YIU YAN CHE AND OTHERS v. YIU HO MING, HERMES AND OTHERS

CACV 261/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 261 OF 2012

(on appeal from HCA No. 630 of 2008)

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J U D G M E N T

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Hon Yuen JA:

1.  This is the defendants’ appeal from a judgment of Mimmie Chan J given on 25 October 2012 after a 3-day trial.

2.  To understand the issues, it is necessary to go briefly into the background facts.  (Since nearly all the individuals are surnamed Yiu, they will be referred to by their initials).

Background

3.  The parties to this action were divided into two camps - the plaintiffs (“Group A”) and the defendants (“Group B”).  The 2 Groups held the Chung Tung group of companies which comprised companies in Hong Kong and overseas. 

KK

4.  One such overseas company was Klang Krung Co Ltd (“KK”), a company incorporated in Thailand.  KK had 9 shareholders:

(1)  1 from Group A, viz the 1^st plaintiff (“YC”);

(2)  3 from Group B, viz the 1^st defendant (“HM”), the 2^nd defendant and the 3^rd defendant, and

(3)  5 Thai persons, viz Kitti Sricharoensuk (“Kitti”) also known as Yiu Wang Kei, and his 4 children.

There were 4 directors: YC, HM, Kitti and his son.

The Sum

5.  In 2004, KK sold a plot of land.  The proceeds of sale, some 80m baht (“the Sum”) were deposited in an account held by KK at the Kasikorn Bank (“the Bank”), of which YC was an authorized signatory.

6.  On 17 October 2005, KK commenced voluntary liquidation in Thailand.  Joint liquidators were appointed, with Kitti apparently having sole authority to deal with KK’s financial activities (see paras. 17 and 19 of the Report of Group A’s expert on Thai law).    

7.  On 11 January 2006, YC opened an account in his name at the same branch of the Bank and transferred the Sum to his account.

Complaint to Police

8.  The following month, on 17 February 2006 HM made a complaint to the Thai police that the Sum had been misappropriated by YC.

Freezing of YC’s bank account

9.1  On 20 February 2006, HM through his lawyers informed the Bank that YC had no authority to transfer the Sum because KK had commenced dissolution, and that a lawsuit would be filed against YC for misappropriation. 

9.2  HM requested that the bank freeze YC’s account, which the bank duly did.

10. 1  According to YC, he did not know of either the police complaint or the freezing of his account until 8 May 2007. 

10.2   It would appear that the learned judge did not specifically make a finding accepting that evidence, but she noted that even on the 4^th defendant’s evidence,

“she claimed only that YC should have had knowledge of the defendants’ complaint made to the Thai police (as distinct from the complaint to the Thai Bank), and admitted that she did not know if YC had knowledge of the Account having been frozen, and when he had such knowledge” (para. 14).

10.3   Consequently YC’s evidence that he did not know of the freezing of the account until 8 May 2007 was not contradicted.

Deed of Settlement

11.1  Meanwhile there had been a number of disputes between the two Groups since 2004, involving legal proceedings in Hong Kong. 

11.2   However they managed to settle their differences and on 26 March 2007 (ie before YC was aware that his account had been frozen), the two Groups executed a Deed of Settlement.  The Deed was expressed to be governed by Hong Kong law.

12.  In the Deed of Settlement, it was acknowledged that each Group had a 50% share in the companies in the Chung Tung group, and that the parties had agreed to terms for the purpose of settling their disputes and separating their interests in the Chung Tung group (and others) “on a clean break principle”.

13.  Essentially the Deed of Settlement provided that YC would buy out Group B for a sum of $115m to be paid as follows:

- 1^st instalment of $34.5m on execution of the deed,

- 2^nd instalment of $34.5m on 26 September 2007,

- 3^rd instalment of $23m on 26 December 2007 and

- 4^th instalment of $23m on 26 March 2008,

conditional upon certain acts having been performed by Group B.

4^th Schedule

14.  The acts that had to be performed by Group B were set out in the 4^th Schedule.  Each clause in this Schedule stipulated specific acts to be done in relation to the companies named therein.  Clause 5 related to KK.   

