STEADFAST INTERNATIONAL LTD v. TUENBO CO LTD AND OTHERS

HCA 2095/2016

[2022] HKCFI 717

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2095 OF 2016

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J U D G M E N T

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INTRODUCTION AND OVERVIEW

1.  This is the hearing of the 2^nd to 4^th and 6^th to 7^th defendants’ (the “Tuenbo Parties”) summons dated 1 March 2021 (the “Summons”), by which the Tuenbo Parties seek:

(1)  Leave to re-amend their Amended Defence and Counterclaim (“ADC”) as per the draft Re-amended Defence and Counterclaim (“RADC”)annexed to the Summons;

(2)  Final judgment be entered against the plaintiff (“Steadfast”) for prayers (xE) to (xG) in the draft RADC; and

(3)  Discharge of the interlocutory injunction granted by this court against the Tuenbo Parties on 19 August 2016 (the “Injunction”).

2.  In summary, the Tuenbo Parties’ case is as follows:

(1)  These proceedings were commenced by the plaintiff (Steadfast) (as chargee) on 11 August 2016 to seek inter alia certain declarations confirming its alleged right to enforce the underlying security (namely, shares of the 1^st defendant, Tuenbo Company Limited (“TCL”)) against the Tuenbo Parties (as chargors).

(2)  TCL, which is 94% owned by the Tuenbo Parties, holds an interest in a PRC real estate project known as the Golden Lake Project. The Tuenbo Parties’ shares in TCL were charged to Steadfast, a subsidiary within the New World Group, pursuant to a joint venture under which Steadfast controlled, managed and funded the Golden Lake Project.

(3)  On 19 August 2016, the Injunction was granted in favour of Steadfast and against the Tuenbo Parties, which inter alia restrained the Tuenbo Parties from acting as directors of TCL pending resolution of these proceedings. The effect of the Injunction was to temporarily validate Steadfast’s purported enforcement of the charge and allow Steadfast’s nominees to be in control of the board of TCL in the place of the Tuenbo Parties on an interim basis.

(4)  The Tuenbo Parties deny that Steadfast was entitled to enforce the charge in 2016 for a variety of reasons canvassed in the ADC. In particular, they contend that but for various wrongs committed by Steadfast, the secured liability would have been already discharged or substantially reduced (to a sum which the Tuenbo Parties could have paid to redeem the security) by 2016. Hence, Steadfast cannot benefit from its own wrong.

(5)  Alternatively, the Tuenbo Parties seek an account of the outstanding sum owed to Steadfast and redemption of the charge.

(6)  Since 2016 and in particular since the filing of the ADC, it has come to the Tuenbo Parties’ attention that an enormous amount of proceeds from the sale of units in the Golden Lake Project has become available to Steadfast which is sufficient to discharge the outstanding secured liability even using the figures pleaded by Steadfast. Therefore, the Tuenbo Parties submit that they are indisputably entitled to redemption of the underlying security now (ie irrespective of whether Steadfast was indeed entitled to enforce the charge back in 2016).

(7)  By the Summons, the Tuenbo Parties seek to introduce these new developments into their pleading, a partial summary judgment for redemption of the underlying security now, as well as the consequential discharge of the Injunction. Since it is incontrovertible that no outstanding secured liability remains, there is no reason why Steadfast should still retain the charge and control over TCL. TCL should be returned to the Tuenbo Parties immediately.

3.  At the hearing, Steadfast did not oppose the re-amendments as per the RADC. Hence, the only questions for the determination of the court is whether summary judgment should be granted against Steadfast as per the Summons, and the consequential discharge of the Injunction.

BACKGROUND

4.  The background to these proceedings has been canvassed in Section A of the Affirmation of Wong Sung King Dorothy filed in support of the Summons. The following salient aspects are highlighted by the Tuenbo Parties.

5.  These proceedings relate to a secured loan arrangement arising out of a joint venture in a PRC real estate project known as the Golden Lake Project. The project has various phases. The events in this action concern Phases I and II.

6.  The Golden Lake Project is held by Guangzhou Golden Lake Residential Neighbourhood Development Company Limited (“GLRN”), a Sino-foreign joint venture company incorporated in the PRC on 27 August 1991. The shareholders of GLRN have at all material times been TCL, and Zhongguo Guangzhou Bairun Properties Company (“Bairun”). In particular:

(1)  TCL has at all material times since 1977 been the corporate vehicle of the Tuenbo Parties - the business and success of TCL were built up over the years by the Tuenbo Parties.

