WAN TAI INVESTMENTS LTD v. LI HIU YAN

HCA 1998/2020

[2022] HKCFI 3702

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1998 OF 2020

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REASONS FOR

JUDGMENT

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The Plaintiff’s application

1.  By summons filed on 10 June 2022, the Plaintiff (“P”) applied for summary judgment and/or declaratory relief under Orders 14, 14A and/or 86 in the form of an order for specific performance of a Put Option Deed, entered into by P and the Defendant (“D”) on 6 November 2018 (“the Put Option Deed”) in respect of a parcel of 45.6 million shares (“the Put Option Shares”) in Beijing Sports and Entertainment Industry Group Ltd (“Beijing Sports”), alternatively for damages for breach of the Put Option Deed.

2.  At the conclusion of the hearing of P’s summons, I decided that it was appropriate to make an order for specific performance of the Put Option Deed. The following are my reasons for that decision.

APPLICABLE PRINCIPLES : Orders 14, 14A and 86

3.  The applicable principles in respect of Orders 14, 14A and 86 are well established, well known and are not in dispute. There is no need to rehearse them here. I will explain why I have thought fit to grant an order for specific performance after addressing the merits of P’s claim and the construction issue which arises from it.

The parties

4.  P is a wholly owned special purpose vehicle of CCBI Investment limited which is an investment arm and wholly owned indirect subsidiary of China Construction Bank Corporation, a company listed on the Hong Kong Stock Exchange and on the Shanghai Stock Exchange.

5.  D is a Hong Kong investor and has at all material times been the legal owner of a significant number of shares in Beijing Sports.

The background to the Put Option Deed

6.  In or around August 2018, a Mr Shie (or “Xie”), introduced CCBI to Beijing Sports and to D.

7.  Through discussions with Mr. Shie/Xie, CCBI became interested in investing in Beijing Sports and it was agreed in principle that CCBI or a nominated entity would acquire a substantial number of shares in Beijing Sports (i.e. shares which became the Put Option Shares) on the basis that, in the event that the share price of Beijing Sports significantly appreciated and the shares were then sold, D would be entitled to a share of the profit, in return for which (a) D would grant CCBI (or its nominated entity) a put option for the purchase by D of the shares at the acquisition price after 3 years and (b) D would charge assets in favour of CCBI (or its nominated entity) as security for D’s payment obligations under the put option.

8.  According to D, the terms of the agreement to which I have referred in the preceding paragraph and the documentation reflecting it were largely, if not entirely, negotiated between CCBI on the one hand and Mr. Shie/Xie on the other, albeit that, at the end of this process, drafts of the documents were provided to D for his approval. According to D, he did not make any comments on the documents or their contents (relying on Mr. Shie/Xie to have looked after his interests during the preceding negotiations) but according to P, the drafts were sent not only to D but also to a lawyer acting for him; D did comment on the drafts and such comments were reflected in the final versions of the documents.

The key provisions of the Put Option Deed and associated security documents

9.  Under the Put Option Deed, it was agreed as follows:

(1)  P would subscribe for the Put Option Shares at a price of HK$2.49 per share (“the Put Option Price”).

(2)  During the period of 3 years from the date of the Put Option Deed (i.e. the period ending on 6 November 2021), P would not dispose of any of the Put Option Shares at a price of less than HK$3.6 per share.

(3)  Should the price of the Put Option Shares equal or exceed HK$3.6 per share, P would be entitled to sell the shares and, in the event of the disposal of the Put Option Shares by P at a price greater than HK$3.6 per share, P would pay D 70% of the difference between the actual sale price and HK$3.6 per share less any costs fees and expenses incurred by P in the disposal of the shares.

(4)  After the end of the 3 year term or upon the occurrence of an event of default (as defined by the Put Option Deed), P would have the right to require D to purchase the Put Option Shares to D at the Put Option Price.

