WINLAND MORTGAGE LTD AND OTHERS v. STAR RAINBOW INVESTMENTS LTD

HCA 1509/2015

[2020] HKCFI 3163

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1509 OF 2015

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J U D G M E N T

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1.  In this action, the 1^st plaintiff, Winland Mortgage Ltd (“Winland”), the 2^nd plaintiff, the joint and several liquidators of Labour Buildings Ltd (in liq) (“Liquidators”) and the 3^rd plaintiff, the joint and several receivers of Labour Buildings Ltd (in liq) (“Receivers”) (collectively “Ps”) claim against the defendant, Star Rainbow Investments Limited (“D”), for a sum of $4.55 million (“Sum”) which has been deducted by D from the purchase price payable by D to Labour Buildings Ltd (“LBL”) under the “PSPA” (as defined in §28 below).

2.  Ms Elaine Liu and Mr Andrew Tse appear for Ps.  Mr Anthony Chan and Mr Bryon Chiu appear for D. 

3.  Pursuant to the directions given at the PTR, counsel submitted agreed dramatis personae, agreed chronology, agreed facts and agreed issues all dated 26 August 2020. 

A.  BACKGROUND FACTS

4.  The following facts and matters are taken from the agreed facts or evidence which are not in dispute.

A1.  Dramatis personae

5.  LBL is a company incorporated in Hong Kong.  According to the annual return made up to 17 December 2008, its directors were:

(1)  China States Ltd (“China States”), which was at the relevant time represented by Ms Lin Pai Ching (“Lin”);

(2)  Right Gain Management Ltd (“Right Gain”);  

(3)  Janson Ltd;

(4)  Yan Hei (Holdings) Ltd, represented by Ms Leung Muk Lan (“Leung”); and

(5)  Hanwick International Ltd, represented by Mr Chan Hon Tsang, who is the husband of Lin and brother of Chan Wah Tsang David (“David Chan”). 

6.  David Chan is the sole proprietor of David WT Chan & Co (“DWTC”), which acted for LBL (until appointment of the Receivers) and China States.  David Chan was found by DHCJ Gill to be the person who “orchestrated and controlled” LBL as litigator[1].

7.  LBL was wound up by the Court pursuant to a petition presented on 17 December 2009.  The Receivers and Liquidators were appointed on 26 November 2009 and 14 October 2010[2] respectively. 

8.  Winland is wholly owned by Mexan Limited (“Mexan”), a listed company in Hong Kong.  City Promenade Ltd (“CPL”), which owns and operates Mexan Harbour Hotel, is another wholly owned subsidiary of Mexan.  Mr Lun Yiu Kay Edwin (“Edwin Lun”) was (and still is) a director of Mexan and Winland, and had authority to act on behalf of Winland. Mr Ivan Tang was the in-house counsel of Winland.

9.  D is a company owned and controlled by Mr Miao Tai Wai David (“David Miao”) together with his family members.  David Miao was (and still is) the authorized representative of D. 

10.  Mr Raymond Wan of Savills (Hong Kong) Ltd (“Savills”) is an experienced real estate agent.  He has been known to Edwin Lun for over 20 years in the context of acting as agent in various property transactions. 

11.  There were numerous litigations which concerned LBL and the Property.  The law firms and the handling solicitors were as follows:

Client(s)	Firm	Matter(s)
Bank of East Asia (“BEA”)	Wilkinson & Grist (“W&G”)	HCMP 769/2002 (“BEA Action”)
China States	Peter WK Lo & Co (“PWKL”)	Lease of Property under PSPA
D	Zebra HY Kwan & Partners (“ZKP”)	Purchase of Property under PSPA
HSBC	Mayer Brown JSM (“MBJSM”)	Loan to D for completion of PSPA
LBL	DWTC	BEA Action, HCA 1899/2008 (“YH Action”)
LBL, Winland	KC Ho & Fong (“KCHF”)	Sale of Property under PSPA
Receivers	Hon & Co (“HON”)	Sale of Property under PSPA
Winland	Ho & Partners (“H&P”)	Demand letters to LBL
Winland	ONC Lawyers (“ONC”)	Litigations in 2009

12.  At trial, the following persons give viva voce evidence:

(1)  Edwin Lun on behalf of Winland;

(2)  Mr Wong Sun Keung Daniel (“Daniel Wong”) on behalf of the Receivers;

(3)  David Miao on behalf of D; and

(4)  Mr Woo Banson Thomas (“Thomas Woo”), the manager of conveyancing department of ZKP, on behalf of D.

A2.  Property and prior encumbrances

13.  Until 17 December 2009, LBL was the registered owner of No 11, Changsha Street, Mongkok, Kowloon (“Property”) at which Tatami Hampton Hotel was located (“Hotel”).  The Hotel was operated by:

(1)  LBL, which held a licence and operated at 10/F to 18/F of the Property (“Hampton Licence”); and

(2)  China States, which held a licence and operated at G/F to 9/F of the Property (“Tatami Licence”). 

14.  The Property formed part of the security given to BEA under a Debenture dated 29 October 1999 (“BEA Debenture”), which was registered at the Land Registry against the Property.

15.  Following LBL’s default, in February 2002, the BEA Action was commenced.  On 23 January 2008, BEA obtained judgment for $86 million and a possession order in respect of the Property.  The judgment was registered against the Property on 14 February 2008.  On 18 June 2008, the possession order was executed whereupon BEA closed the Hotel and evicted all the guests.  On 20 June 2008, BEA appointed receivers and managers over the Property. 

16.  As further described in Section A3 below, LBL obtained a loan from Winland and repaid the amount owed to BEA.  The BEA Debenture had been released on 21 August 2008, and the release was registered at the Land Registry on 12 September 2008.  Notification of satisfaction of the judgment was registered on 19 September 2008. 

17.  By a preliminary sale and purchase agreement dated 22 May 2008 and a formal agreement for sale and purchase of the Property dated 6 June 2008, LBL agreed to sell the Property to Year Harvest Investments Limited (“YH”) for $160 million with completion date on 30 September 2008 (together “YH SPA”).  YH paid $16 million as deposit which was stakeheld by its solicitors.  The YH SPA was registered at the Land Registry on 13 June 2008.  On 2 October 2008, the YH Action was commenced against LBL in which YH claimed, inter alia, a declaration that LBL had repudiated the YH SPA and that it was entitled to obtain return of the deposit stakeheld by the solicitors.

A3.  Loan

18.  For the purpose of repaying the amount owed to BEA, LBL entered into the loan agreement dated 7 August 2008 with Winland (“Loan Agreement”) pursuant to which Winland advanced a $104 million loan to LBL for 4 months with interest at 2% per month (“Loan”).  The Loan constituted a major transaction for Mexan and was disclosed on 11 August 2008.

19.  As security for the Loan LBL executed, inter alia, (1) a Debenture dated 8 August 2008 incorporating a fixed legal charge on the Property and a floating charge on all its assets, undertakings and uncalled capital (“Debenture”); (2) an Assignment of Sale Proceeds of the Property (“Assignment SP”); (3) an assignment of the Hampton Licence in favour of CPL[3]; (4) application for transfer of the Hampton Licence executed in escrow in favour of CPL; and (5) Irrevocable Power of Attorney to deal with the Property.

20.  LBL did not repay the Loan by its due date (i.e. 7 December 2008), and Winland agreed to extend its terms for a further 6 months (i.e. until 7 June 2009). 

21.  Following LBL’s default in paying interest and other payments fallen due, Winland through H&P’s letter of 24 February 2009 demanded repayment of HK$113,707,671.66 together with all overdue interest by 3 March 2009.  No repayment was made by LBL.  By another letter dated 4 March 2009, H&P referred to LBL’s default and gave notice of its intention to exercise its powers to take possession of the Property, appoint receiver and manager and sell the Property within the next 30 days. 

22.  LBL intended to sell the Property and engaged Cushman & Wakefield (HK) Ltd as its sole agent from 18 February 2009 to 25 March 2009.  On 31 March 2009, LBL appointed CB Richard Ellis as sole agent for sale of the Property until 31 July 2009.

23.  Despite LBL’s failure to comply with the demand letters, Winland agreed to extend the Loan for one month (i.e. to 7 July 2009), which was announced by Mexan on 11 June 2009.  This notwithstanding, a further demand letter dated 26 June 2009 was issued by H&P, requiring LBL to pay HK$127,582,000 (being the amount due as at 7 June 2009) within the next 7 days and giving notice that Winland intended to exercise its powers under the Debenture within the next 30 days. 

A4.  Lin Charging Orders

24.  On 12 March 2009, Lin obtained a default judgment against LBL for $28 million in HCA 363/2009 (“Default Judgment”). 

25.  On 20 April 2009, Lin registered a charging order nisi against the Property.  This was followed by registration of a charging order absolute on 1 June 2009 (together “Lin Charging Orders”). 

A5.  PSPA

26.  In the meantime, Winland procured Savills to look for potential buyers of the Property.  Through the arrangement of Raymond Wan, a meeting was held on 4 July 2009 (Saturday) between Edwin Lun and David Miao (together with his two sons), Thomas Woo and Zebra Kwan. 

27.  KCHF was engaged by LBL and Winland to handle the sale of the Property to D.  On 9 July 2009, the parties attended the office of KCHF at different times.  They included (1) Raymond Wan, (2) David Chan, Lin and Leung as representatives of LBL and China States; (3) David Miao, Thomas Woo and Zebra Kwan as representatives of D; and (4) Edwin Lun and Ivan Tang as representatives of Winland.

28.  By a Provisional Sale and Purchase Agreement dated 10 July 2009 (“PSPA”) made between LBL (as vendor), D (as purchaser), Savills (as agent), Winland (as mortgagee), China States and Lin, the parties agreed, inter alia, as follows:

(1)  With the consent of Winland, LBL agreed to sell and D agreed to purchase the Property including the Hotel Licences at the price of $147 million (“Price”), with 5% to be paid upon signing the PSPA, 5% within 14 days of the PSPA, 10% within 30 days of signing the formal sale and purchase agreement and 80% on “Completion Date”, being 155 days from the date of the PSPA (i.e. 14 December 2009) subject to fulfilment of the conditions precedent set out in clause 5(a) and compliance by LBL with the terms and conditions thereunder (clauses 1-3);

(2)  The conditions precedent (“Conditions”) require a final and conclusive court order to the effect that the registration of YH SPA be removed from the Land Registry on or before 120 days from the date of the PSPA (“Relevant Date”) (clause 5(a));

(3)  If the court order cannot be obtained before the Relevant Date or that LBL cannot fulfil the Conditions on or before the Completion Date, D shall have the right within the next 7 days to waive the Conditions, postpone the Relevant Date for 60 days or terminate the PSPA and obtain return of all monies paid to and held by KCHF as stakeholder (clause 5(b)-(c));  

(4)  LBL warrants and undertakes that it shall use its best endeavours to obtain the court order as soon as reasonably practicable and cause the same to be registered at the Land Registry (clause 5(d));

(5)  LBL shall give and show good title to the Property (clause 7); and

(6)  On completion, (i) LBL shall obtain a full release and discharge of the Debenture and Lin Charging Orders registered against the Property, and (ii) Lin as authorized attorney of China States shall discharge / vacate the Lin Charging Orders (clause 8).

