DRAGON WINGS COMMUNICATIONS LTD AND ANOTHER v. FINTEL GROUP LTD AND ANOTHER

DCCJ 3251/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3251 OF 2008

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ASSESSMENT OF DAMAGES

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Background

1.  As the 1^st and 2^nd Defendants failed to file any notice of intention to defend and the 1^st and 2^nd Plaintiffs abandoned the claim for specific performance of the contracts as sought in the statement of claims herein, interlocutory judgments were entered against the 1^st and 2^nd Defendants on 8 September 2008 and 10 December 2008 respectively with damages to be assessed.

2.  The Plaintiffs and Defendants are parties to a Stock Purchase Agreement dated 7 May 2005 (“the SPA”) and an Undertaking dated 14 June 2006 (“the Undertaking”) which essentially provided for the sale by the Plaintiffs and purchase by the Defendants of shares in the 1^st Plaintiff (“DW Shares”).

3.  The 1^st Plaintiff is a company incorporated and registered in Hong Kong (“Dragon Wings”) and the 2^nd Plaintiff is its director (“Wong”).

4.  The 1^st Defendant is a Hong Kong company (“Fintel”) and a wholly owned subsidiary of the 2^nd Defendant (“Sancon”), a company registered in Nevada, United States and having offices in Shanghai and Australia.  At the time the parties entered into the SPA, Sancon was known as Financial Telecom Limited (USA), Inc. (“FTL”).  FTL later changed its name to MKA Capital Inc. (“MKAC”), and subsequently, to Sancon.

5.  The Plaintiffs’ claim is for its loss in damages arising from the Defendants’ failure to perform their obligations under the SPA and the Undertaking to complete the sale and purchase, specifically:

(1)   To return to Dragon Wings and Wong (at the expiry of one year after delivering restricted FTL Shares) freely tradable FTL Shares pursuant to Paragraph 1 of the SPA and the Undertaking.  (The freely tradable FTL Shares were to be payment to the Plaintiffs for shares in Dragon Wings that were sold and delivered to the Defendants in July 2005).

(2)   To deliver to Dragon Wings and Wong additional FTL Shares and to release trading restrictions on those shares on 30 June 2007 pursuant to its obligations under Paragraph 3.4 of the SPA and the Undertaking.

The Terms of the SPA and the Undertaking

6.  Under Paragraph 1 of the SPA, the parties agreed as follows:

(1)   Dragon Wings shall sell to Fintel 9,240 DW Shares valued at HKD625,000 for which Fintel shall make payment in the form of a corresponding quantity of FTL Shares.

(2)   Wong shall sell to Fintel 2,000 DW Shares valued at HKD375,000 for which Fintel shall make payment in the form of a corresponding quantity of FTL Shares.

(3)   Wong shall grant an option to Fintel to purchase an additional 3,560 Company Shares at HKD1.

7.  The exact quantity of FTL Shares to be delivered by the Defendants are to be calculated by dividing the total Consideration (i.e. HKD625,000 + HKD375,000 = HKD1m) by 50% of the Base Price.  The Base Price is defined as “the average closing price of the common stock of Financial Telecom Limited (USA) Inc. at the NASD Over-the-Counter Bulletin Board in the 30 trading days before the date of this Agreement.”

8.  Given that the average Base Price of an FTL Share was USD0.1027 (a record of the daily closing price of FTL stock in the 30 days prior to Closing is set out at paragraph 3 (1)(c) of Wong’s Witness Statement filed 9 December 2009, the number of FTL Shares to be delivered are calculated as follows:

				No. of Original FTL shares based on Base
	Purchase PriceHKD	USD	50% Base Price USD	Price
Dragon Wings	625,000	80,128	0.05135	1,560,432
Wong	375,000	48,077	0.05135	936,260
	1,000,000	12,205		2,496,692

9.  On the basis of the calculation above, the Defendants were liable to deliver:

(1)   To Dragon Wing: 1,560,432 FTL Shares

(2)   To Wong: 936,260 FTL Shares

(the “Original FTL Shares”)

10.  The sale and purchase was to take place on 31 May 2005 or some other time and place as mutually agreed orally or in writing (the “Closing”), on which date the Plaintiffs shall deliver to the Defendants certificates of DW Shares and the Defendants shall correspondingly deliver certificates of FTL Shares.

