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

CACV 269/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 269 OF 2011

MISCELLANEOUS PROCEEDINGS NO 2271 OF 2011

(ON APPEAL FROM HCA NO 1244 OF 2009)

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BETWEEN

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Before: Hon Lunn JA and Bharwaney J in Court

Date of Hearing: 4 July 2012

Date of Judgment: 4 July 2012

Date of Handing Down Reasons for Judgment: 20 July 2012

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REASONS FOR JUDGMENT

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Bharwaney J (giving the reasons for judgment of the court):

1.This is an interlocutory appeal from the decision of Deputy High Court Judge Louis Chan given on 28 September 2011 ordering the 1^st and 3^rd defendants to make an interim payment in the sum of HK$20 million to the 2^nd plaintiff.  This appeal has been brought pursuant to the leave granted by Tang VP on 9 December 2011.  An appeal of this nature should not take 6 months to be heard.  That has occurred because indulgence was given to the parties to fix dates in consultation with counsels’ diaries. Interlocutory appeals of this nature should be dealt with expeditiously and there should be no expectation that the indulgence granted in this case would be granted in future cases. 

2.Having heard the parties, we dismissed the appeal with costs to the 2^nd plaintiff, here and below, and indicated that we would give our reasons later.

Brief background

3.A detailed exposition of the dealings between the parties can be found from the judgments of Justice Poon J on 16 October 2009, of Fok J, as he then was, on 9 December 2010, and from the decision of the learned deputy judge which is being appealed against.  The following account suffices for the purposes of the present appeal. Thumb (China) Holdings Group Limited (“Thumb China”), a BVI company wholly owned by the 3^rd defendant, had issued Notes in the aggregate sum of SGD120 million to 3 Noteholders pursuant to a trust deed dated 13 August 2007.  As security for repayment, Thumb China had executed a share charge on the same date in favour of the 2^nd plaintiff, who acted as the trustee of the Noteholders, over its shareholding in a company called Sino‑Environment Technology Group Ltd (“Sino-Environment”), which was a publicly listed company on the Singapore Stock Exchange.  The 3^rd defendant was the chairman of Sino-Environment and also executed the share charge.

4.In early 2008, the price of Sino-Environment on the Singapore stock market dropped substantially and the Noteholders sought additional security from the 3^rd defendant which they were entitled to do under the share charge. The 3^rd defendant then procured security to be provided in the form of a charge over the shares of the 1^st plaintiff which were then owned by the 2^nd defendant.  The 3^rd defendant was also a party to and executed this deed of charge dated 30 April 2008. This additional security satisfied the Noteholders because the entire shareholding of a wholly foreign enterprise incorporated in Mainland China called Chongqing Dading Property Company Limited (“Chongqing Dading”) was vested in the 1^st plaintiff.  Chongqing Dading was a real estate company and held a number of subsidiaries which were in real estate business.

5.Not more than 2 months had passed after the execution of the second share charge when, without the knowledge of the 2^nd plaintiff or the Noteholders, the 1^st plaintiff entered into a share transfer agreement on 5 July 2008 to transfer its entire shareholding in Chongqing Dading to the 1^st defendant for the sum of RMB200 million. At the time of the transfer, the 3^rd defendant was the sole shareholder and director of the 1^st defendant.  This transfer was clearly effected to defeat the entitlement of the Noteholders to the only valuable asset of the 1^st plaintiff.  Subsequently, the 1^st defendant entered into an agreement to transfer its entire shareholding in Chongqing Dading to another mainland company called Fujian Dahong Investment and Development Company Limited (“Fujian Dahong”) also for the sum of RMB200 million.  This agreement of 26 April 2009 was also made without the knowledge of the 2^nd plaintiff or the Noteholders.  The 3^rd defendant and his brother used to own 70% and 20% respectively of the shares in Fujian Dahong but later, the 3^rd defendant’s brother became the owner of 90% of the shares with the remaining 10% being owned by others.

