DRAGON ACCESS HOLDINGS LTD v. LO CHU HUNG

HCMP 1355/2019

[2020] HKCFI 2895

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1355 OF 2019

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J U D G M E N T

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A. INTRODUCTION

1.  By an Originating Summons dated 28 August 2019, the Plaintiff seeks:

(1)  A declaration that the Defendant had repudiated the Provisional Sale and Purchase Agreement dated 22 February 2019 (“the PSPA”);

(2)  The return of deposits totalling HK$18.4 million (“the Deposit”) paid pursuant to the PSPA;

(3)  Liquidated damages in the amount of HK$18.4 million (“the Compensation”); and

(4)  A declaration that the Plaintiff is entitled to a lien on the Sale Share and the Shareholder’s Loan for the Deposit, the Compensation, interest on the Deposit and the Compensation, costs incurred by the Plaintiff in its due diligence and/or title investigations under the PSPA, and the costs of these proceedings.

B.  BACKGROUND

2.  Acme Development and Planning Company Limited (“the Company”) was incorporated on 21 May 2015.  Its only asset was a property known as the Whole of the Ground Floor, Lead On Industrial Building, No 18 Ng Fong Street, Kowloon, Hong Kong (“the Property”).  The Company only had 1 issued share and it was wholly owned by the Defendant.

3.  The Defendant also owned and controlled two other companies, Telecom Generation Company Limited (“Telecom”) and Estate Generation Company Limited (“Estate”).

4.  On 22 February 2019, the Plaintiff and the Defendant entered into the PSPA under which the Plaintiff agreed to purchase the Property by buying (i) the entire issued share capital of the Company (“the Sale Share”); and (ii) the loan advanced by the Defendant to the Company and due and owing by the Company to the Defendant as at completion (“the Shareholder’s Loan”).  The consideration was HK$92,000,000, of which the Deposit paid was HK$18,400,000. The balance that remained unpaid was HK$73,600,000 (“Balance of Purchase Price”).

5.  The PSPA contained the following material terms (and all references below to Clauses shall be to the PSPA unless otherwise specified; underline added):

(1)  “Clause 1: … the Vendor [Defendant] agrees to sell and the Purchaser [Plaintiff] agrees to purchase the Sale Share and all such sum of money advanced by way of loan by the Vendor to the Company and due and owing by the Company to the Vendor as at completion (“the Shareholder’s Loan”) with all the benefits thereof together with all rights attached thereto free from all encumbrances.

(2)  Clause 2: Completion … shall take place … on 22 August 2019 (“the Completion Date”).

(3)  Clause 4: Completion is conditional upon the following:

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

(b)  The Vendor shall … procure the Company to prove and give good title to the Property in accordance with Sections 13 and 13A of the Conveyancing and Property Ordinance (Cap 219 of the Laws of Hong Kong);

(c)  All the representations, undertakings and warranties given by the Vendor under this Agreement and the Formal Agreement are and shall remain true, accurate, correct and complete and not misleading in all respects up to the Completion.

 If any of the foregoing conditions is not fulfilled (or waived by the Purchaser) on or before the Completion Date, the Purchaser shall be entitled to cancel the transaction under this Agreement whereupon the Vendor shall return all the deposit paid to the Purchaser forthwith.

(4)  Clause 5: To facilitate the carrying out of the due diligence investigation by the Purchaser, the Vendor hereby undertakes to deliver to the Purchaser or the Purchaser's solicitors all documents relating to the Company within 14 days from the date of this Agreement. The Purchaser shall carry out the due diligence investigation and confirm in writing to the Vendor or the Vendor's solicitors whether he is reasonably satisfied with the results of such due diligence investigation within 14 days after the date of delivery of all documents by the Vendor or the date of delivery of such further documents reasonably requested by the Purchaser. If it is discovered during the due diligence investigation period that there is any problem, the Vendor shall remedy the same as soon as possible before the Completion Date.

(5)  Clause 8: Upon completion and upon payment of the Balance of Purchase Price by the Purchaser, the Vendor shall:

...

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

(l)  cause the Property to be held by the Company on the following conditions:

(i)  free from all encumbrances and indebtedness; …

(6)  Clause 10: The Vendor hereby represents and warrants to the Purchaser, and shall represent and warrant to the Purchaser and the Company respectively on Completion, that:

…

(d)  Save and except the existing tenancy agreement, the existing mortgage, and/or the sale and purchase agreement and/or assignment in respect of the purchase of the Property by the Company and registered in the Land Registry, the Company has not carried on any business or entered into any contract, agreement or arrangement since its incorporation;

(e)  The Company shall on completion have no outstanding borrowing or indebtedness (whether actual or contingent) other than the following:

(i)  The Shareholder’s Loan (which shall be assigned to the Purchaser upon completion) ...

(7)  Clause 11(h): The Vendor undertakes with the Purchaser that from the date of this Agreement and up to the Completion Date, the Vendor shall procure the Company and the director(s) of the Company not to:

…

(h)  enter into any contract or commitment.

(8)  Clause 16(a): Should the Purchaser fail to complete the purchase in accordance with the terms of this Agreement, the Vendor shall be entitled to forfeit the deposits paid absolutely as liquidated damages and terminate this Agreement and then sell the Sale Share and the Shareholder’s Loan to anyone he thinks fit and the Vendor shall not take any action to claim against the Purchaser for any further liabilities and/or damages nor for specific performance of this Agreement.

