Top One International (China) Property Group Co Ltd and Another v. Top One Property Group Ltd and Others

HCA1244/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1244 OF 2009

________________________

BETWEEN

________________________

Before: Deputy High Court Judge L. Chan in Chambers

Date of Hearing: 28 September 2011

Date of Decision: 28 September 2011

________________________

D E C I S I O N

________________________

1.This is an appeal by the 2nd plaintiff against a Master’s refusal to order interim payment from the 1st and 3rd defendants to the 2nd plaintiff.

Background

2.Background of the matter has been set out comprehensively in a judgment given by Poon J on 16 October 2009.  Judgment on liability has been given by Fok J on 9 December 2010.  But Fok J at the same time dismissed the 2nd plaintiff’s application for damages to be assessed and directed the damages to be assessed by a Master.  The 2nd plaintiff applied for interim payment of damages, but the application was dismissed by the Master.

3.The following is a gist of the background.  The 3rd defendant is the sole owner of a BVI company called Thumb (China) Holdings Group Limited. (“Thumb China”) which issued Notes in the principal aggregate sum of SGD120 million pursuant to a trust deed dated 13 August 2007 to three Noteholders managed by Stark Investments.  As security for repayment of the Notes, Thumb China executed a share charge dated 13 August 2007 over its shareholding in a company called Sino-Environment Technology Group Ltd. (“Sino-Environment”).  The 3rd defendant was the chairman of Sino-Environment and also executed the share charge.  The share charge was in favour of the 2nd plaintiff as the trustee of the Noteholders.  The share charge has provision for topping up of security.

4.Sino-Environment was a company listed in the Singapore Stock Exchange.  In early 2008, the price of Sino-Environment share dropped significantly and the Noteholders as managed by Stark Investments sought additional security from the 3rd defendant.  The 3rd defendant procured a third party security in the form of a charge over the shares of the 1st plaintiff which were then owned by the 2nd defendant.  The 3rd defendant also executed this deed of charge. 

5.The only significant asset of the 1st plaintiff was the entire shareholding of a wholly foreign enterprise incorporated in the mainland called Chongqing Dading Property Company Limited (“Chongqing Dading”).  It is a real estate company. Apart from the shares of Chongqing Dading, the 1st plaintiff did not own anything else that had any significant value.  Chongqing Dading held a number of subsidiaries which were in real estate business. 

6.After the execution of the share charge over the shares of the 1st plaintiff by the 2nd and 3rd defendants, the 1st plaintiff entered into a share transfer agreement on about 5 July 2008 to transfer all the Chongqing Dading shares to the 1st defendant for Renminbi 200 million.  This was done without the knowledge of the 2nd plaintiff or the Noteholders.  At the time of the transfer, the 3rd defendant was the sole shareholder and director of the 1st defendant.

7.Subsequently on 26 April 2009, the 1st defendant entered into an agreement to transfer all the Chongqing Dading shares to another mainland company called Fujian Dahong Investment and Development Company Limited (“Fujian Dahong”) also for RMB200 million.  This was also unknown to the 2nd plaintiff or the Noteholders.

8.The 3rd defendant and his brother used to own 70 per cent and 20 per cent respectively of the shares of Fujian Dahong.  The 3rd defendant’s brother later became the owner of 90 per cent of the shares of Fujian Dahong, with the remaining 10 per cent owned by an unknown person.

9.Counsel for the 2nd plaintiff told me this morning that the shares of Chongqing Dading are now registered in the name of Fujian Dahong which has given an undertaking not to dispose of them.  But it is not known if the undertaking is a security for the claim by the 2nd plaintiff against Fujian Dahong.  This information is not challenged by counsel for the 1st and 3rd defendants.

