SWALLOW KINGDOM HOLDINGS LTD v. LO KOK SHING LEO AND OTHERS

HCA 2260/2016

[2020] HKCFI 2396

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2260 OF 2016

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J U D G M E N T

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1.  This case concerns the acquisition of a Hong Kong company by the plaintiff (“P”) from the defendants (“D1”, “D2”, “D3” and “D4”, collectively “Ds”). Several disputes stemmed from the acquisition, and these disputes have to be resolved by this court eventually.

BACKGROUND

2.  I would first set out the background facts which are either agreed or indisputable.

3.  P is a company incorporated under the laws of British Virgin Islands having registered in Hong Kong as a registered non-Hong Kong company.  Mr Wong Tang Yiu (“Wong”) is P’s director.

4.  Legendtoonland Limited (傳奇動畫科技有限公司) is a company incorporated in Hong Kong (“Legend HK”) and it has a wholly-owned subsidiary, namely珠海傳奇動畫科技有限公司 (Legendtoonland Limited (Zhuhai)) (“Legend ZH”) which is a company incorporated in Zhuhai, China.  At the material time, Legend ZH was the sole legal and beneficial owner of a piece of land at廣東省珠海市斗門區黃楊大道1901號， Zhuhai (“the Land”).

5.  D1 to D4 were shareholders and directors of Legend HK holding 24%, 24%, 26.28%, and 11.42% shareholding thereof respectively in December 2013.  The remaining 14.3% shareholding of Legend HK was and is held by China Hoto (HK) Capital Co Ltd (“China Hoto”).

6.  On 16 & 17 December 2013, P met with D1&D2 for discussions in Hong Kong and Zhuhai.

7.  On 18 December 2013, P and Ds executed an agreement for sale and purchase (“the SPA”), by which the parties agreed that P would acquire Ds’ shares in Legend HK in accordance with the terms set out in the SPA.  The material terms of the 1^st SPA are as follows:

“敘文：

(A) 賣方擁有傳奇動畫科技有限公司(“該公司”) 85.7%的股權，該公司是一間於香港成立的有限公司，商業登記證編號：……，其註冊辦事處地址位於 ……. 該公司擁有珠海傳奇動畫科技有限公司(“珠海傳奇”) 100%的股權，“珠海傳奇”持有土地及廠房，宿舍以及其地設施和生財工具(詳見附件一)。

(B) 賣方同意按本協議所列的條款及條件出售而買方同意按本協議所列的條款及條件購買賣方於該公司的85.7%股份。(“出售股權”)

1. 股權的出售

1.1 在本協議的條款的規定下，賣方同意以法定以及實益擁有人的身分出售而買方同意購買出售的股權，而有關出售股權並無任何留置權、押記及產權負擔或任何債務。

1.2 賣方特此放棄並同意促使他人放棄可能就出售股權而存在(不論是根據該公司的章程或按照其他規定)的對轉讓的任何限制(包括優先購買權利)。

2. 代價

2.1 在賣方完全按照本協議所列載的條款及條文的前提下，買方同意向賣方支付出售股權的代價合共為人民幣2,300萬元(以100%股權為計算)；會先減除一切債務或責任後的餘額。

2.2 受制於本協議第2.3及第3條的條件下，買方同意按照以下方式向賣方支付出售股權代價：

(1) 在簽署本協議時，買方先向賣方支付港幣25萬作為訂金；

(2) 買方需要2014年2月28日，向賣方支付餘下之代價。

2.3 如買方發現出售股權有任何留置權、押記及產權負擔或任何債務，或任何隱形責任，則買方有權從代價中扣除。

3. 先決條件

3.1 買賣雙方同意進行買賣出售股權是以賣方完全或促使以下先決條件於2013年12月18日(“成交日”)或雙方同意的其他日期達成為先決條件：

(a) 賣方需確保於本協議以及賣方所提交的資產負債表(附件二)，應收(附件三)，應付(附件四)的契諾及承諾直至成交日的任何時間，在各方面上均保持真實及準確而無誤導性；

(b) 在簽署本協議的70天內，買方向賣方發出就本協議下的交易進行的盡職調查的書面滿意通知；

(c) 出售股權及公司財產(“公司財產”)為賣方實益合法擁有，除負債表之外並無任何留置權、押記及產權負擔或其他債務；

(d) 賣方需向買方提供一份聲明保証書(附件五)。

(e) 賣方需確保並提供一切協助，促使出售的股權的所有人變更至買方或其指定人仕。

……

6. 保證

6.1 賣方需要向買方陳述、保證及承諾本協議所列的每項聲明現時是並且於成交日仍然是真實而且準確。

6.2 賣方出售股權及公司資產並無任何留置權

、押記及產權負擔或其他債務。

6.3 在簽訂本協議之前，賣方沒有與任何第三方簽訂任何有約束性的有關該公司或其附屬公司之股權轉讓，分配或合作協議。

……

6.6 如成交後買方發現賣方出售之股權及公司資產有任何留置權、押記、產權負擔或其他債務，賣方將一律承擔，而買方亦有權向賣方追討所有有關之損失及補償。

……”

8.  Subsequently, P and Ds executed a supplemental agreement (“the Supplemental Agreement”) dated 24 December 2013.  The terms of the Supplemental Agreement are as follows:

 “就於2013年12月18日簽署的傳奇動畫科技有限公司股權交易協議(以下簡稱“原協議”)。鑒於有需要進一步清楚、明確雙方的責任，雙方在原協議基礎上補充部分條款內容，特訂立並雙方同意簽署以下協議。

原協議的內容作以下補充：

1.  股權的出售

本次成交額人民幣2300萬的交易是以100%股權轉到買方名下才算完成，其中的85.7%於2013年12月18日已簽署；餘下14.3%股權，等待盧國成先生於合理的時間內從CHINA HOTO (H.K.) CAPITAL CO., LTD 購入後才轉給買方。

2.  代價

引述2.3條款的原文：

如買方發現出售股權有任何留置權、押記及產權負擔或任何債務，或任何隱形責任，則買方有權從代價中扣除。

2.3條款的補充：

任何留置權、押記及產權負擔或任何債務，或任何隱形責任指：-

包括但不限於：

1)  人民幣2300萬屬於業主應繳納的土地增值稅或物業交易稅或所得稅或任何稅款。

2)  員工索償或員工將會被解聘的遣送責任、或任何賠償的責任或費用。

3)  任何政府、任何組織或任何機構的賠償或罰款或任何責任或債務。

以上的任何稅款，債務，賠償或責任，無論該責任是過去，現在或將來的，都會在本次交易中扣除，對帳採用多除少補的方法；對帳完結後，餘額於盡職審核之後結算。

3.  對帳表

由於出售的公司有其他應收、應付賬，因此，對賬表將會成為本次交易的惟一結算憑證，雙方簽字確認。

交易成交價人民幣23,000,000加其他應收賬合共資產為人民幣24,317,972.79。負債為人民幣24,623,700.39，差額為人民幣305,727.60。買方以港幣一元承購各方股權，並承擔對賬表上人民幣24,623,700.39的債務。

本補充協議生效後，即成為原協議不可分割的組成部分，與原協議具有同等的法律效力。除本補充協議中明確所作修改的條款之外，原協議的其餘部份應完全繼續有效。”

9.  D1&D2 resigned as directors of Legend HK on 27 December 2013, whereas D3&D4 resigned as directors of Legend HK on 18 December 2013.  By instruments of transfer executed by Ds, all the shares of Legend HK held by them were transferred to P on 24 December 2013.

10.  On 26 November 2014, a declaration and undertaking agreement (“the Undertaking Agreement”) was executed between P on the one hand and D1&D2 on the other hand.  The terms of the Undertaking Agreement are as follows:

“根據一份於2013/12/18日簽署的股權買賣協議附件二的資產負債表

以及根據一份於2013/12/24日簽署的補充協議書第三條的對賬表中的條款。

買賣雙方共同聲明以及承諾：

1)  交通銀行的人民幣15,000,000元貸款是買方的責任，由買方負責清還欠款。

2)  珠海李察投資有限公司的股權訴訟、土地買賣訴訟是賣方的責任，由賣方負責清還欠款。

3)  截至2014/11/26日止，賣方應負責的應收賬$1,270,361.61元。

如果，因為各方未能按時還債，產生訴訟或被追討，由違約方負完全責任，包括但不限於訴訟費、律師費、賠償金或任何費用。”

11.  After the execution of the SPA and the Supplemental Agreement in December 2013 and until at least the signing of the Undertaking Agreement in November 2014, Wong and D1&D2 were on good terms and they were having some other business joint ventures.

