CHONG CHIN AND ANOTHER v. GUOAN INTERNATIONAL LTD

HCCL 9/2020

[2021] HKCFI 525

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 9 OF 2020

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BETWEEN

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DECISION

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1.  By a Summons filed on 21 January 2021, the Plaintiffs seek summary judgment against the Defendant in the sum of HK$100,000,000 based on a claim under a Deed of Extension dated 28 February 2020 (“Deed”).

2.  The applicable principles for a summary judgment application are trite and summarised in Hong Kong Civil Procedure 2021, vol 1, [14/4/1] to [14/4/9].  In particular, on such an application the burden is on the defendant to demonstrate on evidence which is believable that there is an arguable defence.

3.  The undisputed background facts are as follows. By an Acquisition Agreement dated 13 February 2018 (“Agreement”), Elitemind Investments Ltd, which was wholly owned by the husband and wife Plaintiffs, and the 1^st Plaintiff agreed to sell, and Exquisite Honor Holdings Ltd agreed to purchase, the former’s 100% shareholding in Yicko Securities Ltd at the consideration of HK$420,000,000.

4.  Exquisite Honor paid HK$300,000,000 of the consideration by procuring its corporate parent, the Defendant (a company listed in both Hong Kong and Singapore), to issue three Convertible Bonds (“CBs”) to the Plaintiffs as noteholders, each in the principal amount of HK$100,000,000 and bearing interest at the rate of 3.8% p.a.  The CBs would mature, respectively, 12, 24 and 36 months after issuance.

5.  The first CB fell due on 28 February 2020. Pursuant to the Deed dated 28 February 2020 entered into between the Plaintiffs and the Defendant, the latter unequivocally acknowledged that the principal amount of HK$100,000,000 under the 1^st CB had fallen due on 28 February 2020. 

6.  The Plaintiffs and the Defendant agreed that upon the latter’s prepayment of accrued interest under the three CBs totalling HK$11,400,000, the Plaintiffs agreed to extend the maturity date under the 1^st CB from 28 February 2020 to 28 November 2020.

7.  Further, the Plaintiffs and the Defendant agreed that if the latter failed to pay the sum of HK$100,000,000 by 28 November 2020, the former might issue a Default Notice to the Defendant.  If the Defendant failed to pay the sum by 9 December 2020 it would be in “formal default” and the Plaintiffs might immediately take legal action against it without further notice.

8.  In the event, the Defendant failed to pay the sum of HK$100,000,000 by 28 November 2020, and the Plaintiff had issued a Default Notice to it.  However, to date, the sum of HK$100,000,000 remains outstanding.

9.  In addition to the above, the Plaintiffs (represented by Mr Maurellet SC and Ms Yuen) say that, after the Deed was signed, the Defendant had unequivocally and repeatedly admitted its liability to pay the sum of HK$100,000,000 to the Plaintiffs. 

10.  Firstly, by a letter to the Plaintiffs dated 25 November 2020, the Defendant admitted that it would be in formal default if it failed to pay the sum of HK$100,000,000 to the Plaintiffs by 9 December 2020.  It sought the agreement of the Plaintiffs on restructuring proposals to alleviate the cash flow problem it had experienced during the COVID-19 pandemic.  The proposals were not accepted by the Plaintiffs.

11.  Secondly, by public announcement of the Defendant dated 30 November 2020, its shareholders were informed that the Plaintiffs might immediately take legal action against the Defendant if it failed to pay the sum of HK$100,000,000 by 9 December 2020.  Further, the Defendant expected that it would not be able to make such payment and would continue to discuss with the Plaintiffs in relation to the repayment arrangement.  

12.  Thirdly, by public announcement of the Defendant dated 2 December 2020, the Defendant acknowledged receipt of the Default Notice issued by the Plaintiffs.  The shareholders were informed that further announcement(s) would be made where appropriate on any material developments in connection with the repayment arrangement.   

13.  On these facts, Mr Maurellet submitted that there is a clear case for summary judgment in favour of the Plaintiffs for the sum of HK$100,000,000 against the Defendant pursuant to the Deed.

