FUJITA MORIYUKI v. TONG XIAOSHENG

HCA 1128/2017

[2020] HKCFI 1768

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1128 OF 2017

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J U D G M E N T

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Introduction

1.  On 14 January 2019, Master K W Wong entered summary judgment (“Judgment”) in favour of the Plaintiff by original action (“Fujita”) against the Defendant by original action (“Tong”) in the sum of HK$4,764,806.87 (“Judgment Sum”) together with interest and costs under RHC O 14. 

2.  By Notice of Appeal dated 28 January 2019, Tong appeals against the Judgment and seeks the dismissal of Fujita’s application for summary judgment, alternatively, unconditional leave to defend, alternatively, conditional leave to defend.

3.  This is the hearing of Tong’s appeal. 

Background

4.  At all material times prior to 17 August 2015, Farbell Investments Ltd (“Farbell”) was wholly owned by Fujita, holding 29,820,000 shares of $1 each representing 78.89% shareholding, and his wife (“Madam Mok”) holding 7,980,000 shares of $1 each representing 21.11% shareholding.

5.  On or about 23 March 2015, Fujita and Tong signed a “Memorandum of Understanding for the Sale and Purchase of Entire Issued Share Capital of Farbell Investments Limited”.  From 10 April to 15 May 2015, Tong was provided by Fujita with Farbell’s documents concerning its assets, liabilities, customer list, supplier list and so on the basis of which Tong conducted due diligence exercise on Farbell.

6.  It is Tong’s case that in about mid-May 2015, Tong had a meeting with Fujita relating to his intended purchase of Farbell.  In summary, what was discussed at the meeting was that: 

(1)  Tong conveyed to Fujita that, according to the due diligence carried out by him, the total amount of debt of Farbell and its subsidiaries was around HK$26,386,431 (“Locked Debt”).

(2)  Tong agreed to purchase 80% shareholding of Farbell at the price of HK$1 per share from Fujita and Madam Mok. 

(3)  Tong and Fujita agreed that the entire HK$26,386,431 would be shouldered by Tong as the new shareholder if he were to purchase 100% of Farbell’s shares.

(4)  Tong and Fujita agreed that the total purchase consideration would be HK$64,186,431, which included a share compensation of HK$37.8 million (at the price of HK$1 per share) payable to Fujita and Madam Mok, and Tong agreed to take over the responsibility of Fujita and Madam Mok as guarantor of the Locked Debt. 

(5)  Fujita also “promised and agreed” not to cause any increase in the amount of the Locked Debt.

7.  It is further Tong’s case that subsequently and after further discussions, the parties gave instructions to their respective solicitors to prepare the formal agreement for the purchase of 100% of Farbell by Tong on the basis of what was promised and agreed in relation to the Locked Debt as aforesaid.

8.  On 17 August 2015, Tong entered into a formal sale and purchase agreement (“SPA”) with Fujita and Madam Mok. Under the SPA, Tong agree to purchase the “1^st Lot Shares” from Madam Mok, the “2^nd Lot Shares” from Fujita and the Sale Debt from Fujita and Madam Mok. Sale Debt is defined in the SPA as all outstanding balance of all debts owing by Farbell, 杰尔电子(中山)有限公司 (“Jie’er”) and 中山志盛电子有限公司(“Zhongshan ZS”) (collectively “Target Companies”) to Fujita and/or Madam Mok.

9.  Pursuant to Clause 3.2 of the SPA, the total consideration for the purchase of Fujita’s 2^nd Lot Shares and the Sale Debt due to Fujita was HK$29.82 million, payable by 3 instalments ie (i) HK$4.5 million immediately upon the signing of the SPA; (ii) HK$17.22 million immediately before the completion date of the sale and purchase of Fujita’s 2^nd Lot Shares and the Sale Debt due to Fujita (“2^nd Completion Date”); and (iii) HK$8.1 million as the balance of the purchase price (“3^rd Instalment”) 45 days after the 2^nd  Completion Date.

10.  The SPA was subsequently amended by a Supplemental Agreement dated 27 October 2015 (“Supplemental SPA”) executed by Fujita and Tong only[1]. Under the Supplemental SPA, the 2^nd Completion Date should take place on the date of and immediately after the signing of the Supplemental SPA. Completion accordingly took place on 27 October 2015 after the execution of the Supplemental SPA. 

Fujita’s claim and the Judgment Sum

11.  In relation to the payment of the purchase price due to Fujita, there is no dispute that Tong had paid the 1^st two instalments.

