SAM WOO CIVIL CONTRACTORS LTD v. HO KWOK POON AND ANOTHER

HCA714/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.714 OF 2004

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J U D G M E N T

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1. I have heard fairly full submissions from three counsel in this matter : from Ms Queenie Ng for the plaintiff; from Mr Anthony Cheung for the 1st and 2nd defendants, and from Ms Elaine Liu for the provisional liquidators acting on behalf of Hung Mau Realty & Construction Limited ("the Company"). This is an interlocutory application by the plaintiff against the 1st and 2nd defendants for a relief of injunction restraining them from dealing with or disposing of or transferring shares in the Company to any person or party other than the plaintiff.

2. What has caused the plaintiff to seek this interlocutory remedy is said by the plaintiff the necessity to protect an option agreement that had been granted by the defendants who are the beneficial owners of all the shares in the Company to the plaintiff. By the option agreement of 12 July, for the consideration of $1, the plaintiff was given the right to exercise the option to buy all the shares of the defendants in the Company for the consideration of, I believe, $10 million.

3. One of the condition precedent of the exercise of option was a scheme of arrangement approved by the court. The reason why the scheme of arrangement is necessary is that the Company got into financial difficulties last year whereby there was a winding-up petition resulting in the provisional liquidators being appointed by the order of Deputy Judge Lam in July last year.

4. In order for the Company not to be wound up, a scheme of arrangement therefore would be required which necessitates proposal by an appropriate white knight commanding the support of the majority of creditors. That is the only way the Company can effectively defeat a winding-up order and to enable the Company to continue and for the court to sanction an appropriate scheme.

5. The history of the various schemes is somewhat complex but relevant to the application. I will try to summarise it very briefly by saying that the original scheme proposed by the plaintiff was much too selfish and did not take proper account of the interest of the creditors and the Company. From February 2004 onwards, there was in fact an improved scheme proposed by Chevalier and then with the further support of Macao Trading, Chevalier and Macao made a proposal which effectively has the support of all the major creditors. The excellent report of this present scheme is in the key document of the provisional liquidators dated 19 March 2004 which describes clearly the positive aspect of what I will call the Chevalier and Macao Scheme ("Scheme"). At pages 192 and 193 of the bundle, it recites how that Scheme has received the major support of the creditors compared to the scheme of the plaintiff. Page 193 shows the amount of support (in terms of % of estimated liabilities) for the Chevalier and Macao Scheme is 43% and for the plaintiff's scheme is 0.1%.

6. What is also important to bear in mind is that in that report at page 4 (page 185 of bundle) under 2.4(viii), the question of the shares of the Company was touched upon namely, it is said : "After the successful implementation of the Creditors' Scheme mentioned above, a share restructuring scheme of Hung Mau and NEWCO will be implemented on terms to be agreed." Namely, that the shares under the Chevalier and Macao Scheme of the Company would have to be the subject of appropriate arrangement and with the implication that it would involve the shares not going to the plaintiff under the option agreement. A copy of this report of 19 March 2004 was given to the plaintiff and so the plaintiff, from mid-March 2004 has full knowledge that the Chevalier and Macao Scheme (involving shares under the option going elsewhere) was going ahead, that it was receiving the support of all the creditors and that it was the most likely scheme to be approved by the court and that the plaintiff's scheme had no chance of being supported.

7. The plaintiff did not put forward alternative proposal to improve on the Chevalier and Macao Scheme but instead they then started proceedings against the defendants and that was, I think, started some time around 25 March 2004 and its Statement of Claim, which is an interesting document, dated 25 March claimed, basically, that there was a repudiation by the defendants because the defendants supported the Chevalier and Macao Scheme and that the plaintiff accepted the repudiation and sued for damages resulting from the termination of the agreement by reason of the repudiation of the defendants. The amount claimed under paragraph 29 of that Statement of Claim is $41 million. There was nothing said in that Statement of Claim about claiming specific performance of the option agreement or that notwithstanding the breach the plaintiff has refused to accept the said repudiation and insisted on the contract being performed, that is to say, the contract of the option agreement being fully implemented rather than the damages.

8. That state of affair continued until suddenly on 4 June 2004 the Statement of Claim was amended. It was amended in this radical way: it claimed the alternative of specific performance and an injunction to restrain the defendants from disposing of the shares or acting in any way to dispose of the shares. This amendment was made without leave of the court pursuant to Order 20, rule 3 and this was preceded by a letter (obviously on advice of counsel) dated 20 May 2004, basically saying that the plaintiff was still holding the contract to be alive. At that stage new counsel had come in. I think, Mr Shum the new counsel advised very differently which led to this volte face in the position of the plaintiff.

9. The plaintiff then issued the interlocutory injunction application immediately after the amendment of the Statement of Claim and the injunction summons in fact is dated the same day. The Inter Partes Summons issued on 4 June 2004, the same day as the amendment of the Statement of Claim, is part and parcel of this same new way of thinking.