        Clause 16(b): Should the Vendor after receiving the deposits paid hereunder fail to complete the sale in accordance with the terms of this Agreement, the Vendor shall immediately refund the deposits paid to the Purchaser and compensate the Purchaser with a sum equivalent to the amount of the deposits as liquidated damages and the Purchaser shall not take any further action to claim for damages or enforce specific performance.

(9)  Clause 21: Unless otherwise specified herein, time shall in every respect be of the essence of this Agreement.”

6.  The parties were unable to enter into a formal agreement, and the sale proceeded on the basis of the PSPA.  It is undisputed that the Plaintiff duly paid the Deposit pursuant to the PSPA.

7.  Completion never took place due to various alleged defaults of the Defendant.

8.  Essentially, the Plaintiff’s complaints can be classified as follows:

(1)  That the Defendant had failed to provide various documents relating to the Company to facilitate the Plaintiff’s due diligence;

(2)  That the documents provided were late;

(3)  That the Plaintiff discovered during the due diligence investigation that the Company had outstanding loans to Telecom and Estate which were not satisfactorily dealt with to enable assignment of the Shareholder’s Loan to the Plaintiff free from all encumbrances.  There were also unknown liabilities under a mortgage.  The Plaintiff claimed that the Defendant had failed to remedy issues arising out of its due diligence investigation;

(4)  That the Defendant had failed to prove that the Company had good title to the Property; and

(5)  That the Defendant had made false representations and warranties.

9.  The Defendant denied the allegations.  He denied his obligation to provide the documents that the Plaintiff sought.  Time was of the essence but the Plaintiff had allegedly waived the strict compliance with the time. The alleged delay in delivery of documents did not support “a right to repudiate the contract” by the Plaintiff.  The Defendant had tried to resolve issues raised by the Plaintiff but it required cooperation from the Plaintiff, which was not forthcoming.  The land title complaint was misconceived. The alleged false representations were trivial, did not affect any rights, and any breach did not give rise to any “right of repudiation” of the contract.

10.  The Defendant further asserted that if the Plaintiff was not satisfied by the due diligence investigation, and/or that Defendant was in breach, all that the Plaintiff was entitled to was the return of the Deposit and, in the case of breach, for damages to be assessed (if any).

11.  The complaints set out in paragraph 8 thus form the issues in this case.

C.  ISSUE 1: FAILURE TO PROVIDE DOCUMENTS

12.  There were 3 classes of documents that the Defendant failed to deliver under Clauses 5 and 8(k):

(1)  All documents “relating to” the Company within 14 days from the date of the PSPA, ie by 8 March 2019; even the Defendant admitted that various documents relating to the Company were only sent to the Plaintiff between 13 March 2019 and the Completion Date. 

(2)  Auditted accounts of the Company within 1 month after the PSPA, ie by 22 March 2019; but, eg the Company’s audited financial statements for 2018 were only provided on 24 July 2019.

(3)  The draft of the Company’s management account as at Completion Date not less than 5 days before the Completion Date, ie by 17 August 2019 but it was only delivered on 19 August.

13.  With regard to class (1), the Company itself was not a borrower but it had executed a mortgage over the Property (“BOC Mortgage”) to secure Telecom’s indebtedness.  The exact amount of indebtedness was not stated in the BOC Mortgage but was contained in a facility letter (“BOC Facility Letter”).

14.  The Defendant only provided a copy of BOC Facility Letter, with the amount of the facilities granted redacted, at 6:00 pm on the Completion Date.  No other documents such as updated mortgage repayment schedule or indebtedness were provided. As a result, the Plaintiff had no way to ascertain the extent of the Company’s liability to BOC.

15.  The Defendant submits that the BOC Facility Letter was not a document “relating to” the Company for the purpose of Clause 5, but sensitive information relating to Telecom itself.  Similarly, the phrase “such further documents reasonably requested by the Purchaser” did not extend the class of documents “relating to” the Company to cover documents of third parties.

16.  Further, the Defendant contends that the surer guide to interpretation is context: Fully Profit (Asia) Ltd v Secretary for Justice(2013) 16 HKCFAR 351, §15, Ma CJ.

17.  The context included the factual matrix prevailing at the time when the PSAP was signed and which were known to the parties.  The Defendant contends that the Plaintiff was unaware of Telecom and the Company’s liability to BOC at the time. As such, the BOC Mortgage could not be part of the factual matrix when construing Clause 5.

18.  I reject the Defendant’s contentions.  Clause 5 was to enable the Plaintiff, a stranger to the Company, to conduct due diligence investigation before Completion.  It would be wholly contrary to the purpose of that Clause if the Defendant was only required to produce documents that were within the knowledge of the Plaintiff.  To the contrary, the Defendant should provide documents that show the true financial picture of the Company.

19.  The BOC Facility Letter aroused concerns of the Plaintiff.  From the unredacted part, it could be seen that there were different types of loans granted to such aggregate unknown amount that BOC required the same to be secured by mortgages of 6 properties, of which the Property was one.