12.  As stated above, the 3^rd Instalment was in the sum of HK$8.1 million.  Tong was behind schedule in paying this 3^rd Instalment.  On 10 March 2016, Tong transferred HK$2 million to Fujita.  Of that HK$2 million, Fujita contends that only HK$1.6 million represents partial payment of the 3^rd Instalment.  Hence, in the prayer for relief in the Statement of Claim, Fujita’s claim is for the payment of HK$6.5 million (HK$8.1 million - HK$1.6 million).  However, on Tong’s case, the entire HK$2 million goes towards partial payment of the 3^rd Instalment, so that Fujita’s claim for the outstanding balance should only be HK$6.1 million.  In his first affirmation in support (“Fujita 1”), Fujita accepts there is a triable issue in this regard so that, for the purpose of his application for summary judgment, he accepts HK$6.1 million as the outstanding balance of the 3^rd Instalment.

13.  In paragraph 36 of the Defence and Counterclaim, Tong puts forward a counterclaim against Fujita in the sum of RMB3,276,168.96 (“Locked Debt Claim”) for breaking his promise and agreement concerning the Locked Debt made/reached in May 2015.

14.  In paragraph 37 of the Defence and Counterclaim, Farbell puts forward 4 counterclaims against Fujita particularized as follows:

(1)  Sums misappropriated by Fujita from Farbell to repay his personal loan in the amount of HK$59,968.32.

(2)  Sums misappropriated by Fujita from Farbell for his personal use in the amount of HK$485,490.96.

(collectively “Misappropriation Claims”)

(3)  Funds belonging to Farbell which had been wrongly withheld by Sun Link (Far East) Company Limited (“Sun Link”), a company owned by Fujita and Madam Mok, and which Fujita had agreed to be personally responsible in the amount of US$101,247.93 (“Sun Link Claim”).

(4)  Conversion of Farbell’s vehicle FF111 with Cross Border Licence[2] with damages to be assessed (“Vehicle Claim”).

15.  As a preliminary point, it is difficult to see how Tong can rely on Farbell’s counterclaims against Fujita as constituting an arguable defence to Fujita’s application for summary judgment against him.  No authority has been cited to this court that the defence of set off is available in that situation.  Nevertheless, for the purpose of the summary judgment application, and, in Fujita’s counsel’s words, “to avoid protracted arguments”, Fujita is prepared to concede that the 2 Misappropriation Claims ie HK$59,968.32 + HK$485,490.96, and the Sun Link Claim ie HK$789,733.85 (after conversion from US$101,247.93) constitute arguable partial defences.  Hence, in paragraph 9(d) of Fujita 1, he sets out his claim for summary judgment as follows:

Unpaid balance of the 3rd Instalment	HK$6,500,000
Less: HK$400,000 alleged to have been paid by Tong in partial satisfaction on 10 March 2016	(HK$400,000)
Less: Amounts of the 2 Misappropriation Claims	(HK$59,968.32) +
	(HK$ 485,490.96)
Less: Amount under the Sun Link Claim (US$:HK$=1:7.8) x US$ 101,247.93	(HK$ 789,733.85)
Total amount claimed in the O 14 Summons:	HK$ 4,764,806.87

16.  Before Master K W Wong, as before this Court, Fujita did not and does not accept the Locked Debt Claim or the Vehicle Claim has any merits.  In his skeleton submissions, Mr But submits that:

(1)  Neither the Locked Debt Claim nor the Vehicle Claim constitute “arguable” or “bona fide” cross claims based on their merits; and

(2)  Such cross-claims cannot constitute an arguable defence of “set-off” in any event.

Deliberation

17.  It is trite law that in a RHC O 14 application, the defendant bears the burden of satisfying the Court, in respect of the claim or part of the claim, that there is an issue or question in dispute which ought to be tried or that there ought for some other reason to be a trial of that claim or part.  If the defendant fails to do so, the court may give judgment for the plaintiff.

18.  In Re Safe Rich Industries Ltd unrep, CACV 81 of 1994, 3 November 1994 at [13], Bokhary JA (as he then was) observed that:

“ The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable. But it must be recognised — because failure to recognise it would create a debt‑dodgers’ charter — that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.” (emphasis added)

19.  Similarly, in Paul Y Management Ltd v Eternal Unity Development Ltd & Ors unrep, CACV 16 of 2008, 12 August 2008, at [19] Cheung JA observed:

“ In deciding whether a plaintiff is entitled to summary judgment the relevant test is whether the defendant has raised credible triable issues. If there are, the matter should go to trial. If not, judgment should be entered against the defendant. In considering whether there are triable issues the Court will, of course, not take the alleged defence on its face value but test it against the evidence disclosed in the affidavit including matters such as contemporaneous documents, whether the alleged defence is inconsistent with the defence previously put forward or whether the defence is only recently raised despite opportunity being given to the defendant to respond earlier. The Court will also consider the inherent probability of the defence. But what the Court should not do is to conduct a mini-trial on complicated factual issues.” (emphasis added)

20.  Lastly, a defendant is required to “condescend upon particulars” in his affidavit and state clearly what the defence is and what facts are relied on to support it.  A mere general denial by the defendant that he is indebted will not suffice: Hong Kong Civil Procedure 2020 Vol 1 para 14/4/4.

