LO SHING KIN v. SY CHIN MONG STEPHEN

HCA 2392/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2392 OF 2009

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J U D G M E N T

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1.  This action arises out of the dishonouring of a post-dated cheque drawn by the Defendant and payable to the Plaintiff.

2.  It has its historical origin in an Agreement and Supplemental Agreement both dated the 23 May 2008 whereby the Plaintiff as representative of a company he controlled, Silver Ball, purchased from the Defendant as representative of a company he controlled, Elite Dragon, one hundred million shares in a company called Bel Global, for HK$120,000,000, at a price of HK$1.20 per share.  The Defendant appears to have a controlling interest in Bel Global.

3.  The signatures of both parties were witnessed by a solicitor, Mr Lau Yue Sum of Y S Lau & Partners.  He had drawn up both documents in advance of the meeting on the 23 May 2008 at which they were signed.  The supplemental agreement simply provided for the conversion of convertible bonds (60,000,000) into the 100 million shares, the subject of the main transaction.  The parties had in fact been brought together for the purpose of this business deal by three middlemen, at least two of whom were known to the Defendant.  This was without doubt an agreement “at arms length”.

4.  In the course of this trial the Defendant said that the price ‑ HKD$1.20 per share ‑ was below that which he had obtained in other transactions at or about the same time, viz. HK$1.40.

5.  It was nonetheless a substantial transaction and both parties had signed as representatives of their respective companies.  He said in evidence that he was not happy with two clauses in particular which I will describe in short as the “lock-up” clause and the “buy-back” clause.  They were:

“(4)  The buyer guarantees and warrants to the seller that the buyer shall not sell the shares within 3 months from the completion date (hereinafter the “Lock-up Period”).

(5)  If the average closing price of the shares falls below HK$1.20 per share in the last 15 trading days of the Lock‑up Period, the Buyer may sell the shares to the Seller at HK$1.20 per share and the Seller agrees to repurchase the same.”

6.  He said that he wanted a long-term investment by the buyer, as the middlemen assured him it would be.  This however could never conceivably be guaranteed.  No shareholder would sensibly guarantee a long-term freeze on his disposal of his shareholding.  It would be unrealistic and unwise commercially. In any event he had a three month moratorium on sale.  He does not say that the Plaintiff promised any long‑term holding of the shares.  His complaint, such as it was, was against the middlemen, as he made clear.

7.  Despite his expressed aversion to the “buy-back” clause he went into this agreement with his eyes wide open.  He even agreed to give the middlemen HK$20 million, over three times the normal commission rate, and an astonishing sum, one sixth of the consideration ‑ almost 17 per cent.  It is difficult not to conclude that whatever he now says about the unattractiveness of the business deal with the benefit of hindsight, he received HK$120 million to invest in other business ventures and agreed to pay out, however reluctantly, an extravagant commission.

8.  The transaction was completed on the 29 May 2008 when the Plaintiff paid to the Defendant the HK$120 million.  The Plaintiff’s bank draft was made payable to the Defendant himself.  The Defendant’s company Elite Dragon did not have a bank account of its own.  The Defendant financed everything through his own personal account.  The Share Certificate was issued on the 27 May 2008 and sent to the Plaintiff or his company either on that date or in any event by the 29 May 2008.

9.  A curious event but one which does not affect the main issues, was the action in early June 2008 by Bel Global’s Registrar, Tricor Tengis, to prevent the Plaintiff (or Silver Ball) transferring the shares into Silver Ball’s nominee account at the Bank of China.  The agreement did not prevent such a transfer being made, only a sale, and so the block was wrong.  In fact the agreement had provided for the transfer of the shares to the Plaintiff’s or his company’s nominee account – clause (2) of the Agreement.  Accordingly the Defendant was at that early stage in breach of the Agreement.  This may well have been of concern to the Plaintiff about the long-term value of the shares he had bought.

10.  There is no basis for the Defendant alleging misrepresentation or mistake in respect of this transaction.  It was open, clearly expressed, and its contents were understood by him.  The supplemental agreement merely provided for the convertible bonds to be converted into the 100 million shares so as to give effect to the substantial agreement i.e. the sale and purchase of shares.

11.  The trading of shares in Bel Global was suspended from 26 August 2008 until the 17 September 2008.  It is not necessary to examine the reasons for this.  The suspension thus took effect about 2 or 3 days before the end of the lock-up period which according to the subsequent calculations of the parties respective Solicitors was on the 28^th or 29^th August.

