Champion Star Enterprise Ltd and Another v. Champion Star Enterprise Ltd and Others
Read the full judgment text of HCA 847/2004 on BabelCite. This High Court CFI judgment was delivered on 4 July 2005.
1. This is an appeal by the 1st and 2nd defendants against a summary judgment of Master Lung made on 28 February, 2005 ordering (1) the 1st and 2nd defendants by original action to pay the 1st and 2nd plaintiffs by original action HK$9,257,500 together with interest at 15% per annum from 15 January 2003 to the date of judgment; (2) the 1st and 2nd defendants by original action to pay the 1st and 3rd plaintiffs by original action HK$2,167,500 together with interest at 15% per annum from 1 Februar
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HCA847/2004 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 847 OF 2004 _______________________ BETWEEN
_______________________ AND BETWEEN
_______________________ Before: Deputy High Court Judge L. Chan in Chambers Date of Hearing: 29 June 2005 Date of Delivery of Decision: 4 July 2005 _______________ J U D G M E N T _______________ Background 1.This is an appeal by the 1st and 2nd defendants against a summary judgment of Master Lung made on 28 February, 2005 ordering (1) the 1st and 2nd defendants by original action to pay the 1st and 2nd plaintiffs by original action HK$9,257,500 together with interest at 15% per annum from 15 January 2003 to the date of judgment; (2) the 1st and 2nd defendants by original action to pay the 1st and 3rd plaintiffs by original action HK$2,167,500 together with interest at 15% per annum from 1 February 2003 to the date of judgment; and (3) costs of the application for summary judgment including reserved costs be paid by the 1st and 2nd defendants by original action to the 1st, 2nd and 3rd plaintiffs by original action with certificate for counsel. 2.The sum of HK$9,257,500 was the balance of the purchase price and interest thereon for the purchase by the 1st defendant by original action from the 1st and 2nd plaintiffs by original action some shares in a company. The sum of HK$2,167,500 was the balance of a debt and interest thereon payable by the 1st defendant by original action on behalf of one of the subsidiaries of the company to the 1st and 3rd plaintiffs as part and parcel of the purchase of shares. The 2nd and 3rd defendants by original action were the guarantors of the 1st defendant for these payments. 3.The company is called Yat Tat Holding Company Ltd. (“the Company”). It had a paid up capital of $30,000,000 which was divided into 30,000,000 shares of $1 each. The 2nd plaintiff by original action Mok Siu Kee Holdings Ltd. (“Mok”) used to hold 7,200,000 shares of the Company in its own name. The 1st defendant by original action Chin Foh Trading (HK) Ltd. (“Chin Foh”) used to hold 15,300,000 shares of which 1,800,000 shares were held by it on trust for Mok and 4,500,000 shares were held by it on trust for one Skywill Holdings Ltd. (“Skywill”). Skywill in its own name also held 7,500,000 shares. 4.Skywill thus beneficially owned 12,000,000 shares, Chin Foh beneficially owned 9,000,000 shares and Mok also beneficially owned 9,000,000 shares. In February 2001, Mok with the consent of the other shareholders transferred the 7,200,000 shares registered in its name to the 1st plaintiff by original action Champion Star Enterprise Ltd. (“Champion Star”). 5.In the board of the Company, Chin Foh was represented by the 2nd defendant by original action Kuan Pek Seng (“Alan Kuan”) and the 3rd defendant by original action Chung Yat Wai Sunny (“Sunny Chung”). Alan Kuan had an alternate director called Chong Pang (“Chong”). Skywill was represented by Wong Siu Hau (“Wong”) and his wife Yam Yan Sheung (“Yam”) and Champion Star and Mok were represented by the 4th plaintiff by original action Madam Chan Ping Wanda (“Wanda Chan”) and the 5th defendant by counterclaim Chan Kam Wing, Derek (“Derek Chan”). 6.The subsidiary of the Company involved in this action is called Shenzhen Zhaoguan Glass Industrial Company Ltd.(深圳兆冠玻璃實業有限公司)(“the Subsidiary”). 7.The relationship of the parties deteriorated sometime in 2001. The cause of the problem was the alleged misappropriation by Wong of over $17 million from the Company. The parties then negotiated for the sale and purchase of their shares in the Company. In a board meeting of the Company held on 19 April 2001, Madam Wanda Chan suggested several sale and purchase options; namely: (i) that Champion Star and Mok could sell their shares to Chin Foh and Skywill; (ii) Champion Star, Mok and Chin Foh could together buyout Skywill; (iii) Skywill could buyout Champion Star, Mok and Chin Foh; (iv) Chin Foh could buyout every body else; or (v) Champion Star and Mok could buyout everybody else. Chong also suggested that if the existing shareholders were unwilling to buyout the others, the sale could be made to a third party. 