AMCOR PACKAGING (ASIA) PTY LTD v. LI WEI BO

HCA1351/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1351 OF 2009

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BETWEEN

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J U D G M E N T

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1.  The plaintiff is a subsidiary company of Amcor Limited, an Australian company, and is a major cigarette packaging company.

2.  The defendant was the Chairman and founder of the Vision Grande Group of Companies (“VG Group”) which is also in the cigarette packaging business.

3.  Through its holding company Vision Grande Group Holdings Limited (“VGGHL”) it is a listed company in Hong Kong.

4.  VGGHL changed its name to AMVIG Holdings Limited (“AMVIG”) on 1 November 2006.

5.  The defendant was involved in the cigarette packaging business in the PRC since the 1980s.

6.  He conducted the business, inter alia, through four companies.  They were Victory Shenzhen, Nanjing Sanlong, Mattie Hologram and Xian Great Sky (“the four companies”).

7.  In 2004 the defendant had some discussions with the plaintiff concerning their investment in VGGHL who were about to make an acquisition in a business in Kunming.

8.  For the purposes of this judgment it is not necessary for me to go into great deal concerning the developing business relationship between the plaintiff and the defendant.

9.  Suffice it to say that the plaintiff and its associated companies injected a total sum of HK$510,014,000 into companies controlled by the defendant and in return obtained control over these companies.

10.  Although the defendant continued to work for the companies the plaintiff was able to vote its own nominees as Directors of the various companies.

11.  In April 2006, Mr Billy Chan became Chairman of VGGHOL and shortly after this David Hodge and Peter Downing were appointed Non-Executive Directors of the company.

12.  One of the important requirements of the plaintiff when investing in the defendant’s company was to require him to execute a Deed of Undertaking which undertook to pay compensation to the plaintiff if the net profit after taxation (“NPAT”) of the companies did not amount to as much as the figures which were agreed.

13.  A formula was negotiated between the parties which was predicated on the premise that there should be a price to earnings ratio of 8.

14.  The undertaking upon which the present application is founded was the third such undertaking which was entered into.

15.  The undertaking was in this form :

“Deed of Undertaking

I am delighted that the Amcor Group is now the controlling shareholder of AMVIG Holdings Limited (‘AMVIG’).

To demonstrate my commitment and belief in the strength and future potential of AMVIG, and to ensure that the Amcor Group will reap the rewards of its investment in AMVIG, I am prepared to give the following personal undertakings. These undertakings are given in my personal capacity and not in my capacity as a director of AMVIG. They are irrevocable and subject only to the conditions expressly set out in this letter.

1. Undertakings

1.1 Profits guarantee

I undertake to Amcor Packaging (Asia) Pty Limited (‘Amcor Packaging’) and each of its affiliates as follows :

(a) If the audited consolidated net profit after tax and minority interests (‘NPAT’) of the AMVIG Group (the ‘2006 & 2007 Profit’) as shown in the audited consolidated accounts of AMVIG for the two years ending 31 December 2006 and 31 December 2007 (the ‘2006 & 2007 Accounts’) is less than HK$320 million, within ten business days after the certification of the 2006 & 2007 Accounts by the Auditors I shall pay to Amcor Packaging or an affiliate nominated by Amcor Packaging an amount in Hong Kong dollars calculated in accordance with sub-paragraphs (b) and (c) below.

(b) The amount to be paid to Amcor Packaging or its affiliate by me in each of 2006 and 2007 pursuant to sub-paragraph (a) above will be determined as follows :

A = 8 x (B-P) x S/C

where

A = the amount to be paid by me to Amcor Packaging or its affiliate;

B = HK$320 million;

P = the actual NPAT for 2006 and 2007;

S = the aggregate number of Shares held by Amcor Packaging and its affiliates; and

C = the total issued share capital of AMVIG as at the date on which the calculation described in this sub-paragraph (b) is made.

(c) The following provisions shall apply in respect of the preparation and report of the 2006 & 2007 Accounts :

(i) the 2006 & 2007 Accounts shall confirm to the generally accepted accounting practice, standards and principles of Hong Kong;

(ii) the 2006 & 2007 Accounts shall be issued and certified by the Auditors as soon as possible but no later than four months after the end of the relevant accounting period; and

(iii) unless otherwise agreed in writing by Amcor Packaging and myself, the accounting policies adopted for the preparation of the audited accounts of AMVIG for the year ended 31 December 2004 shall be consistently applied in the preparation of the 2006 & 2007 Accounts for the purpose of calculating the 2006 & 2007 NPAT in accordance with this clause.