29.  Crucially, clause 9 of the PSPA (“Clause 9”) provides as follows:

“Sale and Lease Back: It is a condition of this Agreement that on or before 7 days before Completion, [LBL] shall procure China States as tenant (‘Tenant’) to enter into a lease (in the form stipulated by [D’s] solicitors and to be signed in escrow pending completion of the sale and purchase) of the Property with [D] as landlord for the term and at the rent (‘the Lease’) upon the following terms and conditions:-

(a)  Term:	For a term of 5 years commencing from the actual date of completion of the sale and purchase herein;
(b)  Monthly rental:	(i) HK$650,000.00 payable in advance on the first date of each calendar month exclusive of management fee, … for the first three years of the term commencing from the actual date of completion of the sale and purchase herein;
	(ii)  HK$715,000.00 payable … for the last two years of the term commencing immediately after the expiration of the first three years and a further rental deposit in the sum of HK$390,000.00 to maintain 6 months’ deposit shall be paid by the Tenant.
(c)  Rental Deposit:	A deposit equivalent to 6 months of the monthly rental in the sum of HK$3,900,000.00 as security deposit for the due performance of the obligations of the Tenant under the Lease, which is refundable upon expiry of the Term in accordance with the terms of the Lease and provided that [D] shall have a right upon completion of sale and purchase herein to deduct the said sum from the balance of the sale proceeds direct;
(d)  [D] shall have a right upon completion of the sale and purchase herein to also deduct a sum of HK$650,000.00 being the first month monthly rental payable in advance from the balance of sale proceeds; and
…
(g)  The Tenant agrees and undertakes to continue to run the hotel business after commencement of the term and not to change the business nature from Hotel business to other business, as well as the name of the Hotel without the prior written consent of [D].”

30.  Further, clauses 12, 15 and 22 of the PSPA provide that:

(1)  Winland agrees to withhold any action (except to make statutory demand and to take receiver action) which may be taken against LBL (clause 12);

(2)  The PSPA supersedes all prior negotiation, representation, undertaking and agreements of the parties hereto (clause 15); and

(3)  LBL, China States, Winland and Lin jointly and severally warrant, declare and confirm that the indebtedness owing by LBL and China States in respect of the Property do not exceed the purchase price (clause 22).   

31.  By a deed dated 10 July 2009 made between Winland, LBL, China States and Lin (“Deed of Settlement”), the parties agreed that they would discharge their respective encumbrances and claims on the Property upon receipt of the following amounts:

Purchase Price	$147,000,000
Six month’s rental deposit $650,000 x 6 payable under tenancy	$3,900,000
One month’s rent in advance	$650,000
Commission payable to Savills for the subject sale	$1,470,000
Balance of purchase price	$140,980,000
Legal fee payable to KCHF for the subject sale (say)	$100,000
Legal fee payable to KCHF and counsel fee for vacating the YH SPA	$200,000
Balance A	$140,680,000
Outstanding legal fee payable to DWTC (part payment)	$2,000,000
Outstanding debt to China States (part payment)	$3,450,000
Consultant fee payable to Kencon Property Consultants (part payment)	$400,000
Balance B	$134,830,000
Security for cost for vacating YH SPA	$1,000,000
Reduced redemption amount payable to Winland	$133,830,000

A6.  Further encumbrances against Property

32.  No formal sale and purchase agreement was entered into between the parties.  In the meantime, further encumbrances were registered against the Property in that:

(1)  on 9 September 2009, BEA obtained a charging order nisi followed by a charging order absolute (“BEA 1^st Charging Orders”) in respect of the costs of the appeal brought by LBL against the judgment in the BEA Action.  The BEA 1^st Charging Orders were registered against the Property on 14 September 2009; and

(2)  on 8 October 2009, DWTC commenced HCA 2071/2009 against LBL for allegedly outstanding legal costs in the amount of $13.8 million and registered a lis pendens against the Property on the same day (“DWTC Lis Pendens”).

33.  No step was taken by LBL to remove the YH SPA or any of the encumbrances registered against the Property.  This led to D commencing the following proceedings to remove the encumbrances.

34.  In HCA 2174/2009 (D v YH, LBL and Winland):

(1)  On 27 October 2009 (2 weeks before the Relevant Date), D commenced the action and applied for an injunction to compel LBL to comply with clause 5(d) of the PSPA by taking steps to remove the YH SPA and register the court order with the Land Registry.

(2)  On 30 October 2009, D obtained an order from Chu J to vacate the YH SPA with costs against LBL.  A sum of $350,000 (out of the balance of Price) was ordered to be paid into Court to abide by any order of to be made in the YH Action.  YH and LBL were ordered to pay the costs of D’s application, and D to pay Winland’s costs.

35.  In HCA 2410/2009 (D v Lin, China States, DWTC, LBL and Winland):

(1)  On 2 December 2009, D commenced the action and issued a summons to vacate the Lin Charging Orders and the DWTC Lis Pendens.

(2)  On 4 December 2009, Chu J ordered, inter alia, Lin to procure the discharge of the Lin Charging Orders, and vacated the DWTC Lis Pendens. 

(3)  However, the Lin Charging Orders and DWTC Lis Pendens were only removed by Lin and DWTC on 16 December 2009 and 15 December 2009 respectively.

(4)  On 16 December 2009 Lin applied for leave to appeal against the Order of 4 December 2009.  The application was dismissed by Chu J on 22 January 2010.

36.  On 14 December 2009, BEA registered 2 other charging orders against the Property in respect of the costs payable by LBL in the failed applications for leave to appeal before the Appeal Committee (“BEA 2^nd Charging Orders”). 

A7.  Enforcement actions taken by Winland and Receivers

37.  As LBL remained in default of the Loan Agreement, Winland gave notice to crystallize the floating charges and appointed the Receivers over LBL’s assets including the Property on 26 November 2009.  However, LBL refused to let the Receivers to take possession of the Property. 

38.  By letter dated 27 November 2009 from HON, the Receivers terminated the engagement of DWTC as solicitors for LBL. This notwithstanding, DWTC continued to write to ZKP on matters relating to the sale of the Property to D as if they remained solicitors for LBL. 

39.  On 2 December 2009, Winland and CPL commenced HCA 2406/2009 against LBL and China States and obtained an injunction from Chu J on the same day:

(1)  requiring LBL and its officers to hand over the Property and documents relating to LBL to the Receivers;

(2)  authorizing the Receivers to take all steps in the name and on behalf of LBL for the purpose of transferring the Hampton Licence to CPL; and

(3)  requiring China States to transfer the Tatami Licence to CPL by 7 December 2009.

40.  In compliance with the injunction, the Receivers took possession of LBL’s assets including the Property on 2 December 2009; and the Hampton Licence and Tatami Licence were transferred to CPL on 2 December 2009 and 8 December 2009 respectively. 

41.  On 9 December 2009, the Receivers commenced HCMP 2544/2009 (“Receivers Action”) against LBL, D and Winland to obtain an order confirming their powers to sign all documents and receive all purchase price for the purpose of completing the PSPA on behalf of LBL.  On 11 December 2009, the Receivers obtained an order from Yam J confirming their powers to complete the PSPA including executing all necessary documents and receiving the Price. 

A8.  Lease with China States

42.  By letter dated 24 November 2009 PWKL (on behalf of China States) requested ZKP to provide a draft lease to be entered into between China States and D. 

43.  On 26 November 2009, ZKP sent a letter to DWTC (acted for LBL), in reply to DWTC’s letters dated 19 November 2009 and 23 November 2009.  The letter was forwarded to PWKL on the same date by ZKP. 

44.  By letter dated 5 December 2009 to D, LBL sent a “lease duly signed by China States in escrow” (“Signed Lease”). D considered the Signed Lease to be not in compliance with Clause 9.  This letter was provided by China States to ZKP on 7 December 2009 which, in turn, provided it to Winland. 

45.  On 8 December 2009, the Receivers obtained a valuation report from Jones Lang LaSalle Sallmanns which opined that the market value of the Property as at 8 December 2009 “for receivership purpose” was $134,000,000.

46.  By letter dated 11 December 2009 to ZKP, HON (on behalf of the Receivers) requested a copy of the draft lease to be entered into between China States and LBL.  In response, ZKP in its letter dated 14 December 2009 reiterated that Clause 9 did not impose any obligation on D and D has the right to waive the same. 

47.  On 14 December 2009, the “Completion Date” stipulated in the PSPA:

(1)  PWKL (on behalf of China States) sent a letter dated 14 December 2009 to ZKP, stating that China States had not received any draft lease despite ZKP’s promise to send it to them. 

(2)  ZKP (on behalf of D) in its letter dated 14 December 2009 to PWKL enclosed a draft lease (“Draft Lease”) and a draft personal guarantee to be signed by Lin and Chen Hui Fang (“Draft Guarantee”), and required China States to sign and return both documents by close of business of the same day.   

(3)  The PSPA was not completed, but the parties agreed to postpone completion for 7 days.

48.  By letter dated 16 December 2009 to PWKL, ZKP extended the time for China States to return the executed Draft Lease and Draft Guarantee to 18 December 2009.  ZKP stated that if China States did not return these signed documents by 18 December 2009, D would assume that China States no longer wished to enter into a lease pursuant to Clause 9, and the arrangement for lease back of the Property would cease and lapse automatically.

A9.  Instructions on payment of purchase price and completion

49.  Meanwhile, by letter dated 12 December 2009 to HON, DWTC referred to the Deed of Settlement and gave “split cheques” instructions on payment of the balance of purchase price as follows:

(1)  $8,000,000 in favour of China States, being (i) $3,450,000 for “Outstanding debt to China States (part payment)”; (ii) $3,900,000 for 6 month’s rental deposit; and (iii) $650,000 for one month rental in advance, given that without a lease in favour of China States due to be executed 7 days before completion, (ii) and (iii) were “no longer deductible”;

(2)  $2,000,000 in favour of DWTC; and

(3)  $400,000 in favour of Kencon Property Consultants. 

50.  In response, in their letter of 14 December 2009, HON stated that they only acted for the Receivers and would not act on the instructions given by DWTC or China States.

51.  Also on 14 December 2009, there were discussions between Daniel Wong and Lin during which Lin (on behalf of herself and China States) purportedly gave instructions to Daniel Wong to forfeit the deposit paid by D according to the terms of the PSPA. 

