue which traversed well past the Due Diligence deadline, the Buyer was led to believe that the Due Diligence deadline would be delayed until the resolution of the Tax Issue.

35.Mr Tang relies on the ratio decidendi of Lord Cairns LC in Hughes v Metropolitan Railway[5]:

“it is the first principle upon which all Courts of Equity proceed, that if parties who have entered into definite and distinct terms involving certain legal results… afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties”

36.Mr Tang submitted that if estoppel is established, a party is estopped until a reasonable time before it can enforce the contract, even if the contractually stipulated time had already expired[6]. Thus, after the Vendors decided to stop negotiations on 16 June 2023, the Buyer ought to have been given a reasonable time to issue the Written Notice.

37.Given the history of dealings between the parties, I see the force of the estoppel argument:

1)  The Buyer had raised the Tax Issue on 31 January 2023. Negotiations then took place between the parties. The Due Diligence deadline was extended from 6 February 2023 to 20 February 2023.

2)  The Cross Indemnity Clause was added on 20 February 2023.

3)  The Prescribed Form was also added to the Escrow Agreement on 20 February 2023.

4)  Despite the expiry of the Due Diligence deadline on 20 February 2023, parties had continued to negotiate over the terms of a deed of undertaking by 黃志深 (“Deed of Undertaking”). The 15 March 2023 draft Deed of Undertaking was further revised on 17 March 2023, 21 April 2023, 9 May 2023 and 31 May 2023. There can be little dispute that the Deed of Undertaking was for 黃志深 to provide the cross indemnity to Listco. This is indication that parties proceeded on the basis that the previous Prescribed Form as provided in the Escrow Agreement was no longer sufficient.

5)  Other than the draft Deed of Undertaking, negotiations on the terms of the sale and purchase agreement also took place in parallel between the parties after 20 February 2023. A draft sale and purchase agreement was produced on 15 March 2023, which was further revised on 17 March 2023, 31 March 2023, 21 April 2023, 9 May 2023, 22 May 2023 and 31 May 2023 The amendments in the drafts showed that most of the negotiations concentrated on the resolution of the Tax Issue.

6)  The revised drafts of the sale and purchase agreement as well as the Deed of Undertaking show that the obligation of 黃志深 had evolved between 15 March 2023 and 21 April 2023 to include the tax liability of Agile, which is essentially the Tax Issue.

7)  The fact that the revised drafts had concentrated on the resolution of the Tax Issue supports the Buyer’s argument that it had remained unsatisfied with the Tax Issue even after 20 February 2023, and that parties were still on a course of negotiation to resolve it.

8)  The last drafts of the Deed of Undertaking and the sale and purchase agreement were both produced on 31 May 2023. There is no evidence that from 31 May 2023 onwards the Vendors had at any point indicated that they would cease further negotiations or that the 16 June 2023 expiry date of the Exclusive Period would not once again be extended. The Buyer was not aware that negotiations had fallen through, nor did they think it necessary to serve the Written Notice.

9)  Mr Cheung submitted that the negotiations following the expiry of the Due Diligence deadline on 20 February 2023 could not be relied upon as something that had led the Buyer into thinking that they did not have to adhere to the Due Diligence deadline. This is because as contemplated by the parties, there was a two-stage process and the negotiations on the sale and purchase agreement would in any event only commence if the Buyer was satisfied with the due diligence results. This is why the Exclusive Period and the Due Diligence deadlines fell on different dates.

10)  Whilst I accept that the two-stage process was so designed, it does not change the fact that after the Tax Issue was raised by the Buyer in late January 2023, there was no evidence that the Tax Issue was resolved or abandoned by the Buyer before the Due Diligence deadline. On the contrary, the evidence currently available shows that the negotiations between the parties concentrated on trying to resolve the Buyer’s concern in relation to the Tax Issue.

11)  As such, I am of the view that the evidence available does not support Mr Cheung’s suggestion that the negotiations on the terms of the sale and purchase agreement and the Deed of Undertaking proceeded on the basis that the Buyer was satisfied as to the result of the Due Diligence.

12)  Based on the above, I am of the view that as the evidence now stands, the parties have entered upon a course of negotiation focusing on the resolution of the Tax Issue, which might have the effect of leading the Buyer to suppose that the strict rights to submit the Written Notice by 20 February 2023 would not be enforced. It is thus arguable that the Vendors are estopped from holding the Buyer to the Due Diligence deadline and instead, the Buyer should be given reasonable time to exercise its right to issue the Written Notice and to retrieve the Sum after the negotiations had fallen through.

13)  Likewise, it is arguable that parties’ negotiations on the terms of the Deed of Undertaking indicated that the Prescribed Form in the Escrow Agreement was no longer sufficient for the purposes of the Cross Indemnity.

Determination

38.Although the Vendors have shown a prima facie case of entitlement to the Sum under the Escrow Agreement, I am of the view that the Buyer has raised a bona fide defence based on a breach of the MOU and estoppel and there are triable issues.

39.Estoppel is fact-sensitive and the facts forming the basis of the alleged estoppel ought to be properly pleaded before the matter can be determined. It is therefore inappropriate for me to determine who is entitled to the Sum on a summary basis purely based on affidavit evidence.

40.I therefore give the following directions:

1)  The proceedings begun by Originating Summons dated 4 July 2023 herein be continued as if they had been begun by Writ.

2)  The 2^nd to 5^th Claimants (as the 1^st to 4^th plaintiffs) do file and serve their Statement of Claim within 28 days from the date hereof.

3)  The 1^st Claimant (as the defendant) do file and serve its Defence and Counterclaim (if any) within 28 days thereafter.

4)  The 2^nd to 5^th Claimants do file and serve their Reply and Defence to Counterclaim (if any) as the 1^st to 4^th plaintiffs within 28 days thereafter.

5)  The parties do comply with the provisions of Order 25, rule 1 of the Rules of the High Court (Cap. 4A) within 28 days after the close of pleadings.

6)  There be liberty to apply.

Costs

41.There be a costs order nisi that costs of the hearing be in the cause, with certificate for counsel. The costs order will become absolute if no application to vary is taken out within 14 days hereof.

Attendance of the Applicant was excused

Mr Alexander Tang, instructed by Li & Partners, for the 1^st claimant

Mr Ivan T. Y. Cheung, instructed by Jack Fong & Co, for the 2^nd to 5^th claimants