Goldlion Properties Ltd and Others v. Regent National Enterprises Ltd

HCMP5273/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5273 OF 2003

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BETWEEN

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Before : Deputy High Court Judge Longley in Court

Dates of Hearing : 1-3 and 30 November and 1 and 4 December 2006

Date of Judgment : 29 January 2007

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J U D G M E N T

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1.This is an originating summons seeking an order of specific performance against the defendant as vendor of property currently known as the Kimberley Hotel at 28 Kimberley Road and 28 Kimberley Street (“the Property”) by virtue of an Agreement for Sale and Purchase dated 23 July 2003 (“the Sale and Purchase Agreement”).

2.The 1^st plaintiff was the other party to the Sale and Purchase Agreement as purchaser.  The 2^nd, 3^rd and 4^th plaintiffs are companies to whom the 1^st plaintiff has transferred rights under the Sale and Purchase Agreement by virtue of subsequent nominations.

3.The Sale and Purchase Agreement provided that completion should occur on or before noon on 21 November 2003.

4.At 10:21 p.m. on 20 November 2003, less than 14 hours before the deadline for completion under the Sale and Purchase Agreement, the solicitors handling the conveyancing aspect of the transaction on the defendant’s behalf, Messrs Koo & Partners, faxed a letter dated the same day to the 1^st plaintiff’s solicitors, Messrs Johnson, Stokes & Master, purporting to exercise its rights under Clause 13.2 of the Sale and Purchase Agreement to terminate the sale.

5.Thereafter the defendant did not complete the sale by the deadline provided in the Sale and Purchase Agreement or at all.

6.The issue before this court now is simply whether the defendants were entitled to invoke the provisions of Clause 13.2 and by reason thereof not to complete the sale.

7.For reasons I gave in a ruling on 2 November 2006 I ordered that a recently raised second issue as to whether the Bank of China agreed to release its rights under a debenture on payment to it by the defendant of the proceeds of sale (which would need to be determined before an order for specific performance could be made in the plaintiffs’ favour) be, if necessary, tried separately and subsequently either in, or utilizing the procedure of, an action begun by writ.

8.The relevant part of Clause 13.2 is in the following terms :

“13.2      Notwithstanding the provisions in Clause 13.1 above, the parties hereto agreed that should the Vendor become unable or fail to complete the sale and purchase of the Property on the completion date due to any matter (including and without limitation to third party action) beyond the reasonable control of the Vendor and which in the reasonable opinion of the Vendor materially hinders, prevents or obstructs the completion of the sale and purchase of the Property, the Vendor shall, within 3 business days of the date fixed for completion, return all deposits and other monies paid by the Purchaser in connection with the purchase of the Property, together with all interests accrued thereon and the actual costs incurred by the Purchaser in connection with the purchase, as full and final settlement of the Purchaser’s claim herein and (conditional upon the receipt of such deposits, interests and costs) the Purchaser shall not take any further action to claim for damages or to enforce specific performance.”

9.In circumstances where the vendor had exercised its rights under Clause 13.2, Clause 13.3 gave the disappointed purchaser a right of pre-emption in the following terms :

“13.3      If the Vendor, after having invoked the provisions of Clause 13.2, is in a position to offer the Property for sale in future, it shall grant to the Purchaser the following right of pre-emption over the Property :-

(a)   If the Vendor receives a bona fide arm’s length offer or bid for the purchase of the Property which the Vendor is prepared to accept, then it shall before acceptance give written notice of that offer/bid to the Purchaser (the ‘Notification’) accompanied by details of the price and terms offered by the third party;

(b)   If within 3 days of receipt of the Notification the Purchaser gives the Vendor written notice of its desire to purchase, then the Purchaser shall be allowed an opportunity to match the same.”

10.The background to the sale of the Property is relevant to the question of whether the defendant was justified in invoking the terms of Clause 13.2.

11.The defendant company (a Hong Kong company) is a wholly owned subsidiary of High Pressure Resources Ltd (“High Pressure”) (a BVI company).  High Pressure is a wholly owned subsidiary of Kimberly Hotel Holdings Ltd (“KHHL”) (also a BVI company).

12.The largest asset of the defendant was the Property, namely the Kimberly Hotel.  The Property was charged as security for a loan facility of up to US$200 million (“the loan agreement”) granted by the Bank of China in favour of the defendant under a debenture dated 6 June 1996 and a second mortgage dated 11 June 1997 between the defendant and the Bank of China.  The loan agreement stipulated that the loan was to be guaranteed by Mr Stephen Lau Hei Wing (Stephen Lau) at that time a director of the defendant.  In addition, pursuant to a share charge dated 29 May 1997 given by High Pressure and KHHL in favour of the Bank of China, all the shares in the issued capital of the defendant were charged in favour of the Bank of China.

13.It appears that there were repeated defaults by the defendant in the repayment of sums advanced under the loan facility.  On 2 October 2002 the Bank of China presented a petition for the compulsory liquidation of KHHL in the British Virgin Islands (“BVI”) on the basis of the failure by KHHL to make payment under a covenant by KHHL under the share charge to pay monies owing by the defendant under the loan agreement.  The sum allegedly owing at that stage was in excess of US$265 million.

14.An order for winding-up of KHHL was subsequently made in the BVI on the Bank of China’s petition and Mr Joseph Lo (“Joseph Lo”) and Mr Derek Lai (“Derek Lai”) (both partners of Deloitte Touche Tohmatsu (“Deloittes”)) were subsequently appointed as liquidators of KHHL by order of the BVI court.

15.Pursuant to their appointment as liquidators of KHHL, Joseph Lo and Derek Lai took over the management of the defendant by removing the then existing directors (who included Stephen Lau who up to then had been the principal management figure in the group) and appointing five corporate directors.