8.When the negotiation continued, the parties were represented by solicitors. Champion Star and Mok were represented by Louis K. Y. Pau & Co. Chin Foh and Skywill were represented by Li, Wong and Lam. 9.As a result of the negotiation, Chin Foh agreed to purchase from Champion Star the 7,200,000 shares in its name and from Mok the beneficial interest in the 1,800,000 shares held by Chin Foh on trust for Mok (collectively called “the Shares”). The purchase price was at the par value of the Shares at $9,000,000 (“the Consideration Money”). The terms of the agreement were embodied in a Chinese provisional agreement dated 6 October 2001. 10.The Subsidiary owed the 3rd plaintiff Madam Chan Kam Chu HK$3,000,000.00 (“the Debt”). The Debt was also dealt with in the negotiation as part of the sale and purchase of the Shares. In the negotiation, Chan Kam Chu was represented by Wanda Chan, Derek Chan and Louis K. Y. Pau & Co. As part of the sale and purchase of the Shares, the parties also entered in a repayment agreement which governed the repayment of the Debt by Chin Foh for the Subsidiary to Chan Kam Chu. 11.The 2nd and 3rd defendants by original action guaranteed the payment by the 1st defendant of the Consideration Money and the Debt. 12.On the basis of the provisional agreement and the repayment agreement both dated 6 October 2001, the four plaintiffs by original action (“the plaintiffs”), the three defendants by original action (“the defendants”) and the Subsidiary entered into an agreement dated 23 May 2002 (“the Agreement”). The terms of the Agreement 13.The relevant provisions of the Agreement are as follows:
The default 14.Chin Foh duly paid the $600,000 as part of the Consideration Money and $700,000 as part of the Debt. It also delivered 24 post-dated cheques for payment of the balance of the Consideration Money under clause 2(c)(i) of the Agreement and 9 post-dated cheques to pay the balance of the Debt under clause 5(b)(ii). However, only the first cheque in each group was honoured. For the remaining 31 cheques, 23 of them were dishonoured upon presentation and 8 were not presented. The dishonoured cheques included the second cheque in each group. 15.The balance of the Consideration Money plus interest accrued less the amounts paid as per the First Schedule of the Agreement is HK$9,257,500 and the balance of the Debt plus interest accrued less the amounts paid as per the Second Schedule is HK$2,167,500. The Agreement also provided for interest at 15% per annum on the unpaid balances. On the terms of the Agreement, the balance of the Consideration Money and of the Debt had become due and payable and Alan Kuan and Sunny Chung, as guarantors, were also liable to pay the same. 16.By an e-mail dated 17 September 2003 from Alan Kuan to Wanda Chan and copied to Derek Chan, Kuan told them his cash flow problems which had prevented him from paying the outstanding amount. In about November 2003, Alan Kuan paid Wanda Chan $50,000 for indulgence in time to pay under the Agreement. This payment, however, is not one of the grounds of defence. The action 17.Demand letters were sent by the plaintiff’s former solicitors to Chin Foh, Alan Kuan and Sunny Chung on 30th March, 2004. The letters did not invoke any meaningful response and the plaintiffs commenced this action on 14 April 2004 against the defendants for payment of the said sums. The plaintiffs have alternative claims against the defendants for $6,440,000 and $1,863,750 as the sums of the dishonoured cheques for the Consideration Money and the Debt respectively. Grounds of defence 18.Chin Foh and Alan Kuan filed a defence and counterclaim which was amended in response to an amendment to the statement of claim. They pleaded that in or about the end of 2001 to early 2002, the parties had negotiated for the sale and purchase of the Shares. During the negotiations, Wanda Chan and Derek Chan acted for Champion Star, Mok and Chan Kam Chu and Alan Kuan acted for Chin Foh. They had no less than 5 meetings in Hong Kong and Malaysia. During the negotiations, Wanda Chan and Derek Chan produced draft accounts of the Company and its 3 subsidiaries including the Subsidiary ending January 2002 and orally represented and warranted to Alan Kuan as follows: (i) About 80% of the total account receivables of the Company and its 3 subsidiaries at $48,030,452 were collectible within 24 months; 19.These 2 defendants further pleaded that the said representation and warranty were to induce Chin Foh to purchase the Shares at the Consideration Money, to acknowledge the Debt owed by the Subsidiary to Chan Kam Chu, to repay the same to her and to induce Alan Kuan to provide his guarantee in the Agreement. They also pleaded that they entered into the Agreement on the faith of and induced by the said representation and warranty. 