12.  The disputes in these proceedings are related to the aforesaid agreements and the discussions leading to the agreements.

P’s CASE

13.  On or about 16 December, Ms Loretta Yeung (“Yeung”) of Synthesis Financial Partners Limited (“Synthesis”) introduced D1&D2 to Wong in a meeting (“the 1^st Meeting”) held at P’s office in Lippo Centre, Hong Kong (“P’s Office”).

14.  P claims that at all material times, D1&D2 represented that they were authorized by D3&D4 to discuss and negotiate with P any matters regarding Legend HK and Legend ZH including but not limited to settling the two companies’ debts and liabilities, any sale and purchase of the shares of the two companies, any potential financial investment and any business opportunities.

15.  At the 1^st Meeting, D1&D2 on behalf of themselves and also on behalf of D3&D4 expressed to Wong that Legend HK and Legend ZH were in critical financial difficulties and hence Ds were seeking for financial assistance from P.  D1&D2 told Wong that Legend HK and Legend ZH were heavily in debt to, amongst other debtors, the Bank of East Asia (“BEA”) and the Bank of Communications (“BC”), and Legend HK and Legend ZH had been unable to pay their employees’ salaries for a few months.  D1&D2 had given personal guarantees to guarantee the debts owed by Legend HK and Legend ZH to the banks.

16.  During the 1^st Meeting, D1 and D2 (on behalf of all Ds) expressly represented to Wong that:

(1)  Legend ZH was a wholly-owned subsidiary of Legend HK (“the 1^st Representation”); and

(2)  Legend ZH owned, inter alia, the Land (“the 2^nd Representation”), hardware equipment and professional computer software for film and animation production, and intellectual property including copy right of two completed aminations.

17.  On 17 December 2013, another meeting between P and D1&D2 (on behalf of all Ds) was held at P’s Office for further discussion and negotiation (“the 2^nd Meeting”).  Eventually, the parties reached a consensus in the 2^nd Meeting:

(1)  85.7% shareholding of Legend HK owned by Ds (“the Shares”) would be transferred to the P.  D1 (on behalf of all Ds) would, within a reasonable time, buy-back the remaining 14.3% shareholding of Legend HK from China Hoto and transfer the same to P.

(2)  P agreed to acquire 100% shareholdings of Legend HK at a consideration of RMB 23 million.  P would pay off the debts owed by Legend HK and Legend ZH to BEA, BC and other debtors.  All such debts should be deducted from the RMB 23 million.

(3)  P would be entitled to all the outstanding receivables of Legend HK and Legend ZH, ie money owed by other entities to Legend HK and Legend ZH (“the Receivables”) after the sale and purchase of the Shares.

(4)  D1&D2 (on behalf of all Ds) agreed that they would collect the Receivables and pass the same to P after the sale and purchase of the Shares, and if they failed to do so, they would compensate P the full sum thereof or any outstanding sum thereof.

(5)  P, D1 and D2 would form a new joint-venture company to carry on the business of film and animation production of Legend HK and Legend ZH, which would cease operation after P acquiring the Shares.

(6)  The Land would be sold by P at a convenient time after P acquiring Legend HK and Legend ZH.

18.  On 17 December 2013, after the 2^nd Meeting, Wong followed D1&D2 to Zhuhai to inspect the Land.

19.  On 18 December 2013, P and Ds signed the SPA.  According to P, the SPA contains attachments 1 to 4, and copies of these attachments can be found in the trial bundles[1].

20.  P claims that the SPA contains the following implied terms:

(1)  Throughout the course of the sale and purchase of Shares, Ds shall provide any outstanding and/or updated balance sheets of Legend HK and Legend ZH, account receivable records thereof, and account payable records thereof which are true, accurate and unambiguous; and (“Implied Term A”).

(2)  Further, Ds shall warrant that there shall not be any liens, charges, encumbrances, and any other debts attached to the Shares and the companies except for those debts and liabilities shown in balance sheets (“Implied Term B”).

21.  On 18 December 2013, upon the request of D1&D2 (on behalf of all Ds), P transferred a sum of RMB 250,000 to Legend ZH (who received for and on behalf of the Ds) in compliance with clause 2.2(1) of the SPA.

22.  The consideration from P as provided in the SPA is for the acquisition of 100% shareholding of Legend HK, not only 85.7%.

23.  The parties agreed that outstanding and updated accounting documents including but not limited to balance sheets of Legend HK and Legend ZH, account receivable records thereof, and account payable records thereof, would be given by the D1&D2 (on behalf of all Ds) after the signing of the SPA.

24.  On or about 24 December 2013, after receiving all outstanding and updated accounting documents of Legend HK and Legend ZH from Ds, P on the one hand and the D1&D2 (on behalf of all Ds) on the other hand verified the accounts of Legend HK and Legend ZH (“the Verification Exercise”) so as to determine the actual amount to be paid by P after taking into account all the liabilities which P had to settle after acquiring the Shares.  The final account of Legend HK and Legend ZH was then reduced into writing and recorded in a statement of account (對帳表) (“the Statement of Account”)[2].  D1&D2 have signed the Statement of Account

25.  At the end of the Verification Exercise, D1&D2 (on behalf of all Ds) produced two payables tables (“the Final Payable Tables”)[3] and two receivables tables (“the Final Receivables Tables”)[4] to Wong.  D1&D2 have signed these tables.  D1&D2 told Wong that apart from the sums set out in the Final Payables Tables, there was no other debt payable by Legend HK and Legend ZH (“the 3^rd Representation”).

26.  On 24 December 2013, after having the Statement of Account, P and Ds signed the Supplemental Agreement.

27.  During the Verification Exercise, Wong on behalf of P and D1&D2 on behalf of Ds orally agreed that all the other debts not recorded in the Statement of Account should be borne by Ds, and Ds undertook to pay off the same (“1^st Oral Agreement”).  P claims that further or alternatively, there is an implied term in the Supplemental Agreement that all the other debts not recorded in the Statement of Account should be settled by Ds (“Implied Term C”).

28.  In the course of the Verification Exercise, the parties orally agreed that (“the 2^nd Oral Agreement”):

(1)  the total sum of the Receivables was taken into account in determining the value of Legend HK and Legend ZH; and

(2)  D1&D2 (on behalf of all Ds) should collect all the Receivables as stated in the Statement of Account, and if they failed to do so, they should compensate P the full sum thereof and/or any outstanding sum thereof.

29.  On or about 24 December 2013, the Shares were transferred to P.  Since then, P has been the majority shareholder of Legend HK.

30.  Pursuant to the 2^nd Oral Agreement and to give effect the 2^nd Oral Agreement, Ds were authorized by P (for and on behalf of Legend HK and Legend ZH) to hold themselves out as agents and/or representatives of Legend HK and Legend ZH to collect the Receivables.  Between December 2013 and November 2014, D1&D2 (on behalf of all Ds) had collected part of the Receivables.  However, as of November 2014, there were still outstanding receivables which had not yet been collected by the Ds.

31.  The 2^nd Oral Agreement was reduced into writing and recorded in the Undertaking Agreement in November 2014.

32.  P claims that it has discharged all its obligations under the agreements with Ds.  However, Ds have not performed all their obligations under the agreements, including the liability to personally pay all the uncollected Receivables to P.

33.  P also claims that Ds should compensate the losses suffered by P as a result of two sets of legal proceedings in the Mainland (“RI Litigation”) relating to a Zhuhai Richards Investment Limited (珠海市李察投資有限公司) (“RI”).

(1)  In the course of the Verification Exercise, D1&D2 (on behalf of all Ds) represented to Wong that a debt of RMB 2 million due to RI was a loan owed by Ds and repayable by Ds personally, and the sum was not a liability of Legend HK and/or Legend ZH (“the 4^th Representation”). Accordingly, Wong and D1&D2 agreed that the said RMB 2 million should not be included in the Statement of Account.

(2)  In a meeting held on 15 January 2014, D1 (on behalf of all Ds) revealed that the debt due to RI was RMB 2 million with interest of RMB 500,000, and he was required by RI to repay the same.  The debt was a loan advanced by a Mr Tang of RI (“Tang”) to D1.  It was agreed that, had Tang successfully introduced a new investor to acquire 30% shareholding of Legend ZH, the RMB 2 million would have been treated as the purchase price of the 30% shareholding.  However, if no new investor was found, the RMB 2 million would be treated as a loan and D1 would have to repay the same with interest personally.  Wong reiterated to D1 that the debt should not be P’s responsibility.

