Johnson Electric International Ltd v. Bel Global Resources Holdings Ltd

HCA 1240/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1240 OF 2012

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REASONS FOR DECISION

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Introduction

1.On 30 January 2013, I granted the Plaintiff’s application by summons dated 17 August 2012 seeking summary judgment against the Defendant pursuant to Order 14 rule 1 of the Rules of the High Court.  Hereunder are the reasons.

The background

2.The Plaintiff is the registered holder of a bond in the principal amount of $28.75 million (the “subject bond”) issued by the Defendant, a company listed on the Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

3.By a sale and purchase agreement dated 18 September 2007 (“the SPA”), the Defendant’s wholly owned subsidiary, Par Excellence Investment Limited (“Par Excellence”) agreed to purchase from, inter alios, Elite Dragon Limited (“Elite Dragon”) and High Chance Investments Limited (“High Chance”) the entire issued share capital in Honour Max Trading Limited (“Honour Max”).  Stephen Sy and Supardi were the majority beneficial owners of Elite Dragon and High Chance respectively.  The purpose of the SPA was to enable the Defendant to acquire the exclusive right to nickel resources in a mine in the District of Bunta in the Province of Sulawesi Tengah in Indonesia (“the Mine”) supplied by PT Aneka Nusantara Internasional (“PT Aneka”).  For that purpose and on the same day, PT Aneka entered into a master supply agreement to supply nickel exclusively to Bel Nickel Resources Limited (“Bel Nickel” which was then known as Sharp Speed Investment Limited), a subsidiary of Honour Max.

4.The consideration for the sale was $2,340 million, which comprised of $30 million cash, shares and five tranches of bonds in the principal amount of $2,221.326 million to be issued by the Defendant.  The first tranche of bonds in the principal amount of $1,051.326 million was issued upon completion of the SPA.  The other four tranches in the principal amount of $292.5 million each were to be issued at the end of each quarter starting with the first full quarter ending on 31 March 2008 and the following three quarters thereafter on condition that the final quarterly actual output from the Mine for the relevant quarter was not less than 250,000 wet metric tons.

5.The subject bond was among the second tranche issued by the Defendant to Elite Dragon on 6 May 2008.  On 29 September 2009, Elite Dragon transferred the subject bond to the Plaintiff to discharge a debt owed to the Plaintiff’s holding company.

6.One of the material terms of the bonds provided that the bondholder would be entitled to give notice to the Defendant that the bond was “immediately due and repayable” if the shares of the Defendant were suspended by the Stock Exchange for a period of 90 consecutive trading days (the “Event of Default”).  On 4 July 2011, the trading of the Defendant’s share on the Stock Exchange was suspended and continued to be suspended on 9 November 2011, thus triggered the Event of Default.  On 29 June 2012, the Plaintiff’s solicitors gave notice to the Defendant in full compliance with the terms of the bonds that the subject bond was immediately due and repayable.  The Defendant failed to pay.

7.There is no dispute that the prerequisites under Order 14 were met and the burden was shifted to the Defendant to show a triable issue or an arguable defence.

8.In Wong Wan Sing’s (“Wong”) two affirmations filed on behalf of the Defendant in opposition to the application, the Defendant advanced the defence of fraudulent misrepresentation.  However, at the hearing, Mr Mak, counsel for the Defendant, advanced common mistake as its principal defence leaving fraudulent misrepresentation as a fall back.

9.Mr Mak accepts that the two defences are inconsistent and if there was fraudulent misrepresentation, there was no room for the defence of common mistake.  His approach is that in any inquiry as to fraudulent misrepresentation, the court should consider two issues: firstly, whether there was misrepresentation; and secondly whether the misrepresentation was not fraudulent.  If it was not, then it might be a case of common mistake.  If it was, it was a case of fraudulent misrepresentation.  He submits that whether the mistake was one or the other is to be resolved after trial.  With respect, I think this approach is flawed.  It may well be the correct approach for a solicitor advising his client, but it is not the proper approach to resist an Order 14 application.  In an Order 14 application, if a plaintiff has satisfied the prerequisites under rule 1, the burden is shifted to the defendant to show cause.  He may do so by raising technical objection that the case is not within the Order or on the merit that he has a good defence and condescend on particulars.

The defence of common mistake

10.In Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407, the English Court of Appeal held at §76 that the following elements must be present if common mistake is to avoid a contract:

(1)  there must be a common assumption as to the existence of a state of affairs;

(2)  there must be no warranty by either party that that state of affairs exists;

(3)  the non‑existence of the state of affairs must render contractual performance impossible; and

(4)  the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible.

A common mistake has to be distinguished from a mutual mistake or a unilateral mistake.  It requires that the parties have a positive belief in something which is not in fact true.  They may not have to believe precisely the same thing but they must make substantially the same mistake.

