GOOD RETURN (BVI) LTD v. WICKHAM VE NTURES LTD AND ANOTHER

HCA 987/2016

[2020] HKCFI 2287

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 987 OF 2016

_____________

_____________

__________________________

JUDGMENT

__________________________

I. Introduction and Background

1.  By a writ dated 15 April 2016, the plaintiff (“Good Return”) claimed against the defendants for breach of contract.  On 7 August 2019, Good Return discontinued its claim against the 1^st defendant (“Wickham”). This judgment is therefore concerned with Good Return’s claim against the 2^nd defendant (“Ms Lee”). 

2.  Good Return is a company incorporated in the British Virgin Islands (BVI) and is a subsidiary of Seamless Green China (Holdings) Limited (“Seamless Green”), a publicly listed company on the Hong Kong Stock Exchange (the “HKSE”).

3.  Ms Lee is a Hong Kong resident, and as at 1 April 2011, she was the sole director of Wickham, a company incorporated also in the BVI. 

4.  Arnda Semiconductor Limited (“Arnda”) is a company incorporated in Hong Kong that was at the material time engaged in the business of semiconductor design for LED devices.  As at 1 April 2011, Wickham was Arnda’s sole shareholder. 

5.  On 1 April 2011, Wickham, Good Return, Arnda and Ms Lee entered into a sale and purchase agreement (the “SPA”), whereby Wickham agreed to sell, inter alia, its shareholding in Arnda to Good Return for a consideration of HK$11,100,000, HK$8,000,000 of which was to be paid by way of deposit and the balance of HK$3,100,000 on completion. The sale included a shareholder loan owed by Arnda to Wickham.

6.  On 31 May 2011 and 17 March 2012 respectively, Good Return, Wickham, Ms Lee and Arnda entered into two supplemental agreements (the “1^st SA” and “2^nd SA”) supplementing and amending the parties’ obligations under the SPA. 

7.  Although the circumstances in which the above agreements were entered into are strongly contested, there is no dispute between the parties that the agreements were actually signed by the following persons:

(1)  The SPA: Ms Lee signed as director on behalf of Wickham (the latter in its own capacity as vendor and in its capacity as Arnda’s sole director) and on her own behalf.  Ms Kim Chan Yim Kum (also known as Kim Chan) (“Kim Chan”) signed as a director on behalf of Good Return;

(2)  The 1^st SA: Ms Lee signed as director on behalf of Wickham and on her own behalf.  Kim Chan signed as director on behalf of Good Return and Mr Nee Henry Pei Ching (“Mr Nee”) signed as director on behalf of Arnda; and

(3)  The 2^nd SA: Ms Lee signed as director on behalf of Wickham and on her own behalf.  Mr Nee signed as director on behalf of Good Return and as director on behalf of Arnda.

8.  Pursuant to the SPA, Good Return paid the deposit and balance of the sale price to Wickham on 1 April 2011 and 17 May 2011 respectively, and Wickham transferred its shareholding in Arnda to Good Return.

9.  Good Return’s claims in this action concern certain profit guarantee provisions in the SPA, as amended by the 1^st and 2^nd SA’s (the “Amended SPA”), which may be summarised as follows:

(1)  Wickham and Ms Lee, each as primary obligor and not merely as surety, irrevocably and unconditionally guaranteed to Good Return that:

(a)  Arnda’s net profit after tax (the “Net Profit”) calculated on a yearly basis according to generally accepted accounting principles in Hong Kong for the year ending 31 December 2012 would not be less than HK$3,000,000;

(b)  The Net Profit for the year ended 31 December 2013 would not be less than HK$4,000,000; and

(c)  The Net Profit for the year ended 31 December 2014 would not be less than HK$6,000,000;

(clause 8.1(a)(ii), (iii) and (iv));

(2)  Wickham and Ms Lee each irrevocably and unconditionally undertook to pay to Good Return within 3 days upon demand the “Profit Guarantee Shortfall”, which was defined as “the sum of money representing all and any shortfall in the guaranteed amounts of [Net Profit] pursuant to Clause 8.1” (clauses 8.1(b) and (c)); and

(3)  The liability of Wickham and Ms Lee was joint and several (clause 8.1(f)).

(collectively, the “Profit Guarantee Clauses”)

10.  It is also relevant to note that in addition to the Profit Guarantee Clauses set out above, clause 8.1(a)(v) of the Amended SPA provided that inter alia:

“Each of [Wickham] and [Ms Lee], as primary obligor and not merely as surety, irrevocably and unconditionally guarantees to [Good Return] that:

…

“[Mr Nee]… shall continue to be a director of [Arnda] and shall devote the majority of his time, attention and abilities during his hours of work for [Arnda] and to his duties for [Arnda] until 31 December 2014.”

(the “Nee Directorship Clause”).

11.  The Nee Directorship Clause was further enforceable by a put option clause, which provided that, inter alia, if the Nee Directorship Clause were breached, Good Return can require Wickham to repurchase the shares and shareholder loan at the same consideration of HKD 11 million (clause 9) (the “Put Option Clause”).  There is no dispute that Mr Nee resigned from Arnda at the end of 2013, prior to the fulfilment of the Nee Directorship Clause.

II.   Pleaded Cases

Good Return’s Claim

12.  In short, Good Return claims that Arnda not only did not make a Net Profit but suffered a loss in each of the relevant years, as shown by Arnda’s financial statements: (1) in 2012, a loss of HK$1,252,101; (2) in 2013, a loss of HK$1,533,232; and (3) in 2014, a loss of HK$403,041.  Good Return thus claims the Profit Guarantee Shortfall for each of these years as follows:  

(1)  For 2012: HK$4,252,101 (being the difference between a Net Profit of HK$3,000,000 and a loss of HK$1,252,101) (the “Alleged 2012 Shortfall”);

(2)  For 2013: HK$5,533,232 (being the difference between a Net Profit of HK$4,000,000 and a loss of HK$1,533,232) (the “Alleged 2013 Shortfall”); and

(3)  For 2014: HK$6,403,041 (being the difference between a Net Profit of HK$6,000,000 and a loss of HK$403,041) (the “Alleged 2014 Shortfall”).

