Dragon Wings Communications Ltd and Another v. Fintel Group Ltd and Another
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DCCJ 3251/2008 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CIVIL ACTION NO. 3251 OF 2008 ----------------------
---------------------- Coram: Before Master S. Lo in Court Date of hearing: 20 April 2010 Date of handing down Judgment : 19 May 2010 ---------------------------------------- ASSESSMENT OF DAMAGES -------------------------------------- Background 1.As the 1st and 2nd Defendants failed to file any notice of intention to defend and the 1st and 2nd Plaintiffs abandoned the claim for specific performance of the contracts as sought in the statement of claims herein, interlocutory judgments were entered against the 1st and 2nd Defendants on 8 September 2008 and 10 December 2008 respectively with damages to be assessed. 2.The Plaintiffs and Defendants are parties to a Stock Purchase Agreement dated 7 May 2005 (“the SPA”) and an Undertaking dated 14 June 2006 (“the Undertaking”) which essentially provided for the sale by the Plaintiffs and purchase by the Defendants of shares in the 1st Plaintiff (“DW Shares”). 3.The 1st Plaintiff is a company incorporated and registered in Hong Kong (“Dragon Wings”) and the 2nd Plaintiff is its director (“Wong”). 4.The 1st Defendant is a Hong Kong company (“Fintel”) and a wholly owned subsidiary of the 2nd Defendant (“Sancon”), a company registered in Nevada, United States and having offices in Shanghai and Australia. At the time the parties entered into the SPA, Sancon was known as Financial Telecom Limited (USA), Inc. (“FTL”). FTL later changed its name to MKA Capital Inc. (“MKAC”), and subsequently, to Sancon. 5.The Plaintiffs’ claim is for its loss in damages arising from the Defendants’ failure to perform their obligations under the SPA and the Undertaking to complete the sale and purchase, specifically:
The Terms of the SPA and the Undertaking 6.Under Paragraph 1 of the SPA, the parties agreed as follows:
7.The exact quantity of FTL Shares to be delivered by the Defendants are to be calculated by dividing the total Consideration (i.e. HKD625,000 + HKD375,000 = HKD1m) by 50% of the Base Price. The Base Price is defined as “the average closing price of the common stock of Financial Telecom Limited (USA) Inc. at the NASD Over-the-Counter Bulletin Board in the 30 trading days before the date of this Agreement.” 8.Given that the average Base Price of an FTL Share was USD0.1027 (a record of the daily closing price of FTL stock in the 30 days prior to Closing is set out at paragraph 3 (1)(c) of Wong’s Witness Statement filed 9 December 2009, the number of FTL Shares to be delivered are calculated as follows:
9.On the basis of the calculation above, the Defendants were liable to deliver:
10.The sale and purchase was to take place on 31 May 2005 or some other time and place as mutually agreed orally or in writing (the “Closing”), on which date the Plaintiffs shall deliver to the Defendants certificates of DW Shares and the Defendants shall correspondingly deliver certificates of FTL Shares. 11.Acting in accordance with the SPA, the parties delivered share certificates to each other in July 2005:
12.The FTL Share certificates were stamped with the legend which stated:
In other words, the shares under the certificates could not be traded unless legend removal had been authorized by written release. 13.For this particular share sale transaction, the parties had agreed that there be a one-year restriction prohibiting trading of the FTL Shares. At the expiry of one year, Dragon Wings and/or Wong could return the Restricted FTL Share Certificates to FTL who was obliged to deliver back to Dragon Wings certificates for freely tradable FTL Shares. 14.Under Paragraph 3.4 of the SPA, the parties further agreed that if the Base Price (that is, the average price of the stock in the 30 days before Closing) turned out to be lower than the Reference Price (defined as the average closing price of the FTL Shares at the NASD over-the-counter bulletin board in the 30 trading days before the first anniversary of the Closing, Fintel would compensate the Plaintiffs the shortfall by delivering additional FTL Shares or their cash equivalent (“Additional FTL Shares”). 15.Wong explained in his witness statement that the rationale behind this arrangement was to protect Dragon Wings against loss that may result from a price drop of the FTL Shares. 16.One year after Closing (i.e. as of 31 May 2006), the Reference Price (USD0.02725) turned out to be lower than the Base Price (USD0.1027) and as such, Fintel was liable to compensate the Plaintiffs for the shortfall (pursuant to Paragraph 3.4(c) of the SPA) in the following quantities of Additional FTL Shares:
Re-issue of tradable MKAC shares 17.The first issue was how to go about lifting the trading restrictions on the Original FTL Shares. At this point in time, the Plaintiffs were in possession of restricted FTL share certificates and were entitled to exchange these with the Defendants for certificates for freely tradable shares of MKAC due to the reason that, by this time, FTL had merged into MKAC which had a different share structure. 18.The parties agreed that the FTL Shares were to be merged into MKAC Shares at 25 FTL Shares to 1 MKAC Share and as such, instead of delivering unrestricted FTL Shares back to the Plaintiffs, the Defendants should deliver unrestricted MKAC Shares to the Plaintiffs in the following amounts:-
Therefore, a total of 99,869 tradable MKAC Shares have to be transferred according to the Undertaking. Payment of HKD150,000 by Dragon Wings to Digital Financial Services Limited 19.The second issue was in relation to a sum of HKD150,000 which was at the time owed by Dragon Wings to a wholly owned subsidiary of FTL – Digital Financial Services Limited (“Digital”) under a Financial Advisory Contract (“FAC”) dated 7 May 2005. According to the 2005 Annual Return of Digital, it is wholly owned by FTL. Under the FAC, Dragon Wings agreed to pay a monthly service fee of HKD25,000 to Digital. 20.As at June 2006, a sum of HKD150,000 (being outstanding monthly payments for the months from 1 December 2005 to 31 May 2006) was due and owing from Dragon Wings to Digital. Delivery of Additional Shares 21.The Defendants were also liable in June 2006 – one year after Closing to transfer Additional Shares to the Plaintiffs to make up for the shortfall resulting from the Reference Price being lower than the Base Price (pursuant to Paragraph 3.4 of the SPA).
