AMBANG JAYA SDN BHD AND ANOTHER v. ZHU FENG CHANG AND OTHERS

HCA 1631/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1631 OF 2004

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J U D G M E N T

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1.  The plaintiff companies in this action are the creditors of a company called CIL Holdings Ltd (“CIL”) in a sum in excess of HK$130 million.  The 2^nd defendant (“Mr Ke”) holds 5.3% of the shares in CIL, and is the chairman of CIL.  In about August 2002, CIL proposed a scheme of arrangement with its creditors.

2.  Mr Ke says that about the time the scheme of arrangement was proposed, the plaintiffs proposed to him that they would agree to the scheme of arrangement if he would purchase, or arrange for the purchase, of 81,500,000 unencumbered shares owned by the plaintiffs in a company called eCyberChina Ltd, (“ECC shares”), for a sum in excess of HK$5.7 million.  Mr Ke says that he arranged for the 1^st defendant to purchase the shares and at the request of the plaintiffs, both he and the 3^rd defendant entered into an agreement of guarantee of the 1^st defendant’s obligations.

3.  Mr Ke says that the plaintiffs’ position was that if this so called “side arrangement” in relation to the ECC shares was not satisfactorily concluded, the plaintiffs would vote against the proposed scheme of arrangement.  It is common ground that the vote of the plaintiffs was essential if the required majority was to be achieved in relation to the scheme of arrangement.

4.  It is common ground that prior to 20 December 2002, agreement was reached between the plaintiffs and the defendants as to the terms of the ECC share transaction.  On 20 December 2002, following several adjournments, the creditors of CIL approved the scheme of agreement.  On the same day, the parties entered into the ECC share transaction.

5.  Mr Ke says that the demand by CIL that he entered into the ECC share transaction, in return for their vote at the meeting to approve the scheme of agreement, constituted economic duress and that consequently, the defendants ought not to be held liable on the contracts for the purchase or guarantee in relation to the ECC shares.

6.  There is no doubt that the doctrine of economic duress is clearly established in law and, if established, may provide a basis upon which a party may escape obligations under a contract.  The authorities and principles are collected in Chitty on Contracts, Vol. 1, 28^th E., Chapter 7.

7.  The Master accepted the submission and gave unconditional leave to defend.

8.  On the appeal, Mr Brewer for the plaintiffs has been commendably short and to the point.  It would greatly assisted judges if all counsel were able to conduct appeals in the sensible way that he has done, concentrating simply on the relevant points and not on side issues.

9.  First, he says that the claim that the ECC share transaction needed to be structured as a side arrangement to avoid criticism is unbelievable.  I reject that proposition.  In Somji v Cadbury Schweppes Plc [2001] 1 BCLC 498, it was held, without deciding the point, that the court may well impose a strict requirement of good faith as between competing unsecured creditors and prohibit any secret inducement to one creditor, even if that inducement did not come from the debtor’s own estate.

10.  It is right that those principles were established from very old cases which were not particularly well-known, but the proposition only needed to be stated to show how sensible it is.

11.  Mr Brewer says that it is inherently implausible to suggest that the plaintiffs themselves would have had a proper grasp of these principles.  That may well be right.  They may not have had a proper grasp of the principles, but the proposition that the transaction could potentially have an effect on other creditors if it were known to them before the meeting is one which is easily accepted.  In any event, I have little doubt that the solicitors advising the plaintiffs would have a proper grasp of the principles.  In my view, any commercial lawyer faced with a set of circumstances in which the chairman of directors of a public company facing a creditors’ scheme is entering into private arrangements with a creditor would, at least, raise his eyebrows and make inquiries.

12.  I do not find the claim that this was a demand made by the plaintiffs in return for their vote to be inherently implausible.

13.  It is right, as Mr Brewer submitted, that paragraph 9 of the defence pleads that the plaintiffs’ demand was made around December 2002, and Mr Ke’s affidavit states that the demand was made three months earlier.  That is a pleading point and not such an inconsistency as to lead me to find Mr Ke’s assertions to be beyond belief.

14.  It is right also, as Mr Brewer correctly says, that making the ECC share transaction conditional upon the success of the scheme was a commercially sensible arrangement, but it is a matter for the trial judge, in my view, to determine as to whether that is a point which takes Mr Ke’s assertions beyond belief.  It does not of itself take those assertions beyond belief.

15.  Mr Brewer is right too in saying that the mere assertion of the defence is not enough, but the coincidence of the dates, with both the ECC share transaction being signed on 20 December 2002, the scheme of arrangement being approved on that date and the share arrangement being discussed and negotiated in the lead-up to the vote, are coincidences which are sufficient to raise the inference of duress.  In my view, it is a matter for the trial judge as to whether the defence is established.

16.  I am satisfied that the Master was right to give leave to defend.  The defence is neither shadowy nor moonshine, but is, in my view, plainly arguable.

17.  The appeal must be dismissed.  Following discussions between counsel I fixed gross costs to be paid by the plaintiffs to the defendants in the sum of $80,000.