BRILLIANT GAIN INTERNATIONAL LTD v. FU KEE AND OTHERS

HCA1064/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1064 OF 2009

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BETWEEN

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J U D G M E N T

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1.  By summons filed on 20 May 2009, the plaintiff applies for summary judgment against the defendants on its claim.

2.  The facts relevant to this application are not in dispute and can be briefly put.

The parties

3.  The plaintiff is a BVI company. It is an associated company of New World China Enterprises Project limited (“NWCEP”). Its investment in the 3^rd defendant, the subject matter underlying this litigation, is one of the investment projects of a private equity fund managed by NWCEP.

4.  The 3^rd defendant is a company incorporated in Hong Kong. Its main business is the manufacturing, distributing and packaging of household related products. It has factories and regional offices located in various parts of the Mainland China, USA and Europe.

5.  The 3^rd defendant is a company within the Gerber Group. It is a wholly owed subsidiary of the 4^th Defendant, which is a BVI company.

6.  The 1^st and 2^nd defendants are the only two shareholders of a Hong Kong company called Gerber Holdings Ltd. This company holds 64.4% of the issued share capital in the 4^th defendant. The 1^st and 2^nd defendants are the directors of this company as well as the directors of the 3^rd and 4^th defendant. They control and run the business of these companies.

The Agreement

7.  By a Subscription Agreement dated 5 December 2006 made between the plaintiff, the 1^st, 2^nd and 3^rd defendants as amended by a Supplemental Agreement dated 9 February 2007 made between the parties and also the 4^th defendant (collectively referred to as “the Agreement”), the plaintiff agreed to subscribe for new shares in the 4^th defendant (defined and referred to in the Agreement as “the Subscription Shares”) and the 4^th defendant agreed to allot and issue the Subscription Shares to the plaintiff at an aggregate consideration of HK$54,600,000 subject to the terms and conditions of the Agreement.

8.  Under the Agreement, the 1^st to 3^rd defendants as guarantors agreed to irrevocably and unconditionally guarantee to the plaintiff the due and punctual performance of the 4^th defendant under the Agreement.

9.  On 12 February 2007, completion of the subscription of the Subscription Shares took place. HK$54,600,000 was paid by the plaintiff and shares in the 4^th defendant were allotted and issued to it. A number of documents were included, including a Deed of Assignment (“the Assignment”) executed by the 1^st, 2^nd and 4^th defendants in favour of the plaintiff.

10.  For the present purpose, clauses 9.5 and 10.1 of the Agreement are of particular relevance, as they form the basis of the plaintiff’s claim in breach of the Agreement. Under clause 9.5, the 1^st to 3^rd defendants undertook to procure the 2006 Accounts and the 2007 Accounts (as defined in the Agreement) to be made available to the plaintiff within five months after the respective year-ends, being 28 February 2007 and 29 February 2008 respectively.

11.  Under clause 10.1 of the Agreement, the 1^st to 4^th defendants further undertook to supply to the plaintiff certain documents and information, including the 2006 Accounts and the 2007 Accounts, (“the Documents and Information”) within the time schedule set out in the clause.

12.  The importance of the provision of the 2006 Accounts and 2007 accounts and the Documents and Information is twofold. First, under clause 6 of the Agreement, there is a mechanism for adjustments (if any) to the number of Subscription Shares, which is to be completed within seven days from the date of the issue of the 2006 Accounts. Second, under clause 9.2 of the Agreement, in the event the actual growth rate of the NAT[1] as shown in the 2007 Accounts is less than the Guaranteed Growth Rate[2], the 1^st to 3^rd defendants shall compensate the plaintiff either by cash or by shares in the 4^th defendant within five days of the issue of the 2007 Accounts.

13.  It is further provided in clause 16.6 of the Agreement that time shall be of the essence.

The Assignment

14.  Additionally, under clause 2 of the Assignment, the plaintiff becomes the legal and beneficial owner of the Assigned Account and is solely and absolutely entitled to it with effect from the date of the Assignment. Assigned Amount is defined in the Assignment to include, inter alia, dividends, distributions, divisions and sums of money that the 1^st and 2^nd defendants are legally entitled to from time to time from any member of the Group of companies that includes the 4^th defendant and its subsidiaries or as a result of the Security Shares (i.e. shares held by the 1^st and 2^nd defendants through Gerber Holdings Limited in the 4^th defendant).

15.  Clause 2.3 of the Assignment further obliges the 1^st and 2^nd defendants to arrange for the Assigned Amount to be paid to the plaintiff either by the 4^th defendant directly or by the 1^st and 2^nd defendants forthwith upon receipt.