20.  Under the BOC Mortgage, Telecom and the Company jointly and severally covenanted to pay “all monies” owing by Telecom on demand (Cl.2.01 of the BOC Mortgage).  As between BOC and the Company, the Company shall be deemed the principal debtor (Cl.15.02(a) of the BOC Mortgage).

21.  The BOC Facility Letter was plainly a document “relating to the Company” which would have shown the extent of potential liability of the Company to BOC.  I hold that the Defendant was in breach of Clause 5 in failing to provide an unredacted version of the BOC Facility Letter or proof of outstanding indebtedness under the BOC Mortgage.

22.  With regard to class (2), the Defendant failed to deliver any of the Company’s audited financial statements until 20 May 2019, about 2 months after the deadline.  That delivery did not include the audited financial statements for the period up to 31 December 2018, which were delivered only on 24 July 2019. 

23.  With regard to class (3), it was not provided on the due date.

24.  Time was of the essence under the PSPA.  Failure to provide any of the 3 classes of documents on the due date(s) was sufficient to establish the Defendant’s breach under Clause 5 or 8(k).

25.  The failure to provide or lateness to provide was no small matter.  It deprived the Plaintiff of the opportunity/sufficient time to consider the documents and, if needs be, to raise further requisitions.

D.  ISSUE 2: DELAY IN PROVISION OF DOCUMENTS

26.  The Defendant contends that even if he was in breach of Clauses 5 and 8(k), the Plaintiff had affirmed the PSPA by pressing on with completion.

27.  The applicable legal principles have been summarized in Castle Global Limited v Ip Tai Hoi Paul[2020] HKCFI 1106, at §§35-36, following Prism Technology Ltd v Topwin & Companies Ltd, HCA 1190/2011, 30 March 2015, §§102-103, Ng J:

(1)  An act relied on as an affirmation needs to be sufficiently unequivocal to enable the inference to be drawn that the innocent party intends to go on with the contract regardless of the breach, or that he will not exercise his right to treat the contract as repudiated.

(2)  The fact that the innocent party has demanded the party in breach to continue to perform the contract and accepted the latter’s performance will not without more amount to a waiver of his right to treat the contract as repudiated.  This is because such a demand is not itself a clear and unequivocal representation that the right will not be exercised.

(3)  The law does not require an injured party to snatch at a repudiation and he does not automatically lose his right to treat the contract as discharged merely by calling on the other to reconsider his position and recognize his obligations.

(4)  There is middle ground between acceptance of repudiation and affirmation of the contract, and that is the period when the innocent party is making up his mind what to do.  If he does nothing for too long, there may come a time when the law will treat him as having affirmed.  If he maintains the contract in being for the moment, while reserving his right to treat it as repudiated if his contract partner persists in his repudiation, then he has not yet elected.

28.  In Castle Global, the Court, at §35, held that the purchaser’s letters did not amount to an unequivocal act of affirmation because “it stated that ‘…time is hereby made of the essence of the [Agreement]’ and more importantly ‘Meanwhile, all our client’s right under the [Agreement] are hereby expressly reserved’.  Rather, the position was that the Plaintiff was considering its options.”

29.  Mr Chiu disputes the proposition in paragraph 27(2).  He submits that this proposition appears to have been derived from Prism Technology, §102, which in turn appears to have relied on the case of Yukong Line Ltd of Korea v Rendsburg Investments Corp Ltd of Liberia [1996] 2 Lloyd’s Report 604.  However, Yukong Line does not appear to support the proposition.

30.  I am unable to agree with Mr Chiu.  Although the principle in paragraph 27(2) was not copied word by word from Yukon Line, it was completely in line with the 8 principles set out by Moore-Bick J on page 607 after reviewing a line of authorities.  In particular, Moore-Bick J guarded against “an unduly technical approach to deciding whether the injured party has affirmed the contract and should not be willing to hold that the contract has been affirmed without very clear evidence that the injured party has indeed chosen to go on with the contract notwithstanding the other party’s repudiation.”

31.  In Yukon Line, a fax of 23 January 1996 from brokers of the charterers (D) stated that the charterers were unable to perform any further. The owners (P) responded on the 24^th, giving 20 days’ notice of delivery, stating that the charterers’ cancellation of the charterparty was totally unacceptable and the charterers were strongly requested to honour their contractual obligations according to the charterparty; and in case of non-performance, all damages were to be for the charterers’ responsibility.  On 25 January, the charterers’ brokers responded, regretting non-performance by the charters.  On 29 January, the owners gave 12 days’ notice of delivery of the vessel.  Having heard no further from the charterers, the owners advised the charterers that they were accepting the repudiation on 1 February. 

32.  D conceded that the 23 January fax amounted to repudiation of the charter and that P’s fax on the 24^th was insufficient on its own to constitute an affirmation of the contract.  Moore-Bick J found that to be a right concession and in that context effectively applied the principle in paragraph 27(2) above (at p 608).  He held that P had not affirmed the contract.  The 24 January response meant that the owners were asking the charterers to withdraw their repudiation and confirm their willingness to perform.  It was impossible to find in that message an unequivocal statement by P that P would proceed with the contract and await performance in due course regardless of the position adopted by D (at p 609).

