Asialand Ltd and Another v. Lam Yiu Cho and Others
Read the full judgment text of HCA 1944/2005 on BabelCite. This High Court CFI judgment was delivered on 31 January 2007.
1. This action concerns the purchase of shares in a pharmaceutical company, as to give total ownership to those in control of the purchaser. The 2 nd plaintiff (Advance Pharmaceutical) is that company. The 1 st plaintiff (Asialand) is the purchaser. The defendants variously are or were owners of the shares being bought and sold, or owned and controlled the shareholders.
Cited by 2 cases
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HCA 1944/2005 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 1944 OF 2005 ____________ BETWEEN
____________ (By Original Action) AND BETWEEN
____________ (By Counterclaim) Before: Deputy High Court Judge Gill in Chambers Dates of Hearing: 11-12 January 2007 Date of Judgment: 31 January 2007 ______________ J U D G M E N T ______________ 1.This action concerns the purchase of shares in a pharmaceutical company, as to give total ownership to those in control of the purchaser. The 2nd plaintiff (Advance Pharmaceutical) is that company. The 1st plaintiff (Asialand) is the purchaser. The defendants variously are or were owners of the shares being bought and sold, or owned and controlled the shareholders. 2.Most of the sales were completed forthwith on the date the parties committed themselves, being 17 September 2002. The sale of the remaining shares, being parcels held by the 1st and 2nd defendants, were by agreement deferred for three years; completion for this part of the sale was scheduled for 16 September 2005. 3.But there has been no completion. By this time Asialand through its owners had formed the view that Asialand and Advance Pharmaceutical were the victims of fraudulent or reckless misrepresentation by the former shareholders of Advance Pharmaceutical. This caused them to be paid prior to the sale of the shares more than their proper entitlement in dividends, and inflated the purchase price to a higher figure than Asialand would have otherwise paid. 4.Advance Pharmaceutical sues to recover the overpaid dividends and interest; Asialand sues in damages for the overpaid purchase price. As against the 1st and 2nd defendants it seeks a declaration that it be entitled to set-off the loss against the purchase price of the shares still to be transferred; alternatively damages. 5.The writ having issued in October 2005, only the 1st and 2nd defendants have been served. They have filed a defence refuting the allegations of fraudulent misrepresentation and any liability, and counterclaim (inter alia) for specific performance against Asialand in respect of the overdue remaining transaction. 6.There are two matters before me, both brought by the 1st and 2nd defendants. 7.The first is for specific discovery of certain documents. By the date of this hearing the plaintiffs had volunteered all but one set of the documents called for; that matter remains at large, as does the issue of costs. 8.The second matter is by way of summons an application to strike out certain claims in the statement of claim upon the grounds that they are scandalous, frivolous or vexatious, or may prejudice, embarrass or delay a fair trial, or are an abuse of process. Those claims which offend are those in which the 1st and 2nd defendants:
9.Consequential upon this application being granted, the 1st and 2nd defendants seek summarily an order for specific performance in respect of the yet to be completed sale and purchase of the remaining shares in Advance Pharmaceutical. Background 10.Advance Pharmaceutical was up to 16 July 2001 (the first material date) owned and run by members of three families. The paid up capital was $3 million divided into 3,000 $1,000 shares. The 1st defendant (Mr Lam) and his wholly owned company the 2nd defendant (New Rainbow) together held 1,000 shares. The 3rd defendant (Mr Lee) and his wholly owned company the 4th defendant (Vigor) together held 1,000 shares. Brothers Chang Iok Meng and Chang Iok Wai (the 5th and 6th defendants) together owned the 7th defendant (Master Sum) which held 1,000 shares. 11.The directors comprised Mr Lam who was chairman, Mr Lee and the brothers Chang. Also on the board were Mr Lam’s son, Michael Lam and Mr Lee’s daughter, Karen Lee. 12.Prior to the 1st material date, the three groups of shareholders resolved to introduce into the enterprise two businessmen called Ting Siu Yin and Cheng Chi Heng. This was achieved by each group selling 4% of Advance Pharmaceutical to a company wholly owned by Messrs Ting and Cheng called Koon Hay Development Limited. The total consideration was $21.6 million. 13.This was by agreement (one agreement only, involving all parties) of the 1st material date. It provided for appointment to the board of Messrs Ting and Cheng. It is said both thereafter played active roles in the management of Advance Pharmaceutical, although only Mr Ting joined the board. 14.Following completion of the share transfers the shareholding of Advance Pharmaceutical was as follows:
15.The next development began in the lead up to 17 September 2002 (the 2nd material date). 16.It came to be agreed that the original shareholders of the Advance Pharmaceutical would dispose of their remaining shares to Messrs Ting and Cheng and thereby give up their interests in Advance Pharmaceutical. 17.The first step, undertaken on the 2nd material date, was to increase the capital by allotting 39,100 new shares of $1,000 each to the existing shareholders on a pro rata basis. The original shareholders paid for these by set-off from shareholders’ loans due to them by Advance Pharmaceutical. 18.Thus the shareholding of Advance Pharmaceutical was as follows:
19.On the same day each set of original shareholders entered into three separate agreements to sell all of their shares to the vehicle of choice of Messrs Ting and Cheng, Asialand. 20.The 2nd Agreement, entered into by Mr Lee and Vigor as vendors, was for the sale of all their shares for the consideration of $47 million with immediate completion. Thus the shares were transferred forthwith and the full purchase price was paid forthwith. Mr Lee and his daughter Karen resigned from the board. 21.The 3rd Agreement entered into by Master Sum as vendor was on the same terms, and completion was immediate. The brothers Chang resigned also. 22.The 1st Agreement from Mr Lam and New Rainbow was structured differently. By its terms their joint shareholding was to be transferred in two tranches. Shares representing 14.33% of the company, that is 4,545 owned by Mr Lam and 1,489 by New Rainbow (in all 6,034 shares) were transferred and paid for forthwith at a total consideration of $32 million. The remaining shares, that is 2,105 of Mr Lam and 4,210 of New Rainbow, were to be transferred at a further consideration of $33.5 million with completion on or by three years’ hence; that is, 16 September 2005. 23.The 1st Agreement provided further for the immediate retirement from the board of Michael Lam, but for Mr Lam’s appointment as chairman for the further three years, thence for him to resign. The 1st Agreement 24.Given the allegations of fraudulent or reckless misrepresentation Mr Lam and New Rainbow now face, it is appropriate to examine some of the terms of their agreement with Asialand. The following are pertinent:
25.With these terms and conditions to be borne in mind, I now come to Asialand’s allegations of fraud as pleaded. The Allegations of Fraud 26.These are pleaded in this way:
27.It is Asialand’s pleaded case and as advanced by Mr Tang in his affidavit in opposition to the strike out application that the purchase price to be paid by Asialand for the 88% shares in Advance Pharmaceutical bought and sold under the 1st, 2nd and 3rd Agreements was determined by the accounts, audited and otherwise, for the year ending March 31 2001, the four months ending July 31 2001, and the year ending March 2002. 28.It is so pleaded thus:
29.It is pertinent to note however that when further particulars of the so-called ‘agreement’ referred to in the first line of paragraph 19 were sought, the response was to refer to the terms of the 1st, 2nd and 3rd Agreements, thus:
30.But none of the 1st, 2nd or 3rd Agreements include reference to the purchase price having been assessed upon the profit before tax as determined by the accounts. Further, the only accounts exhibited were the management accounts for 2002, not the audited accounts for the previous year, or the audited accounts to 31 July 2001. 31.This is significant, because it is further pleaded at paragraph 21 of the statement of claim that all of the vendors under the 1st, 2nd and 3rd Agreements “represented to Asialand that the accounts stated in the 2001 Accounts, the July 2001 Accounts and hence the 2002 Management Accounts were true and accurate”. 32.In his affidavit, Mr Ting deposed:
33.Mr Ting then takes up his account leading to the allegation of fraud:
34.He then goes on depose that there having been no such transaction, no receivables in the sum of $3,260,227, there had been an over-calculation of dividends payable and paid to the former shareholders in this amount. 35.Further, that by virtue of the profit before tax having been over imflated by 16.53%, the purchase price paid and payable by Asialand was too high by this amount, causing losses of over $20 million, not counting interest. 36.The fraud and consequential loss is pleaded thus:
The Response 37.This emerges first in the statement of defence. 38.King Wai Hong is described as a long established client, based in Macau. As a means of encouraging enhanced sales, it was proposed that as from July 1999 products bought by King Wai Hong would be invoiced at half-price, leaving the balance to be paid in whole or part or forgiven altogether, depending on the level of purchases made by King Wai Hong over a trial period. In the event, enhanced sales were not achieved; this resulted in the special arrangement being terminated as at 31 March 2001. The decision was made then to invoice King Wai Hong for the balance due, discounted by 35%. Michael Lam instructed the Accounts Department to calculate the amount, which came to the sum of $3,260,227, being the amount depicted in the voucher complained of by Mr Ting. In the pleadings this is backed up by an appendix recording at least 300 invoices for particular amounts added up and then discounted to get to a precise amount. The reference ‘backpay’ is to show that it concerns purchases already made and invoices already rendered. 39.Demand thus having been made from King Wai Hong, the sum of $1,600,423 was paid, leaving outstanding the sum of $1,959,804. 40.It is further pleaded that Messrs Ting and Cheng complained of the inherent improbability of Advance Pharmaceutical being able to recover this, and sought $653,000 from each of the three sets of vendors in the 1st to 3rd Agreements. The pleading confirms Mr Ting’s account; that two out of the three did pay, Mr Lam declining to do so. 41.To complete the picture, it is indisputable that the March 2001 accounts were certified by the auditors on 14 November 2001, and were approved by the board at a meeting of the same day. My Determination 42.It is not for me to resolve disputes of fact on the affidavits before me. If the issue boils down to determining disputed matters of fact, or the outcome is sensitive to findings of fact, then the action must proceed to trial, with the pleadings undisturbed. 43.But are the pleadings alleging fraudulent or reckless misrepresentation sustainable? 44.I come to deal with that next. First, the legal principles. Striking Out 45.It is only in plain and obvious cases that the court should exercise its summary powers to strike out a pleading. The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out. 46.It is for the party seeking to strike out a pleading to demonstrate that the case is a plain and obvious one in which the other party’s claim is bound to fail; see the White Book, 18/19/4. 47.Allegations of fraud should not be lightly made, and must be pleaded distinctly and with utmost particularity, failing which such allegations should be struck out; see ADS v Wheelock Marden & Co. Ltd [1994] 2 HKC 264, per Bokhary JA (as he then was) at pp.269, 270. 48.Where misrepresentation is pleaded, particulars must be contained in the pleading. The statement of claim must show the nature and extent of each misrepresentation, by whom and to whom it was made and whether verbally or in writing — in the latter case identifying the document; see the White Book, 18/12/25. 49.For an action of fraudulent or reckless misrepresentation to succeed, the following must be established; that is, pleaded and proved:
per Bullen v Leake & Jacob’s Precedents of Pleadings, 49-01. Application of the Legal Principles 50.What is the representation of fact, made by words or by conduct? 51.This can only emerge in the agreements, in the case of Mr Lam and New Rainbow, the 1st Agreement. This is because clauses 3.2 and 6.4 preclude reliance by the purchaser on any previous warranty or undertaking. Clause 3.1 provides a warranty by New Rainbow that each event set forth in Appendices II, III and IV “are true and correct as of today”. By clause 9.1, Mr Lam committed to honour these terms. Only one warranty is relevant; that in Appendix III which states: “Document ‘A’ attached to this Appendix is the unaudited financial report … of [Advance Pharmaceutical] up to 31 March 2002”. 52.There is no reference at all to the earlier accounts which covered the period of the alleged fraud. Moreover, this is not a warranty of correctness or accuracy, only that they are the accounts in question. 53.Clauses 6.1 and 6.2 reveal that the buyer had had every opportunity to examine the books of account and all other records of Advance Pharmaceutical, and thereafter had no right to assert any claim against the vendors, including New Rainbow and Mr Lam. 54.It follows, as I find, that there was no representation of fact made by Mr Lam or New Rainbow by words or conduct, as pleaded in clause 21 of the statement of claim; thus, no representation made known to be false, with the intention that it be acted on, that it was acted on and that the claimant purchaser sustained loss by so doing. 55.There are further matters that render the pleadings going to fraudulent misrepresentation inherently bad. Mr Ting prior to the 2nd material date was aware that there was a question mark over the recoverability of some or all of the amounts in question; the auditors had made reference to this when certifying the accounts. On the 2nd material date, being the date of commitment by Asialand to the purchase, Mr Ting raised the matter again, and was able to persuade two out of the three vendors to pay the same out of their own pockets. Mr Lam was the one who refused to comply. 