ROH CHUNG HYUN v. KOREA EXCHANGE BANK, HONG KONG BRANCH AND ANOTHER

HCA 598/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 598 OF 2014

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D E C I S I O N

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1.  This is the substantive hearing of an inter partes summons issued by Roh Chung Hyun (“the plaintiff”) for the continuation of an interim injunction ordering Korea Exchange Bank, Hong Kong Branch (“D1”) and Woori Bank, Hong Kong Branch (“D2”) (collectively “the banks”) not to “howsoever sell, assign, transmit, transfer, convey or part” with 7.8 million shares in M & C Holdings (Hong Kong) (“the company”) until final judgment unless varied or discharged by further order.  At the conclusion of the hearing, judgment was reserved which I now give.

BACKGROUND FACTS

2.  As at the date the ex parte injunction was granted, the shareholding structure of the company was as follows:

Shareholder	Number of shares held	Percentage
SSCP Holdings (Hong Kong) Ltd (“SSCP”)	15.6 m	23.5%
Diamond Arch Investments Ltd	15.6 m	23.5%
iWorld Hong Kong Ltd	3.9 m	5.9%
Lee Sung Moo (“LSM”)	11.7 m	17.6%
The plaintiff	11.7 m	17.6%
Lee Yong Moo (“LYM”)	7.8 m	11.8%

3.  In January 2013, SSCP was the registered holder of 15.6 million shares (“the shares”) in the company.  At that time SSCP (HK) was also heavily indebted to the banks: it owed almost $35 million to D1 and just over $38 million to D2.

4.  On 2 January 2013, D1 and D2 obtained charging orders absolute over the shares in respect of the debts due to them respectively.

5.  On 5 June 2013, the banks obtained an order from Master J Wong (“the original order”) in HCMP 282/2013 for the sale of the shares at the reserved price of HK$11,600,160 (US$1,487,200) (“the reserved price”) which is approximately US$0.0953 per share.  Pausing there, it is to be noted that although the banks were the applicants for the original order, no information was given as to the evidence that was placed before the master for obtaining the original order.

6.  The banks experienced difficulties in finding purchasers for the shares at the reserved price.  By mid July, the plaintiff and LSM who were two of the six shareholders of the company jointly submitted a letter of intent to purchase the shares not at the reserved price but for US$301,074 being approximately 20% of the reserved price or US$0.0192 per share.

7.  On or about 5 December 2013, the plaintiff and LSM as purchasers and the banks as vendors entered into an agreement for the sale and purchase of the shares (50% to the plaintiff and the remaining 50% to LSM) for a total consideration of US$301,074 (“the SPA”) conditional on:

(1) the banks being “allowed to complete the sale of the [shares] to the plaintiff and [LSM]” pursuant to the “Order” defined to mean the original order (including all further orders and directions to be made); and

(2) the banks obtaining a valid order at their own costs.

8.  On 10 January 2014, the banks took out a summons to vary the reserved price.  The summons was supported by affirmations dated 8 January 2014 of Lee Eunyoung (“EY Lee”) and Kim Tae Jin (“TJ Kim”). 

9.  On 22 January 2014, the master adjourned the summons to 28 March 2014, and directed that a supplemental new valuation report supporting the new reserved price of “not less than USD 301,074” to be filed and served not less than 14 days before the adjourned hearing. 

10.  It was the plaintiff’s evidence (with which the banks agreed) that sometime in January 2014 the plaintiff provided a valuation report to the banks that had been prepared by Korean firm of accountants (“the Korean valuation”) but no one present in court for either party could assist the court with the precise date.  It was therefore wholly unclear when the Korean valuation had been made available and whether or not it was before 22 January 2014. 

11.  But having reviewed the evidence since the hearing, the following matters have come to light.

12.  The affirmation of Siu Yat Fung Anthony (“Mr Siu”) (the plaintiff’s solicitor) dated 4 April 2014 filed in support of the interim injunction stated (at § 17) that after the parties had reached an agreement on the SPA in December 2013, TJ Kim requested a valuation report of the company for the variation application.  The plaintiff then instructed a Korean accountant to prepare such a report which was provided a copy to Mr Kim in or around January 2014.  The valuation report in Korean and English and together with a receipt said to have been issued by D1 were exhibited as “SYFA 6”.

