MANDECLY LTD AND ANOTHER v. HAO WEI AND OTHERS

HCA 1216/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1216 OF 2002

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D E C I S I O N

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1.  This is the hearing of an application for an inquiry as to damages and other reliefs arising from a partially unsatisfied judgment obtained by the plaintiffs against the 1^st to 3^rd defendants in 2006.

Background

2.  The original dispute between the parties arose out of a transaction by which the 1^st defendant acquired the plaintiffs’ interest in a real estate development project in Beijing, called Greenlake Garden.  The relevant agreements were entered into in 2001.  The transaction was structured in such a way that the 1^st defendant was to acquire from the plaintiffs all the issued shares in the 3^rd defendant, which was a Hong Kong company used by the plaintiffs to engage in the real estate project by way of a joint venture with a Beijing company called Beijing Chaoyang.  The 3^rd defendant and Beijing Chaoyang together (in the proportion of 52%:48%) held the 4^th defendant, a company called Beijing Mandas which was the developer and held the land and buildings in question. 

3.  There were two phases in the development of Greenlake Garden.  The 1^st defendant was interested principally in acquiring Phase 2.  As a result, it was agreed that after the sale of the shares in the 3^rd defendant to the 1^st defendant, while some of the residential units in Phase 1 would be left in Beijing Mandas to offset its liabilities, some other residential units in Phase 1 would be transferred to the plaintiffs as part of the price which the 1^st defendant had to pay for buying the 3^rd defendant.  The latter group of properties were set out in Schedule 1 to the plaintiffs’ statement of claim in these proceedings and have since been referred to in a number of subsequent judgments and orders as “Schedule 1 Properties”.

4.  In the event the plaintiffs duly transferred the shares in the 3^rd defendant to the 1^st defendant and to his corporate vehicle the 2^nd defendant in 2001, but he failed to pay part of the price including the transfer of the Schedule 1 Properties to the plaintiffs.

5.  The plaintiffs brought the action herein in 2002 against the 1^st, 2^nd and 3^rd defendants seeking to enforce the agreement.  After a 38-day trial which took place in 2005 and 2006, on 17 August 2006 Yam J decided in favour of the plaintiffs.  By way of relief, Yam J made an order, inter alia, that the 1^st to 3^rd defendants transfer the Schedule 1 Properties free of encumbrance to a nominee of the 2^nd plaintiff called Beijing Millennium, and to take all necessary steps to effect such transfer within 21 days.  His lordship also made a declaration that the plaintiffs are entitled to a lien on the shares in the 3^rd defendant for the transfer of the Schedule 1 Properties and for the payment of the sum of RMB11 million which he had ordered the 1^st defendant to pay the plaintiffs.  In support of that lien the defendants were ordered to deliver up the shares in the 3^rd defendant to the plaintiffs.  Liberty was given to the plaintiffs to apply for the sale of or appointment of receivers over the shares in the 3^rd defendant in the event of default by the 1^st and 2^nd defendants in, inter alia, transferring the Schedule 1 Properties.

6.  The defendants’ appeal to the Court of Appeal from the judgment of Yam J was dismissed on 13 November 2007.

7.  It then transpired that some of the Schedule 1 Properties could no longer be transferred by the defendants.  The judgment of 17 August 2006 was therefore varied by an order made by Yam J on 12 June 2008 to require the defendants to transfer to Beijing Millennium (as the plaintiffs’ nominee) specified units which then remained unsold and transferrable.  There were all together 43 flats and 26 car parking spaces so ordered to be transferred, which were identified in a relevant specified affirmation.  The orders relating to the lien were correspondingly amended.

8.  Despite the lapse of the time prescribed for the transfer in accordance with the amended order of Yam J and despite the lapse of the time as extended by the Court of Appeal in August 2008, none of these 43 flats and 26 car parking spaces has been transferred by the defendants to the plaintiffs or their nominee.  Nor were the share certificates in respect of the shares in the 3^rd defendant delivered to the plaintiffs as ordered, apparently because they had been pledged to the 5^th defendant and were not in the possession of the 1^st and 2^nd defendants, a matter to which I shall return later on.

9.  The 4^th and 5^th defendants were joined as parties to the action, upon the plaintiffs’ application, in about October 2008.  By an order made on 14 November 2008, Yam J granted an injunction restraining, inter alia, the 4^th defendant from disposing of its assets which included the properties ordered to be transferred to the plaintiffs.  The judge also appointed receivers over the business and undertakings of the 3^rd defendant and the 52% shareholding held by the 3^rd defendant in the 4^th defendant.

