TANG CHACK WING v. YUNG WOON KWAI

HCA 1837/2020

[2021] HKCFI 2566

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1837 OF 2020

________________________

________________________

________________________

REASONS FOR DECISION

________________________

1.  By the Summons dated 4^th May 2021, the Plaintiff seeks summary judgment against the Defendant.  

Background

2.  The Plaintiff, the Defendant and Mr Yung Yui Kwai are the founders of a group of companies that carry on business under the name of “Chun Yip”[1].  

3.  The Plaintiff and the Defendant respectively owns 50% shareholding in the following companies: Chun Yip Plastic Limited (“Chun Yip Plastic”), Chun Yip Industrial (Holdings)  Limited (“Chun Yip Industrial”), Joinmark Investment Limited and Chun Yip Holdings Limited (hereinafter collectively the “Companies”).  

4.  By an agreement for sale and purchase of shares dated 15^th Aug 2019 (hereinafter the “SPA”), the Plaintiff (as vendor)  agreed to sell, and the Defendant (as purchaser)  agreed to buy, the Plaintiff’s shares in the said Companies at the consideration of HK$1,000,000,000.  

5.  Pursuant to clause 3.2 of the SPA, the said consideration is to be paid by 5 installments throughout a period of four years from 15^th September 2019 to 15^th August 2023.  On the day when the last installment is paid, completion shall take place.  The Defendant shall acquire the Plaintiff’s 50% shareholding, thereby becoming the sole shareholder of the Companies.  

6.  Since completion will not take place until August 2023, clause 4.2 of the SPA requires the parties to ensure that pending completion, the Companies would continue to carry on normal business operation.  Clause 4.2 also seeks to maintain the status regarding the affairs of the Company in various respects.  The details of this clause will be further discussed hereinbelow.  

7.  Clause 3.3 of the SPA provides that if the Defendant fails to pay any installment, he shall give 7 days’ advance notice to the Plaintiff, and the Plaintiff shall give the Defendant a grace period of 2 months for payment of the installment that is due and payable.  If the Defendant still fails to make payment within the grace period, all outstanding balance of monies payable under the SPA would become immediately due and payable by the Defendant.  

8.  It is not in dispute that pursuant to clause 3.1 of the SPA, on 15^th September 2019 the Defendant did pay the first installment in the amount of HK$10 million to the Plaintiff.  

9.  However, the Defendant failed to pay the second installment of HK$190 million which became due on 15^th August 2020.  The Plaintiff gave the Defendant the grace period of 2 months in accordance with clause 3.3.  After the expiry of the grace period, the Defendant still failed to pay the 2^nd installment.  

10.  Hence, by virtue of clause 3.3 of the SPA, all the sums that will be payable under the SPA have become immediately payable.  The total amount is HK$990,000,000 (ie HK$1,000,000,000 less HK$10,000,000).  

11.  On 16^th October 2020, the Plaintiff, through his solicitors, issued a pre-action letter demanding the Defendant to pay him the sum of HK$990,000,000 pursuant to clause 3.3 of the SPA.  

12.  Since no payment was forthcoming, on 29^th October 2020 the Plaintiff commenced the present Action.  

13.  In the Statement of Claim, the Plaintiff pleads that by operation of clause 3.3 of the SPA, the Defendant is liable to pay him the sum of HK$990,000,000[2]. Whilst the Plaintiff claims against the Defendant for the sum of HK$990,000,000[3], he also seeks “a decree of specific performance”[4].

14.  As will be elaborated below, the Plaintiff is clearly seeking to enforce the SPA.  It is not the case that the Plaintiff accepted the Defendant’s repudiatory breach and sues for damages.  This is why acceptance of repudiation and damages are not pleaded in the Statement of Claim at all.  Instead, the Plaintiff pleads clause 3.3 of the SPA (which entitles him to receive the sum of HK$990,000,000)  as well as specific performance. The significance of this will be discussed below.  

The Defendant’s Case

The initial defence

15.  Initially, the Defendant’s case is grounded on clause 4.2(A)  of the SPA. This clause provides that both the Plaintiff and the Defendant shall ensure that the Companies would continue to carry on normal daily operation, and they would consult each other on operational matters.  

16.  The Defendant alleges that the Plaintiff (1)  refused to attend office; (2)  was hardly contactable; and (3)  often refused to sign or approve resolutions (including resolutions for obtaining loans for business operation)[5]. Based on these allegations, the Defendant contends that the Plaintiff failed to actively engage in the operation and business of the Companies, and hence he breached a condition of the SPA.  The Defendant says that this was why he accepted the Plaintiff’s repudiation and terminated the SPA by the letter or notice dated 22^nd October 2020.  