(3)  On or about 24 February 2014, P discovered that 30% shareholding of Legend ZH had already been sold by Legend HK to RI at a consideration of RMB 2 million pursuant to an agreement on or about 5 September 2012.  The said agreement was executed by Legend HK pursuant to a board resolution of Legend HK dated 31 August 2012.  Further, the Land owned by Legend ZH had been sold by Legend ZH to RI at a consideration of RMB 2.5 million pursuant to an agreement on or about 20 August 2013.  All the relevant documents were signed and executed pursuant to relevant board resolutions of Legend HK and/or Legend ZH (which were at the material times controlled by Ds) and/or by Ds on behalf of Legend HK and Legend ZH.

(4)  Wong confronted D1&D2 and requested them together with D3&D4 to settle the debts due to RI and the other matters mentioned in the above.  D1&D2 (on behalf of all Ds) maintained that they would be responsible for the debts due to RI.

(5)  On or about 28 May 2014, RI sued Legend HK in the Mainland Court in respect of matters relating to the RMB 2 million.  On 17 March 2015, the Mainland Court handed down a judgment, in which the court ruled in favour of RI and against Legend HK. P also incurred legal costs in these mainland proceedings.

(6)  RI also sued Legend ZH in the Mainland Court in relation to the Land.  Legend ZH succeeded in defending RI’s claim in the proceedings.  However, P incurred legal costs in the proceedings.

(7)  P claims that Ds should be liable to compensate all the losses suffered by P as a result of the RI Litigation (“Losses in RI Litigation”), particulars of which are as follows:

(a)  In the first set of legal proceedings:

(i)  Compensation paid to RI as ordered by the Mainland Court: RMB 1,980,000

(ii)  Court fee: RMB 27,000

(b)  In the second set of legal proceedings: Legal costs of RMB 28,000

34.  A further claim made by P is in relation to the losses suffered by P in another set of legal proceedings in the Mainland.

(1)  In or about 2011, 丁梅英，吳安琳，and丁伊可，who were the directors of 上海滙投創業投資管理有限公司 (“the SH Directors”), sued Legend HK and Legend ZH in the Mainland Court in respect of an unpaid consultancy fee.  According to the SH Directors, the consultancy fee was due to be paid in about mid-2010.  At the first instance, Legend HK and Legend ZH lost.

(2)  Legend HK and Legend ZH appealed.  On 24 December 2014, the appeal was allowed.  As a result, no debt in relation to this litigation was recorded in the Statement of Account.

(3)  However, the SH Directors appealed.  The final appeal judgment was handed down on 28 December 2015 and the appeal was allowed.  According to the final appeal judgment, Legend HK and Legend ZH should be liable to pay RMB 150,000 to the SH Directors.

(4)  As a result of this litigation, P suffered losses.  P claims that Ds should compensate P those losses (“Losses in SH Litigation”), which are:

(a)  sum payable to the SH Directors as ordered in the final appeal judgment plus court fee: RMB 165,101.02; and

(b)  legal costs incurred: RMB 10,000.

35.  P also claims a compensation of HKD 250,000 from Ds as a result of Ds’ failure to acquire the 14.3% shareholding of Legend HK from China Hoto and transfer to the same to P.

36.  To sum up, P’s claims are as follows:

(a)  Receivables;

(b)  Losses in the RI Litigation;

(c)  Losses in the SH Litigation; and

(d)  Compensation in relation to the 14.3% shareholding of Legend HK.

37.  P has called Wong to give evidence in support of P’s case.

38.  In P’s pleadings, P claims that D1&D2 had actual and ostensible authority to represent D3&D4 at all material times. At the beginning of the trial, I asked counsel for P whether any ground in support of the alleged ostensible authority had been pleaded.  After some exchanges between the court and counsel, counsel told me that P would only pursue the actual authority point at the trial.

39.  While Wong was giving evidence, Wong mentioned that he had never met D3&D4, and had no direct communication with D3&D4 at any time.  Wong also said that he had never seen any document by which D3&D4 had authorized D1&D2 to represent them to negotiate any business matter.  At the end of the trial, I asked counsel for P to clarify P’s case on actual authority in the light of Wong’s evidence. Having taken instructions, counsel told me that P’s claim against D3&D4 would be based upon the SPA, the Supplemental Agreement and the Undertaking Agreement only.

40.  It is not in dispute that D3&D4 have signed the SPA and the Supplemental Agreement, and they shall be bound by the terms therein.  As to the Undertaking Agreement, P claims that D1&D2 signed the Undertaking Agreement on behalf of themselves and also on behalf of D3&D4.

Ds’ CASE

41.  D1&D2 have filed a defence and counterclaim, and D3&D4 have filed a separate defence and counterclaim.

D1&D2’s case

42.  D1&D2 deny that they have any authority to represent D3&D4 at any time.

43.  D1&D2 say that they have given financial documents of Legend HK and Legend ZH to Yeung before the 1^st Meeting, for the sole purpose of locating potential lenders.  At that time, Legend ZH was indebted to various debtors, including BEA, BC and some employees.

44.  At the 1^st Meeting, D1&D2 proposed to borrow a sum of RMB 5 million from Wong.  However, Wong counter-proposed to purchase the shares of Legend HK and asked D1&D2 to come to P’s Office the next day to discuss the details.

45.  At the 2^nd Meeting, D1&D2 told Wong the following:

(1)  Legend ZH was indebted to various creditors including the BEA and BC.

(2)  Legend ZH once entered into a set of agreements with RI on 5 September 2012 to the following effect: -

(a)  RI should procure a purchaser for the acquisition of all the shares in Legend ZH at a price of not less than RMB 35,000,000 (“the Requirement”); and

(b)  Upon the fulfilment of the Requirement, RI was entitled to purchase 30% of the shareholding in Legend ZH at a price of RMB 2,000,000[5].

(3)  However, the Requirement was never satisfied and thus the shares of Legend ZH had never been transferred to RI.

(4)  As to the litigation relating to the SH Directors, Legend HK and Legend ZH were appealing the 1^st instance decision.

46.  At the 2^nd Meeting, Wong and D1&D2 reached a consensus that P would purchase the 85.7% shareholding in Legend HK collectively owned by Ds at the price of RMB 23 million.  Wong and D1&D2 went to Zhuhai to see the Land on the same day.

47.  D1&D2 deny that they made the 1^st Representation or the 2^nd Representation to Wong in the 2^nd Meeting.

48.  D1&D2 claims that under the SPA, the consideration to be paid by P is for the purchase of 85.7% shareholding in Legend HK only.  D1 and D2 deny that the SPA contains Implied Term A or Implied Term B.  D1&D2 further claims that the RMB 250,000 advanced by P to Legend ZH is a loan and not the deposit stipulated in the SPA.

49.  D1&D2 rely upon clause 9.3 of the SPA and claim that any representation or oral agreement made prior to the signing of the SPA would have been superseded by the SPA.  The terms of SPA have only been varied by the Supplemental Agreement.  D1&D2 accept that the Supplemental Agreement signed by P and by all Ds is binding upon them.

50.  D1 admitted that he has a contractual obligation to purchase the 14.3% shareholding of Legend HK from China Hoto within a reasonable time.  However, that should be done at P’s expense.  D1 claims by issuing a letter dated 17 January 2014 to China Hoto, offering to purchase the 14.3% shareholding from China Hoto at HK$250,000, he has discharged his contractual obligation.  There has never been any reply from China Hoto.

51.  D1&D2 allege that there was an oral agreement between them and P regarding the shareholders’ loan owed by Legend HK to them (“the SL Oral Agreement”):

(1)  In or around September 2014, realizing the difficulty in acquiring the 14.3% shareholding of Legend HK, P decided to dilute the shareholding of China Hoto in Legend HK by way of shares allotment (“the Dilution”).

(2)  P noted that there was a shareholders’ loan of approximately HK$16,068,557.68 owed by Legend HK to D1&D2 (“the SL”).  Wong on behalf of P proposed to D1&D2 that they might transfer the SL to P to finance the Dilution, and P would repay the SL to them.  D1&D2 agreed.

(3)  The SL was transferred to P shortly after the SL Oral Agreement was made.

(4)  However, P has not repaid the SL or any part thereof to D1&D2.

52.  It is D1&D2’s case that:

(1)  Legend HK and Legend ZH’s accounts have been completely set out in the financial documents given to Yeung prior to the 1^st Meeting.

