KONG LING AND ANOTHER v. CHAN CHI WAH

HCA 1846/2024

[2025] HKCFI 474

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1846 OF 2024

________________________

________________________

________________________

JUDGMENT

________________________

Application

1.  This is the application of the 1^st plaintiff (“P1”) and the 2^nd plaintiff (“P2”) (together “Ps”) by a summons filed on 19 September 2024 (the “Summons”) for summary judgment under Order 86 rule 1 of the Rules of the High Court (Cap. 4A) against the defendant (“D”) for the following reliefs:

(1)  A declaration that D has repudiated the PSPA (as defined hereinbelow) and P1 and P2 had accepted such repudiation.

(2)  A declaration that P1 and P2 are entitled to the return of the deposit in the sum of HK$4.85 million.

(3)  Damages in the sum of HK$158,350 for P1 and P2 as wasted expenditure.

Background

2.  Pursuant to a provisional agreement for sale and purchase dated 15 April 2024 (the “PSPA”), P1 and P2 agreed to purchase, and D agreed to sell the entire share capital of Trump Sound Limited (the “Company”) for the consideration of HK$48,500,000.

3.  The Company is the registered and beneficial owner of Apartment No. 9, 35^th Floor and residential car parking space No. P25 on 5/F, Celestial Heights, 80 Sheung Shing Street, Kowloon (the “Property”).

4.  There is no dispute that what is contemplated under the PSPA is in substance a sale and purchase of the Property.

5.  Pursuant to the PSPA, Ps has paid a total of HK$4.85 million as deposit (the “Deposit”) which has been held by D’s solicitors, Messrs K.B. Chau & Co (“KBC”) as stakeholders.

6.  No formal agreement was signed. Pursuant to Clause 2(c) of the PSPA, completion was set out to be before 2 pm on 14 August 2024 (the “Completion Date”).

7.  P1 and P2 purportedly accepted D’s repudiation of the PSPA on 13 August 2024.

8.  On 15 August 2024, D commenced HCA 1617/2024 against Ps for the forfeiture of the Deposit and damages for loss of bargain.

9.  P1 and P2 commenced the present action against D on 24 September 2024 for the same relief as set out in the Summons.

P1 and P2’s Case

10.  After the PSPA had been signed, Ps’ Solicitors, Messrs Lam, Lee & Lai (“LLL”), by letter dated 19 April 2024 had asked for all books and documents of the Company, a total of 16 categories of documents as follows:

(1)  Certificate of Incorporation;

(2)  Business Registration Certificate;

(3)  Memorandum and Articles of Association;

(4)  Registers of Members, Directors, Secretaries, Transfers, Charges and Significant Controllers;

(5)  Minutes of general meetings and board meetings;

(6)  Copies of all documents filed with the Companies Registry;

(7)  Stamped instruments of transfer and bought and sold notes relating to the shares of the Company;

(8)  Application for Shares;

(9)  Appointment of First Directors;

(10)  Unissued and cancelled share certificates;

(11)  Resignation Letters of past directors and secretaries (if any);

(12)  All contracts of the Company;

(13)  Audited financial statements since the incorporation of the Company;

(14)  Latest unaudited accounts of the Company;

(15)  All accounting records and vouchers of the Company;

(16)  All correspondence with the Inland Revenue Department (including but not limited to tax return) since the incorporation of the Company.

