MIRAMAR HOTEL & INVESTMENT CO LTD v. EXPRESS CROSS BORDER COACH MGT. CO. LTD

HCA 1693/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1693 OF 2007

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J U D G M E N T

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1.  The plaintiff is a listed Hong Kong company specialising in hotel and tourist related businesses, including the operation of cross border coach services.

2.  The defendant company is a well-established operator of cross border coaches.  Both parties held quotas from the Transport Department for the operation of such services.

3.  As a consequence of general traffic congestion at cross‑border points the Department invited the coach operators in Hong Kong to form five (5) groups to operate 6 (six) routes – one to operate 2 (two) routes and the others one (1) route each.

4.  In order to apply for a route under the Scheme the operators in a group needed to hold a minimum of 80 quotas.  An applicant group needed to form a company and the coach operators within the group would be shareholders in the group.  The defendant company set out to obtain 240 quotas to operate 3 (three) routes, and thereby lead a coalition of coach operators.

5.  To this end it sent a proposal to a number of coach operators including the plaintiff.  This formed the basis of the contract between the defendant and coach operators wishing to come under the defendant’s umbrella.  The terms included:

(1) An understanding not to join any other coalition of coach operators.

(2) Coach operators should make available its quotas for an application for routes under the Scheme.

(3) An operating company was to be formed in which the coach operators would hold shares in proportion to their quotas.

(4) The coach operators would be entitled to operate 1 (one) coach for every 5 (five) quotas obtained, and they could group their quotas with those of other operators.

(5) 3% of the revenue/turnover would be distributed to the shareholders.

(6) 82% of the revenue would be distributed to the operating shareholders (as opposed to the participating shareholders), in proportion to the trips made by their coaches.

6.  At a meeting in May 2004 the defendant through Eddie Choi indicated that the plaintiff would be required to make available its 2 (two) quotas in an application to the Transport Department to operate under the Scheme, and that the plaintiff would be allotted shares in the operating company in proportion to its quotas. The defendant denies that such a meeting took place, alleging that the Proposal was sent by fax to Mr Sham of the plaintiff company.  This difference of communication is of no consequence.

7.  In or about June 2004 the plaintiff entered into a contract with the defendant whereby the plaintiff was to receive 2,000 shares in the defendant company, out of a total issued share capital of 199,000 \ shares and 3 per cent of the defendant’s turnover in proportion to its share holding viz. 3% of 2,000/199,000.

8.  The consideration for the said shares and share of turnover was the plaintiff’s provision of the 2 (two) quotas it held for the provision of cross-border transport services issued by the Transport Department.

9.  The plaintiff signed the Declaration of Intent dated 1 June 2004, confirming its intention to join the operating company to be formed by the defendant in accordance with term 3 of its proposal.  It also submitted a Declaration of Intent also dated 1 June 2004 to the Transport Department confirming that it would participate in its Scheme.  These formed the basis of the plaintiff’s contract with the defendant.

10.  There was a meeting on 17 June 2004 of the coach operators within the defendant’s coalition.  It was agreed that the defendant company would be the operating company and that each coach operator would be entitled to 1,000 shares for each quota held.  The plaintiff would thus be entitled to 2,000 shares.

11.  Furthermore two limited companies, Cross-Border Coach (Yau Tsim) Management Co Ltd (or “YT” for short) and Cross-Border Coach (Kwun Tong) Management Co Ltd (or “KT” for short) were to be incorporated for the purposes of contact and/or formalities with the Transport Department.  Shareholdings in these two companies were to be in proportion to the quotas held by the participating coach owners.

12.  The minutes of that meeting, duly circulated to the plaintiff, which was absent from the meeting and recorded as such, listed the plaintiff as the holder of 2,000 shares in the new operating company.  The plaintiff company was a member of the KT company and held 2 shares to represent its entitlement on the basis of the quotas contributed to the coalition.

13.  This was an important meeting and the agendas, carefully itemised, and the material circulated were designated to form confidential commercial know-how, policy and/or secrets.  The minutes dated 25 June 2004, were circulated to “Shareholders of the New Operating Company”, and recorded that Mr Lin Chung Fai took the chair at the meeting.

14.  The Shareholders were listed as was the shareholding basis being 1,000 shares for each quota provided.

15.  On 23 June 2004 the First Directors’ Meeting of the operating company was held.  Again Mr Lin Chung Fai took the chair.  The minutes were circulated to the plaintiff, amongst others.  They were recorded by Mr Eddie Choi.

16.  Agenda 3 set out the financial return for “all shareholders” with date for distribution.  The formula for the management fees was also calculated, as was the operation revenue.