52.  On 16 December 2009, a meeting was held between Thomas Woo, Ivan Tang and Daniel Wong during which Thomas Woo wrote down the “split cheques” instructions and Daniel Wong added his comments (marked in italic) on the note which read as follows (“Handwritten Instructions”):

“$117,600,000 (balance of p.p.)

- 350,000 – Court [sic] by result HCA2174/2009

- 3,900,000 – rental dep. deducted

- 650,000 – first month rental

- 275,846 – settlement of outstanding mgt, rates and other charges

112,424,154 – balance

108,974,154 Winland

3,450,000 K.C. Ho

Redemption money to Winland

$112,374,922

- 29,400,000 (K.C. Ho & Fong’s stakeholder)

$82,974,922

Balance: $112,424,154
-	82,974,922 (redemption money) -> Winland
-	3,450,000 (transfer of Hotel licence)
	5,999,232 (net balance)”

53.  Thereafter, Thomas Woo prepared a memo on the “split cheque” instructions for Daniel Wong, who then faxed it to HON (“Typed up Instructions”).  The Typed up Instructions stated as follows:

“Upon completion of the sale and purchase, please split and deliver us your cheques for the total sum of HK$112,424,154.00 (after deduction of (i) HK$350,000 to be paid into Court pursuant to the Order of Madam Justice Chu to abide by the result of the HCA 2174/2009; (ii) HK$3,900,000.00 being rental deposit for the Lease of the Property pursuant to Clause 9(c) of the [PSPA]; (iii) HK$650,000 being the first month monthly rental payable in advance pursuant to Clause 9(d) of the said [PSPA]; and (iv) HK$275,846.00 for settlement of the outstanding rates, water charges and electricity charges) being the balance of purchase price drawn in the following manner:-

1.  HK$3,450,000.00 drawn in favour of ‘K.C. Ho & Fong’ as security money for transfer of the Hotel Licences; and

2.  HK$108,974,154.00 drawn in favour of ‘Winland Mortgage Limited’ being the net balance of purchase price of the Property.”

54.  On 17 December 2009, completion of the sale and purchase of the Property took place (“Completion”) in that:

(1)  ZKP gave instructions to MBJSM to draw down the mortgage loan of $102,900,000 by issuing (i) a cheque for $350,000 to be paid into Court to abide by the result of YH Action pursuant to the Order of Chu J made in HCA 2174/2009; and (ii) a cheque for $102,550,000 in favour of Winland.

(2)  In their letter to D, the Receivers confirmed that the balance of Price had been fully paid by D and the legal formalities in respect of the sale and purchase of the Property had been completed and finalized.

(3)  D acknowledged receipt of a cheque for $4,550,000 issued by ZKP as “the rental deposit for the Lease of the Property and the first month monthly rental payable in advance”. 

(4)  Winland executed a deed of indemnity whereby it agreed to indemnify D of all claims, losses, damages, costs and expenses which D may suffer or incur by reason of Lin Charging Orders and BEA 1^st and 2^nd Charging Orders up to $2.2 million.

(5)  A management contract was made whereby D engaged CPL as exclusive manager and operator of the Hotel on behalf of D from 17 December 2009 to 31 January 2010, and D has the right to terminate the contract upon giving 3 business days’ notice (“Management Contract”). The Management Contract was, as stated by Ivan Tang in his email dated 16 December 2009, to “be used if China States Ltd failed to take a lease on completion of the [PSPA]”.

(6)  Winland executed a Reassignment of Sale Proceeds (“Reassignment”) to release, assign and discharge unto LBL all its rights, title, interest and benefit to and in the “Assigned Proceeds”[4] (as secured by the Assignment SP), to hold the same unto LBL absolutely free and discharged of and from the Assignment SP.

(7)  HON provided to D, inter alia, Assignment of the Property and Assignments of the Hotel Licences executed by CPL, sealed order in the Receivers Action dated 11 December 2009, Release of the Debenture and Release of the Assignment SP both dated 17 December 2009, all executed by Winland. 

(8)  Edwin Lun made a statutory declaration to confirm that as at 17 December 2009, LBL owed $164,236,255 to Winland and that the entire indebtedness of LBL exceeds $147 million (i.e. the Price under the PSPA).    

(9)  A mortgage was created over the Property in favour of HSBC.

A10.   Post-Completion

55.  By letter dated 22 December 2009 to ZKP, PWKL referred to Completion and demanded return of the Signed Lease within 24 hours and rejected the Draft Lease. 

56.  In their letter dated 22 December 2009 to PWKL, ZKP stated that as China States had failed to sign and return the Draft Lease and the Draft Guarantee within the time limit as extended by D (i.e. 18 December 2009), “the arrangement for lease back of the Property pursuant to Clause 9 of the [PSPA] has lapsed and no tenancy in respect of the Property will be granted to [China States] in any event”.  ZKP further asserted that China States had mispresented the income / financial position of the Hotel and thus the rental value of the Property, which was relied upon by D when entering into the PSPA and completing the purchase. D reserved its right to claim against China States for any loss and damage it suffered. 

A11.  WU Proceedings and LBL Action

57.  On 17 December 2009, Lin relied on the Default Judgment and presented a winding up petition against LBL in HCCW 721/2009 (“WU Proceedings”). 

58.  In their letter dated 24 December 2009, HON informed ZKP that the WU Proceedings had been commenced and pursuant to s 182 of the former Companies Ordinance (Cap 32) (“former CO”), any disposition of the property of LBL shall be void unless the court otherwise orders.  D was asked not to release the Sum until further order of the Court.

59.  On 11 January 2010, D issued a summons for a validation order in respect of the Assignment of the Property (“Validation Summons”). 

60.  On 19 January 2010, DWTC commenced HCA 68/2010 in the name of LBL against D (“LBL Action”) alleging that the Assignment of the Property to D was “void” on the grounds that (1) completion did not take place on 14 December 2009; (2) D had failed to pay the full Price; and (3) D had failed to grant the lease of the Property to China States pursuant to Clause 9.  

61.  On 22 January 2010, the Receivers obtained an order from Yam J (in the Receivers Action) empowering them to (1) trace LBL’s assets from, inter alios, the directors and shareholders of LBL, Leung, DWTC, David Chan, and the persons suspected to have misappropriated assets of LBL (being Right Gain, Lin and China States) so as to repay $26,262,101 owed to Winland together with interest from 18 December 2009; and (2) defend the WU Proceedings and to appeal against the Default Judgment.  In his Reasons for Decision dated 3 February 2010, Yam J observed that although Winland and the Receivers had not provided any formula as to the calculation of the amount owed, on his calculation, interest on the unpaid principal alone would be $25,930,666.67[5].

62.  By letter dated 26 January 2010, HON informed the Court that the Receivers had no objection to the Validation Summons. 

63.  On 29 January 2010, Harris J granted a validation order in respect of the Assignment of the Property to D from the date of completion.  As explained in §§14 – 15 of His Lordship’s ex tempore Judgment, the validation order does not prevent LBL from pursuing the LBL Action.   

64.  On 1 February 2010, the Hotel changed its name to “Hotel MK” and began to be operated by Sparkle Legend Ltd.

65.  On 23 February 2010, Winland applied for leave to be substituted as petitioner in the WU Proceedings.  In his affirmation filed in support of the application, Edwin Lun confirmed that as at 17 December 2009, LBL owed Winland $164,236,255 and, after selling the Property, as at 31 January 2010, LBL was still indebted to Winland in the amount of $28,935,584 (exclusive of further interest, legal costs and the costs incurred in enforcing the Debenture). 

66.  On 24 May 2010, Winland was substituted as petitioner, and LBL was ordered to be wound up. 

67.  In respect of LBL Action:

(1)  D filed a Defence and Counterclaim dated 8 April 2010.

(2)  As LBL was ordered to be wound up on 24 May 2010, D’s counterclaim was stayed pursuant to s 186 of the former CO. 

(3)  By a consent order dated 22 June 2010, the Action was stayed pending appointment of the Liquidators of LBL.

(4)  Pursuant to a consent order dated 27 May 2019, the Action including D’s Counterclaim was discontinued with no order as to costs. 

68.  By letter dated 16 March 2012, HON on behalf of the Receivers demanded D to return the Sum. 

69.  ZKP on behalf of D sent to HON a reply letter dated 7 May 2012.

70.  On 6 July 2015, Ps issued the writ in this action.

B.  ISSUES

71.  In the agreed list of issues, counsel identified the following issues by reference to the pleadings filed:

(1)  Whether the Liquidators and Receivers, not being parties to the PSPA, have standing to bring this action against D, and whether under the PSPA, D owed any obligation to pay the Price to Winland (Locus standi Issue).

(2)  Whether Winland’s claim is barred by the rule against reflective loss (Reflective Loss Issue).

(3)  Whether Clause 9 only permits deduction and retention of the Sum as rental deposit pursuant to clause 9(c) and first month’s rental pursuant to clause 9(d) (Construction Issue).

(4)  Whether there is an implied term to the PSPA that D shall pay back the Sum to LBL and/or Winland if no lease is entered into pursuant to Clause 9 (Implied Term Issue).

(5)  Whether in retaining and using the Sum without accounting the same to Ps, D acted in beach of the PSPA (Breach of PSPA Issue).

(6)  Whether Winland, the Receivers and D had concluded an enforceable agreement to the effect that the Sum would be deducted from the Price and kept by D even though no lease is entered into pursuant to Clause 9 (Collateral Agreement Issue).

(7)  Whether D was unjustly enriched at the expenses of Ps by retaining and using the Sum in the absence of any lease, and whether Ps are entitled to a restitution of the Sum (Unjust Enrichment Issue).

(8)  Whether Ps are estopped by convention from recovering the Sum, and whether Winland and the Receivers are estopped by representation or promissory estoppel from recovering the Sum (Estoppel Issue).

(9)  Whether D is holding the Sum as constructive trustee for Ps or that D is liable to account the Sum to Ps by reason of resulting trust (Trust Issue).

C.  ANALYSIS OF ISSUES

C1.  Locus standi Issue

72.  The Locus standi Issue was raised in §5A of the Amended Defence filed by D on 26 February 2019 (“Defence”).

73.  In their Amended Reply filed on 24 May 2019 (“Reply”), Ps denied that they do not have standing to bring the claim and asserted that the Liquidators and the Receivers have “the full rights, powers and entitlements … at law to bring the present proceedings”.  Specifically, in respect of the Receivers, reliance was placed on:

(1)  clause 12.01(i), (iii) and (v) of the Debenture which, it was said, conferred powers on the Receivers (i) to demand and recover all the income arising out of the Property by action in the name of either LBL or Winland; (ii) to transfer the Property in the name of LBL and to receive the consideration for the sale of the Property; and (iii) make any arrangement or compromise or enter into any contracts which Winland shall think expedient.