(2)  Under Clauses 16 and 18 of the Co-operative Contract dated 25 September 1989 entered into between TCL and Bairun, Bairun’s role was to obtain the land use rights over the Golden Lake Site from the PRC government in return for a fixed fee from TCL; otherwise, TCL was to be responsible for the construction of, and was to enjoy the fruits of selling, the properties on the Golden Lake Site.

7.  Soon after the incorporation of GLRN in August 1991, by a Land Use Contract dated 28 August 1992, Bairun was granted land use rights over the Golden Lake Site by the PRC authorities.

8.  In 1992, the New World Group (of which Steadfast is a member) approached the Tuenbo Parties for potential collaboration over the Golden Lake Project. As a result, various agreements were entered into between inter alios Steadfast, TCL and/or GLRN for collaboration.

9.  In broad terms:

(1)   The arrangement involves Steadfast entering into a joint venture with TCL, whereunder Steadfast would provide investment by way of a number of loans to finance the construction costs of the project (secured by, among other things, securities over the shares in TCL), and to manage the construction of the project.

(2)   The contemplation was that the Golden Lake Project would be completed as soon as possible; the units would be sold offshore (ie outside the Mainland); proceeds would be received by 2 joint venture companies owned by TCL and Steadfast; those 2 companies would then distribute the proceeds to TCL and Steadfast, first to repay the loans advanced by Steadfast, and then as profits to be shared between the different parties.

(3)   The Tuenbo Parties submit it was obviously the contemplation of the parties that the proceeds of sale would quickly be applied to repay the loans advanced by Steadfast and Steadfast would only get interest for the construction period. It was certainly not the contemplation of the parties that sales should be delayed, and most certainly not the contemplation that even if there were sales, the proceeds would be applied elsewhere and not to reduce the loans advanced by Steadfast which would continue to run at high interest.

(4)   More specifically, Steadfast agreed to advance 4 loans to various entities as follows:

(a)  An “Initial Loan” to TCL of HK$50,000,000, under Clause 8.01 of the Shareholders’ Agreement (“Phase I SA”) between Steadfast, TCL and Holicon Holdings Limited (“Holicon”), a BVI company that was to act as the overseas sole sales agent for properties constructed under Phase I of the Golden Lake Project under a Sole Agency Sub-Contract between TCL, Holicon and GLRN (“Holicon Sub-Contract”).

(b)  A “Further Loan” to TCL of HK$50,000,000 under Clause 9.01 of the Phase I SA.

(c)  A “Shareholder’s Loan” to Holicon under Clause 6.01 of the Phase I SA (“Holicon Shareholders’ Loan”), being the necessary financing for the purposes of developing Phase I of the Golden Lake Project.

(d)  A “Shareholders’ Loan” (“Jorvik Shareholders’ Loan”) to Jorvik International Limited (“Jorvik”) under Clause 6.01 of the Shareholders’ Agreement (“Phase II SA”) between Steadfast, TCL and Jorvik, a BVI company that was to act as the overseas sales agent for properties constructed under Phase II of the Golden Lake Project under a Sole Agency Sub-Contract between TCL, Jorvik and GLRN (“Jorvik Sub-Contract”).

(5)   Insofar as security for Steadfast’s funding is concerned, the Tuenbo Parties executed 2 share charges over their shares in TCL in favour of Steadfast, respectively dated 23 September 1992 (“1^st Share Charge”) and 30 September 1993 (“2^nd Share Charge”).

10.  At all material times, Steadfast has been in control of the construction and the management of the Golden Lake Project:

(1)   As pleaded in §11B of the ADC:

(a)  Under Clause 7.02(i)(i) of the Phase I SA and Clause 7.02(h)(i) of the Phase II SA, TCL was obliged to procure Holicon and Jorvik or any other person(s) nominated by Steadfast to manage the construction and development of Phases I and II of the Golden Lake Project on behalf of GLRN.

(b)  Under Clause 5.01(c) of the Phase I SA and Clause 5.01(b) of the Phase II SA, Steadfast and TCL were to each nominate 2 out of the 4 directors of GLRN comprising the development committee; however, under Clause 7.02(s) of the Phase I SA and Clause 7.02(p) of the Phase II SA, in the case of an equality of votes, one of the directors nominated by Steadfast was to have a casting vote.

(2)   Further, at all material times since 1998, Steadfast has had a majority of 7 out of 12 directors on GLRN’s board.

