SUPER MASTER HOLDINGS LTD v. CHUNG NAM SCURITIES LTD AND ANOTHER

HCA 4573/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4573 OF 2003

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J U D G M E N T

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I. Background

1. The Plaintiff ("Super") was incorporated on 25 April 2001 in the British Virgin Islands. It is wholly owned by Mr Li Tat Ting ("Li"). Super holds 300,150,000 shares ("the Shares") in Surge Recreation Holdings Limited ("Surge"), a company listed on the Hong Kong Stock Exchange ("HKSE") (stock code 703). The Shares represent 50.3%, a controlling interest, of Surge. Super being a corporate vehicle or alter ego of Li, I refer below to Li and Super interchangeably.

2. Surge was incorporated in Bermuda on 5 June 2001. It was listed on the HKSE main board on 15 August 2002. Surge belongs to a group of companies ("the Group") whose principal business is the operation of a theme park ("the Theme Park") known as "SammyLand" (formerly "Fantasy Film City") in Panyu, Guangdong. According to the Group's Annual Report 2002, as at the end of the financial year ended 31 December 2002, it enjoyed a net year-end profit of $20,449,000 and had assets of $268,869,000. But, with the outbreak of SARS in the Mainland and Hong Kong in 2003, the Group's profits plummeted last year. The Group's income decreased by some 72% with the result that the Group's loss attributable to shareholders for the 6 month period ending 30 June 2003 was $14.7 million. Until the events described below, Li was the chairman and a director of the Group.

3. On about 1 August 2003 Li applied for a loan from the 1st Defendant ("Chung Nam"). He dealt with Mr Eugene Chuang ("Chuang") at the time. Chuang told Li that Chung Nam was prepared to lend money on the security of an equitable mortgage of the Shares. As the Shares represented a controlling interest in a public-listed company, Chuang warned that Li ran the risk of his shares being sold off (and Li thereby losing his control of the Group) in the event of a default in repayment. Chuang asked Li carefully to consider the consequences and, if Li were still minded to proceed, to complete all agreements and other forms required of Li to open a deposit and margin account with Chung Nam.

4. Li decided to go ahead with the loan arrangement. The loan was to be advanced to Li through Super with Li as guarantor. Li filled in the various requisite documents on his own and Super's behalf. Those documents included a "Margin Client's Agreement" ("the Agreement") which provided as follows:-

Clause 5:-

"I/We [Super] shall on demand from you [Chung Nam] make payments of deposits or margins in cash, securities or otherwise in amounts agreed with you or which may be required by the rules of any exchange or market of which you are a member."

Clause 7:-

"If I/We commit a default in payment on demand of the deposits or margins or any other sums payable to you hereunder, on the due date therefor, or otherwise fail to comply with any of the terms herein contained, without prejudice to any other rights you may have, you shall have the right to close the margin account(s) without notice to me/us and to dispose of any or all securities held for or on behalf of me/us and to apply the proceeds thereof any cash deposit(s) to pay you all outstanding balances owing to you. Any monies remaining after such application shall be refunded to me/us."

Clause ?¹:-

"I/We hereby agree to pay interest on all balances owing by me/us to you (after as well as before any judgement), at such rate(s) not exceeding Hong Kong prime rate plus 30% or another rate(s) as demanded by you and be calculated and payable on the last day of each calendar month or upon any demand being made by you. You reserve the right to alter the interest rate charged from time to time."

Although the Agreement stipulated an interest rate of up to 30% above prime, Chuang and Li orally agreed that the rate actually charged would be prime plus 10%.

5. On 2 August 2003 Chung Nam informed Li that it was prepared to lend up to $13 million on the security of the Shares. In his oral evidence, Mr Chuang explained how Chung Nam roughly arrived at the figure of $13 million. It is Chung Nam's policy to lend only up to about 50% of the market value of blue chip shares held by it as collateral. On the other hand, the Securities and Future Commission ("SFC") recommends lending no more than 30% of the value of share collateral. Given Surge's shares were trading at a little over $0.08 per share at the beginning of August 2003 and taking into account Chung Nam's policy and the SFC's guidelines, Chung Nam considered that $13 million was the maximum that it could lend in the circumstances. As a businessman, Chuang considered that the transaction was worth the risk, given the high interest of 10% above prime which Chung Nam was charging on the loan.

6. At the trial, there was some dispute as to how much money Li wanted to borrow and for what purpose. Li claimed that he had been introduced to Chung Nam by Mr Antonio Cham ("Cham") of Get Nice Capital Limited ("Get Nice"). Cham denies this. Li says that he was only looking for a loan of $13 million. He claims that he needed $10 million to pay off an outstanding loan between himself and Get Nice (Union) Finance Company Limited ("Union") and $3 million for personal reasons. He says that, upon drawdown of Chung Nam's loan, about $10 million was in fact used to pay off his debt to Union. Cham in contrast says that he has no knowledge of the use made of the $13 million loan by Li and, in any event, in early August 2003 only some $6 million of principal and $200,000 of interest was due from Li to Union. Nothing hinges on whether or not Li wanted to borrow more than $13 million and how he used the principal lent by Chung Nam. Whatever the position in respect of those matters, the fact is that $13 million was lent by Chung Nam in 2 tranches of $6.5 million each credited to Li on 5 August 2003.