20.They then pleaded that the representation was untrue and was made recklessly and the warranty had been breached in that: (i) more than 70% of the $48,030,452 account receivables were not collectable within 24 months of the making of the Agreement; 21.They also pleaded that there was an implied term in the Agreement that Champion Star, Mok, Wanda Chan, Chan Kam Chu or Derek Chan would provide to Chin Foh detailed information of all the debtors or debts that constitute the said account receivables within a reasonable time after the making of the Agreement. In breach of the implied term, they had not provided any information of the debts or debtors and Chin Foh encountered tremendous difficulties in ascertaining or collecting the debts. Chin Foh and Alan Kuan then pleaded that the Company was insolvent, the Shares were worthless and the plaintiffs were not entitled to be paid the Consideration Money or the Debt by them. Summary judgment 22.The plaintiffs applied for summary judgment on 13 October 2004. The application was supported by affirmations made by Wanda Chan and Derek Chan both filed on the same date. Affirmations 23.Miss Wanda Chan in her affirmation dealt with the background on the formation of the Company and the alleged misappropriation of over $17 million by Wong. She also produced the correspondence exchanged between the solicitors for the parties which showed that she had complained to Alan Kuan about Wong’s alleged misconduct. The letters also showed that Chin Foh had access to the accounts of the Company and had conducted enquiry on her allegation against Wong. 24.Miss Wanda Chan also denied of having made the alleged misrepresentation or warranty. She said Chin Foh and Alan Kuan were fully aware that the credit period of the customers of the Company ranged from two to three months only except for retention monies payable to a subsidiary called Chung Hing Glass Engineering Ltd (“Chung Hing”) which would be held by the employers for no more than a year after the completion of the relevant projects. She denied that the Company was insolvent. She also referred to the e-mail dated 17 September 2003 from Alan Kuan. 25.Mr Derek Chan in his affirmation also denied of having made the alleged misrepresentation and warranty. He on the whole corroborated Miss Wanda Chan in her affirmation. 26.Mr. Alan Kuan made an affirmation to oppose the application. He admitted that Sunny Chung and Chong had access to the accounts of the Company. He also admitted that in late 2000 or early 2001, Wanda Chan had complained to him about Wong’s alleged misappropriation of money of the Company and she wanted Wong to leave the Company. He then asked Sunny Chung and Chong to investigate this matter. However, Sunny Chung and Chong after investigating the matter did not say that Wong was guilty of the misconduct alleged by Wanda Chan. He then referred to and confirmed the allegations of misrepresentation and warranty and his reliance on them all as pleaded in the amended defence and counterclaim. He also said that Wanda Chan was eager to go ahead with the transaction despite Chin Foh’s lack of funds. Wanda Chan also procured a loan of $3 million to facilitate the transaction and had proposed to accept post-dated cheques as conditional payment. He further said that he did not realize the falsity of the representation when he wrote the e-mail to Wanda Chan seeking indulgence for payment. As the Company continued to suffer financially, he then instructed the Company's financial controller Ching Yiu Kuang (“Ching”) to investigate on the amount of account receivables that could be collected. He then found out the falsity of the representation as pleaded in the amended defence and counterclaim. 27.Chin Foh and Alan Kuan also filed an affirmation by Ching who produced a large number of so-called investigation reports on the account receivables and the debtors. But he did not produce any audited accounts of the Company from 1 May 2002 onwards. He also produced a legal opinion from a lawyer of the Mainland alleging that the Debt was irrecoverable according to the law of the Mainland. Analysis
28.I firstly deal with the argument of the so-called implied term. I do not think that there is the necessity to imply this term so as to make the Agreement work. There is also no evidence of any request by Chin Foh or Alan Kuan to the plaintiffs for any detail of the debtors or that the plaintiffs had refused to provide such details. Even if the term could be implied, there is no evidence of any breach. This argument thus fails.
