STARK MOLY LTD v. LAM FUNG

HCA 1581/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1581 OF 2010

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D E C I S I O N
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Introduction

1. This is the hearing of the plaintiff’s application for an order that:

(1) the order made by Reyes J on 2^nd August 2011 for specific performance by the defendant of his obligation under a put option in an agreement dated 2 October 2007 (“the Investment Agreement”) be discharged; and

(2) judgment for damages in lieu of specific performance in the sum of US$58,560,000 be entered against the defendant.

Background facts

2. The defendant was formerly the owner of all the 1,000,000 issued shares of Fabulous Way Limited (“FabWay”), the holding company of Wiseking Mining Investment Company Limited (“Wiseking”) which owned interests in a molybdenum mining business.  He was desirous of seeking capital injections from investors with a view ultimately to securing a listing for the mining business.  

3. On 2 October 2007, the defendant as vendor, Dragonrider Opportunity Fund LP (“Dragonrider”) as investor and FabWay entered into the Investment Agreement to purchase 230,700 ordinary shares in FabWay (the “option shares”) representing approximately 23.07% of its issued share capital for US$52,630,000. The agreement is governed by Singapore law.  Under the agreement, Dragonrider has the option of sharing the investment with further private investors pending listing and if there was no listing, the investors would be entitled under clause 16 of the Investment Agreement to require the defendant to repurchase the option shares under a put option exercisable during the option period (the “put option agreement”) as defined in the Investment Agreement and at a consideration equivalent to the purchase price for the share and a return of 18% per annum (the “option consideration”).  

4. To secure the due performance of his obligation under the Investment Agreement, the defendant agreed under clause 13.1 to execute a security over shares agreement with Dragonrider as security trustee for itself, the investor nominees and/or other investors in favour of itself the investor nominees and/or other investors in respect of 55% of the shares in FabWay held by, to the order or on behalf of the defendant (the “charged shares”). Pursuant to that clause, the defendant entered into a deed dated 12 October 2007 charging certain of his assets, described as the “Charged Portfolio” by way of first fixed charge and assign and agree to assign absolutely to Dragonrider all his present and future rights, title and interest in and to the Charged Portfolio (the “Share Charge Deed”).  Under clause 1.1 of the Share Charge Deed, “Charged Portfolio” is defined as meaning the “Shares” and the “Related Assets”.  The “Shares” means:

“55% of the shares in the share capital of [FabWay] held by, to the order or on behalf of the Chargor at any time.”

“Related Assets” means:

“all dividends, interest and other monies paid or payable in respect of the Shares and all other rights, benefits and proceeds in respect of or derived from the Shares (whether by way of redemption, bonus, preference, option, substitution, conversion or otherwise);”

5. By February 2009, Dragonrider had brought in four further investors, including Stark Moly Limited (“Stark Moly”), the plaintiff herein, SIG China Investments One Ltd (“SIG”), Angel Wise Limited and Addgood Holdings Limited (“Addgood”).  Together, they hold the 230,700 option shares in FabWay, representing 23.07% of its issued capital.  Another investor, Monz Investments Limited (“Monz”) acquired 50,000 shares in FabWay.  On the other hand, the defendant transferred 209,300 of his shareholding in FabWay to Full Harbour International Ltd (“Full Harbour”), a company wholly owned by his son. As result, the defendant was left with 510,000 shares representing 51% of the shareholding in FabWay. 

6. On 25 February 2009, the defendant and his son restructured the shareholding of Wiseking by causing Wiseking to issue 1,000,000 shares to the shareholders of FabWay in the same proportion as their shareholdings in FabWay.  Formerly, FabWay held all the 10,000 issued shares in Wiseking.  Now, as result of some minor adjustments, it holds only 2,807 shares in Wiseking on trust for the investors.  By this restructuring, the shares in FabWay were depleted of their value which was transferred into the 1,000,000 shares in Wiseking.  Dragonrider was only informed of the restructure on 30 December 2009 after its completion.

