CHAK KAK AND OTHERS v. PACRIM INTERNATIONAL CAPITAL INC.

CACV 366/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 366 OF 2007

(ON APPEAL FROM HCA NO. 1250 OF 2006)

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JUDGMENT

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Hon Tang VP

Introduction

1.  The defendant is a company listed on the Toronto Stock Exchange.

2.  This is the plaintiffs’ claim against the defendant for, inter alia, CN$60,000 said to be payable by the defendant on the redemption of the 60,000 convertible preference shares (“CP shares”) of CN$1.00 each in the defendant held by each of the plaintiffs.

3.  Notices of the redemption had been issued by the defendant on 27 October 2003, stating that the CP shares were being redeemed at a value of CN$0.01 per share.  According to the defendant, they had received in August 2003 an independent valuation of the CP shares from Global Merger & Acquisition Finance Inc which assessed their value as “nominal from a financial point of view”.

4.  Yam J, after trial, decided in favour of the plaintiffs.  This is the defendant’s appeal.

Background

5.  The facts are not very clear.  But I think I can proceed on the basis that in about 1992, each of the plaintiff invested CN$150,000 in order to qualify for emigration to Canada.  If the investment had prospered they would have received CN$160,000 pursuant to a Promissory Note issued to them by the First Mortgage Nova Scotia Fund Inc (“the Funds”).

6.  As of about June 1997, each of them had received a first instalment of CN$50,000.  In the meantime, as was explained in the Funds’ letter to note holders dated 10 June 1997 (“the letter”), because the investment was made under the investment program which was designed to create jobs and benefit small business in Canada, and that the relevant Immigration Act and Regulations provided tight restrictions on the types of project the Funds could invest in, which were strictly enforced, the investments were essentially in mortgages and in the few years leading to 1997, many real estate projects and developers had gone bankrupt in Canada.

7.  The letter went on to say the immediate prospect did not appear to be promising as the mortgages were in respect of buildings in relation to which, about 52% of the space of the buildings was empty.  It was because of that that the director of the Funds had considered various alternatives, for example, foreclosing on the mortgage properties and selling them in the open market.  But because of the low occupancy rate and the poor market condition in general, no substantial offer was expected even if there was a willing buyer.  The other alternative was to complete the leasing and seek refinancing later, but that might take several years as the market condition would not improve rapidly.  It mentioned that there were various reports and studies which were on file and available for review.

8.  The note went on to suggest what was described as the “Full Repayment” Solution 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.”

9.  The plaintiffs decided to opt for the “Full Repayment” solution.  Each of them had entered into identically worded Transfer Agreements with the defendant accordingly.  The Transfer Agreements, which were produced at trial, were dated from 18 September 1997 to 15 October 1997.  It does not appear that anything turn on the dating of the Transfer Agreements. 

10.  The Transfer Agreements provided:

“… In consideration of the [assignment of the promissory note to the defendant], the Company hereby agrees to procure to the Investor:

   C$50,000  Cash (Bank Draft No. …)

   C$60,000  PCN Convertible Preference Shares Redemption Value

   C$50,000  (already paid previously to the Investor by the Fund)

 C$160,000  (full repayment on the Fund’s Promissory Note)

where PCN means Pacrim International Capital Inc. which is listed on the Toronto Stock Exchange.  The details of the Convertible Preference shares are described in ‘Schedule B’ supplied by the Company to the Investor, and the Investor acknowledges receipt of same.”

11.  Mr Carolan, who appeared on behalf of the defendant, submitted that since the convertible shares certificates issued to each of the plaintiffs were dated 21 July 1997, the offer must have been accepted orally or otherwise on or before 21 July 1997.  We have received no submission from the plaintiffs in relation to that.  The importance of the date of 21 July 1997 is that it appeared to be common ground that 21 July 1991 was the “Initial Issue Date” under section 1.1(j) of Schedule B.  The “Initial Issue Date” dated the commencement of all relevant periods of time under Schedule B.

12.  Each of the plaintiffs had been paid CN$50,000 by the defendant.  As noted, essentially, the dispute, the subject of the appeal, is over the remaining CN$60,000.

13.  Schedule B is a schedule to the Memorandum and Articles of Association of the defendant.  It was adopted by a resolution of the directors of the defendant on 21 July 1997 and appeared to have been filed with the Registry of Companies, British Virgin Islands on 21 July 1997.  Under Schedule B, the defendant was liable to pay a cumulative dividend during the first 24 months from the initial issue date which was defined under section 1.1(j) as:

“… the first date on which any Convertible Preferred Shares are issued and outstanding;”

14.  Under section 2.1, a cumulative dividend was payable during the first 24 months at a rate of 2% per share per annum of the redemption price.  The “Redemption Price” is defined under section 1.1(n) to mean:

“… for each Convertible Preferred Share, CAN $1.00;”

15.  However, under section 2.1(b) a non-cumulative dividend could be declared and paid after the expiry of 24 months immediately following the initial issue date.  Some non-cumulative dividend was paid after the first 24 months.