(2)  The Statement of Account was prepared by Wong for the sole purpose of calculating stamp duty for the transfer of shares rather than for any verification purpose as alleged.

(3)  The 3^rd Representation, the 1^st Oral Agreement, the Implied Term C, the 2^nd Oral Agreement, and the 4^th Representation alleged by P are denied.

(4)  The Undertaking Agreement is not binding upon D3&D4.

(5)  D1&D2’s obligation in relation to the Receivables under the Undertaking Agreement is limited to providing assistance to P in the preparation of an undated balance of the account receivables of Legend HK.

53.  In relation to the RI Litigation, D1&D2 claims that the matters relating to RI had been disclosed to P before the SPA, and they should not be liable to P in respect of those matters.

54.  In relation to the SH Litigation, before entering into the Supplemental Agreement, D1&D2 informed P that Legend HK and Legend ZH succeeded in the appeal against the first instance judgment.  As a result, Legend HK and Legend ZH did not suffer any loss in the litigation at that time.  D1&D2 did not know the development of the litigation after that time and should not be liable to the Losses in the SH Litigation as a result of the final appeal judgment in that litigation.

55.  Originally, D1&D2 lodged a counterclaim for the purchase price as set out in the SPA.  At the beginning of the trial, I asked counsel for Ds to clarify why D1&D2 might pursue this counterclaim, while they had accepted that they should be bound by the Supplemental Agreement.  After taking instructions, counsel told me that D1&D2 would not pursue this counterclaim at the trial.

56.  D1&D2 are saying that they are not liable to P.  They counterclaim on the SL based upon the SL Oral Agreement.

57.  D1&D2 have given evidence in support of their case.

D3&D4’s case

58.  D3&D4’s case is that D1&D2 did not have any authority to represent them in all the negotiations with P.  They have never had any meeting or discussion with P.  They only signed the SPA and the Supplemental Agreement.  They accept that these two agreements are binding upon them.  Save that, the representations, the oral agreements and the Undertaking Agreement pleaded in P’s case should not be binding upon them.  They deny that they are liable to P in any respect under the SPA and the Supplemental Agreement.

59.  Originally, D3&D4 raised a counterclaim for the purchase price as set out in the SPA.  I asked counsel for Ds a question similar to the one set out in [55] above. Having taken instructions, counsel confirmed with me that D3&D4 would not pursue this counterclaim at the trial.

60.  D3&D4 have given evidence in the trial.

LATE DISCOVERY OF DOCUMENTS

61.  At the beginning of the trial, I have dealt with two applications, one made by P and the other made by Ds.

62.  By a summons filed on 7 August 2020, P seeks leave to rely upon the documents set out in its 2^nd supplemental list of documents filed on 3 August 2020.  The application is not opposed.  I therefore allow the application.

63.  Without issuing any summons, Ds seek leave to rely upon the documents set out in their 2^nd supplemental list of documents filed on 7 August 2020.  The application is opposed by P.  Counsel for P submits that Ds’ application is a very late application, and no satisfactory explanation has been provided to justify the lateness.  The new documents introduced by Ds are mainly WeChat or SMS messages in about 2014.  The documents do not appear to be a complete set of records.  Some of the messages involve persons who are not parties in these proceedings.  There is also a document, which allegedly is a record of a meeting held on 27 December 2013.  These documents are introduced at the eleventh hour.  Counsel for P submits if these documents are introduced in these proceedings, P would need time to conduct investigation and to prepare evidence to meet these new documents, including finding a new witness to give evidence at the trial.  The trial would have to be adjourned in these circumstances, which is most undesirable.

64.  In my view, all the criticism made by P are valid points.  Ds’ application is a very late application, and there is no justification for the lateness.  As said by DHCJ Marlene Ng (as she then was) in Liu Chen v Chan Poon Wing[6]:

“36. Let me say as a general observation that the court is generally unhappy with last minute applications at the commencement of assessment hearing for further evidence to be filed or for further discovery to be made. After the CJR, the court is even more jealous to ensure that the assessment of damages will proceed as scheduled, and that the hearing will not be burdened with last-minute applications that take up valuable time thereby prolonging the assessment hearing, causing an adjournment and/or increasing costs for the party(ies). To say the least, last minute applications fly in the face of the underlying objectives of reasonable expedition, procedural economy, cost-effectiveness and fairness between parties enshrined in Order 1A of the RHC.

37. In the circumstances, after the implementation of the CJR, if there is any last minute application (which necessarily must be a rare occurrence), the court will not expect anything less than what was required even prior to the CJR, namely, a full account for the lateness of the application.  In addition, it is further expected that the applicant will place before the court full justification as to why the application should be entertained at all at such late stage notwithstanding the underlying objectives.  Failure to do so may result in the court rejecting the application without further ado, especially if there is a history of breach of court timetables or if there is something in the conduct of the applicant that gives rise to suspicion of conscious manoeuvring.”

65.  In view of the unjustified delay in taking out the application and the prejudice to P, I dismiss Ds’ application.

MY FACTUAL FINDINGS

66.  I have carefully considered the evidence given by the witnesses in the trial.  In respect of evaluating the evidence given by witnesses, a valuable guidance can be found in Hui Cheung Fai and another v Daiwa Development Limited[7], in which DHCJ Eugene Fung SC said:-

“77. Generally speaking, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility: Onassis v Vergottis [1968] 2 Lloyd’s Rep 403 at 431 (Lord Pearce) ……

78. In deciding whether to accept a witness’ account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events: e.g. Lam Rogerio Sou Fung v Tan Soon Gin George (unreported, HCA 2576/2005, 5 May 2011) §39 (Chu J).

79. In determining a witness’ credibility, I have also attached importance to the consistency of the witness’ evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence. The latter type of consistency is often tested by a comparison between the witness’ oral testimony and his or her witness statement.

80. I have cautioned myself against the dangers of too readily drawing conclusions about truthfulness and reliability solely or mainly from the appearance of witnesses (Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336 at §§36-37 (Bokhary PJ)), or from the assessment of the witnesses’ character (Esquire (Electronics) Ltd v HSBC [2007] 3 HKLRD 439 at §135 (Stock JA)).”

67.  See also Lee Fu Wing v Yau Po Ting Paul [2009] 5 HKLRD 513, in which DHCJ Au (as he then was) said: -

“53. In assessing the credibility of a party’s case on a particular issue, I accept the submissions of [counsel] that the Court should take into considerations the following: -

(1) Whether the party’s case is inherently plausible or implausible.

(2) Whether the party’s case is, in a material way, contradicted by other evidence (documentary or otherwise) which is undisputed or indisputable.

(3) Where it is shown that a witness has been discredited over one or more matters to which he has given evidence using the above tests. This is relevant to the assessment of his overall credibility.

(4) The demeanour of the witnesses.”

68.  If a witness has told lies on a central issue, that may have a significant adverse impact on the credibility of his or her evidence as a whole.  As said by Sir John Dyson in MA (Somalia) v Secretary of State for the Home Department[8]:

“31. ....... where a claimant tells lies on a central issue, his or her case will not be saved by general evidence unless that evidence is extremely strong. It is only evidence of that kind which will be sufficient to counteract the negative pull of the lie. But much depends on the bearing that the lie has on the case……

32. Where the appellant has given a totally incredible account of the relevant facts, the tribunal must decide what weight to give to the lie, as well as to all the other evidence in the case, including the general evidence……

33.     ...... where the appellant tells lies on a central issue in the case, the [tribunal] may conclude that they are of great significance……It will be a matter for the [tribunal] to decide whether the general evidence is sufficiently strong to counteract what we have called the negative pull of the appellant’s lies.”

Wong

69.  Having seen and heard Wong’s evidence, I am of the view that Wong’s evidence is credible and reliable. On all the key issues, Wong’s evidence is consistent with the documents and in accordance with common and commercial sense.  I accept Wong’s evidence and attach full weight to his evidence.

70.  Wong said that at the 1^st Meeting, D1&D2 provided some Legend HK’s and Legend ZH’s financial statements to him, but he was told that the documents were not trustworthy as they were prepared for submitting to the Mainland tax authority.  He could not recall what exactly the financial documents were. Those financial documents were returned to D1&D2 at the end of the meeting.

71.  There can be no doubt that Legend HK and Legend ZH were in financial difficulties at that time, and D1&D2 were seeking financial assistance from P.  Both D1&D2 had provided personal guarantees to the banks in respect of the loans owed by Legend HK and Legend ZH to the banks.  There is every reason to believe that D1&D2 would have tried their very best to persuade P to give them financial assistance in this meeting.  Naturally, D1&D2 would have mentioned the Land in this meeting, for the Land would be the most valuable asset owned by Legend HK through Legend ZH.  I accept that D1&D2 did make the 1^st Representation and the 2^nd Representation to Wong in this meeting.