17.  As will be elaborated below, I am not convinced that this defence is credible and/or arguable.  

18.  However, this is not the end of the story.  After this Action was commenced, there was subsequent development.  

The defence arising from subsequent development

19.  On 28^th April 2021, the Plaintiff commenced winding-up proceedings under HCCW 167/2021 and HCCW 168/2021 (the “Winding-up Proceedings”).  He sought to wind-up two of the Companies, namely Chun Yip Plastic and Chun Yip Industrial, on just and equitable grounds.  

20.  The Defendant contends that:

(1)  The SPA must contain an implied term to the effect that (i)  the Plaintiff shall not do anything which would diminish, negatively affect and/or destroy the value and economic substance of the shareholding in the Companies; and (ii)  the Plaintiff shall not do anything that would adversely affect the Companies’ ability to operate as an on-going concern.  

(2)  Hence, by commencing the Winding-up Proceedings, the Plaintiff breached the said implied terms of the SPA, and he evinced an intention that he no longer wished to be bound by the SPA.  Accordingly, the Defendant was entitled to accept repudiation, and this was done when the Defendant’s solicitors issued the further letter dated 9^th July 2021.  

21.  In light of the said development, the Defendant has taken out a summons dated 20^th July 2021 seeking to amend his Defence.  Whilst there are a couple of proposed cosmetic changes, the Defendant also seeks to bring a Counterclaim against the Plaintiff seeking restitution in respect of the first installment of HK$10 million on the basis of unjust enrichment (the unjust factor being total failure of consideration).  

Legal Principles on Summary Judgment

22.  Once the plaintiff can show a prima facie case, the defendant is vested with the burden of establishing an arguable defence or triable issue. There shall be no mini-trial on affidavits as genuine factual disputes ought to be resolved at trial, and summary judgment application is only for clear cases: see Hong Kong Civil Procedure (2021), para 14/4/9. 

Analysis

The initial defence

23.  For the following reasons, I am of the view that there is no merit in the Defendant’s contention that the Plaintiff breached clause 4.2(A)  of the SPA, such that he was entitled to terminate the SPA by the letter dated 22^nd October 2020.  

24.  The starting point is that clause 4.2(A)  of the SPA only provides that the parties should ensure that the Companies would continue their normal business operation, and the parties would consult each other.  As pointed out by Mr Richard Leung[6] (who represents the Plaintiff), clause 4.2(A)  does not impose any obligation requiring the Plaintiff to devote himself.  

25.  There is no evidence showing that the daily operation of the Companies has been affected as a result of the alleged inaction or inertia on the part of Plaintiff.  This is hardly surprising.  The success of the Companies (which appear to have a sizeable operation)  does not depend on the effort of one person.  Indeed, the Defendant does not even suggest that these Companies have difficulty in carrying on daily operation. 

26.  Furthermore, Mr Leung helpfully draws my attention to the following contemporaneous documents, which contradict the Defendant’s allegations: -

(1)  In the termination letter or notice dated 22^nd October 2020, the Defendant stated that the SPA had to be terminated because he lacked the ability to complete the deal[7]. This diametrically contradicts the Defendant’s current stance that he terminated the SPA because the Plaintiff was in breach of clause 4.2(A)[8].  In fact, the letter or termination notice does not contain one single word suggesting that the Plaintiff breached the SPA, neglected his duties owed to the Companies or refused to cooperate.  

(2)  Furthermore, there are telephone messages showing that as of 11^th August 2020, the Defendant’s daughter and the Plaintiff’s daughter were discussing the Defendant’s plan to generate cash (which involved selling a property in Repulse Bay).  In a telephone message from the Defendant’s daughter, it was indicated that the Defendant’s side intended to honour the payment obligations, and the delay was ascribed to “uncontrollable circumstances” (including Covid 19).  These telephone messages show that the reason why the Defendant did not pay the second installment was that he faced financial difficulty. 

27.  In the premises, I am of the view that the Defendant’s accusations against the Plaintiff are only some afterthoughts conjured up after this Action was commenced.  The accusations are incredible.  

28.  In any event, it is wrong for the Defendant to suggest that clause 4.2(A)  is a condition of the SPA[9]. I am of the view that clause 4.2(A)  of the SPA is an “innominate term” or “intermediate term”, a breach of which does not necessarily amount to repudiation.  

29.  In Pui Ying Middle School of Hong Kong & Ors v So Shing Yit Eric & Ors [2020] HKCFI 692, para 255-257, DHCJ Bernard Man SC stated:-

255.  It would appear that the modern approach is that most contractual terms are regarded as “innominate terms”. See Ark Shipping Co LLC v Silverburn Shipping (IoM)  Ltd [2019] EWCA Civ 1161 at [81] (Gross LJ); Burrows, A Restatement of The English Law of Contract (2^nd edn, 2020)  at 119.

