HCA 642/2013
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 642 OF 2013
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BETWEEN
FCL CHINA DEVELOPMENT PTE. LTD.
1st Plaintiff
SHANGHAI FRASERS MANAGEMENT & CONSULTANCY CO. LTD.
2nd Plaintiff
and
LAI YUEN LING
1st Defendant
SAR INTERNATIONAL HOLDINGS
2nd Defendant
FEDERATED GROUP HOLDINGS
3rd Defendant
KEYLAND (HK) LIMITED
4th Defendant
_____________
Before: Deputy High Court Judge Lok in Chambers
Date of Hearing: 11 June 2014
Date of Judgment: 12 September 2014
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JUDGMENT
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1. This is an application for summary judgment by:
(i) the 1st plaintiff against the 4 defendants for the sum of US$5,742,315.22 plus interest; and
(ii) the 2nd plaintiff against the 1st , 3rd and 4th defendants for the sum of RMB798,463.20 plus interest.
Background
2. The plaintiffs’ claims are based on 2 settlement deeds dated 18 October 2011 (“the Settlement Deeds”) which are related to a development project in Qingdao (“the Qingdao Project”).
3. On or about 25 October 2006, a tri-parte framework agreement (“the Tri-Partite Agreement”) was entered into between Qingdao State Enterprise, Hong Kong Fung Choi Co Ltd (“Fung Choi”) and Frasers Centrepoint Ltd (“Frasers Centrepoint”). Under clause 6 of the Tri-Partite Agreement, Fung Choi and Frasers Centrepoint were to incorporate a company with a minimum registered capital of US$50 million to carry out the Qingdao Project on terms to be agreed between them.
4. On or about 16 March 2007, the 1st plaintiff and the 2nd to 4th defendants, which were the affiliates of Frasers Centrepoint and Fung Choi respectively, entered into a joint-venture agreement to carry on the business under the Qingdao Project (“the JV Agreement”). The main provisions of the JV Agreement are as follows:
(i) the 1st plaintiff was to subscribe for 65 shares in the 4th defendant, whilst the 2nd defendant was to subscribe for 34 shares in addition to the 1 share it already owned (clause 6.01);
(ii) the funding of the 4th defendant would be US$50 million, to be provided:
(a)subject to the subscriptions having been completed, initially by shareholders’ loans in the respective sums of US$6.5 million and US$3.5 million to be provided by the 1st plaintiff and the 2nd defendant by the end of March 2007; and
(b)the balance would be advanced by the 1st plaintiff and the 2nd defendant to the 4th defendant in the “specified proportion” (initially the 1st plaintiff 65% and the 2nd defendant 35%: clause 1.01) in the manner resolved by the board (clause 8.01(a));
(iii) a wholly-owned foreign enterprise was to be established in Qingdao for the operation of the project (clause 7.04);
(iv) the 1st plaintiff would be entitled to appoint 4 of the 6 board members of the 4th defendant which in turn controlled the wholly-owned foreign enterprise (clause 9.02(a)); and
(v) the 3rd defendant guaranteed the 2nd defendant’s obligations under the JV Agreement (clause 12.11).
5. On about 19 December 2006, Qingdao Fraser Real Property Development Co Ltd (“Qingdao Fraser”) was incorporated as the wholly-owned foreign enterprise for the development project under the JV Agreement. The name of Qingdao Fraser was subsequently changed to “Qingdao Huidafeng Trading Co Ltd”.
6. In purported compliance with their obligations under clause 8.01(a) of the JV Agreement, the 1st plaintiff and the 2nd defendant injected the respective sums of US$6.5 million and US$1.5 million into Qingdao Fraser.
7. Unfortunately, there was a breakdown of trust and confidence between the parties. The plaintiffs claimed that the 2nd to 4th defendants were in breach of the terms of the JV Agreement in, amongst other things, failing to procure the issue of any shares of the 4th defendant to the 1st plaintiff and to inject the agreed sum of US$3.5 million into Qingdao Fraser. On the other hand, the defendants complained that there was mismanagement of Qingdao Fraser by the plaintiffs.
8. In order to resolve the dispute between the parties, the defendants agreed to buy out the plaintiffs’ interests in the Qingdao Project. The parties therefore entered into the 2 Settlement Deeds which are the subject-matters of the present claims.