(2)  Yam J’s Order of 11 December 2009.

(3)  The sale and purchase under the PSPA was completed by D and the Receivers qua receivers of the Property and the undertakings of LBL. 

74.  Despite the fact that counsel have identified the Locus standi Issue as the first issue which requires determination of the Court, in Ms Liu’s written Opening, no submission is made to address the salient question as to why Ps (or any of them) have standing to sue in respect of the Sum.   

75.  In his written Opening, Mr Chan submits that none of Ps have standing to sue D for the purpose of recovering the Sum in that:

(1)  Although Winland was a party to the PSPA, it has no standing to enforce the covenant to pay the Price which was given by D to LBL qua vendor. This is reinforced by clause 4(a) of the PSPA, which provided that KCHF was LBL’s agent for the purpose of receiving all monies payable to LBL pursuant to the PSPA.   

(2)  Winland’s security over the Property has been discharged and released upon Completion, and the Property has been assigned to D free from encumbrances.

(3)  The Liquidators and the Receivers were not parties to the PSPA and, therefore, have no standing to sue, whether for the purpose of enforcing its terms or recovering the Sum paid pursuant thereto.

(4)  The cause of action (if any) to recover the Sum has not been vested in the Liquidators or the Receivers. In Kent, Liquidators of la Banque Ville-Marie v La Communaute Des Soeurs de Charite de la Providence [1903] AC 220 at 226, Lord Davey held that “wherever the object of the action is to recover a debt, or to recover or protect property the title to which is in the company, the action should be brought in the name of the company”.  Similarly, in Liu Yiu Keung Stephen v Keen Lloyd Resources Ltd (in liq) [2007] 1 HKC 605 at §§12, 14, Barma J applied the principle stated by Kennedy J in Robertson v Oskar (1983) 8 ACLR 570 at 572 that “[t]here is no doubt that a receiver, as such, is not ordinarily entitled to bring an action in his own name, since no property is vested in him by virtue of his appointment … and there is no vesting in him of any cause of action”. 

76.  Ms Liu does not take issue with the 1^st, 3^rd and 4^th points made by Mr Chan, which seems to me to be incontrovertible.  In her supplemental Opening (lodged 2 days before the trial), Ms Liu makes the following points:

(1)  D could not dispute Ps’ authority to sue by way of defence and cannot do so at the trial, citing Tang Kam Sheung v Tang Kit Yee, HCA 677/2007, 25 September 2009, at §§13 – 14, per Chu J (as she then was). 

(2)  The Release of the Debenture dated 17 December 2009 executed by Winland is a partial release, and Winland reserved its rights at the penultimate paragraph of the Release.

(3)  D’s challenge is “a challenge of form and style in which [the Liquidators] and [the Receivers] sue in this action”.  D did not deny the Liquidators and Receivers’ right to sue for recovery of LBL’s assets and the Court ought to allow a substitution or joinder of LBL.  Reliance is placed on Kent pp 226-227 and Re Tele-art Limited, HCMP 26/2006, 4 August 2006, §40 where the Courts observed that the liquidators should not bring the action in their own names, instead of the name of the companies in liquidation. 

(4)  Without prejudice to Ps’ submission that D should not be allowed to dispute Ps’ standing to sue at trial, the Liquidators will apply for substitution or joinder of LBL as a party.  For this purpose, the Court has power to make such order under Order 15 rule 6 and there is no prejudice to D (Kirkpatrick v Snoozebox Ltd [2014] BCC 477 at §§13 – 14; Remedy Asia Ltd v Yick Shing Contractors Ltd, HCMP 2543/2014, 12 December 2014, at §11; In re Daniel Lynch Ltd (in administration) [2011] 1 WLR 1364, at §§24, 26-28).

(5)  The Receivers have standing to sue in their own names as they handled the Completion in the name of LBL and agreed to the deduction of the Sum on the mistaken belief that a lease would be entered into after Completion. 

77.  I am unable to accept Ms Liu’s submissions. 

78.  First, it is wrong to characterize the Locus standi Issue as a challenge on P’s authority to sue.  There is no suggestion that Ps do not have the authority to sue in their names.  Rather, the point raised in the Defence is whether Ps have the necessary standing to sue which is a different point.  Even if there is a proper basis to ask the Court to adopt the same approach in dealing with the issue of authority to sue in the same way as the issue of standing to sue (none has been identified), it is clear from the principle expounded by the English Court of Appeal in Airways Ltd v Bowen [1985] BCLC 355, at 359a-359f that it is still incumbent upon the Court to determine the issue:

“The important point … which the judge must have overlooked is that a contention that an action is not properly constituted, due to lack of authority from the named plaintiffs to bring it, is one which cannot be raised by way of defence. It must be raised at the outset, and it must therefore be dealt with at the outset. The only qualification is that even if it is not raised at the outset, but if it then comes to the notice of the court or of the defendants in the course of the proceedings, then it can still be raised as an issue at that stage, but not by way of defence to the action. In the present case it was properly raised at the outset. The judge should therefore have borne in mind that this issue had to be decided at the outset, subject only to the possibility of adjourning the application. Once the issue has been raised, it is, with respect, plainly wrong to decline to decide the issue on the ground that the rights and wrongs as to the control of the company and the propriety of the proceedings may be in doubt, and then to allow the action to go on by dismissing the application without having decided it on the merits. That, unfortunately, was the course which the judge ultimately took at the end of the lengthy and careful consideration which he gave to this issue, being one with which he may not have been familiar in the ordinary course of his experience. If the application is dismissed, when it is either clear that the action has in fact been brought without authority or that it is at any rate doubtful whether it was brought with authority, and if the action is thereupon allowed to proceed, which is what the judge decided, then that must be a plainly erroneous conclusion. The reason is that the defendants will then never have any further opportunity of raising this issue, however well-founded their application may be.” (underlined added)

79.  The belated suggestion that D cannot take issue with Ps’ lack of standing to sue is surprising, given that Ps have pleaded the issue in their Reply and counsel has identified the issue in the agreed list of issues. 

80.  Second, the reservation of rights in the Release of the Debenture dated 17 December 2009 is in these terms (“Reservation Clause”):

“AND IT IS HEREBY EXPRESSLY DECLARED that nothing herein contained shall prejudicially affect the continuing nature of the remaining security under the [Debenture] or other security which [Winland] may now or at any time hold or take from [LBL] in respect of the monies which remain due and owing by [LBL] to [Winland] or prejudice or affect or invalidate the appointment of receivers by [Winland] and the irrevocable power of attorney granted by [LBL] in favour of [Winland] and/or the receivers under the Debenture and that the right of [Winland] to recover from [LBL] in respect of monies which remain due and owing to [Winland] is unaffected by the Release.”

81.  As is clear from the Reservation Clause, it only reserves the rights to recover from LBL the monies which remain due and owing to Winland and Winland’s rights under the Debenture to the extent that such rights have not been released.  It does not have the effect of assigning any cause of action which belongs to LBL to Winland.   

82.  For completeness, I do not think that clause 12.01(i), (iii) and (v) of the Debenture, a point pleaded in the Reply, has the effect of assigning any cause of action which belongs to LBL to Winland.  At their highest, the clause only permits Winland to bring proceedings in the name of LBL.  They do not confer any right on Winland to assert a cause of action which belongs to LBL. 

83.  Third, I do not accept that the Receivers have standing to sue in their own names.  As explained by Barma J in Liu Yiu Keung Stephen v Keen Lloyd Resources Ltd (in liq), at §16, it is only if there is something beyond the mere fact of receivership that gives rise to a cause of action vesting in the receiver personally that the receiver is entitled to sue in his own name.  On the facts of this case, the Receivers handled all matters relating to the Completion including agreeing to the deduction of the Sum by exercising their powers qua receivers of LBL.  There is nothing in support of Ms Liu’s contention that the Receivers have acquired any cause of action in respect of the Sum in their own right. 

84.  Fourth, contrary to Ms Liu’s suggestion, D has in the Defence specifically pleaded that Ps have no standing to claim the Sum.  This is a point of substance and should be addressed by Ps much earlier on, rather than leaving the matter at large and seeking to rectify the position by making a very late “application” at trial. 

85.  Indeed, despite the very late indication that Ps intend to apply for substitution or joinder of LBL, no summons has been issued by Ps for such purpose.  Nor have Ps filed any affirmation to explain the reasons for their failure to make the application during the 20 months after D had raised the issue in the Defence, particularly when until 27 May 2019 (see §67(4) above), the LBL Action remained on foot and it was possible for LBL to claim the Sum in that Action.  In her supplemental Opening, Ms Liu does not commit to any definitive stance other than saying that the Liquidators will “apply for substitution or joinder of LBL as a party”.  On Day 1 of the trial Ms Liu still makes the “application” for leave to either substitute or join LBL as a plaintiff and the basis of the application remains opaque (see §§88-89 below). 

86.  As a result of Ps’ stance and inaction, D is forced to deal with the “application” in great haste, thereby deprived of a proper opportunity to consider and take legal advice in the fullness of time or to file evidence in opposition to the “application”. I do not think that there is any justification for Ps to push through the “application” in this manner, which is most unfair and cannot be justified on any ground.  For these reasons alone, even if the Court has discretion to order joinder of LBL at this late stage (which I do not think is the case for the reasons set out in Section C2 below), I would not exercise my discretion in allowing the joinder of LBL as a plaintiff in this action. 

C2.  Application for joinder of LBL

87.  As the Sum was paid to D on 17 December 2009 and Ps only demanded for return the same on 16 March 2012, by the time the application for joinder of LBL is made by Ps, the relevant 6-year limitation period applicable to LBL’s claim already expired.  This Court therefore draws counsel’s attention to Beijing Tong Gang Da Sheng Trade Co v Allen & Overy (2016) 19 HKCFAR 705 so that submissions can be made on whether the requirements stipulated in s 35(3)-(7) of the Limitation Ordinance (Cap 347) (“LO”) and the applicable Rules of the High Court (“RHC”) are satisfied. 

88.  On Day 1 of the trial, Ms Liu makes the application for  substitution or addition of LBL in reliance on:

(1)  s 35(6)(b) of the LO, which provides that “in the case of a claim involving a new party, if the addition or substitution of the new party is necessary for the determination of the original action” (“Necessity Limb”); and

(2)  s 35(7)(b) of the LO, which provides that “any claim already made in the original action cannot be maintained by or against an existing party unless the new party is joined or substituted as plaintiff or defendant in that action” (“Not Maintainable Limb”).

89.  It is not clear if it is Ps’ position that their claim cannot be maintained without the joinder of LBL, and Ms Liu does not commit to a definitive position despite being pressed by this Court.  It is wholly undesirable for Ps to make a very late application in such an obscure and non-committal manner.  With great reluctance, the trial is adjourned to the next day so that counsel can prepare written submissions on Ps’ application and the Court can hear all the arguments on the application before the parties proceed to open their case and call their witnesses. 