(collectively, the “Alleged Shortfalls”)

13.  Despite demands being made by Good Return against Wickham and Ms Lee for each of the Alleged Shortfalls, no payment was received from either of them. 

Ms Lee’s Defence and Counterclaim

14.  Ms Lee raises a number of defences on liability to Good Return’s claims under the Amended SPA. 

15.  Whilst she admits to signing each of the SPA, the 1^st SA and the 2^nd SA, she contends that she was “not conversant with English”, “did not have the capacity to understand and did not understand the terms contained” in the SPA and the 1^st and 2^nd SAs. 

16.  Further, she alleges that she signed the SPA, the 1^st SA and the 2^nd SA at the office of Good Return’s solicitors, Messrs Keith Lam Lau & Chan (“LLC”), in the presence of and in reliance upon various misrepresentations and omissions by Kim Chan on behalf of Good Return as to the meaning and effect of the terms of the agreements.  Such misrepresentations and omissions were made, she contends, in the presence of solicitors from LLC (whom she did not identify in her defence, but in her evidence, were said to have included Keith Lam, a partner at LLC).  She also claims that she signed the 2^nd SA without the entire agreement being placed before her as amendments were still being made to the body of the agreement when she signed the execution page. 

17.  In short, Ms Lee alleges that Kim Chan never informed her of, inter alia, the Profit Guarantee Clauses and that Kim Chan fraudulently or negligently misrepresented the terms of the agreements to her.  By reason of such misrepresentations and omissions, she was unaware of, inter alia, the Profit Guarantee Clauses or that she would be personally liable for any of the Profit Guarantee Shortfalls. I refer to these allegations compendiously as the “Misrepresentation Defence”.

18.  In addition to claiming that she should not be liable under the Profit Guarantee Clauses due to Kim Chan’s misrepresentations and omissions, Ms Lee also claims set-off to any liability under the Profit Guarantee Clauses with damages for misrepresentation.  By her counterclaim, she further seeks inter alia orders for rescission or rectification (by the exclusion of inter alia the Profit Guarantee Clauses) of the Amended SPA.

19.  Further or in the alternative, Ms Lee alleges that if the Amended SPA were binding and enforceable against her:

(1)  The following terms should be implied into the Amended SPA: (a) the parties shall do all that is necessary to be done on their part to ensure the performance of their bargain; (b) the parties shall not do anything which would prevent fulfilment of the contract; and (c) the parties shall act in good faith in carrying out the agreement (collectively, the “said Implied Terms”);

(2)  Since the completion of the SPA, Good Return was in full control of Arnda, and in breach of the said Implied Terms:

(a)     “in a way that is commercially unacceptable by reasonable and honest people, intentionally caused [Arnda] to conduct or conduct itself, or intentionally failed to stop [Arnda] from conducting itself, in a way that would minimise the net profit of the company and in any event render the guaranteed profit target… impossible to achieve”;

(b)     “intentionally caused [Arnda] to cease from maintaining or carrying on, or intentionally omitted to cause [Arnda] to carry on, its usual business activities, including but not limited to the sales and marketing activities”; and

(c)      “intentionally caused [Arnda] to incur, or intentionally omitted to stop [Arnda] from incurring, costs that were unnecessary and/or out of proportion that no reasonable and honest people would regard it as commercially sound”;

(3)  Good Return’s “conduct and/or omission was/were intentional and for the purpose of minimising the profit of [Arnda]” and in any event rendered the guaranteed profit target “impossible to be achieved”, and preventing the fulfilment of the contract and depriving Ms Lee from the benefit of the contract. Good Return’s “conduct was in bad faith”;

(4)  Ms Lee contends, therefore, if Arnda suffered losses in the respective years (which was not admitted), such losses and the Alleged Shortfalls were caused by Good Return’s own breach of the said Implied Terms, and therefore, Good Return was not entitled to benefit from its own wrong. 

I shall refer to this as the “Prevention Defence”.

Good Return’s Reply and Defence to Counterclaim

20.  In its reply and defence to counterclaim, Good Return contended that, inter alia:

(1)    Ms Lee was conversant in English and was competent in understanding English documents;

(2)  The SPA, the 1^st SA and the 2^nd SA had all been executed at the offices of LLC in the presence of, and after explanation of the key terms in Cantonese to her by, the handling solicitor, Mr Chan Ting (also known as Matthew Chan) (“Matthew Chan”);

(3)  Kim Chan was never present during the execution of any of, inter alia, the SPA, the 1^st SA or the 2^nd SA by Ms Lee and indeed has never even met Ms Lee; and

(4)  Good Return never sought or contributed in any way to minimise Arnda’s net profits.

21.  Further, on 1 April 2011, Ms Lee signed two further documents:

(1)  A debenture by AJA International Limited (“AJA”), a Hong Kong incorporated company of which she was the sole shareholder and director, granting to Good Return a first floating charge over its undertakings, property and assets to secure the repayment of the deposit in the event such an obligation arose under the terms of the SPA (the “Debenture”); and

(2)  A share charge between her and Good Return, whereby she granted a first legal charge of her entire shareholding in AJA to secure Wickham’s obligations under the SPA (the “Share Charge”).

III. Evidence

22.  As can be seen from the parties’ respective cases summarised above, there is a stark divergence between them as to the circumstances in which the agreements were executed.  Ms Lee’s allegations of misrepresentations and omissions are directed entirely at Kim Chan, whom she contends was present on each of the 3 occasions she attended LLC’s office to execute the documents.  In contrast, Good Return’s case is that Kim Chan was never present on any of those occasions and indeed had never even met Ms Lee.  This is not a mere difference in recollection and the Court is faced with the task of determining, on a balance of probabilities, which of the parties is being untruthful.