11.  The SAs and the Sub-Contracts constitute, inter alia, the key documents which govern the parties’ relationship. In gist:

(1)  Holicon and Jorvik were appointed as the sole sales agents who would sell the units in the Golden Lake Project offshore: Clause 5 of the Phase I SA; Clause 2 of the Holicon Sub-Contract; Clause 5 of the Phase II SA; Clause 2 of the Jorvik Sub-Contract.

(2)  In principle, all the landed properties would be sold as soon as practicable after completion upon obtaining governmental consent: Clause 4.01 of the Holicon Sub-Contract; Clause 4.01 of the Jorvik Sub-Contract.

(3)  Steadfast would provide Holicon and Jorvik each with a “Shareholders’ Loan” to enable them (among other things) to fulfil their obligations under the Holicon/Jorvik Sub-Contracts, including the payment of Pre-Determined Proceeds (which were essentially the construction costs) to TCL, and management fees of HK$50,047,157 and HK$161,477,475 respectively to TCL: Clauses 6 and 9A of the Phase I SA; Clauses 6 and 8 of the Phase II SA.

(4)  The Shareholders’ Loan is lent at an interest rate of HIBOR plus 2% in the case of Holicon and Prime plus 1% in the case of Jorvik, compounded quarterly: Clauses 1 and 6.01 of the Phase I SA; Clauses 1 and 6.01 of the Phase II SA.

(5)  Further, Steadfast extended the Initial Loan of HK$50,000,000 and the Further Loan of HK$50,000,000 to TCL: Clauses 8.01 and 9.01 of the Phase I SA.

(6)  After the properties were constructed, they were to be sold offshore via Holicon and Jorvik as sole agents. The sales proceeds were to be applied in accordance with Clause 11 of the SAs, namely:

(a)  First to repay Steadfast for the “Shareholders’ Loans” together with interest;

(b)  Then to pay taxes, imposts, levies or duties; and

(c)  The balance was to be distributed to Steadfast and TCL in equal shares, save that TCL’s share was to be used first to repay the “Initial Loan” and the “Further Loan”. In the event that the sales proceeds were insufficient for repayment as aforesaid, TCL shall be liable for the shortfall for the Holicon Shareholders’ Loan, the Initial Loan and the Further Loan (but not the Jorvik Shareholders’ Loan).

(7)  In other words, there was only a profit guarantee in respect of the Phase I units but not the Phase II units.

12.  As mentioned, there were 2 share charges over the shares in TCL. It was the 2^nd Share Charge which was relied on by Steadfast when enforcing in these proceedings. In particular:

(1)  The shares in TCL were charged as security for inter alia the due and punctual payment to Steadfast of the “Indebtedness”, which is defined to mean all money payable by TCL and all parties to whom, at TCL’s request, Steadfast has advanced money under any of the Agreements: Clauses 1.02(c) and 1.03.

(2)  However, advances and lending by Steadfast to any Related Parties (defined to include Holicon and Jorvik in Clause 1.02(d)) does not constitute lending at the request of TCL: Clause 1.03. This means that in practical terms, the obligations constituting the “Indebtedness” are the Initial Loan and the Further Loan (but not either Shareholders’ Loan) (“Secured Amount”): see paragraph 9(4) above.

(3)  Apart from “Indebtedness”, the 2^nd Share Charge also secures “Obligations”: Clause 2.01(b). For present purposes, the most material “Obligation” is the obligation of TCL to pay any shortfall under Phase I should the proceeds be insufficient to cover the Shareholders’ Loans, taxes, imposts, levies and/or duties, and the Initial and the Further Loan (“Deficit”): see paragraphs 11(6) and 11(7) above. Given the priority set out in Clause 11 of the SAs, if the project is sufficiently profitable so that there is no Shortfall, it will follow that there is also no Secured Amount. Thus, the crucial question for the court in determining whether there is any outstanding secured liability is to determine whether there is any Shortfall.

(4)  The equity of redemption is expressly provided for in Clause 3.01.

(5)  The 2^nd Share Charge is enforceable upon occurrence of an event of default (as defined in the Agreements): Clause 8.01.

13.  If the contracts had been performed, the following things would have ensued. Steadfast would have constructed the units in the Golden Lake Project. Those units would have been sold as soon as practicable after construction. The sale proceeds would go to Holicon and Jorvik, which would have been applied as soon as practicable in accordance with Clause 11 of the SAs to extinguish or reduce any Deficit.