11.  The following correspondence between KBC and LLL ensued:

Date	Letter
29 April 2024	KBC sent over 10 items (the “1st Batch Documents”) to LLL. However: 1.  In the Register of Charges, only a few sets of minutes and written resolutions were provided. 2.  The Significant Controllers Register and Company’s Contracts were not included.
8 May 2024	LLL sent over the initial due diligence questionnaire (the “Questionnaire”).
14 May 2024	KBC replied that their replies to the Questionnaire were all contained in the 1st Batch Documents.
21 May 2024	LLL disagreed.
23 May 2024	KBC reiterated Clause 5 of the PSPA and claimed that they had delivered all documents.
24 May 2024	LLL informed KBC that D had not delivered all the documents and LLL raised 47 requisitions (the “Requisitions”).
27 May 2024	LLL raised 15 further requisitions.
28 May 2024	KBC questioned the relevance of the documents sought by LLL in the 21 May 2024 letter.
29 May 2024	KBC replied the requisitions set out in the 27 May 2024 letter and sent over a copy of demand letter and the tripartite legal charge/ mortgage in favour of China CITIC Bank to LLL.
8 July 2024	KBC sent over a 2nd batch of documents (the “2nd Batch Documents”) of 3 undated written resolutions, some licences and tenancy agreements.
26 July 2024	LLL pointed out that KBC only answered Requisitions 2, 3, 36, 37, 44, 45 and 47.
29 July 2024	KBC provided LLL with the contact information of D’s accountant.
30 July 2024	LLL sent an email to D’s accountant requesting him to answer the outstanding requisitions.
5 August 2024	KBC sent to LLL the Company’s Significant Controllers Register and its related Written Resolution both dated 21 March 2018.
6 August 2024	KBC provided LLL with copies of several written resolutions.
8 August 2024	LLL reiterated the 38 outstanding requisitions and gave explanations on the requests for documents.
	LLL requested KBC to provide the proforma completion accounts (the “Profroma Accounts”) which had to be provided on or before 9 August 2024 as per Clause 9 of PSPA.
12 August 2024	LLL raised further requisitions with KBC including rectification of Annual Return and provision of all banking facilities letters and loan agreements made with China CITIC Bank.
	LLL suggested postponing completion to 16 September 2024 and requested D to confirm by 5 pm on the same day.
	KBC provided LLL with the requested Proforma Accounts (out of time).
13 August 2024	LLL noted that D had not agreed to postpone the Completion Date.
	KBC provided LLL with general ledger for the period from 1 April 2024 to 14 August 2024, bank statements, cheques and cheques deposit.
	KBC provided LLL with 7 written resolutions.
	LLL by a 2nd letter, purported to accept D’s repudiation of the PSPA.
	D purportedly sent over the documents in reply for Requisitions 6 to 27, the banking facility letters/loan agreements and resolutions as requested by LLL under Requisitions 2, 5, 28 & 42.
	KBC denied P’s claim
14 August 2024	Completion Date

12.  It is contended by Mr C.Y. Li SC and Mr Axis Yu, counsel for Ps, that D had repudiated the PSPA in:

(1)  having failed to supply all documents and/or answering all questions for due diligence review under Clause 5 of the PSPA, and

(2)  having failed to produce the Proforma Account under Clause 9 of the PSPA

and Ps had accepted such repudiation.

13.  Having accepted D’s repudiation on 13 August 2024, P1 and P2 seek a return of the Deposit and as damages, they claim for wasted expenditure for the failed transaction in the liquidated sum of HK$158,350.

D’s Defence

14.  Mr Raymond Lau, counsel for D, contended that there was no breach of the PSPA on D’s part and it was Ps who had repudiated the PSPA and failed to complete the sale and purchase of the Property by the Completion Date.

Issues in Dispute

15.  As seen from the arguments of the parties, the issues in dispute are as follows:

(1)  Has D breached Clause 5 of the PSPA?

(2)  If so, whether Ps are entitled to terminate the PSPA based on D’s breaches of Clause 5 and Clause 9 of the PSPA?

(3)  Whether Ps ought to have been satisfied with the results of the due diligence so that the conditions precedent to the completion were fulfilled by 14 August 2024.

(4)  Whether Ps had elected to affirm the PSPA and had lost the right to terminate the PSPA on 13 August 2024?

(5)  Whether Ps had wrongfully repudiated the PSPA in refusing to complete the sale and purchase.

Legal Principles – Order 86

16.  The legal principles on applications for summary judgment under Order 14 and Order 86 are the same[1].

17.  The applicable principles for summary judgment are trite and not disputed. Parties agreed that the burden is on D to show a real or bona fide defence on the merits or that there are issues of fact or points of law which ought to be tried.