16.  In addition, under clause 2.2 of the Assignment, the 4^th defendant acknowledged and confirmed that as from 12 February 2007, the Assigned Amount is owed to the plaintiff and that the 4^th defendant will make payment due in respect of the Assigned Amount to the plaintiff.

The claim

17.  The plaintiff’s claim is twofold. The first is for breach of clauses 9.5 and 10.1 of the Agreement. It is the plaintiff’s case that the defendants had failed to procure and/or supply to the plaintiff: (a) the 2006 Accounts and the 2007 Accounts; and (b) the Documents and Information, whether within the time limits stipulated in the Agreement or at all. The second part of the claim is for breach of the obligations under clause 2 of the Assignment.

18.  In respect of the first claim, the plaintiff had by two letters both dated 17 December 2008 demanded the 1^st and 2^nd defendants and the 4^th defendant to provide the 2006 Accounts, the 2007 Accounts and the Documents and Information. By an email from the Financial Adviser of the 3^rd defendant, Mr Dennis Ow, it was stated that the financial statements for 2006 and 2007 would be ready around 20 March 2009 and that for 2008 should be available within one and half months later.

19.  By another letter to the 4^th defendant dated 24 February 2009, the plaintiff reiterated its demand. By three letters dated 6 April 2009 to the 1^st and 2^nd defendants, the 3^rd defendant and the 4^th defendant, the plaintiff’s solicitors repeated the demand for the supply of the 2006 and 2007 Accounts and the Documents and Information.

20.  On about 16 April 2009, the 3^rd defendant wrote to the plaintiff, stating that due to “unforeseen force majeure such as banking storm”, performance of the Subscription Agreement had been affected, making it impossible for both sides to perform the Subscription Agreement according to the terms and conditions as stipulated in it. The letter suggested a meeting be held to discuss the matter. The suggestion was not taken up by the plaintiff.

21.  The plaintiff says that as a result of the failure of the 1^st to 4^th defendants to supply the 2006 Accounts and the 2007 Accounts, it has suffered loss and damages, including no adjustment of the Subscription Shares and no assessment on whether any compensation is payable to the plaintiff under clause 9.2 of the Agreement can be carried out.

22.  As for the claim for breach of the Assignment, since its execution, the 1^st and 2^nd defendants have not made any payment of the Assigned Amount to the plaintiff. It is the plaintiff’s case that the 1^st and 2^nd defendants, being the top executives of the Group and having the majority shareholding and controlling interest, would since 12 February 2007 have received payments from the 4^th defendant that fall within the definition of Assigned Amount.

23.  On 6 April 2009, the plaintiff’s solicitors wrote to the 1^st and 2^nd defendants asking for a written detailed and itemized breakdown of the Assigned Amount that they had received since 12 February 2007 and to pay the sums received to the plaintiff. At the same time, the plaintiff’s solicitors wrote to the 4^th defendant on 6 April 2009, declaring and demanding the 4^th defendant to pay to the plaintiff directly any payments due to the 1^st and 2^nd defendants in respect of the Assigned Amount. The 4^th defendant was also asked to provide a detailed and itemized breakdown of the Assigned Amount received by the 1^st and 2^nd defendants since 12 February 2007. No breakdown or payment was made by the 1^st and 2^nd defendants. Neither did the 4th defendant make any payment or supply a breakdown to the plaintiff.

24.  However, the 3^rd defendant wrote to the plaintiff on 10 April 2009, saying that their accounting personnel are actively preparing and vetting the financial and accounting documents requested for and asked for an extension of time to complete the financial and accounting documents requested for.

The defence

25.  The defendants have not yet filed any Defence. It is evident from the affirmations of the 2^nd defendant filed also on behalf of the other defendants that there is no dispute that the 2006 Accounts and 2007 Accounts as well as the Documents and Information have not been supplied to the plaintiff. The 2^nd defendant’s affirmations, however, referred to the collaboration between the plaintiff and NWCEP on the one hand and the defendants on the other hand to float the 3^rd defendant. They went to some length to describe the attempts to float the 3^rd defendant initially in Hong Kong and later in London, and the activities and involvement of the plaintiff in it.

26.  In summary, the defendants’ case is that in the course of preparing for the listing of the 3^rd defendant, the plaintiff had made a number of representations to the defendants and the defendants had acted in reliance of these representations. The representations relate to the choice of auditors for the 3^rd defendant, the venue for the listing of the 3^rd defendant, the appointment of financial advisor and consultant and also the supervision in the preparation of the accounts. It is said that the course adopted by the defendants was dictated by the plaintiff, but the auditors and consultants nominated and recommended by the plaintiff had failed in their tasks, causing delays and the eventual failure to float the 3^rd defendant. In conclusion, the 2^nd defendant said in her affirmations that it would be inequitable for the plaintiff to claim against the defendants when they had been acting in reliance of the plaintiff’s representations and had thereby altered their position.