14.  The Tuenbo Parties contend that Steadfast did not abide by the contractual scheme and committed various wrongful acts against the Tuenbo Parties, including the following:

(1)  Steadfast failed to procure the sale of the properties offshore via Holicon/Jorvik and Holicon/Jorvik never received any sales proceeds. Instead, the properties remained under GLRN (which was controlled by Steadfast at all material times - see paragraph 10 above). Some properties were rented out, some were sold in the Mainland but only after significant and undue delay. Had the sales not been delayed, there would have been significantly more sales proceeds to be applied as per Clause 11 of the SAs.

(2)  Further, in respect of those properties that were rented out/sold, Steadfast failed to procure GLRN to apply the rental and/or sale proceeds that were derived from the Golden Lake Project in accordance with Clause 11 of the SAs.

(3)  Having obtained some rental/sales proceeds, in breach of its fiduciary duties owed to the Tuenbo Parties, Steadfast procured GLRN to use the said proceeds to advance low-interest or interest-free loans to its affiliated companies within the New World Group; and further extracted value from GLRN by causing companies within the New World Group to advance high-interest loans to GLRN.

(4)  Further, at the construction stage, Steadfast caused excessive and unreasonable costs to be incurred, which had the effect of unreasonably inflating the “Shareholders’ Loans” and thus (to the extent that the Holicon Shareholders’ Loan was inflated) consequently the Deficit.

15.  Indeed, even at the time of commencement of these proceedings, there were still unsold units in Phase I and Phase II, despite the fact that the construction was completed in 2011.

16.  Notwithstanding the above, on 18 May 2016, Steadfast purportedly declared an Event of Default under the SAs on the basis that TCL and Bairun have failed to extend the operation period of GLRN; and subsequently purported to exercise its rights under the 2^nd Share Charge to convene an EGM of TCL.

17.  On 21 July 2016, at the purported EGM of TCL, Steadfast purported to resolve to remove Cheung Sung Lam (the 2^nd defendant), Wong Sung King Dorothy (the 3^rd defendant) and Cheung Ka Ming (the 7^th defendant) from the board of TCL and appoint 2 representatives of Steadfast in their place. Such a purported resolution, if valid, would seize TCL away from the Tuenbo Parties altogether.

18.  On 19 August 2016, Steadfast obtained the Injunction from this court to restrain the Tuenbo Parties from inter alia holding themselves out as directors of TCL until judgment in these proceedings. The effect of this Injunction is that the entire Golden Lake Project is now wholly under Steadfast’s control (whether at the TCL, Holicon, Jorvik and/or GLRN level). These proceedings were commenced by Steadfast to take hold of the shares in TCL so as to control GLRN and extend its operation period.

19.  The Tuenbo Parties deny that there was an Event of Default. Alternatively, even if there had been an Event of Default, had Steadfast not committed the wrongful acts stated at paragraph 14 above, the Deficit would be nowhere close to what is presently alleged to be owed (and it is also possible that no money is actually owed under the 2^nd Share Charge).

20.  In any event, even if Steadfast’s purported enforcement in 2016 were valid (viz Steadfast is able to prove an Event of Default and also there existed an outstanding debt in 2016), the Tuenbo Parties are still entitled to redeem the charged shares by payment of the outstanding liability as of today (if any).

21.  In their Counterclaim, the Tuenbo Parties seek an account and redemption of their shares in TCL.

22.  Steadfast, on the other hand, denies that it has committed any wrong.

23.  In particular, Steadfast contends that after the contractual structure had been put in place, due to the changes of circumstances over the years, the arrangements for the operation, sale and management of the Golden Lake Project were varied as between the parties.

24.  Inter alia, the funding arrangement by Steadfast took place through various companies in the New World Group instead of through Holicon/Jorvik, properties were leased instead of being sold, and those properties which were sold were sold through GLRN in the PRC, rather than offshore through Holicon/Jorvik. On Steadfast’s case, and objectively after such a long lapse of time without objection, these variations were and must have been agreed to (or acquiesced in) by the Tuenbo Parties at all material times.

SUMMARY JUDGMENT

25.  The principles on summary judgment are well-established and not in dispute. Inter alia:

(1)  Summary judgment should only be granted in clear cases.

(2)  The defendant has to raise a “plausible and prima facie sustainable case”; the burden is merely to show that there is a “triable issue or question or that for some other reason there ought to be a trial”.

