PEARLDELTA GROUP LTD v. HUGE WINNERS INTERNATIONAL LTD AND OTHERS

FAMV No. 1 of 2011

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 1 OF 2011 (CIVIL)

(ON APPLICATION FOR LEAVE TO APPEAL

FROM CACV NO. 105 OF 2010)

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Between:

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DETERMINATION

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Mr Justice Ribeiro PJ:

1.  The plaintiff entered into an agreement dated 23 August 2005 with the 1^st defendant subscribing for HK$20 million of convertible bonds issued by the latter and guaranteed by the 2^nd to 6^th defendants.   Under the agreement, the return on the plaintiff’s investment might take the form of converting the bonds into ordinary shares in 1st defendant (it being intended to take that company public) or redeeming the bonds (or part of them) for cash.  If redemption was sought, the agreement contained two different formulae for calculating the redemption amount, referred to in the Court of Appeal’s judgment[1] as formula (i) and (ii) respectively.

2.  An event of default having occurred and its claims not having been met, the plaintiff brought an action on the agreement and on the guarantees, claiming the right to convert part of its bonds and to redeem the rest.  By his judgment dated 22 April 2010, Saunders J[2] awarded the plaintiff the sum of $104,010,717.29 comprising $86,321,292.66 plus interest of $17,689,424.63 representing the amount he found to be payable as redemption money applying formula (ii).  He also made various other orders that need not detain us.

3.  The defendants appealed to the Court of Appeal, having first paid to the plaintiff the sum of $41,783,117.00 which was the redemption money agreed to be payable applying formula (i) and which, on their case, was the only relief to which the plaintiff was entitled.  By a respondent's notice, the plaintiff claimed additional relief by way of a declaration that it is entitled to convert its un-redeemed bonds with an issue value of $100,000 into 10 million ordinary shares at a conversion price of $0.01 per share.

4.  The Court of Appeal allowed the defendants’ appeal holding that there was no basis upon which the Judge could properly apply formula (ii) to arrive at the amount awarded.   Rogers VP, speaking for the Court, held that such award was based on an unjustified modification of that formula wrongly accepted by the Judge.  The Court of Appeal also rejected the plaintiff’s claim for conversion of the remaining bonds into 10 million shares at $0.01 per share.  The agreement stipulated a conversion price of $685.70 per share subject to adjustment pursuant to a clause which required determination of the 1st defendant’s consolidated net profit after tax in accordance with applicable accounting standards before it could be operated. The Judge had purported to rely on two sets of draft financial statements and had construed the relevant clauses as setting $0.01 as the minimum conversion price rather than the minimum adjustment increment.  Moreover, as Rogers VP pointed out, the draft financial statements were heavily qualified and disclaimed a true and fair view.  Their figures could not be treated as accurate.  Furthermore, the Company showed an overall loss which was a position not catered for by the contractual mechanism which assumed the existence of a net profit after tax.

5.  The Court of Appeal held that the only entitlement established by the plaintiff was for the redemption amount which it had already been paid by the defendants.  The appeal was allowed and the cross-appeal dismissed.  Leave to appeal to this Court was refused.

6.  The plaintiff now approaches this Appeal Committee, arguing first that leave is as of right.  The claim is said to be for a liquidated sum, namely, the difference between the $104,010,717.29 awarded by Saunders J and $41,783,117.00 which the Court of Appeal held was the plaintiff’s entitlement.  That argument is with respect misconceived.  The judgment sum in this case was arrived at upon a calculation applying a contractual formula whose meaning and make-up was disputed and using component figures which are on their face fundamentally open to question.  The court had to interpret the contract and to quantify, if possible, those component figures.  The Court of Appeal found that certain figures could not be ascertained and certain formulae could not be applied.  A claim which can be quantified only after going through such a process is obviously not a claim for a liquidated amount.  Leave to appeal is plainly not as of right.

7.  The plaintiff then seeks leave on the “or otherwise” ground.  It is well established that it is only in highly exceptional cases that leave will be granted on this ground.[3]  Mr McCoy SC argues that leave should be given on this ground or else the defendants (whom he has characterised as rogues) would be allowed to defeat the contractual intention.  We do not accept that argument.  The contractual intention was to afford the plaintiff protection in cases where formula (ii) is inoperable by permitting them to rely on formula (i).  That has been achieved.  There is no basis for leave on the “or otherwise” ground.  In any event, we consider the reasoning of the Court of Appeal compelling.  The application must be dismissed with costs.