10. I have before me this application and Ms Ng had made steadfast and unwavering submissions to the court to support the plaintiff's last minute case for interlocutory injunction. She says all that can be said in support of a case that the court should enforce the contract and should prevent injustice to the plaintiff's cause. Four points had been taken by Mr Cheung on behalf of the defendants. The four points are :

(1) no serious questions to be decided;

(2) no irreparable loss;

(3) long delay; and

(4) the balance of convenience.

11. Before I go on to consider these submissions in detail I shall also mention that the court had been greatly assisted by Ms Liu (acting for the provisional liquidators) who had been intimately involved in the various schemes and had pointed to the court not only from the material filed by the parties but also from the affidavit filed by the provisional liquidators, various aspects of the schemes and the implication to the Company of what would happen if the proposed order is made.

12. It seems to me that it is first essential to point out from the submissions made to me of the tight timetable that is facing the Company. The tight timetable comes about this way. The business of the Company is in engineering contracts, building works especially building works for the Government. In order to do work for the Government you need to be a Government approved contractor and as a result of this the most valuable asset of the Company is its licence from the Government to be on the list of the approved contractor under various categories. When the Company got into financial difficulties and was the subject of winding-up petition, the Company was suspended from various categories of work and this is reflected in a letter dated 31 July 2003 from the Environment, Transport and Works Bureau to the provisional liquidators and it shows the suspension from late 2002 onwards of the Company's position as a government approved contractor. In that letter it says this :

" Furthermore, I would like to remind the Company that if he has not taken any action to uplift himself from the suspension status or fails to make good the shortfall in employed and/or working capital within one year from suspension, he shall be removed automatically from the captioned List in accordance with paragraphs 5.5.6 and 5.6.3 of the CMH."

That one-year period elapses on 31 July 2004.

13. So that is the critical date - 31 July 2004. In order for the Company to be a meaningful company, namely, to be able to continue to carry out its Government contracts which are valuable contracts and valuable source of possible future work, it must not be automatically removed from the Government contractors approved list. So, the scheme will only have a chance of survival and the Company will only have a chance of survival if, first of all :

(1) the Company is not struck out from the approved list by 31 July 2004; and

(2) that the scheme has a reasonable chance of being approved by the court.

Those seem to me to be the two critical areas and time is not on the side of the plaintiff. I said time is not be on the side of the plaintiff because what the plaintiff is asking the court to do under the proposed order is to grant injunction to restrain the defendants, in any way, from dealing or transferring the shares to any one else, namely to the suitable white knight under the proposed Chevalier and Macao Scheme. If an order, therefore, is made in favour of the plaintiff as suggested, then effectively the Scheme of Chevalier and Macao would be killed. The reason why I say this is because the Chevalier and Macao Scheme envisaged as part of its condition precedent that an option will be given of those shares to Chevalier and Macao as part of the package for the rescue. That is the first problem.

14. The second problem again relates to timing is that because next Tuesday under the Timetable, which Ms Liu has quite helpfully pointed out to me at page 33 of the bundle of exhibits to the 1st affirmation of Leung Wai Po, there will be the hearing of the court application scheduled before Mr Justice Barma for him to approve or to give the go ahead of Notice of creditors' meetings. This Notice involves the sending out to the creditors, with 21 days notice (plus 3 days allowance for proxies arrangement) so that the holding of the creditors' meeting could take place on 23 July. If the Scheme is approved at that meeting then there would be application to court to be made on 27 July 2004 leading to perhaps the hearing of the court application on 11 August 2004 and the sanction by the court of the Scheme on that day.

15. Although the application of the court is on 27 July and the approval of the court is on 11 August as proposed under the Scheme Timetable as set out in the Supplementary Agreement of Chevalier, there has been a little bit of grace period given by the Government, that is the Bureau, as described in paragraph 15 of Ms Leung's affidavit at page 5.

16. This tight Timetable with next Tuesday being the first hearing hurdle to overcome involves therefore the necessity of this court dismissing the application of the plaintiff for an injunction order. This is the first and major point made by the parties that a court sanction in time is essential to a scheme of arrangement and that the court sanction in time requires a lack of impediment before Tuesday. That lack of impediment involves this court by necessity dismissing the application of the plaintiff. The whole fallacy of the plaintiff's attack in the present application is to believe that it can have the best of both worlds. The successful scheme is fundamental to the possible exercise of its right of option. Without a successful scheme, there is nothing for it to exercise. By this injunction it is killing the most likely scheme. Ms Ng said, "Oh, but give me the order and we can still have enough time to work and put forward another scheme." I do not think so. I think the tight timetable that I have described made it wholly impossible for the plaintiff to put up any alternative scheme and with enough time to fit into the tight timetable.