7. Pausing here, there are three points to be noted. First, as result of their acquisition of the 230,700 option shares in FabWay, Dragonrider and the five investors were issued the same number of shares in Wiseking for free.  Thus effectively, the value of their shareholding in FabWay was transferred to their shareholding in Wiseking, and their shareholding in FabWay was depleted of value.  Second, the 510,000 new shares in Wiseking issued to the defendant also fall within the meaning of Related Assets charged under the Share Charge Deed.  Third, the defendant’s shares in FabWay charged have fallen short of the 55% level by 4% by reason of his transfer of 209,300 shares to Full Harbour.

8. Despite three extensions of the option period, the listing of FabWay never materialised.  The put option period expired on 31 March 2010.  On 3 December 2009, one of the investors, SIG, served a put option notice on the defendant demanding repurchase of its option shares in FabWay.  The defendant failed to complete the repurchase.  SIG obtained summary judgment against the defendant before a master on 14 December 2011.  The defendant’s appeal was dismissed by Poon J on 16 March 2012.

9. On 30 December 2009, Stark Moly also served a put option notice on the defendant in respect of its 87,669 option shares in FabWay. The defendant also failed to complete.  On 21 October 2010, Stark Moly commenced proceedings in HCA 1581/2010 against the defendant seeking specific performance of the put option it had exercised.  Reyes J granted an order for specific performance against the defendant on 2 August 2011.  This is the order which Stark Moly now seeks to discharge.  On 5 August 2011, Stark Moly’s then solicitors, Messrs Stephenson Harwood, demanded performance, but the defendant failed to complete the repurchase. 

10. Meanwhile, on 30 March 2010, Dragonrider faxed a put option notice to the defendant.  The defendant having failed to complete pursuant to clause 16, Dragonrider made a demand on 2 April 2012 under the Share Charge Deed and on 30 April 2012 took out an originating summons under HCMP 839/2012 to enforce the Share Charge.  It then commenced HCA 752/2012 on 9 May 2012 and on 14 June 2012 took out a summons under Order 86 for specific performance of the put option.  Stark Moly intervened by summons dated 30 November 2012 in HCA 752/2012 and was joined as the 2^nd defendant in that action.

11. HCA 752/2012 and HCMP 839/2012 were heard together before Deputy High Court Judge Le Pichon.  Judgment was delivered on 21 March 2013.  In HCA 752/2012, Deputy Judge Le Pichon ordered specific performance of the put option against the defendant in respect of the 3,397 option shares in FabWay held by Dragonrider and 19,725 option shares held by Addgood. 

12. In HCMP 839/2012, Deputy Judge Le Pichon made an order which was then amended on 29 May 2013 (the “Amended Order”).  Under paragraph 1 of the Amended Order, the defendant was ordered to specifically perform his obligations under clause 5.4 of the Share Charge Deed by transferring and procuring the transfer:

(a) before 4pm on 4 June 2013:

(i) of 87,669/230,700 proportion of 550,000 shares in Wiseking into the name of Stark Moly; and

(ii) the balance to Dragonrider as security agent; and

(b) before 4 pm on 11 June 2013:

(i) of 87,669/230,700 proportion of 55% of the shares in the share capital of FabWay into the name of Stark Moly; and

(ii) the balance to Dragonrider as security agent.

The proportion represents the number of option shares held by Stark Moly as against the total number of option shares held by the group of five investors represented by Dragonrider, which does not include Monz.  On the fact, the defendant only had 510,000 shares in Wiseking to transfer.  The shortage was caused his transfer of 209,300 shares in FabWay to Full Harbour, which reduced his shareholding in FabWay below 55%. 

13. On 17 September 2013, the defendant executed documents transferring 193,807 shares of Wiseking to Stark Moly and 316,193 shares of Wiseking to Dragonrider in late compliance with paragraph 1(a)(i) and (1)(a)(ii) of the Amended Order.  However, as at the date of his removal as director of Wiseking on 14 May 2014, he never caused Stark Moly, and presumably Dragonrider also, to be registered as owner of the transferred shares.  Needless to say, he never complied with paragraph 1(b)(i) and 1(b)(ii) of the Amended Order requiring him to transfer his charged shares in FabWay to Stark Moly, and presumably to Dragonrider.  Thus, apart from the shortage in the shares in Wiseking transferred, he had not transferred his charged shares in FabWay in fulfilment of his obligation under the Share Charge Deed and in compliance with the Amended Order of Deputy Judge Le Pichon.

