Tse Ping Shun David and Another v. Lai Ho Man Shan Grace and Another

cacv 97/2009

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 97 of 2009

(on appeal from HCA NO. 105 of 2006)

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BETWEEN

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Before:     Hon Rogers VP, Le Pichon and Kwan JJA in Court

Date of Hearing:     23 April 2010

Date of Judgment:     23 April 2010

Date of Handing Down Reasons for Judgment:     30 April 2010

REASONS FOR JUDGMENT

Hon Rogers VP:

1.I agree with the reasons for judgment of Le Pichon JA.

Hon Le Pichon JA:

2.This was an appeal by the plaintiffs from an order of 23 March 2009 of Deputy High Court Judge A. Chow.  The judge dismissed the plaintiffs’ claim that the plaintiffs had effectively rescinded an agreement dated 19 June 2005 for the sale and purchase of the issued shares of Win Wise Investment Ltd (“the company”) and so were entitled to the return of the deposit paid and other relief.  At the conclusion of the hearing the appeal was dismissed.  My reasons appear below.

Background

3.The company was the vehicle used by the defendants to hold a property situated at Beacon Hill Road, Kowloon (“the property”).  The plaintiffs wished to purchase the property after visiting it through the introduction of an estate agent.  As was known to the parties at the time, the property was mortgaged to the Citic Ka Wah Bank (“the bank”) and there was an outstanding loan to one of the directors.

4.With a view to saving stamp duty, the transaction was structured as a purchase of the entire issued share capital of the company comprising 800 ordinary shares of $1 each from the defendants who were the sole shareholders and directors, with each of the two defendants being the registered holder of 400 shares in the company.

5.While the transaction was hardly the garden variety type of sale and purchase of property, the estate agent, who clearly had no expertise in the matter (and it would not be an exaggeration to say that she was totally out of her depth), nevertheless undertook the task of drafting the agreement for the parties.  As will become apparent, her inept drafting was the cause of the dispute between the parties that gave rise to these proceedings.

Chronology

6.On 19 June 2005, the parties entered into a provisional agreement for the transfer of the shares in the company (“the agreement”).  The agreement identified the parties to it, the company and the property.  Recital (B) then recited that:

“The buyer wishes to buy the entire shareholding of the above Company with the ultimate aim for acquiring the above Property owned by the Company.”

7.For present purposes, it is only necessary to set out the following provisions of the agreement:

“The parties agree as follows:

The consideration for transfer of all the shares of the Company is Hong Kong Dollars: HK$19,800,000.00                                                             

(including all moneys paid in the above agreement) transferred to the seller his all the shares in the Company, in accordance with the following the seller shall make payment to the transferor’s solicitors firm for safe keeping as stakeholder, and the deposit(s) shall only be handed to the seller after the completion of the verification of the relevant legal procedures necessary for the transfer of the shares of the Company.)

1.       At the time when this agreement is signed, pay deposit HK$500,000.00

2.       On or before 02-07-2005 when signing the formal agreement for the transfer of shares pay the remaining balance of the deposits HK$1,480,000.00.

…

4.       Both parties agree to sign the formal document(s) of transfer of shares not later than 02-07-2005.

5.       On the signing of this agreement, without the consent of the buyer, the seller shall not make any decision on behalf of the Company, including signing any contracts and/or undertaking any debt and or legal liability, otherwise it shall be regarded as a breach of contract.

…

12.     On or before the completion of the transfer of the shares of the Company, namely 15-10-2005 the balance of the transaction price, namely HK$17,820,000.00 shall be settled at the seller’s solicitors firm.

(Sd.)(Sd.)(Sd.)

13.     Remarks: The seller and the buyer both agree that in respect of the above Property owned by the above Company, the seller has to ensure that on or before the transaction completion, (the seller) shall clear all bank loan(s) liabilities in connection with the above Property and other liabilities in connection with the above Property; and the seller agrees to lend the buyer the Company rubber chop(s), the seal for the purpose of obtaining a mortgage loan fourteen (14) working days before the transaction completion, and on completing the transaction all the above related documents and articles of the Company shall be handed back to the buyer.”

8.By a separate agreement of even date made between the plaintiffs, the defendants and the estate agent, the plaintiffs and the defendants agreed to pay the estate agent commission in the sums of $118,000 and $198,000 respectively.  No payment has been made.