11.The mistake relied on by the Defendant is the accuracy of the quarterly supply statement prepared by Bel Nickel in accordance with clause 3.3 of the SPA.  The arrangement under the SPA and master supply agreement was that the Defendant first made a part payment and if the Mine proved to meet the required capacity in the first four full quarters it shall pay the additional four tranches of bonds.  Pursuant to clause 3.5, the Defendant, as purchaser under the SPA, shall procure Bel Nickel which it acquired under the SPA, to prepare a quarterly supply statements of the quantity of nickel ores supplied by PT Aneka and delivered to and accepted by Bel Nickel.  If the quarterly actual output was not less than the quarterly target output, the Defendant would issue the respective tranche of bonds.

12.The Defendant’s case is that the quarterly supply statement based on which the second tranche of bonds was issued was prepared by its staff, Sze, on the instruction of Stephen Sy.  However, the Defendant later discovered that two of the seven deliveries of the nickel ores reported in the respective quarterly supply statement did not come from PT Aneka but from another mine through another mining company, PT Antam PK (“PT Antam”).  They were purchased by Good Year Corporation Limited, a company managed by Stephen Sy and his wife, from PT Antam on behalf of Bel Nickel.  According to Sze, Stephen Sy gave her a document bearing the company chop of PT Aneka and told her to use the information to prepare the quarterly supply statement.  She was given to understand that the document was brought to Bel Nickel by Supardi.  She was also given to understand that Stephen Sy and Supardi were de facto shareholders of the Defendant upon completion of the SPA.  Thus she prepared the quarterly supply statement using the document given to her by Stephen Sy as instructed.

13.It is therefore the Defendant’s case that Stephen Sy knew  full well that not all the nickel ores reported in the quarterly supply statement came from the Mine.  But, instead of arguing that Stephen Sy fraudulently misrepresented the source of the nickel ore, Mr Mak argues that he “cannot rule out the possibility that being party to the quarterly statement, Stephen Sy was under genuine belief that he was entitled to” include in the quarterly supply statement nickel ores purchased from sources other than from the Mine through PT Aneka.  He submits that this is a clear case of common mistake which has to be investigated before considering fraudulent mistake.  He further argues that Elite Dragon’s position is clear.  It denied that the nickel ores were not from the Mine, but contended that even if they were not, on the proper construction of the SPA, it was still entitled to the second tranche of bonds. Mr Mak submits that extrinsic evidence from both the Defendant and Elite Dragon would be admissible and “there is a fair or reasonable probability that there was a common mistake”.  He therefore submits that there is a triable issue on what is the proper construction of clause 3.5 of the SPA and Elite Dragon should be made a party.  In my view, whatever is the proper construction is not going to help the Defendant.  If the Defendant’s construction is right, it still has to prove a mistake held in common with Elite Dragon.  If Elite Dragon’s construction is correct, then there is no basis to avoid the second tranche of bonds.

14.Next, Mr Mak argues that there are unexplained features of Elite Dragon’s dealing in getting the second tranche bonds and transferring some of them to third parties which bear the appearance of falsity, disreputable business dealings and questionable conduct.  He suggests that the court should not make tentative assessments of the respective chances of success of the Defendant and Elite Dragon or the relative strengths of their good or bad faith.  He submits that unconditional leave to defend should be granted to the Defendant in order that the relevant issues can be fully examined.

15.The way that Mr Mak puts his argument is a clear admission that there is no evidence of a mistake held in common by both the Defendant and Elite Dragon.  He cannot point to any evidence of a common mistake.  The highest he can put it is that he cannot rule out the possibility of a common mistake or that there is a fair or reasonable probability of a common mistake.  He then hopes that something would turn up at trial if Elite Dragon is made a party.  As I have already indicated, to resist an Order 14 application, a defendant has to show a good defence and condescend on particulars.  The Defendant has nothing but surmise about a common mistake and a desire to investigate.  Even the primary case of Elite Dragon, the other party to the alleged common mistake, was that the nickel ores came from the Mine.  Therefore, if the Defendant’s case is accepted, there was fraudulent misrepresentation by Elite Dragon.  If Elite Dragon’s case is accepted, there was no reason to avoid the SPA or the subject bond.  There was no evidence of any common mistake.  In Lady Anne Tennant v Associated Newspapers Group Ltd ]1979] FSR 298, Megarry V‑C said:

“A desire to investigate alleged obscurities and a hope that something will turn up on the investigation cannot, separately or together, amount to sufficient reason for refusing to enter judgment for the plaintiff. You do not get leave to defend by putting forward a case that is all surmise and Micawberism.”

The Defendant’s case of common mistake cannot get off the ground for lack of evidence.

The defence of fraudulent misrepresentation

16.In essence, according to Wong’s affirmation, the Defendant was a victim of a fraudulent misrepresentation by Elite Dragon that it had delivered nickel ores up to the pre-determined target when in fact it had not.  Such a fraudulent misrepresentation induced the Defendant to issue the second tranche of bonds including the subject bond to Elite Dragon.  As a result of such fraudulent misrepresentation, the issuance of the subject bond was “without any legal basis” and the SPA pursuant to which the bond was issued was void ab initio.  Accordingly, the Plaintiff did not obtain a good title and had no right under or in relation to the subject bond against the Defendant.