23.  Three witnesses gave evidence at the trial, namely, Matthew Chan, Ms Leung Po Yee (“Ms Leung”), Good Return’s director, and Ms Lee.

Matthew Chan

24.  Matthew Chan’s evidence may be summarised as follows:

(1)  He was admitted as a solicitor in Hong Kong in 2000 and joined LLC in 2007.  LLC was Seamless Green’s legal adviser from around 2009 to 2016;

(2)  On 31 March 2011, he received urgent instructions from Seamless Green to prepare contract documents for Good Return’s acquisition of Arnda, comprising inter alia the SPA, the Share Charge and the Debenture;

(3)  He did not know whether Ms Lee was the owner of Wickham, the vendor.  However, he knew that she was Wickham’s sole director and that she would be executing the SPA on behalf of Wickham in that capacity.  He also knew she was AJA’s sole director and shareholder, and in those respective capacities, would be executing the Debenture and the Share Charge;

(4)  He had a distinct recollection of the occasion when Ms Lee came to LLC’s office to execute the SPA, the Share Charge and the Debenture on 1 April 2011.  Seamless Green was anxious for the documents to be executed as soon as possible, and it was not until late in the evening of 1 April 2011 that the documents were ready for execution;

(5)  That evening, Ms Lee attended LLC’s office with a male friend.  No one else was present at the office other than himself that evening.  He was certain that neither Keith Lam nor Kim Chan was present.  He described Kim Chan as a busy person whom he saw only occasionally, and she would not have attended LLC’s office at such a late hour.  He recalled that Kim Chan only signed the SPA on behalf of Good Return at LLC’s office the following Monday;

(6)  In accordance with his usual practice, he explained to her in Cantonese the key terms of the documents, including the SPA, the Debenture and the Share Charge. Insofar as the SPA was concerned, these included, inter alia, the completion date, the consideration, the Nee Directorship Clause and the Profit Guarantee Clauses.  She never told him that she was unable to read English, but as a Hong Kong Chinese person, he naturally conversed with her in Cantonese.  The execution process took about an hour, during which she signed the documents without raising any queries;

(7)  He firmly denied that he had in any way misrepresented the terms of the contract documents or consented to any of Ms Lee’s alleged misunderstanding of them;

(8)  On 31 May 2011 and 17 March 2012, Ms Lee attended the office of LLC to sign the 1^st and 2^nd SAs respectively, and again he explained the key terms of each of the agreements to her in Cantonese, which she signed without raising any queries.  He recalled distinctly that Kim Chan was also not present on either of those occasions.  In fact, by the 2^nd SA, Kim Chan was no longer a director of either Good Return (or Seamless Green), and hence, it was Mr Nee (who had been appointed a director of Seamless Green on 28 May 2011) who signed on behalf of Good Return;

(9)  He again firmly denied having made or consented to any of the alleged misrepresentations as to the meaning of the terms in the 1^st and 2^nd SAs.  He also denied that the entire document containing the 2^nd SA had not been placed before Ms Lee when she signed it.

25.  In cross-examination, Mr Pakco Chan, counsel for Ms Lee, queried Matthew Chan as to the commercial wisdom of various clauses in the SPA, including why Ms Lee would be willing to assume personal liability under the Nee Directorship Clause or the Profit Guarantee Clauses, given that neither Wickham nor Ms Lee had any control over Mr Nee or over Arnda after the sale to Good Return.  Matthew Chan, not surprisingly, responded that he was not involved in the negotiation of the agreements and his task was merely to draft the contractual documents and not to advise Ms Lee.  I will come back to the question of commercial rationale of these clauses below.

26.  On the whole, I found Matthew Chan to be a candid witness.  He gave his evidence in a sincere and professional manner, as one would expect from a solicitor.  It was not suggested that he had any personal interest in the outcome of the action or any reason to give false evidence to the Court.  This is of course not conclusive, and it is necessary to weigh his evidence against that of Ms Lee (discussed below) as well as, inter alia, the contemporaneous documents and the inherent credibility of their respective versions of events.

Ms Leung

27.  Ms Leung joined Seamless Green as an executive director on 25 June 2014 and only became a director of Good Return on 15 September 2015.  By that time, Good Return had already disposed of its entire interest in Arnda, which apparently took place sometime around the end of 2014.  She had limited personal knowledge of the circumstances in which the agreements were entered into or the day to day operations of Arnda prior to its disposal. 

28.  She told the Court that after she became a director of Seamless Green, she learned that Mr Nee had resigned as a director of Arnda in December 2013.  In an attempt to salvage Arnda’s business, Seamless Green appointed new directors to Arnda’s board in 2014.  However, she was told by those directors that their efforts were unfruitful as Mr Nee was the only person who understood how to operate Arnda’s business, and they were only able to perform some “basic company administration”.  Ms Leung did not herself have any experience in the semiconductor design business and thus relied only upon what she was told by Arnda’s directors. 

29.  Ms Leung also explained that according to the documents she had seen, Kim Chan resigned from Seamless Green as a director on 11 January 2012 and as company secretary and authorised representative for communications with HKSE sometime in 2014.  Since then, Kim Chan has had little contact with the management of Seamless Green and Good Return, and Good Return has not been able obtain her assistance in this action.  She said that Good Return was also unable to contact Mr Nee, whom she believes is no longer in Hong Kong.  As to the other directors of Arnda since the sale, she believed that they had limited knowledge relevant to the profit guarantee issues in the action, and therefore, Good Return did not call them to give evidence.

30.  In her witness statement, Ms Leung sought to support Good Return’s pleaded case by reference to the documentary evidence before the Court, much of which had been created before she even joined Seamless Green and Good Return.  She had little personal knowledge of the matters in issue in this action, and whilst I found her to be a sincere witness, her evidence was of limited assistance to the Court.