33.  Mr Chiu further submits that paragraph 27(2) above was against established authorities.  He relies on Buckland v Farmer & Moody [1979] 1 WLR 221, English CA, which followed Webb v Hughes(1870) LR 10 Eq 218.  At p 286 of Webb v Hughes, Malins VC held that:

“But if time be made the essence of the contract, that may be waived by the conduct of the purchaser; and if the time is once allowed to pass, and the parties go on negotiating for completion of the purchase, then time is no longer of the essence of the contract. But, on the other hand, it must be borne in mind that a purchaser is not bound to wait an indefinite time; and if he finds, while the negotiations are going on, that a long time will elapse before the contract can be completed, he may in a reasonable manner give notice to the vendor, and fix a period at which the business is to be terminated. …” (at p 229, underline added)

34.  However, it has to be noted that in Webb v Hughes, Malins VC found that the contract did not make time of the essence, unlike the PSPA.  His remarks were obiter and there was no discussion as to what sort of negotiations would amount to affirmation.

35.  Buckland v Farmer went on to consider the case of Luck v White, 26 P & CR 89 and Mr Chiu relies on this passage (at p 230 A-D):

“The notice to complete had expired early in September. The vendors did not then, as they had threatened, either rescind the contract or resell the property. Instead they continued to discuss the possibility of completion and ultimately agreed to November 16. It would have been easy for the vendors to reserve their rights in express terms. They might, for example, have extended the period for compliance with the notice to a specified day, time to be of the essence in that regard. Indeed, the mere extension of the period to a new fixed date would on the authorities have preserved the position that time was of the essence, without fresh stipulation to that effect. The vendors, however, did nothing of the kind. They encouraged the purchaser to try to complete notwithstanding the expiry of the notice, and there was nothing to tell him at what moment the axe would fall.” (emphasis added)

Goulding J encapsulated the principles in these terms, at p 96:

“If the party who is in the right allows the defaulting part to try to remedy his default after an essential date has passed, he cannot then call the bargain off without first warning the defaulting party by fixing a fresh limit, reasonable in the circumstances.”

36.  Goff LJ considered both Webb and Luck and concluded (at p 236):

“Waiver, however, is based on encouraging the purchaser to think that he will be given time indefinitely and will not be cut off without further notice. Mere standing by is not enough, at all events unless it continues for an unreasonably long time, and there is no suggestion of that in this case.”

37.  In the present case, in the face of continued breaches by the Defendant, the Plaintiff’s solicitors had all along been expressly reserving the Plaintiff’s rights to accept the Defendant’s repudiation and/or disclaimed any waiver of rights.  The letters accompanying payment of the 2^nd to 4^th instalments of the Deposit and the letters issued by the Plaintiff’s solicitors on the Completion Date contained words to similar effect.

38.  In the light of such correspondence, there was no sufficiently unequivocal act of the Plaintiff from which one could infer waiver on its part.

39.  Even applying Buckland v Farmer and the authorities cited therein, the Plaintiff had on numerous occasions pointed out the breaches and fixed a period(s) at which the business was to be transacted (Webb v Hughes). There was no suggestion that the extension(s) fixed by the Plaintiff was unreasonable (Luck v White).  The Plaintiff had not encouraged the Defendant to think that he would be given indefinite time to perform (Buckland v Farmer).

40.  Even if the Plaintiff had waived the prior breaches, on the Completion Date, the Defendant had still failed to provide the unredacted BOC Facility Letter.

41.  Immediately after the Completion Date, the Plaintiff’s solicitors set out in a letter the various breaches of the Defendant and lost no time in exercising the right to accept the Defendant’s repudiation (paragraph 27(4) above).

42.  Further, whether there was acceptance of repudiation was, strictly speaking, irrelevant to the Plaintiff’s claim for Liquidated Damages.  Clause 16(b) was triggered when the Defendant failed to “complete in accordance with the terms” of the PSPA.  That was wide enough to cover any act which the vendor was required to do under the agreement leading to the final act of completion: Castle Global, at§39.

43.  In light of the matters discussed under Issues 1 and 2 above, I find that the Defendant had failed to provide documents and his delay was not waived by the Plaintiff.  His failure (individually or collectively) amounted to a failure to complete in accordance with the terms of the PSPA.

E.  ISSUE 3: FAILURE TO RESOLVE OUTSTANDING PROBLEMS ARISING OUT OF THE PLAINTIFF’S DUE DILIGENCE INVESTIGATION

44.  There were 2 outstanding problems which the Defendant allegedly failed to remedy:

(1)  The Company’s liabilities to BOC; and

(2)  Loans due from the Company to Telecom and Estate (“the 2 Loans”).

45.  The Defendant submits that Clause 5 did not require him to guarantee the satisfaction of the Plaintiff in the due diligence investigation. Instead, Clause 5 should be construed to only require the Defendant to use reasonable efforts to do so.  Further, the Defendant was only obliged to provide documents relating to the Company but not a third party.

46.  This construction is untenable and contradicts the plain wording of Clause 4 that completion was conditional upon the Plaintiff being satisfied with the results of his due diligence investigation; and Clause 5 which imposed a duty on the Defendant to deliver to the Plaintiff’s solicitors all documents relating to the Company and such further documents reasonably requested by the Plaintiff.  If it was discovered during the due diligence investigation that there was any problem, the Defendant shall remedy the same as soon as possible before the Completion Date.