17.As a matter of law, these assertions disclosed no defence.  It is well settled law that the effect of a fraudulent misrepresentation only renders a contract voidable but not void.  The victim of a fraudulent misrepresentation is entitled to, at his election, rescind the contract ab initio.  But, unless and until he does so, the contract continues to be binding and enforceable: White v Garden (1851) 10 CB 919, 138 ER 364; Treitel, The Law of Contract, 13^th edn, (2011) at §9‑085; O’Sullivan, Elliott & Zakrzewski, The Law of Rescission (2008) at §1.32; and China Everbright‑IHD Pacific Ltd v Ch’ng Poh (2002) 5 HKCFAR 630, per Lord Millett NPJ at §100.  The right of the innocent party to avoid this voidable transaction is lost if the interest in the subject matter of the transaction has been acquired by a bona fide purchaser for value without notice of the underlying fraud: Cartwright: Misrepresentation, Mistake and Non‑Disclosure, 3^rd edn, 2012; Cundy v Lindsay (1878) LR 3 App Cas 459; White v Garden; The Attorney General v Leung Kam Wah [1968] HKLR 366.

18.On the Defendant’s own case, it did not even become aware of the circumstances surrounding the alleged fraud until around December 2011 and January 2012, a full two years after the Plaintiff had obtained title to the bonds.  The Plaintiff obtained the bonds as a bona fide purchaser on 29 September 2009. The Defendant was henceforth barred from exercising its right to rescind as such rescission would  prejudice the rights of a third party: Cartwright: Misrepresentation, Mistake and Non-Disclosure, 3^rd edn, 2012 §4‑59.

19.Mr Mak seeks to argue that the Plaintiff might have constructive notice of the fraud on the part of Elite Dragon.  He argues that the subject bond received by the Plaintiff under the alleged settlement arrangement represented a significant premium over and above the sum of US$2.8 million, ie about $21.7 million allegedly owed to its holding company.  He queries why instead of receiving a haircut, the Plaintiff, as assignee, got a windfall, if the face value of the bond, ie $28.75 million, represents the true value thereof.  He submits that such circumstances should have prompted the Plaintiff to conduct further inquiries.  He also queries why Gold Excellence International Limited, which held the subject bond issued to Elite Dragon, proposed the settlement in the first place instead of simply selling the subject bond to another buyer to pay the debt and then pocket the balance.  I think Mr Mak has raised the questions and answered them all.  The face value of the bond may not represent its market value at the time of the assignment.  The market value of a bond depends on the current financial condition, the financial prospect and creditworthiness of the issuer; and the market value of its shares.  If the Defendant was not in sound financial condition, as it now certain is not, the bond could only be sold at a discount or might not even have a market.  The subject bond was assigned to the Plaintiff in September 2009.  The Defendant did not even take the trouble of adducing evidence of the value of its shares and its financial condition at that time, let alone the market value of the bond.  Without such evidence, how can Mr Mak launch his argument of constructive notice by simply relying on the amount of the debt and face value of the bond?  It is difficult to know who was having a haircut.  The more probable inference is that in September 2009 the subject bond was not worth its face value or that there was no market for the subject bond.  Mr Mak’s argument is a very desperate one built on speculation.

Conclusion

20.This is a clear case for summary judgment.  In accordance with the terms and conditions of the subject bond, the amount stated therein was immediately due and payable.  On any view, the Defendant’s evidence only supports a case of fraudulent misrepresentation against Elite Dragon which rendered the SPA voidable, but not void.  The subject bond had been passed onto the hands of a bona fide purchaser for value  without notice for more than two years before the Defendant even discovered the fraud.  The Defendant has lost its right to avoid the SPA, let alone the subject bond issued under the SPA.  In desperation, counsel attempts to advance the defence of common mistake.  Not only is that defence not supported by any evidence it is inconsistent with its own evidence which, on any view, only supports a case of fraudulent misrepresentation which negates the defence of common mistake.  Both defences of common mistake and fraudulent mistake are doomed to fail.

21.Accordingly, I enter judgment for the Plaintiff against the Defendant in the amount of $28,750,000 with interest at the best lending rate as promulgated by The Hongkong & Shanghai Banking Corporation Limited pursuant to clause 6.2 of the terms and conditions of the bond from 29 June 2012 until 30 January 2013 and thereafter at judgment rate.  The Defendant shall also pay the Plaintiff’s costs of the application with certificate for counsel. Such costs are to be taxed by gross sum assessment.

Mr Ashley Burns SC, instructed by Mayer Brown JSM, for the Plaintiff

Mr Bernard Mak, instructed by Michael Li & Co, for the Defendant