27.  Pausing here, it should be noted that the 2^nd defendant had not in her affirmations said anything in relation to the claim for breach of the Assignment, including whether any sum of money falling within the definition of Assigned Amount had been received by the 1^st and 2^nd defendant or is due to them from the 4^th defendant.

28.  In his submission, Mr Hon indicated that the defence is one of estoppel. It is said that despite the terms of the Agreement and the Assignment, the plaintiff had by various representations induced the defendants to act in reliance of the representations. In acting upon the representations, the defendants suffer detriment or have altered their positions. It is thus inequitable for the plaintiff now to insist on its rights under the Agreement. Mr Hon further pointed out that despite the several deadlines imposed under clause 10.1 of the Agreement, the plaintiff had not demanded for the Documents and Information until 17 December 2007.

29.  As for the claim relating to Assigned Amount, Mr Hon submitted that no dividend had been paid to the 1^st and 2^nd defendants. He however acknowledged that there is no evidence before the court to support this assertion.

Reasons for decision

30.  The legal principles governing summary judgment application are trite and counsel have no disagreement over them. In a nutshell the threshold onus of the defendant is to show a triable issue and he must condescend upon particulars.

(1)  Defence of estoppel

31.  There are a number of problems with the defence of estoppel. In the first place, it is unclear what are the contents of the representations alleged by the defendants. Even accepting the evidence of the 2^nd defendant in its entirety, it only shows the plaintiff had made suggestions or nominations for the appointment of PriceWaterhouse Coopers (PWC), Liberta and Warren Law as the 3^rd defendant’s auditor, financial advisor and consultant as well as recommendation for the 3^rd defendant to be listed in London, AIM.

32.  Secondly, even assuming that these suggestions, nominations and recommendations amount to representations, it is not shown how they relate to the obligations under clauses 9.5 and 10.1 of the Agreement. The obligations to provide the 2006 Accounts and 2007 Accounts and the Documents and Information under the Agreement are separate and independent contractual obligations. It is not the defendants’ case that there is any relationship between these obligations and the listing of the 3^rd defendant. Mr Hon in his submissions made it clear that the defendants are not contending that the successful listing of the 3^rd defendant is a condition precedent to the obligations under clauses 9.5 and 10.1. More importantly, it is not the defendants’ case (and also no part of the 2^nd defendant’s evidence) that in making the so-called representations, the plaintiff had excused or temporarily suspended the defendants from their obligations under clauses 9.5 and 10.1.

33.  Thirdly, it is a quantum leap to say that because the defendants had acted upon the representations as to choice of auditors, consultants and venue of listing, it will be inequitable for the plaintiff to pursue the obligations to supply the 2006 Accounts and 2007 Accounts, the Documents and Information. It is said that the plaintiff had manipulated the course and the defendants had in reliance of the plaintiff’s instructions or advice altered their position. However, all these are only directed at the process to list the 3^rd defendant. There is no elaboration of the allegation that the defendants’ position had been altered. The evidence before the court simply does not demonstrate how the defendants’ reliance on the plaintiff’s so-called representations affects their compliance with the contractual obligations. On the other hand, the email dated 13 February 2009 from Mr Dennis Ow, the 3^rd defendant’s financial adviser, and the 3^rd defendant’s letter dated 10 April 2009 demonstrate the absence of linkage between the representations and the failure to perform clauses 9.5 and 10.1

34.  Fourthly, as Mr Hon’s submission acknowledged, the effect of a promissory estoppel is only to suspend but not to dispense entirely with the contractual obligations. It is argued that the defendants should be given time to prepare and supply the accounts and documents. It is also said that the defendants are not arguing that they should not or will not supply the accounts and documents. All these arguments, however, ignore the fact that there has already been a long span of time since the plaintiff’s first written demand in December 2008.

35.  In my view, the defence of estoppel gives rise to no triable issue of fact or law.

(2)  Defence on the Assigned Amount

36.  As for the claim in breach of the Assignment, as noted above, the 2^nd defendant’s affirmations did not said no dividends were received by the 1^st and the 2^nd defendant. Further, dividend is not the only form of payment that falls within the definition of Assigned Amount.