Clause 5

15.  It was acknowledged in the Deed of Settlement that KK was a company within the group.  It was described as “a company incorporated in Thailand which has been wound up”.  Clause 5 of the 4^th Schedule provided:

“Group B doth severally and collectively cause, procure and effect any document in respect of all or any of their interests, rights, entitlements and claims of and in the proceeds of sale and realization of the properties and assets of [KK], a company incorporated in Thailand, and for such purpose, to execute all necessary documents to ensure that the same be achieved and effected whenever reasonably required of them by [YC]”.

16.  The issue in the present case is whether Group B was obliged under this clause to procure those persons within their Group who were shareholders of KK (viz the 1^st, 2^nd and 3^rd defendants) to execute a document which the Bank demanded as a condition to lifting the freeze on YC’s account, so that the Sum could be withdrawn.  (I should note here that all Group B members have been represented by the same solicitors and counsel with presumably no conflict of interests).

YC’s inability to withdraw the Sum

17.  YC found out about the freezing of the bank account in May 2007 which, as mentioned earlier, had been done at HM’s request.  This led to correspondence between the solicitors for the two Groups which became increasingly antagonistic. 

HM’s withdrawal of complaint to police against YC

18.  Eventually on 1 August 2007, solicitors for HM wrote to the Thai police informing them that “our client hereby withdraw the said complaint against [YC]”. 

HM’s letter to the Bank   

19.  On 17 August 2007, solicitors for HM wrote to the Bank referring to their letter to the Thai police and saying “as a result of the said withdrawal, we are of the opinion that [YC’s account] shall be activated and your bank shall release the money to [YC] upon his request”. 

The Bank’s position

20.  Those letters from HM’s solicitors did not change the Bank’s position.  On 24 August 2007 YC’s solicitors informed Group B’s solicitors that the bank would not allow YC to operate the account unless (amongst other things) all the shareholders of KK executed a resolution withdrawing their claim against him.

Proposed Settlement Contract

21.  On 25 October 2007 YC’s solicitors sent Group B’s solicitors a “Settlement Contract” proposed on behalf of the Bank.  The document provided that:

- the Sum belonged to the shareholders of KK whose names appeared in the Companies Registration at the time of the “account settlement” completed on 11 January 2006 (the day the Sum was transferred to YC’s account);

- all of KK’s shareholders, directors and “Accounting Authority” (the same persons as the directors) were to be parties to the Settlement Contract;

- all the above persons had to attest that no shareholder has charged his share to a third party as security;

- all of them had to consent to the Bank allowing YC to withdraw the Sum;

- all of them had to abide by the Bank’s requirement that HM would withdraw the charge of misappropriation against YC and produce proof of such withdrawal;

- all of them had to accept that the Bank had received the Sum without knowledge of KK’s dissolution and give the Bank an assurance that there would be no attempt to seek compensation from it;

- if any “stakeholder” sought damages from the Bank, all of them had to jointly compensate the Bank, together with interest at 15% pa until full payment.       

Group B’s refusal to sign the Settlement Contract

22.  Group B refused to sign the Settlement Contract.  The obstacle appeared to be the indemnity sought by the Bank (no discrete point was raised regarding the rate of interest demanded). 

23.  Subsequently in March 2008 YC proposed in a Chinese side agreement that if the Bank made any claims against the Group B shareholders, he would indemnify them to the full extent of the claims. However the Group B shareholders took exception to the description of the deposit in the Chinese side agreement and refused to sign the Settlement Contract. 

Proceedings

24.  On 15 April 2008 Group A instituted HCA630/2008 against Group B requiring them to specifically perform the Deed of Settlement by executing the Settlement Contract. 

Memorandum of Agreement

25.  Eventually on 9 April 2010 a Memorandum of Agreement was signed by all the KK shareholders which was along the lines of the Settlement Contract except that only YC was required to indemnify the Bank in the event it suffered any damage as a result of the withdrawal of the Sum.  YC was subsequently able to withdraw the Sum on 11 July 2010.      