17.  The Annual Return for the “KT” company dated 25 July 2005 for the year ended 23 July 2005 (which was the first anniversary of the First Directors’ Meeting) identified the plaintiff Company as member and shareholder to the extent of the 2 shares, then recorded as transferred to Eternal East, one of Mr Lin Chung Fai’s companies.  It should also be noted that the Corporate Secretary was Good China Management Limited.  We now need to go back in time to 2004.

18.  From September 2004 the defendant continued to issue notices concerning operational matters to the plaintiff, and between August and December 2004, issued cheques to the plaintiff in respect of shareholder profit, and between August and December 2004 issued cheques for quota payments.  These are set out in a record prepared by the defendant. There is also a statement, again prepared by the defendant headed entitlements of “YT” and “KT” companies.  Under the column “Actual number of shares”, against the name of the plaintiff, is the figure, “2,000” followed by the amounts of the quota monies payable.

19.  Counsel for both sides have helpfully agreed and signed a number of facts.  These included all the matters I have set out earlier.  On the basis of these agreed facts alone, it is difficult to see how the defendant can logically contend that the plaintiff was not a shareholder in any company concerned with this business coalition.

20.  Before I set out the matters upon which the defendant relies as implied terms, it is relevant to see the defendant’s stance as demonstrated by its actions and its writing.

21.  Towards the end of 2004, Mr Eddie Choi, the prime representative of the defendant in its dealings with the plaintiff, indicated that there would be some restructuring within the companies concerned to merge the “YT” and “KT” companies with the defendant, the overall operating company.  The plaintiff, through Mr Simon Sham, was assured that its interests would not be affected.

22.  The completion of documentation was required and this would be effected at a meeting at the defendant’s solicitors office on 12 January 2005.  Mr Choi indicated that it was not necessary for the plaintiff to send representatives to that meeting and that the plaintiff’s purposes and interest would be effectively secured by executing a Power of Attorney in favour of Mr Lin Chung Fai, who was obviously the guiding force of what was going on in this business and its various activities.

23.  The Notice in relation to that meeting is dated 6 January 2005.  It is from Mr Eddie Choi.  It was to be called to complete the merger and to explain to the shareholders the formation of the new company, and for them to sign the relevant documents.

24.  The Power of Attorney was drafted by Mr Lin, although Mr Choi in evidence said he did it.  It was printed on the plaintiff’s headed paper and signed by Mr Simon Sham with Miramar’s chop.  The wording is significant.  It authorised Mr Lin “to handle the increase of capitals, transfer of shares in respect of the three companies…..  Mr Lin has full power to handle and sign all documents on its [Miramar’s] behalf.” It is particularly clear that Mr Lin was authorised, no doubt on a wholly trusting basis, to act as Miramar’s agent or attorney, in carrying out in Miramar’s interest all that was necessary in relation to Miramar’s existing shareholding for the purpose of the merger.

25.  Mr Hon seemed to suggest when I asked him about the wording that one should not pay too much attention to the ambit covered because the drafter was a layman, not a lawyer.  Since both Mr Choi, and by implication Mr Lin, knew the purpose and significance of this document, I was not a little surprised at Mr Hon’s effort to dilute its value.  In the event Mr Lin failed to act properly in accordance with the Power of Attorney to the extent that he neglected, if he did, to complete the document so as to meet the plaintiff’s interests as an existing shareholder.  The meeting was at the defendant’s solicitor’s office.  If he was unsure of what he had drafted or of his powers under it, he could easily have sought advice.  If he failed to complete the necessary documents, he made a serious mistake in not fulfilling the duty owed to the plaintiff or he did so deliberately in order to try and raise some difficulty at a later stage.  But the defendant certainly tried to convince the plaintiff that all was in order in the contact immediately after the meeting on 12 January 2005.

26.  On or about 25 January 2005 Mr Eddie Choi sent to Miss Yuen So Han, the plaintiff’s General manager and Mr Simon Sham’s immediate supervisor a Memorandum of Agreement.  It confirmed that “KT” and “YT” transferred its shares to the operating company.  “Cross-Border Management Company Limited forming a company with a share capital of 199,000 shares –“ out of which Miramar Hotel…holds 2,000 shares.” That was clear enough.  It simply confirmed the plaintiff’s shareholding.

27.  It went on to make an offer for the purchase of Miramar’s 2,000 shares in the sum of HK$148,000, leaving the two cross-border quotas held by the plaintiff unaffected.  That offer came from Eternal East, one of the companies controlled by Mr Lin Chung Fai.

28.  It is not surprising that this started to generate some confusion about what was going on.  This led to a letter of 4 February 2005 to Mr Eddie Choi of “Cross-Border Express” from the plaintiff signed by Mr Simon Sham of the plaintiff seeking clarification of a number of matters.

