CASTLE GLOBAL LTD v. IP TAI HOI PAUL

HCMP 645/2019

[2020] HKCFI 1106

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 645 OF 2019

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J U D G M E N T

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A. INTRODUCTION

A1.  The application

1.  By an originating summons of 30 April 2019 (“the Originating Summons”), the Plaintiff seeks the return of a deposit of HK$5.2 million (“the Deposit”) paid pursuant to a provisional agreement of 11 January 2019 for the sale and purchase of the entire issued share capital of Kingstate Inc Limited (“the Agreement”) and liquidated damages of the same amount.

2.  By a notice of 27 September 2019, the Defendant seeks a declaration that the Plaintiff was not entitled to repudiate the Agreement and wrongly failed to complete the purchase thereunder, and to forfeit the Deposit as liquidated damages. 

3.  The Originating Summons was originally set down for argument on 20 March 2020, but was adjourned pursuant to the general adjournment of court proceedings announced by the Judiciary by reason of public health considerations. The parties have subsequently agreed that the Originating Summons should be determined on the papers.

A2.  The background

4.  The following facts are not disputed.

A2.1  The Agreement

5.  Kingstate Inc Limited (“the Company”) is the registered owner of Unit C on the 21^st Floor of Tower 3, Grand Austin and Car Parking Number Space Number 2-64 on Basement 2 Floor, Grand Austin (together, “the Property”). By the Agreement, the Plaintiff contracted to acquire the Property from the Defendant through the purchase of all the shares in the Company.

6.  The Plaintiff paid the initial and further deposits, each of HK$2.6 million, pursuant to cl.2(a) and 2(b) of the Agreement (together comprising the Deposit).

7.  No formal agreement for sale and purchase was executed, so that, as provided for under cl.3 of the Agreement, the Agreement remained valid and in full force and effect.

8.  The Agreement provided as follows.

“Clause 2

…

(c) Completion … shall take place … on 11-4-2019….

Clause 4

Completion is condition upon the following.

(a) the Purchaser having completed his due diligence investigation on the business, financial, legal and all other aspects of the Company and reasonably satisfied with the results thereof;

(b) all the representations, undertakings and warranties given by the Vendor under this Agreement and the Formal Agreement are and shall remain true, accurate, correct in all material respects up to the Completion.

If any of the foregoing conditions is not reasonably fulfilled (or waived by the Purchaser) on or before the Completion Date, the Purchaser shall be entitled by not less than 7 business days’ prior written notice to cancel the transaction under this Agreement whereupon the Vendor shall return all the deposit paid to the Purchaser forthwith and neither party shall be entitled to claim against other party for any reliefs.

Clause 5

To facilitate the carrying out of the due diligence investigation by the Purchaser, the Vendor hereby undertakes to deliver to the Purchaser or the Purchaser’s solicitors all documents relating to the Company for the past 7 years in his possession within 30 days from the date of this Agreement. The Purchaser shall carry out the due diligence investigation and confirm in writing to the Vendor or the Vendor’s solicitors whether he is reasonably satisfied with the results of such due diligence investigation within 14 days after the date of delivery of all documents by the Vendor or the date of delivery of such further documents reasonably requested by the Purchaser. If the Vendor does not receive the Purchaser’s confirmation in writing on or before the aforesaid deadline, the Purchaser shall be deemed to be reasonably satisfied with the results of the due diligence investigation. If the Purchaser discovers during the reasonably due diligence investigation period that there is any material problem, the Vendor shall use his reasonable endeavour to remedy the same as soon as possible before the Completion Date.

Clause 8

Upon completion and upon payment of the Balance of Purchase Price by the Purchaser, the Vendor shall:

…

(k) deliver to the Purchaser all the audited accounts of the Company for up to the past seven (7) financial years to the end of the latest financial year and the management account of the Company as at the Completion Date which must be certified as true and correct by the director of the Company. The aforesaid audited accounts shall be delivered to the Purchaser for verification within one month after the date of this Agreement and the draft of the said management account as at the Completion Date shall be delivered to the Purchaser for verification not less than 5 days prior to the Completion Date.[1] The Vendor shall be responsible for the costs and expenses incurred for the preparation of the audited accounts and management account;

…

Clause 16

(a) Should the Purchaser fail to complete the purchase in accordance with the terms of this Agreement, the Vendor shall be entitled to forfeit the deposits paid absolutely as liquidated damages and terminate this Agreement and then sell the Sale Share and the Shareholder's Loan to anyone he thinks fit and the Vendor shall not take any action to claim against the Purchaser for any further liabilities and/or damages nor for specific performance of this Agreement.