26.  In due course, the claim in HCA630/2008 was amended so that the claim against Group B was limited to the loss of commercial interest on the Sum for the period during which YC was unable to withdraw it, less interest actually earned. 

Judgment

27.  For reasons set out in the judgment, the learned judge held that Group B was contractually bound under Clause 5 of the 4^th Schedule to procure the signing of the Settlement Contract, and accordingly she ordered that Group B pay Group A the interest on the Sum from 15 November 2007 (being 21 days after the date when the Settlement Contract was presented for signature) to 11 July 2010 (when the Sum was withdrawn), at the prevailing commercial rate, less interest actually earned, together with costs and expenses incurred, and costs of the action.

Appeal

28.  Group B appealed.  The primary argument advanced by Mr Pow SC their leading counsel was that because the Sum was already in YC’s account and he did not know that it had been frozen at the time of the Deed of Settlement, the parties could not have intended that Clause 5 of the 4^th Schedule would refer to the Sum.  It was argued that the clause referred only to proceeds of prospective sales of KK’s assets, whatever they may have been. 

Discussion

29.  With respect, I do not agree with that argument.  It focuses only on the Sum’s physical location, and fails to take account of Group B’s legal entitlement to distribution from KK’s assets on completion of liquidation, a process which involved persons who were not parties to the Deed.  I will expand on this below.          

30.  First and foremost, it is important to bear in mind that

(1)     under the Deed of Settlement, KK was acknowledged as a Chung Tung group company, and so 50% of it was owned by Group B;

(2)     at the time of the Deed of Settlement, the parties knew that KK was being wound up (consequently when Clause 5 refers to “interests” etc in “the proceeds of sale” etc, the parties must be taken to be referring to entitlements to distribution from those proceeds on completion of liquidation);

(3)     at the time of the Deed of Settlement, KK’s liquidation had not been completed and no distributions had been made (the transfer of the Sum into YC’s account was not a distribution). 

31.  Accordingly before the Deed of Settlement, the whole Sum remained KK’s assets, to be got in by KK’s liquidators and to be distributed when liquidation was completed, with Group B being entitled to 50%.  Group B’s legal entitlement to future distribution, arising from their 50% shareholding, is irrespective of where physically KK’s assets were held, or by whom.  The fact that the Sum was in YC’s account did not mean that Group B had lost its legal entitlement to future distribution when the liquidation process was completed.  Whether YC knew about the freezing is also irrelevant to Group B’s entitlement.

32.1     When the Deed of Settlement was signed and Group A agreed to purchase Group B’s interests, the quid pro quo was that Group B would have to sign over their “interests, rights, entitlements or claims” in KK’s assets.  

32.2   Since (before the Deed of Settlement) Group B was legally entitled to distribution from those assets, a proper and objective interpretation of Clause 5, applying the principles in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, must include effecting the transfer of that entitlement to Group A. Otherwise the liquidators (who were not party to the Deed of Settlement) would have been duty-bound to get in the Sum from YC’s account and to distribute 50% to Group B when they completed the liquidation.  This is not a scenario that Group B suggests was the understanding under the Deed of Settlement.

32.3   Accordingly I cannot accept Mr Pow’s argument that simply because the Sum was physically in YC’s account at the time of the Deed of Settlement, nothing remained to be done legally for Group B to sign over their entitlement to distribution from the Sum, and that Clause 5 only governed prospective sales of KK’s assets.  I respectfully agree completely with the learned judge’s judgment that (para. 17):

“Objectively construed, Clause 5 must include documents which relate to the defendants’ acknowledged 50% indirect interest in and rights to, and their claims to the Sum, which is the property of KK. It cannot be disputed that the proceeds of sale of KK’s property remain KK’s property, whether they are in KK’s bank account, or YC’s Account”.

33.1     Moreover Mr Pow’s alternative, more restrictive, interpretation is not supported by the factual matrix. 

33.2   According to Kitti, KK was formed only to hold one plot of land, which was the one sold in 2004. 

33.3   This evidence from Kitti was not contradicted by Group B even though HM was a director and would have knowledge of KK’s operations.  Indeed there is no evidence from Group B that KK had any other assets at all, even a typewriter which Mr Pow used as an example during his submissions.