16.The liquidators then undertook the task of selling the hotel in order to apply the proceeds towards discharging the defendant’s outstanding liability to the Bank of China.  The unchallenged oral evidence of Joseph Lo in these proceedings was that as between the co-liquidators he was the sole person making decisions regarding the sale of the Property.  Derek Lai played no part.  He also stated that the new directors of the defendant company would only sign documents in relation to the sale of the Property if he instructed them to do so.

17.There are three principal events which occurred between the signing of the Sale and Purchase Agreement on 23 July 2003 and the deadline for completion which the defendant maintains brought the situation within one contemplated by Clause 13.2 and justified it not proceeding with the sale.

18.The first was a petition for the winding-up of the defendant company filed in the High Court of Hong Kong on 19 November 2003 by a company named Waygood Investment Ltd (“The Waygood Petition”).  This matter was referred to in Koo & Partners’ letter of 20 November 2003 terminating the sale.  It is not now disputed by the plaintiffs that Mr Campbell Korff of Messrs Clifford Chance who were the solicitors acting for the defendant in relation to “contentious matters” in relation to the sale (as opposed to conveyancing matters) advised that by virtue of section 182 of the Companies Ordinance, Cap.32, it would be necessary in view of the winding-up petition to obtain the sanction of the court for the completion of the sale of the hotel pursuant to the Sale and Purchase Agreement, even though in his view it should be a formality.

19.The second matter was an application by Stephen Lau to the High Court of the BVI on 19 November 2003 for leave to appeal against the winding-up order against KHHL and a stay of the winding-up order pending appeal including in particular a stay of the sale of the company’s assets by the court appointed liquidators (“The BVI application”).  This matter was also referred to in Koo & Partners’ letter of 20 November 2003 terminating the sale.  The defendant’s solicitors were notified of this application by a faxed letter from Messrs Siao, Wen & Leung, the solicitors for Stephen Lau, dated 20 November 2003.  This letter emphasized the stay being sought covered the sale of the hotel by the defendant and warned of the claims that might arise from wrongful disposal of the defendant’s assets.  It is not disputed that Joseph Lo, the liquidator of the defendant, was not informed of this application until he stepped off an aeroplane from Beijing in the late afternoon of 20 November whereupon he requested a meeting with the defendant’s solicitors.  He only saw the Notice of Application and the supporting affirmation of Stephen Lau during the course of a meeting at the offices of Clifford Chance which started at around 6:30 to 7:00 p.m. that same evening.

20.The third matter was an injunction which it is admitted was made by the High Court of the BVI at about 5:00 a.m. Hong Kong time on 21 November 2003 (“The BVI Injunction”).  It is not seriously disputed, and I accept, that the defendant’s solicitors, Clifford Chance (whom as I have said it was consulting in relation to “contentious matters” relating to the sale) and Koo & Partners (who were handling the conveyancing) were not informed of this injunction until they received faxes marked 11:45 a.m. and 11:47 a.m. respectively on 21 November 2003.  It was at some stage thereafter, and exactly when is the subject of dispute, that Joseph Lo (the defendant’s liquidator) was informed.

21.The injunction was only obtained after Koo & Partners’ letter of termination at 10:21 p.m. on 20 November 2003.  It was not therefore referred to in the letter of termination.

THE INTERPRETATION OF CLAUSE 13.2

22.Before examining whether the defendant was entitled not to complete by virtue of Clause 13.2 it is necessary to resolve conflicting submissions from the parties as to the meaning of this clause.

23.It is common ground, and I accept, that Clause 13.2 is dealing with two situations :

(i)      an inability by the vendor to complete; and

(ii)      a failure by the vendor to complete.

It is logical to infer by reason of the reference to inability and failure in the alternative that the failure by the vendor to complete must be for reasons other than inability.

24.I am satisfied that the reference to inability must include both legal and practical inability to complete.

25.The clause refers to a situation where the vendor should become “unable or fail” to complete on the completion date “due to any matter (including and without limitation to third party action) beyond the reasonable control of the Vendor and which in the reasonable opinion of the Vendor materially hinders, prevents or obstructs the completion of the sale and purchase of the Property”.

26.It can therefore be seen that there are two qualifications to matters that can give rise to the situation contemplated by Clause 13.2 :

(1)     the matter must be beyond the control of the vendor; and

(2)     it must in the reasonable opinion of the vendor materially hinder, prevent or obstruct the completion of the sale and purchase of the Property.

27.It is the submission of Mr Ronny Tong, SC, for the defendant that these two qualifications, or at any rate the second, only qualify matters where the vendor fails to complete (i.e. where he has a choice in the matter) not when he is unable to complete.  He argues that in a situation where the vendor is unable to complete, its opinion would have little relevance.  The vendor would have no choice about whether to complete and so its opinion could not possibly affect the situation whether it would have to complete.  He points out that the use of the words “hinders” and “obstructs” are not apposite to a situation where the vendor is unable to complete.

28.The point of construction argued by Mr Tong is of considerable significance in this case because of its relevance to the BVI injunction of 21 November 2003.  It would mean that for the purpose of Clause 13.2 the defendant would not need to establish that it knew of the injunction at all prior to the 21 November 2003 deadline or that it had considered whether the injunction materially hindered, prevented or obstructed the completion of the sale and purchase of the Property.

29.I am satisfied that Mr Tong’s construction in this respect is not correct.

30.As a matter of simple grammatical construction, the words “due to any matter … beyond the reasonable control of the Vendor and which in the reasonable opinion of the Vendor materially hinders, prevents or obstructs the completion of the sale and purchase” qualify both the words “unable” and “fail” to complete.  This is reinforced by the last sentence of Clause 13.2 which is in these terms :

“… The Purchaser also agrees that (conditional upon such receipt as aforesaid) it shall have no claims against Deloitte Touche Tohmatsu, its partners, principals, directors, managers and staff, and in all cases, any successors or assignee, Bank of China (Hong Kong) Limited, their agent and solicitors by reason of the Vendor’s inability or failure to complete the sale hereunder for the reason aforesaid.”