7. There was also some dispute at trial as to precisely when Li tendered the Shares as collateral for Chung Nam's loan.

8. When Surge was floated, Li and Super each gave an undertaking to Surge (among others) to the effect that:-

"he/it will not, and will procure that none of his/its associates and the companies controlled by or nominees or trustees holding in trust for him/it will sell, transfer or otherwise dispose of (save pursuant to a pledge or charge as security for a bona-fide commercial loan or otherwise permitted under the Listing Rules) or create any rights in respect of any of the Shares owned or held by him/it, his/its associates or the relevant company, nominee or trustee immediately upon completion of the Offer, or sell, transfer or otherwise dispose of (save pursuant to a pledge or charge as securities for a bona-fide commercial loan or otherwise permitted under the Listing Rules) any interest in any shares in any company controlled by him/it which is directly, or through another company indirectly, the beneficial owner of any of the Shares:

(a) within the period commencing on the date of the Underwriting Agreement and ending on the date falling six months after the date on which dealings in the Shares first commence on the Stock Exchange ('First Six Months'); and

(b) within a period of six months from the date which commences on the expiry of the First Six Months ('Second Six Months'), if, immediately following such sale, transfer or disposal, Super Master and/or Mr Li would cease to be the controlling shareholder (as defined in the Listing Rules) of the Company."

Li and (it seems) Chuang construed the undertaking as prohibiting Super from charging the Shares at all within a year of Surge's flotation. If that were the case, Li could not have charged the Shares to Chung Nam (except on pain of breaching his undertaking) before 15 August 2003. But such reading of the undertaking may be mistaken. This is because the undertaking expressly allows Li and Super to pledge or charge the Shares as security for a genuine commercial loan.

9. Whatever may be the strict legal position, on the basis of his understanding of the undertaking, Li contended at trial that the parties to the loan had agreed that the loan was be treated as unsecured prior to 20 August 2003. Li said that after that date Chung Nam could appropriate the Shares (which Li deposited with Chung Nam on 4 August 2003) as security for the $13 million advanced.

10. In his Affirmation dated 22 December 2003, Chuang in contrast suggested that Li had breached his undertaking by charging the Shares in Chung Nam's favour. Implicit in such accusation is a denial of Li's evidence that the loan was initially a clean one.

11. I am puzzled, if Chuang is right, why Chung Nam which would have known of the undertaking at the time of making the $13 million loan, was prepared to lend money on the security of the Shares before 15 August 2003. However, this is again an issue which I need not consider in any more detail than I already have, since it is irrelevant to the real questions arising in this case.

12. A third issue which arose was the status of an abortive undated share placement agreement ("the Placement Agreement") which Chung Nam and Li (purporting to act on Surge's behalf) signed. Chuang states that on 8 August 2003 Li asked Chung Nam to help in the placement of Surge shares to secure working capital for that company.

13. The Placement Agreement was conditional upon HKSE granting permission for the placing, listing of and dealing in 120,000,000 Surge shares ("the Placing Shares"). The Placing Shares were to be issued at a price of $0.075² per share. By the Placement Agreement, Chung Nam was appointed as Surge's agent for the placement of the shares. Chung Nam would be entitled to receive certain fees and commission for its services.

14. Chuang says that the signed Placement Agreement was deposited with Chung Nam in escrow pending a decision by Chung Nam's finance team on the prospects of a placement. He says that:-

"[a]fter careful analysis of the financial and corporate background of Surge Recreation, it was unanimously concluded that it was in financial turmoil and the placing exercise would be bound to be a failure".

Chuang accordingly informed Li in late August 2003 that it would not proceed with the placing exercise.

15. Li in contrast contends that the Placement Agreement was prepared at Chung Nam's request. He says that the real purpose of the Placement Agreement was to prevent Surge from issuing new shares and diluting the Shares held by Chung Nam as security. Beyond the evidence (which I accept) that:-

(1) Chung Nam's corporate finance team closely examined Surge's financial position in late August 2003 when deciding whether or not to proceed with the Placement Agreement;

(2) an issue price of $0.075 per Placing Share was thought unrealistic by Chung Nam's corporate finance team in the circumstances prevailing in late August 2003; and,

(3) neither Chung Nam nor Surge proceeded with the Placement Agreement after the same was lodged with Chung Nam,

I do not think that the status of the Placement Agreement has any significant bearing on the dispute before me.

16. Finally, there was a peripheral issue among the parties on whether prior to the signing of the Agreement Ms. Shirley Lee Yuk Fan ("Ms Lee"), an account executive at Chung Nam, had represented to or agreed with Li that he would have a chance to redeem the Shares before Chung Nam would ever sell the same. By its Statement of Claim Super pleaded that Ms. Lee had so acted. Ms. Lee denied making any such representation or agreement. She was available for cross-examination. But Mr Yip (appearing for Super) opted not to cross-examine. I therefore find that Ms. Lee did not act as alleged in Super's pleading.

17. 2003 was unkind to Surge financially. There is evidence that over 2003 Surge was faced with a number of legal proceedings in which an aggregate sum of over $8.2 million was claimed. In particular, by a writ in HCA No.656 of 2003 filed on 20 February 2003 Elegance Finance Printing Services Limited ("Elegance") claimed unpaid fees of about $1.5 million for the printing Surge's listing documents in August 2002. On 25 October 2003 Elegance presented a winding-up petition ("the Petition") in HCCW No.1185 of 2003. The Petition remains extant, having been first heard by the Companies Judge on 22 December 2003. At that hearing Surge's counsel asked for a 3 to 6 months adjournment to allow negotiation of a scheme of arrangement with Surge's creditors and a restructuring of Surge. A supporting creditor also appeared at the hearing, alleging a $3.5 million debt.

18. Recently, at a restored hearing of the Petition on 9 February 2004, Superlink Consultant Limited ("Superlink") has appeared claiming unpaid advertising costs amounting to $512,000 incurred between 29 July and 15 October 2001. Superlink opposes a winding-up because it believes that "the consequences of a winding up order would be detrimental to creditors in that it is unlikely creditors would recover any of its debts from Surge". It has submitted that the Court should "order provisional liquidation upon a suitable and appropriate rescue plan of Surge".

19. The Group also faces litigation on the Mainland. In October 2003 the Theme Park's landlord obtained a judgment in the Mainland Court entitling repossession of the land on which the Theme Park is situated. According to Li that judgment is presently under appeal, so repossession has not actually taken place. But Li accepts that unpaid rent and interest thereon amounting to about RMB 15 million remains due to the Theme Park's landlord.