56.If it could be said that the accounts for 2001 were false and that amounted to a representation, then it was made to Advance Pharmaceutical and its board of directors at the time the accounts were prepared, not to Asialand; after all, Asialand as purchaser was not on the scene and would not be so for another 18 months. 57.At the time in question, Mr Ting was a director of Advance Pharmaceutical with full access to the accounts and records of Advance Pharmaceutical, and a working knowledge of how Advance Pharmaceutical operated. 58.Furthermore, as is revealed by clauses 12.1 and 12.2, the relationships between Koon Hay and Mr Ting on the one hand and Mr Lam and others on the other were decidedly rocky, with actions pending or underway. It is apparent that clauses 12.1 and 12.2 were for the purpose of putting a line under these differences. But they are also a graphic illustration that the alter ego of Messrs Ting and Cheng, Asialand, was certainly not a buyer coming cold into Advance Pharmaceutical. 59.There are further irregularities. 60.The claim in damages is extravagant, for it includes losses of arising from the 2nd Agreement and 3rd Agreement. This is misconceived. 61.The 1st, 2nd and 3rd Agreements may have been connected as giving rise to the sale of all the remaining shares in Advance Pharmaceutical, but they were and are separate legal documents. Mr Lam and New Rainbow cannot be held liable for breaches in agreements in which they were and are not parties. 62.Clause 9.1 does not, as was submitted for Asialand, assist its cause. By its terms, Mr Lam and New Rainbow are liable only for losses arising from breach of “this Agreement”; the 1st Agreement. This may be distinguishable from the single agreement in which Koon Hay bought its 12% interest, which incorporated all three sets of vendors. 63.The allegations of fraudulent and/or reckless misrepresentation made against Mr Lam and New Rainbow are obviously unsustainable; the pleadings relating thereto are bad. As I find it is impossible that such claim should succeed. 64.The same goes for the claims against them for breaches of the 2nd and 3rd Agreements. The Result 65.There will be an order in terms of clauses 1(a)(b) and (c) of the application of 3 October 2006. Discovery 66.The application made in August 2006 was made in these terms:
67.The ‘Report’, is a report commissioned by Advance Pharmaceutical at the instigation of Mr Ting following a meeting of the board of directors of 24 May 2004. A translation of the board’s minute on the matter is as follows:
68.It is the case of the plaintiffs that the Report was withheld because it and related documents fall outside the ambit of discoverable documents because it amounted to an expert report, to be relied on in the trial, to be part of the exchange of expert reports already ordered in a directions order of 15 June 2006. Thus it was inappropriate for it to be sought in a discovery application. 69.In the event the documents sought to be discovered at 1(c) and (d) were forthcoming by a consent order of 11 September 2006, with costs in the cause, and the Report was made available a few days before the hearing, but without prejudice to costs. 70.It is submitted for the plaintiffs that the Report and thus the correspondence between Deloittes and Advance Pharmaceutical are privileged documents and not amenable to discovery. 71.I disagree. The directions order envisaged reports to be sought from experts, one for each side, to be used in the forthcoming trial of the issues between the parties. Such reports and related communication would undoubtedly be privileged; see the White Book, 24/5/13. 72.But the Report was not sought after litigation was contemplated or commenced and with a view to such litigation. It was called for at the instigation of Advance Pharmaceutical’s board and falls into the category and is and at all times was discoverable. The same goes for correspondence entered into in connection with the Report. The Result 73.There will be discovery in terms of clause 1(b) of the application of 23 August 2006. Specific Performance 74.The claims by Asialand against Mr Lam and New Rainbow for fraudulent or reckless misrepresentation having fallen away, there is now no defence to the counterclaim for specific performance, and no outstanding issue in dispute to be determined. The Result 75.There will be an order in terms of clause 2 of the application of 3 October 2006. Costs 76.These are nisi; they are to Mr Lam and New Rainbow on both applications.
Mr W Poon, SC, leading Miss L Chan, instructed Messrs S K Lam Alfred Chan & Co., for the 1st and 2nd Plaintiffs (by original action) Miss A Eu, SC, leading Mr S Yip, instructed by Messrs Lau, Kwong & Hung, for the 1st and 2nd Defendants (by original action) Application for stay of execution pending appeal refused: see CACV45/2007 dated 20 April 2007 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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