……

257.  Whether a breach of an innominate term amounts to repudiation turns on the seriousness of the consequences of the breach. The test is whether the innocent party is being deprived of substantially the whole benefit of the contract: Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 70 (Diplock LJ); or whether the breach goes “to the root of the contract” at 63-64 (Sellers LJ)…

30.  As mentioned, there is no evidence before me showing that any serious consequence has arisen as a result of the matters alleged by the Defendant. Hence, even if the Defendant’s accusations against the Plaintiff were made out (which is not the case), the Defendant would not be entitled to rely on these accusations as the ground to terminate the SPA.  

The defence arising from subsequent development

31.  I now deal with the defence arising from the subsequent development that took place after present Action was commenced (i.e. the commencement of the Winding-up Proceedings). 

32.  Mr Leung argues that the Winding-up Petitions are irrelevant.  This is because by commencing the present Action on 29^th October 2020 or issuing the pre-action letter dated 16^th October 2020, the Plaintiff had already accepted the Defendant’s earlier repudiatory breach in regard to failure to make payment.  Hence, the Winding-up Proceedings (which were commenced subsequently on 28^th April 2021)  are irrelevant.  

33.  Despite Mr Leung’s skillful submissions, I am not convinced that the Plaintiff had accepted the Defendant’s repudiatory breach by commencing this Action on 29^th October 2020 or issuing the pre-action letter dated 16^th October 2020.  In my view, this is not the correct analysis.  On the facts of the present case, the commencement of the present Action and the issuance of the pre-action letter were not acts of accepting repudiation.  On the contrary, they were acts of enforcing the SPA.  The Plaintiff had kept the SPA alive, such that he could sue on clause 3.3 to claim the contractual sum of HK$990,000,000 against the Defendant.  As mentioned, the Plaintiff does not seek to claim damages upon acceptance of repudiation.  Neither acceptance of repudiation nor damages has been pleaded in the Statement of Claim.  Instead, as pleaded in paragraphs 6 to 9 of the Statement of Claim, the Plaintiff makes it clear that he claims for the sum of HK$990 million pursuant to the contractual terms of the SPA, and in prayer (c)  the Plaintiff even seeks “a decree of specific performance”.  

34.  As pointed out by Mr John Hui (who represents the Defendant), the jurisdiction to order specific performance of a contractual obligation is based on the existence of a valid and enforceable contract: see Chitty on Contract (33^rd Ed), para 27-012.  This must be correct.  

35.  Mr Hui also relies on Doherty v Fanigan Holdings Ltd [2018] EWCA 1615, para 42-43 (per Sir Colin Rimer)  to contend that the Defendant’s duties to pay and the Plaintiff’s duties to deliver the shares are “dependent obligations”, in that “neither party [is] entitled to enforce the performance of the other’s except against a perform of his/its own”. 

36.  This makes sense to me.  It would be absurd if the Plaintiff were entitled to the contractual sum of HK$990 million without performing his contractual obligations to deliver or transfer the shares in the Companies to the Defendant.  Hence, if the Plaintiff takes steps to destroy the value of the shares or render himself unable to deliver the shares, he risks breaching the terms of the SPA.  

37.  In this connection, Mr Hui helpfully draws my attention to Chao Keh Lung v Don Xia [2004] 2 HKLRD 11.  In paragraph 73, Ma JA (as he then was)  pointed out that unless a contract was terminated, it remained in existence for the benefit of the wrongdoer and the innocent party.  If the innocent party subsequently failed to perform his side of the bargain, he took the risk that the initial wrongdoer might turn the tables on him.  See also Chitty on Contract (33^rd Ed), para 24-002, 24-011.

38.  For the following reasons, I am of the view it is highly arguable that the implied terms contended by the Defendant do exist, i.e. the Plaintiff shall not do anything which would diminish, negatively affect and/or destroy the value and economic substance of the shares, and shall not do anything that would adversely affect the Companies’ ability to operate as an on-going concern: 

(1)  The SPA seeks to ensure that when completion takes place in 2023, the Companies would still be carrying on business as an on-going concern.  This is why clause 4.2(A)  provides that the parties are under a contractual obligation to ensure that the Companies would continue their normal daily business operation.  The purpose of clause 4.2(A)  is to ensure that at the time when the Defendant becomes the sole shareholder upon completion, the Companies would still be carrying on normal business operation.  

