Tallmany Enterprises Ltd v. Prosten Technology Holdings Ltd and Another
|
HCA 669/2009 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 669 OF 2009 ____________ BETWEEN
____________ Before: Deputy High Court Judge L. Chan in Chambers Date of Hearing: 18 September 2009 Date of Judgment: 20 October 2009 _______________ J U D G M E N T _______________ 1.This is an application for summary judgment by the plaintiff against both defendants. There is also a summons issued by the two defendants for security of costs to be provided by the plaintiff. The background 2.The plaintiff is a BVI company. The 1st defendant is a company listed in the Growth Enterprises Market of the Hong Kong Stock Exchange. The 2nd defendant is a shareholder of the 1st defendant holding 100,000,000 of some 592,000,000 odd issued and allotted shares of the 1st defendant. 3.The plaintiff entered into a subscription agreement with the 1st defendant on 30 April 2007 whereby the plaintiff agreed to subscribe for and the 1st defendant agreed to issue zero-coupon convertible bonds due 2012 in an aggregate principal amount of HK$28,800,000. The plaintiff duly paid the 1st defendant HK$28,800,000 and the 1st defendant issued to the plaintiff the convertible bonds (“the Convertible Bonds”) on 6 June 2007 in a certificate of the same date (“the Convertible Bonds Certificate”). 4.The plaintiff also entered into an agreement with the 2nd defendant on 30 April 2007 where the plaintiff agreed to subscribe for and the 2nd defendant agreed to issue zero-coupon exchangeable bonds in the principal amount of HK$30,000,000. The plaintiff duly paid the 2nd defendant HK$30,000,000 on 6 June 2007 and the 2nd defendant issued to the plaintiff exchangeable bonds (“the Exchangeable Bonds”) on 6 June 2007 in a certificate of the same date (“the Exchangeable Bonds Certificate”). 5.The Convertible Bonds Agreement between the plaintiff and the 1st defendant provided, among other terms, the following:
6.The Convertible Bonds Certificate also has conditions and the relevant ones are:
The Exchangeable Bonds Agreement between the plaintiff and the 2nd defendant provided, among other terms, the following:
The Exchangeable Bonds Certificate also has conditions. The relevant ones are:
7.Under clause 12.4 of the warranties (“the 12.4 warranty”) in the Convertible Bonds Agreement, the 1st defendant warranted to the plaintiff that certain trade debts at RMB3 million(“the Trade Debts”) due from one 華澳世紀(北京) 投資有限公司 (“華澳”) to the 1st defendant’s subsidiary “長達萬通通訊科技 (上海) 有限公司) (“Prosten Shanghai”) would be settled on or before 31 May 2007. 8.The Trade Debts were not settled on or before 31 May 2007. There is a dispute as to when the plaintiff was advised about this. The plaintiff said that it was told about this before the completion of the subscriptions on 6 June 2007. Mr Dennis Yip, a director of the defendants, however said that the default was relayed by him to one Dr Xu of the plaintiff on 21 June 2007. In this decision, I would proceed on the basis that the default was related by Mr Yip to Dr Xu on 21 June 2007. 9.In any case, the parties entered into a supplemental agreement (“the Supplemental Agreement”) deferring the due date for payment of the Trade Debts to 30 September 2007. The terms of the Supplemental Agreement were indeed agreed on 21 June 2007, but the agreement itself was backdated to 6 June 2007. Clause 5 of the agreement provided:
The defendants’ default 10.Despite the postponement of the due date by the Supplemental Agreement, the debts were still not repaid by 30 September 2007. The plaintiff says that the non-payment constituted an event of default for both the Convertible Bonds Agreement and the Exchangeable Bonds Agreement. 11.The 1st defendant in fact made an announcement to the Stock Exchange pursuant to the Listing Rules on 14 July 2008. It admitted in the announcement of its failure to procure repayment of the Trade Debts on or before 30 September 2007. It further admitted that this was an event of default entitling the plaintiff to early redemption of the convertible bonds on the entire principal sum plus 25% premium in accordance with the Convertible Bonds Agreement. 