Ms Lee

31.  Ms Lee was born in Hong Kong and was around 27 at the time she signed the SPA. She was locally educated up to Form 3 level, and although she studied English in primary and secondary school, she explained that she had only limited proficiency in the language. She did not dispute that she could understand basic words, including words such as “guarantee”.

32.  She told the Court that after leaving school, she worked a variety of jobs, including as a hair washer in a salon, a bar waitress and as a salesperson.  Eventually, she saved enough money to acquire a bar on Yiu Wah Street in Causeway Bay, which she operated. She then met a patron who worked at Standard Chartered Bank and who told her he had a client with an electronics factory in Dongguan who was in need of funds and invited her to invest.  She agreed, sold her bar and invested the proceeds in the factory using AJA as a vehicle.

33.  She met Mr Nee in 2008 or 2009 “due to business reasons”. She believed that he had studied at the Massachusetts Institute of Technology and had some 20 years of experience in the electronics industry. Although in her witness statement dated 4 October 2018, she said that, “我們關係一直都很好 [our relationship has all along been very good]”, in her oral evidence, she told the Court that she had no further contact with him after 2013 until she spoke with him once over the telephone in 2016 after the present action was commenced against her. They had an argument and she accused him of cheating her. He then disappeared.

34.  In her witness statement, she explained how she came to be involved in Arnda. It is helpful to set out certain extracts in full:

(1) “Subsequently, Henry [Nee] said that he had founded a company for the design of microchips for LED equipment. This company is actually Arnda. He then asked me if I would like to invest in the company. What he said at the time was that the business of Arnda was mainly about high-end technology. It was prospective… In his opinion, over time, Arnda can make a lot of profits. He was also hoping to expand Arnda’s business. Nevertheless, he also said that he would need assistance. Owing to my trust for Henry and his words, I agreed to invest in Arnda. Therefore, through [Wickham], I acquired Arnda’s shares. Henry also trusted me and transferred all Arnda’s shares to [Wickham] owned by me.”

I pause here to note that no mention was made in her witness statement as to how much she invested or when Mr Nee transferred the shares of Arnda to her. There is also no evidence of any payment of funds from Ms Lee or Wickham to Mr Nee. Moreover, it is unclear what she meant by Mr Nee trusting her and transferring the shares of Arnda to Wickham if she was in fact investing in Arnda at arm’s length.  

(2)  Shortly thereafter, Mr Nee told her that a listed company was interested in Arnda and would like to acquire Arnda:

“In this way, he could take Arnda’s business to the next level. On the other hand, although Arnda was fully sold, if it was successfully sold, it would be sold for at least double. It was a good return of several million dollars in a relatively short period of investment time. At that time, I agreed… and said that I could accept the idea of selling Arnda…

“At that time, what I knew about that business was limited. Therefore, after I had made the investment, the business, in reality was controlled by Henry. Although [Wickham] became one of the directors of Arnda after acquiring the shares, in reality, all [of] Arnda’s business were still handled and controlled by Henry…

“When Henry discussed this issue with me for the first time, we did not discuss the agreement terms in detail, not even the exact figure. It was my impression that he had got this opportunity elsewhere and talked to me first to understand my position on the issue of selling Arnda. I replied Henry with my preliminary position that I trusted him that he would continue with the discussions with the other parties. Regarding the sale of Arnda’s shares, apart from the discussions with Henry, I did not participate in any other discussions regarding any agreements. I cannot recall how many rounds of discussions I had with Henry on this issue, however, as I recall, at a certain stage, Henry did confirm the details of the sale and purchase with me; in other words, it refers to selling all Arnda’s shares at the consideration of HK$11,100,000. The first instalment of HK$8,000,000 would be payable within 3 days after signing the agreement. There would be a month’s time to perform due diligence and auditing work on the documents and the outstanding balance would be paid upon the completion of the sale and purchase. This would be all the liability for my side… At that time, Henry did not tell me the name of the buyer; however, it was in my knowledge that this transaction was with a listed company. I was not worried about the arrangements of the buyer which was a listed company. I agreed to those terms. Henry also told me that I had to sign the written agreement. I would be contacted by a woman named Kim later…” 

35.  In cross-examination, however, her version of events departed markedly from her witness statement. She told the Court that inter alia:

(1)  In 2010, Mr Nee told her Arnda had lost a lot of money, and he asked to borrow some HK$3 million from her. She agreed and lent him the sum in instalments.

I again pause to note that no particulars or documents whatsoever have been provided concerning such loans. Further, in response to queries from the Court, she accepted that HK$3 million was a significant sum of money for her at the time. However, she maintained that her relationship with Mr Nee was one of ordinary friendship (“he was not my boyfriend”), and she merely wished to help him at a time of need. She could not recall, however, whether the monies had been lent to Arnda or to Mr Nee personally.

(2)  Mr Nee later told her that Arnda was able to earn a small profit that year, and at the beginning of 2011, he asked her to invest in the business.  She agreed and invested between HK$3 to 3.5 million into the company.

It is unclear whether this amount was the same sum as the loan he made to him, or whether she invested this amount in addition to her previous loans to him.

(3)  In March of that year, Mr Nee told her that he had found a buyer but she would have to sell her entire shareholding. As she felt she had nothing to lose, she agreed. She later said that if she did not agree to sell Arnda and sign the SPA, he would not repay the amount that he owed her, and getting back the money he lent to Mr Nee was all that mattered to her.

36.  I asked her whether Mr Nee was the owner of Wickham. She did not appear to deny such a suggestion and said that she was not concerned with whether Wickham made a profit from the sale of Arnda or not. She just wanted her money back. In re-examination, she was again asked whether she was a shareholder of Wickham, to which she replied that she did not receive any share in the sale proceeds and that she merely signed on its behalf.

37.  Pausing here, in addition to the lack of supporting documentary evidence and the significant inconsistencies between her witness statement and oral evidence, there was a distinct air of unreality to her evidence. Although she may not have had a great deal of formal education, she plainly came across as someone who is intelligent, articulate and street wise. Yet, she sought to portray an extraordinary degree of naivety in her financial dealings with Mr Nee and Arnda. My firm impression is that there is far more to her relationship, arrangements and dealings with Mr Nee than what she has disclosed to the Court.  Regrettably, I do not find Ms Lee to be a truthful witness.