12.  The next stage in this unhappy saga was the Plaintiff’s decision, in exercise of his right under clause (5) of the Agreement to require the Defendant to buy back the shares at HK$1.20 each.  His Solicitors’ letter of the 5 September 2008 set out the position clearly.  It contained a calculation as to the period of “lock-up” and asserted that the average price of the shares had decreased to HK$1.17.  Confirmation of agreement to buy back the shares was requested within 7 days.

13.  Just within that period, Solicitors instructed by the Defendant’s son, Mr Sunny Sy, wrote in reply, disputing the calculation of the “lock-up” period, the calculation of trading days, and consequently the average price.  In fact there was only one day’s difference in their respective calculations for both periods.  There was however a clear differential in the average price as a consequence.

14.  The reaction of the Defendant to the contents of DLA Piper’s letter on behalf of the Plaintiff is quite conclusive.  As far as he was concerned DLA Piper’s calculation and claim were well founded.  His sole concern was to buy time in order to try and negotiate a settlement with the Plaintiff.  He knew DLA Piper’s office.  It had acted for him and his businesses on a number of occasions.  He respected their view as lawyers of repute.  It did not matter to him what Edward C T Wong & Co, the Solicitors instructed to act on his behalf by his son, said in reply to DLA Piper as long as it could buy him time.  It was therefore to be a stalling exercise.  It was clear from his evidence that he was not concerned with any dispute over the calculations.  He accepted that he had an obligation to buy back the shares.  He needed time to come to an agreement with the Plaintiff.  He did not have readily available the money to repay immediately.

15.  I am quite satisfied that there was no misrepresentation by the Plaintiff or his Solicitors in making the claim on the calculations set out in their letter.  The Defendant through his Solicitors had every opportunity of disputing those calculations and maintaining a defence to the claim, as indeed they did.  No one could have been under any misapprehension about the issue at all.  In fact it never operated on the Defendant’s mind.  His sole concern was to achieve a negotiated settlement with the Plaintiff on a personal basis.  He conceded that the Plaintiff had him “over a barrel” to use a common metaphor.

16.  After a number of meetings with the Plaintiff and/or his employee Madam Lu Yongyu a further agreement was reached on the 18 November 2008.  Again the parties were identified as the representatives of their respective companies. Once again the Solicitor Mr Lau Yue Sum of Y S Lau & Partners drew it up and signed as witness to the parties’ signatures.  It is described as a Settlement Agreement.  The preamble recited the original Agreement and Settlement Agreement of 23 May 2008.  The terms set out that the Defendant was to provide a personal cheque drawn in favour of the Plaintiff for HK$40 million to be met on presentation on or before 1 October 2009.  It was a cheque which was post-dated the 30 September 2009.

17.  In return the Plaintiff was to deposit not less than 71 million shares into Elite Dragon’s (the Defendant’s company) designated securities account. If the cheque was not met on presentation the Plaintiff was entitled to pursue his claim under the original agreement of 23 May 2008 – in other words require the Defendant to buy back 100 million shares for HK$120 million. Additionally the Defendant warranted that at the time of presentation of the cheque he would hold not less than 16 per cent of the share capital of Bel Global.

18.  It was clear that the Defendant had in fact bought the time that he appeared so desperately to seek.  Not only that, he was now able to stave off his financial obligation for ten months by means of the post‑dated cheque.  The Plaintiff had certainly stayed his hand and some would say generously so. Moreover the Plaintiff was taking a significant reduction in the amount of his claim.  Instead of HK$120 million for the return of 100 million shares he was receiving only HK$40 million for at least 71 million shares, a potential loss of over HK$45 million for those shares.  He had of course sold some shares earlier, as he was clearly entitled to, at a considerable loss. The settlement was clearly of substantial advantage to the Defendant.  It involved a considerable loss nonetheless for the Plaintiff.  No doubt he thought it was better to salvage what he could from what was, for him, a disastrous business venture.  But it was an “arm’s length” agreement for both of them even if to the casual observer the real gainer was the Defendant.  This was a genuine, uncomplicated compromise.

19.  During the elapsing ten month period the Plaintiff sold some of the shares.  It has not been necessary to examine the reasons for this but all were at a loss.  Some may have been sold simply to realise some capital; there may have been a fear that the price could go even lower or even that they may be valueless at some stage.

20.  As the deadline for the presentation of the cheque approached it was apparent on the evidence that the Defendant was not going to be in a position to honour that cheque.  One can well understand the Defendant’s predicament.  He now needed the Plaintiff’s further indulgence if he was to avoid the inevitable consequences of a dishonoured cheque, which included an adverse effect upon his standing as a businessman.