31.Again, as a matter of grammatical construction, the words “for the reason aforesaid” (which must relate to the words “due to any matter … beyond the reasonable control of the Vendor and which in the reasonable opinion of the Vendor materially hinders, prevents, or obstructs the completion of the sale and purchase of the Property”) qualify both “inability and failure”.

32.While accepting that the construction of a document is an attempt to discover what a reasonable person would have understood the parties to mean (see Jumbo King Ltd v. Faithful Properties Ltd [1999] 2 HKCFAR 279),  Mr Tong’s suggested construction would involve the court disregarding a literal construction of the clause as it is drafted and effectively re-writing it.  The courts would be slow to take such a course unless it could be shown that the clause as drafted cannot possibly have expressed what the parties intended.

33.In my view that has not been demonstrated in this case.  As drafted the clause requires that the vendor should have known about and actively considered any particular matter which it subsequently relies upon as causing either an inability or failure to complete.  I accept the submission of Mr Huggins SC for the plaintiffs, that the parties have effectively agreed by the terms of Clause 13.2 that the defendant cannot rely on the general rule which would otherwise have applied, that if a party refuses to perform a contract, giving a wrong or inadequate reason or no reason at all, he may yet justify his refusal if there were at the time facts in existence which would have provided a good reason even if he did not know of them at the time of his refusal (see Chitty on Contracts, 29^th edition, Volume 1, paragraph 24-014).

34.The consequence of this construction would be that if an event occurred unknown to the vendor which rendered the defendant as vendor unable to complete, this might have the effect of frustrating the contract and relieving the parties of their obligation to complete but the terms of Clause 13 would not apply.

Reasonable opinion

35.It is common ground that the court must be satisfied that the defendant did in fact hold the opinion that it asserts and therefore that the “reasonable opinion” to which Clause 13.2 refers must be that of the defendant and not his solicitor.

36.The court must then go on to consider whether the opinion thus formed was objectively reasonable.

37.I accept the submissions made by Mr Huggins that the word “reasonable” relates to the quality of the opinion, in other words, whether it was reasonable from the point of view of logic and reason.

38.In considering whether it was reasonable from the point of view of logic and reason, the court is entitled to look at the knowledge and experience of the person or persons who made the decision, the circumstances prevailing at the time and whether the decision was reached as a result of the application of reason and logic, after enquires had been made and relevant matters considered.  While a person is entitled to take into account the advice of his lawyers as to matters beyond his expertise, the mere fact that his lawyers did or did not give certain advice does not make reasonable and otherwise unreasonable opinion made in reliance of on that advice.  In other words, the courts must look at all the relevant circumstances in deciding whether an opinion was reasonable.

39.While I accept Mr Tong’s submission that the court must consider whether the defendant’s opinion was bona fide and one within the range of possible reasonable opinions in all the circumstances, I do not accept his submission that on the analogy of Regal Success Venture Ltd v. Jonlin Ltd [2000] 3 HKCFAR 364, the court is bound to find the defendant’s opinion as reasonable unless it can quickly be seen to be absurd or ridiculous.  The situation in Regal Success was quite different to that in a case such as this.  That case involved a “solicitor’s satisfaction clause” where both parties had nominated an independent solicitor who would act for both of them in order to avoid protracted litigation where legally uncertain points as to title arose.  The term “reasonable” was not used in the Sale and Purchase Agreement.  The court was simply concerned with the basis upon which in those circumstances the opinion of the solicitor could be challenged.  In the present case, the court is dealing with the force majeure clause which specifically refers to “a reasonable opinion” where the person relying upon the clause must prove that the circumstances referred to in the clause have arisen, in particular that he held the specified opinion and that it was reasonable.

“Materially hinders, prevents or obstructs”

40.Without purporting to construe what each of the terms “hinders, prevents or obstructs” means in the context of Clause 13.2, it seems to me that the word “hinders” is the word with the widest scope and covers something making completion more difficult but not impossible (see Tennants (Lancashire) Ltd v. C.S. Wilson and Co. Ltd [1917] AC 495 at 518 per Lord Atkinson).

41.In Clause 13.2 all three words are qualified by the word “materially” which I find to mean “to an important extent, substantially or considerably” (Oxford English Dictionary).

The controlling mind of the defendant

42.The evidence of Joseph Lo was to the effect that he alone as liquidator took decisions in relation to the sale of the Property on behalf of the defendant.  He himself was not a director.  He did not defer to the representatives of the corporate directors of the defendant who had been appointed by him and Derek Lai in their capacity liquidators.  Indeed he did not consult them.  He gave evidence of what his opinion was about the circumstances that had arisen and attributed that opinion to the company.

43.Although the board of directors was the ultimate controlling mind of the defendant company, they could delegate their responsibilities in relation to any matter.  There is no evidence of the board of directors of the defendant company having by resolution expressly delegated to Joseph Lo their decision-making powers in relation to the sale of the Property on behalf of the defendant.  Indeed it appears that Joseph Lo may have simply arrogated to himself that authority by virtue of his role as liquidator of KHHL.  Nonetheless it appears from the evidence that the board of directors must have acquiesced in him assuming that role.  For the purpose of Clause 13.2, I take the view that the opinion of Joseph Lo can be attributed to the company.

44.This does not mean that the ultimate controlling mind and will of the company did not remain with the board of directors.  This is a relevant matter when considering the question of whether the defendant company was unable to complete the sale by reason of the BVI injunction.