10.Thumb China was supposed to repay the 2nd plaintiff as trustee for the Noteholders SGD65 million on 15 February 2009, but it defaulted.  On 2 March 2009, the 2nd plaintiff cited Thumb China’s failure to repay as an event of default and gave notice to Thumb China for repayment of principal and all interests accrued. The 2nd plaintiff was authorized by the Noteholders to enforce the share charge over the 1st plaintiff’s shares.  On 29 April 2009, the 2nd plaintiff appointed receivers to the 1st plaintiff.  The 1st plaintiff then started this action.

11.I have already mentioned that judgment has been given to the 2nd plaintiff against the 1st and 3rd defendants for breach of the share charge over the 1st plaintiff’s shares because of the siphoning away of the Chongqing Dading shares from the 1st plaintiff.

12.The case of the 1st and 3rd defendants in opposing the 2nd plaintiff’s application for interim payment is that when the shares of Chongqing Dading were transferred from the 1st plaintiff to the 1st defendant, the net asset worth of the 1st plaintiff was in the negative. 

13.The 1st and 3rd defendants alleged that the 1st plaintiff owed the 3rd defendant a loan of more than RMB273 million with interest at 2 per cent per month accruing from about November 2007.  The sale of the Chongqing Dading shares fetched RMB200 million for the 1st plaintiff which was used to reduce the loan and interest owed to the 3rd defendant.  The value of the Chongqing Dading shares at that time was also at RMB200 million as evidenced by the audited financial report of Chongqing Dading for the financial year ending 31 December 2007.  The 2nd plaintiff thus suffered no loss from the transfer of the Chongqing Dading shares by the 1st plaintiff to the 1st defendant on about 5 July 2008.

14.Calculation by counsel for the 1st and 3rd defendants shows that as at 5 July 2008 and after the sale of the Chongqing Dading shares, the 1st plaintiff still owed the 3rd defendant nearly RMB108 million.

The law on interim payment

15.Interim payment is governed by Order 29 rule 11 of the Rules of the High Court.  The rule provides:

“(1) If, on the hearing of an application under rule 10 in an action for damages, the Court is satisfied -

(b) that the plaintiff has obtained judgment against the respondent for damages to be assessed....

The Court may, if it thinks fit and subject to paragraph (2), order the respondent to make an interim payment of such amount as it thinks just, not exceeding a reasonable proportion of the damages which in the opinion of the Court are likely to be recovered by the plaintiff after taking into account any relevant contributory negligence and any set-off, cross-claim or counterclaim on which the respondent may be entitled to rely.”

16.The 2nd plaintiff’s claim against Thumb China is for SGD47,781,296.51 as at 1 June 2011.  This includes interests accrued from time to time which were capitalized. That sum is equivalent to about HK$309 million.  This is the shortfall to the Noteholders after the enforcement of security for repayment.  The 2nd plaintiff says that the value of the Chongqing Dading shares far exceeded the RMB200 million allegedly paid by the 1st defendant to the 1st plaintiff which was allegedly used to defray part of the debt owed by the 1st plaintiff to the 1st defendant.

Discussion

17.The first piece of evidence relied on by the 2nd plaintiff is the unaudited consolidated account of Chongqing Dading as at 30 June 2008 which was only a few days before the transfer of shares by the 1st plaintiff to the 1st defendant.  The total asset on 30 June 2008 was recorded in the accounts at RMB2,522,285,130.03, and the total liability was at RMB1,088,749,273.07. The net asset value was thus at RMB1,433,535,856.96.  Therefore, the transfer out of the Chongqing Dading shares from the 1st plaintiff meant the siphoning away of more than RMB1,233 million from the 1st plaintiff.  That was a lot more than the HK$309 million or thereabouts which is claimed by the 2nd plaintiff.

18.Counsel for the 1st and 3rd defendants submitted that the unaudited account is unreliable as it was not audited.  He instead asked me to look at an audited account of Chongqing Dading for the year ending 31 December 2007 which was about half a year before the share transfer.  This is not a consolidated account.  It shows that the net asset value of Chongqing Dading as at 31 December 2007 was at RMB200,127,850.84.  However, the auditors valued the long term investments held by the subsidiaries of Chongqing Dading at costs at RMB60 million.  