21.  A meeting was arranged at the Macau Jockey Club Members Club in Hong Kong on or about 15 September 2009.  The Plaintiff and his assistant Madam Lu Yongyu attended with the Defendant, his assistant Mr Sze, and his son, Mr Sunny Sy.  The Defendant proposed three options for the Plaintiff’s consideration, the only one of potential interest being the transfer of a property known as the 8^th Floor of Island Place Tower, Island Place, 510 King’s Road, Hong Kong, which was commercial premises.  In response to a request from Madam Lu on behalf of the Plaintiff, the Defendant sent an e-mail on the 21 September 2009 drafted on his instructions by his assistant Madam Sze. That e-mail is important not simply for what he set out in relation to the three options.  The general preamble and flavour was important in the light of the Defendant’s evidence:

“Firstly, thank you very much for your support and understanding all along which give me some comfort in times of such difficulty I am facing. It is because of this hardship, because of the company development, and because of my personal reasons, I am having a cash shortage problem, and thus I am not able to provide cash to solve the problem between us. I feel very much regret and very sorry about it…”

22.  The Defendant says that he was unaware of this expression of gratitude for and appreciation of the Plaintiff’s forbearance and that it must have been in effect, Madam Sze’s own complexion.  If so, she struck a wholly appropriate note.  He says he was only concerned with the options set out.  The Island property was the only viable one as far as the Plaintiff was concerned.  The Defendant described it as “his property”.  It was not.  It belonged to a company of which his daughter was the controlling shareholder.  It was subject to a substantial mortgage.  On his valuation of HK$110 million there was a net equity of less than HK$30 million.  There is no doubt that the Plaintiff was interested in this as a commercial proposition no doubt because it had regular rental potential, and so Solicitors were instructed to look at various aspects of its potential acquisition. The Defendant’s Solicitors or agents sent information for the preparation of a provisional sale and purchase agreement by the Plaintiff’s Solicitors.

23.  In the meantime, on the 25 September 2009 the Defendant sent instructions to his bank to stop the cheque.  He gave as the reason “settled by other means”.  The action was unwise.  The reason stated was untrue.  The best he had got was an expression of interest in the first option which required investigation.  This interest soon evaporated because in an e-mail or text of 30 September 2009 from Madam Lu to the Defendant she stated “about using the property to pay the debt, after consulting with the lawyer, Mr Lo thinks that it is comparatively troublesome.  There also involves a series of bank’s procedures, so please make repayment and hope that the cheque issued by you can be honoured.”

24.  The Defendant clearly had not seen the reality of the situation.  On the 9 October 2009 he texted to Madam Lu: “firstly hope that both of you can follow the original proposal.  However, I will try my best in different ways, hope that next week it will become clearer.”

25.  The next day Madam Lu crystallised the situation in another text message: “we have already presented the cheque at the bank, and hope it would not be dishonoured.”

26.  Some frantic messages from the Defendant thereafter indicated that he was still playing for time.  On 19 October 2009 Madam Lu tried to bring home the reality of the position to the Defendant in another text message

“To replay one’s debt is one’s responsibility. Business is business. From $120,000,000 to $40,000,000 and from 3 months to 18 months now Mr Lo has already given enough time and chances to you. Up to now you have not repaid a cent. Please ask yourself, who is pushing who?”

27.  For a pithy encapsulation of the state of affairs, Madam Lu’s assertion cannot be bettered.  Although the Defendant kept promising settlement, nothing materialised. He has fallen back upon the allegation of an oral promise by the Plaintiff to accept the Island Property in satisfaction of the cheque.  I am satisfied that on the evidence there was no oral promise and at most a declaration of interest.  Even if the Defendant interpreted that declaration and the carrying out of investigations as amounting to an oral promise, it was only ever going to be subject to contract. No draft contract ever materialised.  Furthermore the Defendant’s action in stopping the cheque pre-empted even the time for a draft contract to be prepared, and before the e-mail from Keenson Company’s accountant, Danny Ng, to Jeffrey Mak of DLA Piper.

28.  Mr Wong for the Defendant has sought to argue that there was a lack of bona fides on the Plaintiff’s part in that he did not believe in the validity of his claim under the buy-back provision and in fact even that his claim had no merit. Although Mr Wong did his valiant best there was no basis for this contention. I am satisfied that the Plaintiff was concerned about the share price and sought his Solicitors’ advice.  They applied their minds to the relevant clauses and dates and made a claim accordingly.  The Defendant’s Solicitors countered this with their own calculations.  Of course they could not both be right but the Defendant’s sole concern was to obtain time to negotiate, which he did.  It seemed to be immaterial to him what his Solicitors put forward to counter the Plaintiff’s claim ‑ all that mattered was a breathing space in which to find a way to hold off the Plaintiff for a while.