47.  The Company was supposed to be a property holding company with no businesses or other liabilities. It was not unreasonable for the parties to expect that the outstanding issues were to be remedied.  As will be demonstrated in the remaining parts of Section E, the documents which the Plaintiff requested for were the Company’s, not third party’s, documents.

E1.  The Company’s liabilities to BOC

48.  The Company’s liability under the BOC Mortgage was prima facie contrary to the Defendant’s representations under Clauses 10(d) and (e)(i) of the PSPA.

49.  The Defendant submits that he had resolved this issue.  Clause 7 permitted him to use the Balance of Purchase Price to redeem the Mortgage on Completion.  At 6 pm on the Completion Date, the Defendant’s solicitors, So, Ho, and Co (“SH”), sent a draft form of discharge to the Plaintiff.  The draft form provided that BOC acknowledged receipt of all moneys secured by the BOC Mortgage. SH undertook that BOC would sign the form of discharge within 21 days of Completion.

50.  However, the draft form of discharge was insufficient to remedy the issue.

51.  First, the draft was only sent to the Plaintiff at 6 pm on the Completion Date.  Under Clause 5, the Plaintiff would have been entitled to confirm in writing, within 14 days thereafter, whether it was reasonably satisfied with the results of its due diligence investigation.  There was plainly insufficient time for the Plaintiff to consider the contents.

52.  Second, the Defendant would still be in breach of Clause 10(d) and (e)(i) since, on the face of the draft form of discharge, the BOC Mortgage would only be discharged after Completion.

53.  Third, it was not clear if the Company would still owe money to BOC, and how much, after the BOC Mortgage was discharged. 

(1)  Clause 4.01 of the BOC Mortgage only required BOC to discharge the BOC Mortgage when the entire secured indebtedness was repaid.

(2)  Clause 14.01(c) of the BOC Mortgage provided that BOC had “absolute discretion in releasing or discharging the whole or any part of this security without receiving any payment or on payment of an amount less than the total amount hereby secured or the value of the security released or discharged.  In such event the Mortgagor [Company] and the Borrower [Telecom] shall remain fully liable for the monies hereby secured or the balance thereof.”

E2.  Loans owed to Telecom and Estate

54.  According to the Company’s audited financial statements made up to 31 December 2018, the Company owed the Defendant over $13 million, Telecom over $63 million, and Estate $188,005.80.  That was on its face in breach of Clauses 10(d) and (e)(i).

55.  The Defendant submits that it had come up with various proposals to resolve this problem.  In essence,

(1)  The Telecom and Estate Loans would be transferred to the Defendant (in escrow or absolutely), and they would be discharged or assigned to the Plaintiff upon Completion.

(2)  The Telecom and Estate Loans, together with the amount owing by the Company to him, would amount to HK$75,554,749.09, as per the 12 August 2019 Balance Sheet. 

(3)  Except for the HK$75 million, the rental deposit received and the prepayment received, the Company would have no outstanding indebtedness on the Completion Date. 

(4)  The Defendant would use the Balance of Purchase Price to pay BOC “for the account of Telecom being redemption money” and Estate.

     (“the Defendant’s Proposals”).

56.  Pursuant to the Defendant’s Proposals, the Defendant gave a Draft Deed of Assignment to the Plaintiff on 12 August 2019 and 2 Draft Loan Assignments on 22 August 2019.

57.  Mr Chiu described the Defendant’s Proposals as a matter of passing money from the Defendant’s left hand to his right hand but Mr Chiu conceded that it was not clear why they were not communicated to the Plaintiff before the Completion Date.

58.  Despite the Defendant’s efforts, I find that this issue was not remedied before the Completion Date.

59.  Firstly, there was considerable confusion over the exact amount of the Telecom and Estate Loans. At least 4 sets of figures have been provided to the Plaintiff in the month leading up to the Completion Date, ranging from about $62.28 million to $63.68 million.  

60.  The Defendant now claimed in §27 of his affirmation that the differences represented interest accruing on those 2 Loans. However, there was no documentary proof or computation of the changing amounts. In any event the Defendant never explained the discrepancies to the Plaintiff before the Completion Date.

61.  Secondly, there was considerable confusion over when the Telecom and Estate Loans were or were to be assigned to the Defendant. In the draft Deed of Assignment, it appeared that the assignment of the 2 Loans would take place just before Completion. However, in the Company’s 12 August 2019 balance sheet, the Company had no liabilities due to Telecom and Estate, indicating that assignment had already taken place. The Defendant only revealed for the first time in §23 of his Affirmation that the Telecom and Estate Loans were assigned to him in escrow on 12 August 2019 but the escrow agreement was not produced.

62.  Thirdly, the 2 Draft Loan Assignments were worded as “agreements” to assign instead of assignments.

63.  That aside, I find that the purported assignment would violate the definition in Clause 1, in that the Telecom and Estate Loans were not “money advanced by way of loan by the [Defendant] to the Company” and hence should not form part of the Shareholder’s Loan.

64.  If the Balance of Purchase Price were used to redeem the Mortgage as suggested in paragraph 55(4) above, the Company would be indebted to the Defendant after Completion at least to the extent of the Telecom and Estate Loans.

