CHAK KAK AND OTHERS v. PACRIM INTERNATIONAL CAPITAL INC

HCA1250/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1250 OF 2006

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REASONS  FOR  JUDGMENT

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1. 1997 had been the talk of the town in the 1980s and 1990s.  Thus in the 80s and the 90s emigration to the western world like Canada, USA and Australia in light of the problem of 1997 was quite trendy.  However, this is not the talk of the town anymore in the present day.  It is already the 10^th anniversary of the turnover this year.  

2. This action involved five plaintiffs who had emigrated to Canada by way of investment in early 1990s.  They, like 200 odd other investors, invested in a fund called First Mortgage Nova Scotia Fund Inc (“the Funds”).  Each of them had paid CN$150,000 into the Funds and each was given a Promissory Note bearing the face value of CN$160,000.  They were then qualified, as part of their immigration application, under the category of “business investors”.  In or about 1995/1996 the Funds paid back to each of the subscribers CN$50,000 in accordance with those terms of the Promissory Note, leaving CN$110,000 outstanding. 

3. There was however a downturn of the Nova Scotia property market in around 1997 and the value of the Promissory Notes were not what they once were.  The subscribers obviously became very concerned about the value of their investments because of the poor performance of the Fund.  By then the Promissory Notes were due for repayment in June 1997.  

The transfer agreements offered by the defendant

4. It was at this point that the defendant became involved in the commercial arrangement offered by them.  The defendant is a public company incorporated in the British Virgin Island and listed on the Toronto Stock Exchange.  The main focus of their business is real estate investments. 

5. The defendant offered to the subscribers, including the plaintiffs, two Options as follows :

(a)	to swap their Promissory Notes in exchange for CN$50,000 cash together with 60,000 Convertible Preference Shares in the defendant company (“CP Shares”); or
(b)	to accept an once-and-for-all settlement in cash payment after the liquidation of the Funds which was then estimated to be about CN$58,000.

6. The offer was stated in a letter dated 10 June 1997 written by one Steward McInnes, a director of the Funds.  It was said inter alia as follows :

“

The ‘Full Repayment’ Solution

After studying the alternatives in detail, the Funds have decided to enter into an arrangement with Pacrim International (‘Pacrim’), a company listed on the Toronto Stock Exchange.  Each Investor will receive another cash payment of C$50,000, which adds up to C$100,000 including a first installment of C$50,000 made to date, and will be issued with convertible preferred shares in Pacrim.  The convertible preferred shares with a redemption amount of C$60,000 will be redeemable in two years and will carry cash dividends comparable to the bank deposit rate during that period.  In other words, an investor would be in much the same position financially as though the Fund repays the full C$160,000 in cash and the investor keeps C$60,000 at a bank to invest in Pacrim shares after two years.  Because of its continuing and future interest in the immigration fund business.  Pacrim decided to assist the Funds to facilitate this ‘Full Payment’ package to all Fund Investors.  At the request of the Funds’ custodian.  HSBC Capital Canada Inc., (formerly Wardley Canada Inc.) the Funds have obtained a Fairness Opinion from a global commercial real estate specialist, Colliers International, which recommends favorably the arrangement with Pacrim.”  (Emphasis added)

7. It was also stated at the end of the letter that :

“	If you have any questions, please call our Hong Kong Representative, at [a telephone number] attention Ms Cindy Fung.”

8. Since the defendant is a listed company on the Toronto Stock Exchange, this arrangement with the subscribers had to be and was approved by the Regulatory Authority in Toronto, Canada. 

9. Thereafter Mr Chak said some of the plaintiffs including himself have met Mr Guy Lam Kwok Hung, a director of the defendant company.  According to Mr Chak, he said Mr Lam met them at the Pacific Place Conference Centre on or about 3 or 4 July 1997.  That was an investment conference introducing the aforesaid options offered by the defendant.  According to Mr Chak, Mr Lam said the CP Shares could attract 2% dividend a year and they could have an option of exchanging the same for the common shares of the company tradable at the Toronto Stock Exchange.  Further they could wait until after 24 months to exchange CP Shares at $1 per share, i.e. 60,000 CP Shares could be redeemed for CN$60,000. 

10. Further on about 7 October 1997 when Mr Chak and two other plaintiffs attended the defendant company to sign the Transfer Agreements and received their CN$50,000 each and 60,000 CP Shares, they were told by the aforesaid Ms Cindy Fung that “if they do not want to exchange their CP Shares for the common shares, they could be redeemed for CN$60,000”.  (「該優先股如不欲換為普通股，贖回價為60,000 元加幣」). 

11. From 21 July 1997 to 20 July 2001 i.e. four years, each subscriber received four years of dividends at 2% of the par value of the CP Shares i.e. CN$4,800 in total. 

12. Thereafter the defendant decided to stop issuing dividends to the subscribers in spite of protests from them.  However the Transfer Agreement only provided that the defendant would only pay dividends for two years.  Thereafter the defendant would have the absolute and unfettered discretion to decide on whether or not to issue dividend and if so the amount thereof. 