29.  The alternative proposition advanced was that DLA Piper’s calculations in their letter was a misrepresentation upon which the Defendant acted to his detriment. With hindsight Mr Wong argues, one can see it is a misstatement of the factual position, as the “expert evidence” makes clear.  There is, no “expert evidence” which affects the position one way or another.  The agreed “expert report” is not admitted by me into evidence in this case.  The joint view is not expert evidence.  It is a matter of fact for me to find, if necessary.  I do not deem it necessary in this case.

30.  The Solicitors were putting forward their calculations.  There may or may not be an error in their calculations.  Certainly the two firms of Solicitors disagreed on the calculations but they were both putting forward, very properly, the argument on behalf of their respective clients.  Only one of them could have been right.  But the Defendant was not concerned with that.  He was prepared, for his immediate purpose, to accept DLA Piper’s proposition at face value.  He never had direct contact with Edward C T Wong & Co.  His immediate purpose was to achieve a settlement through his own efforts.  It was not a misrepresentation on the part of DLA Piper.  If I were so to find it would mean that every calculation advanced on behalf of a client could be designated as a misrepresentation, if some error of calculation or construction appeared in it so as to weaken or destroy the argument.  In any event the Plaintiff was so concerned to negotiate a settlement that, even though he respected DLA Piper’s reputation, he was not in any way concerned to see whether his own Solicitors agreed or disagreed with the Plaintiff’s Solicitors.  It did not operate on his mind so as to effect a settlement he would not otherwise have sought to obtain.

31.  As for the allegation of an oral agreement to accept a commercial property in place of the cheque, that never got off the ground as I have already detailed.  Mr Wong has referred me to a number of authorities and extracts from respected books in relation to mistake, misrepresentation and compromise.  I need not refer to them.  In my judgment the position is clear cut on the facts.  The Defendant was never under any illusion as to the facts or his obligations under the original agreement or the settlement agreements.  He made no mistake.  At best it could only have been a unilateral mistake and that affords him no defence.

32.  It is unarguable that the Defendant has benefited to a considerable extent from the tactics he has employed to try and avoid his obligation under the agreement and settlement agreement, whereas the Plaintiff “lent over backwards”, to use a common metaphor, to give him the chance to salvage his situation and in so doing has lost a significant amount of his capital investment.

33.  The Defendant is not the naive, careless business man he would have us believe.  Nor is he susceptible to express or implied threats.  He knew that, as I have expressed earlier, he was “over a barrel” on the dishonoured cheque. Any commercial pressure brought to bear by the Plaintiff was legitimate.  The only duress, if that is the correct term, suffered by the Defendant, was self-induced.  The Defendant clearly thought that he was under pressure.  He had the perception that he was being pressurized by the Plaintiff.  Towards the end I have no doubt that some legitimate pressure was being applied.  The Plaintiff had arguably been too patient for too long.  The Defendant feared a “fire-sale” of shares which would lower the market value of his company.  But of course such a sale would be disadvantageous to the Plaintiff as well.  There had been some large disposals of shares by other investors larger than at least most of the disposals by the Plaintiff.  I am satisfied that the Plaintiff did not threaten any “fire-sale”.

34.  Finally as if by a side-wind came a suggestion that this action was wrongly constituted and that it should have been between the parties’ respective companies instead.  There is no merit in that.  Both of them ran their companies as if they were private one man businesses.  The Defendant ran his company on his own finances.  He had had the benefit of the original HK$120 million.  He provided the cheque for HK$40 million.  It does not matter if they sue or are sued in their private capacities or as representatives of the companies they controlled.  This was a thoroughly bad point for the Defendant to take.

35.  There will be judgment for the Plaintiff for HK$40 million, less the sum of $10,354,449-84¢, together with interest thereon at the commercial rate from the date of dishonouring of the cheque viz. 9 October 2009 until payment.  Upon payment of the aforesaid sum the Plaintiff will deposit the remaining 1,856,000 shares in Bel Global Resources Holdings Ltd held by Silver Ball Limited or its nominees into a securities account nominated by the Defendant’s Solicitors.  The Defendant is not entitled to any of the declarations he claims.

36.  The Defendant will pay the Plaintiff’s costs, to include any costs reserved, on a party and party basis to be taxed if not agreed.  In view of the fact that this judgment is handed down there is liberty to the parties to apply.