10.  Under the Put Option Deed and associated security documents:

(1)  D agreed to provide security for the performance of his Put Option obligations. Initially this was to comprise his holding of 48 million Beijing Sports Shares (“D’s 48m Beijing Sports Shares”). Depending on the “Collateral Coverage Ratio” (as defined by the Put Option Deed) from time to time D might be required to provide further security for the performance of his Put Option obligations by charging in favour of P (a) additional shares in Beijing Sports, (b) D’s shares in Yadea Group Holdings Limited (“Yadea”) and/or (c) cash.

(2)  The expression “Collateral Coverage Ratio” is defined in the Put Option Deed as meaning, for any trading day, the amount equal to “(A×B) + (C×D) + E / (F×G)” (“the CCR Formula”) where:

A = the number of charged Beijing Sports Shares

B = the closing price of the Beijing Sports Shares on such Trading Day

C= the number of charged Yadea Shares

D = the closing price of the charged Yadea Shares on such Trading Day

E = the amount of charged Cash

F = the then outstanding number of Put Option Shares

G = the Placing Price

(3)  It was agreed that if, on any trading day, the Collateral Coverage Ratio fell below 0.85, D would be obliged to charge additional shares in Beijing Sports and/or Yadea and/or cash in favour of P so that the Collateral Coverage Ratio would increase to no less than 1.0.

11.  D deposited D’s 48m Beijing Sports Shares into the securities account with P on 29 October 2018 and on November 2018, P purchased the Put Option Shares and paid the Put Option Price, i.e. a total of HK$113,544,000 (45,600,000 shares @ HK$2.49 per share).

Events after the execution of the Put Option Deed

12.  At no time after the execution of the Put Option Deed did the share price of Beijing Sports ever attain HK$3.60 per share.

13.  On 8 July 2019, the share price of Beijing Sports closed at HK$0.405 per share which represented a drop of 83.7% from the Put Option Price.

14.  On 10 July 2019, P sent a top up request to D on the basis of its interpretation of the Collateral Coverage Ratio (as to which, see below). At that time the security provided by D consisted of no more than D’s 48 million Beijing Sports Shares.

15.  On 26 July 2019, D deposited 1.7 million Yadea shares into the Securities Account.

16.  Notwithstanding the deposit of 1.7 million Yadea shares into the Securities Account, the Collateral Coverage Ration (as interpreted by P) has remained significantly below 0.85. No further security has been provided.

17.  On 3 June 2020, P served a default redemption notice on D to exercise the Put Option.

18.  No payment has been made by D pursuant to the default redemption notice.

19.  On 4 June 2020, P disposed of the Yadea Shares in the Security Account. The proceeds of sale, amounting to HK$6,864,339.90, have been into CCBI’s own account.

20.  P has not taken any steps to sell the 45.6 million Put Option Shares and still holds them.

Principles of contractual construction

21.  The relevant legal principles on contractual interpretation are not in dispute. In Mr. Yu’s skeleton argument it is stated that D takes no issue with the summary of the relevant principles set out in the skeleton argument of Mr. Alder, P’s counsel. In my view this is a fair and accurate summary of the principles in question. It is as follows:

“It is trite law that it is necessary to construe an agreement (a) against the ‘factual matrix’, and (b) as a whole. The relevant principles are now well established and have recently been conveniently summarised in:

(1) Maeda KKKK v Bauer Hong Kong Ltd[1] per Kwan V-P; and

(2) Eminent Investments (Asia Pacific) Ltd v DIO Corp[2] per Ribeiro PJ and Lord Collins NPJ.

The Court may consider the absurdity of the results of a proposed construction to guide it to the correct interpretation, Convoy Global Holdings Ltd v Kwok Hiu Kwan[3] per Kwan V-P, as did the CA in Maeda [36].

To the extent it may be necessary to rely on the notion, in clear cases the Court may correct obvious mistakes by ‘corrective construction’ without the need for a rectification suit:

(1) Wilson v Wilson[4] per Lord St Leonards:

If you find a clear mistake, and it admits of no other construction, a Court of Law, as well as a Court of Equity, without impugning any doctrine about correcting those things which can only be shown by parol evidence to be mistakes—without, I say, going into those cases at all, both Courts of Law and of Equity may correct an obvious mistake on the face of an instrument without the slightest difficulty.