9.Prior to 2 July 2005, there was an exchange of correspondence between the solicitors respectively representing the parties and, on 29 June 2005, the defendants’ solicitors sent a draft formal “Agreement for Sale and Purchase of Share and Loan” to the plaintiffs’ solicitors.  It is to be noted that the draft formal agreement (which was not before the court) was an agreement not only for the sale and purchase of the shares but extended to the director’s loan which, presumably, was to be assigned on completion.  The plaintiffs’ solicitors stated in a letter dated 30 June 2005 that, while the plaintiffs were ready and willing to pay the balance of the deposit, the draft could not be signed in time because no audited accounts had been provided and the amount of the shareholders’ loan had been left blank.

10.No formal agreement was signed, no share transfers were executed and no further deposit was paid on 2 July 2005, notwithstanding clauses 2 and 4 the agreement.  In fact, no mention was made as to what ought to have occurred on 2 July in subsequent correspondence.

11.Other than a letter dated 13 July 2005 from the plaintiffs’ solicitors seeking a response to their letter of 30 June, there was no further correspondence between the parties until 24 August 2005 when the defendants’ solicitors sent to the plaintiffs’ solicitors a revised draft (“the August draft”) for approval.  The title deeds as well as a certified copy of an audited report of the company were also enclosed.

12.The August draft provided, inter alia, for the assignment of the “Loan” by the defendants to the plaintiffs on completion and a draft assignment was scheduled to the August draft.  Recital (D) stated that as at the Management Accounts Date (defined to mean the completion date i.e. 15 October 2005), the company was indebted to a director for the sum of $10,670,444 (“the Loan”).

13.The audited report showed that as at 30 June 2005 the company was indebted to a director in the amount of $10,670,444 and to the bank in the amount of $7,780,508.81.

14.On 15 September 2005, the first plaintiff submitted a mortgage application to the Hang Seng Bank for a loan of $13,860,000 upon security of the property.  He was told by a manager of the bank that after the shares had been formally transferred to the plaintiffs, it would take the bank about two weeks to verify the transfer and release the loan to the solicitors.  Shortly thereafter, the first plaintiff asked the estate agent to request the defendants to make the share transfer documents available prior to completion to enable him to obtain a mortgage loan from the bank.

15.As there had been no response from the plaintiffs either to the August draft or the reminders sent by the defendants’ solicitors, on 7 October 2005, the defendants’ solicitors requested the plaintiffs’ solicitors to treat the August draft as an engrossment as the plaintiffs had had ample time (6 weeks) to consider the August draft and to return the same duly signed by the plaintiffs together with the further deposit.

16.On 12 October 2005, in preparation for the then impending completion, the defendants’ solicitors gave directions for split cheques to the plaintiffs’ solicitors, having themselves been advised by the bank on 10 October 2005 that the amount payable on discharge of the property on or before 17 October 2005 would be $7,832,195.75, inclusive of a prepayment fee of $120,000.  They also sought other necessary information from the plaintiffs’ solicitors to facilitate completion.

17.In response, the plaintiffs’ solicitors wrote on 13 October 2005 (in a letter marked “subject to contract”) seeking perusal of the statutory books and asking to be provided with a certified copy of the latest management accounts.  It complained that the latest annual return was out of date.  Under the pretext that the defendants’ solicitors had failed to tender the necessary documents two working days before the scheduled completion date, they proposed a postponed timetable for completion.  They also sought clarification of various matters including confirmation that both bank loans to be repaid on completion were due to the same bank.

18.The defendants’ solicitors provided the requested documents the same day (13 October) including the balance sheet as at 15 October 2005 (“the October balance sheet”) and the profit and loss account for the period from 1 July 2005 to 15 October 2005 (“the October P & L account”), commenting (in their covering letter) that the purchasers’ solicitors’ letter of 13 October was the first time the documents had been requested and, further, that the proposal to postpone completion was not acceptable.  The October balance sheet showed that the amount due to a director had increased by $202,879.13 since 30 June 2005.

19.The August draft, marked up with suggested amendments by the plaintiffs’ solicitors (“the marked-up draft”) was returned to the defendants’ solicitors on 14 October 2005 and the defendants’ solicitors were asked to prepare engrossments if the amendments were acceptable.  The request to postpone completion was renewed.  The marked-up draft included amendments that reflected the latest figure of the “Loan” as shown in the October balance sheet.

20.Later the same day, the plaintiffs’ solicitors wrote a second letter recording their understanding that their respective clients had reached an agreement to postpone completion from 15 October to 21 October 2005 (on or before 1 pm) and for the further deposit to be paid upon the signing of the formal agreement on or before 17 October 2005.  The plaintiffs’ solicitors also requested that they be provided with company documents for perusal.  The letters from the plaintiffs’ solicitors of 14 October were marked “without prejudice subject to contract”.