(d) Force Majeure

If as a result of a Force Majeure Event, any of the manufacturing plants of a member of the AMVIG Group are forced to close for at least 3 consecutive production days during 2006 or 2007 (other than for public holidays or shut downs for maintenance or any voluntary closure by management), the profit guarantee period will be extended for a portion of the following year equal to the number of days the relevant manufacturing plant(s) were closed due to the Force Majeure Event.

1.2 Covenant not to compete

I hereby undertake to Amcor Packaging and each of its affiliates as follows :

(a) that I will not for a period from the date of this letter up to 31 December 2015, within Hong Kong or the People’s Republic of China, do any of the following :

(i) be directly or indirectly engaged, concerned or interested whether on my own account or as a director, officer, member, shareholder, partner, employee, consultant, agent, beneficiary, trustee or otherwise in any enterprise, corporation, firm, trust, joint venture or syndicate which is engaged, concerned or interested in or carrying on any business other than AMVIG which is the same as or substantially similar to or in competition with that conducted by AMVIG as at the date hereof;

(ii) on my own account or for any person, enterprise, firm, trust, joint venture or syndicate directly or indirectly solicit or entice (or attempt to entice) away from AMVIG any customer of AMVIG;

(iii) on my own account or for any person, enterprise, firm, trust, joint venture or syndicate directly or indirectly solicit or entice (or attempt to entice) away from AMVIG any supplier to AMVIG;

(iv) on my own account or for any person, enterprise, firm, trust, joint venture or syndicate directly or indirectly solicit or entice (or attempt to entice) away from AMVIG any director, officer or employee of AMVIG; or

(v) personally or by my employees or agents or by circulars, letters or advertisements whether on my own account or for any other person, enterprise, firm, trust, joint venture or syndicate directly or indirectly interfere with the business of AMVIG or divulge to any person any information concerning the business or AMVIG or any of its respective dealings, transactions or affairs.

(b) I acknowledge that each of the prohibitions and restrictions contained in clause 1.2(a) will be read and construed and will have effect as a separate severable and independent prohibition or restriction and will be enforceable accordingly and that such restrictions and reasonable as to period, territorial limitations and subject matter in order to protect Amcor Packaging’s investment in AMVIG, and that breach of any of the prohibitions and restrictions contained in clause 1.2(a) may not be adequately compensated by an award of damages and will entitle Amcor Packaging, in addition to any other remedies available at law or in equity, to seek an injunction to restrain the committing of any breach (or continuing breach) of any of those prohibitions or restrictions.

(c) It is my intention that all combinations of the prohibitions and restrictions will apply and be enforceable and that only those which a Court, in exercising its direction, may hold to be an unreasonable restraint of trade will be served.

1.3 Appointment

I hereby undertake to Amcor Packaging and each of its affiliates that, for so long as Amcor Packaging and its affiliates are, in aggregate, the single largest shareh9older in AMVIG :

(a) I will vote all my shares in AMVIG in favour of any nominees to the Board of AMVIG proposed by Amcor Packaging so that Amcor Packaging will have the right to appoint a majority of the Directors at all times; and

(b) I will exercise my vote as a Director in favour of the appointment of Amcor Packaging’s nominee as chairman of the Board.

1.4 Right of first refusal

(a) Subject to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (‘Listing Rules’) and the Code on Takeovers and Mergers promulgated by the Securities and Futures Commission (‘Takeovers Code’), if at any time up to 31 Dec 2010 I wish to transfer any of my Shares in AMVIG to any person other than a Permitted Transferee, I undertake to comply with the following procedure and I agree to be bound by such the obligations set out in this paragraph 1.4 :

(i) I must give written notice (First Offer Notice) To Amcor Packaging of the number of shares (Offered Shares) I wish to transfer and the terms on which I wish to transfer the Offered Shares;

(ii) if Amcor Packaging or its nominee wishes to purchase all or some of the Offered Shares, it must give written notices to me (Acceptance Notice) any time within 3 clear Business Days after the date of receipt of the First Offer Notice. The Acceptance Notice must specify the number of Shares (Acceptance Shares) that Amcor Packaging or its nominee wishes to purchases;

(iii) an Acceptance Notice constitutes an unconditional agreement by Amcor Packaging to purchase the Acceptance Shares at the price calculated in accordance with sub-paragraph (iv) below and on the terms set out in the First Offer Notice.

(iv) the price shall be calculated as the average of the last twenty days closing price of the Shares immediately preceding the date of the First Offer Notice;

(v) if Amcor Packaging or its nominee does not give an Acceptance Notice within the 3 Business Day period specified in sub-paragraph (ii) above, or if Amcor Packaging or its nominee does not agree to purchase all the Offered Shares, I may transfer (or enter into legally binding obligations to transfer_ all or any other Offered Shares that are not subject to an Acceptance Notice given by Amcor Packaging or its nominee to any other person at any time within two months after the date of the First Offer Notice, at a price which is not less than the price calculated in accordance with sub-paragraph (iv) and on terms and conditions no more favourable to the purchase than those set out in the First Offer Notice; and

(vi) after such two month period, if I wish to transfer any of my Shares in AMVIG to any person other than a Permitted Transferred, I must follow the procedure set out in this clause 1.4.