12.The plaintiff also pleaded that it only came to know about the non-payment after reading this announcement. This is disputed by the defendants 13.The plaintiff further said that by reason of the default, it is entitled to early redemption of the entire convertible bonds and the entire exchangeable bonds both at 25% premium. The plaintiff gave notice to the 1st and 2nd defendants on 26 November 2008 of their default and demanded early redemption of the capital with 25% premium. The grounds of defence 14.The defendants put up several arguments to resist the claim. The first ground is that the 12.4 warranty was not fulfilled and the Convertible Bonds Agreement thus terminated automatically on 31 May 2007 before the subscription and did not apply to the subscription. The plaintiff’s subscription of the Convertible Bonds was thus not on the terms of the agreement but only on the terms and conditions of the Convertible Bonds Certificate. This argument was not pursued at the hearing. There are also clear provisions in the Convertible Bonds Agreement that the terms of the agreement would survive completion of the subscription. 15.The second ground of defence is that the 1st defendant had made every endeavour to recover repayment. But I cannot see how this allegation, even if true, could have avoided the default. There are also no particulars of the endeavours either in the defence or in the affirmations filed by the defendants. This ground is therefore of no use. 16.Under the third ground, the 1st defendant said that the non-repayment of the Trade Debts did not amount to a “material” breach of the Convertible Bonds Agreement. Since only a “material” breach of the Convertible Bond Agreement would amount to an event of default under the conditions of the two certificates, there was therefore no breach of the conditions of the certificates. 17.The reasons why the defendants said that the breach was not material are that the non-payment by華澳to Prosten Shanghai of the Trade Debts did not affect the 1st defendant’s financial ability to redeem the Convertible Bonds on maturity. The RMB3 million was insignificant compared to the total assets of the 1st defendant. Furthermore, the Trade Dbts were due to Prosten Shanghai and not to the 1st defendant direct. 18.Under this ground, leading counsel also argued that clause 5.6 of the Convertible Bonds Agreement also did not apply to this default. 19.The next ground of defence is waiver and estoppel. The 1st defendant pleaded that after completion of the subscription on 6 June 2007 Mr Dennis Yip told Dr Xu of the plaintiff in a meeting on 21 June 2007 about the default. Dr Xu then told Mr Yip that the plaintiff was not overly concerned whether the Trade Debts were collected as they were insignificant in amount. The plaintiff therefore would not redeem the Convertible Bonds on the basis of the failure to collect the debts. 20.One reason allegedly given by Dr Xu for the plaintiff not to grant a total waiver of the 1st defendant’s obligation to collect the Trade Debts was because the collection would affect the 1st defendant on whether it could meet the consolidated profit target for the year ending 31 March 2008 which in turn affect the price of conversion of shares of the 1st defendant. The other reason was that a total waiver would constitute an amendment to the original terms of the Convertible Bonds Agreement which would involve many administrative formalities within the plaintiff’s management. There was then insufficient time to comply with the formalities as the Supplemental Agreement had to be made on 21 June 2007 so that the results of the financial year ended 31 March 2007 could be announced on that day. 21.Relying on these representations of Dr Xu, the 1st defendant then entered into the Supplemental Agreement with the plaintiff. The 1st defendant therefore pleaded that the plaintiff was estopped from relying on the purported breach of 12.4 warranty. 22.Finally, the 1st defendant also argued that the plaintiff had delayed the giving of notice of redemption to 26 November 2008, which was 14 months after the breach. 23.Mr Yip in his affirmation in opposition said that the plaintiff should have known about the non-payment before the 1st defendant’s announcement to the Stock Exchange on 14 July 2008. The reason being that Dr Xu of the plaintiff was a director of the 1st defendant by virtue of the Convertible Bonds Agreement and the plaintiff was thus aware of the business of the 1st defendant. In this decision, I would proceed on the basis that the default was related by Mr Yip to Dr Xu before 14 July 2008. 24.Furthermore, Mr Yip said that the plaintiff must have known about this by 20/21 June 2008 as Mr Yip had told Dr Xu and one Mr Liu of the plaintiff of the same and requested them to give a formal written waiver of the 12.4 warranty or a further formal extension of time for compliance. However, both Dr Xu and Mr Liu said that neither a formal waiver nor a further formal extension was necessary. They assured Mr Yip that the plaintiff would not redeem the Convertible Bonds on the basis of the non-payment. The 1st defendant was therefore led to believe that the plaintiff had no intention to have early redemption. 