21.  With the above in mind, this court now turns to the 2 defences raised in Tong’s skeleton submissions:

(1)  Mr Tong has a claim against Fujita for a sum of RMB3.2 million plus interest totalling RMB3,276,168.96, being the amount of further bank loans which Fujita had caused Zhongshan ZS to incur between June and August 2015 and which Tong had to shoulder in excess of the Locked Debt. 

(2)  Farbell has a bona fide claim against Fujita for HK$1.5 million, being the value of the Cross Border Licence of Farbell’s vehicle which Fujita has wrongfully refused to transfer to Farbell.

Locked Debt Claim

22.  For reasons given below, this court is of the view that the Locked Debt Claim is not only inherently improbable but is clearly unbelievable if one takes it in the context of so much of the background as is either undisputed or beyond reasonable dispute—especially when it is considered in light of the terms of the SPA itself.  Further, the Locked Debt Claim is bad in law, whether framed as a contractual claim or as a claim in misrepresentation.

23.  First, at paragraph 7 of the Defence and Counterclaim, it is pleaded that on 16 May 2015, Tong communicated with Fujita capturing the main items of (i) an “agreement” based on the maximum debt of Farbell and its subsidiaries at HK$26,386,431 (as revealed in the due diligent exercise) and (ii) Fujita “promised” not to cause any increase of the Locked Debt beyond HK$26,386,431.  At paragraph 8, it is pleaded that both parties then gave instructions to their solicitors to prepare the SPA on the basis of paragraph 7. 

24.  Yet, when one looks at the SPA or the Supplemental SPA, there is nothing in them which is concerned with the Locked Debt or the alleged promise made by or agreement reached with Fujita along the lines pleaded at paragraph 7 at all.  That’s why Tong’s legal advisers cannot formulate a case based on a breach of the SPA or the Supplemental SPA. 

25.  Given that both parties were separately legally represented, it is highly surprising that something which Tong now claims to be so important to him could have been omitted or overlooked by both or at least his own solicitors.  This is especially so when the parties were not under any pressure of time—they had about 3 months to prepare the SPA for the parties to sign in August 2015.  This omission is not only surprising but is also unexplained—there is no explanation from Tong or his then solicitors in the evidence about the omission regarding the promise/agreement concerning the Locked Debt in the SPA or the Supplemental SPA.

26.  Second, the SPA as approved and signed by the parties contains a number of clauses which expressly exclude any such alleged promise/agreement by Fujita.  In this regard, the following terms are particularly pertinent for the present purpose:

“7.4 The Purchaser hereby irrevocably agrees and acknowledges that:-

(a) the Warranties[3] given by the Vendors are in lieu of and to the exclusion of any other warranty, condition, term, undertaking or representation of any kind, express or implied, statutory or otherwise in respect of the transaction contemplated hereunder, the Shares, the Sale Debt, the Properties, the Target Companies or their respective businesses, affairs, assets and/or liabilities;

(b) the Purchaser has not been induced to enter into this Agreement by any representation or warranty other than those expressly set forth herein;

(c) the Purchaser has conducted adequate due diligence investigations of all or any business, financial, taxation, legal and property matters in respect of the Shares, the Sale Debt, the Target Companies and the Properties and is satisfied with the same;

(d) the Purchaser is deemed to have full knowledge of the business, financial, taxation, legal, property and other matters in respect of the Shares, the Sale Debt, the Target Companies and the Properties in all and every respects; and

(e) none of the information supplied by any Target Companies or its professional advisers to the Purchaser or its agents, representatives or advisers in connection with the Warranties or otherwise in relation to the business or affairs of any Target Companies, shall be deemed a representation, warranty or guarantee of its accuracy by any of the Vendors to the Purchaser and the Purchaser hereby waives any claims against the Vendors which he might otherwise have in respect of it.

