SMART EDGE LTD v. HG PROPERTY INVESTMENT HK LTD

CACV 138/2023, [2026] HKCA 149

On appeal from [2023] HKCFI 1059

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 138 OF 2023

(ON APPEAL FROM HCMP 2146 OF 2022)

________________________

________________________

________________________

________________________

J U D G M E N T

________________________

Hon Barma JA (giving the Judgment of the Court):

1.  This is an appeal by the defendant against the judgment of Cheng J (“the Judge”)  dated 27 April 2023[1] (“the Judgment”).

2.  By the Judgment and an Order of the same date (“the Order”), the Judge made declarations (“the Declarations”)  that:

(i)  the Writ of Summons filed in HCA 1469 of 2022 (“the HCA Proceedings”)  on 3 November 2022 (“the Writ”)  by the defendant against each of Cheng Mei Holdings Limited and Goal Eagle Limited, being shareholders of the plaintiff (“the Shareholders”), is not a lis pendens affecting the property known as the parcel or piece of land registered in the Land Registry as New Kowloon Inland Lot No 6314 with the building thereon known as Goldin Financial Global Centre, No 17 Kai Cheung Road, Kowloon (“the Property”); 

(ii)  the amended Writ filed on 20 January 2023 (“the Amended Writ”)  by the defendant against the Shareholders and the plaintiff is not a lis pendens affecting the Property; 

(iii)  the agreement for sale and purchase dated 22 September 2022 (“the Agreement”)  between the Shareholders and the defendant is not an instrument affecting the Property; 

(iv)  the Writ, the Amended Writ and the Agreement (“the Instruments”), among others[2], are not instruments registrable on the land register of the Property under the Land Registration Ordinance (Cap 128)  (“the Ordinance”). 

3.  By the Order, the Judge also ordered the defendant to (i) procure the removal from the register of all references to (among others)  the Instruments (including as a “deed pending registration”); and (ii)  be restrained from delivering or causing to be delivered to the Land Registry the Instruments for registration against the title of the Property. 

4.  By its Notice of Appeal filed on 5 May 2023 (“the NoA”), the defendant seeks to set aside the Judgment and Order, and further seeks a declaration that the Instruments are registrable on the land register of the Property under the Ordinance. 

5.  By a Summons dated 9 May 2023, the defendant applied to the Judge for a stay of execution of [54] and [55] of the Judgment, which were essentially the Judge’s declarations and orders set out above, pending appeal.  By a decision dated 30 May 2023[3] (“the CFI Stay Decision”), the Judge dismissed the application for the reasons given therein. 

6.  The defendant renewed its stay application before the Court of Appeal (Barma and Au JJA)  by a Summons dated 13 July 2023.  The renewed application was dismissed by this Court’s judgment dated 31 July 2024 (“the CA Stay Judgment”)[4].

7.  We heard the appeal on 21 August 2024.  At the hearing, the defendant was represented by Mr Edward Chan SC (“Mr E Chan”)  and Mr Jeffrey Tam, while Mr Abraham Chan SC (“Mr A Chan”)  and Mr James Wood represented the plaintiff.[5] At the conclusion of the hearing, we reserved our judgment, which we now give.  The parties were agreed that costs of the appeal should follow the event. 

Background

8.  We do not propose to repeat in detail the background to these proceedings, which has been set out by the Judge in the Judgment at [4]‑[28], and by this court in the CA Stay Judgment at [10].  For the purposes of this appeal, it suffices to highlight the following facts.

9.  The plaintiff is a limited company, the issued shares of which (“the Shares”)  are wholly owned by the Shareholders.  The plaintiff also owed certain loans to the Shareholders (“the Loans”).  Since 13 July 2020, joint and several receivers and managers (“the Receivers”)  have been appointed in respect of the Shares and the plaintiff’s assets. 

10.  The Agreement, from which the issues central to the proceedings below (and to this appeal)  arise, was entered into by the Shareholders (as vendor)  with the defendant (as purchaser)  on 22 September 2022.  The Agreement was for the sale and purchase of the Shares and the Loans. 