18.  Mr Lau submitted that summary judgment under Order 86 is inappropriate as there are triable issues as summarized in Paragraph 15 hereinabove.

Analysis

Has Clause 5 of the PSPA been breached?

19.  Clause 5 of the PSPA provides:

“To facilitate the carrying out of the due diligence review by [Ps], D hereby undertake to deliver to [Ps] or [their] solicitors all documents relating to the Company within 28 days from the date of this Agreement. [Ps] shall carry out the due diligence review and confirm in writing to [D] or [his] solicitors whether he is satisfied with the results of such due diligence review within 28 days after the date of delivery of all documents by [D]. If it is discovered during the due diligence review that there is any irregularity, [D] or [his] solicitors shall rectify the same as soon as possible. In addition, [D] shall deliver to [Ps’] solicitors for their inspection all title deeds and documents relating to the Property in his possession or under his control at least 28 business days prior to the Completion Date.”

20.  There is no dispute that at least the following documents had not been provided to Ps within 28 days of 15 April 2024, namely, 13 May 2024:

(1)  the 2^nd Batch Documents;

(2)  the Company’s Significant Controllers Register and its related Written Resolution both dated 21 March 2018;

(3)  bank facility letters/loan agreements and resolutions.

21.  By the time Ps purported to rescind the PSPA on 13 August 2024, at least the following documents had not been provided:

(1)  complete Register of Charges;

(2)  complete and up to date Significant Controllers Register;

(3)  details of all facilities and loans, financial arrangements or agreements;

(4)  all mortgages of the Company.

22.  Mr Li thus submitted that it is beyond clear that D had breached Clause 5.

23.  It was submitted by Mr Lau that D’s duty “to deliver … all documents relating to the Company” is arguably not as unqualified as it seems as otherwise Ps could insist on some trivial documents not having been provided. The duty is said to be too onerous on D. Mr Lau further submitted that the disclosure of documents under Clause 5 could not have been “of the essence” as documents had varying degree of importance. It was submitted that Clause 5 “must be read down” and it was arguable that D only had to provide documents which were necessary for the exercise of due diligence.

24.  I reject the submissions of Mr Lau and find that D had breached Clause 5 for the following reasons:

(1)  There is no authority provided by Mr Lau for the proposition that that D’s undertaking to deliver all documents of the Company must be “read down”. It needs to be borne in mind that what the parties were dealing with is the sale and purchase of the entire share capital of the Company, the effect of which would be that Ps, as strangers to the Company, would take over all assets as well as liabilities of the Company.

(2)  The point of due diligence is to satisfy Ps, and whether D deems the documents produced as sufficient for such purpose is irrelevant to the exercise. It would be wholly contrary to the purpose of the clause if D were only required to produce documents that only they deem “necessary”. D should provide documents that “show the true financial picture of the Company”[2].

(3)  Mr Lau submitted that as the audited accounts had already been provided to Ps, they ought to have been satisfied on the financial standing of the Company and as such, all other documents sought by Ps were not necessary. However, clause 4 of the PSPA expressly provides that completion is conditional on Ps having been satisfied with “the business, financial, legal and other aspects of the Company” after conducting due diligence. Ps were thus entitled to satisfy themselves by conducting due diligence on all aspects of the Company and not be content with what D represented to them on just the financial side of the Company.

(4)  Against such background, I cannot see any basis for D to now contend that their undertaking to provide “all documents” in the PSPA only relate to certain documents that are deemed “necessary” by D.

(5)  In any event, in failing to provide the requested documents, D had not at any point alleged or given the justification that such documents were insignificant or that such documents did not exist. In fact, D had continuously provided documents to Ps in a scattered manner all the way up to 13 August 2024.