14.  Mr Chan, who appeared for the Defendant, advanced the following defences based on the affirmation of Mr Tsui Tan Ning (“Affirmation”) :

(1) The Agreement is liable to be rescinded based on misrepresentation on, inter alia, the Guaranteed Profit and Guaranteed NAV in respect of Yicko;

(2) The Plaintiffs’ breach of the fundamental terms of the Agreement giving rise to counterclaim and/or set-off.

15.  At the hearing, it was confirmed by Mr Chan that the defences are premises on 3 issues, namely, the Guaranteed Profit, Guaranteed NAV and the Distribution of Dividends made in breach of the Agreement. 

16.  I regret to say that I can find no real merit in the defences based on Guaranteed Profit and Guaranteed NAV.  First and foremost, there is a volte-face by the Defendant on its liability to repay in full the amount due under the Deed.  I can find no proper explanation for the volte-face. 

17.  The Affirmation went no further then, firstly, alleging a close relationship between the Plaintiffs (and/or Yicko) and the 2 executive directors of the Defendant, Mr Huang and Mr So.  It was said that the Plaintiffs are the parents-in-law of So.  Huang and So were the executive directors of the Defendant from 11 March 2016 to 31 January 2020, which covered the time when the Agreement was made and the CBs were issued.  Based on such alleged relationship, there was an unspecific overtone in the Affirmation that the issues raised in respect of the Acquisition were attributable to the wrongdoings of the Plaintiffs and those directors. 

18.  Apart from the lack of specificity in support of the serious overtone, the Defendant had failed to address the fact that the Deed was made after So was replaced on 31 January 2020 by Mr Du, who was (and is) the Chairman of the Board and an executive director of the Defendant. Huang was no longer an executive director from 10 August 2020.  The letter and public announcements (see paras 10 to 12 above) were issued and made after both So and Huang had left the Defendant.

19.  Indeed, on the evidence, Du has been the Chairman of the Defendant since 11 March 2016.  He was also a non-executive director since that day until 31 January 2020 when he became an executive director.  It is surprising that there is not a word of evidence from Du on the alleged issues in respect of the Acquisition. 

20.  As pointed out by Mr Maurellet, it appears from the Letter from the Board to the shareholders dated 24 May 2018 on the Acquisition that Du must have been closely involved with that exercise.  Further, it can be seen from the Letter that the relationship between So and the Plaintiffs had been disclosed under “Connected Transaction”. 

21.  In respect of the defences, there is a fundamental issue in that the Defendant was not a party to the Agreement, and cannot be entitled to any counterclaim or set-off arising from any breach thereof. 

22.  Seeking to overcome the point, Mr Chan relies on Johnson Electric International Ltd v Bel Global Resources Holdings Ltd [2014] 5 HKC 504 and Liu Qian v Sunway International Holdings Ltd, unrep, CACV 88/2017, 1 September 2017. 

23.  Johnson Electric does not assist the Defendant.  The facts and issue were materially different.  The issuance of the bond in that case was conditional upon the output of a nickel mine.  The defendant alleged that the bond was obtained by fraud in that the evidence of output was fraudulent.  The focus of the appeal was whether there was a triable issue raised that the plaintiff transferee of the bond was implicated with the knowledge of fraud so that it took the bond subject to the equity of the defendant to have it set aside.

24.  The same may be said in respect of Liu Qian. Although the general background of that case was similar to the present, there is an important distinction in that the issuer of the convertible notes in that case was a party to the Share Sale Agreement.  Allegations of fraudulent misrepresentations were made by the issuer and it was alleged that the holder of the notes had knowledge of its claims and rights to rescind the notes. Proceedings were taken out by the issuer and the buyer accordingly.  The scope of the appeal was limited to 2 issues, both of which concerned an element of notice on the part of the note holder of the fraud (see para 9 of the judgment).

25.  In addition to the fundamental issue, as an overview, I find the defences (and the Affirmation) advanced by the Defendant little more that post-transaction complaints by a purchaser who might have thought that he had paid too much for what he got.  It should be pointed out that there was a Financial Due Diligence Review carried out by an accountant company provided to the Defendant prior to the completion of the Acquisition. 

26.  In respect of the allegations concerning the Guaranteed Profit, the Defendant says that much of the profits set out in the 2018 Financial Statements of Yicko should not have been counted as such.  Apart from being bare assertions, I believe that the allegations are misconceived. According to clause 7.1 of the Agreement, the Guaranteed Profit should be no less than HK$23,800,000 after tax as stated in the Audited Financial Statements of Yicko for the year ended 28 February 2018 (“Financial Statements”).  The profit so stated was HK$25,531,393.  It has not been explained why Exquisite Honour or the Defendant is entitled to go behind the Financial Statements on the Guaranteed Profit.