25.Regarding the announcement by the 1st defendant to the Stock Exchange dated 14 July 2008, Mr Yip explained that this was done pursuant to the advice of the auditors but without the benefit of legal advice. Analyses and decisions 26.Leading counsel for the defendants submitted that the plaintiff wanted to have early redemption because the 1st defendant had achieved profits at a level which would have pushed up the subscription price payable by the plaintiff. That would have made the shares unattractive in a rapidly falling market. But I do not think the ultimate reason for redemption is relevant as the plaintiff is relying on its contractual rights. Should breach be material? 27.Since the Trade Debts were not recovered on or before 30 September 2007, the 1st defendant prima facie breached clause 5.6 of the Convertible Bonds Agreement. For the same reason, the 2nd defendant also breached clause 5.12B of the Exchangeable Bonds Agreement. But counsel argued under the third ground of defence that the non-repayment of the Trade Debts were not covered by these clauses Counsel further argued that the default did not amount to a “material” breach of the Convertible Bonds Agreement and there was thus no breach of the conditions of the certificates either. 28.Regarding clause 5.6 of the Convertible Bonds Agreement, counsel submitted that it only concerned with breaches that occurred before the issue of the bonds on 6 June 2007. Counsel further submitted that for breaches that occurred after the issue of the bonds, they were covered by clause 5.4 of this agreement and clause 10.1(2) of the Convertible Bond Certificate. Clause 5.4 of the Convertible Bonds Agreement provided:
29.Counsel submitted that clause 10.1(2) of the certificate deals with material breaches not discovered until after the issue of the bonds. Clause 5.4 of the agreement also deals with material breaches. But clause 5.6 covers breaches which may or may not be material. Hence, clause 5.4 of the Agreement and clause 10.1(2) of the certificate must both be dealing with the same kind of breach, namely material breaches that occurred before issuance of the certificate while clause 5.6 of the agreement deals with breaches that occurred after the issuance. 30.Counsel then submitted that clause 5.6 therefore does not cover the non-receipt of the Trade Debts because this default occurred on the original due date of 31 May 2007 which was before the issuance of the certificate. Though the Supplemental Agreement postponed the due date to 30 September 2007, it did not relieve the breach that had occurred on 31 May 2007. The breach would only have been relieved if the Trade Debts were received on or before 30 September 2007. 31.Counsel then submitted that for the purposes of clause 5.4 of the Agreement and clause 10.1(2) of the certificate, the breach has to be a material one. But the non-receipt of the Trade Debts was not a material breach, hence these two clauses also have no application. 32.The plaintiff is therefore not entitled to early redemption under clause 5.4 or clause 5.6 of the Convertible Bonds Agreement and clause 10.1(2) of the Convertible Bonds Certificate. 33.I do not agree with the interpretation and construction of clauses 5.4 and 5.6 of the agreement and clauses 10.1(2) of the certificate as submitted by the defendants’ leading counsel. I do not think the coverage of clauses 5.4 and 5.6 can be so segregated simply because of the presence of the word “material” in clause 5.4. The fact that both clause 5.4 of the agreement and clause 10.1(2) of the certificate require the breach to be material and clause 10.1(2) only covers breaches before issue of the bond that are discovered after issue cannot thereby limit clause 5.4 to the same type of breaches as covered by clause 10.1(2). I am of the view that both clauses 5.4 and 5.6 deal with breaches that occurred at anytime. They are cumulative remedies for the plaintiff. Hence, even if the breach of non-recovery of the Trade Debts should not be treated as a material breach, the plaintiff can still rely on clause 5.6 of the agreement to demand early redemption by the 1st defendant. Was breach material? 34.Leading counsel for the plaintiff further submitted that this breach was indeed a material one. The plaintiff wanted compliance of the 12.4 warranty to show good corporate governance of the 1st defendant in properly recovering debts due from connected parties. The Trade Debts were admitted by the defendants to be due from a connected party. The due recovery of debts from connected parties also shows respect to minority shareholders of the 1st defendant. 