(6)  Even if I were wrong and D’s obligation to provide documents are limited, there is no dispute that certain documents remained missing (as set out in paragraph 21 hereinabove) as at the date Ps accepted the repudiation (13 August 2024). In my view, those outstanding documents cannot on any view be said to be trivial or irrelevant. Ps must be entitled to look at and examine the relevant loans, mortgages or financial arrangements of the Company to satisfy themselves on whether there are any potential liabilities that they would be burdened with in acquiring the Company.

(7)  It was also submitted that there is a conflict between Clause 5 and Clause 6 in terms of the timing of the delivery of documents, as Clause 6(b) provides for the provision of documents after completion:

“Upon Completion, [D] shall:

…

(b) deliver to [Ps] all accounting records, books, documents and instruments in relation to the affairs of the Company including, but not limited to, the certificate of incorporation, business registration certificate, common seal of the Company, copies of its memorandum and articles of association, the statutory books and any unissued share certificates…”

(8)  Clause 5 and Clause 6 relate to completely different matters: Clause 5 is clearly on providing documents to assist due diligence whilst Clause 6 is for D to hand over all Company documents post-completion. There is no merit in the argument that there is a conflict between Clause 5 and Clause 6 as to the timing for the provision of documents such that any obligation on D under Clause 5 can be watered down.

(9)  It was misleading for Mr Lau to have submitted that the request for the facilities letter and loan agreement entered into by the Company with China CITIC Bank was only specifically asked for on 12 August 2024: the reality is, Ps had already: i) on 8 May 2024 asked for “all material contracts to which the Company is a party” and ii) on 24 May 2024 asked for “all banking facilities letters/loan agreements entered into by the Company”. The fact that there was no specific request made earlier does not mean the request was made late. D ought to have provided the relevant facilities letter and loan agreement without any specific reference to them.

(10)  The significance to the facilities letter and loan agreement entered into by the Company with China CITIC Bank lies in the fact that the Company is itself the borrower. Therefore, even if the mortgage securing the liability has been discharged, that does not necessarily mean that the Company is released of all indebtedness under the loan. As Ps were acquiring the Company and not just the Property, in addition to showing that the Property has no encumbrances, D also had the obligation to show that the Company was free from liability[3].

(11)  Mr Lau further submitted that D has no duty to reply to the Questionnaire under Clause 5. This is a red herring: Clause 5 of the PSPA provided what documents need to be provided, and that D or his solicitors would need to rectify those defects or irregularity discovered by Ps. It is irrelevant that there was no specific requirement to answer the Questionnaire. D’s obligation under Clause 5 was to provide documents and to rectify irregularities. Such obligation does not fall away simply because it was conveyed in the form of the Questionnaire.

(12)  As D had failed to produce at least the documents which are relevant, Clause 5 was breached. It is not necessary to consider whether Ps ought to have been satisfied with the results of the due diligence reviews when relevant documents had not even been provided.

(13)  As accepted by Mr Lau, Clause 5 is a condition. As D had breached a condition of the PSPA, Ps were entitled to accept D’s repudiation and rescind the PSPA. There was no wrongful repudiation on Ps’ part in failing to complete. I find that there is no triable issue on D’s breach of Clause 5.

Failure to Provide of the Proforma Accounts

25.  Clause 9 of the PSPA provides:

“[D] undertakes to deliver to [Ps] or [their] solicitors at least five (5) days prior to the Completion Date the proforma completion accounts (hereinafter called “the Proforma Accounts”) comprising a proforma profit and loss account of the Company for the period from its date of incorporation/ the beginning of the current financial year to the Completion Date and a proforma balance sheet of the Company as at the Completion Date. If the NTAV (hereinafter defined) shown in the Proforma Accounts is more or less than zero, the Balance shall be adjusted upwards or downwards (as the case may be) accordingly in the manner as follows:

(i) it shall be added to the Balance all current tangible assets of the Company as shown in the Proforma Accounts including rentals receivable (if applicable) (up to and inclusive of the Completion Date), utilities and other miscellaneous deposits, prepaid rates and government rent, and other expenses relating to the Property (up to but exclusive of the Completion Date);

(ii) it shall be deducted from the Balance all liabilities of the Company as shown in the Proforma Account (other than the Sale Debt).