65.  Fourthly, the Defendant’s Proposals gave rise to a risk of the arrangement being set aside on the ground of unfair preference under s.266 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance (“Cap 32”) if Telecom is wound up. 

66.  The Defendant was a guarantor for any of Telecom’s debts under the BOC Facility Letter.  He was the sole shareholder and director of Telecom and hence an “associate” and “a person connected with” Telecom: s.265A(3)(b) of Cap 32.  If Telecom were wound up within 2 years of the PSPA, the assignment of the Telecom Loan may be set aside.  The Plaintiff thus requested, pursuant to Clause 5, for copies of the latest audited financial statements of Telecom to ascertain if Telecom was unable to pay its debts and/or whether Telecom would become unable to do so in consequence of the transaction with the Defendant.  The Defendant refused to provide those documents.

67.  Fifthly, the Defendant’s Proposals gave rise to a risk of the loan assignments being set aside on the ground of being at undervalue under s.265D of Cap 32.

(1)  The draft Deed of Assignment stated that Telecom and Estate “hereby acknowledges receipt of the sum of the Loan paid to him by the Assignee [Defendant] being the full consideration for the assignment of the Loan.”  However, there was no proof of payment.

(2)  The 2 draft Loan Assignments did not state any consideration provided or to be provided by Telecom and Estate to the Defendant.

(3)  The suggestion that the Balance of Purchase Price would be paid to BOC for the account of Telecom was no answer as it was:

(a) not acknowledged on any document or the Draft Loan Assignments to be the consideration for the assignments;

(b) not clear on account of what debts between Telecom and the Defendant;

(c) inconsistent with the express acknowledgement of Telecom and Estate on the draft Loan Assignments that they had received HK$63,683,542.77 as consideration, which did not match the amount of the Balance of Purchase Price;

(d) inconsistent with SH’s 5^th letter on the Completion Date that no payment of consideration was required; and

(e) not purporting to be consideration for Estate’s Loan.

68.  Mr Chiu maintains that the Plaintiff’s request for the financial or other documents of Telecom and Estate was not for documents “relating to the Company” but third parties.

69.  Mr Chiu may well be right.  However, if the Defendant would not procure Telecom or Estate to produce evidence of solvency, he still has to provide evidence of consideration for the assignments of the 2 Loans.

70.  I hold that the Defendant was in breach of Clause 5 in failing to remedy the Company’s liabilities to BOC and the Telcom and Estate Loans.

F.  ISSUE 4: TITLE BEING DEFECTIVE

71.  The Plaintiff says that the Defendant failed to satisfactorily answer 2 requisitions relating to: (1) the release of a previous mortgage to HSBC; and (2) 2 earlier tenancy agreements (“the Tenancy Agreements”).

72.  The legal principles are not in dispute. The vendor must prove, beyond reasonable doubt, that he has good title to the property and that the purchaser will not be at risk of a successful assertion against him of an encumbrance.  The vendor discharges his obligation if he shows to that standard that he is in a position to convey the estate or interest contracted to be sold without any blot or possibility of litigation to the purchaser: Chi Kit Co Ltd v Lucky Health International Enterprise Ltd (2000) 3 HKCFAR 268.

73.  A good title need not be a perfect title.  Whether there is any real problem in the title should be approached from the standpoint of a willing purchaser and a willing vendor with reasonably robust common sense, both intending to see the transaction through to completion in terms of their own bargain: Kingdom Miles Ltd v Ever Crystal Ltd [2019] 1 HKLRD 643 (CA), at §68, citing Mexon Holdings Ltd v Silver Bay Intl Ltd (2000) 3 HKCFAR 109, at 117D-E.

F1.  Release of the HSBC Mortgage

74.  The Company had previously executed a mortgage over the Property in favour of HSBC.  HSBC’s release of the mortgage, which was registered, described the Property released as the “Whole of the Ground Floor”, Lead On Industrial Building”, ie the Property.

75.  However, in the original release, the description of the property released was amended by deleting the words “Whole of” and substituting it with the words “Workshop on”.  The amendment was initialled by a “Ngan Siu Lun”, who verified the signature of one Kelly Poon Ka Yee, who signed the release as “Attorney and Agent for and on behalf of the Lender”.

76.  The Plaintiff submits that the amendment was invalid because there was no evidence that Ngan Siu Lun acted as the lawful attorney of HSBC. There was therefore a defect in the Company’s title in the Property.

77.  I reject the Plaintiff’s submission. Ngan Siu Lun appeared to be the solicitor acting for HSBC in the one-party release.  If Ngan Siu Lun acted without authority, then the amendment would simply be invalid and the Whole of the Ground Floor was released under the original release.

78.  Applying the test in Mexon Holdings, I find that (a) there was no real prospect that the title of the Property was under threat because the attorney of HSBC did not initial on the amendment but the solicitor of HSBC did; and (b) the property described in the registered release was the same as that in the amended release.

F2.  The Tenancy Agreements

79.  The Tenancy Agreements were discovered during the Plaintiff’s due diligence investigation.  The first tenancy was described as “for 2 years from 17.12.90 with option to renew for 2 years”.  The second was described as a tenancy “for 2 years from 16.10.1999 to 15.10.2001 with an option to renew for another term of 2 years”.

