PEARLDELTA GROUP LTD v. HUGE WINNERS INTERNATIONAL LTD AND OTHERS

HCA 595/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 595 OF 2008

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REASONS   FOR   RULING

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Background:

1.  On 23 August 2005, the plaintiff, Pearldelta, invested HK$20 million in Huge Winners by way of a convertible bond.  I accept Mr Carolan’s submission that a convertible bond is not a loan, but a form of an investment in a company in the nature of a security which gives the holder the right to convert, or exchange the par amount of the bond for common shares of the issuer at a fixed ratio during a particular period.

2.  With this bond, as in the usual case of a convertible bond, the agreement provided that if, on the final redemption date, the bond had not been converted into common shares of the issuer, (Huge Winners), the sum invested would be repaid to Pearldelta with interest.  Also with this bond, in the usual way, the bond provided for early redemption in the event of certain defaults occurring.

3.  Condition 1 of the Bond Conditions defines the Redemption Amount as the higher of (i) the amount that provides an internal rate of return of 12% per annum based on the number of days elapsed from the issue date through to actual redemption as determined by a particular formula or, (ii) the amount determined by the application of a different formula involving the value of the total assets less total liabilities, multiplied by a factor of 1.2, and divided by the total number of ordinary shares outstanding as if the bond had been converted into ordinary shares.

4.  The effect of this definition is that upon redemption on maturity Pearldelta must be entitled to at least the principal sum of $20 million together with interest at 12%.  Provision has also been made for penalty interest.

5.  On 14 March 2008, Pearldelta gave notice to Huge Winners that it exercised its redemption rights for 99.5% of the bond, and demanded a payment of HK$86,755,068, calculated in accordance with the formula provided for in Bond Condition 1(ii). 

6.  No payment was made, and on 10 April 2008, Pearldelta issued a writ against Huge Winners seeking the sum of HK$86,755,068.  Together with the writ there was a statement of claim alleging two breaches of the bond, first, that Huge Winners had failed to provide Pearldelta with financial accounts within a prescribed time, and second that Huge Winners was in default of an obligation under the bond to deposit a sum known as the Sinking Fund Account, to an account of the Hong Kong office of HSBC.

7.  A statement of defence and counterclaim was filed by Huge Winners. 

8.  On 15 December 2008, Pearldelta filed an amended statement of claim in which it now alleged that the bond had matured on 31 August 2008, and on that date a redemption notice had been given.  The amended statement of claim sought, in the alternative, the sum of HK$28,098,560 pursuant to the alternative formula 1(i), set out on the bond conditions under which the holder of the bond was entitled repayment of the principal plus 12% per annum compound interest for three years.

9.  The amendment to the statement of claim was by consent, and at the same time, Huge Winners filed an amended statement of defence and counterclaim, those amendments also by consent.

10.  In the original statement of defence there had been an admission by Huge Winners that Pearldelta was entitled to the principal sum of HK$20 million with interest upon maturity of the bond.  In the amended defence that admission was withdrawn, but no assertion of a positive defence to liability upon maturity was made.  In that respect the amended statement of defence was entirely silent.

The application:

11.  Now, Pearldelta seeks, in the alternative, summary judgment pursuant to O 14, for the lesser sum, or an interim payment pursuant to O 29 rr 10, 11(1)(c), and or 12(c).  In the course of argument Mr Carolan indicated that he was content with an order for an interim payment.

Huge Winners’ argument:

12.  The point taken in opposition to Pearldelta’s claim for an interim payment is that the right to redemption upon maturity accrued only on 31 August 2008, more than four months after the commencement of the action.  It is contended, relying upon the decision of the Court of Appeal in Wing Siu Co Ltd v Goldquest International Ltd [2003] 2 HKC 64, that in those circumstances it is not open to Pearldelta to introduce a claim based upon the right of redemption upon maturity as that right did not exist at the time the proceedings were issued.

13.  Mr Ng contended that the claim for redemption upon maturity is a separate cause of action, which did not exist at the time the proceedings were issued, and which, applying the principle inWing Siu may not now be added.

Discussion:

14.  With respect to Mr Ng, his argument makes the same mistake as is so often made by those pleading in a statement of claim, and fails to distinguish between a fact, and the evidence required to prove that fact.  That distinction is vital when giving consideration to the concept of a cause of action as may be seen from the following passage in Hong Kong Civil Procedure 2009 15/1/2:

“The words “cause of action” comprise every fact (though not every piece of evidence) which it would be necessary for the plaintiff to prove, if traversed, to support his right to the judgment of the court (see Read v Brown (1888) 22 QBD 128 per Lord Esher MR at 131).  (The emphasis is mine).