20. Whatever the merits and demerits of the various claims being advanced against Surge in the Hong Kong and Mainland Courts, it is apparent that Surge is at the moment and, for a significant part of 2003, has been in considerable economic difficulty.

21. Li did not fare any better personally in 2003. There is evidence that over 2003 Li was beset by legal claims in Hong Kong and the Mainland for an aggregate of over $50 million and RMB 4 million respectively. Lately, after a 2-day hearing on 19 and 24 September 2003 in HCA No.148 of 2003, on 5 December 2003 Barma J gave summary judgment in favour of Cash Smart Enterprises Limited ("Cash Smart") against Li for some $15 million. That judgment is currently under appeal. Nonetheless, in cross-examination before me, Li accepted that including loans of which he was guarantor he was still facing some $40 million in claims. There can thus be little doubt on the evidence that Li has himself been experiencing serious cashflow difficulties since at least mid-2003.

22. Given his financial problems, it is not surprising that in October 2003 Li failed to pay the accrued interest on Chung Nam's loan. By letter dated 10 October 2003 signed by a director Mr Glenn Wong ("Wong"), Chung Nam requested Li to "take immediate action to settle the total account balance within 7 days or your collateral will be liquidated without further notice pursuant to the terms of the margin account agreement". An updated Statement of Account was enclosed with the letter for Li's reference.

23. By way of follow-up to the 10 October 2003 letter, Chung Nam's Financial Controller Mr Cecil Chan Kwok On ("Cecil Chan") called Li several times on the latter's mobile phone to press for repayment of the outstanding principal and interest on Chung Nam's loan. On some occasions Li promised to repay, on others he could not be contacted. Reached by Cecil Chan on 24 October 2004, Li said that he would "discuss the matter after he returned to Hong Kong" from the Mainland.

24. Having learned of the Petition, Chung Nam further wrote to Li on 29 October 2003 as follows:-

"We write to notify you that your outstanding margin loan has been in default for a period of time. We also remind you that we will liquidate your collateral at any time when we think fit and proper without further notice."

An updated Statement of Account was sent with this letter.

25. Chung Nam also instructed its then solicitors Messrs Huen & Partners ("Huen") to send a letter before action to Li in respect of the amount outstanding under the loan. This Huen did on 24 November 2003, although Li denies having received such letter.

26. The loan remaining unpaid despite the two October letters from Chung Nam (which Li received) and Cecil Chan's calls, from October 2003 onwards Chuang explored the possibility of selling the Shares as a block by private treaty. According to his evidence, Chuang had looked at Surge's interim report and information about Surge on Bloomberg. He was aware of the Petition and other litigation against Surge. He knew of the proceedings by the Theme Park's landlord in the PRC. Chuang was concerned that he may not be able to realise the Shares in light of Surge's deteriorating economic position.

27. A major difficulty was that there was no serious prospect of disposing of the Shares by selling them through the HKSE. Between 1 October and 12 December 2003³ Surge's shares were thinly and sporadically traded. Over that period, shares were bought and sold on only 12 trading days (3 October (498,000 shares), 17 October (96,000 shares), 29 October (180,000 shares), 30 October (84,000 shares), 5 November (96,00 shares), 3 December (468,000 shares), 4 December (666,000 shares)⁴, 5 December (912,000 shares), 8 December (438,000 shares), 9 December (858,000 shares), 10 December (1,580,000 shares) and 11 December (540,000 shares)). On most other days no trades in Surge's shares took place. During the period, Surge's shares traded at between $0.060 (30 October) and $0.110 (8 December).

28. If Chung Nam attempted to unload the Shares through the HKSE, the number of the Shares and the fact that Surge's shares were only thinly traded at low volumes relative to such number would mean that the price for Surge's shares would fall dramatically. Further, a price collapse could cause trading in Surge's shares to be suspended. This would mean that Chung Nam, as an Exchange Participant, could not deal in the Shares at all (see Rules of the Exchange r.539).

29. In addition to realising that disposal of the Shares through the HKSE was impractical, Chuang was conscious of the fact that the Shares constituted a controlling interest in Surge. If it became public knowledge that Chung Nam was attempting to sell Li's interest in Surge, there might well have been adverse effects on Surge's share price also resulting in the suspension of trade. Neither would too openly marketing the shares help Li's reputation. Given the litigation facing Surge and Li (including the Petition), the market could readily assume the worst about their abilities to meet their respective financial obligations.

30. Chuang thus decided quietly to approach high net worth individuals and their companies and sound out their interest in acquiring a controlling interest in Surge. Between October and December 2003 Chuang approached some 6 persons, including Mr Benny Kwong of Heritage International Holdings Limited, Dr. Lam of Qualipak and Mr Wilson Chung of China United Holdings Limited. In all cases Chuang received the same response. He could never reach the point of negotiating price. The moment that Chuang identified the shares which he was trying to sell as a majority block in Surge, the persons approached simply said that they were not interested.

31. On 5 December 2003 Chuang received a call from Mr George Hung Sui Kwan ("Hung"), a director of Get Nice. Hung told Chuang that Get Nice had a potential buyer, Mr Chan Chak Mo ("Chan") for the Shares. Chan was and remains a shareholder and director of Cash Smart. Cash Smart held and continues to hold an 11% interest in Surge.

32. On 12 December 2003 (Friday) Chuang met Chan who offered to buy the Shares for $10 million, the offer to lapse at 5.30 pm of the same day. According to Chan's evidence, Chuang tried to raise Chan's offer to around $13 million, but Chan was adamant. In Court Chuang described Chan's offer as having been made on a "take it or leave it" basis. The offer was backed by the tender of a cashier order for $10 million in the early afternoon of 12 December.