80.  The Plaintiff complained that the Defendant failed to provide the originals of the Tenancy Agreements, and thus failed to show that the Tenancy Agreements have ceased to have effect on the title of the Property. 

81.  The Plaintiff relies on Wong Bik Ching v Yu Hon Chung & anor [1997] 4 HKC 38, and submits that the Defendant was under a prima facie duty to provide the Tenancy Agreements because they were registered against the Property:

“I am of the view that prima facie when an instrument was registered against the property and it was not apparent from the land search that the document had ceased to affect the property, the document ought to be treated as part of the title deeds which the vendor should make available to the purchaser.” (p 45E-F) (underline added).

82.  However, there were alternative ways by which a vendor could prove the expiry of previous tenancies.  In New Jade Enterprises Limited v Jing Ying She Limited, HCA 13764/1997 (unreported, 22 September 2000), §30, DHCJ Gill found that production of the current original tenancy agreement, coupled with the fact that the current tenant was in occupation, was sufficient to show that the earlier tenancies were “dead and buried”.

83.  In the present case, according to the land search, the Tenancy Agreements had expired by 2003 at the latest.  If they had been further extended, they were not registered and would not bind the Plaintiff: s.3(2) of the Land Registration Ordinance (Cap 128).

84.  Additionally, the Defendant produced a current tenancy agreement which covered a portion of the Property, although this said nothing about the remaining portion of the Property.  However, there was still some overlap between the current tenancy agreement and the Tenancy Agreements.  The facts, taken together with the preceding paragraph, pointed against the possibility that the Tenancy Agreements are still alive.

85.  In summary, I find that the Plaintiff’s complaints about the title being defective are unsubstantiated.

G.  ISSUE 5: FALSE REPRESENTATIONS AND WARRANTIES

86.  Based on the above analyses, apart from expressly excluded agreements, the Company had carried on business or “entered into the following contract, agreement or arrangement since its incorporation” in breach of Clause 10(d):

(1)  The HSBC Mortgage;

(2)  The Telecom and Estate Loans; and

(3)  The BOC facilities.

87.  The representations and warranties given by the Defendant upon signing the PSPA were not true.  The Plaintiff had not waived the falsity on or before the Completion Date.  The falsity in relation to the HSBC Mortgage was not substantial as it did not affect title to the Property. The falsity in relation to the other 2 items justified the Plaintiff’s refusal to complete by virtue of Clause 4(c).  Mr Chiu makes no submission in opposition in this respect.

88.  The Plaintiff further claims that the Defendant had breached the undertaking in Clause 11(h) by:

(a)  the Company entering into a contract, or at least a commitment, in relation to its indebtedness to Telecom and Estate; the Plaintiff relies on the difference in figures said to be owed by the Company to Telecom and Estate when comparing the Draft Deed of Assignment, and July and August balance sheets.

(b)  purported assignments by Telecom and Estate of loans due by the Company to the Defendant in escrow on 12 August 2019. 

89.  With regard to (a), the Defendant alleged that the changes in figures were pursuant to interest.  I do not regard that, in itself, as evidence of the Company “entering into” a new contract or commitment unless interest was imposed after the date of the PSPA.

90.  With regard to (b), the purported assignments were proposals only.  There was no evidence of the Company participating in the assignments before the Completion Date.

91.  In summary, for the reasons given in paragraphs 86 and 87 above, I find that the Defendant was in breach of Clause 10(d).

H.  RELIEFS

H1.    Declaration

92.  Based on the above analyses, this Court has no difficulty in granting a declaration that the Defendant had repudiated the PSPA, which was accepted by the Plaintiff and duly terminated the PSPA.

H2.    Return of the Deposit of HK$18,400,000 together with the Compensation

93.  The Defendant accepts that under Clause 16(b), he has to return the Deposit to the Plaintiff but disputes the liability to pay the Compensation.  Mr Chiu’s arguments are twofold:

(1)  Clause 16(b) is an “escape clause” for the benefit of the vendor only (eg when he backs out in a rising market). Its purpose is to forestall a further claim of damages or specific performance by the purchaser;

(2)  The Compensation is a penalty that is irrecoverable. There is no evidence from both sides to suggest that there was any genuine effort by the parties to pre-estimate the loss which the innocent party would suffer in the event of breach.

94.  I can see nothing in Clause 16(b) to suggest that only the Defendant can invoke it.  Wong Lai-fan v Li Ha [1992] 1 HKLR 125, at 127 and Castle Global (at §§39-42) contained a clause similar to Clause 16(b) and the Courts had no difficulty enforcing it in favour of the purchasers. As the condition, namely, “fail to complete in accordance with the terms of [the PSPA]” was plainly met here, the Defendant has to pay the Compensation.

95.  As for the penalty point, the burden is on the defendant to establish that a clause is a penalty clause: Brio Electronic Commerce Ltd v Tradelink Electronic Commerce Ltd [2016] 2 HKLRD 1449, §14, where the Court of Appeal accepted defence counsel’s concession.

96.  In Brio Electronic (not a case of sale of land or shares)§17, Barma JA held that the question of whether a clause was a valid liquidated damaged clause or a penalty should be considered in broad and general terms, from the standpoint of the parties at the time when they entered into the contract.  There is no necessity for there to be an accurate assessment of the damages that would have been awarded at common law. To focus on the actual breach that has been found to have taken place and compare that to the damages that might be suffered with the stipulated damages is the wrong approach. (at §§17 and 19)

97.  In England, the correct test for a penalty is “whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract” Cavendish Square Holding BV v Makdessi [2015] UKSC 67, [2016] AC 1172, Lord Hodge JSC, at §255.