16.  Section 3.1 gave the right to the holders of the CP shares to convert:

“… the holders of Convertible Preferred Shares shall have the right, at any time after the expiry of 22 months immediately following the Initial Issue Date and up to the close of business on the last day of the twenty-third month immediately following the Initial Issue Date, to convert all or any part of their Convertible Preferred Shares into fully paid and non-assessable Common Shares on the basis of the following formula:

Redemption Price of the Convertible Preferred Shares to be converted ¸ Conversion Rate

For the purposes of the foregoing formula ‘Conversion Rate’ means the greater of:

(i)    an amount equal to the Current Market Price of the Common Shares on the trading day immediately prior to the date of conversion less the applicable TSE discount calculated on the following basis:

Market Price    Discount Therefrom

$0.50 or less    25%

$0.51 to $2.00 20%

$Above $2.00  15%

and

(ii)   A x B

Where,

A = the average TSE 300 Price Earnings Ratio of the TSE on the date of the conversion

and

B = the greater of:

1.  the average annual earnings per Common Share in Canadian dollars for the five year period immediately prior to the date of the conversion; and

2.  the most current quarterly earnings per Common Share in Canadian dollars multiplied by 4.”

17.  It is unnecessary to go into the formula save to say that the number of common shares to which the CP shares could be converted would depend on the result of the calculation under such formula which in turn depended on the performance of the common shares or the earnings of the defendant.  Thus, the number of common shares to be allotted would vary according to the calculation made under the formula, for example, the lower the conversion rate the greater the number of common shares to be allotted.

18.  Section 4 of Schedule B covers redemption and the relevant provisions are:

“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 limitation, 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.”

19.  The plaintiffs appeared in person.  However, the 1^st plaintiff, Mr Chak Kak (“Mr Chak”), not only made submissions for himself but also acted as spokesman for the 3^rd, 4^th and 5^th plaintiffs.  Mr Chak has informed us, he is highly educated and has been working in the financial market for a long time.  His son, Mr Chak Chun, John (“Mr John Chak”), a Canadian law student, represented, with our permission, the 2^nd plaintiff.  Mr John Chak addressed us first.

20.  Mr John Chak referred us to what has been said by Mortimer NPJ in Marble Holding Ltd v Yatin Development Ltd, FACV 21/2007, unreported, dated 28 April 2008, at para. 20:

“20.   If the words used are free of ambiguity and devoid of commercial absurdity their natural and ordinary meaning will apply unless the relevant surrounding circumstances demonstrate otherwise. …”

21.  He then referred to what Lord Hoffmann NPJ said in Jumbo King Ltd v Faithful Properties Ltd and Ors [1999] 2 HKCFAR 279 at 296D as follows:

“… The construction of a document is not a game with words.  It is an attempt to discover what a reasonable person would have understood the parties to mean. …”

22.  These principles are well known and provide the necessary guidance to us. 

23.  Mr Chak took us through the relevant provisions in section 4.

24.  He submitted that section 4.1 is reasonable and is commonly found in such documents.  Since the holder of the CP shares could convert during the 23^rd month after the initial issue date, for the right to convert to be meaningful, the company should not be entitled to redeem CP shares compulsorily before the end of the 23^rd month.

25.  As for section 4.2, Mr Chak submitted the word “no” has no place in this section.  He submitted that normally the holders of the CP shares would have the right to require the company to redeem the CP shares.  It is unnecessary for me to determine whether that is indeed so.  There is no evidence on this.  But, I find it difficult to understand how section 4.2 was supposed to work if “no” was removed.  It would then read:

“4.2   The holders of the Convertible Preferred Shares have [no] right to require the Company to redeem any Convertible Preferred Shares.”

26.  But when?  It would not make commercial sense if a holder could require redemption during the first 24 months.  It would defeat the defendant’s purpose in issuing the CP shares in the first place if the holder of the CP shares could ask for his money back at any time during the 24 months.  Presumably, the redemption amount payable under section 4.2 would be CN$1.00.  Also, for example, it would sit awkwardly with section 4.3(ii) where the defendant could choose to deliver shares.  It should also be noted that the right to convert into common shares under section 3.1 could only be exercised in the 23^rd month and the defendant’s right of compulsory redemption could not be exercised until after the first 23 months.

27.  The 1^st plaintiff further submitted that although he was not aware that the word “no” had been inserted into section 4.2 but as he had signed the Transfer Agreement, subject to the question of unconscionability, he had to accept the consequence.  Unconscionability was not a point taken below.  Nor was it a point in this appeal.  In any event, I cannot see why section 4.2 should be regarded as unconscionable.  The holder of a CP share had the right to convert during the 23^rd month.  If he chooses not to convert that is his business.  Section 4.3 is clear enough.  It provides that the company may during the 24th month compulsorily redeem all (but not less than all) of the issued and outstanding CP Shares either for the redemption price which as defined as was CN$1 or for the number of common shares as if the holder had converted under section 3.1.  After the expiry of 24 months section 4.4 comes into play.

28.  Section 4.4 provides that:

“4.4   After the expiry of 24 months … the Company … may, at its option, compulsorily redeem any or all of the issued and outstanding Convertible Preferred Shares on such terms and conditions, including without limitation, 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.”

