Chak Kak and Others v. Pacrim International Capital Inc.
Read the full judgment text of CACV 366/2007 on BabelCite. This Court of Appeal judgment was delivered on 4 June 2008.
1. The defendant is a company listed on the Toronto Stock Exchange.
Cites 2 cases
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CACV 366/2007 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 366 OF 2007 (ON APPEAL FROM HCA NO. 1250 OF 2006) ----------------------
---------------------- Before: Hon Tang VP, Cheung JA and Chu J in Court Date of Hearing: 23 May 2008 Date of Judgment: 4 June 2008 ---------------------- JUDGMENT ---------------------- Hon Tang VP Introduction 1.The defendant is a company listed on the Toronto Stock Exchange. 2.This is the plaintiffs’ claim against the defendant for, inter alia, CN$60,000 said to be payable by the defendant on the redemption of the 60,000 convertible preference shares (“CP shares”) of CN$1.00 each in the defendant held by each of the plaintiffs. 3.Notices of the redemption had been issued by the defendant on 27 October 2003, stating that the CP shares were being redeemed at a value of CN$0.01 per share. According to the defendant, they had received in August 2003 an independent valuation of the CP shares from Global Merger & Acquisition Finance Inc which assessed their value as “nominal from a financial point of view”. 4.Yam J, after trial, decided in favour of the plaintiffs. This is the defendant’s appeal. Background 5.The facts are not very clear. But I think I can proceed on the basis that in about 1992, each of the plaintiff invested CN$150,000 in order to qualify for emigration to Canada. If the investment had prospered they would have received CN$160,000 pursuant to a Promissory Note issued to them by the First Mortgage Nova Scotia Fund Inc (“the Funds”). 6.As of about June 1997, each of them had received a first instalment of CN$50,000. In the meantime, as was explained in the Funds’ letter to note holders dated 10 June 1997 (“the letter”), because the investment was made under the investment program which was designed to create jobs and benefit small business in Canada, and that the relevant Immigration Act and Regulations provided tight restrictions on the types of project the Funds could invest in, which were strictly enforced, the investments were essentially in mortgages and in the few years leading to 1997, many real estate projects and developers had gone bankrupt in Canada. 7.The letter went on to say the immediate prospect did not appear to be promising as the mortgages were in respect of buildings in relation to which, about 52% of the space of the buildings was empty. It was because of that that the director of the Funds had considered various alternatives, for example, foreclosing on the mortgage properties and selling them in the open market. But because of the low occupancy rate and the poor market condition in general, no substantial offer was expected even if there was a willing buyer. The other alternative was to complete the leasing and seek refinancing later, but that might take several years as the market condition would not improve rapidly. It mentioned that there were various reports and studies which were on file and available for review. 8.The note went on to suggest what was described as the “Full Repayment” Solution as follows:
9.The plaintiffs decided to opt for the “Full Repayment” solution. Each of them had entered into identically worded Transfer Agreements with the defendant accordingly. The Transfer Agreements, which were produced at trial, were dated from 18 September 1997 to 15 October 1997. It does not appear that anything turn on the dating of the Transfer Agreements. 10.The Transfer Agreements provided:
11.Mr Carolan, who appeared on behalf of the defendant, submitted that since the convertible shares certificates issued to each of the plaintiffs were dated 21 July 1997, the offer must have been accepted orally or otherwise on or before 21 July 1997. We have received no submission from the plaintiffs in relation to that. The importance of the date of 21 July 1997 is that it appeared to be common ground that 21 July 1991 was the “Initial Issue Date” under section 1.1(j) of Schedule B. The “Initial Issue Date” dated the commencement of all relevant periods of time under Schedule B. 12.Each of the plaintiffs had been paid CN$50,000 by the defendant. As noted, essentially, the dispute, the subject of the appeal, is over the remaining CN$60,000. 13.Schedule B is a schedule to the Memorandum and Articles of Association of the defendant. It was adopted by a resolution of the directors of the defendant on 21 July 1997 and appeared to have been filed with the Registry of Companies, British Virgin Islands on 21 July 1997. Under Schedule B, the defendant was liable to pay a cumulative dividend during the first 24 months from the initial issue date which was defined under section 1.1(j) as:
14.Under section 2.1, a cumulative dividend was payable during the first 24 months at a rate of 2% per share per annum of the redemption price. The “Redemption Price” is defined under section 1.1(n) to mean:
15.However, under section 2.1(b) a non-cumulative dividend could be declared and paid after the expiry of 24 months immediately following the initial issue date. Some non-cumulative dividend was paid after the first 24 months. 16.Section 3.1 gave the right to the holders of the CP shares to convert:
17.It is unnecessary to go into the formula save to say that the number of common shares to which the CP shares could be converted would depend on the result of the calculation under such formula which in turn depended on the performance of the common shares or the earnings of the defendant. Thus, the number of common shares to be allotted would vary according to the calculation made under the formula, for example, the lower the conversion rate the greater the number of common shares to be allotted. 18.Section 4 of Schedule B covers redemption and the relevant provisions are:
19.The plaintiffs appeared in person. However, the 1st plaintiff, Mr Chak Kak (“Mr Chak”), not only made submissions for himself but also acted as spokesman for the 3rd, 4th and 5th plaintiffs. Mr Chak has informed us, he is highly educated and has been working in the financial market for a long time. His son, Mr Chak Chun, John (“Mr John Chak”), a Canadian law student, represented, with our permission, the 2nd plaintiff. Mr John Chak addressed us first. 20.Mr John Chak referred us to what has been said by Mortimer NPJ in Marble Holding Ltd v Yatin Development Ltd, FACV 21/2007, unreported, dated 28 April 2008, at para. 20:
21.He then referred to what Lord Hoffmann NPJ said in Jumbo King Ltd v Faithful Properties Ltd and Ors [1999] 2 HKCFAR 279 at 296D as follows:
22.These principles are well known and provide the necessary guidance to us. 23.Mr Chak took us through the relevant provisions in section 4. 24.He submitted that section 4.1 is reasonable and is commonly found in such documents. Since the holder of the CP shares could convert during the 23rd month after the initial issue date, for the right to convert to be meaningful, the company should not be entitled to redeem CP shares compulsorily before the end of the 23rd month. 25.As for section 4.2, Mr Chak submitted the word “no” has no place in this section. He submitted that normally the holders of the CP shares would have the right to require the company to redeem the CP shares. It is unnecessary for me to determine whether that is indeed so. There is no evidence on this. But, I find it difficult to understand how section 4.2 was supposed to work if “no” was removed. It would then read:
26.But when? It would not make commercial sense if a holder could require redemption during the first 24 months. It would defeat the defendant’s purpose in issuing the CP shares in the first place if the holder of the CP shares could ask for his money back at any time during the 24 months. Presumably, the redemption amount payable under section 4.2 would be CN$1.00. Also, for example, it would sit awkwardly with section 4.3(ii) where the defendant could choose to deliver shares. It should also be noted that the right to convert into common shares under section 3.1 could only be exercised in the 23rd month and the defendant’s right of compulsory redemption could not be exercised until after the first 23 months. 27.The 1st plaintiff further submitted that although he was not aware that the word “no” had been inserted into section 4.2 but as he had signed the Transfer Agreement, subject to the question of unconscionability, he had to accept the consequence. Unconscionability was not a point taken below. Nor was it a point in this appeal. In any event, I cannot see why section 4.2 should be regarded as unconscionable. The holder of a CP share had the right to convert during the 23rd month. If he chooses not to convert that is his business. Section 4.3 is clear enough. It provides that the company may during the 24th month compulsorily redeem all (but not less than all) of the issued and outstanding CP Shares either for the redemption price which as defined as was CN$1 or for the number of common shares as if the holder had converted under section 3.1. After the expiry of 24 months section 4.4 comes into play. 28.Section 4.4 provides that:
29.The plaintiffs contended, here as well as below, that the discretion of the defendant under section 4.4 was only in terms of the amount of shares to be redeemed. The plaintiff submitted that the redemption price could not be changed since that has been fixed at CN$1 in section 1.1(n). 30.Sections 1.1(m) and 1.1(n) are set out below:
31.The learned judge accepted the plaintiff’s submission and said:
32.The language of section 4.4 is clear and unambiguous. I repeat those words for convenience:
Even without the words in parenthesis, I believe “such terms and conditions” would have included the price payable on redemption. The words in parenthesis made any contrary argument untenable. If as seemed to be the learned judge’s view, the redemption amount depended on the number of shares to be redeemed, although the price remained constant, it is difficult to understand why it was necessary to refer to it at all, since it is clear that under section 4.4 the company:
33.Nor do I agree with Mr Chak that section 4.5 which deals with partial redemption helps with the construction of the expression and redemption amount in section 4.4. 34.As noted, under section 1.1(m):
35.Under section 4.3(i) the amount payable would have been the redemption price, but if the defendant chose to convert under section 4.3(ii) then common shares would have been deliverable, the amount of which would depend on the calculation under section 3.1. 36.But so far as section 4.4 is concerned, section 1.1(m) makes it beyond argument that the redemption amount refers to the amount payable. In the context, the redemption amount could not reasonably be regarded as a reference to the actual amount payable depending on the number of CP shares which the directors have decided to redeem. 37.The learned judge also relied on the letter for his interpretation. He said:
38.With respect, the learned judge has misunderstood the letter. The letter made it clear that the so called “full payment” was to be in terms of common shares to be allotted. That is what the plaintiffs would have got had they exercised the right to convert in the 23rd month. 39.The learned judge went on to say:
40.We have heard no submission on Canadian law but it does not seem improbable that any such power must be exercised bona fide. The power to fix the redemption price:
does not seem to me to permit an arbitrary price to be given. Here, as noted, the redemption price was supported by a valuation. There was no suggestion that the valuation was wrong. It follows that in certain circumstance it might make good commercial sense for the defendant to exercise its power under section 4.3. 41.Since we are of the view that the language of section 4.4 is unambiguous, it is unnecessary for us to deal with Mr John Chak’s submission that if it were ambiguous, we should construe contra proferentem. 42.The learned judge also referred to misrepresentation in his judgment. He said:
43.It is not clear whether the learned judge treated “misrepresentation” as a live issue. Misrepresentation had not been pleaded. He came to the conclusion that there was no misrepresentation because he took the view that both the letter and section 4.4 fixed the redemption price at CN$1. There is no cross appeal. So it is unnecessary for me to deal with this matter. 44.The plaintiffs acted in person throughout. The court will always be careful to ensure that everyone including litigants in person receives a fair trial. But due administration of justice requires proper pleadings. Judges should not be too ready to entertain a plea, especially one which is fact sensitive, in the absence of proper pleadings. Although in some of the witness statements filed on behalf of the plaintiffs, there were allegations of misrepresentations. They were unclear. The learned judge said he preferred the plaintiffs’ evidence to those of Ms Cindy Fung and Mr Guy Lam of the defendant. The learned judge gave no reason (apart from saying that they were not misrepresentation because that is what the letter or section 4.3 provided) why he preferred the plaintiffs’ evidence. As I have said he concluded however that there had been no misrepresentation because Schedule B required repayment of the redemption price of CN$1. I believe in coming to the conclusion that he preferred the evidence of the plaintiffs, he must have been influenced by that. I will not pause to analyse the learned judge’s views or their implication except to say that because they were made in passing they were not products of careful analysis by the learned judge. 45.Mr John Chak mentioned the doctrine of unconscionability and that the court should not give effect to the onerous section in favour of the defendant. However, this was not a point which was raised at trial and is not a point which can be raised before us. Mr Chak quite sensibly did not press the point. 46.I will allow the appeal, dismiss the plaintiffs’ claim, set aside the judgment and order that the plaintiffs pay the defendant’s costs here and below, such costs to be taxed if not agreed. Hon Cheung JA: 47.I agree. Hon Chu J: 48.I agree. Hon Tang VP: 49.The appeal is allowed with costs here and below, such costs to be taxed if not agreed.
Mr Paul Carolan, instructed by Messrs Robertsons, for the Defendant. 1st, 3rd to 5th Plaintiffs, in person, present 2nd Plaintiff, in person, present, represented by Mr Chak Chun, John. |
Cases cited in this judgment
Further hearings and rulings under CACV 366/2007