72.  Wong said that at the 2^nd Meeting, he was given some internal documents of Legend ZH.  He accepted and agreed that the consensus reached in the 2^nd Meeting, ie P would acquire Legend HK subject to the conditions discussed in the meeting, was not a legally binding agreement.  At that time, P had an intent to acquire the 100% shareholding of Legend HK, for P was very much interested in obtaining the Land.  That is why on that date, after the 2^nd Meeting, Wong followed D1& D2 to Zhuhai to inspect the Land.

73.  I accept Wong’s evidence in relation to the 2^nd Meeting, including the consensus reached in the meeting is that P would acquire 100% shareholding of Legend HK, not only 85.7%.  It is clear that P was intending to have complete control of the Land after the acquisition, and that task could only be satisfactorily achieved by acquiring 100% shareholding of Legend HK.  Further, P was prepared to take up the debts of Legend HK and Legend ZH disclosed by D1&D2.  There would be no reason for P to take up 100% of those debts if P was not going to acquire 100% shareholding of Legend HK.

74.  On 18 December 2013, P entered into the SPA. Wong said that although Legend HK’s financial documents were not available to him and he only had limited information from D1&D2 (ie the documents mentioned in [72] above) at that time, Wong regarded that P’s risk was not high, for the Land was a valuable asset, and Legend HK was the de facto owner of the Land.  Further, the deposit to be paid by P as specified in the SPA was only HKD 250,000, which was not a huge amount.  Wong’s evidence is consistent with common and commercial sense. I accept his evidence.

75.  According to Wong, at the time of the execution of the SPA, D1&D2 told him that they needed cash on an urgent basis to pay salaries to the employees in the Mainland and some utilities expenses. D1&D2 requested Wong to provide RMB 250,000 to Legend ZH instead of paying the deposit of HKD 250,000 to Ds.  Wong considered that RMB 250,000 would be more or less equivalent to HKD 250,000 and acceded to the request.  There is documentary evidence showing that P did provide RMB 250,000 to Legend ZH on 18 December 2013, and the fund was recorded as a loan from P to Legend ZH[9].

76.  Wong said that after signing the SPA, Ds did not provide the undertaking mentioned in Clause 3.1(d) to P.  However, before the execution of the Supplemental Agreement, there were discussions between him on the one hand and D1&D2 on the other hand to verify the accounts of Legend HK and Legend ZH (ie, the Verification Exercise).  In the course of those discussions, D1&D2 provided two draft payables tables to him (“the Draft Payables Tables”)[10], in which the payables of Legend HK and Legend ZH were shown.  Wong went through the draft items with D1&D2 and found out that some items in the drafts in fact were not the payables of the two companies, and hence those items were deleted from the drafts.  A debt owed to RI was among the items deleted.  Wong was told by D1&D2 that the debt was owed to RI by D1 personally and not owed by Legend ZH.  At the end of the Verification Exercise, Wong and D1&D2 agreed on all the figures as recorded in the Statement of Account, in the Final Receivables Tables, and in the Final Payables Tables. I accept Wong’s evidence and find that the 3^rd Representation and the 4^th Representation pleaded by P in its Re-Amended Statement of Claim are true.

(1)  As shown in the Supplemental Agreement, before executing the same, the parties did have the Verification Exercise.  The figures recorded in the Supplemental Agreement are same as the figures set out in the Statement of Account.  I accept that the Statement of Account is the conclusion reached by the parties in the Verification Exercise.

(2)  The Draft Payables Tables in fact have been produced as attachment 2 to D2’s witness statement.  There are some handwritings on these tables and some items in the tables have been crossed out.  These handwritings are evidence showing that there have been some discussions concerning these 2 draft tables.

(3)  As set out in the Statement of Account, the total of the payables of Legend ZH should be RMB 1,911,817.86.  This is the total of the remaining items in the Draft Payables Table concerning Legend ZH.

(4)  Based upon all these documents, I am of the view that Wong’s evidence on the 3^rd Representation and the 4^th Representation is credible and reliable.

77.  According to Wong, the parties signed the Supplemental Agreement on 24 December 2014.  In the light of Clause 3 of the Supplemental Agreement, it is clear that the parties treat the figures in the Statement of Account as the fundamental basis of the transaction.  After acquiring Legend HK, P would be responsible for all the payables of Legend HK Group (including Legend ZH) as set out in Clause 3 of the Supplemental Agreement, no more and no less.  I am of the view that D1&D2 did make the 1^st Oral Agreement with Wong.

78.  All Ds disagree that the Supplemental Agreement was signed on 24 December 2013.  According to them, the Supplemental Agreement had only been executed by all Ds by about 31 December 2013.  I note that neither P nor Ds have produced any documentary evidence shedding any light on the exact execution date of the Supplemental Agreement.  I tend to agree with P that the Supplemental Agreement was executed on 24 December 2013, as this is the date as shown on the agreement.  In any event, this is a minor issue and would not affect the outcome of these proceedings in any way.  It would be sufficient to say that there is no dispute that the Supplemental Agreement was signed by P and all Ds in late December 2013.

79.  As to the 2^nd Oral Agreement pleaded in P’s case, I find that there were discussions concerning the receivables before the execution of the Supplemental Agreement.  In the light of clause 3 of the Undertaking Agreement signed by D1&D2, I also accept that D1&D2 have agreed to be responsible for those receivables in those discussions.  In my view, being responsible for the receivables in clause 3 of the Undertaking Agreement should mean being personally liable to pay those receivables to P.

(1)  In clauses 1 and 2 of the Undertaking Agreement, “責任” in the context means the obligation to pay off the sums as set out in the clauses.

(2)  In the last paragraph, it is stated “如果，因為各方未能按時還債…” (underline supplied). What has been said in this last paragraph should apply to clauses 1, 2 and 3 of the Undertaking Agreement.

(3)  In light of all these, the term “負責” in Clause 3 should mean the obligation to pay.

80.  According to Wong, the purpose of the Supplemental Agreement is to clarify a few points, including:

(1)  D1’s obligation of acquiring the 14.3% shareholding from China Hoto and transferring the same to P;

(2)  the sums which should be deducted from the RMB 23 million mentioned in the SPA, including the taxes payable to the Mainland authorities when the Land is sold;

(3)  the conclusion of the Verification Exercise conducted by the parties; and

(4)  based upon the conclusion reached in the Verification Exercise, the actual purchase price paid by P to Ds in the acquisition should be nominal, ie HK$1.

81.  Under cross-examination, Wong was asked why the Statement of Account, the Final Receivables Tables and the Final Payables Tables had only been signed by D1&D2, and not by all the parties as contemplated in clause 3 of the Supplemental Agreement.  Wong explained that all the figures in the tables had been incorporated in the Statement of Account, and the conclusion of the Statement of Account had been reproduced in the Supplemental Agreement.  Since the Supplemental Agreement had been signed by all the parties, he did not think that it would be necessary for P and D3&D4 to also sign the Statement of Account and the relevant tables.  I am of the view that Wong’s explanation is logical and sensible.  I accept his answer.

82.  Wong mentioned that after signing the SPA and the Supplemental Agreement, P has paid off the debts owed by Legend HK and Legend ZH to BEA, BC and other creditors.  Ds have not put forward any evidence to contradict this.  I accept Wong’s evidence.  After P discharging the debts owed by Legend HK and Legend ZH to the banks, D1&D2 would have been released from their personal guarantees given to the banks in relation to those debts.

83.  After signing the Supplemental Agreement, P discovered the matters as set out in [33] above in relation to RI.  As a result of those matters, P has suffered losses in the RI litigation.  The details of the Losses in RI Litigation pleaded in P’s Re-Amended Statement of Claim are as follows:

(1)  Debt due to RI as found by the Mainland Court: RMB 2 million;

(2)  Court fee: RMB 27,000

(3)  Legal cost: RMB 28,000

84.  Wong said that D1&D2 made the 4^th Representation to him in the Verification Exercise, and that representation was untrue.  Wong was of the view that Ds should compensate P the losses suffered by P in the RI Litigation. That is why there is a clause dealing with the RI Litigation in the Undertaking Agreement, ie clause 2 of that agreement.  Wong’s evidence is consistent with and supported by the documentary evidence.  I accept Wong’s evidence.