29.  The next missive from or on behalf of the defendant came from the Company Secretary of Cross-Border Express, Good China Management Limited, also, interestingly as we have seen, the Company Secretary of “KT” as recorded in the annual return of “KT” for the year ended 23 July 2005.

30.  The relevant content is:

“As Miramar Hotel…….holds two Huang Gang quotas, Miramar is therefore allotted with 2,000 shares and nominal value of each share is HK$1.00. Those 2,000 shares are the 1,000 shares sold by the Motor Transport Co of G.D. & H.K. Ltd to Miramar and the other 1,000 shares is by application for allotment of new share capital respectively totalling 2,000 shares.”

31.  Both communications from the defendant bear a simple inference.  All the documentation and necessary processes at the meeting of 12 January 2005 had been satisfactorily completed.  Neither communication suggests that the plaintiff had yet to do anything in relation to the allotment which had been made.

32.  Sometime in February 2005 as best Mr Sham can recall, Mr Eddie Choi asked him to execute certain documents which he did.  No mention was made of a Deed of Indemnity then, nor had there been any earlier mention of it.  Nor did Mr Lin or Mr Choi raise any such matter prior to or after the execution of the Power of Attorney.  It is first mentioned on the 28 February when the same company Secretary – Good China Management Ltd – referred to it having been signed by the shareholders on 12 January 2005 at the very meeting for the purposes of which Mr Lin held the Power of Attorney which had been drafted to enable himself to act as the agent of the plaintiff for the purposeof carrying out all that was necessary in relation to the merger.

33.  The letter contains unspecified threats that the plaintiff’s delay in carrying out the necessary transfers will occasion prejudice to (and consequent claims for compensation by) other Shareholders.  Despite requests to explain this they never did so and a sequence of letters was inconsequential as well as constituting by the defendant what I consider to be obfuscation. 

34.  Had the Deed been a material document Mr Lin using the Power of Attorney could have signed it.  But no obligation in such terms had ever been explained to the plaintiff.

35.  For some unaccountable reason, when the plaintiff asked for a copy of the Deed, it was refused by the defendant, a particularly bizarre aspect of their case.  In any event if the Deed of Indemnity was material aspect of the agreement it involved payment of a sum of a little over HK$1,284.  But the Deed related to the purchase of the defendant’s assets which belonged to the company.  As a matter of law the so-called Deed of Indemnity has no status.

36.  The minutes of the AGM of the operating company on the 29 June 2005 contain yet another bizarre twist in the defendant’s activity.  An ordinary resolution purported to authorise the operating company to buy back its own shares.  That was not a legitimate means of accomplishing that purpose.  In the Agenda of the meeting was the following:

“When the company was in the process of increasing share capital, Miramar did not submit the documents requested for the process by the expiry date.”

37.  Such an “expiry date” was never identified at any material time but more importantly, Mr Lin held the Power of Attorney to do all that was necessary for the plaintiff in respect of the merger and reconstruction and the plaintiff’s attendance at the meeting was not required by reason of the giving of the Power of Attorney.

38.  This content of the Agenda continued :

“Therefore those 2,000 Shares were held on trust temporarily by External East and Motor Transport of GD & HK of each 1,000 Shares respectively. Those 2,000 Shares will be redeemed by Express Cross-Border Coach Co Ltd.”

39.  In the following year the plaintiff made efforts to get the defendant to put into effect what its own records had made clear - that the plaintiff was entitled to 2,000 Shares.  On Mr Sham’s evidence, Mr Lin increased this offer to HK$400,000 - which Mr Choi denies - but the plaintiff was not prepared to sell for that sum.

40.  One part of the defendant’s case was that the plaintiff wanted in effect to withdraw from any commercial enterprise with the defendant.  That suggestion was wholly devoid of any logical basis.  All the documentation and contact showed the opposite.  Mr Sham rejected a suggestion that he had said that the plaintiff had in effect “cold feet” about the undertaking with the defendant.  I have no doubt that Mr Sham was telling the truth and that, in reality, it was the defendant who was looking around for material to justify its defaulting on an agreement which had already been reached and implemented.  The plaintiff was not a large Shareholder and if the defendant or one of its associated companies, could somehow secure the 2,000 shares there was a revenue and/or profit element that would come to it or them.