9. The 1st Settlement Deed was made between the 1st plaintiff, the 4 defendants and Qingdao Frasers (“the 1st Settlement Deed”). Its material provisions are as follows:
(i) the 2nd to 4th defendants would pay to the 1st plaintiff the settlement amount of US$5,737,216.68 (“the Settlement Amount”) on or before 17 April 2012 (clauses 3.1 and 3.2);
(ii) the sums referred to in clauses 3.2 and 3.3 were used only for the purposes of arriving at the Settlement Amount and the 1st plaintiff was under no liability in respect of Qingdao Fraser’s expenses or liquidation expenses, including any tax, fees and/or penalty (clause 3.5);
(iii) the 1st defendant guaranteed the performance of the obligations on the part of the 2nd to 4th defendants (clause 4.1);
(iv) the 2nd to 4th defendants would liquidate Qingdao Fraser and, without affecting the defendants’ liability to pay the Settlement Amount and the 1st defendant’s liability under the guarantee, would apply the proceeds obtained after the liquidation of Qingdao Fraser towards the payment of the Settlement Amount if the proceeds were received before 17 April 2012 (clauses 5.3(a) and (b)); and
(v) the liability of the 2nd to 4th defendants to pay the Settlement Amount under clause 3.1, and the liability of the 1st defendant under the guarantee, were not dependent on or in any way affected by the liquidation of Qingdao Fraser or its progress (clause 5.3(c)).
10. At the same time, the 2nd plaintiff entered into a Settlement Deed with the 1st , 3rd and 4th defendants and Qingdao Fraser (“the 2nd Settlement Deed”). Its material provisions are:
(i) Qingdao Fraser acknowledged that it was indebted to the 2nd plaintiff for the sum of RMB798,463.20 (as the money paid by the 2nd plaintiff to discharge the expenses of Qingdao Fraser)(“the Agreed Indebted Amount”), which it agreed to repay the 2nd plaintiff on or before 31 December 2011 (clause 2.1); and
(ii) the 1st , 3rd and 4th defendants guaranteed the due and punctual payment of the Agreed Indebted Amount to the 2nd plaintiff (clause 3.1).
11. The Settlement Amount under the 1st Settlement Deed was subject to adjustment:
(i) under clause 3.3(a), if the defendants within 1 month from the date of the Deed could prove to the satisfaction of the 1st plaintiff that any items set out in Appendix 1 were properly incurred by Qingdao Fraser, the Settlement Amount would be correspondingly reduced; and
(ii) under clause 3.3(b), if the 1st plaintiff within the same period proved to the satisfaction of the defendants that the legal expenses set out in Appendix 2 of RMB¥91.800 had been properly incurred, the Settlement Amount would be increased by 35% of that amount.
12. The defendants did not provide the requisite proof under clause 3.3 within the time specified and so they lost the right to adjust the Settlement Amount. On the other hand, the 1st plaintiff, by the emails dated 4 September and 21 December 2011, provided proof relating to the propriety of the legal expenses. Accordingly, the Settlement Amount was increased by 35% of RMB¥91,800 (RMB¥32,130) = US$5,098.54, making a total of US$5,742,315.22 (US$5,737,216.68 + US$5,098.54).
13. It is common ground that the defendants have not made any payment to the plaintiffs under any of the Settlement Deeds.
14. In opposing the plaintiffs’ claims, the defendants put forward the following grounds of defence.
15. Firstly, the defendants claim that in about August and September 2007, Dr Han Cheong Fong (“Dr Han”), the former Chief Executive Officer of the 1st plaintiff, made a representation to the 1st defendant that Frasers Centrepoint had reached an agreement with Qingdao State Enterprise and/or Qingdao Provisional Government that the latter would not claim against Frasers Centrepoint or Qingdao Fraser for breach of the Tri-Partite Agreement, and that Qingdao State Enterprise and Qingdao Provisional Government had agreed to release the capital injected into Qingdao Fraser by the parties after the dissolution of Qingdao Fraser. It is suggested that as a result of this alleged representation, it was the common intention of the parties when they entered into the 2 Settlement Deeds that the payments under those Deeds would be made using the capital released under the liquidation of Qingdao Fraser. Since the liquidation process has yet completed and the representation given by Dr Han turns out to be incorrect, the defendants are not liable to make the payments under the Settlement Deeds. For the ease of reference, I would refer this as “the misrepresentation defence”.