(2) Chartbrook Ltd v Persimmon Homes Ltd[5] per Lord Hoffman.

(3) Cherry Tree Investments Ltd v Landmain Ltd[6] per Arden LJ.

(4) Corrective construction is not a discretionary remedy but a matter of discerning what the document has always meant, Marley v Rawlings[7] per Lord Neuberger.”

22.  Mr. Yu, in his skeleton has added the following propositions:

“While D takes no issue with the relevant legal principles on contractual interpretation as set out by P, D wishes to highlight / add the following:

(1) The courts have never interfered with contracts merely because they were improvident: see Polyset Ltd v Panhandat Ltd (2002) 5 HKCFAR 234, §103-104; Maeda KKKK v Bauer Hong Kong Ltd [2020] HKCA 158, §29(3) & (4)

(2) The court has been slow to reject the ordinary and natural meaning of a contractual provision as correct: see Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646, §§23-24, citing Arnold v Britton [2015] AC 1619 at [19].

(3) The courts do not easily accept that people have made mistakes in formal documents: Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, §§14, 23

(4) It requires a strong case to persuade the court that something must have gone wrong with the language. But where such a case is established, the court may correct the mistake as a matter of construction. Before it does so, it needs to be satisfied, first, that there is a clear mistake on the face of the document and, secondly, it must be clear what correction ought to be made in order to cure the mistake: Chartbrook, §§14-15, 22-25.”

23.  Mr. Yu’s propositions were not challenged by Mr. Alder and I accept them.

The interpretation of the CCR Formula

24.  P’s case is that that part of the CCR Formula: “(A×B) + (C×D) + E / (F×G)” which appears before the symbol “/” represents the total value of the security provided by D under the Put Option Deed and Security Documents. This, P says, is obvious and is in any case clear from the definition of the expression “Collateral Value’” [defined as meaning an amount equal to “(A×B) + (C×D) + E”)] which appears immediately below the definition of “Collateral Coverage Ratio” in the definitions clause in the Put Option Deed, albeit that it is accepted that the definition of “Collateral Value” is expressly for the purposes of Clause 8.3 of the Put Option Deed only which is not material for the purposes of the issues in this action. The fact remains however that, for the purposes of the CCR Formula, the letters A-E represent the same items as the letters A-E in the “Collateral Coverage Ratio” formula.

25.  P argues that it is plain and obvious that the CCR Formula, i.e. “(A×B) + (C×D) + E / (F×G)”, is simply the total value of the security provided by D (i.e. the value of the Beijing Sports Shares plus the value of the Yadea shares and the value of any cash provided by way of security) divided by the placing price of such Put Option Shares which were at the material time outstanding. This could have been expressed in other ways, e.g.:

(A×B) + (C×D) + E
        (F×G)

or,

[(A×B) + (C×D) + E] / (F×G)

But, says P, nevertheless, there can be no other meaning of the CCR Formula (as it appears in the Put Option Deed) other than that which P has attributed to it.

26.  On the other hand, D maintains that P’s interpretation of the expression “Collateral Coverage Ratio” is wrong and, applying the “BODMAS” arithmetical rule, which identifies the order of operations to follow when carrying out calculations or putting a formula into effect[8], the effect would be:

(A×B) + (C×D)  +       E     
                                (F×G)

27.  In other words, D argues that the division line “/” relates only to ‘E” (the cash element of the security, if any) - not to “(A×B)” (the value of the charged Beijing Sports Shares as at the relevant trading day); and not to “(C×D)” (the value of any charged Yadea shares as at the relevant trading day).

28.  In the course of the oral submissions of Mr. Tim Chi Hang Yu, counsel for D, which were made during the hearing before me of P’s application, Mr. Yu acknowledged that the strict application of the BODMAS rule (giving rise to the interpretation stated in paragraph 27 above may or might give rise to an absurd result but nevertheless, as, so he submitted, the CCR Formula is certain and unambiguous and D’s interpretation mathematically sound, no other interpretation is possible or permissible. In short, that was the bargain which the parties had struck and it must be adhered to.