14. By a letter dated 8 May 2013, the defendant’s solicitors informed Dragonrider that apart from being unable to make arrangement to travel to Hong Kong, the defendant was unable to raise funds to pay for repurchase of the charged shares in FabWay pursuant to the Amended Order made under HCA 752/2012.

15. On 30 April 2014, Stark Moly’s current solicitors demanded performance under Reyes J’s order of 2 October 2007. Again, the defendant did not comply.  On 15 May 2014, Stark Moly took out the present summons.  The legal basis of Stark Moly’s application is that as the defendant repeatedly refused to repurchase its charged shares in FabWay despite the specific performance order, it is entitled to accept the defendant’s repudiation and seek damages in lieu of specific performance.  Mr Toms, solicitor for Stark Moly relies on the principle as stated by Lord Wilberforce in Johnson v Agnew^[1].

16. The defendant objects to the application on two grounds.  First, Mr Kwok, counsel for the defendant, argues that, as a matter of law, Stark Moly is not entitled to accept the defendant’s repudiation because it has not sought permission from court to put an end to the put option agreement.  Second, Mr Kwok argues that it would be unjust to dissolve the order for specific performance. 

Whether application has been made to put an end to the put option agreement

17. Mr Kwok has no disagreement with the principle in Johnson v Agnew relied on by Stark Moly, but emphasises the procedural requirement that alongside the application to discharge the order, Stark Moly must also seek permission from court to put an end to the put option agreement and cannot rescind the put option agreement by a mere statement in its affidavit.  If I understand him correctly, he seems to suggest that it is not enough to seek court’s order to have the specific performance order discharged, Stark Moly must also at the same time apply for another order to put an end to the put option agreement and cannot itself bring an end to that agreement by accepting the defendant’s repudiation.  Mr Kwok relies on Johnson v Agnew and GKN Distributors Ltd v Tyne Tees Fabrication Ltd^[2].

18. In Johnson v Agnew, the vendors of property were in arrears with repayment of mortgages on their property.  They entered into a contract to sell the property to the purchasers at a price which would be sufficient to repay the mortgages with a surplus which would be sufficient to enable the vendors to buy another property.  The purchasers did not complete.  The vendors obtained a summary order for specific performance.  The purchasers did not comply with the order and the mortgagees sold the property at a price which was insufficient to repay the mortgages.  The vendors then moved for an order that the purchasers should pay the balance of the purchase price less the amount realised by the mortgagee.  The court made no order on the motion.  On appeal by the vendors, the English Court of Appeal allowed the appeal, holding that the order for specific performance should be discharged and damages awarded in lieu.  Though Mr Kwok only seeks to rely on one point in that judgment, ie the fifth point in the passages quoted below, it would be instructive to quote extensively the following passages to understand the rationale of the rule.  Lord Wilberforce said at 392D as to the legal basis of the principles:

“In this situation it is possible to state at least some uncontroversial propositions of law.

First, in a contract for sale of land, …

Secondly, the vendor may proceed by action for the above remedies (viz. specific performance or damages) in the alternative. At the trial he will however have to elect which remedy to pursue.

Thirdly, if the vendor treats the purchaser as having repudiated the contract and accepts the repudiation, he cannot thereafter seek specific performance. This follows from the fact that, the purchaser having repudiated the contract and his repudiation having been accepted, both parties are discharged from further performance. …

Fourthly, if an order for specific performance is sought and is made, the contract remains in effect and is not merged in the judgment for specific performance. This is clear law, best illustrated by the judgment of Sir Wilfrid Greene MR in Austins of East Ham Ltd v Macey [1941] Ch 338, 341 in a passage which deals both with this point and with that next following. It repays quotation in full.