19.It is common knowledge that value of development land in the mainland has been going up consistently during the last decade.  This valuation of development land at costs is therefore a conservative approach.  The advantage of adopting this approach may well be to avoid paying profits tax for unrealized profits.  In any case, the market value of Chongqing Dading as at 31 December 2007 should be substantially over the RMB200 million odd as stated in the audited account because of appreciation in the price of development land.  Hence, counsel for the plaintiff also relied on this report to show that the transfer of the shares of Chongqing Dading from the 1st plaintiff to the 1st defendant has caused loss to the 2nd plaintiff. 

20.The third piece of evidence relied on by the 2nd plaintiff is a valuation report by Jones Lang LaSalle Sallmanns dated 16 May 2008.  It was commissioned by the board of directors of Chongqing Dading and the 3rd defendant was its chairman. The share charge by which the shares of the 1st plaintiff were charged to the 2nd plaintiff and dated 30 April 2008 has referred to this report. 

21.Clause 3.1 (c)(i) of the charge deed provided:

“(c) The Chargor shall produce, to the satisfaction of the Security Trustee (acting on the instructions of the Majority Beneficiaries acting reasonably):

(i) the Jones Lang Report by 7 May 2008, which contents may be relied upon by the Security Trustee without any independent verification.”

22.The report was not yet available to the parties when the charge deed was executed. In fact it was not produced by 7 May 2008, but was only completed on 16 May 2008.  Despite its unavailability, the 3rd defendant in the charge deed agreed that the 2nd plaintiff could rely on the valuation content without independent verification. 

23.The report stated that it was prepared:

“In accordance with your instructions to provide an opinion of the market value of the captioned properties, we confirm that we have carried out inspections, made relevant enquiries and searches and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the market value of the property interests as at 30 April 2008 (the ‘date of valuation’) for internal reference purpose.”

24.The basis of valuation, valuation assumptions and method of valuation were stated as:

“Basis of Valuation

Our valuations of the property, interests represent the market value which we would define as intended to mean ‘the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.

Valuation Assumptions

No allowance has been made in our report for any charges, mortgages or amounts owing on the property valued nor for any expenses or taxation which may be incurred in effecting a tenancy. Unless otherwise stated, it is assumed that the property is free from encumbrances, restrictions and outgoings of an onerous nature, which could affect its value.

Method of Valuation

Except for property 1, we have adopted the residual method of valuation to estimate value of the properties. The method involves making estimate of the Gross Development Value (‘GDV’) which is the capital value of the proposed development, as if completed, as at the date of valuation. We assess the GDV by reference to comparable transactions and other market evidences in the respective markets where the properties situate. We have also assessed the total costs of development which include construction costs, professional fees, finance costs on construction, marketing costs of the completed development. After making a reasonable allowance for developer’s profit, acquisition and finance costs for land, the difference between the gross development value and costs represents the value of the land.

It must be stated that the residual method of valuation is subject to a number of special assumptions, as a small variation in any assumptions would lead to significant variation in the end result.

For property 1 which is currently under development as at the date of valuation, we have assumed that it will be developed and completed in accordance with the latest development proposal provided to us by the Group. In arriving at our opinion of value, we have taken into account the construction cost and professional fees relevant to the stage of construction as at the date of valuation and the remainder of the cost and fees to be expended to complete the development.”

25.There were nine pieces of properties that were valued.  Save for the first property, the report contained the following assumptions for the remaining eight pieces of properties.  They were:

“5. We have made the following assumptions in preparing our report:

a. We have valued the property on the basis that the property will be developed and completed in accordance with the Company’s development plan provided to us. We have assumed that approvals for the development scheme as mentioned in note 4 by the relevant authorities have been obtained as at the date of valuation;

b. All land premium payments and other costs such as resettlement and ancillary and utilities services have been paid in full and there is no requirement for payment of further land premium or other onerous payments to the government;

c. The design and construction of the development are in compliance with the local planning regulations and have been approved by the relevant government authorities and all necessary authorizations and permits have been obtained in respect of the construction works; and

d. The property has a good title and can be freely transferred, leased or mortgaged by the owner for the time being without payment of any further land premium or transfer fee.”