1.   THE BVI INJUNCTION

45.I propose to deal firstly with the matter that came last in time.

46.At about 5:00 p.m. BVI time on 20 November 2003 (which it is agreed was 5:00 a.m. on 21 November 2003 Hong Kong time) the High Court of the BVI made an interim order on the ex parte application of Stephen Lau restraining the three respondents, namely (1) Joseph Lo (2) Derek Lai and (3) the defendant company “whether by themselves their servants agents or otherwise” “from carrying out any acts in furtherance of the Agreement for Sale dated 16^th day of July 2003” between the defendant and the 1^st plaintiff “for the sale of the property as described in Schedule 3 to the said Agreement for Sale including but not limited to the completion of the sale and conveyance of the property”.

47.I understand the “agreement for sale dated 16 July 2003” referred to in the injunction to be the letter of offer from the 1^st plaintiff dated 16 July 2003 which was accepted by the defendant the same day and which was formalized in the formal Sale and Purchase Agreement dated 23 July 2003.  The Kimberley Hotel was the property described in the paragraph numbered 3 of the letter of 16 July 2006.  Since I have not received submissions to the contrary I have assumed that it is accepted that the terms of the interim injunction would enjoin the three respondents from completing the Sale and Purchase Agreement dated 23 July 2003.

48.This interim injunction was not discharged until 17 December 2003 (BVI time) and so it was in effect at the time of the deadline for completion at noon on 21 November 2003.

49.Since the injunction was made after 10:21 p.m. the previous day (20 November 2003) when Koo & Partners on behalf of the defendant wrote to the plaintiff’s solicitors purporting to exercise its rights under Clause 13.2 to terminate the sale, the BVI injunction did not form any part of the reasons stated by the defendant for exercising its rights at that time.

50.It is nonetheless argued on behalf of the defendant that it is still entitled to rely upon the injunction as justifying its failure to complete by 12 noon on 21 November 2003.

51.By reason of the manner in which I have accepted Clause 13.2 must be construed, it follows that even if (which the plaintiffs do not accept) the injunction rendered the defendant legally unable to complete, the defendant would be unable to rely upon the injunction as triggering Clause 13.2 unless it was aware of the injunction.

52.In paragraph 30 of his 3^rd affirmation Joseph Lo maintained that he was informed “sometime prior to 12 noon on 21 November 2003” that the injunction had been granted.  He continued saying “when I heard of the injunction I felt reinforced in my decision the previous evening not to proceed with the completion of the sale”.  This aspect of Joseph Lo’s evidence was the subject of cross-examination.

53.It was apparent that he did not have any direct recollection of the time when he was first informed of the injunction and was relying on inference from the documents.  He could not even be sure where he was at the time.  Eventually he said that he was probably playing golf.  He did recall that it was his assistant Glen Ho who had called him to inform him of the injunction and that it was “probably late in the morning”.

54.It was apparent that one of the documents which had helped him draw the inference that he had learnt of the injunction before noon was a letter dated 22 November 2003 from Clifford Chance, the defendant’s solicitors, to Siao, Wen & Leung, Stephen Lau’s solicitors in which a reference had been made to a call between a Miss Chan of Siao, Wen & Leung and Mr Campbell Korff of Clifford Chance at approximately 10:00 a.m. on 21 November 2003.  Joseph Lo said in evidence that the letter suggested that Campbell Korff had been informed of the injunction around or shortly after 10:00 a.m.  I am satisfied that this was a mistaken inference from that letter and that the call being referred to cannot have related to the injunction.

55.As I have already stated I find that Clifford Chance and Koo & Partners, the defendant’s two firms of solicitors, were not informed of the matter until they received faxes timed at 11:45 and 11:47 a.m. on 21 November 2003 respectively.  Those faxes were sent to the general fax numbers of those firms.  The faxes would therefore have had to be passed to or drawn to the attention of the person dealing with the matter who would thereafter have had to contact Glen Ho of Deloittes who then telephoned Joseph Lo.  While it is not impossible that Joseph Lo was informed before 12 noon on 21 November 2003, the defendant has failed to show that it was probable.

56.Bearing in mind that on the facts it was the opinion of Joseph Lo that was relevant for ascertaining the opinion of the defendant, the defendant has failed to show that prior to the deadline for completion Joseph Lo had formed any opinion about the BVI injunction.  This therefore is decisive in so far as the BVI injunction is concerned.

57.Even if I had reached a different view as to the construction of Clause 13.2 and found that the words relating to the opinion of the vendor did not qualify an inability to complete, I would not have been satisfied that this was a case where the defendant had shown that the BVI injunction rendered the defendant “unable” to complete.

58.The defendant was a Hong Kong company.  There is nothing to suggest that any of its directors was subject to the jurisdiction of the BVI court.  The 1^st plaintiff had exercised its right under Clause 3.1 of the Sale and Purchase Agreement to nominate the 2^nd plaintiff, a Hong Kong company, as the party to whom the property should be assigned.

59.There is nothing to suggest that the BVI injunction had any force in Hong Kong.

60.Even though Joseph Lo, whose appointment as liquidator had been by the BVI court, might have been in breach of the injunction if he had aided or abetted a breach of the injunction, there was nothing as a matter of law preventing the directors of the defendant company themselves authorizing the completion of the sale.  Even though the directors may have been appointed by the liquidators and subject to removal by them and even though as a matter or practice they had followed the directions of Joseph Lo as liquidator, there was nothing as a matter of law or in fact rendering them unable to complete the sale without his instructions.