35.Counsel further submitted that the whole of the Trade Debts must still be outstanding, otherwise the defendants would have claimed that it had been recovered in whole or in part. This argument clearly makes good sense. 36.The defendants disagreed and alleged that the 1st defendant has a good system for collecting debts. But the defendants have not explained while the Trade Debts were not recovered despite having such a collecting system. 37.The defendants further argued that the non-receipt of the Trade Debts did not affect the 1st defendant’s financial ability to redeem the Convertible Bonds on maturity. They also argued that this sum was insignificant comparing with the net assets of the 1st defendant and this sum was due to the 1st defendant’s subsidiary only. However, they cannot dispute that this matter was important enough to warrant the making of the Supplemental Agreement. 38.Leading counsel for the plaintiff also referred to the wording of clause 10.1(2) of the certificate which provides an event of default as “a material breach of any of the terms of the Subscription Agreement, including a breach of any warranty therein which is not discovered until after the issue and delivery of the Bonds”. Counsel thus submitted that by this provision, a breach of any warranty amounts to a material breach of the Convertible Bonds Agreement. The defendants cannot now rewrite the Convertible Bonds Agreement to say that a breach of the 12.4 warranty is not material. The plaintiff must be right on this. 39.I also note that in the announcement by the 1st defendant to the Stock Exchange of 14 July 2008, the 1st defendant admitted that the non-recovery of the Trade Debts was an event of default under the terms of the Convertible Bonds Certificate. This admission is contrary to the submissions by its counsel. 40.I agree with all the submissions of the plaintiff. I also think that good governance must include the due recovery of trade debts from connected parties. I do not think the defendants can now argue that the amount of the Trade Debts is too small to be material. I hold that the non-recovery of the Trade Debts was a material breach that entitled the plaintiff also to rely on clause 10.1(2) of this certificate to ask for early redemption. Waiver and estoppel 41.For waiver and estoppel, leading counsel for the defendants argued that since the plaintiff had waived the 1st defendant’s obligation to recover payment and led the defendants to believe that the plaintiff would not exercise its right for early redemption, it is now estopped from relying on it for early redemption. 42.Counsel also referred me to Luo Xing Juan Angela v the Estate of Hui Shui See, Willy, deceased & Ors, FACV No.32 of 2007 where Mr Justice Ribeiro, PJ in paragraphs. 55 and 56 referred to the three elements for promissory estoppel, namely:
43.Counsel then referred to the representation by Dr Xu to Mr Dennis Yip in the meeting on 21 July 2007 and the affirmation of Mr Yip on what Dr Xu and Mr Liu had allegedly told him on 20/21 June 2008 that neither a formal waiver nor a further formal extension of time for recovery of the Trade Debts was necessary and assured him that the plaintiff would not redeem the bonds for non-recovery of the same. 44.I have already referred to the dispute on when the plaintiff was aware of the non-recovery of the Trade Debts and would proceed on the basis that the plaintiff was aware of it long before 14 July 2008 announcement to the Stock Exchange. The defendants further submitted that the plaintiff’s conduct in not seeking early redemption long time after it had been aware of the non-recovery was consistent with the defendants’ case that the plaintiff had made the said representation to the 1st defendant. The defendants had also alleged that it had relied on the representation and did not procure repayment of the Trade Debts before 30 September 2007 or made alternative arrangements like factoring it or assigning it to a third party. 45.The first point to note is that this ground of waiver and estoppel is contrary to the defendants pleaded case that the 1st defendant had made every endeavour to recover the Trade Debts. The second point to note is that it is contrary to the 1st defendant’s announcement to the Stock Exchange where it admitted to the Stock Exchange and it had not received any waiver from the plaintiff. The defendants now argue that the public announcement was made without benefit of legal advice. But whether the 1st defendant had or had not received the waiver from Dr Xu was a matter of fact. I cannot see how the 1st defendant would have told the Stock Exchange that it had not received the waiver when in fact it had received it. 46.Leading counsel for the plaintiff also pointed out that the waiver did not appear in any of the contemporary documents. It was also contradicted by the terms of the Supplemental Agreement. 