10.  Notwithstanding the injunction, in 2009 the 4^th defendant assigned 33 of the 43 flats to China Construction Bank to settle a debt.  The bank then transferred the properties to other parties who have since sold them to individuals or other entities.  There is no longer any realistic prospect of the plaintiffs obtaining the transfer of these 33 flats.  Nor have the receivers appointed by the Hong Kong court been able to take charge of the 3^rd defendant or exert control over the 4^th defendant. 

11.  By the present application before me, the plaintiffs therefore seek an inquiry as to damages in respect of the defendants’ failure to transfer these 33 flats.  In addition, the plaintiffs seek (i) a declaration that the plaintiffs have a lien on the 999,999 shares and 1 share held by the 1^st and 2^nd defendants respectively in the 3^rd defendant for the amount of damages assessed; (ii) an order that those shares be sold pursuant to the lien; and (iii) ancillary and consequential orders relating to such sale and the application of the proceeds of sale.

12.  The 1^st, 2^nd and 3^rd defendants have not filed any affirmation in opposition.  Of these three defendants, only the 2^nd defendant has appeared on previous directions hearings relating to the present application.  It has indicated by counsel that it takes a neutral stance to the plaintiffs’ application.  The 4^th defendant was not served with the application.

13.  The 5^th defendant, which was served, also takes a neutral position with regard to the application for an inquiry as to damages, but opposes the plaintiffs’ application for a sale of the shares.

Inquiry as to damages and lien

14.  The plaintiffs brought the action to enforce the shares sale agreement and in particular the 1^st defendant’s obligation to transfer the Schedule 1 Properties to the plaintiffs.  They obtained in effect an order for specific performance of the agreement from Yam J in 2006. Although at that point they had elected to pursue the remedy of specific performance, it is clear law that the contract remains in place and is not merged in the judgment for specific performance.  Thereafter, if the order for specific performance is not complied with, the plaintiffs have an option: they may either apply for further orders for the purpose of enforcing the order for the transfer of properties, or they may apply to the court to dissolve the order for specific performance, put an end to the contract, and award damages for the loss suffered in consequence of the defendants’ breach: Johnson v Agnew [1980] AC 367 at 393F, 394B, 398B, 399E.

15.  The 33 flats having been assigned away without any fault on the part of the plaintiffs, thereby rendering it impossible for them to be transferred to the plaintiffs, there seems to me no reason why the plaintiffs should not be entitled now to seek damages instead. 

16.  The primary position of the plaintiffs is that they wish to seek damages only in relation to these 33 flats, and to maintain their claim for the transfer in specie of the 10 other flats and 26 car parking spaces.  There may be some doubt, on the logic of Johnson v Agnew which required the court to put an end to the contract, whether a plaintiff may claim damages for breach of part a contract and seek specific performance of another part.  It is established, however, that under s 2 of the (UK) Chancery Amendment Act 1858, also known as Lord Cairns’ Act (the equivalent provision in Hong Kong being s 17 of the High Court Ordinance (Cap 4)), the court may give damages as to part of a contract and specific performance as to the rest: Chitty on Contracts (31^st ed), vol.1, §27-082.  I am satisfied that there is power to award damages on this basis, and that such power may be exercised in this case on this application by way of a supplemental alternative order having regard to the material change in circumstances since the amended order of Yam J made in 2008, namely the supervening impossibility of the specific transfer of the properties in question: Northern Counties Securities Ltd v Jackson & Steeple Ltd [1974] 1 WLR 1133, 1137-1138.

17.  As for the measure of damages, it is established that the measure under Lord Cairns’ Act and at common law is the same: Johnson v Agnew, at 400G.  I accept Mr Lee’s submission for the plaintiffs that, in a case such as the present, damages should be assessed as at the date when the contract is lost: Johnson v Agnew, at 401B.  The plaintiffs have placed before me a professional valuation report that states the open market value of the 33 flats to be RMB100,420,000 as at 23 November 2012, which works out to be RMB30,784 per square metre.  The date chosen was about one month after the plaintiffs discovered that it could no longer recover those flats.  I accept it as a reasonable proxy for the date when the relevant part of the contract was lost.

18.  On the basis of the evidence before me, I assess the damages to be in the sum of RMB100,420,000.  There will be interest on the damages at the rate of prime plus 1% per annum from 23 November 2012 until today.  Interest will accrue hereafter at judgment rate on the aggregate sum of judgment as at today.