98.  This test was applied in Hong Kong in Bank of China (Hong Kong) Ltd v Eddy Technology Co Ltd [2019] 2 HKLRD 493 at 502, §38, Lam VP.

99.  Here, the Defendant only first raised the penalty point in Mr Chiu’s written submission.  There was no evidence from the Defendant to show that the Compensation was a penalty in nature and there was no opportunity for the Plaintiff to adduce evidence to show that the Compensation was a genuine pre-estimate of damages. 

100.  Anyhow, applying Cavendish Square, the Plaintiff had a legitimate interest in the Completion of the PSPA. Having regard to the consideration for the sale and purchase, the uncommon 6-month period for completion, the 20% deposit (which was double the usual deposit amount), the need for the Plaintiff to do due diligence investigation of the Company, the mirror provision in Clause 16(a), the Compensation was neither exorbitant nor unconscionable in nature to justify judicial intervention.  I hold that the Defendant must pay the Compensation.

H3.  Declaration of lien

101.  A purchaser has an equitable lien over land in respect of any deposit paid.  It is stated in Snell’s Equity (34^th ed), §44-014, at p 1095:

“The purchaser of land who has paid to the vendor a deposit (or other money towards the purchase price) has a common law lien in respect of title deeds that he may have in his possession. However, as a common law lien, this is again dependent on the purchaser having possession of such documentation. … However, as with the vendor, the purchaser also has an equitable lien over the land itself in the hands of the vendor for any deposit or instalment of his purchase-money which the purchaser has paid to the vendor (and not merely to a stakeholder) without obtaining a conveyance. … The purchaser has this lien not only when the contract goes off for want of title, but also where he [P] rescinds the contract under a condition enabling him to do so, or the vendor [D] repudiates the contract; but if the contract goes off through the purchaser [P]’s default, the lien is gone. The lien extends not only to the purchase-money actually paid, but also to interest thereon, and to money paid as interest on the unpaid purchase-money, and to costs properly incurred by the purchaser. The purchaser’s equitable lien arises on the principle, converse to that applicable to the vendor’s lien, ‘that he who has agreed to convey property in return for a purchase price will not be allowed to keep the price if he fails to make a conveyance.’

As with the vendor’s equitable lien, the purchaser’s equitable lien is of a proprietary nature, capable of binding third parties.” (underline added)

102.  The equitable lien applies not only to landed properties but also to all properties over which a court of equity would assume jurisdiction, including personal properties such as shares: LY Group Development Ltd v East Canton Ltd [2015] 4 HKLRD 84, §§25-33, To J.

103.  The lien even extends to security re payment of damages with interest.  The lien exists even though the plaintiff had parted with possession of the shares. In Mandecly Ltd v Hao Wei, HCA 1216/2002, 19 February 2014, the trial judge granted a lien over the shares sold by the plaintiff (§5). Subsequently, upon assessment of damages, G Lam J extended the vendor’s lien to cover damages (at §19):

“The 33 flats represent part of the property that the 1^st defendant was obliged to transfer to the plaintiffs as consideration in part for the sale of the shares in the 3^rd defendant. An unpaid vendor’s lien may arise where “the property sold is of such a nature as that the court will decree specific performance of the contract for purchase of it”: In re Stucley [1906] 1 Ch 67, 79; Langen & Wind Ltd v Bell [1972] 1 Ch 685, 692E Moreover, a lien arises as security not only for an obligation to pay a monetary price, but also to provide other form of consideration: Nuport Holdings Ltd v Duff Estate 2003 NLSCTD 63 at §56. It follows that the plaintiffs have a lien on the shares in the 3^rd defendant – the subject matter of the sale – to secure the performance of the obligation of the 1^st defendant. That obligation having been breached and substituted by an obligation to pay damages, the lien in my view extends to secure the payment of such damages together with interest. It cannot be right that whenever an unpaid vendor obtained judgment for the price or for damages, or whenever a purchaser obtained judgment for the return of his deposit, the vendor’s lien or the purchaser’s lien would be lost. The security for the obligation must pass over to the judgment enforcing that obligation. There will be a declaration accordingly.” (underline added)

104.  In summary, the lien can be applied to land or personal assets, and covers the purchase price paid, damages, interests and costs.  I see no reason why, if unliquidated damages are covered, the Compensation, which is liquidated in nature, is not.

105.  The Plaintiff had paid the Deposit.  Applying the principles in the preceding paragraph, the Plaintiff is entitled to an equitable lien over the Sale Share and the Shareholders’ Loan, both being subject matter of the PSPA. Although the Defendant has given different versions, the amount of Shareholders’ Loan as appearing on the audited financial statement of the Company, ie HK$13,268,677.00 shall be taken as the amount for the purpose of the lien.

I.  ORDERS

106.  I make orders as set out in paragraph 1 above.

107.  On a nisi basis, costs should follow the event and be to the Plaintiff with certificates for 2 counsel.

108.  I thank counsel for their assistance.