6.Thumb China was in default of its obligations to its Noteholders on 15 February 2009 when it failed to repay the sum of SGD65 million to the 2^nd plaintiff as trustee for the Noteholders.  On 2 March 2009, the 2^nd plaintiff cited the failure to repay as an event of default and gave notice to Thumb China to repay the principal and accrued interest.  The 2^nd plaintiff also sought to enforce the share charge over the 1^st plaintiff’s shares.  On 29 April 2009, the 2^nd plaintiff was appointed as receivers of the 1^st plaintiff.  The 1^st plaintiff then started these proceedings claiming that, by virtue of the first transfer to the 1^st defendant and the subsequent transfer to Fujian Dahong, the defendants wrongfully siphoned off the shares in Chongqing Dading, which was the valuable security under the second share charge, from the plaintiffs and the Noteholders, thereby causing them loss and damage. 

7.On 9 December 2010, Fok J acceded to the application of the 1^st and 2^nd plaintiffs to strike out the Amended Defence of the 1^st and 3^rd defendants by reason of their failure to comply with an unless order made by Registrar Au‑Yeung on 12 July 2010.  The consequence of the striking out of the Amended Defence was that the allegations in the Amended Statement of Claim were deemed to have been admitted.  Although Fok J was prepared to enter judgment against the 1^st and 3^rd defendants for damages to be assessed by a Master, he was not prepared to enter judgment against the 1^st and 3^rd defendants in the sums pleaded in the Amended Statement of Claim.  Mr William Wong, who appeared before us on behalf of the 1^st and 2^nd defendants, had submitted to Fok J that the plaintiffs’ damages, arising out of the transfer of the equity in Chongqing Dading from the 1^st plaintiff to other parties, being claims for unliquidated damages, should be assessed in the usual way before a Master rather than by Fok J on the basis of the allegations in the Amended Statement of Claim.  Mr Douglas Lam, who appeared before Fok J, and before us, for the 2^nd plaintiff, candidly accepted that proposition.  On that basis, Fok J directed that damages be assessed by a Master in the usual way under RHC O.37, r.1.  He had referred to the averments of the loss and damage that had been pleaded in the Amended Statement of Claim and concluded that “the value of the Chongqing Dading shares and the loss arising from the deprivation of that asset is lacking in precision, and the court cannot realistically make an assessment at this stage”. 

8.There was no application for interim payment before Fok J.  The application for interim payment was dealt with by the learned deputy judge on an appeal by the 2^nd plaintiff against the master’s refusal to order interim payment. The 1^st and 3^rd defendants had opposed the application for interim payment on the ground that, when the shares of Chongqing Dading had been transferred from the 1^st plaintiff to the 1^st defendant, the net asset worth of the 1^st plaintiff was negative, and, accordingly, that the 2^nd plaintiff suffered no loss from the transfer.  They alleged that the 1^st plaintiff had owed RMB273 million to the 3^rd defendant with interest accruing at 2% per month from about November 2007.  The sale of the shares in Chongqing Dading by the 1^st plaintiff fetched some RMB200 million which was used to reduce the loan and accrued interest.  Even after the sale of such shares, the 1^st plaintiff still owed the 3^rd defendant nearly RMB108 million.  The value of the Chongqing Dading shares at that time was RMB200 million as evidenced by the audited financial report of that company for the financial year ending 31 December 2007.  However, the 2^nd plaintiff contended that the value of the Chongqing Dading shares far exceeded the RMB200 million allegedly paid by the 1^st defendant to the 1^st plaintiff.

9.The learned deputy judge was well aware of the respective contentions of the parties and had careful regard to the evidence presented to him in support of these contentions.  He had regard to the audited account of Chongqing Dading showing a net asset value as at 31 December 2007, some 6 months before the share transfer, of about RMB200 million.  However, he rightly noted that the auditors had valued the long‑term investments held by the subsidiaries of Chongqing Dading at cost in the sum of only RMB60 million.  He also had regard to the unaudited consolidated account of Chongqing Dading as at 30 June 2008, shortly before the wrongful transfer of shares by the 1^st plaintiff to the 1^st defendant, and this showed a net asset value in excess of RMB1.4 billion.  The difference between the two sets of accounts arose largely from the fact that the audited accounts had valued the development land held by the subsidiaries of Chongqing Dading at cost which, as the learned deputy judge rightly noted, was a conservative approach and might well have been done to avoid paying profits tax for unrealised profits.