38.  The picture that does emerge, however, is that Mr Nee plainly had a significant financial interest in the transaction, which he sought to conceal or obscure through Ms Lee and Wickham for reasons best known to him and Ms Lee, although I would be surprised if Good Return and Seamless Green were wholly oblivious to the arrangement, especially given Mr Nee’s subsequent involvement in Seamless Green.

39.  The purported sale of Arnda from Mr Nee to Ms Lee or Wickham, of which there is scant evidence to support, is unlikely to have been a genuine sale but rather a device to shield Mr Nee’s interest in the subsequent sale to Good Return. Indeed, the terms of the SPA only make commercial sense if Ms Lee is substituted with Mr Nee as the true beneficial owner of Arnda or Wickham, including, for instance, personal liability under the Profit Guarantee Clause, the Nee Directorship Clause, the Put Option Clause and clause 8.1(e) of the Amended SPA, which provided that:

“Each of [Wickham] and [Ms Lee] irrevocably and unconditionally undertakes to deliver to [Good Return] the relevant audited accounts of [Arnda] (prepared by the auditors nominated by [Good Return] for the year ending 31 December 2011 within 3 months after 31 December 2011 and that for the year ending 31 December 2012 within 3 months after 31 December 2012.”

40.  It is against this background that the Court must assess her evidence as to the circumstances in which she executed the SPA and the 1^st and 2^nd SAs. It is unnecessary for me to delve in detail here as to what precisely she said Kim Chan told her on the three occasions she signed the documents at LLC’s office.  I have considered both her witness statement and her oral evidence, and insofar as she alleges that Kim Chan was present on those occasions and had misrepresented the terms of the documents to her, I firmly the evidence of Matthew Chan.

41.  I would add that although in her defence Ms Lee pleaded that Kim Chan (with the knowledge and acquiescence of LLC) either dishonestly or negligently represented the terms of the SPA and the 1^st and 2^nd SAs to her by omitting inter alia to mention the Profit Guarantee Clauses to her, it is clear from her evidence that her case was primarily one of fraud – “Never for a moment have I imagined that a solicitor would lie to me or assist others [i.e. Kim Chan] in deceiving me...”.

42.  Needless to say, Ms Lee’s allegations here are very serious - involving not only grave professional misconduct on the part of a solicitor but also potential criminal conduct. Cogent evidence is required to overcome the unlikelihood of such conduct (see eg A Solicitor v The Law Soeciety of Hong Kong (2008) 11 HKCFAR 117). In my judgment, it is inherently incredible that Matthew Chan and Kim Chan would have conspired to deceive Ms Lee on the terms of the SPA. This was in effect an acquisition by a publicly listed company, and it is not suggested that either Matthew Chan or Kim Chan had anything personal to gain from defrauding Ms Lee or concealing the Profit Guarantee Clauses from her.  Moreover, given that Kim Chan had already resigned as an executive director of Seamless Green at the beginning of 2012, it is more likely than not that she would not have been present at the signing of the 2^nd SA, as confirmed by Matthew Chan.

43.  It may well be that Ms Lee genuinely believed that she would not be incurring any liability under the Amended SPA as she did not receive or retain the consideration, or even a substantial part of it, from the sale. However, in my judgment, such a belief was not due to any alleged misrepresentation by Kim Chan or Matthew Chan, but rather her arrangement with Mr Nee to act as his nominee or front person in the sale of Arnda to Good Return. There may have been a subsequent falling out between the two of them or Mr Nee may have run into financial difficulties (in her oral evidence, she mentioned bankruptcy proceedings against him), such that she is now unexpectedly left personally exposed to Good Return’s claims under the Profit Guarantee Clauses. Be that as it may, this cannot affect her responsibilities under the Amended SPA which, in my judgment, she entered into with full knowledge of its terms (or had shut her eyes to them).

44.  For completeness, I should mention that in relation to the Share Charge and Debenture, Ms Lee said in her witness statement that:

“I have seen the signatures on the signature of the two documents. They look like my signature. However, I have never concluded these two agreements with anyone. I have also never in my knowledge signed any [documents] for the conclusion of these two agreements… Based on the layout of the two agreements, I am very certain that I have not signed these two documents. In addition, I do not recall signing on the two signature pages.

45.  In oral evidence, she told the Court that she could not be certain whether she signed the Debenture and Share Charge but believed that she may have been signing agreements for AJA to test LED products designed by Arnda. Again, I reject such an explanation, which had never been mentioned in her witness statement.

IV. Discussion

Misrepresentation Defence and Damages for Misrepresentation

46.  As mentioned above, I have no hesitation in preferring the evidence of Matthew Chan to that of Ms Lee as to the circumstances in which the agreements were executed.  I therefore find that Kim Chan was not present on any of the 3 occasions in which the respective agreements were signed by Ms Lee at LLC’s office.  It follows that none of the alleged misrepresentations could have occurred.

47.  It is therefore unnecessary to examine the legal consequences had the alleged misrepresentations in fact been made. As to Ms Lee’s alleged inability to understand the agreements, it is clear from her evidence in cross-examination that she had at least a basic ability to read English, and she accepted that she understood the term “guarantee”.  This is hardly surprising, as she had received her primary school and 3 years of secondary education in Hong Kong.  She was fully aware that she was signing important legal documents for the sale of Arnda to Good Return.  In any event, I accept Matthew Chan’s evidence that he explained the main terms of the agreements, including the Profit Guarantee Clauses, to her in Cantonese. Even if she did not fully understand the documents, this is no defence when she made no effort to find out the meaning of the same before signing them (see e.g.  Saunders v Anglia Building Society [1971] AC 1004).