“The contract is still there.  Until it is got rid of, it remains as a blot on the title, and the position of the vendor, where the purchaser has made default, is that he is entitled, not to annul the contract by the aid of the court, but to obtain the normal remedy of a party to a contract which the other party has repudiated. He cannot, in the circumstances, treat it as repudiated except by order of the court and the effect of obtaining such an order is that the contract, which until then existed, is brought to an end.  The real position, in my judgment, is that, so far from proceeding to the enforcement of an order for specific performance, the vendor, in such circumstances is choosing a remedy which is alternative to the remedy of proceeding under the order for specific performance.  He could attempt to enforce that  order and could levy an execution which might prove completely fruitless.  Instead of doing that, he elects to ask the court to put an end to the contract, and that is an alternative to an order for enforcing specific performance.”

Fifthly, if the order for specific performance is not complied with by the purchaser, the vendor may either apply to the court for enforcement of the order, or may apply to the court to dissolve the order and ask the court to put an end to the contract. This proposition is as stated in Austins of East Ham Ltd v Macey [1941] Ch 338 (and see Singh (Sudagar) v Nazeer [1979] Ch 474, 480, per Megarry V-C) and is in my opinion undoubted law, both on principle and authority. It follows, indeed, automatically from the facts that the contract remains in force after the order for specific performance and that the purchaser has committed a breach of it of a repudiatory character which he has not remedied, or as Megarry V-C puts it [1979] Ch 474, 480, 790, that he is refusing to complete.

These propositions being, as I think they are, uncontrovertible, there only remains the question whether, if the vendor takes the latter course, ie of applying to the court to put an end to the contract, he is entitled to recover damages for breach of the contract. On principle one may ask “Why ever not?” If, as is clear, the vendor is entitled, after, and notwithstanding that an order for specific performance has been made, if the purchaser still does not complete the contract, to ask the court to permit him to accept the purchaser’s repudiation and to declare the contract to be terminated, why, if the court accedes to this, should there not follow the ordinary consequences, undoubted under the general law of contract, that on such acceptance and termination the vendor may recover damages for breach of contract?”

(Emphasis by defendant underlined)

19. Though Johnson v Agnew is a case about sale and purchase of real property, the principles quoted are general principles of law applicable to real property and personal property alike.  As Lord Wilberforce said, the principles are uncontrovertible.  Though a plaintiff has elected specific performance, if the defendant refuses to perform despite the court order, the plaintiff could either apply to court for enforcement of the order, or may apply to court to dissolve the order and ask the court to put an end to the contract which the order has kept alive.  By applying for an order for specific performance, the plaintiff has put it into the hands of the court on how the contract is to be performed.  The court has become seised of the matter.  Thus, despite non-compliance with the order, it is no longer open to the plaintiff to accept repudiation on the part of the defendant to put an end to the contract.  To seek damages instead of enforcing the order for specific performance, the plaintiff has to come to court and seek the court’s order, first, to discharge the order for specific performance and, second, to put an end to the contract so that the plaintiff can claim damages.  It is not for the plaintiff to accept any repudiation, but for the court to put the contract to an end where it is just to do so.   

20. To seek the court’s order to dissolve or discharge the specific performance order and to put an end to the contract is of course no mere formality as the contract has been kept alive by order of the court.  An application has to be made to invoke the court’s jurisdiction.  But by no reading of the judgment could the dictum that a plaintiff “may apply to the court to dissolve the order and ask the court to put an end to the contract” be construed as imposing a requirement that a plaintiff must make a separate application to court to seek an order of the court to put an end to the contract.  I have outlined the facts in Johnson v Agnew.  I can find nothing in the headnote to suggest that the vendors had made a separate application to put an end to the contract.  The vendors made only one motion for damages in lieu of the order for specific performance which the purchasers failed to comply.  Thus, Lord Wilberforce must have considered one motion seeking damages in lieu of the order for specific performance as encompassing an application to dissolve the order and to put an end to the contract so that the court can order damages.  There is no need for a separate and formal application for an order to put an end to the contract.  There are no magic words to be used.  With respect, Mr Kwok is reading far too many words into the dictum and giving the law a rigidity and undue technicality which Lord Wilberforce never intended.  This is particularly so in the light of the Civil Justice Reform.