10.The learned deputy judge also had regard to a valuation report prepared by Jones Lang LaSalle Sallmanns dated 16 May 2008, which had been prepared to induce the Noteholders to accept the share charge over the shares of the 1^st plaintiff to make up for the shortfall arising from the drop in the share value of Sino-Environment.  This report valued 9 properties held by the subsidiaries of Chongqing Dading and, except for one of the properties, adopted the residual method of valuation to estimate the value of the properties.  The valuers estimated the capital value of the proposed development, as if completed as at the date of valuation, by reference to comparable transactions, and they deducted from that valuation the total likely cost of the development and a reasonable allowance for the developer’s profit, acquisition and finance costs.  For one of the properties, which was currently under development, they took 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.  On this basis, they arrived at a valuation in excess of about RMB10.6 billion for the nine properties.

11.In addition to the above, the learned deputy judge also had regard to the notice published by Sino-Environment to the investing public through the Singapore Stock Exchange, following upon the enforcement action taken by the 2^nd plaintiff in March 2009 when Thumb China defaulted on its repayment obligations.  The notice, published by Sino‑Environment whose chairman was the 3^rd defendant, stated that the real estate assets, valued by Jones Lang LaSalle Sallmanns as at 30 April 2008 in the sum of about RMB10 billion, had been provided as security to the Noteholders, as well as the shares of Sino-Environment.  The 3^rd defendant was clearly using and relying on this notice to pacify the shareholders of Sino-Environment and to allay their concerns by stating that there were ample assets to meet the demand of the Noteholders. 

12.After having considered all this evidence, and the other matters which he referred to in his judgment, the learned deputy judge concluded as follows:

“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 1^st plaintiff to the 1^st 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 1^st defendant to the 1^st plaintiff plus the RMB108 million allegedly owed by the 1^st plaintiff to the 3^rd (defendant) and the HK$20 million sought by the 2^nd plaintiff as interim payment.

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

13.The main ground of appeal raised by the 1^st and 3^rd defendants was that the learned deputy judge had applied the wrong standard of proof and that, because he could not say, with any degree of precision or certainty, what the value of the Chongqing Dading shares was at the time of their wrongful transfer, he was wrong to make any award for interim payment.  Mr Wong, for the 1^st and 3^rd defendants, submitted that the judge hearing an application for interim payment had to come to a decision, on a balance of probabilities on the evidence before him, that the applicant would get an award of substantial damages.  He cited from the often quoted judgment of Lloyd LJ in Shearson Lehman Inc v Maclaine, Watson Ltd [1987] 1 WLR 480 at 489B that:

“Something more than a prima facie case is clearly required; but not proved beyond reasonable doubt. The burden is high. But it is a civil burden on the balance of probabilities, not a criminal burden.”

14.In his reasons for refusing leave to appeal, the learned deputy judge said:

“8. However, the principles governing the assessment of damages and the ordering of interim payment are very much different. For assessment of damages, the court has to find on the balance of probability the amount of loss suffered by the victim. For interim payment, the court is to order an amount not exceeding a reasonable proportion of the damages which in the opinion of the court are likely to be recovered by the plaintiff at the end.