For the purpose of this Agreement, “NTAV” means the aggregate of all tangible assets of the Company which are readily convertible into cash or cash equivalents (excluding the Property, any intangible assets and other fixed assets and deferred tax), less the aggregate of all liabilities (actual, contingent or otherwise but excluding the Sale Debt) and provisions of the Company as at the Completion Date.”

26.  Mr Lau accepted that under Clause 9, the Proforma Accounts are required to determine the ultimate amount of the balance purchase price. It is also admitted that the Proforma Accounts had not been provided to Ps or LLL at least five days prior to the Completion Date: they were only provided on 12 August 2024, 2 days before the Completion Date.

27.  Mr Lau ventured to argue that Clause 9 is an “innominate term” or an “intermediate term”, as there is allegedly a conflict between Clause 9 and Clause 10, which provides:

“[D] undertakes to deliver to [Ps] or [their] solicitors within 30 days from the Completion Date the financial statements audited by certified public accountants (practising) (hereinafter called “the Completion Accounts”) of the company for the period from its date of incorporation/ the beginning of the current financial year to the Completion Date. If the NTAV as shown in the Completion Accounts is more or less than the NTAV as shown in the Proforma Accounts, [Ps] or [D] (as the case may be) shall pay the difference to the other party within five (5) days from the date of receipt of the Completion Accounts.”

28.  It was further argued that time is not of the essence in respect of the provision of the Proforma Accounts because there would be a Completion Account prepared by the auditor within one month of the completion. Mr Lau thus argued that the delay in the provision of the Proforma Accounts does not deprive Ps the substantial benefit of the PSPA and as such it is an innominate term that the breaches of which would be of different degrees with different results.

29.  I reject Mr Lau’s submissions and find that Clause 9 is a condition to the PSPA and that time is of the essence for the following reasons:

(1)  In the conveyancing practice of Hong Kong, in the absence of special circumstances, parties are usually taken to have proceeded on the basis that time was of the essence of the contract despite the fact that there was no express provision to that effect in the provisional agreement[4]. This is also the case in relation to a sale and purchase of a property via the acquisition of the entire share capital of a property holding company[5].

(2)  Mr Lau did not suggest that there were any special circumstances in the present case that would depart from this general rule. He only submitted that “time is of the essence” would not apply to Clause 9.

(3)  Clause 9 is an important provision which could potentially vary the balance of the purchase price. It can be said to be the final step prior to completion of the sale and purchase. There can be no doubt that this is an essential stipulation of the PSPA. Given the fact that: i) the parties were dealing with a piece of valuable landed property, ii) the volatility of the property market in Hong Kong generally, I cannot see why time would not be of essence to a stipulation which could affect the ultimate balance purchase price.

(4)  Further, Clause 9 provides that D undertakes to deliver the Proforma Accounts to Ps or the Ps’ solicitors at least five (5) days prior to the Completion Date. As held in Eternal Crown Development Ltd. v Great Wide Investment Ltd.[6], in employing the words “at least”, parties had agreed to a deadline the time of which must be of the essence, otherwise the use of the expression would have been out of place.

(5)  The fact that there is a mechanism for parties to further vary the consideration for the sale and purchase of the shares under Clause 10 in no way makes Clause 9 any less important.

(6)  As D had failed to produce the Proforma Accounts 5 days before the Completion Date, Clause 9 was breached and Ps were entitled to accept D’s repudiation. Ps were not in repudiatory breach in failing to complete.

30.  There is no triable issue under Clause 9.

Affirmation by P?

31.  Mr Lau submitted that Ps had affirmed the PSPA and waived their right to rescind the PSPA as:

(1)  Ps kept asking for the documents after 13 May 2024 (the original deadline for the provision of documents); and

(2)  Ps had proposed on 12 August 2024 to postpone the Completion Date to September 2024.