21. I now turn to GKN Distributors Ltd v Tyne Tees Fabrication Ltd^[3].  Before turning to the dicta relied on by Mr Kwok, it is important to note that in that case, as distinguished from the present case, no application whatever was made to court to have the specific performance order discharged.  That, in my view, is an important distinguishing feature which must be borne in mind in reading the dicta relied on by Mr Kwok.  The facts of that case are as follows.  The vendor of property obtained an order for specific performance against the purchaser.  Neither the vendor nor the purchaser proceeded with performance.  Then the vendor entered into a second contract to sell the property to a third party for less than the original sale price and told the purchaser that the claim for specific performance would be changed to a claim for damages.  The vendor then sought a declaration that it was entitled, notwithstanding the specific performance order, to treat its agreement with the purchaser as terminated, to forfeit the deposit paid and claim damages.  It was in that context that Nourse J held that an application to dissolve an order of the court, which had never been made, and ask the court to put an end to the contract is no mere formality.  The following is the passage relied on by Mr Kwok^[4]:

“It seems to me that the fundamental objection to Mr Teverson’s submissions, which would allow the vendor to treat the contract as being at an end without first going back to the court, is that they wholly ignore those words. Moreover, it is clear from other passages in Lord Wilberforce’s speech that an application to dissolve the order and ask the court to put an end to the contract is no mere formality; and that the court would not accede to the application if to do so would be unjust, in the circumstances then existing, to the purchaser: Johnson v Agnew [1980] AC 367, 394, 399.

In Singh (Sudagar) v Nazeer [1979] Ch 474, 480-481 Sir Robert Megarry V-C said:

“By applying to the court for an order of specific performance, and obtaining it, I think that the applicant has put it into the hands of the court how the contract is to be carried out.  As the court has become seised of the matter, and has made an order, it seems to me that subject to anything that the parties may then agree, the working out, variation or cancellation of that order is essentially a matter for the court.”

I entirely and respectfully agree with those observations.  The court has decreed that the agreement shall be specifically performed and carried into execution.  That is a regulation of the rights of the parties in a specified manner.  If those rights are subsequently to be regulated in some other manner it is obvious that that can only be done by agreement or by first obtaining a further order of the court.”

(Emphasis by defendant underlined)

22. These passages explain the rationale why once the court has made an order for specific performance the plaintiff has to apply to court to dissolve or discharge that order and put an end to the contract before he is entitled to any alternative remedy.  But that is far from saying that the plaintiff must make two applications, one to discharge the order and another one to put an end to the contract.  I must emphasise that in that case no application to dissolve the order for specific performance was made.  Nourse J also relied on Johnson v Agnew for the proposition that an application to dissolve the order and ask the court to put an end to the contract was required in that case.  If Lord Wilberforce had not intended a separate formal application to put an end to the contract necessary, I do not think in GKN Distributors Ltd Nourse J would have intended or held otherwise.

23. Accordingly, I reject Mr Kwok’s argument that Stark Moly must make a separate application to put an end to the put option agreement before it would be entitled to seek damages in lieu.  Stark Moly has made an application to discharge the order for specific performance and seek damages.  The application encompasses an application to the court to put an end to the put option contract.  That, in my view, is sufficient to invoke the court’s jurisdiction. 