…

14.4 This Agreement (together with any documents referred to herein) constitutes the whole agreement between the parties relating to the transactions contemplated hereby and supersedes all previous agreements, arrangements, promises, representations, warranties and undertakings relating to any such transactions (including but not limited to the Memorandum).” (emphasis added)

27.  Whether or not, as Ms Lau submits, some or all of Clause 7.4 of the SPA are subject to the control of the Misrepresentation Ordinance, Cap 284 or the Control of Exemption Clauses Ordinance, Cap 71 or any other statutory control is beside the point.  The important point here is that if Tong’s case on the Locked Debt is believable, it is inherently improbable that the SPA as drafted/approved by Tong’s lawyers would have contained anything similar to Clause 7.4, or Clause 14.4 for that matter.

28.  Third, as noted above, what are pleaded in paragraphs 7 and 8 of the Defence and Counterclaim are clearly meant to be contractual promises.  This is fortified by paragraph 36 of the Defence and Counterclaim where it is pleaded that Tong has suffered loss and damage ie RMB3,276,168.96 “under the Agreement[4]”. Similarly, in the 1^st affirmation of Tong (“Tong 1”), Tong basically repeated the Defence and Counterclaim and referred to what was discussed in mid-May 2015 concerning the Locked Debt as a promise/agreement by Fujita.

29.  In so far as the entire agreement clause at Clause 14.4 of the SPA is concerned, Ms Lau very properly accepts that, unlike Clause 7.4, it is not subject to any statutory control.  On the authorities, such entire agreement clauses clearly have the effect of showing that statements made in the course of negotiations are to have no legal effect as a collateral contract: Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyd’s Rep 611, 614.  Hence, for that reason, the Locked Debt Claim, as a contractual claim, also fails as a matter of law.

30.  Fourth, in Tong’s skeleton submissions at para 26, instead of explaining the Locked Debt Claim in terms of Fujita’s breaches of his contractual promises, Tong for the first time relies on a claim for loss and damage based on his pre-contractual misrepresentations. 

“26. It is respectfully submitted that Mr. Tong has (at least) an arguable defence in relation to pre-contractual representations on the Locked Debt, which involves significant factual disputes and cannot be resolved in an application for summary judgment. As can be seen from Tong 1^st, it is at least reasonably arguable that Mr. Tong has a claim for loss and damage against P for misrepresentation.

(1) A representee is entitled to damages if he can show that he entered into a contract with the defendant; that the defendant made a misrepresentation to him before the contract; that he suffered loss as a result; and the defendant would have been liable to pay damages if he had been fraudulent under the tort of deceit: Cartwright, Misrepresentation, Mistake and Non-Disclosure (4th edn) §7-03.

(2) P represented to Mr. Tong that the debts of Farbell (which Mr. Tong would have to bear under the SPA to be executed) was HK$26,386,431, which is evidenced for example by an email dated 16 May 2015 from Mr. Tong to P …” (emphasis added)

31.  In so far as it is suggested that Tong 1 provides the factual basis in support of a misrepresentation claim against Fujita, one can immediately see from Tong 1 itself that it is wrong.  It is trite law that in general no relief will be given for a misrepresentation as such unless it involves a representation of fact^[5] which is false.  In this regard, it is important to note that it is not at all clear from Tong 1 (or his skeleton submissions) what is the misrepresentation of fact that Tong seeks to rely on.  Is Tong saying Fujita represented to him that the amount of Farbell’s debt was HK$26,386,431 as at mid-May 2015 and the figure was false?  If that is Tong’s suggestion now, it is clearly incorrect since on the evidence, the figure was arrived at from Tong’s own due diligence exercise.  It was never pleaded in the Defence and Counterclaim that it was Fujita who represented to Tong that the amount of Farbell’s debt was HK$26,386,431 and that figure was false.  Nor was it so stated in Tong 1. 

32.  Further, it is trite that a representation as to the future does not, of itself, give rise to any cause of action unless it is binding as a contract.  However, in Tong’s skeleton submissions, it seems he has given up relying on his pleaded case of a “promise and agreement” by Fujita.

33.  If Tong now relies on Fujita’s alleged promise/agreement as a (mis)representation, that would not avail him either.  If and in so far as Tong is now saying Fujita had always intended to increase the indebtedness of Farbell and its subsidiaries despite having allegedly promised/agreed in mid-May 2015 that he would not ie a misrepresentation as to his intention, the short answer is that it was never pleaded in the Defence and Counterclaim.  Nor was it so stated in Tong 1.

34.  All in all, this court agrees with Mr But that the Locked Debt Claim has no merits whatsoever and cannot constitute a triable issue or an arguable defence in resisting the summary judgment application. 