29.Mr. Ho argued for Chin Foh and Alan Kuan that the cheques tendered in this case should not be treated as cash as they were only provided for convenience rather than payment. To support this argument, he referred me to the provisions in the Agreement where Chin Foh could deposit cash into the account of Champion Star to redeem the cheques or to pay early so as to reduce the amount of interest payable. There were also provisions to accelerate payments upon default. I do not agree with this argument. Clauses 2(c)(i) and 5(b)(ii) clearly provide that the cheques were to be used for payments. They were not provided for convenience. The provisions referred to by Mr. Ho merely provided Chin Foh with other options to effect payment. The provision on acceleration of payments is for ensuring prompt payments. Since the cheques were tendered as payments, Chin Foh has not advanced any defence to the respective sums of $6,440,000 and $1,863,750 which are the sums of the dishonoured cheques for the Consideration Money and the Debt respectively.
30.In the Agreement, there is no warranty given by Champion Star, Mok, Chan Kam Chu or Wanda Chan on the accuracy of any audited or management account or that any account receivable could be collected within any period. If Chin Foh and Alan Kuan should have relied on the alleged representation and warranty, there was no reason why their solicitors would not have included such representation and warranty in the Agreement and annexed the relevant accounts to the Agreement. 31.The content of the misrepresentation also lacks common and commercial sense. I cannot understand how business can be operated if the proceeds for goods sold and delivered and services rendered cannot be collected within a few months. Retention moneys in construction projects may be retained longer, but the period normally would not be as long as 2 years. If Wanda Chan and Derek Chan should have made the alleged misrepresentation, Alan Kuan, Sunny Chung and Chong would no doubt have queried them on what sort of account receivables there were and why it would take so long to collect them. However, it is not the case of Chin Foh and Alan Kuan that they had made the query. Their case is simply that they had accepted and acted on the representation and warranty as made without query. Such attitude lacks common and commercial sense and is hard to believe. 32.Again on the content of the misrepresentation, the amount of debt owed by Wong to the Company was $18,755,133 and constituted 39% of the total account receivables. Alan Kuan had instructed Sunny Chung and Chong to investigate this debt when Wanda Chan accused Wong of misappropriation. Thus Kuan should have learnt about this debt from the investigation with Wong. If there was any representation on the time of repayment of this debt, it would have come from Wong rather than from Wanda Chan or Derek Chan. In fact, Wanda Chan was accusing Wong of misappropriation of money. I cannot see how she could have represented to Kuan on the time when Wong would repay the money. Even if Wanda Chan should have made any misrepresentation as to when Wong would repay, Kuan should have verified the same with Wong. It would have been most unreasonable for him not to do so. He would therefore have no difficulty in exposing the misrepresentation if it had been practiced on him. I therefore do not think that Wanda Chan and Derek Chan would have told Alan Kuan that 80% of the account receivables would be collected within 24 months. 33.Alan Kuan also said that the misrepresentation was made by Wanda Chan and Derek Chan by using the draft account for the period ending January 2002. But that was impossible as by the provisional agreement and repayment agreement, Chin Foh had on 6 October 2001 already committed to pay the $9,000,000 Consideration Money and to the $3,000,000 Debt and Alan Kuan had on the same date guaranteed Chin Foh’s obligations. They committed to these obligations before there was any account, draft or otherwise, for the period ending January 2002. This account was too late for the alleged misrepresentation. It could not have been used to mislead Alan Kuan. The amount of account receivables totalling $48,030,452 as at the end of January 2002 would also not have been known on as early as 6 October 2001. The amended defence also pleads the misrepresentation to have been made in late 2001 to early 2002. That again was too late for the provisional agreement and repayment agreement which were made on 6 October 2001. 