19.  The 33 flats represent part of the property that the 1^st defendant was obliged to transfer to the plaintiffs as consideration in part for the sale of the shares in the 3^rd defendant.  An unpaid vendor’s lien may arise where “the property sold is of such a nature as that the court will decree specific performance of the contract for purchase of it”: In re Stucley [1906] 1 Ch 67, 79; Langen & Wind Ltd v Bell [1972] 1 Ch 685, 692E.  Moreover, a lien arises as security not only for an obligation to pay a monetary price, but also to provide other form of consideration: Nuport Holdings Ltd v Duff Estate 2003 NLSCTD 63 at §56.  It follows that the plaintiffs have a lien on the shares in the 3^rd defendant – the subject matter of the sale – to secure the performance of the obligation of the 1^st defendant.  That obligation having been breached and substituted by an obligation to pay damages, the lien in my view extends to secure the payment of such damages together with interest.  It cannot be right that whenever an unpaid vendor obtained judgment for the price or for damages, or whenever a purchaser obtained judgment for the return of his deposit, the vendor’s lien or the purchaser’s lien would be lost.  The security for the obligation must pass over to the judgment enforcing that obligation.  There will be a declaration accordingly.

Sale of shares in the 3^rd defendant

20.  As mentioned above, the 5^th defendant opposes the plaintiffs’ application relating to the sale of the shares in the 3^rd defendant.  The interest of the 5^th defendant in this matter arose as follows.  In August 2002, the 1^st defendant proposed to enter into a loan agreement (“the Loan Agreement”) to borrow from the 5^th defendant the sum of RMB30 million, on the security of the shares in the 3^rd defendant, apparently for the purpose of repaying the 4^th defendant’s indebtedness to one China Xin Xing Construction Development Company Limited.  At the time, the plaintiffs had applied to the Hong Kong court for an interlocutory injunction to restrain the 1^st and 2^nd defendants from dealing in any way with the shares they held in the 3^rd defendant.  That application came before Ma J (as he then was).  The following passages in paragraph 11 of Ma J’s judgment dated 28 September 2002 show the position as understood by the court at that time:

“(3) There is at the moment an asset preservation order over Beijing Mandas' assets imposed by the Beijing Second Intermediate People's Court in relation to a judgment that a company called China Xin Xing Construction and Development General Company Limited ("Xin Xing") has obtained against Beijing Mandas. The judgment was over a debt of some RMB60 million that Beijing Mandas was adjudged to owe to Xin Xing. Beijing Mandas' appeal from the judgment has been dismissed. On 10 July 2002, the Beijing Court served an execution notice on Beijing Mandas to pay the judgment debt by 30 September 2002, failing which execution would be levied on its assets by sale. These assets comprise on the whole both Phases of the Development. Quite apart from the threat of execution, the asset preservation order has prevented the utilization of Beijing Mandas' property to raise money to pay its liabilities.

…

(6) The 1st defendant's financial difficulties are detailed in his affirmations. In particular, he refers to the difficulties even obtaining loans amounting to RMB5 million. The plaintiffs do not really contradict this. Indeed, on the contrary, it is part of their case that it is precisely because the 1st defendant is in a precarious financial position that an interlocutory injunction becomes necessary.

(7) However, the financial predicament that Beijing Mandas finds itself in arising from the Xin Xing judgment has some chance of being alleviated in that Xin Xing has apparently in principle agreed with the 1st defendant that upon payment of RMB40 million to it, presumably only as partial discharge of the judgment debt, it will procure the discharge of the asset preservation order. Xin Xing requires the RMB40 million to be paid to it by 15 October 2002 and that a signed agreement be made prior to 30 September 2002 (when as will be recalled, execution will be levied on Beijing Mandas' assets by the Beijing Court). The 1st defendant has managed to secure finance from a company called Hua Ke Industry and Development Company Limited ("Hua Ke"), under a loan agreement for the sum of RMB30 million. However, Hua Ke requires as security, not surprisingly, the shares held by the 1st defendant in the 3rd defendant.

(8)     There is some dispute between the parties as to whether or not this loan might contravene PRC laws.  I am unable to come to a conclusion on this issue on the material before me, but would wish merely to say that it is by no means obvious that it is illegal.  In these circumstances, the existence of a lender who will enable Beijing Mandas effectively to pay the RMB40 million required by Xin Xing (RMB5 million I have already referred to and the 1st defendant deposes to his ability to raise another RMB5 million) is a major factor in my consideration.  However, an interlocutory injunction would or might well stifle that lifeline offered to Beijing Mandas and the defendants.  It seems to me it is in everyone's interest, including the plaintiffs, that the loan agreement goes through.  The difficulties that Beijing Mandas would have in getting any loan is acknowledged by the plaintiffs in the third affirmation of the 2nd plaintiff.”

21.  Ma J therefore ordered that the 1^st defendant be at liberty to enter into the Loan Agreement with the 5^th defendant, with the restriction that the proceeds of the loan shall be used for no other purpose than repayment to China Xin Xing Construction Development Company Limited.