48.  In the circumstances, I reject the Misrepresentation Defence, and find that the agreements, including in particular the Amended SPA, are valid and binding on her.  It follows also that the counterclaim for damages for misrepresentation also fails.

The Prevention Defence

49.  It is well established that a term will often be implied into a contract that a party would not act to prevent or frustrate the performance of the contract by the other party.  For instance, in Jerram Falkus Construction Ltd v Fenice Development Ltd [2011] EWHC 1935 (TCC) 138 Con LR 21, Coulson J said at p. 23:

“…the essence of the principle is that the promisee cannot insist upon the performance of an obligation which he has himself prevented the promisor from performing.”

50.  As to the implied duty to cooperate, Mr Chan referred me to Ying Ho Co Ltd & Others v Secretary for Justice (2004) 7 HKCFAR 333, where Ribeiro PJ said at para. 128:

“As is pointed out in Chitty on Contracts (29th ed.  2004) Vol.  1 at para.  13-011, the court is often willing to imply a term that the parties shall co-operate to ensure the performance of their bargain.  Mackay v Dick (1881) 6 App Cas 251 is often cited in this context for Lord Blackburn’s statement as follows: “I think I may safely say, as a general rule, that where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.  What is the part of each must depend on circumstances” (at p 263)

51.  Further, parties have an implied obligation to exercise a power or discretion provided for in a contract in good faith.  In Tadjudin Sunny v Bank of America, National Association [2016] HKCU 1193, the Court of Appeal held at paragraph 55 that:

“In all, a power or discretion given to a party to a contract which on its face is unqualified is generally to be read as being subject to an implied requirement that it can only be exercised in good faith, rationally and for a proper purpose, and not arbitrarily or capriciously or in a manner which is not bona fide. Such restrictions are implied in order to give effect to the reasonable expectations of the parties to the contract.”

52.  As mentioned above, in her Prevention Defence, Ms Lee alleges that Good Return acted in breach of the said Implied Terms by acting intentionally and in bad faith to minimise Arnda’s profits and preventing or rendering it impossible for Arnda to meet the Profit Guarantees.  I have no hesitation in rejecting the Prevention Defence.

53.  First, allegations that someone has acted in a manner “commercially unacceptable by reasonable and honest people” or “in bad faith” are equivalent to pleas of dishonesty (for the latter, see eg Cannock Chase D. C. v Kelly [1978] 1 W.L.R. 1, as cited in Hong Kong Civil Procedure 2020 at 18/12/11).  Litigants and their legal advisers should need no further reminder that such allegations must be pleaded with utmost particularity and should be made only where there is sufficient evidence to do so.  A party is not permitted to plead an unparticularised case of dishonesty in the hope of making it good after discovery (see eg Hong Kong Civil Procedure 2020 at 18/8/15). Ms Lee’s pleas in her defence in this regard were wholly unparticularised and purported to reserve “the right to plead further upon discovery.” Not only is this unsatisfactory, but in the event, she provided no further particulars after discovery.  The allegations should never have been made or in any event withdrawn at the first opportunity.  This is a matter which the Court will take into account when considering costs.

54.  Moreover, there was no real evidence, let alone sufficient evidence, to support her allegations that Good Return acted intentionally to minimise Arnda’s profits.  In his closing submissions, Mr Chan confined his case to the year ended 31 December 2012, submitting as follows:

(1)  Arnda “drained its working capital” by repaying bank loans of HK$1.7 million and a shareholder loan of HK$3 million to Good Return that was assigned to it by Wickham under the SPA.  It was “common sense that without sufficient working capital, Arnda could not have been able to generate revenue”;

(2)  Good Return failed to inject any new capital or provide continuing financial support to Arnda, notwithstanding Seamless Green’s indication in Arnda’s financial statements that it would do so to enable Arnda to continue as a going concern;

(3)  Arnda’s administrative expenses in 2012 were also out of proportion with its turnover, which was “a clear sign that Arnda was not operated in good faith”.  Staff costs excluding directors’ remuneration increased more than five times from HK$171,652 in 2011 to HK$905,852 in 2012.  The increase in staff costs was disproportionate to turnover as sales decreased from HK$1,755,000 in 2011 to HK$351,000 in 2012.  There was also an unexplained motor vehicles expense of HK$284,619, despite the fact that Arnda did not have appear to own any motor vehicles;

(4)  The “unexplained plunge in the revenue of 2012 cries for explanation”. “Prima facie, [Good Return] failed to do all that is necessary to be done on [Good Return’s] part to ensure the performance of Arnda…”

55.  In my view, Mr Chan’s submissions are unsustainable on both the law and on the facts:

(1)  First, although Good Return acquired the entirety of Arnda’s shareholding from Wickham, it was merely a shareholder.  This is so even though Mr Nee was for a period of time a director of both Seamless Green and Arnda.  It is not (nor can it be seriously) suggested that Mr Nee was the alter ego of Seamless Green or Good Return.  It is trite law that the management of a company is conducted not by its shareholders but by its directors. Good Return owed no fiduciary duties to Arnda. Its powers were limited to exercising shareholder rights in general meeting, including the appointment of directors. Nothing in the Amended SPA imposed any restrictions or obligations on Good Return in the exercise of such rights, nor has it been alleged that any such terms should be implied;

(2)  In any event, the Amended SPA contained no restrictions on the manner in which Arnda should conduct its business.  In the absence of cogent evidence of negligence or impropriety, it is not the function of the court to second-guess the business judgment and decisions of Arnda’s directors;

(3)  It is in any event difficult to see how Good Return can be faulted for not preventing Arnda’s directors from repaying or reducing its debts.  There is also nothing in the Amended SPA prohibiting Good Return from demanding repayment of the shareholder loan, which it had acquired from Wickham under the Amended SPA.  Nor is there any obligation on the part of Good Return to provide continued financial support for Arnda;