2.     THE WAYGOOD PETITION TO WIND UP THE DEFENDANT

61.In their letter faxed to the plaintiff’s solicitors at 10:21 p.m. on 20 November 2003 purporting to terminate the Sale and Purchase Agreement by virtue of Clause 13.2 of that agreement, the defendant’s solicitors (Koo & Partners) referred to the winding-up petition filed by Waygood in the High Court of Hong Kong the previous day as one of the two matters which they alleged were beyond the reasonable control of their client and which in their client’s reasonable opinion materially hindered, prevented or obstructed completion.  They referred to the provisions of section 182 of the Companies Ordinance, Cap. 32.

62.Section 182 provides :

“In a winding up by the court, any disposition of the property of the company, … made after the commencement of the winding up, shall, unless the court otherwise orders, be void.”

63.Section 184(2) of the Ordinance provides :

“In any other case (and this case would fall into that category), the winding up of a company by the court shall be deemed to commence at the time of the presentation of the petition for the winding up.”

64.It is common ground that completion of a specifically enforceable contract for the sale of land entered into before the presentation of a winding-up petition cannot constitute a disposition of the company’s property : Re French’s (Wine Bar) Ltd [1987] BCLC 499.

65.Mr Huggins argues that this was plainly an unconditional contract and therefore specifically enforceable and there was no need for a validation order from the court.  He does however concede that, as the plaintiffs have not challenged the evidence of Mr Campbell Korff in his affidavit of 29 December 2005, the defendant received advice from Mr Korff that it would be necessary for the defendant to obtain the sanction of the court pursuant to section 182 even though in Mr Korff’s view it ought to be a formality.

66.Even if it was necessary to obtain a validation order from the court it is not suggested that the court could not grant such validation retrospectively.

67.Three questions arise for the determination of the court :

(i)      Was the defendant’s failure to complete “due to” the presentation of the winding-up petition?

(ii)      Whether the presentation of the winding-up petition and the consequences thereof were beyond the reasonable control of the vendor? and

(iii)     Whether the defendant held the opinion that the petition materially hindered, prevented or obstructed the completion of the Sale and Purchase Agreement?

(i)      Causation

68.It is the contention of the plaintiffs that what caused the defendant to fail to complete was in reality the defendant’s desire to follow the wishes of the Bank of China after having received a letter from the Bank’s solicitors, Gallant Ho & Co., on 20 November 2003 indicating the Bank’s views, rather than the presentation of the winding-up petition or the BVI application of 19 November 2003 themselves.  It is an allegation of lack of bona fides.  I propose to deal with that issue later in the context of my consideration of the BVI application.

69.I would observe at this stage that even on the evidence of the defendant the presentation of the winding-up petition would have played a very minor part in the decision to terminate under Clause 13.2.

70.The decision by Joseph Lo to invoke Clause 13.2 was only taken during a meeting in the evening of 20 November 2003 at the offices of Clifford Chance after he had arrived back in Hong Kong from Beijing.  The last time he had been involved in a discussion about the matter was in a conference call with Campbell Korff of Clifford Chance and Koo & Partners while he was in Beijing.  Those who were party to the call were aware of the presentation of the petition.  On Joseph Lo’s evidence the decision he made during the conference call was to proceed to completion despite the presentation of the petition.

71.On Joseph Lo’s evidence of the meeting in the evening of 20 November, he had not been given any idea of what steps had been taken to obtain a validation order and there had not been much discussion about section 182 “because we were preoccupied with another more important scenario” namely, “the BVI action between Stephen Lau and the Bank of China”.

72.It is clear that the winding-up petition on its own would not have resulted in the defendant’s decision to invoke Clause 13.2.

(ii)     Beyond the reasonable control of the vendor

73.By virtue of the terms of Clause 13.2 the burden lies on the defendant to establish that the matter which caused it to fail to complete (i.e. the presentation of the petition) was beyond its reasonable control.  Even without this express requirement the law requires that a party claiming the protection of a force majeure clause such as this must prove that there were no reasonable steps which it could have taken to avoid being prevented from performing its obligation by the event said to be within the clause : Channel Island Ferries Ltd v. Sea Link UK Ltd [1988] 1 LLRR 323.

74.In this case the defendant had express warning of the presentation of the petition on 25 October 2003 when Siao, Wen & Leung wrote a letter on behalf of Waygood demanding a sum of $49,037,812 and threatening to issue a winding-up petition if that sum was not paid within three weeks.  The same firm of solicitors had written similar letters on behalf of Synergy Finance Ltd and Stephen Lau more or less simultaneously.

75.Although the impression given by Joseph Lo’s affirmation of 27 January 2004 was that it was not until the presentation of the petition two days before the deadline for completion that the defendant had sought and received legal advice about the effect of the presentation of a petition, in fact the defendant had received advice from Clifford Chance in a letter of 28 October 2003.

76.That letter advised that it would be prudent to obtain a validation from the court.  It suggested that the liquidators “may wish to consider producing” documentary evidence to the alleged creditors demonstrating that the defendant was not indebted to them.  It pointed out that the presentation of a petition for winding up of the defendant was likely to cause some delay to the completion of the sale of the hotel.  Joseph Lo gave evidence of subsequent discussions with Clifford Chance.

77.The view taken by Joseph Lo after receiving the advice was that although he did not believe that the defendant was indebted to these alleged creditors he needed to have enquiries carried out to confirm that that was so.  He said that if the defendant was not indebted to them he had “nothing to worry about” and it was just “an empty threat”, just one of a number of threats from Stephen Lau and his companies.

78.Apart from making these enquiries and thereafter Clifford Chance sending a letter of 10 November 2003 to Siao, Wen & Leung denying that the defendant was indebted to their three clients in the sums alleged and informing them that any petition would be vigorously defended, nothing significant was done to anticipate the presentation of a petition by one or more of these three alleged creditors despite the fact that Joseph Lo was aware of the ability of the company to seek an order restraining the presentation of a petition (Mann v. Goldstein [1968] 1 WLR 1091).