33. At this point Chuang thought that he should give Li a last chance to pay his debt to Chung Nam and so retain his interest in Surge. Chuang accordingly caused Chung Nam to fax the following letter ("the 12 December letter") to Super at 11.44 am on 12 December 2003:-

"We refer to our previous correspondence and in particular the letter issued by our solicitors dated 24 November 2003, to which you had not responded.

Please take notice that pursuant to Clause 7 of the Margin Client's Agreement dated 1 August 2003, we shall dispose all the shares held in your margin account to set-off part of the outstanding you owe to us. A willing purchaser has indicated to pay for the total sum of HK$10 million for all the aggregated of 300,150,000 shares of Surge Recreation Holdings Limited (stock no.703) and we shall dispose the same to it by close of business on 12 December 2003. Unless we shall receive your payment before 5 pm on 12 December 2003, we shall proceed with the sale."

The 12 December letter was signed by Wong.

34. In the meantime, Li had not been inactive. Li himself had been looking for a purchaser for the Shares. For example, in the course of cross-examination by Mr Huggins SC (appearing for Chung Nam) Li mentioned negotiations with an unidentified Singaporean. But Li accepted that he was unable to close a deal with that person.

35. Finally, however, Mr Li says that he found a financial backer in a Mainland businessman, Mr Fong Ting ("Fong") of the Guowei Group. Fong had previously provided financing to Li for the lease and purchase of equipment (such as mechanical rides) for the Theme Park. On 1 and 3 November 2003 a company within the Guowei Group entered into management and supplemental agreements respectively with the Group's Panyu Fantasy Film City Ltd. The hope was that Fong would use his good auspices with the Mainland authorities to obtain the licences required to operate a carnival at the Theme Park. Fong would also provide financing of RMB 30 million for the installation of 20 new rides at the Theme Park. Li had high hopes for this carnival project, which he believed would generate $80 million of turnover and $50 million gross profit.

36. On about 8 December 2003 Hung asked Chan whether he would be interested in purchasing Li's controlling interest in Surge. Upon Chan's positive indication, Hung arranged a meeting between Chan and Li at the offices of Messrs Iu, Lai & Li ("ILL") (Chan's solicitors).

37. In his evidence in chief Li alleged that at the 8 December meeting Chan offered to pay $20 million for the Shares. But, upon cross-examination, Li stated that price was never discussed at the meeting. Upon further questioning by Mr Huggins, Li said that Cham had asked Li for authority to put a price of $20 million to Chan. Later Cham (Li alleges) privately told Li that a deal had been done at $20 million. However, somewhat confusingly, Li also told the Court that nothing was actually concluded on 8 December and all that happened was that Chan's lawyers handed Li a draft agreement which did not stipulate a price. Another meeting was scheduled for 10 December.

38. Cham denies ever having proposed a $20 million price for the Shares to Li or having put such a price to Chan. It seems to me that Li's evidence of a $20 million offer emanating from Chan is tenuous. On Li's own version of events, Chan never directly told Li that Chan was prepared to buy the shares for $20 million. At best such information was only conveyed to Li by Cham, who denies ever having done so. On such material, I do not think that I can conclude that Chan made any offer to purchase the shares for $20 million. I find as a fact that no such offer was made by Chan. Chan's own evidence was that he had suggested a willingness to pay $13 million to Li for the Shares. I accept that evidence.

39. The 10 December 2003 meeting was cancelled. Li's solicitors, Messrs Kwok & Yih ("KY"), called ILL to say that Li was out of town and wanted more time to consider the draft agreement.

40. On 10 December 2003 Li was actually meeting Fong. On that day they reached an understanding whereby Fong would provide Li with the funds needed to redeem the shares on condition that there would not be any major change in the control or shareholding of Surge and the Shares, having been redeemed, would not be further encumbered. No written document was disclosed in discovery or produced to the Court evidencing the terms of Li's arrangement with Fong. I presume that this was because the matter was only concluded orally.

41. Chan was certain that Li would agree to sell the Shares to him. But on 11 December 2003 KY telephoned ILL to say that Li did not wish to proceed with the sale of the Shares to Chan. On the same day Li informed Hung that he had rejected Chan's offer to buy the Shares and had secured the financial assistance to redeem the same from Chung Nam. Having been rejected by Li, Chan then approached Chuang as mentioned above.

42. Li's reaction upon receiving the 12 December letter was one of "shock and surprise". There was not much time between the early afternoon (when Li first saw the 12 December letter) and the 5:00 p.m. deadline imposed. Li convened an urgent meeting of the Group's senior management. He also contacted Fong to say that money was urgently needed. Fong apparently asked how much money was required.

43. To find out precisely how much was needed to redeem the Shares, at around 4.30 pm Li called Wong's mobile phone. Wong had left early on 12 December 2003 and was no longer in the office when Li reached him. Li made a total of 3 calls to Wong between about 4.30 and 4.45 pm. Li taped all of his 3 conversations with Wong using the recorder function on his mobile phone.

44. In his first conversation with Wong, Li acknowledged receipt of the 12 December letter and said that he would bring the requisite cash at 12 pm on Monday. He asked for the outstanding sum. Wong said that he would call to let Li know how much money. Li replied (in English translation): "Good, good, good, give me the sum, you give me the sum, I will bring you the money before 12 pm on Monday. Is that good? Good, good, thank you, thank you, bye bye." The conversation ended. Li accepts that in this conversation Wong did not agree to postponing the 5.00 pm deadline to 12 pm on Monday.

45. Shortly thereafter Li called again. Wong then made it clear that the money had to be brought to Chung Nam in 20 minutes. Li pressed for the outstanding sum. Wong said that he would need to call Li again. Li ended (in English translation): "Need to ask again, again, okay, you let me know the sum, okay, thanks."