85.  In relation to the SH Litigation, Wong accepted that D1&D2 did not conceal anything before P and Ds entered into the Supplemental Agreement.  Before the execution of the Supplemental Agreement, D1&D2 showed Wong a copy of the appeal decision, in which the appeal court held that Legend HK and Legend ZH were not liable to the SH Directors.  The situation changed because the final appeal court overruled the appeal court’s decision and held that Legend HK and Legend ZH were liable to pay RMB 150,000 to the SH Directors.  Details of the Losses in SH Litigation suffered by P are as follows:

(1)  Sum due to the SH Directors plus court’s fees: RMB 165,101.02

(2)  Legal costs: RMB 10,000

86.  Wong’s evidence in relation to the SH Litigation is not disputed.  As to whether Ds or any of them are liable to P in respect of those losses, that would depend upon the true meaning of the contract between P and Ds, which will be discussed later in this judgment.

87.  Wong said that eventually, D1 could not acquire the 14.3% shareholding of Legend HK from China Hoto.  This is not disputed by Ds.  Wong claimed that Ds should pay a compensation of HK$250,000 to P as a result of this failure.  The merit of this claim will be analyzed later in this judgment.

88.  Wong agreed that he had discussed the Dilution with D1&D2 in or about September 2014, and D1&D2 did transfer the SL to P.  However, P did not implement the Dilution as planned.  Wong denied the existence of the SL Oral Agreement as alleged by D1&D2.  Wong said that D1&D2 should not be entitled to demand any payment from P in respect of transferring the SL to P.  I accept Wong’s evidence.  The consideration to be paid by P has been fully set out in the SPA and the Supplemental Agreement. The SL is not a payable of Legend HK as evidenced in the Statement of Account and the Final Payables Table concerning Legend HK.  Obviously, the acquisition of Legend HK by P as set out in the SPA and in the Supplemental Agreement would include the acquisition of all the shareholders’ loans owed by Legend HK to Ds. Apart from performing the obligations as set out in the SPA and in the Supplemental Agreement, P has no contractual obligation to pay anything else to any Ds in order to get those shareholders’ loans.

D2

89.  D2 was in charge of the financial matters in Legend HK and Legend ZH before selling her shares in Legend HK to P.  I am of the view that D2 is not a truthful and reliable witness.  Her answers under cross-examination are always evasive and argumentative.  Her evidence is inconsistent with her pleaded case and the documents on various material aspects, and is inconsistent with common and commercial sense.  I refuse to accept her evidence.

90.  Under cross-examination, D2 at first refused to accept that Legend HK and Legend ZH were in critical financial condition in late 2013.  She did not agree that Legend HK and Legend ZH were urgently in need of funds at that time.  However, when being further pressed, D2 finally agreed that Legend HK and legend ZH had financial problems at that time, and hence she and D1 had to approach P to discuss those problems.  She said that in her understanding, “urgent” would mean the necessity of having funds in one or two days.  She did not think the situation was so critical, and hence she denied that Legend HK and Legend ZH needed fund urgently.  In my view, this is an example showing the evasiveness and the argumentative attitude of D2 while she was giving evidence.

91.  D2 also tried to say that the subject matter of the SPA was only the 85.7% shareholding of Legend HK, and Legend ZH would not be transferred to P in the transaction.  D2 was asked to read the SPA and was required to explain how this interpretation would be possible in the light of the wording of the SPA.  D2 was further required to explain why P would purchase Legend HK only and not to acquire Legend ZH at the same time, bearing in mind that Legend ZH was the owner of the Land and P was interested in the Land.  P’s interest in the Land was shown by the site visit conducted by Wong on 17 December 2013, before the execution of the SPA.  Facing all these, D2 finally conceded that the subject matter of the SPA would include the transfer of the control of Legend ZH to P.  This is another example showing that D2 is an evasive witness who is unwilling to tell the truth.

92.  D2 claimed that before the 1^st Meeting, she had provided financial documents of Legend HK and Legend ZH to P through Yeung and Mr Albert Pang (“Pang”) of Synthesis, and P should know the details of the financial situation of the two companies from those documents.  However, as to what documents were provided to Yeung and Pang, and when and by what means the documents were provided to Yeung and Pang, D2’s evidence on all these are unclear.  Further, D2 has not provided any documentary evidence in support of her claim, for example, copies of email exchanges between her on the one hand and Yeung and Pang on the other hand, or any document from Yeung and Pang acknowledging receipt of the alleged financial documents from D2.  I doubt the veracity of D2’s claim.

93.  D2 also claimed that when she and D1 signed the SPA in P’s Office on 18 December 2013, all the attachments mentioned in the SPA were missing.  They did not know what were the attachments.  In my view, this is inherently improbable.  The information in attachments 1-4 constitutes an important basis of the transaction.  In clause 3.1(a) of the SPA, all Ds have guaranteed that the information in attachments 2-4 is true and correct.  Further, in clause 6.1 of the SPA, all Ds have given a warranty that all the representations made by Ds (that would certainly include the representations made by Ds in attachments 1-4) are true and correct.  It is contrary to common and commercial sense that D2 or any defendant would sign the SPA without knowing what are the attachments mentioned in the SPA.

94.  As to the Verification Exercise, D2 claimed that no verification of accounts had been taken place.  According to D2, the Draft Payable Tables were prepared and provided by Wong.  Wong only asked D1&D2 what items in the tables would have to be paid urgently, and what items were not urgent.  In respect of the matters which did not require urgent payments, Wong have deleted those items.  D2 alleged that the debt due from Legend HK to RI had been disclosed to Wong, and P had full knowledge of this.  Since that item was not an item requiring urgent payment, Wong deleted the same from the table.  D2 claimed that Wong showed the Statement of Account, the Final Payables Tables and the Final Receivables Tables to her and D1.  Wong asked them to sign the same, simply and solely for the purpose of calculating stamp duty.  D2 denied the existence of the 3^rd Representation, the 4^th Representation, the 1^st Oral Agreement, and the 2^nd Oral Agreement.  I refuse to accept D2’s evidence.

(1)  The Supplemental Agreement has been signed by all Ds.  Accordingly, the Supplemental Agreement is binding upon all Ds, including D2.  As evidenced by clause 3 of the Supplemental Agreement, all the parties must have carried out a verification exercise before entering into the Supplemental Agreement.  Obviously, what are the payables and what are the receivables of Legend HK and Legend ZH must have been discussed in the Verification Exercise.

(2)  It does not make any sense that the Statement of Account and the relevant tables are merely for stamp duty purpose.  The figures on these documents must also be true and correct.  Otherwise, D1&D2 would not put their signatures on these documents.

(3)  The items deleted from the Draft Payables Tables do not appear in the Final Payables Tables signed by D1 and D2[11].  The irresistible inference is that after discussion, Wong on the one hand and D1&D2 on the other hand have agreed that the items deleted from the Draft Payables Table are not the payables of Legend HK and Legend ZH, and hence are not included in the Final Payables Tables.

(4)  D2’s explanation that the items deleted from the Draft Payables Tables are some non-urgent items.  In my view, this explanation does not make sense.  No matter whether an item is urgent or not, while it is in fact a payable of Legend HK or Legend ZH, that item would be and should be included in the Final Payables Tables, for the item (no matter urgent or not) would be a liability which has to be settled by P after the acquisition.

(5)  In my judgment, the only reason for deleting the debt owed to RI from the Draft Payable Tables is the 4^th Representation made by D1&D2 to Wong.

(6)  The Verification Exercise is a very important episode in the dealings between P and Ds.  D2’s evidence does not sit comfortably with the Supplemental Agreement, the Statement of Account, the Final Payables Tables, and the Final Receivables.  On the other hand, Wong’s evidence is consistent with all these documents.  In the light of all these contemporaneous documents, D2’s evidence must be rejected.  I also find that the 3^rd Representation, the 1^st Oral Agreement, and the 2^nd Oral Agreement pleaded in P’s case are true.

95.  In my view, the Verification Exercise is a key event in this case.  D2’s evidence in relation to this event is utterly untrue. In my judgment, this has a significant impact on the credibility of D2’s evidence as a whole.

96.  As to the SL Oral Agreement, for the reasons set out in [88] above, I do not accept D2’s allegation.  In my judgment, there is no SL Oral Agreement as alleged by D2.

D1

97.  D1 was in charge of production in Legend HK and Legend ZH before selling his shares in Legend HK to P.  I am of the view that D1 is also not a truthful and reliable witness.  His evidence is untrue on various aspects.  I refuse to accept his evidence.