9. On this, (I) echo the words of Recorder J Leong in her decision in Sony Computer Entertaining Inc and Anor v Lik Sang International Limited and Ors, HCA 3583/2002 given on 11 April 2003 where she said in paragraph 62 :

‘Any amount to interim payment is, to an extent, an educated guess which, if wrong, can be collected by adjustment at the assessment stage.’ “

15.There is no substance in Mr Wong’s submissions.  The observations of Fok J, which the learned deputy judge echoed, were made in the context of the application before him for final judgment in the sums pleaded in the Amended Statement of Claim.  There was no application before Fok J for interim payment.  Before making an order for interim payment, the court must be satisfied, on a balance of probabilities, that the plaintiff will succeed in obtaining judgment on liability and, in addition, that he will obtain an award of substantial damages.  However, where, as in this case, interlocutory judgment for damages has already been entered, the court must approach the matter, as the learned deputy judge rightly did, by having regard to the provisions of RHC O.29, r.11 which state:

“(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.There is no better statement of the correct approach than that of O’Conner LJ in Newport (Essex) Engineering v Press & Shear Machinery 24 BLR 71 at pp.76-77:

“The power to make or refuse an order is discretionary so that this court will only interfere on the well established principles. An interim payment is defined by rule 9 as

‘a payment on account of any damages the defendant may be held liable to pay to the plaintiff’.

Rule 11(1) provides that the payment on account is not to exceed

‘a reasonable proportion of the damages which, in the opinion of the court, are likely to be recovered by the plaintiff’.

Lastly, if the court decides to make an order, the amount is to be such

‘as it thinks just’.

The court has to make an estimate of the damages which are

‘likely to be recovered’;

that is, when the issue is finally determined. The ease or difficulty in making such an estimate will vary enormously from case to case. In some cases it is quite impossible to make a useful estimate without hearing the case out. Are plaintiffs in such cases to be excluded from obtaining an interim payment? I think not, for, on the material available to the court hearing the application, the court may be in a position to say

‘the plaintiff should recover at least £x and is likely to recover more or a great deal more’.

In such a case, I do not think it would be wrong to say that £x itself is a reasonable proportion. In contrast, if the court can say

‘the plaintiff should recover at least £x, but is unlikely to recover more’,

then £x itself becomes the likely award and a reasonable proportion should be something substantially less than £x.

I do not think it desirable that applications for interim payments should turn into long drawn out investigations into the very issues which are to form the subject matter of a future hearing.  The wide discretion given to the court, coupled with the safety net for the defendants in rule 17, show that these applications should be decided on a fairly broad approach, with a minimum of expense to the parties.”

17.The statement by Recorder J Leong, that the court has to make an “educated guess”, is a colloquial way of expressing the task of the court that has to undertake, namely, to make an estimate of the damages that are likely to be awarded, which it must do by judiciously weighing the evidence presented to it, giving it such weight that it deserves, and remembering that it is not to conduct an assessment of the damages to be awarded, which the function of a future court.  Once the court has made that estimate, it must award a reasonable proportion of that estimate, taking into account the financial ability of the plaintiff to repay any overpayment should it transpire, after the assessment of damages has been concluded, that the estimate was wrong, and taking into account the hardship to the defendant from having to make an immediate payment and from being unable to recover any overpayment.

18.To suggest that the court has to approach the task of estimating the damages that are likely to be awarded, by making findings on the evidence “on a balance of probabilities”, is to confuse the role of the court on an application for interim payment and the court of the court conducting the assessment of damages.  On an application for interim payment, the court must adopt a fairly broad approach, with minimum expense to the parties, and make an estimate, on the evidence that has been adduced, of the likely award of damages and award a reasonable proportion of that estimate.  Of course, the court will decline to award any interim payment if it is not satisfied that the plaintiff is likely to obtain an award of substantial damages.

19.The other grounds of appeal turn on the court’s consideration and assessment of the evidence before it. 

20.Compliant is made of the fact that the learned deputy judge preferred the unaudited consolidated accounts of Chongqing Dading rather than the audited accounts.  However, the unaudited accounts had been provided by the 3^rd defendant to the 2^nd plaintiff as evidence of the assets and liabilities of Chongqing Dading.  Other than asserting that those accounts were unaudited, the 1^st and 3^rd defendants did not assert or demonstrate that those unaudited accounts were erroneous in any particular.  The difference between the audited accounts and the unaudited accounts largely arose from the fact that the former recorded the real estate assets of Chongqing Dading at cost whereas the latter recorded them at prevailing market value.  As the learned deputy judge had to estimate the value of the shares in Chongqing Dading as at the date when they had been wrongfully transferred, it would have been wrong for him to estimate the value of those shares by reference to the original cost price of the real estate assets acquired by Chongqing Dading, and its subsidiaries, rather than by reference to their prevailing market value as at that date of transfer. 