46. The 3rd conversation ran (in English translation):-

"Li:	Hello, hello.
Wong:	Hello Mr Li, Mr Li.
Li:	Yes, speak up.
Wong:	You should know what to do, a letter has been given to you, do according to the letter.
Li:	According to the letter, then can you calculate and give me the sum and then tell me?
Wong:	You, you, you calculate, you can check. You can calculate your side.
Li:	That is calculate from my side, but you, but you can calculate the sum accurately. You can calculate faster than me.
Wong:	I am in a car, I am driving so I don't have the hand.
Li:	Then that means you can't calculate the sum for me again. You can't calculate the sum for me again.
Wong:	Not that I can't calculate, I mean I am driving, I am now.
Li:	You are driving, can you ask him to calculate, it is more convenient for you to calculate.
Wong:	You can ask him. You call Cecil, Cecil Chan.
Li:	Ask whom?
Wong:	Cecil, 31980838.
Li:	Ai, ai, 3198.
Wong:	0838
Li:	0838, ask for whom?
Wong:	Last name Chan.
Li:	Last name Chan? Good, good, good, thanks, thanks."

47. Li says that he misheard Cecil Chan's name as "Szeto Chan". Thus, when he called the number given by Wong and asked for Szeto Chan, he found that there was no one by that name at the other end.

48. Li also caused a fax to be sent to Wong at Chung Nam's offices at 4.46 pm on 12 December 2003. The fax stated:-

"I refer to your letter dated today requesting me to settle the outstanding amount in my Margin Account, I would like to confirm I have prepared to settle the whole sum by tomorrow morning. Please kindly inform me the up-dated balance and delay the disposal of my 300,150,000 shares of Surge Recreation Holdings Limited (stock 703).

If you have any queries, please contact me at 852-98026109."

49. On the following day, 13 December 2003 (Saturday), Li faxed the following letter to Chung Nam:-

"We refer to your letter of 12 December 2003 requesting us making payment to redeem 300,150,000 shares (the 'Shares') of Surge Recreation Holdings Limited (the 'Company'). We also refer to our letter dated 12 December 2003 requesting you to provide us with details of outstanding indebtedness ('Outstanding Indebtedness') due from us to you. We also refer to the telephone conversations with your Mr Glenn Wong on 12 December 2003 under which we have requested him to provide us with detail of the Outstanding Indebtedness. We confirm that Mr Glenn Wong has failed to respond to us. We called Mr Glenn Wong on 13 December 2003 but Mr Glenn Wong still failed to respond to us. You allege that you have sent a solicitor letter dated 24 November 2003 and we confirm that we have not received such letter. As you know it is your responsibility to inform us details of the Outstanding Indebtedness.

We confirm that we have sufficient fund in place and upon receipt of details of Outstanding Indebtedness from you, we will issue a cashier order and deliver such cashier order to you immediately.

As you may aware the market price of the Shares is equivalent to approximately HK$30 million and your prospective buyer fails to pay the relevant market price (as such buyer is only willing to pay HK$10 million). Under common law you owe a duty of care to us and we reserve our legal rights to take further action in the event that you sell the Shares substantially below market price and without our prior written consent.

We request you to provide us with details of the Outstanding Indebtedness at 9.30 pm on Monday, 15 December 2003 and we will immediately deliver the cashier order to you."

Li also personally delivered the letter to Chung Nam's offices. However, when he got there, no one was in and he slipped the letter through a gap under the office door.

50. On 15 December 2003 (Monday) at about 9.20 am Li obtained a cashier order payable to Chung Nam in the amount of $12.9 million from DBS Bank (Hong Kong) Limited. He then went with his lawyer, the cashier order and $800,000 in cash to Chung Nam. He was met by Chuang who informed Li that the Shares had already been sold for $10 million.

51. On 12 December 2003 Chuang had waited at Chung Nam's offices for any tender of redemption monies by Li. He had been told by Wong at around 5.00 p.m. of Li's intention to redeem. But Li did not try to get in touch with Chuang. Having received no word from Li by the deadline, Chuang left Chung Nam's office. Chuang did not in fact inform Chan that the $10 million offer had been accepted until about noon on the following day (Saturday). Over the Friday night, Chuang says that he thought about the matter "long and hard". He did not go to Chung Nam's office on the Saturday morning but simply contacted Chan about his decision.

52. When Super initiated this action on 17 December 2003 it sued both Chung Nam and Puregain Assets Limited ("Puregain"). Puregain is the corporate vehicle through which Chan purchased the Shares. At the time Super sought the following reliefs:-

(1) a Declaration that the sale of the Shares to Puregain was void and Super remained entitled to redeem the same by settling its indebtedness to Chung Nam;

(2) an Injunction to restrain Puregain from causing itself to be registered as the owner of the Shares; and,

(3) damages.

53. By an Order made at the end of a hearing on 18 February 2004 I struck out Super's prayers for the avoidance of the sale to Puregain as frivolous, vexatious and an abuse of process. In ordering the strike out I was particularly concerned by the fact that, on the admission of Super's legal representatives, regardless of whether Super had access to funds to redeem the Shares on 15 December 2004, there was no certain possibility of Super being able to tender the more than $13 million due on Chung Nam's loan on 18 February 2004 or thereafter and pay such amount into Court pending trial.

54. Following the strike out, on 5 March 2004 Super discontinued its action against Puregain. That left a claim on Super's part for damages in connection with Chung Nam's alleged wrongful sale of the Shares. Essentially, Super contends that Chung Nam wrongly disposed of the Shares to Puregain for a sum which was significantly below the market value of the Shares.

55. According to Super, Chung Nam ought to have sold the Shares for at least $30 million, that is, 300,150,000 shares times $0.10, the approximate price at which Surge shares were being sold on the HKSE board prior to suspension of trading on 13 December 2003. Super adds that, in all likelihood, the Shares should have sold for far more than $30 million since they represented a controlling interest in Surge.