41.  Although Mr Hon sought disarmingly to assure Mr Sham at the outset of his cross-examination that he was not going to criticise him expressly or impliedly in respect of his actions on behalf of his employer, the plaintiff, much of his questioning, which was not germane to the issues, hinted strongly that Mr Sham acted without authority, failed to inform his supervisors of what was going on and in essence, trusted Mr Lin with a Power of Attorney when he should have consulted the plaintiff’s legal department, and not trusted Mr Lin. In fact that trust in Mr Lin was misplaced but against the background of documentation in this enterprise it was entirely understandable for him to have done so.  I accept Mr Sham’s evidence in its entirety and reject that of Mr Choi and of the defendant and the arguments based on it.  Against that background the alleged implied terms do not make sense.

42.  The plaintiff did all that was required to secure the allotment and transfer of Shares and the documentation, correspondence and minutes confirm this save where the defendant raised some wholly contrived and baseless assertion that the plaintiff failed in some respect.

43.  There was no implied term that the plaintiff should make some payment towards the assets.  If this was a valid requirement, and it was not, it should have been an express term.

44.  The plaintiff had already in the original agreement provided all the consideration, ie the application to the Transport Department and the two quotas.

45.  There was no implied term to the effect that the plaintiff held Shares in KT on trust for the defendant.  That would have required an express term. In any event it is wholly contrary to the documentation.  It just does not make sense.

46.  The plaintiff did not by any action or writing repudiate the agreement.  I have to say that this is nonsense.  The matter as pleaded by the defendant is wholly inconsistent with the plaintiff’s actions and the defendant’s own minutes, records and correspondence.  The defendant had made two overtures to purchase the Shares, on the second occasion more than doubling the price, both of which the plaintiff rejected.

47.  To imply any of these terms would make a nonsense of a well evidenced written commercial contract the terms of which are complete.

48.  Finally the defendant relies upon the doctrine of laches.  It is conceded that this has not been pleaded.  It is as illusory as the defendant’s other contentions and does not merit a detailed consideration.  The whole course of this saga of a commercial enterprise from which I find the defendant sought to exclude the plaintiff to its own advantage, contradicts such a notion. There was no delay in commencing proceedings.  As far as any time vacuum which preceded that step, the defendant itself created this.

49.  The plaintiff’s Counsel, Miss Audrey Eu SC, and Mr Alan Kwong have helpfully set out the criteria in respect of implied terms where there is a written contract.  The short pithy statement of Mason J (as he then was) in Codelfa Construction Pty Ltd v State Rail Authority of N.S.W (1982) 149 C.L.R 337 is apposite:

“For obvious reasons the courts are slow to imply a term. In many cases, what the parties have actually agreed upon represents the totality of their willingness to agree... .”

50.  Lord Cross in Liverpool CC v Irwin (HL) [1997] AC 239 held:

“It was not enough for the court to say that the suggested [implied] term is a reasonable one, the presence of which makes the contract a better or fairer one; it must be able to say that the insertion of the term is necessary to give business efficacy.”

and in Comptoire Commercial Anversois and Power Son & Co (CA) [1920] 1 KB 868 Scrutton LJ had said:

“The court ... ought not to imply a term merely because it would be a reasonable term to include if the parties had thought about the matter ... it must be such a term that both parties must have intended that it should be a term of the contract, and have only not expressed it because its necessity was so obvious that it was taken for granted.”

51.  None of the implied terms meets these requirements.  They are as contrived as the other arguments advanced by the defendant.

52.  The defence fails root and branch and the counterclaim similarly.

53.  There will therefore be judgment for the plaintiff and orders in the following terms:

(1) The defendant do forthwith allot or cause to be allotted 2,000 Shares to the plaintiff in the defendant company, do register the same and do issue a Share certificate in accordance therewith, to the plaintiff.

(2) The defendant is forbidden to issue further Shares in itself which would dilute the proportion of Plaintiff’s shareholding below 2,000 in 199,000.

(3) The defendant is to pay or cause to be paid to the plaintiff, the plaintiff’s entitlement to its proportion of the revenue of the operating company being 3 per cent of the formula 2,000/199,000, for every financial year since the inception of trading to date, credit being given for payments made during the first financial year ended 31 December 2004, and also for quota payments of HK$23,142‑87 made in error.

(4) There be an inquiry and an account as to further damages and/or profits in accordance with the Agreement whereby there would be a further distribution of profit if the operating cost is less than 15% of the revenue in any year.  In pursuance of this direction the defendant is ordered to disclose all accounts and records of payments to all other Shareholders since the first trading financial year to the date hereof within 28 days.

(5) The defendant do pay interest on the various sums at the appropriate rate for the relevant period.

54.  The counterclaim is dismissed with costs.

55.  The defendant is to pay the plaintiff’s costs of this action, of the inquiry and account, and of all consequent proceedings in relation thereto. There will be a certificate for two counsel.