98.  D1 accompanied D2 in all the meetings with Wong.  He confirmed the matters said by D2 in D2’s witness statements.  For the reasons set out in the above in relation to D2’s evidence, I also reject D1’s evidence.

99.  In relation to the Draft Payables Tables and the Verification Exercise, D1’s evidence is more or less same as D2’s evidence.  For the reasons set out in [94] above, I refuse to accept D1’s evidence concerning the Draft Payables Tables and the Verification Exercise.  Further, as said in the above, the Verification Exercise is a key matter in this case.  D1’s evidence on this matter is untrue, and this has a significant impact on the credibility of D1’s evidence as a whole.

100.  D1 claimed that the deal between P and Ds was that P would pay RMB 23 million to acquire the 85.7% shareholding of Legend HK owned by Ds, not 100%.  Accordingly, P would have to pay an extra sum to purchase the 14.3% shareholding held by China Hoto.  D1’s assertion is not supported by the documents, and indeed is contradicted by clause 2 of the SPA.

101.  While D1 was giving evidence, he claimed:

(1)  D1 was forced by Wong to sign the Supplemental Agreement.  At that time, D1 was “at the cliff edge”.  He had no choice and must sign the Supplemental Agreement.

(2)  Further, he was forced to sign the Undertaking Agreement by an unknown male at a cockloft in a place in Sham Shui Po.  He signed the Undertaking Agreement under duress, and he did so unwillingly and involuntarily.

102.  At the beginning of the trial, I drew counsel’s attention to what Ribeiro PJ had said in in Ming Shiu Chung & Others v Ming Shiu Sum & Others^[12].  I asked counsel for Ds to explain whether Ds would accept that the Supplemental Agreement should be binding upon them since they had signed the same.  After taking instructions, counsel told me that Ds accepted that the Supplemental Agreement should be binding upon them.  Ds further withdrew their counterclaim against P for payment of the purchase price specified in the SPA[13].

103.  In view of these exchanges, it was a complete surprise to hear D1 to say that he was forced to sign the Supplemental Agreement or the Undertaking Agreement.  No recognized legal basis for vitiating the Supplemental Agreement or the Undertaking Agreement has ever been pleaded in D1’s pleadings.  Further, no event relating to the duress or threat alleged by D1 has been mentioned in D1’s witness statement.  In my view, the matters said by D1 as summarized in [101] above are matters invented by him in the witness box and are untrue.

D3&D4

104.  D3&D4 are brothers.  They were mere investors in Legend HK and they did not participate in the daily operation of Legend HK and Legend ZH.  It is not in dispute that they have not attended all the meetings with Wong, and they have never had any direct communication with Wong.  Both of them say that D1&D2 had no authority to represent them in all the negotiations with Wong.  They would personally examine the draft contractual documents between P and Ds, and would only sign the same if they agree to the contents thereof.  They have never seen the Undertaking Agreement before the commencement of these proceedings.  D1&D2 did not have the authority to represent them to agree to the Undertaking Agreement at any time.

105.  I accept D3&D4’s evidence as summarized in the aforesaid paragraph.  Both the SPA and the Supplemental Agreement have been signed by all Ds.  This is a clear evidence showing that D1&D2 did not have the authority to represent D3&D4 to make any deal with P.  Whether D3&D4 would agree to any proposed deal is matter to be decided by them and not by anyone else.  As the Undertaking Agreement has not been signed by D3&D4, this agreement should not be binding upon them.

106.  Both D3&D4 have adopted the matters set out in D2’s witness statements as part of their own evidence.  I attach no weight to this part of their evidence.  As said in the above, D3&D4 have no participation in all the meetings between Wong and D1&D2.  As to those meetings and the communication between Wong and D1&D2, D3&D4 would have no personal knowledge.

MY RULING

107.  Counsel for P and counsel for Ds have put forward many arguments in their respective submissions.  Counsel have also prepared a list of agreed issues.  With no disrespect to counsel, I am not prepared to deal with each and every argument raised by counsel, and I would not go through each and every issue as set out in the agreed list.  Some issues raised by counsel have been overtaken by events, and some arguments put forward would no longer be relevant in the light of my factual findings set out in the above.  I would set out my ruling on the items claimed in P’s case, my ruling on D1&D2’s counterclaim, and reasons for the rulings in the paragraphs below.

Receivables

108.  I have found that the 2^nd Oral Agreement is true.  The 2^nd Oral Agreement is an agreement between P on the one hand and D1&D2 on the other hand.  I have also found that D1&D2 had agreed to personally pay the uncollected receivables to P in the Undertaking Agreement.  See Clause 3 of the Undertaking Agreement.

109.  However, as a matter of law, P has an insurmountable hurdle in this claim.  The Receivables are debts owed to Legend HK and Legend ZH by their customers.  As to how these debts can be transformed to liabilities due from Ds or any of them to P, there is no answer in P’s case.

110.  I would take a receivable of Legend HK as an example to illustrate the point.  The receivable would be a debt owed by a customer to Legend HK.  In order to transform this debt to a liability owed by Ds to P, the following have to be done as a matter of law:

(1)  Firstly, the debt has to be assigned by Legend HK to P, so that the debt would become a liability owed by the customer to P.

(2)  Secondly, it would be necessary to have a novation among P, Ds and the customer.  As said by the Court of Final Appeal in Guangdong native produce Co Ltd v Tam Tze Ying[14], it is necessary to have the consent of all parties in order to have a novation.  In that case, Chan PJ said:

“16. …… Novation takes place where there is an agreement by three parties (such as in the case of a creditor, debtor and third party) whereby one party agrees to be substituted for another party in relation to the third party. See Chitty on Contracts, 29^th ed. Vol. 1, para. 19-085. The effect of a novation is not to assign or transfer a right or liability, but rather to extinguish the original contract or debt and replace it by another. It involves the release of liability on the part of one party under the original contract and the assumption of such liability by another party under the new contract. Chitty on Contracts, para. 19-087; and Scarf v Jardine (1882) 7 App Cas 345, 351. Thus, it is necessary to have the consent of all parties to achieve a novation and there must be a clear intention that the original contract or debt is discharged or extinguished by the novation.”

111.  It is clear that according to P’s pleadings, all the agreements pleaded are agreements between P and Ds, and all the representations are representations made by Ds to P.  P has never pleaded that in relation to the Receivables, there has been any consent from Legend HK, Legend ZH, and the relevant customers in relation to the assignment and the novation mentioned in the aforesaid paragraph.  That being the case, the Receivables would remain as debts owed by the customers to Legend HK and Legend ZH, and would not become debts owed by Ds to P.

112.  Further, P is only the majority shareholder and not the sole shareholder of Legend HK. China Hoto still has an interest in Legend HK, and in turn an interest in Legend ZH.  It would not be right to say that all the assets of the two companies (including the Receivables) can be deemed to be P’s assets.  In these circumstances, I doubt whether P may properly cause Legend HK and Legend ZH to assign all the Receivables to P, for that would be depriving China Hoto of their interest in the Receivables.

113.  I would dismiss P’s claim under this head.

Losses in RI Litigation

114.  Clause 6.6 of the SPA reads as follows:

“如成交後買方發現賣方出售之股權及公司資產有任何留置權丶押記丶產權負擔或其他債務，賣方將一律承擔，而買方亦有權向賣方追討所有有關之損失及補償。”

115.  In my judgment, D1&D2 have concealed the matters relating to the RI Litigation before the execution of the Supplemental Agreement.  The RI Litigation has caused losses to P.  Those losses are debts discovered by P after the completion of the acquisition, which fall within the scope of clause 6.6 of the SPA.  Pursuant to clause 6.6, P is entitled to require Ds to compensate P in respect of those losses.

116.  Counsel for Ds submits that clause 6.6 of the SPA has been superseded by the Supplemental Agreement.  In his submissions, the parties have agreed that everything, including past, present and future debts of Legend HK and Legend ZH, has been taken into consideration before the parties entering into the Supplemental Agreement, and the final figures have been set out in clause 3 of the Supplemental Agreement.  The calculation as set out in clause 3 of the Supplemental Agreement is final and conclusive and is binding upon all the parties.  Clause 6.6 of the SPA has been effectively superseded by the Supplemental Agreement, and P is not entitled to demand Ds to pay anything by relying upon clause 6.6 of the SPA.