79.I am satisfied it was within the power of the defendant to seek an order restraining the presentation of the petition and thus forestalling the situation that ultimately arose.  Was it reasonable to take such a step?  I am of the view that it was.  Joseph Lo was a partner in Deloittes and an experienced liquidator.  It was no answer for him to rely upon the fact that he did not receive express advice from his solicitors that he should seek such an order when he knew such an option was open to the defendant and had received no advice to the contrary.  He would have known from the correspondence dating back at least to 14 August 2005 that Stephen Lau was aggrieved by the proposed sale of the Kimberley Hotel, that a winding-up petition, which was threatened to be presented shortly before completion was due to occur, would “cause some delay to the completion of the sale of the hotel” (see Clifford Chance’s letter of advice of 28 October 2003).

80.It would not have been a waste of legal costs as he suggested, even though there might have been no foundation to the allegation of indebtedness on the part of the defendant company, bearing in mind the magnitude to the transaction.

81.As an alternative, bearing in mind that the burden lies on the defendant to show that the failure to complete was due to a matter beyond its reasonable control, it has failed to adduce any adequate evidence of the steps it took, bearing in mind the explicit threat of a winding-up petition, to prepare an application and secure an appointment before a judge to obtain a validation order prior to the noon deadline on 21 November 2003 and in particular why it ceased attempts to seek a validation order after 10:21 p.m. on 20 November 2003.  As a further alternative it has failed to show it took any steps to seek the agreement of the plaintiffs to completing the sale before the noon deadline but going through “the formality” of obtaining a validation order thereafter.  In summary I find that the defendant has failed to show that the presentation of the petition was a matter beyond its reasonable control or that, even if it had been, the consequences were not within such control.

(iii)    The opinion of the defendant

82.I find that the failure of Joseph Lo to take any steps beyond the letter denying indebtedness to forestall the presentation of a winding-up petition indicates that prior to the presentation of the petition, the defendant did not consider the presentation of a petition would materially hinder, prevent or obstruct completion.

83.In view of the unchallenged evidence of Mr Korff that he had advised that it would be necessary to seek a validation order, it was reasonable for Joseph Lo to accept that advice.  Mr Korff had however told him that in his view it should be a formality.

84.Against the background of a belief that the petition was groundless, Joseph Lo’s conduct, even after the presentation of the petition, indicated a believe that the obtaining of a validation order was a minor technical issue and not a substantial or considerable difficulty.

85.Up to the time he boarded the aeroplane in Beijing for Hong Kong in the middle of the day on 20 November 2003, he admitted that he was of the view that the sale should go ahead despite the presentation of the petition.

86.It was only after he arrived in Hong Kong and was at the meeting at Clifford Chance’s offices that his view changed.  Mr Korff’s evidence of the advice that he gave Joseph Lo regarding the petition at that meeting is contained in paragraphs 15(b) and (c) of his affidavit of 29 December 2005.  Essentially it was to the effect that it was highly unlikely that the defendant would be able to obtain an appointment before a court to obtain a validation order or to strike out the petition before the noon deadline on 21 November 2003.

87.However he said this :

“In the circumstances, I advised the Defendant that it would be sensible and prudent for it to inform the 1^st Plaintiff of the presentation of the Petition and leave it for the 1^st Plaintiff to decide whether it would prefer to proceed with the completion of the sale and obtain sanction under Section 182 retrospectively, or whether it would agree to allow completion to be delayed until after sanction had been obtained from the Court.”

88.This was advice that was not taken.  Without taking the advice and hearing the response of the 1^st plaintiff, the defendant could not have been of the reasonable opinion that the winding-up petition had materially hindered, prevented or obstructed completion of the sale and purchase.

3.       THE BVI APPLICATION

89.The defendant has not sought to prove that the application by Stephen Lau of 19 November 2003 to the High Court of the BVI for leave to appeal against the winding-up order made one year previously and the stay of that order rendered the defendant “unable” to complete under the Sale and Purchase Agreement.

90.This court must therefore consider the defendant’s failure to complete under the same three headings as in relation to the presentation of the Waygood winding-up petition.

(a)     Causation

91.I am satisfied that Joseph Lo intended that the defendant should complete the Sale and Purchase Agreement, at least up until a time after he had landed in Hong Kong in the late afternoon of 20 November 2003.  According to his evidence, he then received a telephone call from his assistant, Glen Ho, telling him that Stephen Lau had commenced an action in the BVI against the Bank of China, in which he claimed sum greater than the sum claimed by the Bank of China that had led to the winding-up order against KHHL being made.  Joseph Lo said that he regarded this is a worrying factor as he felt it might affect the validity of his appointment and completion, so he asked to meet straightaway with Clifford Chance.

92.It was at that meeting that he saw a letter from Gallant Ho & Co., the solicitors of the Bank of China, dated the same day and, at least briefly, the papers relating to Stephen Lau’s application to the BVI court.  The letter referred to the winding-up petition and the BVI application by Stephen Lau and went on to say that the Bank of China believed that it would be prudent for the defendant to inform the 1^st plaintiff of the situation and to give notice that an event described in Clause 13.2 had occurred.

93.It is suggested by Mr Huggins that in reality what prompted the defendant through Joseph Lo to purport to exercise its right to terminate under Clause 13.2 was a desire to follow the wishes of the Bank of China rather than any genuine belief that a situation described in Clause 13.2 had arisen.  It is also suggested that what prompted the Bank of China to try to prevent the sale was a rising property market.

94.Any motives which the Bank of China might or might not have had for taking the position it did are not relevant to these proceedings.  I accept Joseph Lo’s evidence that such a motive on the part of the Bank of China had not crossed his mind.  Indeed I accept that he believed that the Bank of China’s concerns were on legal grounds.

