TALLMANY ENTERPRISES LTD v. PROSTEN TECHNOLOGY HOLDINGS LTD AND ANOTHER

HCA 669/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 669 OF 2009

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D E C I S I O N

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1.  This is an application by the defendants for stay of execution of my judgment pending appeal.  The judgment was given on 20 October 2009 pursuant to the plaintiff’s application for summary judgment under Order 14.

2.  The plaintiff subscribed for convertible bonds from the 1st defendant for $28.8 million.  It also subscribed for exchangeable bonds from the 2nd defendant for $30 million.  The bonds were to be due for redemption in 2012 if the defendants had not committed any event of default.  However, the plaintiff was entitled to early redemption of the bonds with 25% premium upon event of default committed by the defendants.  The event of default relied upon by the plaintiff was the 1st defendant’s failure to collect some trade debts at RMB 3 million from a party connected to the 1st defendant by the extended due date of 30 September 2007.

3.  On 26 November 2008, the plaintiff gave notices to the defendants for early redemption.  The defendants disputed the plaintiff’s entitlement to early redemption.  They raised a number of grounds of defence in the action.  One ground was that the subscription agreements had ended automatically before the subscriptions took place, hence the plaintiff could not rely on the terms of the agreements but could only rely on the terms in the certificates of bonds.  Under the terms in the certificates, the defendants’ breach had to be a material one before the plaintiff would be entitled to early redemption.  The defendants further said that the failure to collect the said trade debts was not a material breach. 

4.  An alternative ground is that even if the subscription agreements had not ended before the subscriptions but were still binding, the plaintiff would still need to prove a material breach before it could have early redemption.  The defendants said that the clause providing for early redemption even if the breach should not be a material one did not apply to the failure to collect the said trade debts, because this failure occurred initially before the subscriptions took place, but the clause in question only dealt with breaches that took place after the subscriptions.

5.  The defendants also argued that the plaintiff was estopped from early redemption because of certain verbal assurances by those in control of the plaintiff. 

6.  The defendants also argued that the plaintiff was guilty of delay in seeking early redemption.

7.  At the hearing, the defendants did not really argue for automatic termination of the subscriptions agreements prior to the subscriptions.  In any case, if the agreements had so terminated, one wonders what effect the supplemental agreement would have when it purportedly extended the deadline for the collection of the trade debts as provided in the subscriptions agreements.

8.  I also held that the clause providing for early redemption even if the breach was not material did apply to the failure to collect trade debts.  This was an interpretation point that I dealt with in paragraphs 27 to 33 of my judgment.

9.  I also held against the defendants on the estoppel issue as I found the verbal allegations by the defendants unbelievable. 

10.  I also found that the delay of the plaintiff was not a ground of defence. 

11.  The reasons for my findings are in my judgment and I do not wish to repeat them.  However, when I read my judgment again, I found that I seemed to have misunderstood the arguments of leading counsel for the defendants on the interpretation point in paragraphs 27 to 33 of my judgment.  I therefore hold that the defendants have an arguable appeal (see Star Play Development Limited v Bess Fashion Management Company Limited, HCA4726/2001, paragraph 9(6)).

12.  I now consider whether I should order a stay of execution and, if so, on what terms.  The defendants say that if there is no stay, a successful appeal may be rendered nugatory. 

13.  The plaintiff is a foreign corporation.  Its assets are some 30 million shares of the 1st defendant and the redemption moneys.  If the defendants should succeed in the appeal, the plaintiff would presently not be entitled to receive the redemption moneys.  The 30 million shares has a current market worth of some $21 to $22 million.  The judgment sum with interest is about 77.5 million.  I agree that if there is no stay of execution, there is a real risk that a successful appeal may be rendered nugatory.  But I also do not think I should order a stay without imposing terms.

14.  The 1st defendant may have only about $72 million cash and cash equivalent at its disposal.  The plaintiff is now protected by a pledge given by the 2nd defendant over 100 million shares of the 1st defendant.  These shares have a current market worth of $71 to $72 million, but that is only to cover the $37,500,000 with interest, which is close to $40 million, as adjudged against the 2nd defendant.  There is no security for the plaintiff in relation to the sum adjudged against the 1st defendant.

15.  I therefore order that the execution of the judgment against the 1st and 2nd defendants be stayed until 27 November 2009.  If the 1st defendant should pay into court on or before 27 November 2009 the judgment sum of $36 million with interest accrued up to the date of payment in, the stay of execution of judgment in relation to both defendants will continue until the conclusion of the defendants’ appeal or until further order of the Court of Appeal.

16.  If the 1st defendant should fail to make the payment in as required above, the plaintiff will be at liberty to execute the judgments as against both defendants from 28 November 2009 onwards.

(Discussion re date for payment in costs)

17.  I also order costs of this application be in the appeal with certificate for two counsel.  It is not because the application is extremely complicated, which it is not, but because of the substantial sums involved.

18.  I also revised my order on stay of execution so that the last day for stay without payment will be extended to 4 December, 2009, and if payment in should be made on or before 4 December, 2009, the stay will continue as I have already mentioned.