(3)  The court must not embark on a mini trial on affidavits. Leave to defend should be given where the defendant raises any substantial question of fact which ought to be tried.

(4)  The question is one of whether there is a triable issue, and leave to defend should be granted if the defence is believable.

(5)  Leave to defend may also be given where there ought for some other reason to be a trial of the claim or part of it.

26.  The Tuenbo Parties apply for partial summary judgment for prayers (xE) to (xG) in the RADC. The Tuenbo Parties contend that, on any scenario, the Deficit has been extinguished and the Tuenbo Parties must be allowed to redeem their shares in TCL now.

27.  The Tuenbo Parties rely on Order 86, rule 8 (concerning specific performance) and/or Order 14, rule 1, Rules of the High Court in support of the summary judgment application.

28.  The Tuenbo Parties submit that, faced with the Summons, Steadfast has finally put forward what it now contends to be the deficit under the 2 phases as at 31 December 2020. Importantly, it claims that the Deficit (of Phase I) stands at HK$590,128,544.

29.  For the purpose of their application, the Tuenbo Parties have produced a master Excel spreadsheet (the “Spreadsheet”). The Spreadsheet is essentially a comparison of Steadfast and Tuenbo Parties’ models. It first lists out Steadfast’s model and then separates out components which the Tuenbo Parties contend are indisputably not owed or unarguable (the “Disputed Items”).

30.  It can be seen from the Spreadsheet that the total liabilities that make up the Disputed Items come to HK$1,078,795,055. If all of the Disputed Items are discounted, then on Steadfast’s own case there would be a surplus of HK$488,666,511 for Phase I. Therefore, for there to be summary judgment for redemption, the Tuenbo Parties submit the court needs only be satisfied that HK$590,128,544 out of the HK$1,078,795,055 is indisputably not owed, such that the overall accounting position is that there is no Deficit for Phase I and no outstanding secured liability to prevent redemption.

31.  In response to the Tuenbo Parties’ case, Steadfast has raised a number of reasons why summary judgment as sought is not appropriate.

32.  Steadfast submits that the court simply cannot resolve the details of the Tuenbo Parties’ redemption claim without expert forensic accounting evidence. At the very least, further discovery of accounting records and factual evidence would plainly be necessary.

33.  Leaving aside the obvious issue that there has not been any tender at all, it is inherently objectionable that the Tuenbo Parties’ pleaded basis of redemption is predicated upon a series of hypotheticals and conditions - including:

(1)  the hypothetical that the court accepts its various implied term(s) and interpretation;

(2)  the hypothetical that Steadfast has indeed committed all of the pleaded breaches; and

(3)  “the assumptions made” in the various calculations.

Bona fide defences to the Tuenbo Parties’ claim for redemption

34.  Steadfast submits it has bona fide defences to the Tuenbo Parties’ claim for redemption, including:

(1)  Denial of any implied term(s) or “true construction” as put forward at the RADC §17; and

(2)  Denial of any breach of such alleged terms, especially once Steadfast is able to put forward evidence about variation of the parties’ agreement which could well meet the Tuenbo Parties’ case about what it means for distribution to be effected “as soon as practicable”.

35.  On top of these, Steadfast also submits the Tuenbo Parties’ calculations and assumptions are highly questionable - if not erroneous.

36.  Before going into the details, Steadfast has emphasised that the mere existence of dispute over the numbers (as set out below) - whether this is because, for example, documentary evidence for the calculations is alleged to be insufficient, the basis of inclusion of certain amounts is challenged (owing to underlying dispute about the contractual framework and any variation to the same), or parties cannot agree on the timing and extent to which proceeds are applied - in and of itself evidences triable issues. The court need not come to any firm conclusion on the numbers now. On Steadfast’s submissions it simply cannot.

37.  As set out at paragraphs 28 to 30 above, the Tuenbo Parties have put forward a supposedly simple proposition:

(1)  Steadfast claims there is a Deficit of HK$590 million odd for Phase I.

(2)  There are several Disputed Items identified by the Tuenbo Parties which (allegedly) come to around some HK$1,078 million odd. If HK$590,128,544 out of such Disputed amount can be held by the court to be not owed at this summary judgment hearing, then there would not be any Deficit, and as such the Tuenbo Parties would be entitled to summary judgment on their redemption claim.

38.  However, Steadfast submits that this approach is thoroughly unhelpful. In an attempt to put forward a palatable exercise for the court amongst a sea of numbers, the Tuenbo Parties have effectively tried to “short-circuit” the entire action.