27.  There is no evidence of any discussion between Exquisite Honor or the Defendant and the Auditors concerning the computation of Yicko’s profits.  Nor any adequate evidence why the Auditors were wrong in such computation.  The Defendant’s unsupported allegations cannot be accepted. 

28.  As part of the Defendant’s case on the Guaranteed Profit, it alleges that there was an inflated sale of shares to a related party.  The Board minutes dated 31 March 2017 approved a sale at HK$11,444,720 and the bought and sold notes dated 19 July 2017 showed a consideration of HK$9,813,580, ie, a deficiency of HK$1,631,140.  Based on these documents, it is alleged that the Yicko’s profit was overstated[1].

29.  I do not believe that the Defendant had properly condescended upon particulars on this allegation.  I note that the sale was reflected in the Financial Statements in the higher amount[2] and it was stated against the entry: “(Amount included in loss on trading of listed investments)”[3].  Hence, the transaction was disclosed to and audited by the Accountants.  According to the Defendant, the price of HK$11,444,720 was the same as the acquisition price.  It is therefore unclear why there was any loss.  There is no suggestion of any attempt to clarify the matter with the Accountants.  I am therefore reluctant to accept that there is an arguable defence based on the few documents adduced by the Defendant.  In any case, taking the point at the highest, it would not have reduced the audited profits to below the guaranteed level.

30.  I dealt with the inflated sale allegation specifically because it is an allegation on which there is some evidence in support and on which Mr Chan had laid emphasis.   

31.  The allegations over the Guaranteed NAV of HK$120,000,000 are equally unconvincing.  It is reasonably clear from the definition of「完成買賣日期資產淨值」and clauses 4.1 and 4.3 of the Agreement that the NAV was to be determined according to the Audited Financial Statements as of the date of completion of Acquisition.  Such Statements were to be procured by Exquisite Honour or the Defendant within 90 days of the completion of Acquisition.  According to the Defendant’s own announcement, the completion took placed on 28 February 2019[4]. 

32.  There is no Audited Financial Statements of Yicko as of 28 February 2019 or any evidence of attempt to procure such Statements. The 90 day period during such Statements had to be procured had long passed. The Defendant’s assertion of failure to meet the Guaranteed NVA has little substance. 

33.  On the last issue concerning the Distribution of Dividends.  It is the strongest of the defences.  There was such a distribution on 27 February 2019 in the sum of HK$15,500,000, the day prior to completion of the Agreement on 28 February 2019, which appears to be in breach of the Agreement. 

34.  However, at the highest, it was only a breach of warranty which sounds in damages.  Mr Chan took no issue with the proposition that unless the Agreement can be rescinded, there is no defence to the Deed.  Any damages claim there may be must belong to Exquisite Honour. There is no claim in existence.

35.  Further, Mr Maurellet relies on the contractual limitation period for any claim for breach of warranty, which had expired on 27 February 2021 pursuant to clause 8.8(1) of the Agreement.  Mr Chan had no answer to the submission. 

36.  Furthermore, I agree with Mr Maurellet that, at the highest, the breach of warranty does not constitute an adequate defence to the Plaintiffs’ claim for HK$100,000,000. 

37.  Finally, Mr Maurellet submitted that given the passage of time after the completion of the Agreement, Exquisite Honour must have affirmed the Agreement notwithstanding any breach on the part of the vendor.  Given the unconvincing nature of the Defendant’s evidence, the fact that Du has been an important member of the Defendant’s Board from inception and the repeated admission to pay the HK$100,000,000, I find force in the submission. 

38.  For these reasons, I am not satisfied that the Defendant has made out any triable issue grounded on believable evidence. 

39.  I therefore order that final judgment be entered in favour of the Plaintiffs against the Defendant in the sum of HK$100,000,000 together with interest at prime plus 1% from 28 November 2020 until today and thereafter at judgment rate(s) until payment.

40.  I make an order nisi that the costs of this action, including this application, be to the Plaintiffs with a certificate for 2 counsel.