37.  Nevertheless, the starting point is for the plaintiff to prove its case. On the part of the plaintiff, it is its belief that some Assigned Amount would have been received by or due to the 1^st and 2^nd defendants. The belief is further reinforced by the lack of positive response from the defendants to the letters of demand and the request for breakdown. Understandingly, it is not in a position to positively prove this. Mr Hon submitted that in the circumstances the declaratory and associated relief should not be granted because it is futile to do so. I agree with Mr Maurellet that given the defendants’ obligations relating to the Assigned Amount are continuous obligations, the declaratory relief has a purpose to serve. At the same time, given the lack of positive response, including the failure to acknowledge the plaintiff’s rights to the Assigned Amount, the declaration is not academic. However, in the absence of positive evidence of receipt of Assigned Amount by the 1^st and 2^nd defendants, it will not be appropriate to grant the full extent of the other relief relating to this claim.

(3)  Other matters

38.  38. Mr Hon submitted that there should be discovery to explore the dealings and communications between PWC and the plaintiff. Generally, a party’s desire to have discovery is not a reason against giving a summary judgment. In any case, there is no demonstrable relationship between what went on between PWC and the plaintiff and/or NWCEP and PWC and the defendants’ obligations under the Agreement and the Assignment.

39.  Mr Hon also cited Billion Silver Development Ltd v. All Wide Investments Ltd [2000] 2 HKC 262 and made the submission that where there are unexplained features of the claim which are disturbing because they bear the appearance of falsity and disreputable business dealings and questionable conduct, then even if there are weaknesses in the defence, the court should not make tentative assessments of the respective chances of success of the parties or the relative strengths of their good or bad faith, and should not on such an examination grant the defendant conditional leave to defend, but should give unconditional leave to defend. It is further suggested that the evidence in the present case discloses difficulties to be faced by both sides at the trial.

40.  It appears the unusual features relied on by Mr Hon consist of the fact that the plaintiff did not demand for the 2006 Accounts and 2007 Accounts and also the Documents and Information until December 2007, and that in the meantime, the contractual deadlines for their supply had lapsed. I am unable to see how this can amount to unusual circumstance or justification for granting leave to defend when the defendants cannot otherwise show a real or bona fide defence. There is also nothing untoward in the plaintiff’s case and evidence.

Conclusion

41.  For the above reasons, I am satisfied that there is no arguable defence to the claim and the plaintiff is entitled to judgment summarily.

42.  42. Accordingly, I enter judgment for the plaintiff as follows:

(1)  An order for specific performance of clause 9.5 of the Agreement by the 1^st, 2^nd and 3^rd defendants, jointly and severally, to procure the provision of the 2006 Accounts and the 2007 Accounts to the plaintiff within 14 days from the date of this judgment or such other extended period as may be agreed between the parties.

(2)  An order for specific performance of clause 10.1 of the Agreement by the 1^st to 4^th defendants, jointly and severally, to supply the Documents and Information to the plaintiff within 14 days from the date of this judgment or such extended period as may be agreed between the parties.

(3)  Damages in addition to specific performance for breach of the agreement, to be assessed.

(4)  A declaration that the 1^st and 2^nd defendants hold the Assigned Amount received from the 4^th defendant and/or the Group (as defined in the Agreement) by either of them or by any other person or persons by the order or for the use of the 1^st and 2^nd defendants or either of them since 12 February 2007 (“the Received Assigned Amount”), if any, on trust for the plaintiff.

(5)  An order that the 1^st, 2^nd and 4^th defendant do jointly and severally within 14 days or such extended period as may be agreed between the parties, compile and provide to the plaintiff written itemized breakdown (with reasonable details) of the Received Assigned Amount, if any, and further verify the same on oath.

(6)  An order that the 1^st and 2^nd defendants do within 7 days from the provision of the breakdown stated in paragraph (5) above or such extended period as may be agreed between the parties, pay the Received Assigned Amount, if any, into a bank account to be designated by the plaintiff (“the Designated Account”).

(7)  An order that the 1^st and 2^nd defendants do within 14 days or such extended period as may be agreed between the parties, arrange for the 4^th defendant to pay any Assigned Amount payable to each of them into the Designated Account.

(8)  An order that as from the date of this judgment, the 1^st and 2^nd defendants do pay into the Designated Account any Assigned Amount that they or each of them receive from time to time from the 4^th defendant and/or any member of the Group.

(9)  An order that the 4^th defendant do pay into the Designated Account any Assigned Amount payable to the 1^st and 2^nd defendants.

(10)  Damages for breach of the Assignment to be assessed.

(11)  There is liberty to apply.

Costs

43.  43. There is no disagreement that the normal rule of costs follow event should apply. The costs of the plaintiff in this action, including the costs of the summary judgment application, shall be paid by the defendant.

44.  The plaintiff has provided a statement of costs for the purpose of gross sum assessment. The defendants have no comments on it. I am of the view that it is a reasonable bill and the amount should be allowed in full.

45.  Accordingly, there is an order that the defendants pay the plaintiff the costs of this action, including the costs of the summary judgment application, assessed at $241,450.