13.  SYFA 6 consists of a valuation written in Korean as well as its English translation but sandwiched between the two (at B1/133) is a short e‑mail in Korean from TJ Kim to M & C Electronics Co Ltd, the operating subsidiary of the company (“the subsidiary”) concerning the valuation.  It is dated 20 December 2013 and refers to the Korean valuation that had been provided to the banks. 

14.  The Korean valuation valued the shares at HK$0.1496358 per share as at 31 October 2013.  The Hong Kong dollar amount for 15.6 million shares comes to HK$2,334,318.48 and, adopting the same rate of exchange as for the original order, yields US$299,271.60 which is less than the price payable under the SPA.

15.  The Korean valuation states that the valuation was conducted between 18 and 26 November 2013 and the shares were valued as at 31 October 2013.  It stands to reason that the Korean firm must have been instructed before 18 November 2013 and not as suggested in Mr Siu’s affirmation after the parties had entered into the SPA.  But what is clear from the e-mail is that TJ Kim/the banks was/were in possession of the Korean valuation on or before 20 December 2013.

16.  While the timing of the instructions given to the Korean firm that preceded the date of the SPA conceivably could have raised questions as to the purpose of the valuation, the banks have accepted §17 of Mr Siu’s affirmation and for present purposes must abide by that.

17.  But, in any event, it is clear that the affirmations dated 8 January 2014 made no reference to the Korean valuation.  Nor was the existence of the Korean valuation made known to the master at the hearings on either 22 January or 28 March 2014.

18.  The adjourned hearing took place on 28 March 2014 supported by a second affirmation of EY Lee affirmed on 21 March 2014 seeking to explain to the court why a new valuation could not be obtained.  It was said that despite repeated requests to Kang Je Hyung (“Mr Kang”), the CFO of the subsidiary (and made known to LSM and the plaintiff) for the financial statements of the company, none had been forthcoming.  The court was invited to abandon the valuation requirement.

19.  The master refused to vary the reserved price.

20.  On 1 April 2014, the solicitors for the banks circulated an invitation to offer to buy the shares which invitation remained open until 4 pm on 4 April 2014.

21.  On 4 April 2014, the plaintiff applied for and obtained, ex parte on notice, the injunction order.  On the same day, LSM’s brother, LYM, offered to buy the shares for US$1,650,000.  In round terms the price offered was US$0.10577 per share, over five times the SPA price.

22.  On 7 April 2014, the banks entered into an agreement with LYM for the sale of the shares (“SPA 2”) inter alia, on the following terms:

(1) a total sale price of US$1,650,000;

(2) completion of the sale of 50% of the shares (ie 7.8 million shares) on payment of 50% of the total sale price; and

(3) completion of the remaining 50% of the shares to take place subject to the discharge of the injunction order.

23.  It should be mentioned that in May 2014, LSM and LYM filed an unfair prejudice petition against the plaintiff and another shareholder of the company.

24.  Apart from the acquisition by LYM in that transaction of 7.8 million of the shares which was completed on 23 April 2014, there were three other subsequent transactions all of which took place on 30 July 2014, shortly prior to the hearing:

(1) LYM transferred 13.65 million shares to Diamond Arch;

(2) LYM transferred 1.95 million shares to the plaintiff; and

(3) LSM transferred 11.7 million shares to the plaintiff.

25.  In each of the transactions the consideration paid reflected a price of approximately US$0.2015 for each share.

26.  The current shareholding is as follows:

Shareholder	Number of shares held	Percentage
SSCP	7.8 m	11.76%
Diamond Arch	29.3 m	44.19%
iWorld	3.9 m	5.9%
The plaintiff	25.35 m	38.23%

27.  Having regard to recent developments, the real tussle over ownership of the 7.8 million shares, the subject matter of the injunction order (“the disputed shares”), could be said to be between the plaintiff and LYM.  The banks are affected in the sense that they stand to receive considerably more if the sale of the remaining 50% of the disputed shares in SPA 2 could proceed to completion.

The preliminary point

28.  In his written skeleton, Mr Man who appeared for the plaintiff invited the court to apply what was referred to as the Hadkinson principle and to exercise its discretion to decline to hear the banks on the ground that they have breached the terms of the injunction until the alleged breach had been purged.  The principle is said to derive from Hadkinson v Hadkinson [1952] P 285 at 298.