56. Alternatively, Super says that the Shares should have been sold for $20 million, the price which (Li alleges) Chan offered to pay for the Shares on 8 December 2003. This last contention can be disposed of quickly. Given my finding that Chan never offered $20 million, Super's case based on the making of such offer must be rejected.

57. Super's bottom line is that Chung Nam should not have sold the Shares at all to Chan for $10 million, but should have accepted Li's tender to redeem by a combination of cashier order and cash made on 15 December 2003. Had Li's offer to redeem then been accepted, Li would at least have retained his beneficial ownership of the Shares and could, with Fong's financial assistance, have reversed Surge's flagging fortunes. Now, as a result of the wrongful disposition of the shares for a mere $10 million, Li complains that he has lost the Shares and still stands as debtor to Chung Nam for the balance of more than $3 million remaining on the loan. Super points to the fact that by a Writ dated 15 December 2003 in HCA No.4549 of 2003 Chung Nam is suing Super and Li for $3,619,796.46 said to be due from Super on the Agreement and from Li as guarantor. The outcome ensuing from the sale to Puregain (Mr Yip submits) is grossly unfair on Super.

II. Discussion

58. There is no dispute among the parties that Chung Nam was an equitable mortgagee of the Shares as a result of their deposit with Chung Nam under the Agreement by way of security for the $13 million loan. Neither are the duties of an equitable mortgagee in relation to the sale or other disposal of mortgaged security in controversy.

59. The operative legal principles were first most clearly articulated in the famous case of Cuckmere Brick Co. v. Mutual Finance Ltd. [1971] 1 Ch 949 (CA). There Salmon LJ stated the following:-

"(at 965G-966A)

"It is well settled that a mortgagee is not a trustee of the power of sale for the mortgagor. Once the power has accrued, the mortgagee is entitled to exercise it for his own purposes whenever he chooses to do so. It matters not that the moment may be unpropitious and that by waiting a higher price could be obtained. He has the right to realise his security by turning it into money when he likes. Nor, in my view, is there anything to prevent a mortgagee from accepting the best bid he can get at an auction, even though the auction is badly attended and the bidding exceptionally low. Providing none of those adverse factors is due to any fault of the mortgagee, he can do as he likes. If the mortgagee's interests, as he sees them, conflict with those of the mortgagor, the mortgagee can give preference to his own interests, which of course he could not do were he a trustee of the power of sale for the mortgagor."

(at 966D-F)

"The proposition that the mortgagee owes both duties [namely, the duty not to cheat the mortgagor but to act in good faith towards him and the duty to take reasonable care to obtain whatever is the true market value of the mortgaged property at the moment when the mortgagee chooses to sell it] represents the true view of the law. Approaching the matter first of all on principle, it is to be observed that if the sale yields a surplus over the amount owed under the mortgage, the mortgagee holds this surplus in trust for the mortgagor. If the sale shows a deficiency, the mortgagor has to make it good out of his own pocket. The mortgagor is vitally affected by the result of the sale but its preparation and conduct is left entirely in the hands of the mortgagee. The proximity between them could scarcely be closer. Surely they are 'neighbours.' Given that the power of sale is for the benefit of the mortgagee and that he is entitled to choose the moment to sell which suits him, it would be strange indeed if he were under no legal obligation to take reasonable care to obtain what I call the true market value at the date of the sale. Some of the textbooks refer to the 'proper price,' others to the 'best price.' Vaisey J in Reliance Permanent Building Society v. Harwood-Stamper [1944] Ch 362, 364, 365, seems to have attached great importance to the difference between these tow descriptions of 'price.' My difficulty is that I cannot see any real difference between them. 'Proper price' is perhaps a little nebulous, and 'the best price' may suggest an exceptionally high price. That is why I prefer to call it 'the market value.'"

(at 968H-969A)

"I accordingly conclude, both on principle and authority, that a mortgagee in exercising his power of sale does owe a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it. No doubt in deciding whether he has fallen short of that duty the facts must be looked at broadly, and he will not be adjudged to be in default unless he is plainly on the wrong side of the line."

60. The following comment in Cousins, The Law of Mortgages (2nd ed.), §16-70 (at p.295) on Cuckmere is also helpful:-

"However, a number of points remain for consideration [in consequence of the decision in Cuckmere]. First, now that the law has been clarified in that any mortgagee is required to act not only in good faith but also with reasonable care, how far does this duty extend? Having regard to the earlier cases, it appears that the mortgagee is under no duty to advertise the security, nor is he bound to sell it by auction. Further, a mortgagee is under no duty to delay the sale in order to obtain a better price. Again, the mere fact that a mortgagee in exercising his power of sale omits a material point of which he is ignorant (for example, planning permission) does not of itself justify a finding of negligence. Also the mortgagee is not required to put the property into good repair. The answer is that the mortgagee is entitled to proceed to a forced sale to realise his security irrespective of his motive for selling. Provided that he acts bon a fide and takes reasonable care to ensure that the price is the best reasonably obtainable in the circumstances, then such actions are justifiable. Once he elects to act, however, in a given way by, for example, carrying on business he must take all steps that are reasonably necessary to do so profitably."

61. How do the principles just summarised affect the rights and obligations of the parties in this action?

62. On the authorities, the decision to sell the Shares on 12 and 13 December 2003 (when Chan put forward his cashier order for $10 million) as opposed to 15 December 2003 (when Li showed up at Chung Nam's offices with funds to redeem the Shares) was one that Chung Nam was entitled to make. I do not see how Li's conversation with Wong at around 4.30 pm on 12 December 2003 alters Chung Nam's right to choose when to sell the Shares.