11.  Material provisions in the Agreement of particular relevance for this appeal include (with emphasis supplied):

(a)  Cl.2.1: On Completion (as therein defined), subject to certain terms and conditions, the Shareholders as vendor shall sell the Shares and shall assign the Loans to the defendant as purchaser;

(b)  Cl.4.1(a) / Cl.4.2(a): Breach of the warranties given by the Shareholders (which are set out in Schedule 3 to the Agreement)  would entitle the defendant to cancel the transaction under the Agreement by way of written notice;

(c)  Cl.4.1(d): Completion of the Agreement was to be conditional upon the defendant providing to the Shareholders, within 14 days after the date of the Agreement, written confirmation from the defendant’s Financier (as therein defined), in form and substance satisfactory to the Shareholders, that the said Financier has completed all necessary due diligence in respect of the defendant’s Finance Facility (as therein defined)  and obtained all necessary internal approvals (including investment committee approval)  to provide funding under the defendant’s Finance Facility;  

(d)  Cl.6.1(b)(i): Subject to the satisfaction of the conditions in cl.4.1, completion shall take place, and upon receipt of the balance of the consideration, the Shareholders shall deliver to the defendant the items particularised at cl.6.1(b)(i)(1)-(12), such as duly executed instruments of transfer and sold notes in respect of the Shares;  

(e)  Cl.6.1(b)(ii): Apart from the items particularised at cl.6.1(b)(i)(1)-(12), the Shareholders shall also on completion procure the immediate discharge or release of all charges, liens, mortgages, security and Encumbrances (as therein defined)  over, inter alia, the Property; 

(f)  Cl.8.1: The Property shall be delivered to the defendant subject to the existing tenancies and any lettings etc. granted or to be granted or modified by the Shareholders pursuant to cl.8.10; 

(g)  Cl.8.11(b): Vacant possession of such part or portion of the Property (other than the Leased Premises, as therein defined)  shall be delivered to the defendant on completion;

(h)  Cl.8.11(c): The defendant shall be deemed to have obtained vacant possession of such part or portion of the Property other than the Leased Premises (as therein defined)  on completion upon the Shareholders’ delivery to the defendant of the key(s)  thereof and the Shareholders’ obligation to deliver vacant possession shall be discharged accordingly;

(i)  Cl.11: The Property will be delivered to the defendant on completion subject to various matters or interests, such as all rights, rights of way and other easements etc. affecting the Property, as well as to terms and conditions in the Agreement and those in the Government Grant etc.;

(j)  Cl.13.1: As from the date of the Agreement, the Property shall be at the sole risk and responsibility of the defendant as regards loss, expenses and damage etc;

(k)  Schedule 3 (Vendor’s Warranties): This sets out Warranties offered by the Shareholders, among which paragraph 1.5(b)  stipulated that the execution, delivery of, and the performance by the Shareholders of their obligations under the Agreement will not require them to obtain any consent or approval necessary for the purpose of the transactions under the Agreement.

12.  The defendant did not comply with cl.4.1(d)  within the time stipulated. Notwithstanding that an extension of time for compliance (until 14 October 2022)  was granted by the Shareholders to the defendant on 7 October 2022, compliance was not forthcoming, and thus on 1 November 2022, the Shareholders notified the defendant that the Agreement had been terminated due to its failure to comply with cl.4.1(d), and completion of the Agreement did not take place.

13.  On 3 November 2022, the Writ in the HCA Proceedings was issued by the defendant against the Shareholders for alleged wrongful termination of the Agreement.  The Writ was delivered by Messrs ONC Lawyers (solicitors then acting for the defendant)  to the Land Registry for registration against the Property. However, on 24 November 2022, this attempt at registration was retracted by Messrs ONC Lawyers.

14.  On 25 November 2022, the Receivers entered into an agreement with another party, Goldstone Asset (HKSAR)  Limited, for the sale and purchase of the Property. Shortly thereafter, on 28 November 2022, Messrs Khoo & Co (another firm of solicitors representing the defendant)  attempted to register another copy of the Writ and a copy of the Agreement against the Property at the Land Registry.  The present proceedings were therefore commenced by the plaintiff to remove the attempted registration of and references to these documents on the land register. 

15.  The Writ was later amended (by the Amended Writ), to include the plaintiff as a defendant in the HCA Proceedings.  A further attempt was then made by Messrs Khoo & Co to register the Amended Writ on 27 January 2023. 