(2)  The SPA also seeks to avoid material changes in affairs of the Companies.  Whilst clause 4.2(B)  of the SPA provides that the Companies should not enter into any transaction except those involved in daily operation, clause 4.2(C)  provides that there should be no change in directorship.  Clause 4.2(D)  further provides that no new shares should be issued.  

(3)  In the circumstances, it would be most surprising if the Plaintiff could take steps to destroy the Companies or to wind-down the Company’s business operation.  This will wholly defeat the purpose of the deal, and the Defendant will not be able to receive what he bargained for.  

39.  The next question to consider is whether it is arguable that the Plaintiff breached the implied terms (as well as clause 4.2(A))  of the SPA by commencing the Winding-Up Proceedings.  For the following reasons, I am of the view that the answer lies in the affirmative:  

(1)  As a matter of commercial common sense, clients or customers would not wish to deal with a company that is being subject to winding-up proceedings. They would wish to avoid the risks and uncertainty involved.  Depending on the circumstances, a winding-up petition may cause irreparable harm to a company.  

(2)  More fundamentally, if a winding-up order is made, a liquidator will be appointed to take over the affairs of the company.  The directors of the companies would be stripped of their powers.  The liquidator may dispose of the assets of the company, and the company will cease to operate an on-going concern.  

(3)  In the premises, there is an imminent risk that two of the Companies, namely Chun Yip Plastic and Chun Yip Industrial, would cease to be an on-going concern.  There is also an imminent risk that the subject matters of the contractual deal under the SPA would be severely damaged or even destroyed.  If these happen, the Defendant would not receive what he bargained for.  

(4)  I am of the view it is arguable that the Plaintiff had breached the implied terms (as well as clause 4.2(A))  of the SPA by commencing the Winding-up Proceedings.  

40.  Relying on a document used by the parties during negotiation[10], Mr Leung contends that the aggregate value of Chun Yip Plastic and Chun Yip Industrial (which the Plaintiff seeks to wind-up)  may only amount to about 20% of the total value of the Companies.  

41.  However:-

(1)  The document in question is only a home-made summary showing the alleged value of the Companies back in November 2017.  It is not certain as to how the author came up with the figures appearing in the document.  

(2)  Further, I do not lose sight of the fact that the Defendant purchases the shareholding in the Companies “as a package”, and the consideration of HK$1,000,000,000 is a sum to be paid for acquiring the Plaintiff’s shareholding in all the Companies.  

(3)  An individual company may have an important strategic role to play in a group.  It may not be possible to compare and/or assess the importance of companies within a group by looking at their balance sheets only.

42.  In the premises, it is doubtful as to whether it would be appropriate to segregate Chun Yip Plastic and Chun Yip Industrial from other Companies.  I am unable to conclude that no triable issues arise from the Plaintiff’s acts of taking out the Winding-up Petitions.  

43.  Furthermore, it also seems arguable that the Plaintiff had evinced an intention that he no longer wished to be bound by the terms of the SPA:-

(1)  In paragraph 37 of his 2^nd affirmation, the Plaintiff said that he took out the winding-up petitions to protect his interest, ie if the Defendant did not pay him, he could realise his shareholding through the winding-up process.  In an email from the Plaintiff’s daughter, it was also said that the Plaintiff was left with no option but to wind up the Companies so he could cash out his shares and retire. 

(2)  By reason of the analysis set out above, although the Defendant was the party that first breached the SPA by failing to pay, the Plaintiff would still be under a contractual obligation to transfer and deliver the 50% shareholding in the Companies. 

(3)  Hence, any statement that the Plaintiff sought to realize or cash out his shares would be indications that he no longer wished to be bound by the SPA.  The statements were not merely empty threats as the Plaintiff did take concrete actions to commence the Winding-up Proceedings against Chun Yip Plastic and Chun Yip Industrial.  

Conclusion

44.  For all the above reasons, I am not satisfied that the Defendant has no arguable defence at all.  I am of the view it is arguable that the Plaintiff had breached the SPA and/or evinced an intention that he no longer wished to be bound by the SPA.  As such, the Defendant was arguably entitled to accept repudiation or termination by the letter dated 9^th July 2021.

45.  In the premises, I grant unconditional leave to defend to the Defendant, and I order that costs of the summons dated 4^th May 2021 be in the cause, with certificate for one Counsel.  

46.  I grant leave to the Defendant to amend his Defence as per the draft Amended Defence & Counterclaim annexed to the summons dated 20^th July 2021, and the Defendant shall file and serve his Amended Defence & Counterclaim within 7 days.  I order that costs of the summons dated 20^th July 2021 be to the Plaintiff in any event.  

47.  I express my gratitude to Mr Leung, Mr Cheung and Mr Hui for their able and helpful assistance.