63. In the course of his 3 conversations with Wong, Li did not say that he would be redeeming the Shares by close of business on 12 December 2003. Instead, Li was seeking postponement of the 12 December 5.00 pm deadline to 15 December 12.00 pm. It is true that Li's fax dated 12 December 2003 addressed to Wong at Chung Nam's office stated that Li was prepared to redeem the Shares on the morning of the following day. But if Li had intended the fax to have any effect why did he address the fax to Wong, whom Li knew (as Li had just spoken with Wong over the telephone) was no longer in Chung Nam's office? When did Li expect Wong to see the fax and stave off the sale of the Shares? The following day, 13 December, was a Saturday. It was likely that Wong would not even go to the office on that day.

64. In any event, at around 5.00 pm on 12 December Chuang had learned from Wong of Li's intention to redeem. That by itself would not have prevented Chung Nam from exercising its right under cl.7 of the Agreement to sell the Shares on the basis of Super's default in repayment. The law on this is equally clear. It is only actual tender of the monies due to Chung Nam which would have entitled Super to an injunction restraining any intended sale of the Shares to Puregain. See Waring (Lord) v. London and Manchester Assurance Co. [1935] 1 Ch 310 (Crossman J), at 317; Duke and others v. Robson and others [1973] 1 All ER 481 (CA), at 487g-h (Russell LJ). There never was any actual tender by Li of monies due from him until 15 December 2003.

65. Given that after Li's default in October 2003 Chung Nam had been chasing him for payment and Li had failed to pay despite repeated requests, it would be unreasonable to have expected Chung Nam to put its proposed sale to Puregain on hold on Li's mere assertion by telephone or fax that he was intending to pay shortly. Li had over several months been saying that he was going to pay, but nothing had happened. Without the tender of cash, Chung Nam was entitled to regard Li's intimation of redemption as nothing more than a replay of the empty promises of the past.

66. However, Mr Yip submits that Li could not make any proper tender because he did know the precise figure outstanding on the loan on 12 December 2003. It is true that one might be able to arrive at a rough figure of the amount due by applying an interest rate of prime plus 10% over a relevant period to the balance (say) showing on the most recent Statement of Account in Li's possession. Nonetheless, what would happen (Mr Yip asks rhetorically) if Li miscalculated and showed up with something less than the actual amount due? All his effort would have gone to waste and the Shares would have been sold to Puregain. Why could not Chung Nam have taken the few seconds required to press some buttons on its computer to generate the updated balance for Li's information? Following his conversation with Li at around 4.30 pm on 12 December 2003, Wong (Mr Yip argues) could readily have instructed Cecil Chan by telephone to give Li the requisite number. Without the updated balance (Mr Yip concludes) Li was not in a position to make any appropriate tender.

67. I do not think that there is substance in Mr Yip's argument. By the 12 December letter, Li would have known that the proposed sale price for the Shares was $10 million. On his own admission, Li is an experienced businessman. On the other hand, Chuang (as he repeatedly stressed in the witness box) is no fool. It would have been self-evident that if after seeing the 12 December letter, Li had immediately gone to Chung Nam's office and tendered the principal amount of $13 million in cash or by cashier order, Chung Nam would have rejected Chan's offer of $10 million. Chung Nam would have no reason to turn down a tender of $13 million for the significantly lower "take it or leave it" offer of $10 million. It does not follow logically from a premise that Li did not know exactly how much was due and owing that Li was prevented from making a reasonable tender to forestall the sale of his Shares. Li's ignorance of the amount due does not without more found a valid claim against Chung Nam.

68. Super pleads that Chung Nam was under a duty to provide upon request statements of the amount due on the $13 million loan. In support of such duty, Super refers to the Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules (Cap.571 sub leg.) ("SFR") rr.8(3)(c) and 12(1)(b). The former rule imposes an obligation on an intermediary to provide a statement of account within 2 business days of a disposal of collateral provided by a client. The latter rule imposes an obligation on an intermediary to provide a statement of account "as soon as practicable after the date of request".

69. Neither rule advances Super's argument. SFR r.8(3)(b), if relevant, would only have effect after disposal of the Shares. The provision of information after the sale of the Shares would obviously not have allowed for redemption by Li prior to the disposal. SFR r.12(1)(b) requires a statement to be provided as soon as possible after a request. It would be unrealistic to expect Chung Nam to furnish such statement forthwith upon a request made late on Friday afternoon, at the end of the week, just as staff were leaving the office. In any case, as I have already explained, I do not see how the provision or non-provision of a statement has any bearing on Li's ability to make a meaningful tender.

70. To my mind, once the claim against Puregain was discontinued, the only substantial question remaining in this case was whether Chung Nam had taken all reasonable care to ensure that $10 million was the "true market value" of the Shares on 12 or 13 December 2003. On the first day of trial I invited Ms. Yu (then appearing on her own for Super) to specify precisely how, according to Super, Chung Nam had failed to act reasonably in disposing of the Shares to Puregain. Ms. Yu alleged the following defaults:-

(1) Chung Nam delayed in informing Li of the precise amount outstanding on the $13 million loan;

(2) Chung Nam did not accept Li's tender on 15 December 2003; and,

(3) prior to the sale of the Shares to Puregain, Chung Nam only informally inquired of only a few people whether they were interested in selling the shares and "did not really go through any evaluation or auction".

71. I have already dealt with Ms. Yu's first criticism. The second criticism can also be dismissed. By 15 December 2003 the Shares had been sold. The fact that Li belatedly tendered payment on that day cannot mean that Chung Nam was at fault for selling the Shares as of 13 December 2003.

72. That leaves Ms. Yu's third criticism. But I believe that is also unfounded. I do not see what else Chung Nam could reasonably have done to obtain a better price for the shares.

73. There was no realistic possibility of trading 300,150,000 shares on the HKSE board. The sale of so many shares on the HKSE board would have caused Surge's price to collapse with a consequent suspension of trading. Chung Nam would then not have been able to dispose of the Shares at all, even by private treaty, without contravening the Rules of the Exchange.

74. There was also a real risk of suspension if Chuang had sought to dispose of the Shares more publicly (say, through auction) instead of by quietly approaching potential buyers. If word had spread that the majority shareholder's interest in Surge was up for sale, it is not difficult to imagine the massive adverse impact on Surge's share price which would likely take place.