95.The principal evidence supporting Mr Huggins’ suggestion lies in a conference note of the meeting of the evening of 20 November made by a member of the staff of Clifford Chance.  It is not alleged that Joseph Lo played any part in the making or approving of this note.  Part of that note is to the effect that as the sale was for the benefit of the Bank of China “if they don’t want to proceed we wouldn’t” and that “Bank of China should give us an answer as to whether to proceed”.

96.Joseph Lo was unable to explain this part of the note, beyond saying that he had a problem recollecting what had in fact been said.  He said that it might not necessarily reflect what he had said rather than being an analysis of the situation by someone from Clifford Chance.  The note did however later purport to record a summary of a conversation between Joseph Lo and the Bank of China during the meeting.  It was recorded that it was not the Bank of China’s intention to ask the defendant not to proceed with completion.  Indeed the Bank of China was not in a position to instruct the defendant because the defendant was not a receiver appointed by the Bank of China.

97.Joseph Lo’s evidence was that the letter from Gallant Ho & Co. was of secondary importance during the meeting, and that his prime concern was to obtain Clifford Chance’s advice on the effect of the BVI application on his appointment as liquidator and his actions that had resulted therefrom.

98.It is important to bear in mind that the letter from Gallant Ho & Co. recorded the Bank of China’s attitude that it would be imprudent to proceed in the light of the legal situation that had transpired.  At the commencement of the note of the meeting, it is recorded “BOC hesitant to complete (because) BVI action”.  What was being considered therefore was not a simple expression of the Bank of China’s wish not to proceed but what was stated to be a view that the Bank of China had taken of the legal position.  It appears that it was accepted that the Bank of China was concerned with the legal position because it is recorded that it could be pointed out to the Bank of China that as an alternative to a sale by the liquidator the bank could execute a sale under a power of attorney.

99.It was perfectly understandable that the Bank of China’s view as to the legal implications of the situation that had arisen would be taken seriously and considered carefully.  The bank was a mortgagee and effectively the sole creditor.

100.The conference note, read as a whole, does not suggest an attitude that the Bank of China’s views were to be followed slavishly although I am satisfied they do suggest a predisposition to take the same view as the Bank of China if the legal situation justified it.

101.There is no doubt that Campbell Korff of Clifford Chance did give his legal opinion.  The conference note records him advising that it would be imprudent to proceed with the BVI proceedings pending.  In his affidavit he says that bearing in mind that documents relating to the BVI action had only been received on the eve of completion, and there was insufficient time to seek advice from the BVI on the merits and impact of the BVI action, he had indicated that if Stephen Lau was successful in overturning the winding-up order, it was likely that the liquidator’s capacity to appoint the current management of the defendant and thus the current management’s capacity to enter into the Sale and Purchase Agreement would be challenged.  This accords with the evidence of Joseph Lo that the BVI application had the potential to invalidate his appointment and the actions that he took under that appointment.  I am satisfied that the defendant’s decision to invoke Clause 13.2 was based on this legal advice which happened to coincide with the view taken by the Bank of China.

102.It has to be borne in mind that the advice that Joseph Lo was being given was coming from a firm of solicitors, Clifford Chance, who had been specifically instructed to give advice on contentious issues so as to avoid any conflict of interest that might arise from the fact that the defendant’s conveyancing solicitors, Koo & Partners, also acted for the Bank of China.

103.I am satisfied that the defendants’ failure to complete was due to the BVI applications.

(b)     The opinion of the defendant

104.I am satisfied that, bearing in mind the legal advice he had received from Campbell Korff which was supported by the view of the Bank of China, Joseph Lo was justified in concluding that the BVI application at such short notice before the deadline for completion created a situation which materially hindered or obstructed completion.

105.Although an experienced liquidator I do not consider that Joseph Lo’s opinion could be said to be unreasonable simply because he relied upon Mr Korff’s opinion without questioning the legal basis for it, or how likely it would be that the validity of the sale could be impeached.  By Clause 3.1 of the Sale and Purchase Agreement, the defendant had agreed to assign the property subject to the agreement but otherwise free of encumbrances.  The advice Joseph Lo had received from Campbell Korff was to the effect that the title he would transfer was potentially defeasible.  Even if there were elements of Campbell Korff’s advice that he might have queried as Mr Huggins suggests, it would have been unreasonable to disregard even a small possibility that Campbell Korff’s advice was correct bearing in mind the possible implications on the sale.

106.I find that even a small possibility that the title to be passed to the plaintiffs was defeasible would be a material hindrance to the completion of the sale.

(c)     Beyond the reasonable control of the defendant

107.Unlike the situation with the Waygood winding-up petition, it is not suggested that there were any steps that the defendant could have taken to prevent the filing of the application before the BVI court.  The filing of the BVI application itself was therefore a matter beyond the reasonable control of the vendor.

108.That is not, however, an end of the matter.  Before it can rely on a “force majeure clause” like Clause 13.2, the defendant must show that it had taken all reasonable steps to avoid or mitigate the consequences of the filing of the application (Channel Islands Ferry Ltd v. Sealink UK Ltd, supra).  The court must therefore examine whether there were reasonable steps that the defendant could have taken to avoid or mitigate the consequences of the filing of the BVI application.

109.As early as 14 August 2003, more than four months before the deadline for completion, Deloittes had received a letter from Siao, Wei & Leung, as solicitors for Stephen Lau who claimed to be the “ultimate beneficial owner/shareholder” of Synergy Finance Ltd.  This letter was headed with the name of the defendant followed by “Purported Sale of Kimberley Hotel”.  It referred incorrectly to Joseph Lo and Derek Lai as being liquidators of the defendant rather than KHHL and went on to allege that Synergy was a creditor of the defendant and that its interests were being prejudiced by reason of the sale of the Kimberley Hotel at less than its market value.  It therefore requested copies of certain documents.  Incidentally, in referring to the liquidators it said :

“Please note that their purported appointment has been in dispute and our client will apply to set aside the same in due course including but not limited to contesting the validity and bona fide of the winding up proceedings initiated by the Bank of China.”