16. Secondly, the defendants claim in §7(5) of the Rejoinder that the plaintiffs have actively prevented the defendants’ performance of the obligations under the Settlement Deeds by obstructing the liquidation of Qingdao Fraser. In §7(4) of the Rejoinder, the defendants allege that the plaintiffs have obstructed the liquidation because: (i) the plaintiffs have lost the financial accounts of Qingdao Fraser; and (ii) no settlement has been reached between the plaintiffs and the External Economy and Trading Bureau (as defined in the Rejoinder) and that the Bureau is pursuing Qingdao Fraser for the alleged loss suffered by Qingdao State Enterprise due to the failure of the Qingdao Project. However, a different version is given in the subsequent affirmations of the 1st defendant and Mr Song Bingqing, in which the defendants only claim that the plaintiffs, through Madam Ong-Koh Wee Nah (“Madam Ong-Koh”), took away the books and records of Qingdao Fraser in late 2007. I would refer this as “the prevention defence”.
17. Thirdly, the defendants plead in §7(8) of the Rejoinder that by reason of the uncompleted liquidation of Qingdao Fraser, the defendants are unable to obtain their share of capital allegedly “locked up” in Qingdao Fraser and they are therefore entitled to set-off the amount allegedly “locked up” against the plaintiffs’ claims. I would refer this as “the set-off defence”.
Merits of the defences
18. Before I deal with the merits of the various grounds of defence, I have to address a procedural matter relating to the late filing of affirmation.
19. 2 days before the hearing, the defendants sought leave from the court to file the 2nd affirmation of the 1st defendant. However, the directions for the filing of affirmations for the O 14 application had been given by Master Levy as early as 20 January 2014. Mr Fung, SC, counsel for the defendants, very fairly accepts that this is a late application. As no reason has been given to the court to explain why the said affirmation could not have been filed earlier, I refused such late application on the part of the defendants. In any event, as I will demonstrate below, the result of this case would be the same even if the defendants were allowed to rely on the contents of this late affirmation to oppose the O 14 application.
20. Having carefully considered the submissions of counsel, I agree with Mr Joffe, counsel for the plaintiffs, that the purported defences put forward by the defendants are neither sustainable nor credible.
21. Firstly, the alleged misrepresentation and the purported defences are wholly inconsistent with the clear and unambiguous terms in the 1st Settlement Deed. Clause 5.3(b) therein makes it clear that if monies were received in the liquidation of Qingdao Fraser before 17 April 2012 (i.e. the due date for the payment under clause 3.1), they were to be applied to the payment of the Settlement Amount. However, nothing in that clause suggests that the Settlement Amount was only to be provided from that liquidation.
22. More importantly, clause 5.3(c) makes it unequivocally clear that the liability of the 2nd to 4th defendants to pay the Settlement Amount under clause 3.1 and the 1st defendant’s liability under the guarantee under clause 4 are not dependent on or in any way affected by the progress of the liquidation of Qingdao Fraser. Such clause has put it beyond doubt that, although it was the intention of the parties that the defendants would try to pay the Settlement Amount from the funds obtained after the completion of the liquidation, the payment of the Settlement Amount is an independent obligation on the part of the defendants which has nothing to do with the liquidation of Qingdao Fraser. Under such circumstances, any suggestion that the Settlement Amount would only be paid out from the proceeds of the liquidation is wholly unsustainable.
23. The same applies to the payment of the Agreed Indebted Amount under the 2nd Settlement Deed, where it provides for payment before a specified date only 2.5 months after the making of the Deed.
24. Secondly, even if Dr Han had made the alleged representation, clause 5.3(c) of the 1st Settlement Deed has made it clear that the earlier representation should not be relied upon. The alleged representation is related to the liquidation of Qingdao Fraser. As there is an express clause which provides that the defendants had to pay the Settlement Amount even before the completion of the liquidation of Qingdao Fraser, the defendants should not have been misled to believe that they could defer the payment until the completion of the liquidation.