39.  I agree with Steadfast’s submission that the court cannot approach the redemption claim in this way, because underneath the supposed simplistic façade is a host of hotly-contested triable issues about even the elements that make up the HK$590 million figure - which in any event Steadfast confirms should be in fact around HK$479 million instead, as there was indeed an arithmetic error as pointed out by the Tuenbo Parties. In circumstances where parties cannot even agree as to the basis of calculations, the court cannot simply reverse-engineer the purported redemption exercise by deducting Disputed Items up to the amount of around HK$590 million (or rather, HK$479 million), and then call it a day and determine the claim summarily.

40.  To succeed on their application, it is incumbent on the Tuenbo Parties to satisfy the court that there are in fact no triable issues relating to the liabilities and proceeds, and that the calculations are indisputable and clear on their face. They have not done (and cannot do) so.

41.  To make good this point, Steadfast has explained on each of the aspects making up the calculation why there remain various contested points which must be explored at trial, with the assistance of expert evidence and other factual/documentary evidence.

42.  First, on the amount of money owed:

(1)  On Steadfast’s case there are various items which make up the Shareholders’ Loan secured by the Share Charges which come to around HK$1,401 million and HK$1,894 million on Phases I and II respectively. For the avoidance of doubt Steadfast accepts that there was an arithmetic error as pointed out at paragraph 39 above, and figures below are adjusted with that in mind.

(2)  In respect of the 4^th Disputed Item on the Spreadsheet, these include “Land Costs”. The Tuenbo Parties have excluded payment of such “Land Costs” by the New World Group to GLRN/TCL as part of the Shareholders’ Loans, but in fact such “Land Costs” were advances paid by the New World Group for development of the Golden Lake Project. Steadfast has disclosed various contemporaneous records showing these advances as payment of Holicon/Jorvik’s Pre-Determined Proceeds (“PDP”) under the Shareholders’ Agreements.[1] Whilst the Tuenbo Parties dispute that these records are sufficient, this itself confirms why the matter ought to proceed to trial so that such evidence can be properly ventilated and put to relevant witnesses. It is obvious the proposition that “Land Costs” were agreed or understood by parties to be part of the Shareholders’ Loan is not “unarguable”.

(3)  In respect of the 5^th Disputed Item on the Spreadsheet, the relevance of advances from New World Group companies is also in serious dispute. Steadfast has explained that some of these monies were injected into the Project; other funds were contributed as operating expenses of Holicon and Jorvik. The reason for this (on Steadfast’s case) is that the Tuenbo Parties were uncooperative in procuring GLRN to obtain financing from PRC banks, which necessitated New World Group to step in to provide financing. Whose version of events is to be believed is a matter for trial. It is a triable issue which precludes summary determination.

(4)  There is also an amount of around HK$117 million (ie the 6^th Disputed Item on the Spreadsheet) in respect of construction cost for the club house in the Golden Lake Project. Steadfast’s evidence is that this related to Phases I and II in that it was a communal facility benefiting residents of Phases I and II (and hence, on Steadfast’s case, counts as an expense for these two phases). Again the Tuenbo Parties dispute this and claim that these costs should be attributed to Phase III. The extent to which there can be apportionment of the cost (or evidence of any agreement on such subject) is another matter which cannot be resolved at this juncture.

(5)  In view of such highly fact-sensitive disputes between the parties, it is really neither here nor there for the Tuenbo Parties to assert at RADC §118 that “based on the assumptions made…in favour of [Steadfast] as set out in Schedule 8” (which include an exclusion of “Land Costs”) the outstanding Shareholders’ Loans only amount to respectively HK$165 million odd and HK$373 million odd for Phases I and II - which is obviously significantly different from Steadfast’s figures which exceed HK$1,000 million for each phase. The figures put forward by the Tuenbo Parties are also significantly lower than just the contractual PDP (figures agreed upon by the parties for Phases I and II).[2] Clearly, the court cannot summarily come to a view that the Tuenbo Parties’ assumption(s) are sustainable and/or that their calculations are to be preferred.

43.  Second, even moving from the “base figure” of the loan(s) extended, and considering the amount of sales and rental proceeds which allegedly should have been applied:

(1)  GLRN’s auditor’s report for 2020 shows that its sales and rental proceeds for that year totalled around RMB 542 million. That is around RMB 8 million difference as compared to the Tuenbo Parties’ estimate of RMB 550 million. It is at least reasonably arguable that Steadfast’s figure should be preferred given that it is taken from an auditor’s report.