(b) My right to transfer my Shares to a Permitted Transferee is subject to and conditional on the Permitted Transferee executing a letter in form and substance acceptable to Amcor Packaging or an affiliate of Amcor Packaging agreeing to be bound by the right of first refusal set out in this letter.

2. Definitions

Auditors means the auditors of the AMVIF Group from time to time, which must be a firm of auditors acceptable to Amcor Packaging or its affiliate.

Board means the board of Directors of AMVIG.

Business Day means a week day on which banks are open in Hong Kong.

Director means a person appointed to the office of Director of AMVIG and includes any alternate Director duly appointed and acting as a Director.

Force Majeure Event means one or more of the following events due to circumstances beyond my control but no others.

(a) lightning, storm, flood, fire, earthquake or typhoon;

and

(b) act of war, terrorism, riot, insurrection or civil commotion.

Permitted Transferee means an entity in which I directly hold 100% of the voting interests.

Share means an ordinary share of par value HK$0.01 each in the capital of AMVIG.

AMVIG Group means

AMVIG and its proportionate interest in each of the following subsidiary and associated companies of AMVIG (together with their respective subsidiaries) as constituted as at the date the Subscription Agreement as shown below:

(i) 100% of Victory Honest Industries (Shenzhen) Co., Ltd;

(ii) 48% of Nanjing Sanlong Packaging Co., Ltd;

(iii) 51% of Xian Greatsky Laser Holding Co., Ltd

(西安大天激光圖像有限公司); and

(iv) 100% of Mattie Hologram Technology (Huizhou) Co., Ltd.

For the avoidance of doubt, no other companies or businesses that may be acquired by AMVIG at any future time will be included as part of the AMVIG Group for purpose of determining the 2006 & 2007 NPAT.

This letter constitutes the entire agreement between the parties hereto with respect to the matters dealt with herein and supersede any previous agreements, undertakings, arrangements, statements, understandings or transactions between the parties hereto.

This letter shall be governed and construed in accordance with the law of Hong Kong and is signed, sealed and delivered by me as a Deed under the law of Hong Kong.

Signed, sealed and delivered by Mr. Li Wei Bo”

16.  It was the contention that Mr Cooney, SC, for the plaintiff, that the terms of this undertaking were clear and unequivocal and that the plaintiff had fulfilled its obligations within the time specified.  It was for this reason that he argued that a summons under Order 14 was appropriate and that judgment should be entered for the plaintiff.

17.  This was on account of the fact that it was manifest from the AMRIG consolidated accounts which had been delivered timeously to the defendant that there was a substantial shortfall in the relevant profits referred to in the undertaking.

18.  There were essentially four grounds upon which Mr Godfrey Lam, SC, for the defendant opposed the application.  I propose dealing with these separately.

19.  The first ground was that no duly consolidated accounts showing the profits or losses of the four companies had ever been delivered to the defendant.

20.  Consolidated audited accounts were delivered to the defendant.  However these accounts did not particularise the NPAT of any of the four companies.

21.  Mr Lam, SC submitted on the authority of Coghlan v S.H. Lock Australia Limited [1987] 8 NSWLR 8 that it was incumbent upon the plaintiff to comply strictly with the terms of the undertaking before any liability could attach to the defendant.

22.  Even up to the date of the hearing no audited consolidated accounts in relation to the four companies had ever been seen by the defendant or those advising him.

23.  Mr Cooney, SC attempted to surmount this problem by submitting that “consolidated accounts” included the working papers which were used by the auditors when undertaking their audit.

24.  He said that the plaintiff’s solicitors, Deacons, had submitted to the defendant’s solicitors extracts from the working papers which did particularise the accounts of the four companies.

25.  He maintained that the only reason these extracts had been sent to defendant’s solicitors was “to avoid unnecessary argument”.

26.  The defendant, in one of his affirmations, attached a report from KLC Kennie Lui & Co. forensic accountants in which an expert opinion was expressed that the extracts of themselves did not constitute part of an audit.

27.  There is no doubt in my mind that Mr Lam, SC has been able to establish that there is, at the very least, an arguable case that the plaintiff has failed to comply with the requirement contained in the undertaking for the delivery of consolidated audited accounts in relation to the four companies.