21.The defendants’ solicitors replied on 15 October 2005 confirming that the plaintiffs’ solicitors’ understanding of the agreement to postpone completion was correct.  After further correspondence, the terms of the formal agreement were agreed and an engrossment was sent on 17 October 2005 to the plaintiffs’ solicitors for signature.

22.There was a meeting on 17 October 2005 attended by, among others, the plaintiffs, the plaintiffs’ solicitors and the estate agent in the course of which the estate agent had a number of conversations on the telephone with the first defendantin an attempt to resolve the problem facing the plaintiffs in that the Hang Seng Bank would not approve any mortgage loan or release the loan until about two weeks after the shares had been transferred to the plaintiffs.  The parties failed to reach any agreement.  The parties did not sign the formal agreement on 17 October 2005.  Nor was the further deposit paid.

23.A further meeting took place on 22 October 2005 between the first plaintiff, the defendants and the estate agent.  It was a renewed attempt to resolve the difficulties but it also proved unfruitful.

24.On 24 October 2005 the defendants’ solicitors gave notice (on behalf of the defendants) to terminate the agreement and to forfeit the deposit on the basis of the plaintiffs’ breaches of the agreement in failing to sign the formal agreement, to pay the further deposit on 17 October 2005 and to complete on 21 October 2005.

25.On 25 October 2005 the plaintiffs’ solicitors wrote to the defendants’ solicitors alleging that the defendants were in breach and stating that the plaintiffs were entitled to and did elect to rescind the agreement.

26.The plaintiffs commenced these proceedings in January 2006 alleging that it was the defendants who were in repudiatory breach of the agreement by (1) failing to execute the instruments of transfer on or before 2 July 2005; (2) causing the company to undertake additional indebtedness to a director in that the loan had increased during the period from 30 June to 15 October 2005 without the plaintiffs’ consent; (3) failing to discharge the bank loan and the director’s loan on or before 1 pm on 21 October 2005; and (4) wrongfully terminating the agreement on 24 October 2005.

27.The judge rejected the plaintiffs’ contentions and found for the defendants.

This appeal

28.Mr Lin who appeared for the plaintiffs relied on the same grounds that had been advanced below.

Failure to execute instruments of transfer

29.Mr Lin’s argument below was that clause 4 required the defendants to execute the instruments of transfer of the shares on or before 2 July 2005 such that the plaintiffs would become the shareholders of the company prior to completion.

30.The judge held that the subject matter of clause 2 was the formal agreement whereas the subject matter of clause 4 was the formal documents for the transfer of the shares.  While he accepted that the defendants were under an obligation to execute the share transfers on or before 2 July 2005, he rejected Mr Lin’s submission that they were under any obligation to hand them over until completion.  That is evident from § 71 of the judgment.

31.In that paragraph, the judge set out what he considered the agreement envisaged and, hence, what the respective obligations of the parties were:

“ (1)     The formal agreement was to be signed on or before 2 July 2005, and the further deposit was to be paid to the Defendants’ solicitors as stakeholder upon the signing of the formal agreement.

(2)     The share transfer documents were also to be signed by the Defendants no later than 2 July 2005.

(3)     Prior to the signing of the share transfer documents, various procedures had to be carried out to verify that the Defendants were the owners of the Shares and were legally entitled to transfer the Shares to the Plaintiffs.

(4)     The further deposit would only be released to the Defendants after the aforesaid verification process had been completed. The purpose of this arrangement was to ensure that before the further deposit was received by the Defendants, the Plaintiffs would be satisfied that the Defendants had proper right and title to transfer the Shares to them.

(5)     However, notwithstanding the fact that the share transfer documents had been signed by the Defendants, they were not to be delivered to the Plaintiffs until completion which was scheduled to take place on or before 15 October 2005.  In other words, ownership of the Shares would not be transferred to the Plaintiffs until completion.

32.At the appeal hearing, Mr Lin confirmed that he was not seeking to challenge § 71 (5) of the judgment.  Initially, he tried to argue that in order to give business efficacy to the agreement, a term that the plaintiffs would be given copies of the executed transfers had to be implied to demonstrate that they had performed the obligation imposed on them by clause 4.  When it was pointed out that proof could have been achieved by other means such as affording the plaintiffs an opportunity to inspect the executed documents, he reframed the obligation as an obligation to provide proof of compliance with clause 4.  It was said that that might have enabled the plaintiffs to obtain the loan from the Hang Seng Bank.