22.  The Loan Agreement was dated 26 August 2002 and was expressly conditional upon the Hong Kong court not restraining the 1^st defendant from charging the shares.  Clause 10 of the Loan Agreement provides that the 1^st defendant, as the borrower, agrees to charge all his shares in the 3^rd defendant as security for the 5^th defendant as lender. 

23.  On 16 October 2002, the 1^st defendant and the 5^th defendant entered into a further share pledge agreement pursuant to which the 1^st defendant had delivered to the 5^th defendant the share certificates in respect of the 1,000,000 shares in the 3^rd defendant registered in the name of the 1^st and 2^nd defendants respectively.  The share certificates have since remained in the possession of the 5^th defendant.  The shares have remained registered in the name of the 1^st and 2^nd defendants.  The 5^th defendant says that the loan extended under the Loan Agreement, as regards both principal and interest, is wholly outstanding. 

24.  There has been some debate between the plaintiffs and the 5^th defendant and much evidence filed as to whether the Loan Agreement was a genuine commercial transaction and if so whether in all probabilities the loan must have been repaid at some point since 2002.  The plaintiffs have gone so far as to suggest that the Loan Agreement was a sham.

25.  It is however unnecessary to decide this matter for the purposes of today, and this is recognised by Mr Lee who has not pressed his submissions in that respect.  It seems to me that taking as true (for the purpose of argument) the evidence put forward on behalf of the 5^th defendant, the position is as follows. 

26.  The 5^th defendant, not having been registered on the register of members of the 3^rd defendant, has at most an interest over the shares as an equitable mortgagee or chargee by way of security for repayment of the loan.  It is also a pledgee of the relevant share certificates.

27.  The plaintiffs on the other hand have an interest in the shares in the form of an unpaid vendor’s lien.  Mr Chan, who appears for the 5^th defendant, submits that the plaintiffs’ lien only arose in 2006 when Yam J gave judgment in their favour.  I cannot accept this contention.  It is clear law that an unpaid vendor’s lien arises the moment the contract is entered into: In re Birmingham, deceased [1959] 1 Ch 523, 529; Nuport Holdings Ltd v Duff Estate 2003 NLSCTD 63 at §§40-44.  In this case, that occurred in 2001, prior to the 5^th defendant’s Loan Agreement which was created in 2002.

28.  It is also well established that an equitable lien is binding on subsequent purchaser unless he obtained a legal estate for value without notice of the lien, or unless, though his interest is only equitable, he has a better equity than the vendor: Snell’s Equity (32^nd ed) §44-010.  As between the plaintiffs and the 5^th defendant, the maxim “where the equities are equal, the first in time prevails” is applicable.  The equities are equal here, there being no suggestion that the plaintiffs were at fault, for example, that they had culpably failed to retain the share certificates see Snell’s Equity (32^nd ed) §4-047.  Insofar as the 5^th defendant has a legal (as opposed to equitable) interest in the share certificates (through the pledge), it plainly had notice of the plaintiffs’ claim in the action, as evidenced by the condition precedent in the Loan Agreement.

29.  I am also unable to accept Mr Chan’s submission that the order of sale sought would derogate from or contravene the order that Ma J made in 2002.  That order permitted the 1^st defendant to enter into the Loan Agreement with the 5^th defendant, which contained an agreement to create a charge by way of security over the shares. The order did not in any way suggest, let alone guarantee, that the 5^th defendant would be the first encumbrancer on the shares with priority over any claim that the plaintiffs might have.  It is true that a sale would mean that the 5^th defendant had to part with possession of the share certificates, but its position would be no different from that of a subsequent mortgagee who happens to be in possession of the title deeds when a prior mortgagee seeks to enforce his security by a sale.  Such a subsequent mortgagee or chargee equally has to hand over the title deeds, but is in no way being deprived of his security.  It is simply that he takes his security subject to prior encumbrances.

30.  Accordingly, even taking the facts asserted by the 5^th defendant at face value, there is no reason why the plaintiffs who have a prior interest in the form of a lien should not be able to enforce it in the usual way in which liens are enforced, namely, a judicial order for sale.  There will therefore be an order for sale of the shares by way of public tender in respect of which the plaintiffs are not precluded from bidding for and (if successful) purchasing the shares.  If and when the shares are sold, the receivership earlier ordered will of course have to be terminated.

31.  I should make clear that what I have said in no way concerns the priority of the plaintiffs in respect of the three charging orders they have obtained over the shares to secure (i) the unpaid balance of the RMB11 million, (ii) certain sums of costs, and (iii) the sum of approximately RMB40.7 million which Yam J ordered the 1^st and 2^nd defendants to pay the plaintiffs by a further judgment dated 5 December 2008.  I have not heard any argument in that respect and they are not the subject matter of the lien I have declared.