25. Further, according to the defendants’ own case, the alleged representation was made in August or September 2007, about 4 years before the making of the Settlement Deeds in October 2011. I agree with Mr Joffe that any suggestion that an alleged representation in 2007 was still effective 4 years later is simply fanciful. There must have been so many things happening in the intervening 4 years, and I find it incredible that the defendants did not make any attempt to verify the accuracy of the representation in the intervening period.
26. In particular, in the letter dated 10 January 2008 from Qingdao Sifang District Devlopment Co Ltd to Qingdao Fraser, it was expressly stated that the said company would reserve all the rights to claim against Qingdao Fraser for the loss arising from the breach of the Tri-Partite Agreement by Frasers Centrepoint. This is plainly inconsistent with the alleged representation that an agreement had already been reached that the Qingdao authorities would not claim against either Frasers Centrepoint or Qingdao Fraser for breach of the Tri-Partite Agreement. Further, the Qingdao Foreign Trade Cooperation Bureau, on about 8 June 2009, agreed to reduce the registered capital of Qingdao Fraser from US$50 million to US$8 million. In October 2010, approval was also given to Qingdao Fraser to change its name, address and scope of business. In view of all these developments, I find it incredible that the defendants had not made any attempt to verify the accuracy of the representation before entering into the Settlement Deeds.
27. As the defendants would be responsible for the liquidation of Qingdao Fraser, it should not have been difficult for the defendants to find out from the Qingdao authorities their stance on the liquidation of Qingdao Fraser. As the 1st Settlement Deed has expressly provided that the 2nd to 4th defendants had to pay for the Settlement Amount irrespective of the progress of the liquidation, the defendants should have made some enquires about the truthfulness of the representation before they agreed the Settlement Deeds on those terms. Hence, even if the alleged representation had in fact been made (which I do not accept it to be the case), the defendants should not have relied upon such representation in entering into the Settlement Deeds.
28. Thirdly, it is clear from the 2nd defendant’s letter dated 14 August 2008 that it would take at least 18 months to complete the liquidation of Qingdao Fraser. The defendants, at the time of the making of the Settlement Deeds, therefore knew full well that the liquidation process had to take such a long period of time, and yet they agreed to make the payments under the 2nd Settlement Deed in 2.5 months’ time and under the 1st Settlement Deed in 6 months’ time. This reinforces the fact that the defendants would have to make the payments under the Settlement Deeds before the specified dates, even though the liquidation of Qingdao Fraser had yet completed due to whatever reasons.
29. Fourthly, I have serious doubt about the defendants’ allegation that the plaintiffs had obstructed the liquidation of Qingdao Fraser. In the pleading, the defendants claimed that the plaintiffs had lost the books and records of Qingdao Fraser, but subsequently in the opposing affirmations, the defendants changed its version and claimed that the plaintiffs took away the books and records in 2007. Furthermore, the plaintiffs’ email to one Mr Daniel Wong of the defendants dated 15 December 2010 and the reply dated 16 December 2010 show that it was the plaintiffs who requested for the latest audited accounts of the 4th defendant and Qingdao Fraser, and not that the defendants were requesting for such documents.
30. Further, even if the defendants’ allegation about the non-provision of books and records were the truth, it cannot provide a justification to defer the payments under both Settlement Deeds. At the time of the making of the Settlement Deeds, all the relevant parties should have been aware of the works and the time that would be required for the liquidation of Qingdao Fraser. In the 2nd defendant’s letter dated 14 August 2008, the 2nd defendant acknowledged that it would take 18 months to complete the liquidation, and the financial accounts of Qingdao Fraser had to be prepared and submitted as part of the liquidation process. Yet the parties expressly agreed that the defendants had to pay the Settlement Amount in 6 months’ time irrespective of the progress of the liquidation and the Agreed Indebted Amount under the 2nd Settlement Deed in 2.5 months’ time. If the parties were prepared to accept such terms, it is clear to me that the parties’ intention was that the defendants would have to make the payments under both Settlement Deeds before the specified dates no matter what was the cause for the non-completion of the liquidation. At most, the defendants may have a cross-claim against the plaintiffs for breach of the duty of co-operation, but that does not provide a justification for them not to honour their clear obligation for payments under the Settlement Deeds. Hence, the prevention and the set-off defences are both unsustainable.