90.  In her Note on Joinder Application submitted on Day 2, Ms Liu finally confirms that:

(1)  Ps accept that their claims cannot be maintained unless LBL is joined or substituted as a plaintiff.

(2)  Ps seek substitution of LBL in place of all Ps.  If there is any concern about recovery of costs against LBL, Ps are agreeable to a joinder “if that is considered appropriate by the court”.  Ms Liu retracts this point in her submissions in reply.   

(3)  The application for joinder is made pursuant to Order 15 rule 6(2)(b)(i), Order 15 rule 6(5)(a), Order 15 rule 6(6)(a)-(b) of RHC. 

(4)  The application involves the addition of a new party.  By virtue of s 35(2)(b) of the LO, it shall be treated as a “new claim” (Beijing Tong Gang, §23).

(5)  S 35(5)-(7) of the LO sets out the conditions under which a “new claim” involving the addition or substitution of a new party may be allowed.  Ps rely on both the Necessity Limb and the Not Maintainable Limb.

(6)  Ps do not rely on section 35(7)(a) of the LO or Order 20 rule 5(3) of RHC, which concern amendment to correct the name of a party. 

91.  Before dealing with the arguments raised by Ms Liu, I shall set out the approach of the Court in dealing with an application for joinder of a new party made after expiry of the relevant limitation period. 

92.  As submitted by Mr Chan, the starting point is that except as provided by s 30[6] of the LO or by rules of court, the Court shall not allow a “new claim” to be made after the expiry of the limitation period applicable to the claim (s 35(3) of the LO).  This applies to addition or substitution of a new party whose claim is regarded as a “new claim” for the purpose of s 35 of the LO (The “Lu Shan” [1991] 2 Lloyd’s Rep 386 at 389-390; Hong Kong Civil Procedure 2021, §15/6/3). 

93.  S 35(5) of the LO makes clear that the Court would allow a “new claim”:

(1)  where rules of court may provide for allowing such “new claim”;

(2)  only if the conditions specified in s 35(6) of the LO are satisfied; and

(3)  subject to any further restrictions the rules may impose. 

94.  I first consider the rules applicable to Ps’ application and the restrictions imposed by such rules.   

95.  Order 15 rule 6(2)(b)(i) provides that:

“(2) Subject to the provision of this rule, at any stage of the proceedings in any cause or matter the Court may on such terms as it thinks just and either of its own motion or on application –

(a) …

(b) order any of the following persons to be added as a party, namely –

(i) any person who ought to have been joined as a party or whose presence before the Court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon.” (underlined added)

96.  Where, as here, the application for joinder or substitution of a party is made after the expiry of the relevant limitation period, the restrictions under Order 15 rules 6(5) and 6(6) are engaged. They are in these terms:

“(5) No person shall be added or substituted as a party after the expiry of any relevant period of limitation unless either-

(a) the relevant period was current at the date when proceedings were commenced and it is necessary for the determination of the action that the new party should be added, or substituted, or

(b) …

(6) The addition or substitution of a new party shall be treated as necessary for the purposes of paragraph 5(a) if, and only if, the Court is satisfied that -

(a) the new party is a necessary party to the action in that property is vested in him at law or in equity and the plaintiff’s claim in respect of an equitable interest in that property is liable to be defeated unless the new party is joined, or

(b) the relevant cause of action is vested in the new party and the plaintiff jointly but not severally, or

(c) …

(d) …

(e) …” (underlined added).

97.  Ms Liu relies on both Order 15 rule 6(6)(a) (“rule 6(6)(a) Limb”) and Order 15 rule 6(6)(b) (“rule 6(6)(b) Limb”).

98.  As regards rule 6(6)(a) Limb, Ms Liu contends that:

(1)  Winland has equitable interest in the Sum in its capacity as a secured creditor of LBL.  The Court should look at the whole situation of the case, which shows that Winland is the only secured creditor of LBL.  If the Sum is recovered by LBL, it will be caught under the Debenture, which extends to all the general assets of LBL.

(2)  Under the Reservation Clause, Winland specifically reserved its rights under the Debenture.  The Debenture created, inter alia, a floating charge over all present and future assets of LBL.  The floating charge was crystallized when the Receivers were appointed on 26 November 2009, as stated in ONC’s letter of the same date. 

(3)  Once LBL recovers the Sum, it will be caught by the Debenture.

99.  As Mr Chan rightly points out, these arguments fly against Ps’ acceptance that their claim cannot be maintained unless LBL is joined and Ps seek substitution of LBL in place of all Ps (see §90(1)-(2) above).  

100.  I note that Ms Liu is unable to point to any evidence which supports her contention that Winland has equitable interest in the Sum.  The contention is plainly untenable, given that on Completion, Winland executed the Reassignment (described in §54(6) above) in these terms:

“NOW THIS DEED WITNESSETH that [Winland] hereby RELEASES, REASSIGNS AND DISCHARGES unto [LBL] all [LBL’s] rights, title, interest and benefit to and in the Assigned Proceeds (as defined in the [Assignment SP]) and all other subject matter assigned unto [Winland] under the [Assignment SP] TO HOLD the same unto [LBL] absolutely freed and discharged of and from the [Assignment SP]” (underlined added)

101.  The following definitions under the Assignment SP are relevant:

“‘Assigned Proceeds’ means and includes (i) all moneys representing sale proceeds receivable or to be received by [LBL] from Purchasers under the terms of all Contracts, insofar as or to the extent that such moneys are not required to be held and retained by [LBL’s] Solicitors as stakeholders pursuant to the terms of such Contracts, (ii) all [LBL’s] right, title, benefit and interest of and in all moneys for the time being and from time to time held and retained by [LBL’s] Solicitors as stakeholders pursuant to the terms of all or any Contracts subject to the obligations of [LBL’s] Solicitors as such stakeholders under the Contracts and (iii) all [LBL’s] right, title, benefit and interest of and in all moneys for the time being standing to the credit of the Stakeholders Account.”

“‘Contracts’ means and includes all or any agreement fro [sic] sale and purchase which may at any time and from time to time hereafter be entered into in accordance with the terms of the Debenture by [LBL] with any Purchasers for the sale of any undivided part(s) or share(s) of and in the Lot and the Development together with the exclusive right and privilege to hold, use, occupy and enjoy any part(s) of the Development and ‘Contract’ means any one of such agreements for sale and purchase.”

“‘Purchasers’ means and includes all purchasers named as such in all or any of the Contracts; and ‘Purchaser’ means any one of the Purchasers.” (underlined added)

102.  In my view, the definitions of “Assigned Proceeds”, “Contracts” and “Purchasers” are wide enough to cover the Price, the PSPA and D.  As the Sum was part of the Price receivable by LBL under the PSPA, it falls within the meaning of “Assigned Proceeds”.  By executing the Reassignment, Winland agreed to and did release, assign and discharge unto LBL all its rights, title, interest and benefit to and in the “Assigned Proceeds” to LBL.  There is no basis for Ps to contend that Winland still has any equitable interest in the Sum. 

103.  The Debenture does not assist Ps. As can be seen from clauses 3.02 and 3.03 of the Debenture, 3 forms of security were created by LBL in favour of Winland:

(1)  a first legal charge over the Property;

(2)  a security by way of assignment of all the rights of, inter alia, “any payment, covenant, agreement, undertaking or indemnity contained in any sale and purchase agreement, lease or other document, agreement or undertaking whatsoever in respect of or relating to the Property now subsisting or to be created hereafter”; and

(3)  a first floating charge over all of LBL’s general assets, namely:

“all of its undertaking, property, assets, goodwill, rights and revenues, whatsoever and wheresoever, both present and future, including all book and other debts now and from time to time due or owing to [LBL], the uncalled capital, goodwill and all patents, patent applications, trade marks, trade names, registered designs, copyrights, licences and ancillary and connected rights both present and future of [LBL] and so that the charge hereby created shall be a continuing security by way of first floating charge”.

104.  Amongst the 3 forms of security described in the preceding paragraph:

(1)  The first security over the Property was the subject matter of the Release of the Debenture executed by Winland on Completion (see §54(7) above). Under this Release, Winland agreed, inter alia:

“(iii) RELEASES AND REASSIGNS as mortgagee unto [LBL] all rights and benefits of and relating to the Property charged or assigned unto [Winland] under the [Debenture] TO HOLD the same unto [LBL] absolutely

FREED AND ABSOLUTELY DISCHARGED of and from the [Debenture] and of and from all principal, interest and other monies thereby secured and all claims and demands for or in respect of the same or in anyway relating thereto …” (underlined added)

(2)  The second security over “Assigned Proceeds” was dealt with by the Assignment SP. All the rights and interests of Winland over the “Assigned Proceeds” were reassigned to LBL by way of the Reassignment (see §54(6) above). The remaining rights and interests of Winland under the Assignment SP, if any, were released following the execution of the Release of the Assignment SP (see §54(7) above).

(3)  The third security over the general assets of LBL was a separate security created over the other general assets of LBL to the extent that they were not covered by the first and second securities.

105.  Even if, contrary to my view, the “Assigned Proceeds” does not have the effect of reassigning all of Winland’s rights and interest in the Price under the PSPA including the Sum, the terms of the Release of the Debenture[7] are wide enough to cover the Sum, being either “all rights and benefits of and relating to the Property” or “all claims and demands for or in respect of the same or in anyway relating thereto”.

106.  I do not think the Reservation Clause assists Ps.  As can be seen from the Reservation Clause (cited in §80 above), the rights reserved only affect the “remaining security” under the Debenture or other security which Winland may hold.  This can only be a reference to the security which has not been specifically released or reassigned by Winland.  I am unable to see how the Reservation Clause can have the effect of overriding the Release of the Debenture, the Reassignment or the  Release of the Assignment SP. 

107.  For the above reasons, I reject Ms Liu’s contention that Winland has equitable interest in the Sum.  It follows that Ps cannot rely on rule 6(6)(a) Limb.

108.  As for rule 6(6)(b) Limb, Ms Liu’s arguments go like this:

(1)  The right to recover the Sum is vested in the Liquidators/Receivers and LBL jointly, and the Liquidators/Receivers have the right to recover the same. 

(2)  Clause 12.01 of the Debenture confers powers on the Receivers to sue in their own names or in the name of LBL and do all acts and things as incidental or conducive to any such matters. 

(3)  The Receivers handled the Completion and agreed to the deduction of the Sum under the mistaken belief that the lease would be entered into between China States and D shortly.  On this basis, the Receivers have a cause of action against D under mistake of fact and law. 