47.The 1st defendant pleaded that the plaintiff did not grant a total waiver because that would amount to an amendment of the Convertible Bonds Agreement and a lot of time and resources would have to be incurred in order to formalize such total waiver. But leading counsel for the plaintiff rightly observed that the Supplemental Agreement as made also amounted to an amendment. The defendants also did not mention this waiver after the plaintiff had served the demand letters on them on 26 November 2008. This allegation of waiver was only made for the first time on 25 May 2009 upon the 1st defendant filing its defence. There was a lapse of six months. 48.The defences filed by the defendants also did not refer to the waiver allegedly given by Dr Xu and Mr Liu on 20/21 June 2008. The draft of Mr Yip’s affirmation, which was produced ahead of the affirmed version, was also contrary to this allegation of waiver. The draft said that Mr Yip’s request to Dr Xu and Mr Liu for a formal waiver of 12.4 warranty or a further extension of time for compliance was refused by them. This was contrary to what he later said in his affirmation. All these show that the defendants’ allegations of the alleged waiver by Dr Xu on 21 June 2007 and the alleged waiver by Dr Xu and Mr Liu on 20/21 June 2008 are unbelievable. 49.Though the plaintiff’s notice for redemption only came in November 2008 and can be argued to be consistent with waiver having been made, this is however prevailed over by all the above arguments of the plaintiff. I therefore reject these allegations of waiver in total on the ground that they are unbelievable. On this finding, there was no waiver by the plaintiff as alleged. There was also no estoppel as there was no representation as alleged. Delay 50.Though the plaintiff AHS been late in seeking early redemption delay in itself is not a ground of defence. Judgment 51.Since the 1st defendant has not provided any valid ground of defence, I therefore give final judgment for the plaintiff for payment by the 1st defendant to the plaintiff of HK$36,000,000 with interest at the judgment rate from 10 March 2009 until today. 52.Since the 2nd defendant has put forward the same ground of defence, I also hold that it has no defence to the claim. I therefore also give judgment for the plaintiff against the 2nd defendant for payment by the 2nd defendant to the plaintiff of HK$37,500,000 with interest at the judgment rate from 10 March 2009 to today. 53.I also make an order nisi that the defendants do pay the plaintiff the costs of this action. 54.Since I have held in favour of the plaintiff on its application for summary judgment, I also dismiss the defendants’ summons for security for costs with an order nisi that the defendants do pay the plaintiff the costs of this summons. Security for costs 55.In case I were wrong in giving judgment to the plaintiff, I would also briefly deal with the defendants’ application for security for costs. Assuming that the defendants are right that the plaintiff cannot have early redemption, the bonds will then mature in 2012 and they will certainly have substantial value by then. But the defendants argue that these bonds have no presently realisable value for the defendants and are not assets that can be used to resist the need for security for costs. 56.The plaintiff also has 30,000,000 ordinary shares in the 1st defendant which presently worth about HK$7,000,000. The defendants say that these shares could be disposed off at anywhere in the world and the proceeds be taken to anywhere outside Hong Kong. Hence, they are also not assets that can be used to resist the need for security. 57.If the plaintiff has either the bonds or the shares, then the defendants’ arguments may carry weight. But when the plaintiff has both the bonds and the shares, I do not think the plaintiff can really make it difficult for the defendants to recover their costs in the event that the plaintiff should be held liable to pay them such. Therefore, I would have dismissed the defendants’ summons for security for costs irrespective of my decision on summary judgment.
Mr Chua Guan Hock, SC and Mr Jenkin Suen, instructed by Messrs King & Wood, for the Plaintiff Mr Jonathan Harris, SC and Mr José Maurellet, instructed by Messrs Hammonds, for the 1st and 2nd Defendants |
Cases cited in this judgment
Further hearings and rulings under HCA 669/2009