29.  The plaintiffs contended, here as well as below, that the discretion of the defendant under section 4.4 was only in terms of the amount of shares to be redeemed.  The plaintiff submitted that the redemption price could not be changed since that has been fixed at CN$1 in section 1.1(n).

30.  Sections 1.1(m) and 1.1(n) are set out below:

“(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;”

31.  The learned judge accepted the plaintiff’s submission and said:

“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 [sic], as [sic] the 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.”

32.  The language of section 4.4 is clear and unambiguous.  I repeat those words for convenience:

“4.4   After the expiry of 24 months … the Company … may, at its option, compulsorily redeem any or all of the issued and outstanding Convertible Preferred Shares on such terms and conditions, including without limitation, 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.”

Even without the words in parenthesis, I believe “such terms and conditions” would have included the price payable on redemption.  The words in parenthesis made any contrary argument untenable.  If as seemed to be the learned judge’s view, the redemption amount depended on the number of shares to be redeemed, although the price remained constant, it is difficult to understand why it was necessary to refer to it at all, since it is clear that under section 4.4 the company:

“4.4   … may, at its option, compulsorily redeem any or all of the issued and outstanding Convertible Preferred Shares …” [Emphasis added]

33.  Nor do I agree with Mr Chak that section 4.5 which deals with partial redemption helps with the construction of the expression and redemption amount in section 4.4. 

34.  As noted, under section 1.1(m):

“(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;”

35.  Under section 4.3(i) the amount payable would have been the redemption price, but if the defendant chose to convert under section 4.3(ii) then common shares would have been deliverable, the amount of which would depend on the calculation under section 3.1.

36.  But so far as section 4.4 is concerned, section 1.1(m) makes it beyond argument that the redemption amount refers to the amount payable.  In the context, the redemption amount could not reasonably be regarded as a reference to the actual amount payable depending on the number of CP shares which the directors have decided to redeem.

37.  The learned judge also relied on the letter for his interpretation.  He said:

“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’.”

38.  With respect, the learned judge has misunderstood the letter.  The letter made it clear that the so called “full payment” was to be in terms of common shares to be allotted.  That is what the plaintiffs would have got had they exercised the right to convert in the 23^rd month.

39.  The learned judge went on to say:

“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.”

40.  We have heard no submission on Canadian law but it does not seem improbable that any such power must be exercised bona fide.  The power to fix the redemption price:

“4.4   … as the board of directors in its absolute and unfettered discretion deems appropriate.”

does not seem to me to permit an arbitrary price to be given.  Here, as noted, the redemption price was supported by a valuation.  There was no suggestion that the valuation was wrong.  It follows that in certain circumstance it might make good commercial sense for the defendant to exercise its power under section 4.3.

41.  Since we are of the view that the language of section 4.4 is unambiguous, it is unnecessary for us to deal with Mr John Chak’s submission that if it were ambiguous, we should construe contra proferentem.

42.  The learned judge also referred to misrepresentation in his judgment.  He said:

“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 Cha[k] than Mr Lam and Ms Fung.”

43.  It is not clear whether the learned judge treated “misrepresentation” as a live issue.  Misrepresentation had not been pleaded.  He came to the conclusion that there was no misrepresentation because he took the view that both the letter and section 4.4 fixed the redemption price at CN$1.  There is no cross appeal.  So it is unnecessary for me to deal with this matter.

44.  The plaintiffs acted in person throughout.  The court will always be careful to ensure that everyone including litigants in person receives a fair trial.  But due administration of justice requires proper pleadings.  Judges should not be too ready to entertain a plea, especially one which is fact sensitive, in the absence of proper pleadings.  Although in some of the witness statements filed on behalf of the plaintiffs, there were allegations of misrepresentations.  They were unclear.  The learned judge said he preferred the plaintiffs’ evidence to those of Ms Cindy Fung and Mr Guy Lam of the defendant.  The learned judge gave no reason (apart from saying that they were not misrepresentation because that is what the letter or section 4.3 provided) why he preferred the plaintiffs’ evidence.  As I have said he concluded however that there had been no misrepresentation because Schedule B required repayment of the redemption price of CN$1.  I believe in coming to the conclusion that he preferred the evidence of the plaintiffs, he must have been influenced by that.  I will not pause to analyse the learned judge’s views or their implication except to say that because they were made in passing they were not products of careful analysis by the learned judge.

45.  Mr John Chak mentioned the doctrine of unconscionability and that the court should not give effect to the onerous section in favour of the defendant.  However, this was not a point which was raised at trial and is not a point which can be raised before us.  Mr Chak quite sensibly did not press the point. 

46.  I will allow the appeal, dismiss the plaintiffs’ claim, set aside the judgment and order that the plaintiffs pay the defendant’s costs here and below, such costs to be taxed if not agreed.

Hon Cheung JA:

47.  I agree.

Hon Chu J:

48.  I agree.

Hon Tang VP:

49.  The appeal is allowed with costs here and below, such costs to be taxed if not agreed.