109.  Again, Ps have not been able to point to anything which shows that the right to recover the Sum is vested in the Liquidators/Receivers and LBL jointly. 

110.  As for other arguments based on clause 12.01 of the Debenture and the Receivers having handled the Completion, for the reasons explained in §83 above, I do not think such matters have the effect of vesting the cause of action to recover the Sum on LBL and the Receivers (or the Liquidators) jointly.  It follows that Ps cannot rely on rule 6(6)(b) Limb.

111.  In light of the above conclusions, it is unnecessary to consider whether the conditions specified in the Necessity Limb or the Not Maintainable Limb are satisfied.  For completeness, I deal with the points briefly.

112.  On Necessity Limb, Ms Liu submits that:

(1)  Prior to amending the Defence in February 2019, D conducted the case as if LBL is a party.  Witness statements were filed by both parties on that basis. All the underlying fact, causes of action and relief sought are the same.  LBL will rely on the same facts in respect of relief which has already been claimed. There is no prejudice to D. 

(2)  D’s challenge is a challenge in form, citing Kent (226-227) and Re Tele-art. 

(3)  In Remedy Asia Ltd, the Court of Appeal held (at §§11 – 12) that True Light (which was hitherto not a party) should be joined as it is a necessary party to the action on the basis of s.35(5), (6) and (7) of the LO. 

(4)  Similarly, in Re Daniel Lynch, the Court held (at §§26 – 27) that it is possible and appropriate to allow the joinder of the company concerned so as to assert the relevant claims then pursued by an administrator on behalf of the company because of lack of locus standi of the administrator, and the decision would not be changed even if there had been a limitation issue. 

113.  I deal with the points in the same order:

(1)  I reject the point for the reasons stated in §§84 – 85 above.    

(2)  As Mr Chan submits, Kent is irrelevant.  The Privy Council held (at 226) that it has jurisdiction to correct the error under the Code of Civil Procedure in Canada, and the respondent conceded that the Court has such jurisdiction.  It was in this context that the Privy Council said that the error was one of form and the Court has the power to give leave to amend so as to correct that error. No limitation issue was involved in the case.  Similarly, in Tele-Art, the Court was not concerned with limitation issue.

(3)  In Remedy Asia Ltd, the assignee was told that if it wanted to sue in respect of the indebtedness, it had to join the assignor which still held the legal title to the claim.  It has no application to the present case, given that as Ms Liu accepts,  there was no assignment of the Sum from LBL to Winland.

(4)  In Re Daniel Lynch, the relevant provision is CPR r 19.5 (§12), which is very different from our Order 15 rule 6(6)(a) and (b).  The case does not assists Ps. 

114.  On Not Maintainable Limb, Ms Liu contends that:

(1)  The purpose of s 35 of LO is to do justice between the parties.  The right to substitute or join a new party under section 35(7)(a)-(b) of the LO is recognised in Beijing Tong Gang. 

(2)  Unlike D whose position would not be changed by the joinder of LBL, Ps would not be able to maintain the action if the application is disallowed “due to a technical point on the form”. 

(3)  In the interest of justice and on the basis of Order 15 rule 6(a) and s 35(7)(b) of the LO, the application should be allowed “so that the parties can proceed with the resolution of their real controversy”.

115.  This contention runs contrary to Ms Liu’s arguments that Winland and the Receivers have, in their own rights, standing to sue D in respect of the Sum. 

116.  In any event, I do not accept the contention for the following reasons:

(1)  Contrary to Ms Liu’s suggestion, there is no “right” to join a new party unless the restrictions under the relevant RHC and the conditions stipulated in s 35(6)-(7) of the LO are satisfied.

(2)  D’s position would be prejudiced by the joinder.  If LBL is joined as a plaintiff, the effect would be to deprive D of a limitation defence as the claim would be treated as if it were commenced on the same date as this action (s 35(1)(b) of the LO). 

(3)  The interest of justice does not justify the late joinder of LBL as a plaintiff in this action.  As stated in §67(4) above, until May 2019, LBL Action remained on foot and the facts concerning the Price and the grant of the lease to China States had been pleaded.  It was possible for LBL to claim the Sum in that Action.  There is no evidence before the Court as to why the Liquidators decided to discontinue the LBL Action, when they knew that (i) LBL was not a plaintiff in this action; and (ii) D had already raised the Locus standi Issue in the Defence.

117.  I should mention that Ms Liu in her writing Closing attempts to re-open the arguments on the application for joinder of LBL and contends, for the first time, that Winland has “an equitable interest by virtue of it being an equitable assignee”.  This is despite the fact that Ms Liu has in the course of her arguments on Day 2, expressly disavowed any reliance on any assignment between an assignor and an assignee.  I do not think that Ps should be allowed to re-open the application, let alone change the fundamental bases upon which the application are argued by both counsel.   

118.  For the above reasons, I dismiss Ps’ application for joinder of LBL. 

119.  As explained in §§100 – 107 above, I hold that all the rights and interest in the Price payable by D under the PSPA (of which the Sum formed part) has since Completion been reassigned from Winland to LBL and released vis-à-vis LBL.  As Ps have not been able to show that they have any standing to bring a claim in respect of the Sum, their claims in this action must fail.   

120.  The possibility of adjourning the trial until after determination of the joinder application is canvassed with counsel after conclusion of their arguments on Day 2.  Both counsel consider that it is more desirable for the trial to proceed.  As the subject matter of this action is very stale and the parties have already been involved in many litigations in the past 10 years, it seems to me that it would be more expeditious and cost effective for the trial to proceed so that all issues can be debated and determined once and for all.

121.  I turn to the other issues.

C3.  Reflective Loss Issue

122.  In §5A(b) of the Defence, D pleaded that “Winland’s cause of action against [D] for the Sum (if any, which is denied) is in any event barred by the rule against reflective loss.  The loss claimed is reflective of that of LBL.”

123.  Mr Chan does not make any submissions on this issue, whether orally or in writing.  As the point has been abandoned, it is unnecessary to decide the issue.

C4.    Construction Issue

124.  The principles regarding construction of contracts have been authoritatively stated by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912H-913F as follows:

“The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] A.C. 749.

(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB [1985] A.C. 191, 201:

‘… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.’”

125.  The same principle was repeated in Jumbo King Ltd v Faithful Properties Ltd & Ors (1999) 2 HKCFAR 279 at 296D-I, where Lord Hoffmann said this:

“The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well. … If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other … But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail.”

126.  Further, in Fully Profit (Asia) Ltd v Secretary for Justice (2013) 16 HKCFAR 351, Ma CJ said (at §15) that when construing contractual terms, context and the background is a surer guide.

127.  Ms Liu submits that D’s right to deduct the Sum from the Price was based on clause 9(c) and 9(d) which was premised on the existence of a lease to be entered into pursuant to Clause 9.  The language of Clause 9 is clear, D has the right to deduct the Sum only for the 2 specified purposes stated in clause 9(c) and 9(d).  When the specified purposes have gone, D no longer has the right to deduct the Sum and must repay the same.

128.  On the other hand, Mr Chan contends that, properly construed, Clause 9 served 2 purposes:

(1)  If China States executed the lease, the Sum would be used in the manner stipulated in clause 9(c) and 9(d); and

(2)  If China States failed to execute the lease, the Sum would be used as compensation to D for its loss and damage resulting from the breach by LBL and/or China States (“Alternative Purpose”).

129.  Mr Chan relies on the following “key factual matrix” as the context which, he submits, supports the above construction:

(1)  Winland was the mortgagee and LBL was in default.  Winland wanted to sell the Property so as to recover the Loan;

(2)  D was attracted to purchase the Property on the basis that it would be leased back to China States upon Completion, which would bring about 5% yield per annum.  It was insisted by LBL, which David Miao found to be acceptable;

(3)  Clause 9 was a condition of the PSPA and D (alone) was entitled to dictate the terms of the lease;

(4)  D’s entitlement to deduct the Sum became exercisable upon Completion, and did not depend on execution of a lease with China States; and

(5)  At the time of the PSPA, Winland and D were aware, or would reasonably be expected to have known, that LBL (and those behind or associated with it) was reluctant to sell the Property and might be uncooperative in any sale.

130.  Reliance is also placed on the steps taken by LBL (and those controlling it) to engineer and obtain the Lin Charging Orders which, it is said, made the Property unattractive to potential buyers.  As these matters only took place after the PSPA had been entered into, I do not think that they constitute the context against which Clause 9 is construed.   

131.  Nor do I think D is entitled to rely on the “key factual matrix” as the context against which Clause 9 is construed. It is not suggested (let alone proved) that the subjective intention of Winland and D or their knowledge at the time of the PSPA (as stated in §129(1), (2) and (5) above) was the background knowledge available to all parties to the PSPA. 

132.  In my view, the terms of Clause 9 are clear.  The Sum was deducted from the Price for the purposes stated in clause 9(c) and 9(d) of the PSPA.  No other purpose was alluded to.  I am unable to see how a reasonable person having all the background knowledge available to the parties to the PSPA would have understood Clause 9 to mean that the Sum can be applied for the Alternative Purpose as suggested by D. 

133.  The construction contended by D effectively requires the Court to re-write Clause 9 so as to confer a right on D to forfeit the Sum if no lease is signed or that China States and/or LBL acted in breach of the PSPA, when the parties (all of whom had the benefit of legal advice) never agreed to give such right to D. 

134.  I reject D’s construction of Clause 9 insofar as it is suggested that the Sum can be applied for the Alternative Purpose. 

C5.  Implied Term Issue

135.  It is Ps’ pleaded case (at §23 of SOC) that there is an implied term to the PSPA that D shall pay back the Sum to LBL and/or Winland if no lease is entered into pursuant to Clause 9.  The point is not pursued by Ms Liu at trial.  Nothing further needs to be said.

C6.  Breach of PSPA Issue

136.  In §29 of the SOC, Ps pleaded that in retaining and using the Sum without accounting the same to Ps, D acted in beach of the PSPA.  Again, the point is not pursued by Ms Liu at trial. 

C7.  Collateral Agreement Issue

137.  In §§65 and 84B of the Defence, D pleaded as follows:

“65. By the afternoon of 16^th December 2009, the outstanding incumbrances were cleared, Winland reiterated and confirmed that it would allow [D] to deduct the Sum from the balance of the purchase price, and [D] in turn agreed that it would not insist on $2.2 million being stakeheld unless the BEA Charging Order was discharged before Completion, but would instead accept the statutory declaration proposed by Winland together with an indemnity.”