The proceedings below

16.  As at the date of the hearing before the Judge, the Instruments remained on the land register in respect of the Property as “deeds pending registration”, and remained there until such references were removed pursuant to the Order. 

17.  Before the Judge (see [32] of the Judgment), Mr A Chan’s position for the plaintiff was essentially that under s.2(1)  of the Ordinance, an agreement must create some legal or equitable interest in land for it to be registrable.  Further, although proceedings in which there is a claim to land or where some interest in land is asserted may be registrable as a lis pendens (see Thian’s Plastic Industrial Co Ltd & ors v Tin’s Chemical Industrial Co Ltd & anor [1970] HKLR 498), proceedings concerned with agreements for sale and purchase of shares in a company (notwithstanding that that company may itself hold or own an interest in land)  are not a registrable lis pendens as they do not relate to land or an interest in land(see s.1A of the Ordinance; Health First Technology Ltd & anor v Chan Chi Cheung & ors [1993] 2 HKLR 473).

18.  Mr A Chan placed particular reliance on Good Profit Development Ltd v Leung Hoi [1993] 2 HKLR 176 for the proposition that even where the proceedings involve an acquisition of shares in a company which is being done for the very purpose of indirectly acquiring a landed property held by that company, such proceedings are nonetheless not registrable as a lis pendens.

19.  Mr E Chan did not disagree with the principles established by the authorities relied upon by Mr A Chan.  Notably, Mr E Chan agreed that agreements for sale and purchase of shares in a company (which itself holds property)  are not registrable on the land register (see [35], the Judgment).  His case was however that the Agreement was more than one for the mere acquisition of the Shares and that it was one “pursuant to which [the defendant] was to acquire an interest in the Property” (Judgment at [36]); He further submitted that cl.11, when read together with cls.6 and 8 (and in particular the sub-paragraphs in these clauses highlighted above), showed that the Shareholders were obligated to deliver vacant possession of the Property to the defendant, and that this was (in Mr E Chan’s submission)  “tantamount to an assignment” (Judgment at [36]-[40]).

20.  Thus, said Mr E Chan, the obligation to deliver vacant possession created a right or interest in the Property, rendering the Instruments registrable (see [40], the Judgment).

21.  The Judge rejected these submissions.  Her findings and reasoning leading her to do so were essentially as follows (see Judgment at [41]-[45]):

(a)  Cl.2 provided that the subject matter of the Agreement was for the sale and purchase of the Shares and the Loans, as opposed to the Property. 

(b)  Sale of the Shares would only mean that the defendant would become the owner of the plaintiff, which in turn owns “various items of property, including the Property”.

(c)  Cls.8 to 11 merely provided for the features of the Property at the time of completion (or the “state of affairs” concerning the Property)  which the parties had agreed upon, such as cl.8.11(c)  (a clause not relied upon or referred to by Mr E Chan in submissions)  which deals in substance with the delivery of the keys to the non-leased parts of the Property, by the Shareholders to the defendant, upon completion (see fn 4 at p 16 of the Judgment).

(d)  Unlike cl.6, which provided a detailed list of items to be delivered by the Shareholders to the defendant on completion (which did not include vacant possession of the Property), the different language, in the passive voice, used in cls.8 and 11 of the Agreement (which did refer to vacant possession and the Property itself)  suggested that no positive obligation was imposed on the part of the Shareholders to deliver vacant possession of the Property to the defendant.

(e)  The owner of the Property, the plaintiff, was not even a party to the Agreement; so that there was no basis to suggest that the Shareholders were capable of conferring an interest in the Property on the defendant by the Agreement (Good Profit Development Ltd; Salomon v Salomon [1897] AC 22; c.f. In re Duomatic [1969] 2 Ch 365).

(f)  Mr E Chan’s reliance on the Sch.3 warranties, in attempt to advance his case that the Instruments were registrable under the Ordinance, was misconceived.  First, the warranties did not confer any interest in land on the defendant, and in any event there were remedies (including but not limited to the cancellation of the transaction under cl.4.2(a))  for breach of warranty.  Moreover, even if there was an obligation on the part of the Shareholders to procure the plaintiff to deliver vacant possession to the defendant (“the Obligation to Procure”), this obligation (if any)  under the Agreement would not itself have conferred on the defendant any interest in land.