Vehicle Claim

35.  The Vehicle Claim is pleaded very simply in the Defence and Counterclaim at para 37(4) as a claim in “Conversion of a vehicle FF111 with damages to be assessed”.  It is also pleaded in para 32 that Tong will seek to set off Fujita’s claim against the Counterclaim pleaded therein—the set off relied upon is said to be one of equitable set-off.[6]

36.  As Mr But points out in his skeleton submissions, it cannot be disputed that the Vehicle had already been delivered up by Fujita to Farbell and Farbell had confirmed receipt of the same in writing on 7 December 2015.  Further, at the request of Tong, Fujita had driven the Vehicle back to Zhongshan PRC and delivered it up as well as all relevant border-check records—the same having been confirmed by Farbell’s written acknowledgment on 29 February 2016.  Since Farbell had been in possession of the Vehicle, its claim on conversion of the Vehicle is bound to fail. 

37.  In Tong 1 and Tong’s skeleton submissions, Farbell’s claim was switched from conversion of the Vehicle to refusal to cooperate to transfer the Cross Border Licence from Fujita to Farbell.  It is said that Fujita was previously the authorised driver of FF111 under the Cross-Border Licence.  Unless the licence is also transferred to Farbell’s name, Farbell or its authorised officers will be forbidden to drive the FF111 (in the PRC).  Fujita’s obligation to return the FF111 to Farbell can only be completed or made effective when it is coupled with the transfer of the Cross Border Licence.

38.  In order to defend a summary judgment application, a defendant is required to “condescend upon particulars” in his affidavit and state clearly what facts are relied upon to support the defence.  Yet, Tong 1 is silent on the basis on which it is said Fujita had an obligation not just to return the vehicle to Farbell, but also to cooperate with regard to the transfer of the Cross Border Licence to Farbell.  All that Tong puts forward in para 45 of Tong 1 is a bare assertion that:

“… the existing authorised names under this cross border licence are Fujita and his wife Rachel Mok and they are needed to execute documents to change to my desired and/or appointed driver.”

39.  The Cross Border Licence was issued by the PRC licensing authority to Fujita personally.  As Mr But points out, there is nothing in the SPA, the Supplemental SPA or otherwise which imposes a duty on Fujita to transfer the license to Farbell (even if that is legally permissible under PRC laws, as to which Tong has failed to adduce any evidence).  There is also no duty under the SPA, the Supplemental SPA or otherwise for Fujita to add further names as authorized drivers to the licence as designated by Farbell.

40.  On the contrary, given the fact that the Vehicle is Farbell’s property, one would expect Farbell, as owner, should have little difficulty in applying for the necessary permit/licence in its own name to use the Vehicle in Hong Kong and the PRC without the assistance of Fujita.  There is no answer to this in Tong 1 or his skeleton submissions.  In other words, it is wholly unclear what facts are relied upon by Farbell to show the existence of a duty on the part of Fujita in order to support the Vehicle Claim. 

41.  Last but not least, the critical flaw in Tong’s reliance on the Vehicle Claim as an equitable set-off is that there is no mutuality.  As the editors of Hong Kong Civil Procedure 2020 Vol 1 at para 18/17/2 observe, equitable set-off is permissible for unliquidated claims, but requires the cross-claims to be between the same parties and to be sufficiently connected: Muscat v Smith [2003] 1 WLR 2853 at [42]-[45].  In the present case, Fujita’s claim is against Tong for sums due under the SPA whereas the Vehicle Claim belongs to Farbell and but its factual and legal bases are wholly obscure and certainly have no connection with the SPA. 

42.  In Muscat v Smith [2003] 1 WLR 2853 at [45], Buxton LJ explained the legal position in these terms:

“… The dearth of specific statements supporting the proposition that a cross-claim must be a claim against the original claimant is attributable to the fact that that proposition has always been taken for granted. All of the recent cases discussing whether the cross-claim was sufficiently closely connected with the claim to be set off against it in the same litigation presuppose that the claims, whatever they are, lie between the same parties. That stands out from, for instance, the various discussions cited in the judgment of Forbes J in British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] QB 137, 154 D–H …” (emphasis added)

43.  The proposition of Buxton LJ that equitable set-off is only available to the same parties in a litigation who have a claim against one another, as a principle of general application, was followed in Qiyang Ltd & Ors v Mei Li New Energy Ltd & Ors, unrep, HCA 420 of 2011, 5 March 2013, To J. 

Disposition and costs order nisi

44.  To conclude, this court finds Tong’s appeal against the Judgment to be wholly unmeritorious and must be dismissed. 

45.  There shall be an Order nisi that costs of the appeal be to Fujita, to be taxed if not agreed, and paid by Tong forthwith, certificate for 2 Counsel.