(b) Should the Vendor after receiving the deposits paid hereunder fail to complete the sale in accordance with the terms of this Agreement, the Vendor shall immediately refund the deposits paid to the Purchaser and compensate the Purchaser with a sum equivalent to the amount of the deposits as liquidated damages and the Purchaser shall not take any further action to claim for damages or enforce specific performance.

Clause 21

Unless otherwise specified herein, time shall in every respect be of the essence of this Agreement.”

A2.2  Subsequent events

9.  It is relevant at this juncture to note that the Plaintiff’s case is that the Defendant failed to deliver (1) audited accounts for the Company for the year ending 31 December 2018 (“the 2018 Audited Accounts”) and (2) a draft of the management accounts as at the Completion Date[2]  (“Management Accounts”) in accordance with cl.8(k) of the Agreement.

10.  In a letter of 28 January 2019, the Defendant’s solicitors Messrs Wat & Co (“WC”) stated that the Plaintiff and Defendant had mutually agreed to advance the completion date to 28 February 2019. This was confirmed in a letter of 29 January 2019 from the Plaintiff’s solicitors Messrs Terry Yeung & Lai (“TYL”).

11.  By a letter of 8 February 2019, TYL raised a number of requisitions under the headings of “A. Corporate Matter” and “B. Financial Matter”. In particular, under item B1, TYL asked for the Company’s audited financial statements for the financial year ending 31 December 2018; and under item B10, TYL asked for the completion management account “not less than 5 days prior to the completion date”.[3]

12.  By a letter of 26 February 2019, WC responded to TYL’s requests. In respect of item B1, it stated “We shall revert to you shortly”; in respect of item B10, it stated “Noted”.

13.  TYL’s response in its letter of 27 February 2019 was to note that most of their requisitions remained outstanding or not satisfactorily answered. “In the circumstances, we are instructed to postpone the completion date from 28^th February 2019 to 14^th March 2019 with all other term and conditions under the [Agreement] remain unchanged; in this regard, time is hereby made of the essence of the said [Agreement]”. This proposal was accepted by WC’s letter of the same day.

14.  By a further letter of 11 March 2019, TYL referred to WC’s letter of 26 February 2019, stating that having perused the documents provided, they had a number of requisitions. The numbering followed that used in TYL’s letter of 8 February 2019. Under items B1 and B10 (dealt with together with other “B” items), TYL stated that:

“We regret to note that your client has still failed to answer our requisitions up to now; in particular, your client has failed to deliver to us the (i) [2018 Audited Accounts and supporting accounting documents] and (ii) the draft completion management accounts (which should have been delivered to us for our verification not less than 5 days before the completion date in compliance with the [Agreement] despite our repeated request and demand. As it has been agreed by parties that completion shall take place on 14/3/2019 and in this regard, time had been made of the essence as per our letter dated 27/2/2019, it is considered that your client has wrongfully evinced an intention not to be bound by the [Agreement]. We are now taking instructions from our client in respect of your client’s said wrongful repudiation. Meanwhile, we hereby expressly reserve our client’s right including but not limited to its right to accept your client's wrongful repudiation.”

15.  The next day, on 12 March 2019, TYL wrote to WC to indicate that “our client hereby accepts your client’s wrongful repudiation and hereby terminates the [Agreement]”.

16.  On 13 March 2019, WC expressed surprise at the claim of repudiation, and said that as the Plaintiff was continuing to raise requisitions and was not satisfied with its due diligence investigations, the conditions precedent for completion under cl.4(a) of the Agreement had not yet been fulfilled. WC also said that as further requisitions were raised on 11 March 2019, the Defendant had to be allowed reasonable time to reply. TYL disagreed with this in their letter of 14 March 2019.

B.   THE PARTIES’ CASES

17.  The Plaintiff’s case is that the Defendant was in repudiatory breach of the Agreement, having failed to deliver the 2018 Audited Accounts and the draft Management Accounts in accordance with cl.8(k) of the Agreement, time being of the essence of the Agreement. The Plaintiff claims entitlement to refund of the Deposit together with liquidated damages under cl.16(b) of the Agreement.[4]

18.  The Defendant’s case is that:

18.1  the conditions precedent to completion under cl.4 of the Agreement (namely, completion of due diligence by the Plaintiff) had not been fulfilled, or alternatively, waived by the Plaintiff;[5]

18.2  TYL’s letter of 11 March 2019 raised fresh requisitions, and the Defendant was given insufficient time to answer them, thus disqualifying the Plaintiff from treating the Agreement as terminated;[6]

18.3  there was no anticipatory breach of the Agreement;[7]

18.4  the Plaintiff is not entitled to claim relief under cl.16(b) of the Agreement, as it failed to do all that was required of it.[8]

C.   DISCUSSION

C1.  Clause 4 of the Agreement

19.  The Defendant’s argument is that since cl.4(a) of the Agreement provided that completion of the Agreement was to be conditional upon the Plaintiff having completed its due diligence relating to the Company and being satisfied with the results of its investigations, and since the Plaintiff had not completed its investigations, and was not satisfied with the results it had to hand, the condition precedent to completion was not fulfilled (and had not been waived by the Plaintiff), and completion was not due to take place on the agreed completion date.