34.Alan Kuan said that he did not discover the misrepresentation even in November 2003 when he paid the $50,000 indulgence money. That was about 1-½ years after the Agreement was made. But how was it possible that he would not have found out the falsity of the misrepresentation, if it had been made as alleged, when less than 10% of the account receivables had been collected by 30 April 2004. 35.Though Alan Kuan said that he had not discovered the falsity of the misrepresentation in November 2003, he also failed to respond to the demand letter sent to him on 30 March 2004. The misrepresentation argument only appeared for the first time in the defence filed on 10 May 2004. It is not supported by any contemporaneous document. 36.At this juncture, it is useful to refer to some statements of principle on application for summary judgment. Godfrey, J.A. said in Ng Shou Chun v. Hung Chun San [1994] 1 HKC 155 at 158G:
37.Bohkary, J.A. has also said in Re Safe Rich Industries Ltd. CACV 18/1994:
38.Based on the above analysis, I hold that the allegation of misrepresentation and warranty are unbelievable.
39.A Chinese lawyer, on the basis of certain representation by the Subsidiary to him and some information provided to him, gave some vague grounds to suggest that there was no enforceable debt due from the Subsidiary to Mok. He thus further opined that the assignment of the Debt by Mok to Chan Kam Chu did not make the Debt enforceable by Chan Kam Chu against the Subsidiary. Hence, the Chinese lawyer said that Debt was unenforceable. However, the Chinese lawyer did not disclose the representation made by the Subsidiary to him or the information he received. In any case, the Debt was not simply assumed by Chin Foh independently. Chin Foh assumed the obligation to pay the Debt as part of the consideration for its purchase of the Shares. The payment of $9,000,000 was not the only consideration for the Shares. The Debt, once assumed by Chin Foh in the Agreement, had changed its identity. Even if the Debt were unenforceable under the Mainland’s law before it was included as part of the consideration in the Agreement, which I doubt, its inclusion into the Agreement as part of the consideration for the sale of the Shares has changed its nature. It has become part of the price that Chin Foh had to pay for the Shares. The Chinese legal opinion thus cannot save Chin Foh or Alan Kuan from their obligation to pay the balance of the Debt and the interest accrued.
40.Mr Ho has in his written submissions also advanced a defence based on section 45(a) of the Bills of Exchange Ordinance. However, he indicated at the hearing that he was no longer relying on this. I therefore say no more about this. Judgment 41.By reason of the foregoing, Chin Foh and Alan Kuan have not been able to show any ground of defence to this action. Chin Foh is liable to pay the sums in the dishonoured cheques. However, Chin Foh and Alan Kuan are also liable to pay the plaintiffs the balance of the Consideration Money and of the Debt as adjudged by Master Lung. There is no issue or question in dispute which ought to be tried and there is also no other reason for a trial of this claim. I therefore dismiss the appeal. I also make an order nisi that the 1st and 2nd defendants do pay the 1st, 2nd, 3rd and 4th plaintiffs the costs of this appeal.
Mr Lau Wai Man Raymond, instructed by Messrs Ha & Ho, for the 1st, 2nd, 3rd and 4th Plaintiffs Mr B K Ho, instructed by Messrs Liu, Chan & Lam, for the 1st and 2nd defendants | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||