(4)  Unless it can be shown that Good Return procured or knowingly acquiesced to acts of misappropriation or other serious breaches of fiduciary duty by Arnda’s directors (and there is no such evidence here), there is no basis to suggest that there has been any intentional acts to prejudice Arnda’s profits or render the guaranteed profit targets “impossible to achieve” as alleged by Ms Lee; 

(5)  The complaints of administrative expenses being disproportionate to revenue, increases in staff costs and expenses and the fall in revenue from the previous year cannot individually or collectively by themselves amount to evidence of such intentional acts. There is also nothing to suggest that motor vehicle expenses could only be incurred through the ownership of a motor vehicle – it plainly depends on the precise nature of such expenses. I also bear in mind that the accounts for the 2012 financial year were audited and given an unqualified opinion;

(6)  There is no basis whatsoever to draw an inference that these were a “a clear sign that Arnda was not operated in good faith” or that Arnda’s directors had failed to do all that was necessary to ensure Arnda’s performance;

(7)  Significantly, Mr Nee continued to be a director of Arnda until the end of 2013.  He was therefore directly involved in Arnda’s management. On Ms Lee’s own evidence, she maintained a good relationship with him until at least 2013;

(8)  Mr Chan argued that an adverse inference should be drawn against Good Return as it did not call Mr Nee or Arnda’s other directors at the time to give evidence to rebut Ms Lee’s allegations of mismanagement. That is to put the cart before the horse. The burden lies squarely on Ms Lee to particularise and prove the allegations of misconduct and bad faith against Good Return in the management of Arnda, neither of which she has done. In any event, I accept Ms Leung’s evidence that Good Return attempted to contact Mr Nee but to no avail, which in the circumstances is hardly surprising.

56.  It follows that I find Ms Lee liable under the Profit Guarantee Clauses.  However, that is not the end of the matter. Two further issues arise: first, whether Good Return is able to prove the Alleged Shortfalls for the relevant years, and second, the meaning of Net Profit.

57.  I have already referred to Clause 8.1 above.  Given the dispute as to its construction, I set out verbatim the relevant parts of the clause for present purposes:

“8.1(a) …each of [Wickham] and [Ms Lee], as primary obligor and not merely as surety, irrevocably and unconditionally guarantee to [Good Return] that… the net profit after tax (calculated on yearly basis according to the generally accepted accounting principle in Hong Kong) of [Arnda] for the year ended [31 December 2012, 2013 and 2014 shall not be less than [HK$3,000,000, HK$4,000,000 and HK$6,000,000 respectively]…

8.1(b) Each of the Vendor and the Guarantor irrevocably and unconditionally undertakes to pay to [Good Return] the Profit Guarantee Shortfall within 3 days upon [Good Return’s] demand for paying such Profit Guarantee Shortfall.

8.1(c) Subject to Clause 8.1(d) [which is not relevant for present purposes], the Profit Guarantee Shortfall shall be the difference between the guaranteed profit targets under Clauses 8.1(a)… and the actual amounts of net profit after tax of [Arnda] (as shown in its audited accounts).”

58.  In support of its claim for the Alleged Shortfalls, Good Return relies upon Arnda’s audited accounts for the amount of the Net Profit pursuant to Clause 8.1(c).  The difficulty for Good Return, however, is that Arnda’s auditors disclaimed their opinion of the accounts for 2013 and 2014.

59.  In the 2013 accounts, Arnda’s auditors, Elite Partners CPA Limited, stated the following:

“Auditor’s responsibility

…We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those statements require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement. Because of the matters described in the Basis for Disclaimer of Opinion paragraphs, however, we were [sic] not been able to obtain sufficient appropriate audit evidence to provide a basis for audit opinion.

Basis for Disclaimer of Opinion

During our course of audit, the Company was unable to provide sufficient appropriate audit evidence regarding the financial statements of the Company for the year ended 31 December 2013. Based on the representation made by the directors of the Company, due to the incident that the personnel responsible for keeping the accounting records has been [sic] resigned during the year and therefore no proper books and records were kept. Furthermore, all directors were resigned during the year and there was no director during the period from 19 December 2014 [sic] to 21 March 2014 which was non-compliance [sic] with section 153A of the Hong Kong Companies Ordinance. Correspondingly, a director of the Company… appointed on 22 March 2014 provided the management accounts of the Company for the year ended 31 December 2013 without necessary supporting documents. Under this circumstance, we were unable to perform appropriate audit procedures to ensure the completeness and accuracy of the financial statements of the Company for the year ended 31 December 2013.

Furthermore, we have been unable to satisfy ourselves that any liabilities including contingent liabilities should be provided or disclosed in the financial statements of the Company for the year ended 31 December 2013.

Any adjustments found to be necessary in respect thereof would have a significant and consequential effect on the financial position of the Company as at 31 December 2013, the results and cash flows for the year ended 31 December 2013 and related disclosure thereof in the financial statements of the Company for he year ended 31 December 2013.”

60.  For the 2014 accounts, Arnda’s new auditors, Linkers CPA Limited, also disclaimed their opinion of the accounts, stating inter alia that:

“Basis for disclaimer of opinion

The independent auditor’s report issued by the preceding auditor dated 28 March 2014 included a disclaimer of opinion on the Company’s financial statements for the year ended 31 December 2013 because the Company was not able to keep complete set of accounting books and records for the year and the preceding auditor was unable to obtain sufficient appropriate audit evidence.

We were unable to obtain sufficient appropriate audit evidence on the opening balances as at 31 December 2013 and the corresponding balances that still existed as at 31 December 2014. Any adjustments found to be necessary in respect thereof would have significant and consequential effect on the financial position of the Company as at 31 December 2014.

Disclaimer of Opinion

Because of the significance of the matters described under the Basis for disclaimer of opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.  Accordingly, we do not express an opinion on the financial statements.  In all other respects, in our opinion the financial statements have been properly prepared in compliance with the Hong Kong Companies Ordinance.”