13. By a notice dated 27 October 2003 the defendant gave notice that each CP Share would be redeemed at the redemption price of CN$0.01 i.e. 1 Canadian cent per CP Share.  This provoked massive objections from the subscribers. 

The defendant’s case on redemption

14. The defendant relied on Clause 4 of Schedule B to the Transfer Agreement which is part and parcel of the Memorandum and Articles of Association of the company.  They are as follows :

“	4.	REDEMPTION
	4.1	The Convertible Preferred Shares shall not be compulsorily redeemed by the Company during the first 23 months immediately following the Initial Issue Date.
	4.2	The holders of the Convertible Preferred Shares have no right to require the Company to redeem any Convertible Preferred Shares.
	4.3	Subject to the payment of all accrued and unpaid Cumulative Dividends thereon the Company, upon giving Notice as hereinafter provided, may at its option during the 24th month immediately following the Initial Issue Date compulsorily redeem all (but not less than all) of the issued and outstanding Convertible Preferred Shares either for :
		(i)	the Redemption Price of the Convertible Preferred Shares to be redeemed; or
		(ii)	that number of Common Shares into which the Convertible Preferred Shares to be redeemed would be convertible if such Convertible Preferred Shares had been converted on the date specified for redemption pursuant to the conversion formula described in Section 3.1 hereof.
	4.4	After the expiry of 24 months immediately following the Initial Issue Date the Company upon giving Notice as hereinafter provided may, at its option, compulsorily redeem any or all of the issued and outstanding Convertible Preferred Shares on such terms and conditions, including without imitation the redemption amount payable to the holders of the Convertible Preferred Shares, as the board of directors in its absolute and unfettered discretion deems appropriate.
	4.5	Partial Redemption
		If less than all the Convertible Preferred Shares are at any time to be redeemed pursuant to Section 4.4, the shares to be redeemed shall be selected by lot or in such other manner as the board of directors may deem equitable or, if the board of directors so determines, on a pro rata basis, disregarding fractions, according to the number of Convertible Preferred Shares held by each of the registered holders thereof.  If only a part of the Convertible Preferred Shares represented by any certificate shall be redeemed, a new certificate representing the balance of such shares shall be issued to the holder thereof at the expense of the Company upon presentation and surrender of the first mentioned certificate.”  (Emphasis added)

15. Further under the definition section in Clause 1.1 “Redemption Amount” and “Redemption Price” have been defined as follows :

“	(m)	‘Redemption Amount’ means the amount payable or deliverable by the Company to the holders of Convertible Preferred Shares on a redemption of such shares pursuant to clause 4.3 or clause 4.4, as the case may be;
	(n)	‘Redemption Price’ means, for each Convertible Preferred Share, CAN $1.00;”

16. It was provided also in the previous Clause 3 that after the expiry of the 22 months the holders of CP Shares should have the right to convert the CP Shares into fully paid and non-assessable common shares according to a formula therein provided. 

17. In the event none of the plaintiffs exercised their option to convert the CP Shares into common shares after 22 months.  

18. During the 24^th month the company did not exercise its right to redeem all the outstanding CP Shares from the holders including the plaintiffs either.  If they have done so, the defendant agreed that the price must be at the redemption price of CN$1. 

The plaintiffs’ interpretation

19. The plaintiffs contended that the discretion of the defendant under Section 4.4 was only in terms of the amount of shares or the equivalent Canadian dollar amount to be used by the defendant to redeem the CP Shares in the hands of the holders.  It was not in respect of the redemption price which has been fixed under the definition section at CN$1.00.  The redemption price cannot be changed. 

20. There were 7,035,000 CP Shares at that time.  The defendant could decide with absolute discretion as to the redemption amount of shares from zero (i.e. not at all) up to the maximum amount of 7,035,000.  The plaintiffs expressed that in terms of the Canadian dollar amount since the redemption price has been fixed at CN$1.00 for one share. 

The decision

21. I accept the plaintiffs’ submissions.  Under Section 4.3, if the defendant wanted to redeem the CP Shares during the 24^th month they have to redeem all the shares since it was said that the defendant “may ... redeem all (but not less than all) of the issued and outstanding” CP Shares.  It would have to be at the redemption price of the CP Shares under option (i). 

22. It is only under Section 4.4 that the defendant has the option to compulsorily redeem “any or all” of the CP Shares.  Since the redemption amount has been defined as : “the amount payable or deliverable by the company to the holders of CP Shares on the redemption of such shares pursuant to clause 4.3 or clause 4.4 come as to case may be”, the amount payable or deliverable should refer to the Canadian dollar amount payable for the shares to be redeemed.  The defendant only has the discretion to determine the redemption amount.  It has no right to change the redemption price. 

23. It is also in line with Section 4.5 in respect of partial redemption.  If the defendant decided to redeem only part but not all the CP Shares, the shares to be redeemed shall be decided by lot or such other manner as the board of directors may deem equitable or on a pro rata basis. 

