KARCE INTERNATIONAL HOLDINGS CO LTD AND ANOTHER v. CHINA EAGLE DEVELOPMENT LTD AND ANOTHER

HCA 1660/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 1660 OF 2012

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REASONS FOR JUDGMENT

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1. The plaintiffs applied for judgment in default of notice of intention to defend and defence. O.13, r.6 and O.19, r.7 of the Rules of the High Court (“RHC”) are invoked.

2. The application for judgment was first adjourned to enable the plaintiffs to consider this court’s queries about the claim during the first hearing.  This caused the plaintiffs to apply to amend the pleading.  Then the matter had to be adjourned again to enable the plaintiffs to seek consequential amendment of the summons for judgment in line with the amended pleading.  In both cases, service was not, as it should not be, dispensed with.  Hence the adjournment.

3. So before me were first the summons dated 24 May 2013 to amend the summons for judgment; and then the summons for judgment as amended.

4. I gave an order in terms of the summons to amend, ie leave to amend (in terms of paragraph 1) and no order as to costs (in terms of paragraph 3).

5. I also granted relief in default of defence in line with the amended summons.  I now set out the footing for that.

6. For an application like this, the court has to consider if it is satisfied that the pleaded case, if accepted, appears to entitle the plaintiff to the relief claimed.  Evidence is normally not referred to: see Hong Kong Civil Procedure 2013 (Vol.1) (“HKCP”) at 19/7/14.  Nevertheless the plaintiffs have chosen to file affidavit evidence apparently for proving their claim.

SERVICE

7. According to the affirmations of service, documents have been sent to the defendants at their foreign addresses but more importantly their Hong Kong address as well.  Referring to the affidavits, insofar as the same is relevant to service of legal proceedings, I note that the agreement between the parties, which forms the basis of the present action, provided a Hong Kong address and a named recipient for service of documents, including court documents.  It was agreed that service at such address for the attention of the named recipient should be deemed good and sufficient service.  For the defendants which were incorporated overseas, this is an acceptable contractual mode of service under O.65, r.3: see HKCP at 65/3/12.

THE CLAIM

8. The claim is described as a restitution claim.  The pleading, as amended, gives the following account of what gave rise to the claim.

9. Pacific Choice Holdings Limited (“Pacific Choice”) is a company incorporated in the British Virgin Islands (“BVI”).  The defendants own 1/5 of the issued shares in Pacific Holdings.  Pacific Holdings wholly owns 3 subsidiaries: Starwick Development Limited (“Starwick”) Gold Pioneer Enterprises Limited (“Gold Pioneer”) and Sheenway Limited (“Sheenway”).  In other words, Karce and Sourcestar own interest in these 3 companies indirectly through Pacific Choice.

10. Taiwan Micro Display Corporation (“TDMC”) is a Taiwanese company.  It has a wholly owned subsidiary Precise Media Limited (“Precise Media”), a company incorporated in Samoa.  Precise Media has a wholly owned subsidiary in the PRC (“the PRC Subsidiary”).

11. By an agreement dated 29 February 2008 (supplemented by supplemental agreements signed between August and October 2008), Starwick agreed to purchase from TDMC all the issued share capital of Precise Media, TDMC’s sales patents (“TDMC Sales Patents”) and sales machineries (“TDMC Sales Machineries”) in relation to a television manufacturing business (“TV Manufacturing Business”).

12. The defendants then brought about the re-organisation of their group in the following manner (“the Re-organisation”):

(1)    Precise Media, once purchased, would be the wholly owned subsidiary of Starwick.

(2)    The TDMC Sales Machineries would become vested in the PRC Subsidiary.

(3)    The TDMC Sales Patents would become the property of Sheenway.

(4)    The officers of TDMC would enter into employment contracts with the PRC Subsidiary.

13. The 1^st and the 2^nd plaintiffs were incorporated in Bermuda and British Virgin Islands respectively.  The former is listed in the Hong Kong Stock Exchange and wholly owns the latter.

14. By an acquisition agreement dated 30 April 2008, 1^st plaintiff (as purchaser) and the 2^nd plaintiff (as warrantor) entered into agreement with the defendants (as the vendors) for the sale and purchase of shares and interest in Pacific Choice (“the Acquisition Agreement”). The acquisition price was HK$3,400 million.

15. The terms of the acquisition pleaded consist of clauses 3.3, 3.4, 4.1and 4.3 as well as:

Clause 5.5

Each of the vendors agreed and undertook in favour of the 2^nd defendant to implement and procure the implementation of the Reorganisation as soon as reasonably practicable and in any event before the completion date.