26.The report then gave a valuation of RMB10,595 million for the nine properties. 

27.Counsel for the 1st and 3rd defendants criticized the use of the residual method of valuation.  However, this is a common method employed for valuation of development land.  Counsel also referred to the reservation in the report that a small variation in the assumptions would lead to a significant variation in the end result.  Counsel also said that Chongqing Dading was initially acquired by the 1st plaintiff from the 2nd defendant at RMB50 million on 5 July 2008. 

28.However, the reservation about small variations in any assumption does not mean that the valuation method is not reliable for valuing development land.  Furthermore, under clause 3.1(c)(i) of the charge deed, the 3rd defendant has agreed that the 2nd plaintiff can rely on the valuation.  In fact the 3rd defendant has also relied on it as a reliable valuation.

29.In March 2009, when Thumb China defaulted on the repayment obligation in the Notes, the 2nd plaintiff wanted to enforce full repayment and the realization of the security of Thumb China’s shares of Sino-Environment.  Sino-Environment then published a notice to the investing public through the Singapore Stock Exchange saying that real estate assets valued by Jones Lang LaSalle Sallmanns as at 30 April 2008 of estimated value close to RMB10 billion and the shares of Sino-Environment had been provided as securities to the Noteholders.  The 3rd defendant was the chairman of the board of Sino-Environment at that time. 

30.There is no dispute that the valuation referred to in the announcement was the valuation in the report in question.  The 3rd defendant was therefore using and relying on this report to pacify the shareholders of Sino-Environment that there were ample assets to meet the demand of the Noteholders. 

31.Regarding the argument that the 1st plaintiff only paid RMB50 million to the 2nd defendant on 5 July 2008 for Chongqing Dading, this transaction, however, does not appear to be at arm’s length.  When viewed against the audited and unaudited accounts, little reliance can be placed on this transaction. 

32.Counsel for the plaintiff also pointed out that the 1st and 3rd defendants have not sought to produce any valuation report on the value of the lands of Chongqing Dading as at 30 April 2008 or 5 July 2008 to contradict the Jones Lang report or to produce any professional evidence to challenge the reliability of the report by reason of the assumptions therein or otherwise, or that any assumption was wrongly made.  I totally agree with this submission.

Decision

33.Looking at the matter in the round, I certainly cannot say with any degree of precision or certainty on the value of the Chongqing Dading shares as at 5 July 2008 when they were transferred by the 1st plaintiff to the 1st defendant.  However, I can say with confidence that the value of the shares of this company as reflected in the value of its properties was likely to exceed the RMB200 million allegedly paid by the 1st defendant to the 1st plaintiff plus the RMB108 million allegedly owed by the 1st plaintiff to the 3rd and the HK$20 million sought by the 2nd plaintiff as interim payment.

34.In the premises, I hold that the 2nd plaintiff is entitled to be paid by the 1st and 3rd defendants an interim payment at HK$20 million.  I therefore allow the appeal and order that the 1st and 3rd defendants do pay the 2nd plaintiff an interim payment of HK$20 million.

Costs

35.I also make a costs order nisi that the 1st and 3rd defendants do pay the 2nd plaintiff the costs of the appeal and below.  These costs are to be assessed summarily at a 9.30 am hearing to be fixed outside the next 21 days unless an application for variation of the order nisi shall have been made within the next 14 days.  I also certify the matter fit for counsel.  And I expect parties to exchange the bill of costs and objections thereto no less than 7 days before the hearing. 

Mr Douglas Lam, instructed by Messrs Hogan Lovells, for the 2nd Plaintiff

Mr William Wong and Mr Adrian Lai, instructed by L H Kwan & Co., for the 1st and 3rd Defendants

Please refer to CACV269/2011 for the relevant appeal(s) to the Court of Appeal.