11.  Acting in accordance with the SPA, the parties delivered share certificates to each other in July 2005:

(1)   Dragon Wings caused to be allotted to Fintel 9,240 and 2,000 DW Shares and the allotment was registered with the Companies Registry on 15 July 2005.  Dragon Wings delivered to Fintel two share certificates registered in Fintel’s name for 9,240 and 2,000 DW Shares respectively, both dated 15 July 2005.

(2)   Correspondingly, FTL delivered to Dragon Wings share certificates for 1,560,432 FTL Shares (registered in the name of Dragon Wings) and 936,260 FTL Shares (registered in the name of Wong) dated 7 May 2005.

12.  The FTL Share certificates were stamped with the legend which stated:

“144-Restricted Shares

The shares represented by this certificate have not been registered under the Securities Act of 1933 (“the Act”) and are Restricted Securities as that term is defined in Rule 144 under the Act, and requires written release from either issuing company or their attorney prior to legend removal.”

In other words, the shares under the certificates could not be traded unless legend removal had been authorized by written release.

13.  For this particular share sale transaction, the parties had agreed that there be a one-year restriction prohibiting trading of the FTL Shares.  At the expiry of one year, Dragon Wings and/or Wong could return the Restricted FTL Share Certificates to FTL who was obliged to deliver back to Dragon Wings certificates for freely tradable FTL Shares.

14.  Under Paragraph 3.4 of the SPA, the parties further agreed that if the Base Price (that is, the average price of the stock in the 30 days before Closing) turned out to be lower than the Reference Price (defined as the average closing price of the FTL Shares at the NASD over-the-counter bulletin board in the 30 trading days before the first anniversary of the Closing, Fintel would compensate the Plaintiffs the shortfall by delivering additional FTL Shares or their cash equivalent (“Additional FTL Shares”).

15.  Wong explained in his witness statement that the rationale behind this arrangement was to protect Dragon Wings against loss that may result from a price drop of the FTL Shares.

16.  One year after Closing (i.e. as of 31 May 2006), the Reference Price (USD0.02725) turned out to be lower than the Base Price (USD0.1027) and as such, Fintel was liable to compensate the Plaintiffs for the shortfall (pursuant to Paragraph 3.4(c) of the SPA) in the following quantities of Additional FTL Shares:

	Purchase Price(HKD)	PurchasePrice(USD)	50% BasePrice(USD)	Original No.of FTLshares	AdditionalFTLShares	Total No.of FTL Shares
Dragon Wings	625,000	80,128	0.05135	1,560,432	4,319,803	5,880,235
Wong	375,000	48,077	0.05135	936,260	2,591,896	3,528,156
Total	1,000,000	128,205		2,496,692	6,911,699	9,408,391

(1)   To Dragon Wings: Additional 4,319,803 FTL shares

(after adding the original 1,560,432 shares, Fintel is liable to deliver a total of 5,880,235 FTL Shares, equivalent to USD58,857)

(2)   To Wong: Additional 2,591,896 FTL Shares

(after adding the original 936,260, Fintel is liable to deliver a total of 3,528,156 FTL Shares, equivalent to USD35,315)

Re-issue of tradable MKAC shares

17.  The first issue was how to go about lifting the trading restrictions on the Original FTL Shares.  At this point in time, the Plaintiffs were in possession of restricted FTL share certificates and were entitled to exchange these with the Defendants for certificates for freely tradable shares of MKAC due to the reason that, by this time, FTL had merged into MKAC which had a different share structure.

18.  The parties agreed that the FTL Shares were to be merged into MKAC Shares at 25 FTL Shares to 1 MKAC Share and as such, instead of delivering unrestricted FTL Shares back to the Plaintiffs, the Defendants should deliver unrestricted MKAC Shares to the Plaintiffs in the following amounts:-

(1)   To Dragon Wings: 62,418 MKAC Shares (being 1,560,432 FTL shares/25)

(2)   To Wong: 37,451 MKAC Shares (being 936,260 FTL shares/25)

Therefore, a total of 99,869 tradable MKAC Shares have to be transferred according to the Undertaking.

Payment of HKD150,000 by Dragon Wings to Digital Financial Services Limited

19.  The second issue was in relation to a sum of HKD150,000 which was at the time owed by Dragon Wings to a wholly owned subsidiary of FTL – Digital Financial Services Limited (“Digital”) under a Financial Advisory Contract (“FAC”) dated 7 May 2005.  According to the 2005 Annual Return of Digital, it is wholly owned by FTL.  Under the FAC, Dragon Wings agreed to pay a monthly service fee of HKD25,000 to Digital.