20.  I do not agree with this construction of cl.4 of the Agreement. As the Defendant himself submits,[9] cl.4 confers upon the purchaser the right to cancel the transaction under the Agreement in the event that the conditions under cl.4(a), (b) or (c) have not been met – essentially, if there are unsatisfactory aspects of the due diligence investigation into the Company, if good title to the Property has not been shown, or if the vendor’s representations are untrue. It would be entirely contrary to the purpose of the clause if it were to be turned around and construed as conferring upon the vendor the option of deferring completion beyond the agreed completion date by the simple step of (for example) delaying or failing to cooperate in the due diligence investigations or the proving of title. This is particularly so given that cl.21 expressly provides that time is to be of the essence of the Agreement.

21.  The Defendant’s construction has the further consequence (as the Defendant himself submits)[10] that the only way in which the purchaser can insist on the agreed completion date is by waiving any defects in title, deficiencies discovered during the due diligence investigations, or inaccuracies in the vendor’s representations. This seems to me to undermine the requirement of requiring the vendor to facilitate the due diligence investigations under cl.5, to prove and give a good title to the Property under cll.4(b) and 6, and to give the representations and warranties set out in cl.10, and there is nothing in the wording of cl.4 which compels me to adopt such a construction.

C2.  Effect of TYL’s letter of 11 March 2019

22.  The Defendant says that TYL’s letter of 11 March 2019 raised “new requisitions”, and that it should have been given a reasonable time in which to answer them. It argues that the Plaintiff was in “contractual “no man’s land”” when seeking to terminate the Agreement on 12 March 2019, given that the Defendant had not yet had reasonable time to address the new requisitions. From WC’s letters of 13 and 15 March 2019, the Defendant’s argument appears to be that the time for completion was extended beyond 14 March 2019 by operation of cl.4 of the Agreement, as the Plaintiff was not yet satisfied with the results of the due diligence investigations.  

23.  I do not agree that TYL’s letter of 11 March 2019 raised “new requisitions”. The two points relied on by the Defendant were items A3 and B7.[11]

24.  Item A3 relates to the share certificate of the Company.

24.1  TYL’s letter of 8 February 2019 requested as follows: “Please let us have the share certificate duly issued to your client for our perusal.”

24.2  WC’s letter of 26 February 2019 stated “We enclose herewith a copy of Share Certificate No.2 for your perusal…”

24.3  TYL’s letter of 11 March 2019 stated “Regarding the Share Certificate No.2, Ip Tai Hoi, Paul should be the registered holder of “1” fully paid share(s) instead of “Kingstate Inc Limited”.  Please rectify and let us have the same duly rectified for our perusal”. Whilst TYL was requesting a rectified share certificate, this was because what had been provided did not conform to the original request (namely, a share certificate duly issued to the Defendant). All that TYL was doing was to reiterate its original request, as WC had failed to comply with it.

25.  Item B7 relates to “the mortgage loan from SCB”.

25.1  TYL’s letter of 8 February 2019 had requested “(a) The relevant banking facilities letter(s); (b) The repayment records for the period from 05.2018 to 10.2018”.

25.2  WC’s letter of 26 February 2019 referred TYL back to an earlier letter of WC: “(a) Please refer to item 71 of the Schedule attached to our 2^nd letter to you dated 28^th January 2019. (b) Please refer to items 62 & 63 of the Schedule attached to our 2^nd letter to you dated 28^th January 2019.”

25.3  TYL’s letter of 11 March 2019 stated “(a) There was enclosed under item 71 of the Schedule attached to your 2^nd letter dated 28/1/2019 a copy of the banking facilities letter dated 3/10/2014. Please confirm if there is any other banking facilities letter. (b) There was enclosed under item 63 of the Schedule attached to your 2^nd letter dated 28/1/2019 the mortgage loan statements for the period from 10/2014 to 5/2018 only. Therefore, we repeat and reiterate our requisition. Please let have the repayment records for the period from 5/2018 to 10/2018.”