Clause 8.4

The vendor warranties should survive the completion insofar as the vendor warranties were not fully performed on completion.  The rights and remedies of 1^st and/or the 2^nd plaintiff in respect of any breach of any of the vendor warranties should continue to subsist after and notwithstanding completion.

16. So to begin with, the plaintiffs entered into the Acquisition Agreement on the premise that the TMDC Agreement between Starwick (under the control of the defendants indirectly through Pacific Choice) and TMDC as well as the resultant Reorganisation of the defendants’ group would be completed.

17. The intended and agreed result of the completion of the TMDC Agreement and the Reorganisation were spelt out and warranted by the defendants.  For such purpose, the warranties survived the completion of the Acquisition Agreement.

18. The vendor warranties mentioned above were given by the defendants on a joint and several basis; and, as pleaded, consist of the following (clauses 8.25 (d), (e) and (g)):

(1)    Following the completion of the TMDC Agreement (15 January 2009), the defendants’ group would have the necessary and sufficient capacity (in terms of machineries, equipment and technology) for carrying on of the business (namely the research and development, manufacturing and distribution of “liquid crystal and silicon technology” televisions, enlarged display units and related components by the group) in a commercially feasible manner.

(2)    The TMDC officers, who would join the defendants’ group following completion of the TMDC Agreement for at least a term of 36 months from such completion date, are experienced and qualified to render the necessary and adequate design, production, engineering, technical, repair and maintenance and other related services to the group for carrying on the business.

(3)    Following completion of the TDMC Agreement and for a period of at least 12 months following such completion, the defendants’ group would have the necessary capacity to perform the major contracts (as defined).

19. Because of the anticipated postponement caused by the delay in the construction of the PRC Subsidiary’s plant in Suzhou, the parties then entered into a supplemental agreement on 24 October 2008.  The acquisition price was adjusted to HK$2,700 million.  Further the plaintiffs agreed to waive certain conditions precedent to the completion subject to, among others, the following undertakings by the defendants in return:

(1)    Prior to the delivery of the TMDC Sale Machineries to the Suzhou plant of the PRC Subsidiary, TMDC should allow any members of the Group to use or otherwise occupy the TMDC Sales Machineries at no cost.

(2)    Within 3 years from 15 January 2009, the TMDC Sale Machineries would become vested in the PRC Subsidiary to the effect that they would be delivered to the PRC Subsidiary (or Starwick’s nominee).

20. The pleading goes on to set out the payments that the plaintiffs had made pursuant to the Acquisition Agreement.  They took various forms, including convertible bonds, promissory notes and cash.

21. The plaintiffs complains that the defendants were in breach of the Acquisition Agreement, in particular, in that:

(1)    Employment contracts had been entered into between the officers of TMDC and the PRC Subsidiary.  But none of them has rendered any service to the defendants’ group for carrying on the TV Manufacturing Business at all.

(2)    Pursuant to the completion undertakings, a lease had been entered into between TMDC and Starwick in respect of the TMDC Sale Machineries in Taiwan pending transfer to the Suzhou plant under construction.  But the plaintiffs have been denied access to the same to date; and have no knowledge about their whereabout or condition.

(3)    None of the TMDC Sale Machineries have been transferred to the PRC Subsidiary to date.  It has become inconceivable that the same would be vested at all in the PRC Subsidiary within 3 years from 15 January 2009 pursuant to the completion undertaking.

(4)    The defendants’ group has not been able to commence production of any of the TV Manufacturing Business at all.

22. The pleading further sets out the repeated demands and requests made by the plaintiffs and their solicitors.  None of the alleged breach has been remedied by the defendants.  Considering that the defendants had repudiated the Acquisition Agreement, the plaintiffs through solicitors communicated their acceptance of the repudiation to the defendants by letter dated 23 July 2012.  The Acquisition Agreement was thus terminated with immediate effect.

23. The plaintiffs plead that the consideration for the Acquisition Agreement has failed totally.  On this basis, they claim to be entitled to be restored to the pre-contractual position.  Hence the restitution claim.

WHETHER THE PLAINTIFFS ARE ENTITLED TO THE RELIEF CLAIMED

24. What caused me to query the plaintiffs’ claim at the first hearing was that they used to claim for a declaration that the Acquisition Agreement was null and void for total failure of consideration.  I took the view that this had to be wrong.  That the consideration is said to have totally failed goes to the issue of performance, not that of conclusion or validity of the Acquisition Agreement.