28.  The second ground of opposition relates to alleged breaches of implied terms and conditions contained in the undertaking.  To get a flavour of the nature of said implied terms it may be helpful to have regard to paragraphs 35 and 36 of the Defence and Counterclaim :

“Breaches of implied conditions or terms

35. If, which is denied, the NPAT of the AMVIG Group for the two years ended 31 December 2006 and 31 December 2007 was less than HK$320,000,000, the Defendant is not liable under the Third Undertaking as (a) he was discharged from performance thereof by the Plaintiff’s breaches of the implied condition or fundamental or repudiatory breaches of the implied terms and (b) in any event, the deficit was caused by the Plaintiff’s wrongful breaches of the implied conditions or implied terms as set out below.

Wrongful removal of Defendant

36.     Wrongfully and in breach of the first implied condition in the Third Undertaking, the Plaintiff and its affiliates (a) caused or permitted AMVIG to remove the Defendant from its board of directors on 30 April 2007, and (b) shortly thereafter caused or allowed the Four Companies (and their parent companies) to remove the Defendant as its director or to dismiss him as its legal representative and employee when it was within their power to prevent all these things.”

Particulars are given of the implied terms. 

29.  The main argument advanced by Mr Cooney, SC is that he places reliance upon the penultimate paragraph of the undertaking, namely that the letter constitutes the entire agreement and that accordingly it is not open to the defendant to attempt to introduce any further agreements or understandings.

30.  He also submitted what had been referred to as a “common assumption”, namely that the defendant would continue with his employment was not an assumption which was shared by the plaintiff.  He also pointed out that the defendant’s service contract was due to expire and there was no assurance whatever that a further service contract would be forthcoming.

31.  Mr Lam, SC’s response to this was that a broader approach must be adopted.  In this connection what the defendant was seeking to do was not to add an additional term or terms to the undertaking but to endeavour to interpret the undertaking in a meaningful way.  This had been the approach commended by Lord Hoffmann at p. 1993 of AG of Belize & Others v Belize Telecom & Others [2009] 1 WLR 1988 :

“18. In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means.”

32.  Lord Hoffmann went to say at p. 1994 :

“21. It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. It will be noticed from Lord Pearson’s speech that this question can be reformulated in various ways which a court may find helpful in providing an answer—the implied term must ‘go without saying’, it must be ‘necessary to give business efficacy to the contract’ and so on—but these are not in the Board’s opinion to be treated as different or additional tests. There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”

33.  If this approach is adopted it is manifest that it is permissible to consider the overall circumstances.

34.  If this is done it is essential that there must be a trial to determine the overall circumstances.

35.  One is left to wonder whether it is conceivable that the defendant would have been prepared to enter into the undertaking if he had thought there was any possibility that he may have had no opportunity of exercising any control over the management of the four companies.

36.  An example of this can be seen from what apparently subsequently transpired where decisions were made to discontinue purchasing supplies of paper from the supplier who was charging RMB7,500 per tonne and transferring the business to another supplier who charged RMB9,500.  The product in question came from the same source.

37.  What is also of significance is that the officers in the plaintiff’s group who were seized with the responsibility for these actions did not condescend to swear affidavits in response to the contentions being advanced by the defendant.

38.  I have no doubt that the defendant has discharged the burden placed upon him to establish that he has an arguable Defence and Counterclaim and that this is not a case which can be dealt with under Order 14.

39.  The third ground relied upon by the defendant is that the formula adopted for compensation in the undertaking constitutes a penalty.

40.  The basis for this largely depends upon the way the case proceeds.

41.  As stated earlier in this judgment the total amount of funds which the plaintiff and its associated companies have injected into the defendant’s companies amounts to $510,014,000.  This has to be considered against the amount being claimed in this litigation of $539,448,104.  It is of course the case that the plaintiff still controls the four companies.

42.  Mr Cooney, SC’s answer to this is that the terms of the undertaking were reached after negotiations had been conducted by the parties and that it was not unreasonable to base the compensation on a prices to earnings ratio of eight years.

43.  I have come to the conclusion that it only would be possible to determine whether the formula adopted was a penalty after a trial where all of the relevant issues had been determined.

44.  The fourth ground was based upon the defendant’s contention that the agreement contained in the undertaking amounted to a gaming contract and was accordingly unenforceable.

45.  I confess that I am doubtful whether this can be established.

46.  So far as the third and fourth grounds are concerned, I do not consider that it is necessary on this application to make an adjudication having regard to the conclusions I have reached on the first two grounds.

47.  So far as they are concerned I have no doubt that the defendant has discharged the burden which lies on him of establishing that this is a case which should go to trial and which cannot be determined under Order 14.

48.  This being the case the application is dismissed.

49.  Having regard to the fact that the plaintiff was aware of the contentions which were going to be advanced by the defendant, I consider that the appropriate order for costs is an order that the costs of this application will be to the defendant and that they should be paid forthwith.

50.  As I have not had the benefit of hearing Mr Cooney, SC on this proposed order at this stage I make an order nisi.