25.3.1  Thus in relation to (b), all that TWL was doing was to reiterate its original request, as WC had failed to comply with it.

25.3.2  As for (a), all that TWL was doing was to check whether there was any other banking facilities letter, other than the one indirectly referred to, but not specifically identified, in WC’s letter of 26 February 2019. If there was another letter, then there would have been an omission to provide it. If there was not, then there would be nothing further for WC to produce. Either way, this was not a new request.

26.  In any event, the Plaintiff did not rely on the Defendant’s failure to provide documents in respect of items A3 or B7 when it sought to terminate the Agreement on 12 March 2019.

C3.  Whether breach of the Agreement entitling Plaintiff to treat Agreement as terminated

C3.1  The draft Management Accounts

27.  The Plaintiff relies primarily on the fact that (as is not denied) the Defendant failed to provide draft Management Accounts (as at Completion Date) not less than five days prior to the Completion Date as required by cl.8(k) of the Agreement. The agreed completion date was 14 March 2019. As the Plaintiff submitted, since time was of the essence of the Agreement, the stipulation as to time had to be complied with strictly: World Ford Development Limited v Ip Ming-wai and another [1994] 2 HKLR 1 at 5 to 9; Lee Zoe and Hui Pak Fong, unreported, HCMP 157/2009, 19 February 2010, Fok J (as he then was) at [43] to [44]. The failure to provide the Management Accounts entitled the Plaintiff to treat the Agreement as terminated.

28.  The Defendant says that the obligation to provide the draft Management Accounts had not arisen since a condition precedent for completion to take place had not yet been met.[12] I have already addressed this point under section C1 above. As the Plaintiff submits, the Defendant’s argument is circular. He says that the draft Management Accounts did not need to be delivered since completion was not possible, but the very reason why completion was not possible was because the Defendant had failed to deliver the Management Accounts.

29.  In my view, the reference in cl.8(k) to the obligation to deliver the draft Management Accounts “not less than 5 days prior to the Completion Date” is a reference to the agreed completion date, and not a date which has yet to be determined pending satisfaction of cll.4(a), (b) and (c).  After all, as the Defendant acknowledged, it was open to the purchaser to waive (for example) defects in title right up to the time of completion. It would not be possible for the vendor to comply with his obligation to deliver the draft Management Accounts “not less than 5 days prior to the Completion Date” if that date is determined at a time when less than five days remain before its occurrence.

30.  The Defendant submitted that if completion was not to take place, then it did not matter that the draft Management Accounts were not provided five days before the agreed date of completion. It was said that if, for example the Defendant was unable to prove and give title to the Property under cl.4(b) and the Plaintiff did not waive this, then there would not be completion in any event, so that a failure to provide the draft Management Accounts as well should not entitle the Plaintiff to terminate the Agreement. However, whether or not the Defendant is in breach of his obligations to provide the draft Management Accounts would not depend on whether the Defendant is also in breach of his obligation to prove and give a good title to the Property.

31.  The Defendant further submitted that the draft Management Accounts were only for the purpose of due diligence.[13] Even if that be the case, I do see how it waters down the nature of the obligation under cl.8(k) of the Agreement. If anything, the need for the draft Management Accounts to be provided for this purpose only serves to reinforce the importance of the agreed deadline for such provision.

C3.2  The 2018 Audited Accounts

32.  The second matter that the Plaintiff relies on is the Defendant’s failure to provide the 2018 Audited Accounts by 11 March 2019, three days before the agreed date for completion. It is said that this was a breach of cl.8(k) of the Agreement.

33.  Clause 8(k) provided that these audited accounts of the Company for the past seven years were to be delivered to the purchaser for verification within one month after the date of the Agreement. Clause 5 provided that all documents relating to the Company for the past seven years within his possession were to be delivered to the purchaser within 30 days from the date of the Agreement. The Defendant accepts that the effect of the clauses is to require him to procure the 2018 Audited Accounts to be in his possession within one month or 30 days from the date of the Agreement, but says that the Plaintiff lost its right to complain of non-compliance with these deadlines.

34.  The deadlines as provided for under cl.8(k) (or cl.5) would have fallen on 10 (or 11) February 2019. However, subsequently, on 27 February 2019, the parties agreed to postpone completion of the Agreement until 14 March 2019. TYL’s letter of 27 February 2019 expressly noted that the requisitions raised in its letter of 8 February 2019 had not yet been sufficiently addressed, and “in the circumstances”, proposed postponement of completion from 28 February 2019 to 14 March 2019. The Defendant says that this amounted to an affirmation of the Agreement, such that the Plaintiff lost the right to terminate the Agreement for the failure to provide the 2018 Audited Accounts.