20.  As at June 2006, a sum of HKD150,000 (being outstanding monthly payments for the months from 1 December 2005 to 31 May 2006) was due and owing from Dragon Wings to Digital.

Delivery of Additional Shares

21.  The Defendants were also liable in June 2006 – one year after Closing to transfer Additional Shares to the Plaintiffs to make up for the shortfall resulting from the Reference Price being lower than the Base Price (pursuant to Paragraph 3.4 of the SPA).

(1)   To Dragon Wings: the Defendants were liable to deliver Additional 4,319,803 FTL shares, equivalent to 172,792 MKAC Shares

(2)   To Wong: the Defendants were liable to deliver Additional 2,591,896 FTL shares, equivalent to 103,675 MKAC Shares

Therefore, the Defendants were liable to deliver a total of 276,467 Additional MKAC Shares to the Plaintiffs.

22.  Wong gave evidence that these Additional Shares were subject to the same one-year restriction on trading and at the expiry of one year (i.e. June 2007). Dragon Wings could return the restricted shares to the Defendants who were liable to exchange the same with certificates for unrestricted shares.

Terms of the Undertaking

23.  According to the various emails exchange between Wong and Richard Yan (“Yan”), the financial controller of the Defendants in July 2009, the parties eventually agreed that:

(1)   FTL (which had become MKAC at that time) and its stock agent will handle the re-issue of the unrestricted MKAC Shares.

(2)   Because MKAC did not know how much time its stock agent would take to re-issue the freely tradable MKAC shares, Dragon Wings would withhold the monthly HKD25,000 payment to Digital pending delivery of the freely tradable share certificates; during this period, MKAC will not charge any interest penalty on the monthly payment.

(3)   The Defendants would arrange for its stock agent to re-issue freely tradable shares but only after receiving the outstanding HKD150,000 from the Plaintiffs.

(4)   The parties agreed to enter into a written Undertaking (which was drafted by the Defendants) encompassing all the above agreed terms and further agreed that upon receipt of the signed Undertaking from the other party, the Plaintiffs would send the HKD150,000 to the Defendants and the Defendants would arrange for the trading restrictions to be released.

(5)   The parties also agreed to add Digital as a party to the Undertaking as it was also involved.   

24.  The agreed terms from the aforesaid negotiations were reflected in the Undertaking, namely:-

(1)   Insofar as the Original FTL Shares are concerned: Fintel undertook to have its transfer office release the 99,869 MKAC Shares within 21 days of receipt of the certificates of restricted shares from the Plaintiffs. Wong’s evidence is that the word “shares” therein refers to the certificates of the restricted FTL Shares from the Plaintiffs.

(2)   Insofar as the Additional MKAC Shares are concerned: D1 undertook further to reissue the additional 276,467 MKAC restricted shares and cause the trading restrictions on the same to be released after 1 June 2007 (i.e. one year from delivery).

(3)   The Undertaking also states that if the release and re-issue of the shares are not completed on time, the Plaintiffs can delay payment on the service fee under the FAC without penalty under the Defendants have the shares released (referring to the tradable MKAC Shares) and re-issued (referring to the Additional MKAC Shares).

(4)   The Undertaking sets out the parties’ agreement on payment of the HKD150,000 namely for the sum not be paid within 3 days after signing the agreement.

(5)   If the Plaintiffs fail to pay the service fee on time and the Defendants have already issued the 99,869 MKAC Shares and caused the 276,467 Additional MKAC Shares to be delivered, DFS will be entitled to charge interest for delayed payment.  If the Plaintiffs fail to pay the service fee within 30 days of the later of either the due day (i.e. at the end of month) or date of receipt of the 99,869 MKAC Shares and the 276,467 restricted MKAC Shares, the Defendants are entitled to terminate the SPA.

25.  On 26 August 2006 (a Saturday), Wong emailed Yan informing him that the HKD150,000 had been deposited.  On the same day, Wong sent the certificates of the restricted FTL Shares by courier to the Defendants’ Shanghai office, with the expectation that the same would arrive on Monday, 28 August 2006.