24. This is also in line with the explanation stated by Steward McInnes of the Funds in his aforesaid letter.  Otherwise the investor would not be “in much the same position financially as though the Fund repaid the full CN$160,000 in cash and the investor keeps CN$60,000 at a bank to invest in [the defendant] shares after two years”.  Similarly if the defendant had the absolute discretion to decide the redemption price after two years, it would not be right to say that the decision of the defendant to assist the funds was “to facilitate this further ‘Full payment’ package to all Fund Investors”. 

25. As submitted by Mr Chak for all the plaintiffs, if the defendant had the absolute and unfettered discretion to fix the redemption price after 24 months, why should it exercise its right in the 24^th month to redeem all (but not less than all) the CP Shares at the fixed redemption price of CN$1.00. 

The representation of Mr Lam and Ms Fung

26. As aforesaid, the plaintiffs said that Mr Lam represented to them in July 1997 that, inter alia, either they could exchange the CP Shares for common shares or wait until they could redeem these CP Shares at CN$1.00. 

27. Mr Lam gave evidence and adopted his statement as examination-in-chief in which he said there was no meeting on 1 July 1997 at the Pacific Place Conference Centre.  He produced a letter from the Swire Properties to the same effect.  However, the contention of the plaintiffs was the meeting was not held right on the turnover date of 1 July 1997 but a few days afterward on 3 or 4 July.  The letter from Swire Properties did not state clearly that there was no such meeting at the said Centre on these two days.  Although there were conferences held on 4 to 5 July 1998 held by the defendant, it does not make sense, as contended by the plaintiffs, that the meeting was one year later after the Transfer Agreements had been signed months earlier.  This could not be an introduction meeting as to the proposed transfer agreement. 

28. Mr Lam, when he gave evidence, eventually agreed that there might be such a meeting.  It was just the case that he could not recall there was such a meeting.  I find Mr Lam’s evidence to be quite unsatisfactory in terms of accuracy and exactness.  When he was asked whether he was a solicitor in Hong Kong in 1997, he answered that he might be a solicitor in Hong Kong.  He later clarified that he was certainly a solicitor with practising certificate in Hong Kong in 1997, although at present he is just a member of the Law Society without possessing a practising certificate. 

29. In respect of Ms Fung’s evidence, she did not deny that she could have said what the plaintiffs said she said on 7 October 1997 in paragraph 6 of Mr Chak’s witness statement.  She just said that that was not in exactly the same context and she had never said that Schedule B would not be valid.  In fact, it was never the plaintiff’s case that Ms Fung had ever said that Schedule B was invalid and that is not an issue between the parties. 

30. The issue is that the plaintiffs allege that both Mr Lam and Ms Fung have represented to them, as in line with the said letter of Steward McInnes, that the redemption price after two years would be CN$1 for one share, i.e. CN$60,000 for 60,000 CP Shares held by each of the plaintiffs.  It was never explained to them that after two years, the defendant had an absolute and unfettered discretion to refix the redemption price, which they did by changing the unit price from CN$1 to CN$0.01, i.e. 1 cent.  They consider that that was an representation to lure them into entering into the Transfer Agreements.  When that was not true, that would be a misrepresentation.  In so far as maybe necessary, I would prefer the evidence of Mr Chan than Mr Lam and Ms Fung.  

31. However, the issue of misrepresentation is not an issue to be decided between the parties.  The written transfer agreement has specifically provided that if there was any oral representation which differed with any of the terms in the written agreement, the oral representation would not form part of the agreement.  As a matter of law, in the absence of fraud, the plaintiffs cannot rely on any oral representation by the defendant’s director or representative.  Fraud has to be pleaded with particulars but this was not stated in the Statement of Claim, albeit I can understand that the plaintiffs have tried their best to state their case as laymen.  Thus even if there was such an oral misrepresentation, it cannot vitiate the written agreement unless the plaintiffs have pleaded fraud on the part of the defendant. 

32. However the oral representations made by Mr Lam and Ms Fung (which I accept as having been made by them) are in line with my construction of the aforesaid Section 4.4.  I have decided that the construction of Section 4.4 was not in the way as contended by the defendants but in the way as contended by the plaintiffs.  Accordingly there is no misrepresentation when the interpretation as put forward by the plaintiffs is accepted by me.  The end result would be that it is still the case that after 24 months, the defendant may redeem any or all of the CP Shares but the redemption price is fixed at CN$1 at all times.  This is purely a matter of construction of the provisions in the Transfer Agreement.  There is no reliance on the previous representation of Mr Lam and Ms Fung.  

Conclusion

33. Mr Dennis Kwok, counsel for the defendant accepted that if I accepted the plaintiffs’ contention, the defendant would be liable to redeem 60,000 shares from each of the plaintiffs for the redemption amount of CN$60,000.  Accordingly I have given judgment for each of the plaintiffs in the sum of CN$60,000 together with interest from the date of the writ to the date of judgment at 10% per annum. 

34. In respect of costs, I have also accepted the plaintiffs’ submission that the works of five plaintiffs altogether (although it was the 1^st plaintiff Mr Chak who has spent much of the time and efforts in this case) would amount to 180 man-days and it is reasonable to allow HKD$1,000 for each day.  Accordingly, I also awarded costs of HKD$180,000 to the plaintiffs by way of summary assessment.