35.  An act relied on as an affirmation needs to be sufficiently unequivocal to enable the inference to be drawn that the innocent party intends to go on with the contract regardless of the breach, or that he will not exercise his right to treat the contract as repudiated: see Chitty on Contracts, 33^rd ed, volume 1, paragraph 24-003. In my judgment, TYL’s letter of 27 February 2019 was not such an unequivocal act, since it stated that “…time is hereby made of the essence of the [Agreement]”, and more importantly that “Meanwhile, all our client’s right under the [Agreement] are hereby expressly reserved”. Rather, the position was that the Plaintiff was considering its options. As Ng J stated in Prism Technology Limited v Topwin & Companies Limited, unreported, HCA 1190/2011, 30 March 2015, at [102] to [103]:

“102. The fact that the innocent party has demanded the party in breach to continue to perform the contract and accepted the latter’s performance will not without more amount to a waiver of his right to treat the contract as repudiated. This is because such a demand is not itself a clear and unequivocal representation that the right will not be exercised: Yukong Line Ltd of Korea v Rendsburg Investments Corp. of Liberia [1996] 2 Lloyd’s Rep 604. For “The law does not require an injured party to snatch at a repudiation and he does not automatically lose his right to treat the contract as discharged merely by calling on the other to reconsider his position and recognize his obligation”: per Moore-Bick J in Yukong Line Ltd of Korea v Rendsburg Investments Corp. of Liberia at 608.

103. In Stocznia Gdanska SA v Latvian Shipping Company [2002] EWCA Civ 889 at [87], Rix LJ explained the options available to an innocent contracting party in these terms: “In my judgment, there is of course a middle ground between acceptance of repudiation and affirmation of the contract, and that is the period when the innocent party is making up his mind what to do. If he does nothing for too long, there may come a time when the law will treat him as having affirmed. If he maintains the contract in being for the moment, while reserving his right to treat it as repudiated if his contract partner persists in his repudiation, then he has not yet elected.”

36.  I therefore consider that it remained open to the Plaintiff to rely on the Defendant’s failure to deliver the 2018 Audited Accounts in accordance with the Agreement. As with the obligation in relation to the draft Management Accounts, time was of the essence, and the Defendant’s breach entitled the Plaintiff to treat the Agreement as terminated.

37.  Subsequently, having considered the documents provided by WC’s letter of 26 February 2019, TYL’s letter of 11 March 2019 referred to the failure to provide the 2018 Audited Accounts and the draft Management Accounts as a wrongful repudiation of the Agreement, and reserved the Plaintiff’s right to accept the same. TYL’s letter of 12 March 2019 followed the next day, accepting the repudiation and terminating the Agreement.

C3.3  Anticipatory breach

38.  I agree with the Plaintiff that (contrary to the Defendant’s submission) the situation was therefore not one of anticipatory breach. The breaches had already taken place by the time of TYL’s letter of 12 March 2019.

C3.4  Clause 16(b) of the Agreement

39.  The Plaintiff relies on cl.16(b) of the Agreement (“Should the Vendor … fail to complete the sale in accordance with the terms of this Agreement…”) to claim a refund of the Deposit, together with liquidated damages in an equivalent amount. It cited Man Wing Fun Stephen and Chan Man Kuen v Ho Ching Yee Susanna, unreported, HCA 3724/97, 25 February 1999, where Recorder Edward Chan SC held at 22 in relation to a similarly-worded clause that the reference to “complete the sale in the manner herein” included a reference to any other acts which the vendor was required to do under the agreement leading to the final act of completion.

40.  The Defendant sought to distinguish the authority on the grounds that the contract in that case did not contain a clause similar to cl.4 of the Agreement, that there was no issue of a condition precedent not being met such that completion could not make place, and that in the present case, “the Plaintiff itself had not done all that [was] required of it leading to the final act”.

41.  As explained above, I do not agree with the Defendant’s construction of cl.4 of the Agreement, or that the Plaintiff had to have[14] waived its dissatisfaction regarding the due diligence investigations in order for completion to proceed.

42.  Accordingly, I find that the Plaintiff is entitled to the return of its Deposit and to liquidated damages of the same amount.

D.  DISPOSITION

43.  For the above reasons, I make an order in terms of paragraphs (i) to (iii) of the Originating Summons.

44.  I further make a costs order nisi that the costs of the Plaintiff should have the costs of the Originating Summons, with certificate for two counsel, to be taxed if not agreed.