“84B. Further or alternatively, Winland, the Receivers and [D] had concluded an enforceable agreement that Completion should take place and the Sum would be deducted from the purchase price even though the Lease had not been entered into. Insofar as it is necessary, [D] will contend that this agreement is supported by part performance, in that [D] proceeded with Completion in the circumstances and on the terms it did, including entering into the [Management Contract] with Winland’s affiliate company [CPL].” (“Collateral Agreement”)

138.  In §§40 and 50B of the Reply, Ps denied all the allegations and pleaded that:

(1)  Winland and the Receivers “have no authority to agree, and had not agreed, to any variation of the terms of the PSPA”;

(2)  The “cheque for the Sum was expressly referred to as the payment for the Rental Deposit and the Advance Rental, and therefore shall only be deductible from the purchase price if the Rental Deposit and the Advance Deposit were payable after the Lease was entered into”;

(3)  D knew or ought to have known that Winland or the Receivers “could not and would not enter into any agreement with [D] on terms different from the PSPA”;

(4)  Ps “rely on the lack of connection between the [Collateral Agreement] (which is denied) and the alleged performance thereof, namely Completion and the signing of the [Management Contract] with [CPL].”  

139.  Insofar as the matters pleaded in §65 of the Defence are concerned, I find that they are supported by the following undisputed facts:

(1)  the Handwritten Instructions, which were agreed upon by the representatives of Winland (Ivan Tang), D (Thomas Woo) and the Receivers (Daniel Wong), and the fact that the Sum was deducted from the balance of the Price paid by D on Completion (see §§52, 53 and 54(3) above); and

(2)  the deed of indemnity executed by Winland in favour of D up to $2.2 million (see §54(4) above).

140.  In my view, D has discharged the burden of proving the Collateral Agreement (as pleaded in §84B of the Defence) for the following reasons.

141.  First, contrary to Ps’ contention, I find that both Winland and the Receivers (acting on behalf of LBL) had authority to agree on variation of the terms of the PSPA or any terms different from those under the PSPA. 

(1)  So far as Winland is concerned, it had authority to agree on any terms on its behalf. 

(2)  As for the Receivers, by virtue of clause 12.01 of the Debenture and as confirmed by the Order of Chu J dated 2 December 2009 in HCA 2406/2009 (see §39 above) and the Order of Yam J dated 11 December 2009 in the Receivers Action (see §41 above), they were the only persons having the powers and authority to act on behalf of LBL.

(3)  That both Winland and the Receivers had the requisite authority to agree with D on terms different from those under the PSPA is reinforced by the fact that these 3 parties did agree to (i) postpone the date of completion for a week; (ii) not insist on a lease being signed 7 days before Completion; (iii) deduct the Sum from the balance of the Price payable in the absence of any lease; and (iv) substitute LBL’s obligation to obtain a full discharge of the Lin Charging Orders on Completion (as required by clause 8) by accepting the deed of indemnity executed by Winland in favour of D.    

142.  Second, the objective evidence set out in §§46 – 54 above shows that prior to Completion, D, Winland and the Receivers knew that:

(1)  under Clause 9, it was a condition that the lease should be signed 7 days before Completion;

(2)  China States through DWTC’s letter of 12 December 2009 to HON specifically mentioned that in the absence of a signed lease 7 days before Completion, the 6-month rental deposit and one month rent in advance were “no longer deductible”;

(3)  no lease was signed between China States and D; and

(4)  pursuant to the Handwritten Instructions and the Typed up Instructions, the Sum would be deducted from the balance of the Price payable by D for the purposes of paying the 6-month rental deposit and one month rent in advance.

143.  Third, it is indisputable that the deduction of the Sum in the absence of a signed lease was not a term under the PSPA.  It seems to me that such a term could only have been the subject matter of a separate agreement entered into between the relevant parties (i.e. Winland, D and LBL), as D contends.  In so holding, I have not lost sight of the fact that under the Deed of Settlement, the parties had agreed that the Price would be applied for the purposes stated therein, including payment of 6-month rental deposit and one month rent in advance.  However, this is not a case pleaded or advanced by Ps or D and, as such, it is not open to the Court to make a finding based on such scenario (Poon Hau Kei v Hsin Chong Construction Co Ltd & anor (2004) 7 HKCFAR 148 at §12). 

144.  Fourth, as regards consideration, I accept D’s contention that its act in proceeding with Completion (including entering into the Management Contract) constituted consideration in support of the Collateral Agreement.  Such act was not performance of pre-existing obligation, given that by reason of the non-compliance with the condition stipulated in Clause 9, D was not obliged to proceed to Completion. In any event, it is well established that mutual promises satisfy the requirement of consideration (Chitty on Contracts, 33^rd ed, §4-009). 

145.  For completeness, I do not accept Ps’ contention that there was no “connection” between the Collateral Agreement and the signing of the Management Contract with CPL.  As noted in §54(5) above, in Ivan Tang’s email to D dated 16 December 2009, he envisaged that China States might fail to sign a lease upon Completion, whereupon the  Management Contract would be used. 

146.  In short, I hold that D, Winland and the Receivers (acting on behalf of LBL) entered into the Collateral Agreement, which allowed the Sum to be deducted in the absence of a lease, and that the Collateral  Agreement was supported by valid consideration.

C8.  Unjust Enrichment Issue

147.  Despite my conclusion on the Collateral Agreement Issue, the Unjust Enrichment Issue remains a live issue given that on D’s own case, the Collateral Agreement only dealt with the entitlement to receive the Sum, not the entitlement to retain and use the Sum, which is a different matter. 

148.  Ps’ case, as pleaded in §§30 – 33 of the SOC, is that D’s retention and use of the Sum was “unjust” by reason of (1) “the absence of any Lease at the expense of [Ps]”; (2) “total failure of consideration” as D failed to enter into a lease pursuant to Clause 9; and (3) “mistake of fact that the Lease would be entered into shortly after the Completion”.  On these bases, it is said that Ps are entitled to “a restitution of the benefits unjustly received and/or enjoyed by [D] from the retaining and/or use of the Sum”. 

149.  D denies the claim, and contends that by reason of China States’ failure to enter into a lease, D has suffered damages in excess of $4.55 million.  Therefore, it is not unjust for D to retain the Sum.    

150.  Ms Liu cites Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 where the CFA explains (at §§66 – 67) the approach for a restitution claim in this way:

“66. The common law cause of action asserted by the plaintiff for money had and received where consideration has totally failed is now generally regarded as a species of claim for restitution based upon principles of unjust enrichment …

67. A useful framework for approaching such claims which was adopted by both parties involves asking four questions:

(a) Was the defendant enriched ?

(b) Was the enrichment at the plaintiff’s expense?

(c) Was the enrichment unjust ?

(d) Are any of the defences available ?”

151.  Ms Liu accepts that the burden is on Ps to establish the first 3 requirements to sustain the claim. 

152.  As regards the first requirement (whether D was enriched), I agree with Ms Liu that D was enriched by the Sum which had been deducted from the balance of the Price payable by D upon Completion, and the Sum was not applied to pay the 6-month rental deposit and one month rent in advance given that no lease was entered into.

153.  As for the second requirement (whether enrichment was at Ps’ expense) I do not think that the use and retention of the Sum was or can be said to be at Ps’ expense, in light of the following matters:

(1)  The lease envisaged to be made under Clause 9 was one to be entered into between China States and D and for their benefit (and burden) only.  Ps had no right or liability under such a lease.   

(2)  Under the Deed of Settlement, the parties (including Winland and LBL) agreed, inter alia, that the Sum would be deducted from the balance of the Price payable by D upon Completion and applied for the purposes of paying the 6-month rental deposit and one month rent in advance, both of which were payable by China States to D if a lease was entered into between them. 

(3)  If a lease were entered into between China States and D, it was China States which stood to benefit as the Sum would be applied for the purposes of paying rental deposit and rent in advance which would otherwise be payable by China States. Thus analysed, the only party which could conceivably claim to have suffered a detriment as a result of D’s failure to enter into a lease (which is not established, for the reason explained in §154 below) was China States. 

(4)  I am unable to see how Ps can claim that D’s retention and use of the Sum in the absence of a lease was at their expense, when they have no right to receive the Sum even if a lease were entered into between China States and D. 

(5)  Indeed, other than the suggestion that “the PSPA consists of a set of coordinated transactions” such that it would be “artificial to consider each individual transaction separately”, Ms Liu is unable to point to any evidence which supports her contention that the retention and use of the Sum in the absence of a lease was at Ps’ expense. 

(6)  Ms Liu’s attempt to rely on §31(n)(ii) of D’s defence & counterclaim filed in the LBL’s Action is misplaced, given that the Action (including the Counterclaim) has already been withdrawn.  Neither party has adduced any evidence in this action in respect of what was pleaded in that paragraph in the defence & counterclaim. 

154.  I do not accept Ps’ contention that it was D’s failure to enter into a lease with China States. 

(1)  I have set out the facts relevant to the attempts on the part of China States and D in entering into a lease in respect of the Property prior to Completion in Section A8 above. 

(2)  China States had no right to require D to accept the Signed Lease as a lease in compliance with Clause 9.  Nor did China States have any right to waive the requirement to provide the requisite personal guarantees stipulated in Clause 9.  D was entitled not to accept or sign the Signed Lease. 

(3)  While D was late in providing the Draft Lease and Draft Guarantee for China States’ consideration as they were only provided on 14 December 2009 (i.e. the original “Completion Date”), such delay did not affect completion as the parties subsequently agreed to postpone completion for 7 days, and China States was given until 18 December 2009 to sign and return the Draft Lease and the Draft Guarantee.  Had China States acted reasonably by signing the Draft Lease and the Draft Guarantee or informing D that it would need more time to consider the same, it was possible for the Draft Lease and Draft Guarantee to be signed before or on the date of  Completion.  There is no basis to attribute China States’ refusal to sign the Draft Lease and Draft Guarantee as the fault of D or to castigate the failure to sign a lease as D’s failure.   

155.  In respect of the third requirement (whether enrichment was unjust), Ms Liu contends that the enrichment is unjust by reason of “total failure of basis[8] and/or mistake”. 

156.  So far as “total failure of basis” is concerned, the only matter pleaded in §31 of the SOC is the failure to enter into a lease pursuant to Clause 9.

157.  The principle underpinning total failure of basis is described in Chitty on Contracts, 33^rd ed, §29-057 in this way:

“Where money has been paid under a transaction that is or becomes ineffective, the payer may recover the value of the money provided that the basis for the payment has totally failed … Although the ground of failure of basis is not confined to contracts most of the cases are concerned with failed contracts. In that context failure of basis occurs where there has been a complete failure of the performance for which the payer had bargained. Thus, the failure is judged from the payer’s point of view and:

‘… when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is generally speaking, not the promise which is referred to as the consideration, but the performance of the promise.’