29.  Mr. Yu rejected any notion that any mistake had been made or that there had been a typing error in relation to the drafting of the CCR Formula and, in this respect, attached significance to the use of square brackets in the formula for calculating the share of profit to which D would have been entitled (referred to in the Put Option Deed as “the Shared Amount”), had the P disposed of the Put Option Shares at a price exceeding HK$3.6 per share (i.e. “[(A-B) × (C – D)] × 70%”). Mr Yu asked the court to infer from this that the draftsman of the Deed was well aware of the BODMAS rule and made a conscious and informed decision not to use square brackets in the CCR Formula. Mr. Yu also drew attention to the fact that “…the court does not readily accept that people have made mistakes in formal documents…”, citing Charterbrook (supra) at [14] & [23] as authority for that proposition, and pointed out that, in any case, there was no evidence before the court as to how and why any such error might come to have been made.

30.  In the alternative, if which P did not accept, there is any ambiguity in the formula, Mr. Yu prayed in aid the contra proferentem rule on the basis that the Put Option Deed was prepared by P or its legal advisors (without any input from D) and any ambiguity therefore should be resolved against P and in favour of D.

My view on the interpretation of the CCR Formula

31.  In my view, it is plain and obvious from the context of the Put Option Deed and from the nature of the commercial transaction with which it is concerned that the correct interpretation of the CCR Formula, “(A×B) + (C×D) + E / (F×G)” represents, as P submits, the total value of the security provided by D (i.e. the value of the Beijing Sports Shares plus the value of the Yadea shares and the value of any cash provided by way of security) divided by the placing price of such Put Option Shares which were at the material time outstanding.

32.  Whilst the CCR Formula might have been clearer had it been expressed either as

(A×B) + (C×D) + E
            (F×G)

or,

[(A×B) + (C×D) + E] / (F×G),

I do not consider that the fact that the CCR Formula could have been expressed in either of these ways is a sufficient reason for rejecting what seems to me to be the clear and obvious meaning of the formula as it has been written in the Put Option Deed.

33.  I appreciate that this interpretation goes against the BODMAS rule but in my view that rule is not inflexible and is inapplicable where, as here, its application would give rise to an absurd or indeed any unintended result.

34.  The interpretation of the CCR Formula advocated by D would make no commercial sense and contrary to the clear and obvious intention behind the mechanism provided by the formula (to provide for a trigger for the topping up of security when the Collateral Coverage Ratio on any trading day fell below 0.85), the interpretation placed on the formula by D would not have provided any meaningful trigger at all; certainly not one with any practical utility or one which would ever be capable of producing a ratio bearing any resemblance to that of or approximating to 0.85. Indeed, it would not have produced a ratio at all.

35.  On any basis, there cannot conceivably have been any sense in creating a formula where, in order to determine the trigger point for the requirement of topping up the security, only the cash element of the security (if provided, which it was not) fell to be divided by the value of the Put Option Shares [(F×G)].

36.  I therefore consider that the interpretation placed on the CCR Formula by P is correct; that that interpretation is plain and obvious and that construing the Put Option Agreement as a whole, against the factual matrix and against the obvious commercial purpose which the Collateral Coverage Ratio was plainly intended to serve, there can be no other sensible interpretation of the CCR Formula. In particular, I reject the interpretation placed on it by D and have concluded that there is no defence to P’s claims in this action.

Conclusion

37.  In affirmations filed in support of P’s summons, it is stated that in practice, selling the Put Option Shares would now be difficult and in any case would likely take some time because of their low liquidity and because the shares are thinly traded. It is also suggested that flooding the market with a large amount of shares would probably further drive down the share price, which is already hovering around its all time low. I accept this evidence.

38.  In these circumstances I concluded that it was right to make the order for specific performance pursuant to RHC Order 86 rule 1 which I did at the conclusion of the hearing of P’s summons. I should add that even if I had taken the view that P’s claims in this action were not suitable for the summary judgment procedure (which I did not), I would have had no hesitation in determining the issue as to the proper interpretation/construction of the CCR Formula pursuant to RHC Order 14A and would inevitably have reached the same conclusion as I have pursuant to RHC Order 86 and would similarly have made the same order for specific performance.