31. I also have serious doubt as to whether the defendants can rely on these 2 defences to defend the claim by the 2nd plaintiff. According to the undisputed evidence of the present case, the 1st plaintiff was the affiliate of Frasers Centrepoint responsible for the operation of the joint-venture business under the Qingdao Project. The 2nd plaintiff was only an affiliated company of Frasers Centrepoint in providing funds to cover certain expenses of Qingdao Fraser or providing consultancy services to Qingdao Fraser. If the 2nd plaintiff was not directly responsible for operating the joint-venture business or Qingdao Fraser, how can the defendants establish a duty of co-operation on the part of the 2nd plaintiff in respect of the liquidation of Qingdao Fraser? Hence, the prevention and the set-off defences are not available to the defendants to defend the claim by the 2nd plaintiff.
32. Fifthly, if there were any basis in truth in the defences relied on by the defendants, one would expect the defendants to raise them soon after the payments under the Settlement Deeds fell due. But this was not the case here. In the defendants’ emails dated 4 January 2012 and 14 March 2012, the defendants just apologised for not making the payment under the 2nd Settlement Deed and asked for time to pay. Further, in response to the letter from the plaintiffs’ solicitors, the defendants in their email dated 13 January 2013 (which was after the due dates in both Settlement Deeds) did not allege that there was a defence to the plaintiffs’ claims but only sought time to pay the overdue amounts. Even more surprisingly, the defendants did not seek an extension of time for payments until the completion of the liquidation of Qingdao Fraser. If the defendants were relying on the alleged misrepresentation in entering into the Settlement Deeds or that the plaintiffs’ conduct had obstructed the liquidation of Qingdao Fraser, the defendants, even if they wanted to pacify the plaintiffs and to avoid a direct confrontation, should have asked for indulgence in extending the time for payments at least until the completion of the liquidation process. To my surprise, the defendants did not ask for such indulgence. Even in the latest 2nd affirmation of the 1st defendant (which the court had refused leave for its filing: see §19 above), the defendants cannot provide a satisfactory account to explain the delay in raising these defences.
33. The first time that the misrepresentation defence surfaced was in the Defence and Counterclaim on 8 July 2013. But it was not until the Rejoinder dated 25 March 2013, nearly a year later, that the prevention and set-off defences were raised. The delay in raising these defences certainly casts serious doubt on the genuineness of such defences.
34. Mr Fung submits that there are serious disputes of facts in the present case. Presenting with the factual complaints by the defendants, Mr Fung argues that the plaintiffs should have asked: (i) Dr Han to make an affirmation to deny the making of the representation; and (ii) Madam Ong-Koh and another Madam Cheng to make affirmations to deal with the defendants’ complaint about the non-provision of books and accounts. In failing to do so, the defendants have established triable issues which can only be determined at a proper trial.
35. Despite the able submission of Mr Fung, I cannot accept his arguments. To me, the terms of the Settlement Deeds are clear. At the time of the making of the Settlement Deeds, the parties knew full well the time and the works that would be required for the liquidation of Qingdao Fraser. Yet the parties agreed for the Settlement Amount to be paid before 17 April 2012 irrespective of the progress of the liquidation. Further, even if the defendants’ factual allegation about the representation were the truth, the defendants should not have relied upon such representation in entering into the Settlement Deeds. Hence, the defendants have failed to establish a meritorious defence to the plaintiffs’ claims and it is an appropriate case for the court to grant summary judgment in favour of the plaintiffs. I therefore grant judgment in terms of the amounts stated in the summons.
36. I also make the following order nisi relating to the issues of interests and costs:
(i) there be interests on the judgment sums at the existing judgment rate from the dates of the payment specified in the 2 respective Settlement Deeds to the date hereof and thereafter at judgment rate; and
(ii) the costs of the action, including the costs of this application, be paid by the defendants to the plaintiffs.
37. The order nisi shall be made absolute 14 days after the date of the handing down of this Judgment.
(David Lok)
Mr Victor Joffe, instructed by Deacons, for the plaintiffs
Mr Patrick Fung, SC and Mr Felix Ng, instructed by Deannie Yew and Associates, for the defendants