32.  If D had accepted Ps proposal to postpone the Completion Date, it might be said that Ps had affirmed the PSPA despite the breaches to Clause 5 and Clause 9. However, as it is, there is no dispute that Ps’ proposal was not accepted by D, which was noted by Ps by letter on 13 August 2024. Ps had at the same time confirmed that as there was no postponement of the Completion Date, the original Completion Date and other terms in the PSPA remained unchanged.

33.  In terms of the breach under Clause 9, the Proforma Accounts ought to have been provided at least 5 days before Completion Date, i.e. 9 August 2024. Although Ps had offered to extend time for completion, such offer was not accepted by D. Ps therefore rescinded the PSPA on 13 August 2024, 4 days after D’s failure in complying with his obligations under Clause 9.

34.  As endorsed by the Court of Appeal in Cheung Ching Ping Stephen v Allcom Ltd[7]: “an innocent party may delay accepting a repudiation because lapse of time did not operate against a party who was entitled to elect to repudiate liability under a contract unless there was prejudice to the defendant or rights of third parties had intervened or the delay was of such a length as to be evidence that they had in truth decided to accept liability.”

35.  There is no suggestion from D that he had suffered any prejudice due to the delay of 4 days.

36.  Further, in terms of D’s breach under Clause 5, the breach concerned here is a continuing breach. Although it may be said that Ps had waived the breach as to the 13 May 2024 deadline by continuing to ask for documents past the original deadline, there was certainly no waiver on Ps’ part of the requirement to provide documents, as evidenced by the incessant requests for their provision.

37.  “If, before the time arrives at which a party is bound to perform a contract, he expresses an intention to break it, or acts in such a way as to lead a reasonable person to the conclusion that he does not intend to fulfil his part … where the anticipatory breach takes a continuing form, the fact that the innocent party initially continued to press for performance does not normally preclude him from later electing to terminate the contract provided that the party in breach has persisted in his stance up to the moment of termination.”[8]

38.  It cannot therefore be said that Ps had lost their right to rescind at any time after 13 May 2024, as D continued with the breach. Ps would still be entitled to rescind as D continued to fail to produce certain loan documents up to the day before the Completion Date. It was thus reasonable and Ps were entitled to exercise their right to rescind on 13 August 2024.

Conclusion

39.  D has failed to raise any triable issues.

40.  Ps are entitled to a return of the Deposit. Ps have elected to claim for wasted expenditure incurred for the PSPA in the liquidated sum of HK$158,350. Documentary evidence in support had been provided for such sum and D has raised no issue thereto.

41.  Costs follow the event, I will therefore make an order nisi that D do pay Ps’ costs of and occasioned by the action and of the Summons, with certificate for one counsel. In the absence of any variation within 14 days hereof, the costs order nisi will become absolute.

Order

42.  I will grant the following Orders:

(1)  A declaration that the defendant has repudiated the Provisional Agreement for Sale and Purchase dated 15 April 2023 made between the defendant as Vendor, the 1^st and 2^nd plaintiffs as Purchaser and Pan-win Property Services (Agency) Limited as Agent.

(2)  A declaration that the 1^st plaintiff and the 2^nd plaintiff are entitled to accept and have lawfully accepted the repudiation.

(3)  A declaration that the 1^st and 2^nd plaintiff are entitled to the return of the deposit in the sum of HK$4,850,000.00 which is held by Messrs. K.B. Chau & Co. as stakeholders.

(4)  Interest on HK$4,850,000.00 at prime rate + 1% from the date of the acceptance of the repudiation (13 August 2024) to the date of Judgment, and thereafter at judgment rate until payment.

(5)  Damages in the sum of HK$158,350 be paid by the defendant to the 1^st and 2^nd plaintiffs.

(6)  Interest on HK$158,350 at judgment rate from the date of Judgment until payment.

(7)  Costs of the Summons dated 19 September 2024 and of the action be paid by the defendant to the 1^st and 2^nd plaintiffs (on a nisi basis). Such costs order nisi will become absolute if there is no application to vary it within 14 days hereof.