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

cacv 117/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 117 of 2004

(on appeal from HCA NO. 4573 of 2003)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  I agree with the reasons for judgment of Le Pichon JA. 

Hon Le Pichon JA:

2.  This is an appeal from (1) the order made by Reyes J on 5 March 2004 refusing the plaintiff’s application to vacate the trial dates scheduled to commence 10 March 2004 (“the first appeal”) and (2) the order dated 26 March 2004 dismissing the plaintiff’s claim for damages against the 1^st defendant for disposing of shares held by it as equitable mortgagee at an undervalue (“the second appeal”).  At the conclusion of the hearing, the appeals were dismissed with written reasons to be handed down later which we now do.

Background

3.  The plaintiff, a BVI company wholly owned by a Mr Li, held 3,150,000 shares (the shares) representing 50.3% of the issued share capital of a Hong Kong listed company (“Surge”).  Surge belongs to a group of companies which operated a theme park in Panyu, Guangdong.  At all material times, Mr Li was the chairman and a director of the Group.  Up to the end of 2002, the Group was financially successful.  The year-end profit for 2002 exceeded $20 million.  The Group suffered a reversal of fortune with the SARS outbreak in 2003 in Hong Kong and the Mainland.  Its income fell dramatically in 2003 and for the first six months of 2003, the Group’s loss attributable to shareholders was $14.7 million. 

The Facts

4.  On 5 August 2003, the plaintiff obtained a loan of $13 million from the 1^st defendant on the security of an equitable mortgage of the shares.  The transaction was negotiated between Mr Li of the plaintiff and Mr Chuang of the 1^st defendant.

5.  Surge found itself in considerable financial difficulties in 2003: it faced various lawsuits, culminating in a winding up petition presented by one of its creditors in October 2003.  At about this time the theme park’s landlord obtained a judgment in the Mainland for repossession of the land upon which the theme park was situated.  Unpaid rent and interest totalled some RMB 50 million.  Mr Li himself and therefore the plaintiff was in no better position.  He was beset by legal claims both in Hong Kong and on the Mainland of over HK$50 million and RMB 4 million respectively.

6.  Not surprisingly, the plaintiff defaulted in its interest payments to the 1^st defendant as early as October 2003.  The 1^st defendant pressed for payment and threatened to liquidate the collateral.  It received no response from the plaintiff.  The judge found that disposal of the shares was not an easy matter.  First, there was little prospect of doing so through the Hong Kong Stock Exchange because trading of the shares had been thin and sporadic.  Second, unloading such a large block of shares could lead to a price collapse leading to a suspension in trading.  Third, if it became public knowledge that the 1^st defendant was attempting to sell a controlling interest in Surge, there might well have been adverse effects on Surge’s share price also resulting in a suspension of trading.  Against this background, Mr Chuang explored the possibility of selling the shares as a block by private treaty.  Between October and December 2003, Mr Chuang sounded out 6 high net worth individuals and their companies but could elicit no interest. 

The sale of the shares

7.  The circumstances in which the sale took place are detailed in paragraphs 32 to 51 of the judgment.  They may be summarized as follows.  On Friday, 12 December 2003, through the introduction of an intermediary, Mr Chuang met with a potential buyer, a Mr Chan who offered to buy the shares for $10 million.  This was backed by the tender of a cashier order for $10 million in the early afternoon of 12 December with the offer lapsing at 5:30 pm the same day.  Mr Chuang tried to raise Mr Chan’s offer to $13 million but his efforts were unsuccessful.

8.  In the late morning of 12 December, the 1^st defendant gave written notice to the plaintiff by fax of the offer to purchase the shares for $10 million and advised the plaintiff that the offer would be accepted unless the 1^st defendant received payment from the plaintiff by 5 pm the same day.

9.  Unbeknownst to Mr Chuang, Mr Chan had met with Mr Li on 8 December and had indicated a willingness to pay $13 million for the shares.  A further meeting between them scheduled for 10 December was cancelled.  Apparently Mr Li had, meanwhile, secured another backer.  It was in these circumstances that Mr Chan had made his offer to Mr Chuang.

10.  When Mr Li received the fax about the $10 million offer, he contacted his new backer to say that money was needed urgently.  He did not contact Mr Chuang; rather he contacted a Mr Wong of the 1^st defendant on his mobile, saying he would bring the requisite cash on Monday, 15 December by noon but wanted to know what the outstanding sum was.  Although there were 3 conversations between Mr Wong and Mr Li between 4.30 and 4.45 pm, the judge found that Mr Wong never agreed to postpone the deadline to noon on 15 December.  Mr Li also caused a fax to be sent demanding details of the outstanding sum and offering to pay the same upon provision of the details on the morning of the 15^th.  The letter was also hand delivered but no one was in the office.