61.  The effect of the phrase “as shown in its audited accounts” in Clause 8.1(c) is that the net profit figure in the audited accounts would be conclusive or at least would shift the evidential burden to Ms Lee to show that the figure is incorrect.  Such a provision provides a ready yardstick for ascertaining any shortfall and reflects the significant weight generally attributed to audited accounts. Given the importance of such accounts in determining the Profit Guarantee Shortfall, audited accounts in this context must in my view refer to unqualified audited accounts. In other words, accounts disclaimed by the auditors, as was the case for the years ended 31 December 2013 and 2014, cannot have such conclusive or presumptive effect.

62.  The absence of unqualified audited accounts would not necessarily have been fatal to Good Return’s claim for the Profit Guarantee Shortfalls had Good Return been otherwise able to prove the Net Profit.  Good Return, however, has not adduced any evidence from Arnda’s auditors or any other individuals with actual knowledge of Arnda’s financial position in 2013 and 2014.  As mentioned above, Ms Leung had limited involvement in and knowledge of Arnda’s affairs other than what she was able to see from the accounts.

63.  Mr Tony Chow, counsel for Good Return, argued that a distinction should be drawn between the audited accounts for 2013 and 2014.  On the one hand, the auditors’ basis for disclaimer in the 2013 accounts was that they did not have access to Arnda’s books and records due to the apparent resignation of all its directors and no proper books and records had been kept.  On the other hand, the basis of disclaimer in the 2014 accounts was primarily that the auditors were unable to ascertain the opening balances as at 31 December 2013, which would have a “significant and consequential effect on the financial position” of Arnda.  Arguably, the basis of the latter disclaimer was concerned only with the company’s balance sheet rather than profit and loss.  Hence, he submitted that the loss recorded in the 2014 audited accounts should be accepted at face value for the purpose of clause 8.1. 

64.  Whilst there is some attraction to Mr Chow’s argument, in the end, I am unable to accept it.  In my view, the phrase in clause 8.1(c) should be construed strictly - audited accounts must mean unqualified audited accounts.  In the absence of such accounts, it was incumbent upon Good Return, as the claimant alleging the Profit Guarantee Shortfalls, to prove the deficiencies in Net Profit for 2013 and 2014. Whilst audited accounts are often accorded substantial weight as hearsay evidence, given the disclaimer and the absence of any corroborating evidence, I am unable to accept them – particularly the parts relating to net profit, at face value.  It seems to me that Ms Lee should have been given an opportunity to challenge the accuracy of the disclaimed 2013 and 2014 audited accounts by cross-examining their makers, including how (if at all) the profit and loss recorded for those years were affected by the missing books and accounts.  Indeed, Mr Chow was unable to give any reason why the auditors could not have been called.

65.  It follows that the only year that Good Return is able to prove Arnda’s profit and loss for the purposes of calculating the Profit Guarantee Shortfall is 2012 by virtue of the unqualified audited accounts for that year, which showed a loss of HK$1,252,101. No evidence has been adduced by Ms Lee to rebut the accuracy of that figure.  In the circumstances, I accept and find that for the Alleged 2012 Shortfall, that figure represents Arnda’s loss for that year. I also reject the claims for the Alleged 2013 and 2014 Shortfalls.

66.  The next question then is whether, on a proper construction of Net Profit, if a loss was suffered by Arnda in 2012, whether the amount of loss is to be factored into the difference in calculating the Alleged 2012 Shortfall, as contended for by Mr Chow.  As mentioned above, Good Return claims for HK$4,252,101 as the Alleged 2012 Shortfall, being the difference between the guaranteed Net Profit of HK$3,000,000 and the loss of HK$1,252,101. 

67.  Mr Chan submits, however, that the loss should not be taken into account, and the shortfall should be ascertained on the basis that the profit for that year was simply nil, and hence, the Alleged 2012 Shortfall should be limited to HK$3,000,000.

68.  Although Clause 8.1 could have been more clearly drafted, I prefer the construction advanced by Mr Chan for the following reasons:

(1)  Clauses 8.1(a) and (c) both refer only to the “net profit after tax” and makes no reference to loss or net loss;

(2)  The Oxford English Dictionary (Second Edition) defines profit as, inter alia: “The pecuniary gain in any transaction”, whereas “profit and loss” is “…an inclusive expression for the gain and loss made in a series of commercial transactions, and the gain or loss made in one transaction.” (my emphasis)

(3)  In Re Condran, Condran v Stark [1917] 1 Ch 639, Peterson J explained at 645 that,

“Net profits…signify the excess of receipts over current expenses and outgoings of a business, the fund which in any year is capable of being applied to the payment of a dividend or capable of being divided between partners as the fruit of the year’s operations.” (my emphasis)

(4)  On a natural and ordinary reading of “net profit after tax”, that for 2012 should be nil, as there is simply no profit.  Net profit should not be read to include the amount of loss such that “profit” would be read as “negative HK$1,252,101”.  Had the parties intended that the difference include any loss a particular year, they could have made that clear with wording along the lines of “…the difference between the amounts guaranteed under Clauses 8.1(a)… and the actual amounts of net profit or loss after tax of [Arnda] (as shown in its audited accounts).”

69.  In the circumstances, I find the Profit Guarantee Shortfall for 2012 to be HK$3,000,000, and that Ms Lee is liable to pay that amount to Good Return pursuant to Clause 8.1 of the Amended SPA.

V.   Conclusion

70.  For the reasons above, I give judgment in favour of Good Return for the sum of HK$3,000,000, together with interest at a rate of 1% over HSBC’s best lending rate from the date of the writ until the date of this judgment, and thereafter at judgment rate.

71.  As to costs, I make a costs order nisi that Good Return is to have the costs of the action to be taxed on a party and party basis.  I have taken into account the fact that Good Return has not succeeded entirely in its claim.  However, as mentioned above, in my view, the Prevention Defence should not have been pleaded or pursued, and therefore, taking matters in the round, I would allow Good Return the costs of the action in full.

72.  Last but not least, I thank both teams of counsel for their assistance.