25. Further the pleaded case of the plaintiffs is clearly termination upon acceptance of repudiation.  The alleged total failure of consideration goes to their entitlement to money back but not impeachment of the Acquisition Agreement.

26. Mr Leung for the plaintiffs accepted that; and therefore applied to amend the declaration sought by adding the alternative basis of termination of the agreement.  Hence the amended application and further service mentioned above.

27. Mr Leung for the plaintiffs submitted that consideration in the restitution sense refers to the condition which formed the basis for the claimant to transfer a benefit to the defendant, and is different from the contractual sense.  The restitution claim is based on the defendant not having a legal right to the benefit given by the claimant.

28. Mr Leung further referred to the test for determining whether the consideration has failed, which is not whether the promisee has received benefit but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due: Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574 (at 588, per Lord Goff).  It is whether or not the party claiming total failure of consideration has in fact received any part of the benefit bargained for under the contract or purported contract: Rover International Ltd v Cannon Film Ltd [1989] 1 WLR 912 (at 923, per Lord Kerr).  It has also been said that the question is whether the contracting party has performed any part of the essential obligation under the contract: Guiness Mahon Co Ltd v Chelsea and Kensington LBC [1999] QB 215 (at 240, per Lord Robert Walker).  For total failure of consideration, the restitution claim is based on the lack of intention to enrich in the events that happened: Firbosa Spolka Ackynia v Fairbarin Lawson Combe Barbour Ltd [1943] AC 32.

29. In the present case, as pleaded, the plaintiffs agreed to purchase the shares of the defendants in Pacific Choice on the premise that the defendants, through Pacific Choice, would cause Starwick to complete its agreement with TMDC and that the defendants’ group would complete the resultant reorganisation. Pending the actual transfer of the TMDC Sale Machineries to PRC Subsidiary, the plaintiffs should have access to and use of the same.  Following that, the plaintiffs expect to see the necessary and sufficient capacity of the defendants’ group in actually commencing the TV Manufacturing Business.  This was what the plaintiffs essentially bargained and paid for under the Acquisition Agreement.  As pleaded, the plaintiffs have been unable to obtain any of those and none of those appear to be forthcoming.

30. The principle that declaratory relief will not be granted without trial is a rule of practice and not of law.  The court has to consider whether justice will be done to the applying party in each case.  The right course for the court is to state on what footing the relief is to be granted.

31. On basis of the matters pleaded, I am satisfied that the consideration for the Acquisition Agreement has failed totally.  Hence the plaintiffs were entitled to terminate and did terminate the Acquisition Agreement.

32. The plaintiffs claim literally for an order that the position of the parties be restored to the original position prior to the signing of the Acquisition Agreement.  This is quite unheard of simply because an order in such terms is incapable of enforcement.  What the plaintiffs need is an order for payment or things to be done essentially for restoring the parties to their original position.  The plaintiffs pray for the return of the payment made by the plaintiffs in various forms to the defendants pursuant to the Acquisition Agreement as mentioned above.  I am satisfied on the basis of the pleading that they are entitled to that.

ORDER

33. I therefore made the following order:

(1) On the basis of the matters pleaded in the amended statement of claim filed on 20 May 2013, and in default of defence, the 1^st and the 2^nd plaintiffs are entitled to and granted the declaration:

(a) that the 1^st and the 2^nd plaintiffs were entitled to terminate and have terminated the Acquisition Agreement for total failure of consideration;

(b) that the plaintiff is entitled to:

(i) the return of Convertible Bonds in the sum of HK$67,800,000 by the 1^st defendant to the 1^st plaintiff;

(ii) the return of Convertible Bonds in the sum of HK$45,000,000 by the 2^nd defendant to the 1^st plaintiff;

(iii) the return of the outstanding amount of Promissory Notes in the sum of HK$87,500,000 by the 1^st defendant to the 2^nd plaintiff;

(iv) the return of HK$250,000,000, representing the amount of Promissory Notes redeemed by the 1^st defendant at an earlier date, to the  2^nd plaintiff;

(v) the return of cash in the sum of HK$25,000,000 from the 2^nd defendant to the 2^nd plaintiff;

(vi) interest at the HSBC prime rate plus 1% from the date of writ until judgment and thereafter at the judgment rate until payment;

(2)    The 1^st and the 2^nd defendants do pay the plaintiffs’ costs of this action, including those of and occasioned by this application but excluding those of the hearing on 16 May 2013, to be taxed if not agreed.