The failure has to be total because the consideration is ‘whole and indivisible’. This is partly because one cannot assume that all parts of the payee’s performance are equally valuable and that the contract price is earned incrementally, but historically it was also because of the non-recognition in English law of the principle of unjust enrichment. Thus, any performance of the actual thing promised, as determined by the contract, is fatal to recovery under this heading. As Lord Goff said in Stoczina Gdanska SA v Latvian S.S. Co:

‘… the test is not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due.’” (underlined added)

158.  In my judgment, Ps fail to prove that there was a total failure of basis which would entitle them to recover the Sum for the following reasons:

(1)  The Sum was not paid under a transaction that is or becomes ineffective.  The Sum was paid pursuant to Clause 9, as varied by the Collateral Agreement, both of which were binding upon D, LBL and Winland. 

(2)  In any event, the basis for payment of the Sum has not totally failed.  As explained §154 above, there was performance on the part of D in providing the Draft Lease and the Draft Guarantee for China States’ consideration and signature.  It was China States’ failure to sign the Draft Lease and the Draft Guarantee, and LBL’s failure to procure China States to sign the same which resulted in no lease having been signed.

159.  As for mistake of fact, in §32 of the SOC, Ps pleaded case is:

“The retaining and the use of the Sum were also unjust for mistake of fact that the Lease would be entered into shortly after the Completion. If Winland and/or LBL had known that the Lease as anticipated in Clause 9 of the PSPA would not be entered into within a reasonable time after the Completion or at all, they would disagree to the withholding and retaining of the Sum by [D] at Completion and thereafter.”

160.  In her written Closing, Ms Liu relies on the following matters:

(1)  the documentary evidence which, it is said, shows that the Sum was deducted “in contemplation of a lease to be granted and for the Specified Purpose” and, in particular, the letter from ZKP to HON dated 7 May 2012; and

(2)  “Ps were under the mistaken belief that the lease would be entered into shortly that Ps allowed the deduction of the Sum”.

161.  It seems to me that the kind of mistake relied by Ps cannot form the basis of a claim for unjust enrichment in respect of the Sum.  The principle was explained in Chitty on Contracts, §29-041 thus:

“Money paid in discharge of a genuine legal obligation cannot be recovered merely because the payer was induced to fulfil his legal obligation by a mistake … As Lord Hope recognised in Kleinwort Benson Ltd v Lincoln CC[9], ‘The payee cannot be said to have been unjustly enriched if he was entitled to receive the sum paid to him’. For example[10], where the claimant paid money due under a contract to agents of a foreign government in ignorance of the fact that a revolution had broken out which subsequently led to the downfall of the government, it was not recoverable even though the claimant would not have made the payment had he known what was happening:

‘… the money was paid, not under a mistake of fact as to the existence of an obligation; it was paid in pursuance of an obligation which in fact existed’

and was effective to discharge that obligation.” (underlined added)

162.  As D was entitled to receive the Sum pursuant to Clause 9, as varied by the Collateral Agreement, it cannot be said that D was unjustly enriched by the receipt of the Sum.  Moreover, the second reason articulated in §32 of the SOC, even if established (which Ps have not), would not make the Sum recoverable.

163.  In any event, Ps have not discharged the burden of proving  that the Sum was paid “in contemplation of a lease to be granted and for the Specified Purpose”. 

(1)  There is no evidence to show that China States would sign the Draft Lease or any lease as required by Clause 9, whether shortly after Completion or at all. 

(2)  Nor is there any evidence in support of Ps’ suggestion that they were under any mistaken belief that a lease would be entered into shortly after Ps allowed the deduction of the Sum. 

(3)  To the contrary, the objective evidence shows that both Winland and the Receivers were aware that China States might not enter into any lease with D at all.  See §§46 to 51, 54(5) above.

(4)  If Winland and the Receivers were under the mistaken that a lease would be entered into shortly after Completion, it is inconceivable that neither of them took any step to demand return of the Sum.  Instead, the first time the Receivers (on behalf of LBL) demanded return of the Sum was on 16 March 2012, which was 27 months after the Sum had been deducted from the balance of the Price payable by D under the PSPA. 

164.  For all the above reasons, Ps’ claim based on unjust enrichment must fail. 

C9.    Estoppel Issue

165.  D’s case on estoppel by convention, as pleaded in §§77 – 81 of the Defence, may be summarized as follows:

(1)  D and Winland / Receivers, alternatively Winland, had “acted on a common assumption and/or belief that [D] on Completion would be entitled to receive the Sum irrespective of whether the Lease would be entered into” (“Common Assumption”);

(2)  Alternatively, Winland / Receivers, alternatively Winland, “had represented to and encouraged [D] to believe, and expected [D] to act” on the Common Assumption;

(3)  Winland / Receiver, alternatively, Winland knew that D proceeded to Completion under the Common Assumption and allowed D to act on such Assumption;

(4)  In reliance on the Common Assumption and acted to its detriment, D completed the PSPA without a lease and without the opportunity to re-negotiate the terms for Completion and, thereafter, incurred substantial amount of money in renovating the Property.  Winland / Receivers benefitted from D’s relance by selling the Property and obtained cash from D in return; and

(5)  Winland / Receivers were therefore “estopped by convention to deny the common assumption that [D] was entitled to be paid and/or retained the Sum”. 

166.  As for estoppel by representation or promissory estoppel, D pleaded in §§84 – 84A:

(1)  D had relied on the “representation and promise” of Winland / Receivers and acted to its detriment by proceeding to Completion without the benefit of a lease and suffered detriment as a result while Winland / Receivers obtained benefits as pleaded above;

(2)  Alternatively, the same “representation and promise” gave rise to promissory estoppel as against Winland and the Receivers in that: (i) D, Winland and the Receivers (on behalf of LBL) “were all parties to an existing legal relationship under the PSPA”; (ii) the representation and promise were clear and unequivocal; (iii) Winland / Receivers made the representation and promise to D with the intention that D would be induced by the same to proceed to Completion; and (iv) D relied on the representation and promise and proceeded to Completion.  D suffered detriment and/or Winland / Receivers obtained benefits.  It would be inequitable and unconscionable to allow Winland / Receivers to resile from the representation and promise. 

167.  As there is no separate plea on the alleged “representation and promise”, I assume that D relies on the Common Assumption as constituting the representation and promise. 

168.  In the Reply, Ps denied all the allegations in respect of estoppel. 

169.  The principles governing estoppel by convention have been authoritatively stated in Unruh v Seeberger (2007) HKCFAR 31 at §§133 – 141.  In short, D has to establish the following elements:

(1)  the parties must enter into some legal relationship on the basis of an assumption that is shared by or common to them both (§133);

(2)  the assumption was communicated between the parties and acted upon.  There must be some “mutually manifest conduct of the parties”, which may be an express statement or it may be implied from conduct (§135);

(3)  there is no necessity for the parties or either of them to believe that the assumed state of affairs is true (§136);

(4)  the content of the common assumption must be “sufficiently certain to enable the court to give effect to it” (§138); and

(5)  the common assumption may involve “mixed fact and law” (§140).

170.  If I were wrong in concluding that there was the Collateral Agreement between D, Winland and the Receivers (acting on behalf of LBL), by reason of the matters stated in §§139 – 143 above, I find that D, Winland and the Receivers (acting on behalf of LBL) and each of them did act on the Common Assumption when proceeding to Completion.  The Common Assumption, which concerned D’s entitlement to receive the Sum irrespective of whether a lease would be entered into, was sufficiently certain.

171.  However, I do not see how the Common Assumption, which did not concern with D’s entitlement to retain the Sum, could give rise to an estoppel by convention against Winland and the Receivers, let alone confer an entitlement or right on D in retaining the Sum. 

172.  In any event, D fails to prove that it has suffered any detriment in acting on the Common Assumption or that Winland / Receivers have obtained any benefit beyond what the parties had agreed under the PSPA (as varied by the Collateral Agreement):

(1)  D did re-negotiate the terms of Completion with Winland and the Receivers (acting on behalf of LBL) which resulted in the Collateral Agreement.

(2)  The objective fact set out in Section A10 shows that it was D’s own decision (and no one else) that since 18 December 2009, the lease back arrangement under Clause 9 had lapsed such that no tenancy would be granted to Chain States. Having taken such a stance, it is not open to D to claim that it has suffered any detriment by proceeding with Completion without a lease.

(3)  I am unable to see how the expenses incurred by D in renovating the Property can be said to be a detriment suffered by D when D has been able to enjoy the benefit of the renovation.  It is in any event not the result of the parties having acted on the Common Assumption. 

(4)  It has not been demonstrated what benefit Winland obtained as a result of D proceeding to Completion other than obtaining payment of the amount which had been agreed by D, Winland and the Receivers (acting on behalf of LBL). 

173.  For the same reasons stated in §§170 – 172 above, D’s claim based on estoppel by representation or promissory estoppel is not established.

C10.  Trust Issue

174.  In §§34 – 36 of the SOC, Ps pleaded that D had been holding the Sum as constructive trustee for Ps.  Alternatively, by reason of D’s failure to sign a lease within a reasonable time after Completion, all the interests in the Sum vested in Ps by way of resulting trust.

175.  D denied all the allegations. 

176.  In view of my holding that since Winland’s execution of the Reassignment and the Assignment SP, all the rights and interests in the Sum have been re-assigned to LBL, Ps have no basis to claim that D has been holding the Sum as its trustee, whether on the basis of constructive trust or resulting trust. 

D.  CONCLUSION

177.  In conclusion, I hold that:

(1)  Ps have no standing to claim the Sum;

(2)  Ps fail to satisfy the requirements for joinder of LBL in substitution of or in addition to Ps;

(3)  Clause 9, properly construed, does not allow the Sum to be applied for the Alternative Purpose (as contended by D);

(4)  D, Winland and the Receivers (acting on behalf of LBL) did enter into the Collateral Agreement which allowed the Sum to be deducted from the balance of the Price payable by D upon Completion;

(5)  Ps fail to make out a claim based on unjust enrichment; and

(6)  D’s case on estoppel by convention, estoppel by representation or promissory estoppel fails. 

178.  Ps’ claim is dismissed. 

179.  As for costs, I make a costs order nisi that:

(1)  Ps should pay the costs of and occasioned by the joinder application, to be taxed if not agreed and with certificate for 2 counsel.  For taxation purpose, the hearing of the application took 1.5 days during Day 1 and 2 of the trial.

(2)  Ps should pay 85% of the costs of and incurred by D in the action, to be taxed if not agreed and with certificate for 2 counsel. It seems to me that this is a fair apportionment of costs to reflect the fact that (i) the Locus Standi Issue was only raised after the parties had filed all the pleadings and witness statements; (ii) had Ps’ legal advisers properly considered the Locus Standi Issue, they would have realized that Ps have no standing to claim the Sum and the action would not succeed. It would be a waste of time and costs for the action to proceed to trial; and (iii) although D succeeds in defending the claim, much time and costs have been incurred by the parties in dealing with the factual allegations concerning the claims based on estoppels all of which fail.