33.It is trite law that a term will not be implied if it cannot be shown that it is necessary, in the business sense, to give efficacy to the contract.  The plaintiffs failed to adduce evidence to show what the bank required before it would approve the mortgage and make the funds available.  All that was left at large and is a matter of speculation.  In those circumstances, there can be no basis for implying the term that Mr Lin seeks: necessity has not been made out.

Increase of indebtedness to a director

34.A comparison between the October balance sheet and the balance sheet as at 30 June 2005 shows that the amount of the director’s loan had increased by $202,879.13 (being the difference between $10,670,444 and $10,873,323.13) during the intervening period.  The plaintiffs’ case was put on the basis that this constituted a breach of clause 5 as the plaintiffs’ consent to the increase had not been sought.  The judge was of the view that clause 5 was not intended to refer to an indebtedness owing by the company to a director arising as a result of the director having discharged an obligation of the company.  Mr Lin challenged the judge’s interpretation of clause 5 and submitted that, even if it were correct, the burden was on the defendants to adduce evidence to bring themselves within the exception and it was wrong for the judge to infer that the increase in the indebtedness was probably due to the element of interest on the bank loan.

35.It was not Mr Lin’s case that as a result of the increase in the amount of the director’s loan, the purchase price was no longer $19.8 million but some greater amount.  Nor was it his case that the property would remain encumbered in any way after completion.  Plainly, it must have been within the contemplation of the parties that between 30 June and 15 October, mortgage repayments would have to be made as otherwise the company would put itself at risk of action by the bank.  Mortgage repayments by the defendants in the interim would undoubtedly affect the amount of the director’s loan on completion.  In those circumstances, I agree with Mr Chan (who appeared for the defendants) that clause 5 could not have been intended to apply to internal bookings in the company’s accounts.  Since the parties were proceeding on the basis that the defendants would be assigning the director’s loan to the plaintiffs on completion, any increase in the amount would be of no relevance and could have no practical consequence.

36.When Mr Lin’s attention was drawn to the company’s profit and loss account from 1 July to 15 October which contained a breakdown of the expenses incurred during that period, Mr Lin homed in on the entry “Bank charges $120,250”.  He complained that there had been no explanation regarding this entry which, he noted, was in addition to an entry showing bank loan interest of approximately $104,000.

37.In my view, the complaint has no substance.  In fact, there was an explanation for the amount of $120,000.  There is a letter dated 10 October from the bank to the defendants’ solicitors advising them of the amount payable on discharge of the mortgage on or before 17 October 2005 of approximately $7,832,197.75 “within which HK$120,000.00 being the prepayment fee”.  That information was repeated in a letter dated 17 October 2005 from the bank to the defendants’ solicitors in relation to discharge on or before 22 October 2005.

Failure to discharge the bank loan and the director’s loan

38.The defendants’ obligation under clause 13 was

“to ensure that on before the transaction completion, [the defendants] shall clear all bank loan(s) liabilities in connection with the above Property and other liabilities in connection with the above Property …”

39.As I understand it, the nub of the plaintiffs’ case was that the clause required the defendants to clear all outstanding liabilities affecting the property from independent sources and it was not open to them to use the further deposit and/or the balance of the purchase price to do so.  It was said that until the defendants had performed their contractual obligation to clear all outstanding liabilities, they were not entitled to receive the balance of the purchase price.

40.Be that as it may, nothing in clause 13 required the defendants to clear outstanding liabilities before completion.  So long as that could be achieved on completion, that would be sufficient.  Further, the matter has to be considered in the context of the parties’ conduct leading up to the completion date.

41.So far as the bank loan was concerned, directions for split cheques were first given on 12 October 2005.  The plaintiffs knew that the defendants were proceeding on the basis that the mortgagee bank would be repaid from the balance of the purchase monies.  They did not object to that arrangement or indicate that it would not be acceptable.  Indeed, amendments to the August draft proposed by the plaintiffs’ solicitors included a specific reference to a cashier order or solicitors’ firm’s cheque having to be delivered to the vendor “for the whole redemption money and other monies owing to the Mortgage”.  Plainly the defendants were led to believe that the usual arrangement of applying part of the purchase price to clear the bank loan was acceptable.  The parties proceeded on that basis and, in my view, it is not open to the plaintiffs to contend otherwise, at least without first giving the defendants the opportunity to make other arrangements.