33.4   In light of this factual matrix, the Sum must therefore have been the “proceeds of sale ... of the properties and assets of KK” the parties referred to in Clause 5.

34.  Group B also argued that since the Sum was cash, it would have been impossible to speak in terms of “proceeds of sale and realization of cash”.  With respect, that is not what Clause 5 said. The Sum was clearly “the proceeds of sale and realization of the properties and assets of [KK]”.  

35.1     Group B also argued that Clause 5 was only confined to “their interests ... in the proceeds of sale ... of the properties and assets of [KK]” and they no longer had any interests in the Sum after the Deed of Settlement. 

35.2   This argument fails to appreciate that under the Deed of Settlement, Group B had only agreed to assign their interests in the group of Chung Tung companies to Group A.  The actual transfers still had to be effected, irrespective of whether any individual company was extant or in the process of liquidation. 

35.3   Thus Clause 13(a) of the Deed of Settlement expressly provided that Group B’s obligation to perform the acts required of them continued notwithstanding completion.   

35.4   Furthermore, Group B’s argument ignores the word “claims” to the Sum which Group B had made via their lawyers to the Bank.

36.  It was also argued for Group B that the execution of the Settlement Contract was not “reasonably required” by Group A.  In particular they point to the Bank’s requirement that the shareholders provide an indemnity in the event of any future claims against the Bank.

37.1     It should be noted that after considering the oral evidence of the experts on Thai law, the learned judge held that there was no satisfactory evidence that it was unlawful under Thai law for the Bank to demand that all shareholders of KK execute the Settlement Contract before it would lift the freeze on YC’s account (para. 33). 

37.2   In light of the lawsuit threatened by HM’s lawyer, the Bank would have been understandably careful to protect itself against future claims by other stakeholders eg security chargees of the shareholders.  In my view the requirement that all shareholders provide an indemnity was both legally and commercially reasonable. 

37.3   Since this was the Bank’s lawful and reasonable requirement, it cannot be said that Group A was unreasonable in requiring the Group B shareholders to comply with it.  Accordingly the latter was contractually bound under Clause 5 of the 4^th Schedule to execute the Settlement Contract, and in my view this was so whether or not YC gave a counter-indemnity to Group B.

38.  Mr Pow argued that the learned judge had erred in grounding her judgment on the expert evidence because the experts had proceeded on the incorrect assumption that Kitti (who had sole authority to deal with KK’s financial matters in the liquidation) was a nominee of Group B, when in fact he was a nominee of YC.  Accordingly, Mr Pow argued, execution of the Settlement Contract was not necessary.

39.1     With respect I cannot see how the Bank’s demand that all shareholders execute the Settlement Contract would be affected by the beneficial interest in Kitti’s own shares in KK. 

39.2   Further, even if there was some sort of connection between the two matters (which I fail to see), Kitti’s duties as liquidator arose as a matter of law.  He was duty bound to make distributions to the shareholders of KK.  Not being a party to the Deed of Settlement, he would not have been able to rely on it to absolve himself from liability should it be alleged that he failed to distribute KK’s assets at the completion of the liquidation according to each registered member’s shareholding.

40.  Finally I should record that Mr Pow also sought to argue that Group A had waived compliance with Clause 5, or that Clause 5 was spent, because they had made payment of the 3^rd instalment.  However we did not allow him to raise this argument as waiver was never pleaded, nor raised in the court below, and hence not explored in the evidence at trial, and it is well-established that waiver is a defence of mixed law and fact.         

Order

41.  For the reasons above, I would dismiss the appeal.  The parties having agreed that costs should follow the event with certificate for two counsel, I would make an order that the defendants (appellants) pay the costs of the appeal to the plaintiffs (respondents) with certificate for two counsel.

Hon Chu JA:

42.  I agree.

Hon Lam JA:

43.  I respectfully agree with the judgment of Yuen JA and have nothing to add.