29.  In view of the ‘ring fencing’ provisions in SPA 2 that protect and ensure the integrity of the injunction order, the court intimated that it appeared doubtful if any breach (other than possibly a purely technical one) could be made out at all.  Wisely, Mr Man (while not wholly abandoning it) relegated that argument to a footnote.

WHETHER AN INTERIM INJUNCTION SHOULD BE GRANTED

Is there a serious issue to be tried?

30.  The plaintiff’s claim is premised on an implied term that the banks would use their best endeavours to secure a variation order that would vary the reserved price to the amount payable under the SPA so as to enable the SPA to be completed and that the banks were in breach of the implied term in that they failed (1) to disclose the Korean valuation to the court; and (2) to disclose to the plaintiff the court’s direction that a new supplemental valuation be obtained.

31.  While the duty is put somewhat differently, the banks accept that they had a duty to use due diligence and to take all reasonable steps to secure a variation order but contended that it was a duty that required the co‑operation of the plaintiff and LSM and that the plaintiff failed to co‑operate by not making the requested financial statements available.

32.  The affirmation of TJ Kim (at §§7, 8, 10‑13) filed in opposition to the injunction sought to explain why the Korean valuation was not put before the court and the plaintiff's lack of co‑operation.  TJ Kim also relied on the second affirmation of EY Lee. 

33.  I have already alluded to the unsatisfactory state of the evidence concerning the date the Korean valuation was made available to the banks.  That date is relevant to the date and nature of the request by TJ Kim to the plaintiff for a valuation in the first place.  The request would appear to have been made orally since no written request is in evidence.

34.  The explanation put forward, based on the allegedly unsatisfactory aspects of the Korean valuation and casting aspersions on the firm that had prepared the valuation, is hardly satisfactory.  For one thing, the banks had been responsible for obtaining the original order and so they must have known what evidence had been placed before the master on the previous occasion but they have not adduced any evidence in that regard.  If they did not know, then they ought to have known.

35.  In any event, the recitals to the original order show that the application was supported by, inter alia, two affidavits of EY Lee, albeit (judging from the back sheet to the original sale) that a different firm of solicitors had acted for the banks in that application.  Its current solicitors who acted for the banks in the variation application in January and March 2014 must have known or ought to have known the type and quality of evidence that was before the court on the previous occasion.  It is clearly arguable that the plaintiff ought to have been told the type  of report defined.

36.  As regards the requests made whether by TJ Kim or EY Lee to the plaintiff/LSM/Mr Kang for the financial statements, again, these were made orally.  Surprisingly, no written request appears to have been made when nothing could have been simpler than for the solicitors responsible for making the application on behalf of the banks to have made a formal request for the company’s financial statements.

37.  Given the conflict of evidence, the court is in no position to rule on the disputed facts but what is tolerably clear is that no satisfactory answers have been provided so the breach of the implied term remains a live issue.

38.  Accordingly, the requirement that there is a serious issue to be tried is satisfied.

Adequacy of damages as a remedy for the plaintiff

39.  The subject matter of the SPA is shares in an unlisted private company.  In such case, as a general rule, damages are normally regarded as providing an inadequate and inappropriate remedy should the plaintiffs succeed at the end of the day.

40.  Mr Bell SC who appeared for the banks submitted that no injunction should issue because that relief is predicated on specific performance of the SPA but the plaintiff would not be entitled to specific performance because absent a variation order the sale could not proceed.  So, any specific performance order necessarily would be in the nature of the banks being required to make a new variation application.  That, it was said, would be tantamount to ordering the carrying on of an activity and would be objectionable based on Co‑operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1. 

41.  Mr Bell submitted that specific performance order would not be appropriate because it would not be confined to ‘a single and well‑defined act’.  An order ‘to make a proper application’ could encompass a variety of matters such as another valuation, the manner in which it is made and the date of valuation.  It would be open‑ended because if the plaintiff were dissatisfied with the further application, one could not rule out his application being renewed and opens up the possibility of repeated applications for rulings on compliance with the order.  Further, specific performance in the present case would mean the performance of an activity which would require supervision and that was objectionable. It was also said that in view of the four transactions that have occurred since the end of March 2014, it would be extremely unlikely that the court would vary the original order.