42.In any event, the defendants’ solicitors were also the bank’s solicitors in relation to the discharge of the mortgage.  I agree with the judge that had payment been tendered on 21 October, there was no reason why it would not have operated to discharge the bank loan.  Both events would have taken place simultaneously.

43.So far as the director’s loan was concerned, it was envisaged in the various drafts of the formal agreement that it would be assigned to the plaintiffs on completion.  The August draft (if not also the very first draft provided to the plaintiffs’ solicitors in June) made that clear and at no stage thereafter did the plaintiffs indicate that the director’s loan should be discharged instead of being assigned to them.  Since, as the judge pointed out, it was well within the power and ability of the defendants to execute a formal discharge without the assistance of any third party had that been required, it could not be said that the defendants were not in a position to execute a formal discharge.

44.For these reasons, I consider that the submission on the defendants’ alleged failure to discharge outstanding liabilities to be to devoid of merit.  It was certainly not the reason why completion did not take place.  In fact, by the date of completion, the plaintiffs were already in breach of the agreement by failing to pay the further deposit on 17 October.  The real reason, as is abundantly clear, was the fact that they were unable to obtain the approval of the mortgage and release of the mortgage monies until they had become the registered holders of the shares.

Whether defendants entitled to rescind on 24 October

45.Mr Lin submitted that as the defendants were in breach of clause 4, being the party in repudiatory breach, they were not entitled to rescind the agreement.  The judge rejected that submission for the reasons set out in § 74:

“74.      In this case, if there was a breach of Clause 4 of the Agreement, that breach would have occurred on 2 July 2005.  Upon the occurrence of that breach, the Plaintiffs could have elected to terminate the Agreement.  Since they were at all material times represented by solicitors, in the absence of evidence to the contrary, it must be assumed that they had been properly advised of their legal rights.  They did not terminate the Agreement.  On the contrary, they treated the Agreement as being alive, by continuing to negotiate with the Defendants about the terms of the formal agreement.  Also, they reached an agreement with the Defendants on or about 15 October 2005 to vary the Agreement by postponing the date of signing of the formal agreement and the date of payment of the further deposit, as well as the date of completion.  This must be on the footing that the contract was still alive at that time.  In these circumstances, I consider that the Plaintiffs had, by their conduct, affirmed the Agreement notwithstanding any breach of Clause 4 of the Agreement by the Defendants.  That being the case, they could not rely on the Defendants’ failure to execute the instruments of transfer to justify their own failure to complete the purchase on 21 October 2005.”

I fully agree with those reasons.

46.In this court, Mr Lin sought to argue that the judge was not entitled to have regard to the negotiations because the relevant correspondence was marked “subject to contract” or “without prejudice subject to contract”.  That submission is misconceived.  ‘Subject to contract’ cannot have the effect contended for.  All it means is that no contract is concluded until the parties sign the agreement.  In so far as the additional words “without prejudice” added anything, only the letters from the plaintiffs’ solicitors dated 14 October (see §§ 19-20 above) were so marked.  Those letters apart, there was ample evidence to show that the parties were negotiating and going forward with the transaction.  See, for example, the events described in §§ 14, 16, 17, 18 and 21-23above.  They are consistent only with the agreement remaining alive.

47.In those circumstances, when the plaintiffs failed to perform their obligation to pay the further deposit on 17 October and to complete on 21 October, the defendants were plainly entitled to rescind the agreement on 24 October.

The estate agent

48.It would not be inappropriate to add a footnote to this unfortunate saga.  It is my understanding that the estate agent has not been paid.  In my view, she was the cause of these proceedings.  The nature of the transaction was such that the drafting of the agreement required a proper understanding of what the transaction involved and what would be required to achieve the parties’ objective.  It is quite clear that the estate agent who had no expertise in the matter ought not to have undertaken the drafting of the agreement.  She has failed her clients and caused them to incur legal costs in attempting to resolve the ‘mess’ that she had created. In my view, not only does she not deserve to be paid any commission, there is a case for saying that she should be responsible for the legal costs that have resulted.

Hon Kwan JA:

49.I agree with the reasons for judgment of Le Pichon JA.

Mr Kenny C P Lin, instructed by Messrs Mike So, Joseph Lau & Co., for the 1^st & 2^nd Plaintiffs/Appellants

Mr Jeremy S K Chan, instructed by Messrs Ma Tang & Co., for the 1^st & 2^nd Defendants/Respondents