(2)  On the other hand, the same auditor’s report stated that taxes and expenses incurred by GLRN in 2020 came to some RMB 260 million. Again that deviates significantly from the Tuenbo Parties’ estimate.

(3)  The discrepancy between Steadfast’s and the Tuenbo Parties’ figures in respect of the net sales and rental proceeds can hardly be resolved on affidavit evidence alone, especially when a significant part of the Tuenbo Parties’ calculations is not based on actual sales but rest on an estimate based on a valuation conducted based on perceived 2016 market price (ie someone came up with a market price). At the very least, it would be necessary for proper determination of the issues for relevant personnel to be cross-examined, so that the relevant conclusions and opinions can be tested against contradictory evidence (whether witness or documentary).

44.  Third, there is also significant disagreement over the issue of interest (ie the 1^st Disputed Item on the Spreadsheet). This is related to the Tuenbo Parties’ point that the sale and rental proceeds should have been applied latest by December 2016, to extinguish or reduce the Shareholders’ Loans. Accordingly, it is claimed that interest accrued during this time should not be counted. But such argument is predicated on an assumption (which is not yet determined by the court) about required timing for the making of any distribution. Steadfast does not accept and submits there is no logical reason why there ought to be a “cut-off date” of 31 December 2016 or 2020.

45.  Moreover, Steadfast submits that the Tuenbo Parties have overlooked the reality of operating the Golden Lake Project: there were very substantial operating and selling expenses involved in order to generate the relevant proceeds. It is not as though monies that came in from the properties could then just be applied to pay off existing loans and/or distributed. Proceeds had to be retained, and other advances from Steadfast or New World Group companies obtained, simply to ensure the proper development of the Golden Lake Project.

46.  These various aspects of the calculation taken together lead to very different outcomes. Steadfast’s conclusion is that there remain deficits of around HK$479 million (after adjusting for the aforementioned arithmetic error) and at least HK$1,021 million respectively for the two phases under the Shareholders’ Agreements. The interest of the Shareholders’ Loans accrued between 1 January 2017 and 31 December 2020 (on Steadfast’s case) would have been around HK$109 million and HK$328 million for Phases I and II respectively, therefore there would still be deficits in both phases even assuming sales proceeds were applied to discharge the Shareholder’s Loan on 31 December 2016 and 2020 as pleaded by the Tuenbo Parties. Yet the Tuenbo Parties somehow land at a surplus of around HK$26.5 million even allegedly assuming that “Land Costs” are included.

47.  It is a painstaking exercise to pinpoint each specific difference between the parties, but that is not necessary, at least for present purposes. The mere fact the exercise is difficult (if not impossible, at this stage), and the inevitable conclusion that there are too many (at this stage) unresolvable minute disputes between parties as to assumptions adopted, methods of calculation and figures employed, militate against any possibility of summary judgment.

48.  As a further example, Steadfast’s calculations take into account, inter alia, the New World Group advances (which the Tuenbo Parties deny are relevant to the Shareholders’ Loan). Steadfast also disputes that proceeds are to be applied “as soon as practicable” on 31 December 2016. The Tuenbo Parties complain that Steadfast has not provided reasons as to why it would not be “practicable” to apply proceeds in extinction/reduction of the liabilities once they are received: but that is putting the cart before the horse. It is first incumbent on the Tuenbo Parties to justify the implication of terms requiring distribution “as soon as practicable”; it is then also up to them to explain to the court on the affidavit evidence alone (i) what this means; and (ii) how such distribution would work. On Steadfast’s case, GLRN necessarily had to incur various expenses in the course of generating its sale and rental proceeds. The fact such expenses are proposed to be deducted from the proceeds makes clear that the latter have to be used for the ongoing operations of GLRN. Evidently GLRN and the Golden Lake Project requires monies to operate. In other words, it is at least arguable the contention of “as soon as practicable” is itself not practicable in the circumstances of this case - and must go to trial to be tested out.

49.  Moreover, the simplest answer to the Tuenbo Parties’ case may in fact lie in Clause 10.02 of the 2^nd Share Charge, which provides that “Any determination by [Steadfast] as to the amount of the Indebtedness at any time and from time to time outstanding shall be conclusive and binding on the Chargors and each of them, save for manifest error”.