42.  In the Argyll case, Lord Hoffmann (at 13D‑F) drew a distinction between orders which require a defendant to carry on an activity such as the running of the business over an extended period of time and orders which require him to achieve a result.  He explained that the possibility of repeated applications for rulings on compliance in the latter case did not exist to anything like the same extent.  In appropriate circumstances, the courts have ordered specific performance that required the achievement of results if the order could be framed in sufficiently precise terms.

43.  Assuming, for the sake of argument, that the plaintiff were to prevail at the trial, and the judge were to order, for example, that the banks “use the best endeavours to obtain a variation order”, Mr Bell contended that such an order would be tantamount to ordering the banks to carry on an activity rather to achieve a result and no court would make such an order.

44.  In my view, it is arguable such an order is rather different in nature from an order requiring a party to carry on a business for an extended period of time as in Argyll.  Whether or not a variation order is obtained at the end of the day is not the issue: the issue is whether the court, looking at the banks’ renewed attempt, would be able to say whether “best endeavours” had been made.  I cannot think that a judge looking at the nature and quality of the evidence presented and, if necessary, comparing that to what had been done to obtain the original order, would have any difficulty in forming a view.

45.  It was also submitted that given the recent transactions, the court would never make the variation order.  I do not consider that such an assumption should be made for present purposes.  The obligation was for the banks to have used their best endeavours for the 28 March hearing.  It follows that the valuation must pertain to a date that is earlier than the hearing date and one cannot speculate what the valuation would have been then.  The three most recent transactions did not take place until the end of July.

46.  For completeness, I should mention that Mr Bell made reference to a passage in Chitty for the proposition that a failure to use best endeavours sounds only in damages: Chitty on Contracts, vol I, 31^st edn, §2‑158.  What was being considered in that passage was the ‘duty of reasonable diligence to bring about the event’ and it gave the example of a case where the principal obligations to buy and sell would not take effect if no licence was obtained.  It was then stated that:

“… but if the party who should make reasonable efforts has failed to do so he will be liable in damages …”

47.  Mr Bell also made reference to Halsbury’s Laws of England, 5^th edn, vol 22, §271 as further authority that in such situations damages is the appropriate remedy.  The passage reads:

“Where the condition fails to materialise through the fault of one of the parties, for example, because he prevented its occurrence, or failed to make the reasonable efforts required, the court may award damages for breach of the subsidiary obligation which attaches to the fulfilment of the condition and can discount such damages to take into account that the condition may not have been fulfilled …”

48.  It is evident from the authorities cited in support by Chitty, for example, Malik v C.E.T.A. [1974] 1 Ll Rep 279 that the only question before the court was whether the plaintiffs were liable in damages for their failure to perform the contract.  Specific performance did not arise.  I do not consider that the passage in Chitty could fairly be read as stating as a proposition of law that damages is the only and exclusive remedy for a breach of that type of duty.  The passage from Halsbury takes it no further.  In my view, those passages do not assist the banks.

49.  At this stage, unless I am of the view that no court would order specific performance, I should not pre‑empt matters and preclude the trial judge from deciding whether or not specific performance would be a proper order to make at the end of the trial.

Whether the banks would be prejudiced

50.  It would be relevant to consider whether, if the injunction were continued and the banks were to prevail at the trial, the banks would suffer any prejudice that could not be compensated for in damages.

51.  Under the terms of SPA 2, LYM remains bound to purchase the shares at price stated.  Mr Man submitted that the banks would not suffer any prejudice by reason of the continuation of the injunction.

52.  I would agree.  In so far as completion of SPA 2 in respect of the disputed shares is delayed, any interest that is attributable to such delay can be compensated for by way of damages.  I also note that under clause 2.5 of the SPA 2, LYM is not released from his obligation to purchase the shares unless on the date when the plaintiff’s action is fully settled, the banks are still restrained from selling them to LYM.  Mr Bell has not identified any particular prejudice that would be suffered by his clients if the injunction were continued.

CONCLUSION

53.  It follows from what has set out above that the balance of convenience lies in favour of the continuation of the injunction. Accordingly, I will make an order in terms of the summons.