22.  It followed, as the Judge held, that for the primary reason that the Agreement’s subject matter consisted of the Shares/Loans and not the Property, the Agreement was not registrable against the Property under the Ordinance.  As the HCA Proceedings concerned the alleged wrongful termination of the Agreement, it followed that the Writ and the Amended Writ were not registrable as lis pendens (see the Judgment at [46]-[53]).

The grounds of appeal

23.  The grounds of appeal advanced by the defendant are set out in the NoA.  Although there are a total of 4 proposed grounds, Ground 1 is in effect a generalised complaint against the Judge’s finding that the Instruments were not registrable, which ties in with all the other grounds.  In the circumstances, we propose to express the grounds of appeal (based on the summary by the Judge in [8] of the CFI Stay Decision[6])  as follows:

(a)  Ground 1: The Judge should have found, but failed to find, that on a proper construction of cl.11 of the Agreement, the Obligation to Procure was imposed on the Shareholders.  In particular, the Judge failed:

  (i)  to adopt a contextual approach in her reading of other relevant clauses (such as cls.6.1, 8.1, 8.11(b), 8.11(c)  and 13.1)  with cl.11; had she done so, she ought to have found that cl.11 gave rise to the Obligation to Procure; and

  (ii)  to appreciate that the decisions of the Shareholders (being the only shareholders of the plaintiff)  were binding on the plaintiff and thus should the court hold that the defendant[7] was entitled to enforce the Obligation to Procure (notwithstanding that the Property’s ownership is vested in the plaintiff), an order for specific performance of the obligation to deliver vacant possession to the defendant may be made against the Shareholders;

(b)  Ground 2: the Judge failed to consider all the circumstances of the case and the context in which the Instruments arose in determining whether they affected land.  In particular, the Judge’s consideration of whether the Agreement involved transfer of the Shares was “immaterial”, and the “change of possession” of the Property, as required by cl.11, affected land “upon its performance” and thereby rendered the Instruments registrable.

(c)  Ground 3: the Judge failed to properly consider the issue of specific performance of the Agreement in light of the obligation on the Shareholders to deliver vacant possession of the Property to the defendant in the Agreement.

24.  Mr E Chan for the defendant lodged his written submissions on 24 July 2024 (“D’s Skel”), while Mr A Chan lodged his written submissions for the plaintiff on 7 August 2024 (“P’s Skel”).  We have, of course, also had the benefit of oral submissions by leading counsel at the hearing of the appeal.

25.  We will now deal with each Ground in turn. 

Discussion

Ground 1

26.  Under this ground, Mr E Chan advances several arguments in support of the contention that cl.11, which provides that the Property “will be delivered” to the defendant on completion, imposes the Obligation to Procure on the Shareholders, and that the Judge was wrong to interpret it otherwise (D’s Skel, [4]).  As pointed out by Mr E Chan in D’s Skel (at [4]), the determination of this ground essentially boils down to an exercise in interpreting cl.11.

27.  In this connection, Mr E Chan argued that the Judge was wrong to find against the existence of the Obligation to Procure merely because the relevant wording in cl.11 was expressed in the passive voice (D’s Skel, [5]‑[12]).  Relying on authorities such as Building Authority v Appeal Tribunal (Buildings)  (ENM Holdings Ltd) (2018)  21 HKCFAR 194, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 and Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, Mr E Chan submitted that due regard must be paid to the “purpose” of cl.11 and the background that is objectively or reasonably known to the parties at the time of the Agreement.  He further warned against “technical interpretations” and “undue emphasis on niceties of language”.  He submits that the Judge ought to have paid (but failed to pay)  due regard to the objective background known to the parties, which was the acquisition of the Property by the defendant by way of purchasing the plaintiff’s Shares (D’s Skel, [6]-[10]).

28.  To make good his argument, Mr E Chan (as he had done in the court below)  relies on a contextual approach to interpreting cl.11 by reference to cls.6.1, 8.1, 8.11(b), 8.11(c)  and 13.1, which he says impose the Obligation to Procure on the Shareholders that is “tantamount to an assignment” (D’s Skel, [13]-[18]).