(1)  As held in OCBC Wing Hang Bank Ltd v Woo Koo Ping & Ors, HCA 2377/2014 (unrep, 20 July 2016), such a clause means that proof of indebtedness put forward by the lender is conclusive evidence against the chargors (§§15-17). “Manifest error” is “an error which is ‘obviously or easily demonstrable without extensive investigation’”: see also Easy Mount Group Ltd v Lam Ka Yuk, James [2019] HKCA 890 at §62 (per Au JA).

(2)  Given that the whole point of such a clause is to preclude a lengthy and extensive dispute into quantum, arguably it is entirely inappropriate to carry out a detailed investigation into the indebtedness - as the Tuenbo Parties seek to do.

(3)  Steadfast submits that the court ought to take Clause 10.02 (and hence, Steadfast’s figures) as they stand. The calculations as determined by Steadfast should be considered binding on the Tuenbo Parties. At least, the question of whether there is a “manifest error” in Steadfast’s calculations is a question to be determined at trial.

50.  Additionally, Steadfast correctly stressed that the redemption claim is not simply a question of quantification - which itself involves a litany of triable issues and factual disputes. As seen from the RADC §§117-120, the Tuenbo Parties’ case on redemption is squarely premised upon pleas of breach of duties by Steadfast which it denies. Both of these are separate and highly-contentious elements which are fundamental to the judgment sought:

(1)  The existence of the duties itself (including the fiduciary duties which lie at the heart of the Tuenbo Parties’ case on accounting on the basis of wilful default) should be a matter for trial. Steadfast is plainly entitled to plead in response to these alleged implied terms and/or “true construction[s]” and put forward evidence as to the parties’ intentions and the surrounding factual matrix to assist the court in properly applying the test laid down in Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381, §§23 and 59, regarding implication of terms (particularly insofar as necessity is concerned).

(2)  The issue of variation of the Shareholders’ Agreements is again obviously highly fact-sensitive. What contractual duties exist, remain, or are modified would be matters of fact. The court cannot come to a view on this simply on affidavit evidence alone.

(3)  Whether there is any relevant breach, even assuming the above duties are established - this is particularly so given that the implication of breach of the alleged duties pleaded in RADC §17 is that Steadfast has allegedly acted in a way so as to benefit itself and its affiliated companies “at the expense of the Tuenbo Parties”, by allowing interest to accrue as Steadfast persistently refuses to apply any proceeds to discharge outstanding liabilities. This is a serious allegation against Steadfast - to which it should be entitled to respond, with the support of factual evidence.

51.  Belatedly, the Tuenbo Parties put forward the alternative proposal that they make payment into court up to a cap of HK$120 million allegedly representing “the deficit arising from the triable Disputed Items”.

52.  I agree that such a proposal should not be accepted by the court.

53.  First, as set out in paragraphs 34 to 49 above, it is plain that the difference between the parties’ calculations is far greater than merely HK$120 million. It is not so much simply identifying the “triable Disputed Items”, but a more extensive exercise where parties have not agreed on even certain fundamentals of calculations, and where differences exist not just in the items to be included but even the figures for those items which parties accept must be taken into account (such as the precise amount of sale and rental proceeds).

54.  In such circumstances, the cap of HK$120 million is not sufficient to protect Steadfast’s interests even simply as a creditor.

DISCHARGE OF THE INJUNCTION

55.  At paragraph 104 of their Skeleton Submissions, the Tuenbo Parties submit that if the court accedes to the summary judgment application, it follows that there is no basis for Steadfast to continue purport to exercise any rights under the 2^nd Share Charge and remain as directors of TCL. The Injunction should naturally be discharged.

56.  Thus clearly, the Tuenbo Parties’ case on discharge apparently stands and falls with the summary judgment application. As such, given the conclusions regarding the summary judgment application as set out above, there is simply no basis for any discharge of the Injunction.

57.  In the premises, the court should refuse the application under paragraph 3 of the Summons.

DISPOSITION

58.  For the reasons set out above, paragraphs 2 and 3 of the Summons are dismissed. I allow the application by the Tuenbo Parties under paragraph 1 of the Summons for leave to re-amend their ADC.

59.  I order that the Tuenbo Parties do pay the costs of paragraphs 2 and 3 of the Summons to Steadfast, such costs are to be taxed if not agreed (with a Certificate for 3 Counsel).

60.  The above order as to costs is nisi and shall become absolute in the absence of any application within 14 days to vary the same.

61.  Lastly, I express my gratitude to counsel on both sides for their helpful assistance in this matter.