26.  On 4 September 2006, Yan confirmed receipt of the HKD150,000 and told Wong that the Defendants had already instructed their stock agent to issue certificates and release certificates, but that the stock agent had made a mistake and had stamped the supposedly freely tradable MKAC shares with the “144 Restricted” legend.  Yan indicated that he would mail all certificates to Wong when he received newly issued certificates from their stock agent.

27.  Wong gave evidence that after this email exchange, David Chen (the director of MKAC) had proposed early termination of the SPA and the Undertaking and had proposed to treat the transaction as being reversed (that is, each party would be returned to the position as if the transactions had not been carried out).  Wong further stated that David Chen had offered to repay Dragon Wings HKD150,000 out of the total of HKD300,000 paid under the Financial Advisory Contract.

28.  Wong said that he had disagreed with what was proposed and insisted on delivery of (1) share certificates for the released MKAC Shares and (2) share certificates for the Additional MKAC Shares.

Quantum

29.  The Defendants still fail to deliver (1) the released MKAC shares and (2) restricted additional MKAC shares as at the date of this hearing.

30.  The Plaintiffs no longer wish to pursue the remedy of specific performance but seek damages for non-delivery up to the limit of the District Court’s jurisdiction.

31.  I accept the submission made by the Plaintiff’s Counsel that the normal measure of damages for non-delivery is the market price of the shares at the contractual time for delivery less the contract price – this represents the amount that the buyer must obtain to put himself in the position he would have been in had the contract been carried out (since to do so he must buy equivalent shares in the market) (see paragraph 24-003 McGregor on Damages 18^th ed.).

32.  Applying this principle to the present case:-

(a) In relation to the 99,869 tradable MKAC Shares

(1)   The Defendants were liable to deliver the tradable MKAC Shares to the Plaintiffs within 21 days of receipt of the restricted share certificates.  Since the restricted share certificates were sent by courier on 26 August 2006 (a Saturday) with the expectation that the same would reach the Defendants’ Shanghai office on 28 August 2006 (a Monday), the Defendants would have been liable to deliver tradable MKAC Shares to the Plaintiffs on 18 September 2006 (being 21 days after receipt).  Accordingly the date of breach should be 18 September 2006 and the shares should be valued on the basis of market price on that day.

(2)   The market value of one MKAC Share on 18 September 2006 was USD0.25 based on the record of closing price.

(3)   Since the Defendants were liable to deliver 62,417 MKAC Shares to Dragon Wings and 37,450 MKAC shares to Wong, accordingly the market values of the 62,417 tradable MKAC Shares and the 37,450 MKAC Shares are USD15,604.25 (i.e. 62,417 x USD0.25) and USD9,362.50 (i.e. 37,450 x USD0.25) respectively.

(b) In relation to the 276,460 Additional MKAC Shares

(1)   The Defendants were liable to deliver 276,460 additional MKAC Shares to the Plaintiffs (172,792 shares for Dragon Wings and 103,676 shares for Wong) and lift trading restrictions on those shares on 1 June 2007 but had failed to do so.

(2)   Accordingly the date of breach is 1 June 2007.  As of that date, the value of one MKAC Share was USD0.4 based on the record of closing price.

(3)   The market values of the 172,792 MKAC Shares and the 103,676 MKAC shares are USD69,116.80 and USD41,470.40 respectively.

33.  To sum up, the 1^st and 2^nd Defendants do jointly and severally pay the 1^st Plaintiff the damages assessed at USD84,721.05 (USD15,604.25 + USD69,116.80) or the Hong Kong dollar equivalent at the time of payment and the 2^nd Plaintiff damages assessed at USD50,832.90 (USD9,362.5 + UD41,470.40) or the Hong Kong dollar equivalent at the time of payment.

34.  The 1^st and 2^nd Defendants do jointly and severally pay the interest on the aforesaid damages at 8% p.a. from 25 July 2008 up to the date hereof and thereafter at judgment rate until payment.

35.  Regarding costs of this action and assessment of damages, the Plaintiffs’ solicitors filed a statement of costs claiming a total sum of $138,680 including Counsel’s fee.  Having carefully considered the said statement, I make an order nisi that the 1^st and 2^nd Defendants do pay the 1^st and 2^nd Plaintiffs costs of this action including assessment of damages summarily assessed at $105,000, which shall become absolute after 14 days from the date hereof.