117.  With respect, I do not accept these submissions.  In my view, the matter to be dealt with in clauses 2 and 3 of the Supplemental Agreement is the purchase price to be paid by P to Ds.  In clause 2 of the SPA, the parties agreed that the purchase price to be paid by P for acquiring 100% shareholding of Legend HK should be the balance after deducting all the liabilities from RMB 23 million.  The purpose of clause 2 of the Supplemental Agreement is to clarify what are those liabilities. In clause 3 of the Supplemental Agreement, the parties set out their agreement that after taking the liabilities into account, the purchase price to be paid by P in fact should only be nominal.  Obviously, the liabilities discussed before the execution of the Supplemental Agreement would be the liabilities disclosed by D1&D2 and would not include anything not disclosed by them.  The purpose of clause 6.6 of the SPA is to protect P in respect of anything not disclosed by D1&D2 but discovered by P after the acquisition of the shareholding from Ds.  There is no valid reason to say that clause 6.6 of the SPA has been superseded by the Supplemental Agreement.

118.  Clause 6.6 of the SPA is binding upon all Ds, for the SPA has been signed by all of them.  That being the case, all Ds would be liable to P in respect of the losses in the RI Litigation.

119.  I note that the losses in the RI Litigation should primarily be the losses of Legend HK and Legend ZH.  P’s losses in this matter may well be reflective loss.  The principle concerning reflective loss is trite and has been succinctly summarized by the Court of Appeal recently in Topping Chance Development Ltd v CCIF CPA Ltd[15], in which Kwan VP said:

“20. The two seminal authorities in Hong Kong are Johnson v Gore Wood and Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370. In Johnson v Gore Wood at 35, Lord Bingham set out three guiding propositions: (1) where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss; no action lies at the suit of a shareholder suing in that capacity to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company; (2) where a company suffers loss but has no cause of action to sue to recover that loss, if the shareholder has a cause of action to do so, the shareholder may sue in respect of it even though the loss is a diminution in the value of the shareholding; (3) where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by a breach of duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other. We are here concerned with the proposition in (2).”

120.  In my view, the losses claimed by P in relation to the RI Litigation fall within the exception mentioned by the Court of Appeal in [20(2)] of Topping Chance Development.  Legend HK and Legend ZH do not have any cause of action against Ds to recover the said losses.  Only P has a cause of action to do so by relying upon clause 6.6 of the SPA.  I hold that the reflective loss principle would not prevent P from suing Ds in respect of the said losses.

121.  According to Wong’s evidence which has been accepted by this court, all the sums incurred in relation to the RI Litigation in fact have been borne by P[16]. Subject to the following, I allow P’s claim in relation to the losses in the RI Litigation:

(a)  According to P’s pleaded case, the sum payable to RI under the Mainland Court’s judgment in the first set of legal proceedings should be RMB 2 million[17].  However, according to Wong’s evidence and the documentary evidence produced by Wong[18], the exact figure should be RMB 1.98 million.  I would adopt the figure revealed in the evidence.

(b)  In Wong’s 2^nd supplemental witness statement, Wong mentioned an enforcement fee of RMB 22,670 charged by the Mainland Court in the first set of legal proceedings.  That sum has not been pleaded in [19(c)] of P’s Re-Amended Statement of Claim.  I cannot allow this item.

(c)  The administration and preservation fee of RMB 27,000 charged by the Mainland Court in the first set of legal proceedings is pleaded and supported by the evidence.  I allow this item.

(d)  The legal cost of RMB 28,000 incurred in the second set of legal proceedings is pleaded and supported by the evidence.  I allow this item.

Losses in the SH Litigation

122.  Although the final appeal judgment in SH Litigation was handed down on 28 December 2015, according to that judgment, Legend HK and Legend ZH’s liability to pay the outstanding consultancy fee accrued in 2010.  I am of the view that the outstanding consultancy fee is within the scope of clause 6.6 of the SPA.  The legal cost incurred by P in the SH Litigation is a matter relating to the said consultancy fee.  I am of the view that the said legal cost is also within the scope of Clause 6.6 of the SPA.

123.  I am aware of the fact that in relation to the SH Litigation, D1&D2 have disclosed the appeal judgment to Wong before the execution of the Supplemental Agreement.  In December 2013, both P and all Ds were under an impression that Legend HK and Legend ZH did not have any liability in the SH Litigation.  However, the situation changed as a result of the final appeal judgment handed down on 28 December 2015.

124.  Clause 6.6 of the SPA does not make Ds only liable to the debts concealed by Ds or by any of them before completion of the acquisition.   In my view, that clause covers all the liabilities incurred by Legend HK and Legend ZH before completion of the acquisition and discovered by P after completion.  The is the plain and natural meaning of the clause.  That clause would be applicable in P’s claim against Ds in respect of the Losses in the SH Litigation.

125.  As said in the above, I do not accept Ds’ argument that clause 6.6 of the SPA has been superseded by the Supplemental Agreement.  I am also of the view that P’s claim under this head would not be defeated by the reflective loss principle.  Legend HK and Legend ZH would not have any cause of action against Ds in relation to the Losses in the SH Litigation.  Only P may sue Ds for such losses by relying upon clause 6.6 of the SPA.

126.  The losses pleaded in the Re-Amended Statement of Claim under this head are:

(1)  sum payable to SH Directors and court fee: RMB 165,101.02

(2)  legal cost incurred: RMB 10,000

127.  These items are supported by the evidence. According to Wong’s evidence which is accepted by this court, these expenses have been borne by P[19].  I allow P’s claim under this head in full.

14.3% shareholding of Legend HK

128.  As set out in clause 1 of the Supplemental Agreement, D1 would acquire the 14.3% shareholding of Legend HK from China Hoto and transfer the same to P. In my view, D1 has to do so at his own expense.  I am of the view that from the RMB 23 million (subject to the deductions as set out in the SPA and in the Supplemental Agreement), P has no obligation to pay any extra sum to acquire all the shareholding of Legend HK.

129.  However, in my view, P cannot say that D1 has breach his contractual duty in this respect.  It is not in dispute that D1 has sent the letter dated 17 January 2014 to China Hoto, offering to purchase the 14.3% shareholding of Legend HK from China Hoto at HK$250,000.  There is no reply from China Hoto.  D1 has approached China Hoto to try to buy the shares from them. However, it seems that China Hoto is not interested in the matter.  Whether China Hoto is willing to sell the shares is a matter to be decided by China Hoto and is beyond the control of D1.  After all, D1 has done his job in this matter.

130.  Even assuming D1 or any Ds has breached a contractual obligation owed to P by failing to acquire the 14.3% shareholding of Legend HK from China Hoto and transfer the same to P, there is no valid basis for P to claim that Ds have to pay HK$250,000 to P as a result.  Counsel for P explains to me that P claims HK$250,000 under this head, because D1 has tried to acquire the 14.3% shareholding from China Hoto at HK$250,000.  With respect, this cannot be a valid basis in support of the claim.  P can only have compensation as a result of Ds’ breach of their contractual obligation.  This is no evidence showing what loss P has suffered as a result of the non-acquisition of the 14.3% shareholding from China Hoto.

131.  I would dismiss P’s claim under this head.

D1 and D2’s counterclaim

132.  The only issue in D1 and D2’s counterclaim is the SL Oral Agreement.  I have ruled that the alleged SL Oral Agreement is untrue.  Accordingly, this counterclaim must be dismissed.

DISPOSITION

133.  For the reasons above, I allow P’s claim in relation to the Losses in the RI Litigation and the Losses in the SH Litigation. I order that Ds shall pay the relevant sums as set out in the above to P forthwith. There is no dispute that interest on the sums awarded by the court should be 1% above the best lending rate of Hong Kong HSBC from the date of the writ to the date of this judgment, and thereafter at the judgment rate until full payment of those sums.  I so order.

134.  P’s other claims are dismissed.

135.  D1 and D2’s counterclaim based upon the SL Oral Agreement is dismissed.

136.  Ds have raised a counterclaim for the purchase price in the SPA but did not pursue this claim at the trial.  I make an order dismissing this claim.

137.  Costs should follow the event.  P has succeeded on its claim in relation to the RI Litigation and the SH Litigation, but has failed on its claim in relation to the Receivables and the HK$250,000 mentioned in [128] – [131] above. Ds have failed on all their counterclaims.  I am of the view that the majority of the time in these proceedings has been spent on the issues in which P has succeeded.  Taking a broad-brush approach, I make an order nisi that 65% of the costs of these proceedings (including all costs reserved, if any) be paid by Ds to P, to be taxed if not agreed.

138.  I thank counsel for the assistance provided to the court.