17. Secondly, any alternative scheme that can be put up by the plaintiff has to be a substantial improvement on the Chevalier and Macao Scheme. It looks wholly unlikely that commercially that the plaintiff is prepared to do that otherwise it would have already done it. And there is no indication that it will do it or it has the willingness to do it. So this is all a pie in the sky possibility. The reality is that if I accede to the application I would effectively be killing the Chevalier and Macao Scheme which inevitably will result in the loss of the Government licence which would effectively lead to a winding-up of the Company and everyone will suffer, the creditors, the company and the defendants. The plaintiff will not gain by this process. That is what I describe in the course of the hearing as a commercial neutral destruction or suicide. I see no merit in giving approval to that destiny proposed by the plaintiff. So on the balance of convenience, it seems to me, that it is very very clear. The defendants has painted a powerful case of the balance convenience overwhelmingly in favour of refusing the injunction. That seems to me effectively to determine the outcome of this case of interlocutory injunction.

18. I would like however to add that on the other three points advanced before me they are all pointing in favour of the defendants and against the plaintiff.

19. I will first say something about the lateness of time. It has taken from March 2004 when it was plainly on the card after the 19 March report to the plaintiff that there was serious risk of that Scheme of Chevalier involving a loss to the plaintiff of the shares and yet it took no action. Instead, it took the attack of claiming damages on repudiation. So on time the plaintiff has taken much too long to apply for interlocutory injunction and that is a good reason to reject it.

20. The third ground relied on is that damages would be an adequate remedy. In my view, damages would be adequate remedy and how is that shown? That is shown clearly by the Statement of Claim of the plaintiff. Look at paragraph 29. It particularised each and every item. Ms Ng was forced in the course of the hearing to somehow say that, damages would be inadequate because it is difficult to quantify and so on and so forth. But that is not what the pleading says. The pleading has no problem about the quantification of damages. I am of the view that damages are capable of being quantified if ever the plaintiff should suffer any damage because it would involve a loss of a chance of a possibility of the exercise of an option, on the further possibility that the scheme (without the shares being to the successful white knight) would be approved. In my view, damages will be adequate remedy so even the first hurdle of American Cyanamid would not be overcome.

21. The last point is that there is no serious question to be tried. Now there is no serious question to be tried firstly because I think there is a question here rightly pointed out by Mr Cheung that there had been election by the plaintiff for damages. So it is not a question of no serious question to be tried on the damages but there is no serious question to be tried on specific performance and on injunction. There had been election by the plaintiff for damages for accepted repudiation and this is inconsistent with a claim for specific performance. Spry on Equitable Remedies was cited as authority in support. That is not challenged. It is quite different when a plaintiff seeks at the very beginning specific performance and as alternative damages. But when a plaintiff commences proceedings and asks for damages on a contract which it said it have accepted the repudiation, the contract is terminated. Once the plaintiff accepted the repudiation, the contract had gone, and there was nothing on which for the plaintiff to found the relief of specific performance. It seems to me, therefore, that there is no serious question to be tried on the Amended Statement of Claim of specific performance and injunction. That is the first way of looking at the question of no serious question to be tried. Another possible way to look at it perhaps less powerfully put is the question I put to Ms Ng during the course of the hearing and that is there is no specific provision in the contract whereby the defendants undertook not to deal with the shares in the meantime. The reason being that it is only a future possibility that there might be exercise of option but in the meantime, why should the defendants not be at a liberty to deal with their property. Unless there is a specific provision restraining the defendants' freedom to deal with their shares, there is no basis for restraining the defendants. But this point is perhaps less strongly pressed upon. So I am in agreement with the submission of Mr Cheung that everything points to the injunction being wrongly asked. In the circumstances and I have no hesitation on this, I think this is a disgraceful application. The application must be dismissed with costs. I am proposing to hear the parties on costs.

[Discussions on Costs]

22. This is the gross sum assessment of the costs incurred by the defendants and separately by the provisional liquidators for resisting the application of the interlocutory injunction.

23. I have before me two calculations, one for the defendants and one for the provisional liquidators. Both are resisted and it has been said by Ms Ng for the plaintiff in relation to the defendants' costs that the quantum is too high, the number of hours were too long for the solicitors and the costs of counsel's fees are too high and the same applies to the quantum of the provisional liquidators except in relation to the provisional liquidators' costs, it is further objected in principle to the liability to pay the costs.

24. Let me firstly deal with the question of the liability to pay the provisional liquidators' costs. The provisional liquidators, as I has ruled earlier were properly heard in this application. They have performed exemplary task and they have been extremely helpful to the court. Their costs ought to be paid by the party which has wrongly brought the application so that there is no doubt in my mind that so far as liability is concerned that the plaintiff ought to pay the provisional liquidator's costs. So far as quantum is concerned, this is a matter where I have taken a very adverse view of the plaintiff's conduct. In my view, costs ought to be on an indemnity basis. Having said that, in any event the costs under the schedules presented to me are wholly reasonable in the circumstances having regard to the very unusual nature of the case and the urgency with which they had to be dealt with. The plaintiff had brought it on very quickly and everyone struggled very hard including today, sitting on a Saturday, past lunch hour to deal with this matter. In my view, the respective costs of the defendants as well as of the provisional liquidators are wholly justified. I therefore order that the costs of the defendants in the total sum of $146,875 be paid by the plaintiff to the defendants and the costs of the provisional liquidators in the total sum of $135,750, to be paid by the plaintiff to the provisional liquidators. Both costs to be paid forthwith.