21.Complaint is also made of the learned deputy judge’s reliance on the report by Jones Lang LaSalle Sallmanns. Of course, the court conducting the assessment of damages cannot conclude, by reference to this report, that the value of the real estate owned by Chongqing Dading, and its subsidiaries, as at the date of wrongful transfer was in excess of RMB10 billion.  The proper measure of damages is the value of the shares in Chongqing Dading as at the date when they were misappropriated.  This would require the court to assess the prevailing market value of the real estate assets and other assets of Chongqing Dading, as at that date, not their potential value, when fully developed, as indicated in the report by Jones Lang LaSalle Sallmanns.  However, that report, which was referred to and relied upon by Sino-Environment and the 3^rd defendant in the notice to shareholders, goes a long way to supporting the unchallenged statement in the unaudited consolidated accounts of Chongqing Dading, dated shortly before the wrongful transfer, that the prevailing value of the real estate assets was in excess of RMB2.5 billion and that its net asset value, after deducting liabilities, was in excess of RMB1.4 billion. 

22.The learned deputy judge did not reach his conclusions solely upon the “common knowledge that value of development land has been going up consistently during the last decade” but also upon the unaudited consolidated accounts and the report by Jones Lang LaSalle Sallmanns which supported the learned judge’s conclusion that the prevailing market value of the real estate assets was substantially more than their original cost as recorded in the audited accounts.

23.The appellate court will not interfere with the exercise of the judge’s discretion unless he has acted upon a wrong principle of law, or has misapprehended the facts, or has made a wholly erroneous estimate of the damages likely to be awarded.  It has not been demonstrated that the learned deputy judge was wrong in law or that he misapprehended the evidence that was adduced before him.  Given the statements in the unaudited consolidated accounts of Chongqing Dading that its net asset value was in excess of RMB1.4 billion, and the valuation of the real estate assets of Chongqing Dading by Jones Lang LaSalle Sallmanns in the sum of about RMB10 billion, which was referred to and relied upon by Sino‑Environment and the 3^rd defendant in the notice to shareholders, it cannot be said that the learned deputy judge was wrong to estimate that the likely award of damages would exceed the sums of RMB200 million, allegedly paid by the 1^st defendant to the 1^st plaintiff, and RMB108 million, allegedly owed by the 1^st plaintiff to the 3^rd defendant, and HK$20 million sought by the 2^nd plaintiff as interim payment.

24.Further, I am not persuaded that the learned deputy judge exceeded the limits of his discretion by awarding more than a reasonable proportion of the likely award.  On the evidence before him, he could have awarded more than HK$20 million but did not do so as the 2^nd plaintiff had only sought interim payment of HK$20 million, being the amount frozen by the Mareva injunction continued by Poon J.

25.I cannot conclude this judgment without expressing my grave concern at the costs that were wasted in the preparation of the appeal bundles in this case which included, amongst other irrelevant and unnecessary documents, a full transcript of the oral argument before the learned deputy judge.  Unless the solicitors of the 1^st and 3^rd defendants apply within 14 hereof for a oral hearing to give reasons, or within 14 days hereof file written reasons, why I should not make the proposed order, I propose to make an order, pursuant to RHC O.62, r.8, disallowing the costs, as between the solicitors of the 1^st and 3^rd defendants and the 1^st and 3^rd defendants, of obtaining the full transcript of the oral argument before the learned deputy judge.

Lunn JA:

26.I agree with the reasons articulated in the judgment of Bharwaney J for the court dismissing the appeal with costs to the 2^nd plaintiff.  Further, I agree with the orders proposed in respect of the costs of the preparation of the transcript.

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

Mr Douglas Lam, instructed by Hogan Lovells, for the 2^nd plaintiff