75. It is true that Chung Nam did not conduct any valuation of the Shares beyond a study of information obtained from Bloomberg's database. But in the unique circumstances of this case, where Chuang was having difficulty finding any buyer interest but was aware of substantial litigation troubling Surge, it is hard to see how any expert valuation of the Shares would have been anything more than theoretical. As far as Chuang's survey of potential buyers could ascertain, there were simply no willing purchasers for the Shares. It is worth noting that, despite his best efforts, Li himself encountered great difficulty in finding a buyer. For example, he could not close a deal with his unidentified Singaporean. Nor did Li identify any possible purchasers of the Shares to Chung Nam prior to the sale of the Shares on 12 and 13 December 2003. On the evidence before me, Chung Nam was unaware at the time of the sale to Chan that Fong had agreed to back Li.

76. Ms Yu referred to Surge's net asset value as revealed in its Annual Report for 2002. She submitted that the sale price of $10 million was a substantial discount over that value. But I do not think that the evidence supports her. Whatever the net asset value at the end of financial year 2002, the key question is how Surge and its prospects were viewed by the business community in late 2003. Surge's financial standing had undoubtedly deteriorated since 2002, reflecting the cumulative impact of SARS, various writs, a winding-up petition, and the possible repossession of the land on which the Theme Park was situate. In such a situation, it would be unreasonable in my judgment to expect Chung Nam to refuse a certain offer for $10 million and hold out for more.

77. Li suggested in Court that the Shares should have attracted a premium since they constituted a controlling block. But again the evidence, in particular the difficulty both Chung Nam and Li experienced in finding a buyer for the Shares, belies this. The stark fact is that in late 2003 no one apart from Chan appears to have wanted the Shares. If Chan's offer were rejected, as far as Chuang could see on 12 December 2003, there was every danger that Chung Nam would be left holding collateral of insignificant value relative to the outstanding debt.

78. For the foregoing reasons, I conclude that Chung Nam cannot be said to have acted in breach of its duties to Super as equitable mortgagee in selling the Shares to Puregain at $10 million. In my view Chung Nam acted reasonably.

79. I note that the situation in this case is similar to that in Routestone Ltd. v. Minories Finance Ltd. and another [1997] EGLR 123. What Jacob J said of the Plaintiff's argument in that case (at 126F-K) seems to apply with equal force here:-

"I do not think it necessary to go further into Mr Robinson's evidence -- it is simply of no value. But I should record that Mr Harper of the bank gave unchallenged evidence of a string of unfulfilled promises of Mr Shamji during 1984 and 1985. And Mr Homan (one of the receivers) gave unchallenged evidence about promises of 'white knights' during the first half of 1986. The attitude taken in the first receiver's report of February 28 1986 was that:-

'... the possibility of some sort of deal with Larco, Vado or other lingers in the background and cannot be totally dismissed, but it now seems more likely that Mr Shamji's current approaches are designed to create a smoke screen in relation to the bank's pursuit of its judgment debt against him.'

I think that was the only rational view to take, and nothing changed until well after the sale of SGE in September.

Accordingly I reject on the facts the claim based on a claim that the bank and the receiver knew that redemption was round the corner and ought not to have made the sales concerned. The whole plea amounts to no more than a claim that receivers and the bank should have paid heed to a series of vague Micawberesque promises.

Further, however the claim is simply bad in law. As Hoffmann J said in his judgment of March 24:

'The security documents give the receivers an unrestricted right to sell at any time. Until actual redemption or at least until a valid tender of the redemption price, these powers continue to exist. The fact that the plaintiffs claim that they will shortly be able to redeem cannot give a right in law to restrict the powers granted to the receivers.'

It cannot be wrong to exercise a power of sale which exists. Alleging that a decision to exercise a power is negligent in itself is tantamount to saying that the mortgagee or receiver is a trustee of the power of sale which he is admittedly not. No duty of care is owed by the mortgagee or receiver in relation to the actual decision to sell. Mr Crystal made it clear that in practice if a credible real offer of redemption had been made at any time then the sales must have been delayed. That would be a sensible thing to do but there would be no legal obligation so to do."

80. Finally, Mr Huggins submitted that, even if there had been a breach of equitable duty by Chung Nam, Super has failed to establish its pleaded damages of $30 million or, alternatively, $20 million. Therefore, no split trial having been ordered, in any event Super's claim should be dismissed for lack of evidence on quantum. I should state in response that, had I found that Chung Nam had acted unreasonably, I would not have hesitated to order that there be an inquiry and account of the amount (if any) for which Chung Nam ought to have sold the Shares.

81. When considering the rights or wrongs of a mortgagee's conduct, the Court exercises an equitable jurisdiction. If the Court finds any default on a mortgagee's part, the Court can always order the quintessentially equitable relief of an inquiry or account. Thus, I would not have regarded the failure to seek a split trial or show damages of $20 million as a bar to ordering an inquiry and account where justice and equity so require.

82. As authority for such an approach, I refer to Cuckmere. There, at the joint invitation of the parties, Plowman J assessed the true value of land at ￡65,000 (instead of the §44,000 at which it had been sold by the mortgagee). A majority of the Court of Appeal doubted whether it was right on the scant evidence before him for Plowman J to have assessed the value of the land as he did, even on the parties' invitation. In the premises, the majority felt that the fairest course would be to remit the case for an inquiry as to damages at which time the parties could adduce further evidence. See Cross LJ at 976H - 977B and Cairns LJ at 981D-F; Salmon LJ (at 969F) thought that Plowman J's assessment of value was "altogether unassailable".

III. Conclusion

83. Super's claim is dismissed. There will be an Order Nisi that Super is to pay Chung Nam's costs of this action, such costs to be taxed if not agreed.