29.  The relevant principles concerning contractual interpretation are established and undisputed.  The court will endeavour to ascertain the objective meaning of the language in the terms and provisions in the contract.  The contract must be considered as a whole in order to find that objective meaning, by employing the iterative exercise of checking the suggested interpretations against the provisions therein textually and contextually as well as investigating the commercial consequences.  See Da Shing Group Ltd v Rich Promise Ltd [2021] HKCA 960; Wood v Capita Insurance Services Ltd [2017] UKSC 24.

30.  The Judge’s interpretation of cl.11 was that as a matter of language and when the meaning of cl.11 was checked against other relevant provisions in the Agreement, cl.11 did not expressly impose the Obligation to Procure.  For the following reasons, we do not see any errors in the Judge’s reasoning and analysis regarding the interpretation of cl.11, at [38] to [41] of the Judgment.

31.  As pointed out by Mr A Chan (P’s Skel, [17]), the starting point must be cl.2, which unequivocally identified the subject matter of the Agreement as the sale of the Shares and the assignment of the Loans (and not as a sale of the Property).  This was rightly identified by the Judge at [41.1] of the Judgment.  It is, to our mind, the key consideration.  Had the defendant wished to purchase the Property, it could have done so by transacting with the plaintiff.  It did not, choosing instead (no doubt for good commercial reasons)  to acquire the Shareholders’ shares in the plaintiff and the Loans.

32.  Thereafter, the Judge considered cls.8 and 11, which in her view were provisions providing for the “features of the Property” rather than creating a positive obligation on the Shareholders to deliver vacant possession (see Judgment at [41.2]-[41.3]).  In particular, the Judge had regard to the fact that cls.8.11(b)  and (c)  (which referred to the delivery and obtaining of vacant possession in the parts of the Property which were not Leased Premises)  only served to deal with the situation as to tenancies which may or may not have been in existence at the time of completion, as well as the impact, if any, of such a situation on the Shareholders’ rights ([41.2.1], the Judgment).

33.  The Judge also considered cl.11 of the Agreement itself, which was entitled “Matters subject to which the Property is made”.  This provision listed out the “various rights and matters” to which the Property is subject, and provided for the “state of affairs which [the defendant] was to accept” (the Judgment, [41.2.2]-[41.2.3]). 

34.  As can be seen, the fact that the language used in cl.11 (and cl.8), as opposed to cl.2.1 and cl.6, was in the passive voice, was only one of several bases in support of the Judge’s interpretation of cl.11 (see [41], the Judgment; [11], the CFI Stay Decision).  That said, we agree with the Judge, and Mr A Chan, that whereas the language of cl.2.1 and cl.6.1(b)(i)  clearly imposed an obligation on the Shareholders, the language employed in cl.11 is clearly different and is not expressed in the form of an obligation on the part of the Shareholders. 

35.  We therefore agree with the Judge’s conclusion that no Obligation to Procure arises out of the Agreement, and nor does the Agreement confer upon the defendant any interest affecting land. 

36.  For completeness, we note that the Judge also rightly acknowledged that the owner of the Property, namely the plaintiff, was not a party to the Agreement.  There was clearly no basis to suggest that the Shareholders were capable of conferring an interest in the Property on the defendant by way of the Agreement when they themselves had no such interest(s)  (the Judgment, [41.5]).  Had the Agreement proceeded to fruition, there would, on completion have been no change in possession (nor ownership)  of the Property (as pointed out by Mr A Chan at [17], P’s Skel).

37.  In this connection, Mr E Chan submits that the fact that the plaintiff was a non-party to the Agreement “only bears on issues of technicality”, as the Shareholders (as the only shareholders of the plaintiff)  could procure the plaintiff to deliver vacant possession to the defendant without requiring approval from any other party, and that given this entitlement, specific performance could be ordered against them to ensure delivery (D’s Skel, [21]-[24]).  To reinforce his position, Mr E Chan relies on In re Duomatic Ltd [1969] 2 Ch 365 for the proposition that a decision will bind the company if all shareholders assent regarding a matter which a general meeting can put into effect (D’s Skel, [20]).