11.  Although Mr Chuang had been told by Mr Wong at about 5pm on 12 December of Mr Li’s intention to redeem, when no word was received by the deadline, Mr Chuang left the 1^st defendant’s office.  The $10 million offer was accepted at about noon the next day.  So when Mr Li finally materialized in the morning of 15 December with the money, it was too late: the shares had been sold.

12.  The judge held that the 1^st defendant’s decision to sell the shares on 12/13 December rather than 15 December was one it was entitled to make.  Further, the 1^st defendant could not reasonably have been expected to put the proposed sale on hold purely on Mr Li’s assertion that he would pay on 15 December given the empty promises of the past.

The first appeal

13.  This relates to a matter of case management.  The plaintiff’s application had been made at the eleventh hour in the context of an order for a speedy trial made within a week of the commencement of the proceedings.  Mr Yip who appeared for the plaintiff submitted that the judge ought to have vacated the trial dates to enable the plaintiff to obtain expert evidence on share valuation and on the disposal of the shares.  It was said that by March 2004, the need for a speedy trial had evaporated because the relief sought against the 2^nd defendant for avoidance of the sale to it had been struck out and the speedy trial had been ordered at the 2^nd defendant’s request.  It was also said that had the trial dates been vacated, the plaintiff would have consulted Deloittes and would have obtained a report to the effect that the shares were worth $20 million.

14.  A number of features are worth noting.  First, the claim against the 2^nd defendant was struck out 3 weeks before the application for an adjournment.  No explanation was proffered for the delay in making the application.  Second, there was no evidence placed before the judge by way of a letter or statement from Deloittes to explain in outline the nature of the expert evidence it could provide which would have a bearing on the issue of liability.  Indeed, that remained the case even at the appeal hearing.  There was nothing to substantiate the plaintiff’s case other than bald assertions.  In the circumstances, the judge was entitled to take the view that all this was nothing but a ploy to delay the substantive hearing at a time when a substantial part of the costs would already have been incurred.  It is difficult to see how expert evidence could have assisted in achieving an actual sale given the ‘unique circumstances’ of this case.  In my view, the first appeal is devoid of merit.  

The second appeal

15.  The applicable legal principles are not in dispute.  As Salmon LJ explained in Cuckmere Brick Co. v Mutual Finance Ltd [1971] 1 Ch 949 at 966D, the mortgagee owes a duty “to act in good faith” and “to take reasonable care to obtain whatever is the true market value of the mortgaged property at the moment the mortgagee chooses to sell it”.

16.  It was suggested that the judge was at a disadvantage in not having had the benefit of expert evidence when assessing whether the 1^st defendant had taken reasonable steps to obtain the current market value of the shares.  Mr Yip referred to paragraph 38 of the judgment where the judge accepted the evidence that in his meeting with Mr Li on 8 December, Mr Chan had indicated a willingness to pay $13 million for the shares.  Mr Yip proceeded to speculate that had there been expert evidence, that would have shown that the shares were worth more than $10 million and Mr Chan might have increased his offer as a result.  As I understand it, what was being said was that because Mr Chan had given an indication of his willingness to pay more than $10 million, that meant that the shares were worth more than $10 million at the time of the sale and that therefore the sale was at an undervalue.  The absurdity of the submission and its lack of logic hardly require further comment.  As noted in paragraph 9 above, Mr Chuang was wholly unaware of the meeting on 8 December between Mr Li and Mr Chan and what had transpired between them or that Mr Li had secured a different backer.  Whether the steps taken by the 1^st defendant to obtain the current market value were reasonable has to be viewed objectively.

17.  As noted in paragraph 6 above, certain options for the disposal of the shares were simply not open to the 1^st defendant.  At paragraph 75 of the judgment, the judge set out the reasons why he did not see what else the 1^st defendant could reasonably have done to obtain a better price:

“75.  It is true that [the 1^st defendant] 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 [the 1^st defendant] prior to the sale of the Shares on 12 and 13 December 2003.  On the evidence before me, [the 1^st defendant] was unaware at the time of the sale to Chan that Fong had agreed to back Li.”

18.  That reasoning is unimpeachable.  I agree with the judge that the 1^st defendant had done all could reasonably have been expected to do to obtain the best price for the shares.  In my view, the second appeal is equally devoid of merit.

Hon A Cheung J:

19.  I agree.