110.In their reply on behalf of the liquidator dated 26 August 2003, Clifford Chance pointed out that the liquidators were not liquidators of the defendant and stated that Synergy did not appear to be a creditor of the defendant.

111.It should be noted that the reference to an application to set aside the appointment of the liquidators and challenge the validity of the winding-up order was referred to only incidentally in the letter.  There was no reference to any factual basis upon which any BVI application would be made despite the fact that mala fides was being alleged.  It should also be borne in mind that the appointment of the liquidator had been made approximately nine months previously and there had been no challenge to their appointment in the meantime.

112.In view of the unspecific terms of this letter and the incidental way an application in the BVI was referred to, not surprisingly Mr Huggins has not suggested that it should have triggered any action on the part of the defendant to forestall or mitigate the effect of any application in the BVI.

113.It was not until 12 November, three months later, that any further reference was made by Siao, Wei & Leung to an application in the BVI court.  The reference was made in reply to a letter from Clifford Chance in which they had pointed out that there were nothing to support Siao, Wei & Leung’s allegations that either Synergy, Waygood or Stephen Lau were creditors of the defendant.  The reference to an application to the BVI courts was made in the vaguest of terms, namely “As you may know, the winding up proceedings and the orders (which gave rise to the purported appointment of the present ‘directors’ of the client) will be challenged”.

114.Since Siao, Wei & Leung had once again advanced no basis for making such an application and three months had elapsed since their previous letter, it was not surprising that Clifford Chance should in their reply refer to there being no grounds or basis for such an application.

115.Mr Huggins suggests that the defendant could and should have prepared to obtain the sanction of a Hong Kong court for the sale or taken the advice of a BVI lawyer if it feared any BVI application to appeal the KHHL winding-up order might hinder completion of the sale and purchase of the hotel in Hong Kong.  I am satisfied from Joseph Lo’s evidence that he regarded this letter as just one of a number of “threats and disturbances” from Stephen Lau and his associated companies.  Bearing in mind the absence of any reference to the factual basis for making such an application, the fact that three months had elapsed since Siao, Wei & Leung’s letter of 14 August 2003 without any action being taken and the lapse of time since the making of the winding-up order, I consider it entirely reasonable not to take the actions suggested by Mr Huggins.  The letter was yet another unsubstantiated threat in circumstances where an earlier similar unsubstantiated threat had not been followed up on.

116.The defendant cannot reasonably have been expected to have sought legal advice from BVI lawyers or prepared an application to a Hong Kong court (or indeed a BVI court) on a purely speculative basis as to the nature of an application that might or might not be made by Stephen Lau or his associates.

117.Moreover, Mr Huggins has not shown that even if the defendant had taken the advice of the BVI lawyer that that advice would have been to the effect that the title that passed would be indefeasible.

118.It was only later on 20 November 2003 a matter of hours before the deadline for completion that the application came to the notice of Joseph Lo on behalf of the defendant.  I am satisfied by that stage that there were no reasonable steps he could take to avoid what he was advised were potential consequences of the application before the deadline for completion.  It has not been suggested by Mr Huggins that there would at this stage have been sufficient time to obtain legal advice from a BVI lawyer as to the implications of such an application.  It would have been unreasonable at that stage to have expected the defendant to prepare a relevant application for validation to be heard before a Hong Kong court before noon the following day.

119.In any event the plaintiffs have not satisfied me that the Hong Kong court would have been likely to make such a validation order, particularly in the absence of any evidence as to the law of the BVI.

120.Mr Huggins suggests that the defendant could have requested the plaintiffs for an extension of the deadline for completion in order to enable a Hong Kong court to sanction the transaction.  That would have involved a variation of the Sale and Purchase Agreement which, by Clause 25.1, had provided that time should in every respect be of the essence of the agreement.  

121.I am not persuaded that the obligation of a party who seeks to rely on a “force majeure” clause within a contract, to take all reasonable steps to avoid its operation, includes an obligation to negotiate a variation of the contract.   If there were such an obligation it could involve the court being called upon to examine the reasonableness of the parties’, perhaps undisclosed, motives for insisting on a particular contractual term.  Furthermore in this case it has to be borne in mind that the parties themselves had contemplated and expressly provided for a situation where there was a temporary impediment to completion of the sale by the terms of Clauses 13.3 (the right of preemption).  It would have been possible for them to have incorporated a term providing for an extension of time.  They did not do so.

122.I am satisfied in all the circumstances that the defendant was entitled to exercise its rights under Clause 13.2 of the Sale and Purchase Agreement by reason of the filing of the BVI application and that, consequently, the plaintiffs are not entitled to an order for specific performance.

123.I accordingly dismiss the plaintiffs’ originating summons. I make the following order nisi as to costs that unless any party applies to be heard on the question of costs within 14 days of the handing down of this judgment the defendant’s costs of and incidental to this originating summons be taxed if not agreed and paid by the plaintiffs.

Mr Adrian Huggins, SC and Mr Jonathan Harris, SC, instructed by Messrs Johnson, Stokes & Master, for the Plaintiffs

Mr Ronny Tong, SC leading Ms Yvonne Cheng, instructed by Messrs Baker & McKenzie, for the Defendant

Mr Clifford Smith, SC leading Mr Kenneth Ng, instructed by Messrs Stephenson Harwood & Lo, for Intervener

(1-3 November 2006)

Mr Charles Sussex, SC, instructed by Messrs Stephenson Harwood & Lo,  for Intervener (30 November, 1 and 4 December 2006)