15.  In this case the cause of action brought by Pearldelta in April 2008 was an action for the redemption of a convertible bond.  It was an action on a contract, namely a bond.  The fact relied upon to entitle Pearldelta to redeem the bond was that there had been a breach of the contract, i.e. the bond.  The evidence alleged and relied upon to prove the fact of a breach related to Huge Winners’ failure to deliver accounts and to provide for a sinking fund.

16.  The cause of action introduced into the pleadings following the maturity of the bond remained an action for the redemption of a convertible bond.  It remained a cause of action in contract, namely the bond.  The fact relied upon to entitle Pearldelta to redeem the bond remained the same, namely that there had been a breach of the bond.  The evidence alleged and relied upon to prove the fact of the breach related to Huge Winners undenied failure to pay the principal sum due upon maturity together with, at least, interest calculated in accordance with Bond Condition 1(i).

17.  Now the distinction between facts and evidence may be seen.  In both circumstances the cause of action is the same: an action for breach of contract, the contract being the bond.  In both circumstances the fact relied upon to entitle Pearldelta to sue for redemption is the same, namely a breach of the contract, i.e. the bond.  It is simply that the evidence of that breach is different in one circumstance from the other.

18.  When this analysis is applied to the judgement in Wing Siu, that decision may be argued to be right.  The first action commenced was an action in debt for a cash sum.  The fact alleged was that the defendant owed the plaintiff a debt which had not been paid.  The evidence to establish the debt related to the non-payment of rent under the lease.  The second action was a different action, a claim in contract for wrongful repudiation of a lease. 

19.  It might be open to argument, (and of interest to academics), to argue that Wing Siu was wrongly decided, on the basis that the first action was an action in contract for damages for breach of contract, the evidence being relied upon being non-payment of rent, and that the second action was equally an action in contractfor damages for breach of contract,the evidence being relied upon being a wrongful repudiation.  But it is not necessary to explore that in this judgment.

20.  Unlike the present case, in Wing Siu, there were arguably two quite distinct causes of action.  In the present case the cause of action remains throughout an action in contract for the redemption of the bond upon breach of the contract.  The only thing that has changed has been that the plaintiff has, in the meantime, acquired a new reason to pursue his cause of action.

21.  The justification for the rule expressed in Wing Siu is the relation back theory by which amendments to a pleading relate back to the original date of the pleading.  Nothing in the circumstances of this case raises any issue of difficulty consequent upon relation back, should Pearldelta be permitted to proceed with the amendment.  Mr Ng did not contend that any prejudice to Huge Winners arises by virtue of the amendment.

22.  I am satisfied that the amendment made does not introduce any new cause of action, but simply adds to the evidence to support the cause of action already pleaded.

23.  In Maridrive & Oil Services (SAE) v CNA Insurance Co (Europe) Ltd [2002] 2 Lloyd’s Rep 9, (referred to in Wing Siu), the English Court of Appeal made reference to what was described as the modern practice to enable the real issues between the parties to be resolved.  The point taken by Mr Ng is devoid of any real merit and is merely a pleading point.  If upheld, Pearldelta would be perfectly entitled to issue another writ and there could be no answer to that claim.  That circumstance would be artificial and expensive, and ought to be avoided if at all possible.

No defence available:

24.  Mr Ng was unable to suggest that there could be any defence to Pearldelta’s argument that at the least Pearldelta was entitled, upon maturity of the bond, to the principal sum due together with interest.  There was no argument between the parties that Pearldelta had given notice to convert HK$100,000 into shares in Huge Winners, and that the principle due upon maturity was HK$19,900,000.

25.  Mr Carolan put to me a schedule setting out the method by which Pearldelta calculates the amount due.  Mr Ng was not able to raise any opposition to that but leave is reserved to apply should there be any dispute as to the amount due.  Subject to that leave, I order that Huge Winners must forthwith make an interim payment to Pearldelta pursuant to O 29 rr 10 & 12(1)(c) in the sum of HK$30,722,038, together with interest accruing thereon.  Leave is reserved to apply in respect of the form of the order.

Costs:

26.  Mr Ng argued that costs ought to be reserved to the trial judge.  He did so on the basis that a Calderbank offer had been made by Huge Winners.  I am satisfied, from having been told the terms of that offer that Pearldelta were perfectly entitled, at this stage of the proceedings, to reject that offer and to pursue the claim for interim payment.  The argument in opposition to interim payment, confined to the pleading point, has failed.

27.  There will be an order that Huge Winners must pay Pearldelta's costs of and incidental to the application for interim payment, to be taxed on a party and party basis and paid forthwith.