38.  With respect to Mr E Chan, we do not see merit in this argument.  As noted by the Judge, with whom we agree, the Property, being an asset of the plaintiff, was not held or owned by the Shareholders.  The Agreement likewise would not bind the plaintiff as a non-party.  See Good Profit Development Ltd at 183; Salomon v Salomon; the Judgment at [42]; P’s Skel at [21]. 

39.  As to the possibility of specific performance, we have already concluded above (in agreement with the Judge)  that no Obligation to Procure arose out of cl.11, so that Mr E Chan’s argument in this respect takes matters no further.

40.  In any event, we also agree with the Judge that, even if it is assumed that there was an Obligation to Procure on the part of the Shareholders, so that a refusal on their part to deliver vacant possession would amount to a breach of the Agreement, such obligation would not have conferred any interest in land capable of registration (the Judgment at [44]).  Similarly, even if there were a breach of the Sch.3 warranties, this would also not have created any registrable interest in land, as the recourse available to the defendant would have been to cancel the transaction under cl.4.2(a)  or to pursue other traditional remedies for breaches of warranty (see the Judgment at [43]).

41.  There is thus no merit in Ground 1 and it falls to be dismissed.

42.  The remaining grounds may be dealt with relatively briefly.

Ground 2

43.  The crux of Mr E Chan’s argument under this ground is that the obligation to transfer the Shares by the Shareholders and the Obligation to Procure are separate, non-concurrent obligations, and that as long as the instrument in question “affects” land in the wider sense, it may be registrable (D’s Skel, [25]-[28]).  Given that we have affirmed the Judge’s rejection of the existence of any Obligation to Procure (arising out of cl.11 of the Agreement or otherwise), this argument falls away.

44.  Mr E Chan also complains that the Judge ought to have considered all the circumstances of the case and the context in which the Agreement, the Writ and the Amended Writ arose, and that had she properly done so, she would have concluded that the Instruments affect land and thus are registrable (D’s Skel, [32]).  We disagree. 

45.  As explained above and as submitted by Mr A Chan, the transaction in the form of the Agreement was specifically structured as a sale of the Shares (and an assignment of the Loans)  as opposed to a sale of the Property (P’s Skel, [23]; Agreement, cl.2.1).  The Agreement did not alter the legal or beneficial ownership of the Property, and it is well settled that proceedings concerning the sale and purchase of a company’s shares, notwithstanding that the company also owns an interest in land and even if an indirect acquisition of the property through the share acquisition was envisaged by the purchaser of shares, do not give rise to a registrable interest or amount to a registrable lis pendens under s.1A of the Ordinance.  See Health First Technology Ltd; Good Profit Development Ltd.

46.  The Judge was not only alive to the contextual background to the Agreement and its provisions, she also conducted a sound and detailed exercise of contractual construction in determining against the defendant the question of whether the Obligation to Procure arose from the Agreement (cl.11)  and whether the Agreement (and as a consequence the Writ and the Amended Writ)  affected land.

47.  There is therefore no merit in Ground 2.

Ground 3

48.  Mr E Chan (at [33] of D’s Skel)  reasonably accepted that this ground stands or falls with the determination of the question of whether cl.11 of the Agreement imposed any Obligation to Procure on the Shareholders.  We have already affirmed the Judge’s negative answer to that question.  Ground 3 therefore, too, falls away.

49.  For the sake of completeness and clarity, we note that in the NoA at [4], with reference to [53] of the Judgment, it was said that the Judge erred in finding that the specific performance of the Agreement is not a claim to an interest in land.  With respect, this is not an accurate statement of the Judge’s finding.  What the Judge in fact said at [53] of the Judgment was that a claim for specific performance of the Agreement cannot be a claim to an interest in land if the Agreement does not create any legal or equitable interest in the Property on the part of the defendant. Although the statement at [4] was elaborated at [4(e)] of the NoA by a repetition of the defendant’s contention that the Agreement “effectively transfers the possession of the Property to [the defendant] upon completion”, we have already expressed our disagreement with that contention for the reasons explained above.

Disposition and costs

50.  For these reasons, the appeal is dismissed.

51.  As we have noted, the parties agreed at the end of the hearing that costs should follow the event.  We therefore order that the costs of the appeal are to be paid by the defendant to the plaintiff, to be taxed on the party and party basis if not agreed.