Whether it would be unjust to dissolve the order for specific performance

24. As I have said, in an application to discharge a specific performance order and to put an end to the contract, the question is not a simple one of whether the plaintiff accepted the defendant’s repudiation. Having placed the matter in the hands of a court of equity, it is for the court to decide whether in addition to the defendant’s repudiatory conduct, it is equitable in all the circumstances, including the plaintiff’s conduct to grant the application.  In Johnson v Agnew^[5], Lord Wilberforce said:

“… Once the matter has been placed in the hands of a court of equity, or one exercising equity jurisdiction, the subsequent control of the matter will be exercised according to equitable principles. The court would not make an order dissolving the decree of specific performance and terminating the contract (with recovery of damages) if to do so would be unjust, in the circumstances then existing, to the other party, …”

25. Stark Moly claims damages in lieu of the specific performance order in the sum of US$58,560,000 representing the option consideration for its 87,669 option shares in FabWay calculated in accordance with the formula under the Investment Agreement up to 9 May 2014. According to Mr Toms, this amount of damages was assessed on the basis of the option consideration, which Stark Moly would have received had the Investment Agreement been performed, less the value of the 87,669 option shares in FabWay held by Stark Moly.  But by reason of the restructuring of Wiseking, the value of the option shares in FabWay was reduced to zero because the value that lay with those shares was shifted to the shares in Wiseking. Hence, he argues that Stark Moly is entitled to the option consideration.  Effectively, Stark Moly is seeking enforcement of the order for specific performance in a different form.

26. Mr Kwok argues that it is incorrect to say that for the purpose of quantification the value of the option shares in FabWay is reduced to zero because the value of their equivalent shares in Wiseking has to be taken into consideration.  He therefore submits that once the Wiseking shares are considered, the damages claimed could not have been suffered by Stark Moly.  Mr Kwok’s argument is full of good sense, but it cannot explain why in assessing damages for breach of the put option agreement, the value of some other shares has to be taken into account.

27. From the facts as I have outlined above, I can immediately see the inequity in the order for specific performance as it now stands and in an order for damages in the terms sought by Mr Toms.  By reason of the restructuring of Wiseking, which until then was the only asset of FabWay, FabWay’s shareholding in Wiseking was reduced from 100% to 0.28% which is held on trust for the various investors and the value in the option shares in FabWay sold to the investors was shifted to their shares in Wiseking.  Thus the option shares are but empty shells devoid of essence.  By requiring the defendant to purchase the option shares in accordance with the formula under the Investment Agreement, the defendant would have to pay a huge price for the empty shells, while Stark Moly would receive the option consideration and at the same time retain the essence in the FabWay shares which was shifted to its Wiseking shares.  Stark Moly would receive double benefit.  The present circumstances render specific performance of the put option agreement wholly different from what the parties had contracted for.  Though the restructuring was brought about by the defendant and without prior notice or consent of Stark Moly, Stark Moly was fully aware of the change of circumstances at the time it sought specific performance.  Obviously, none of the parties had brought this matter to the court’s attention when seeking the order for specific performance.  The same inequity would also be created if an order for damages in the terms sought by Stark Moly is made.  It is inequitable for Stark Moly to be awarded the option consideration and at the same time be allowed to retain the Wiseking shares. 

28. As the matter is again in the hands of the court of equity, this court can revisit the matter.  Mr Kwok resists Stark Moly’s application for damages and asks that the application be dismissed, thus leaving the order for specific performance in situ.  I think, for reasons as set out in the above paragraph, no court of equity would allow such an order to stand.  Had the shift in value of the FabWay shares to the Wiseking shares and the issue of double benefit been brought to the attention of the court, Reyes J would not have ordered specific performance on those terms he made.  I think the order for specific performance should be discharged and replaced by an order for damages.  By reason of its acquisition of the option shares in FabWay, Stark Moly was issued shares in Wiseking for free and the option shares in FabWay were depleted of their value.  That benefit which Stark Moly derived from the Wiseking shares must be taken into account in assessing the damages occasioned by the defendant’s breach of obligation to buy back the option shares in FabWay which had been depleted of value.  There is no evidence before the court as to the value of the Wiseking shares.  This court can only award damages to be assessed.

Conclusion

29. For the above reasons, I allow the application. I discharge the order for specific performance dated 2 October 2007 and enter judgment for damages to be assessed.  I also make a costs order nisi that there be no order as to costs.  I invite the parties to agree directions for the further conduct of these proceedings.