Therefore, the Defendants were liable to deliver a total of 276,467 Additional MKAC Shares to the Plaintiffs. 22.Wong gave evidence that these Additional Shares were subject to the same one-year restriction on trading and at the expiry of one year (i.e. June 2007). Dragon Wings could return the restricted shares to the Defendants who were liable to exchange the same with certificates for unrestricted shares. Terms of the Undertaking 23.According to the various emails exchange between Wong and Richard Yan (“Yan”), the financial controller of the Defendants in July 2009, the parties eventually agreed that:
24.The agreed terms from the aforesaid negotiations were reflected in the Undertaking, namely:-
25.On 26 August 2006 (a Saturday), Wong emailed Yan informing him that the HKD150,000 had been deposited. On the same day, Wong sent the certificates of the restricted FTL Shares by courier to the Defendants’ Shanghai office, with the expectation that the same would arrive on Monday, 28 August 2006. 26.On 4 September 2006, Yan confirmed receipt of the HKD150,000 and told Wong that the Defendants had already instructed their stock agent to issue certificates and release certificates, but that the stock agent had made a mistake and had stamped the supposedly freely tradable MKAC shares with the “144 Restricted” legend. Yan indicated that he would mail all certificates to Wong when he received newly issued certificates from their stock agent. 27.Wong gave evidence that after this email exchange, David Chen (the director of MKAC) had proposed early termination of the SPA and the Undertaking and had proposed to treat the transaction as being reversed (that is, each party would be returned to the position as if the transactions had not been carried out). Wong further stated that David Chen had offered to repay Dragon Wings HKD150,000 out of the total of HKD300,000 paid under the Financial Advisory Contract. 28.Wong said that he had disagreed with what was proposed and insisted on delivery of (1) share certificates for the released MKAC Shares and (2) share certificates for the Additional MKAC Shares. Quantum 29.The Defendants still fail to deliver (1) the released MKAC shares and (2) restricted additional MKAC shares as at the date of this hearing. 30.The Plaintiffs no longer wish to pursue the remedy of specific performance but seek damages for non-delivery up to the limit of the District Court’s jurisdiction. 31.I accept the submission made by the Plaintiff’s Counsel that the normal measure of damages for non-delivery is the market price of the shares at the contractual time for delivery less the contract price – this represents the amount that the buyer must obtain to put himself in the position he would have been in had the contract been carried out (since to do so he must buy equivalent shares in the market) (see paragraph 24-003 McGregor on Damages 18th ed.). 32.Applying this principle to the present case:-
33.To sum up, the 1st and 2nd Defendants do jointly and severally pay the 1st Plaintiff the damages assessed at USD84,721.05 (USD15,604.25 + USD69,116.80) or the Hong Kong dollar equivalent at the time of payment and the 2nd Plaintiff damages assessed at USD50,832.90 (USD9,362.5 + UD41,470.40) or the Hong Kong dollar equivalent at the time of payment. 34.The 1st and 2nd Defendants do jointly and severally pay the interest on the aforesaid damages at 8% p.a. from 25 July 2008 up to the date hereof and thereafter at judgment rate until payment. 35.Regarding costs of this action and assessment of damages, the Plaintiffs’ solicitors filed a statement of costs claiming a total sum of $138,680 including Counsel’s fee. Having carefully considered the said statement, I make an order nisi that the 1st and 2nd Defendants do pay the 1st and 2nd Plaintiffs costs of this action including assessment of damages summarily assessed at $105,000, which shall become absolute after 14 days from the date hereof.
Ms. Janine Cheung, instructed by Messrs. Li, Wong, Lam & W.I. Cheung, solicitors for the 1st and 2nd Plaintiffs. The 1st and 2nd Defendants acting in person were absent. |