WU RONG ZHAO v. CLARISSA OR AND ANOTHER

HCA 2556/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2556 OF 2016

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D E C I S I O N

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INTRODUCTION

1. I have before me two summonses:-

(1) the plaintiff’s summons dated 24 October 2016 seeking an interlocutory injunction against the defendants to restrain them from (a) completing, for and on behalf of East Victory Limited (“the Company”), the sale of the property known as Flat B, 37/F with Balcony and Utility Platform of Tower 1, Grand Promenade, No 38 Tai Hong Street, Hong Kong (“the Property”) under an agreement for sale and purchase dated 19 September 2016 (“the Formal Agreement”) registered in the Land Registry against the Property by memorial number 16092601700025, and (b) executing or entering into, for and on behalf of the Company, any agreement to sell or otherwise dispose of the Property; and

(2) the summons of Li Lau Yee Lan (“the applicant”) dated 25 October 2016 seeking an order that (a) she be permitted to intervene in these proceedings and be joined as an additional defendant for the purpose of setting aside or varying the ex parte injunction order made by Wong J on 20 October 2016 (“the Ex Parte Injunction Order”); and (b) the Ex Parte Injunction Order be set aside and discharged, or alternatively varied on such terms as the court may think just so as to permit the completion of the Formal Agreement for the sale and purchase of the Property made between the Company as vendor and the applicant as purchaser.

Basic facts

2. The basic facts relevant to the two applications before me can be shortly stated.

3. The Company, incorporated in Hong Kong, is the registered owner of the Property. The 1^st and 2^nd defendants are the registered and beneficial owners of the entire issued share capital, consisting of 10,000 ordinary shares, of the Company, and also the directors of the Company.

4. By a provisional agreement for sale and purchase dated 21 April 2016 (“the Provisional Agreement”), the defendants as vendor agreed to sell and the plaintiff as purchaser agreed to purchase the entire issued capital of the Company (“the Shares”) at the price of HK$12,050,000.  It is the plaintiff’s case that at the time of the signing of the Provisional Agreement, it was within the parties’ contemplation that the Property was the only substantial asset of the Company, and that the plaintiff’s purchase of the Shares was with a view to gaining control over the Property.

5. The Provisional Agreement provided for:-

(1) an initial deposit of HK$600,000 to be paid by the plaintiff upon the signing thereof;

(2) a formal agreement to be entered into on or before 3 May 2016, whereupon a further deposit of HK$605,000 was to be paid by the plaintiff; and

(3) completion to take place on 13 July 2016, whereupon the balance of the purchase price in the sum of HK$10,845,000 was to be paid by the plaintiff.

6. As a matter of fact:-

(1) the plaintiff duly paid the initial deposit of HK$600,000 upon the signing of the Provisional Agreement;

(2) no formal agreement was entered into between the plaintiff and the defendants on or before 3 May 2016 or at any time thereafter; and

(3) nevertheless, the plaintiff tendered a cheque for the sum of HK$605,000 to the defendants’ solicitors on 3 May 2016 as payment of the further deposit.

7. Completion did not take place, whether on 13 July 2016 or at any time, because, it would seem, the parties were arguing over the issue of whether the Company had some potential profits tax liability arising from its previous sale of two other properties in Hong Kong in 2011 and 2012 respectively, and were unable to reach agreement on how the plaintiff, who would become effectively the owner of the Company after completion of the purchase of the Shares, could be protected against such potential liability.

8. On the plaintiff’s side, he proposed that:-

(1) either the defendants provided a bank guarantee in the sum of HK$2,000,000; or

(2) the defendant’s solicitors should hold the sum of HK$2,000,000 out of the balance of the purchase price paid by the plaintiff as stakeholder;

pending the resolution of the issue regarding the Company’s liability to pay profits tax.

9. On the other hand, the defendants proposed to execute a deed of indemnity in the plaintiff’s favour which they considered would be sufficient to protect the plaintiff’s position.  Neither party was prepared to accept the other side’s proposal.

10. On 13 July 2016, the plaintiff through his solicitors tendered 3 cheques totalling HK$10,845,000 (being the balance of the purchase price) to the defendants’ solicitors.  One of the three cheques was in the amount of HK$2,000,000 made payable to the defendants’ solicitor to be applied in accordance with the aforesaid stakeholding arrangement proposed by the plaintiff.

11. The 3 cheques were returned by the defendants’ solicitors on 13 July 2016 because, as earlier mentioned, the defendants did not agree with the plaintiff’s proposal.

12. On 15 August 2016, the plaintiff’s solicitors returned various documents to the defendants’ solicitors as demanded and, more importantly, demanded for the return of all deposits previously paid by him.  On 17 August 2016, the defendants’ solicitors sent a cheque in the sum of HK$1,205,000 to the plaintiff’s solicitors as refund of the initial and further deposits paid by the plaintiff.

13. However, on 19 August 2016, the plaintiff’s solicitors wrote to the defendants’ solicitors stating (inter alia) that the plaintiff accepted the defendants’ indemnity proposal and demanded the defendants to complete the sale of the Shares under the Provisional Agreement.

14. By a letter dated 24 August 2016 from the defendants’ solicitors to the plaintiff’s solicitors, the defendants alleged that the plaintiff was in repudiatory breach of the Provisional Agreement by failing to pay the balance of the purchase price on the completion date (ie 13 July 2016), and accepted the plaintiff’s repudiation.  The defendants’ allegation is denied by the plaintiff.  For reasons which I shall explain below, it is not necessary, for the purpose of disposing of the present applications, for me to reach any view regarding the merits of the plaintiff and the defendants’ respective contentions on the defendants’ allegation of repudiatory breach by the plaintiff.

15. On 2 September 2016, the Company entered into a preliminary agreement with the applicant for the sale and purchase of the Property at the price of HK$12,500,000.  The applicant paid an initial deposit of HK$625,000 to the Company upon the signing of the preliminary agreement. 

16. On 19 September 2016, the Company and the applicant entered into a formal agreement for the sale and purchase of the Property (ie the Formal Agreement mentioned at the beginning of this decision).  The applicant paid a further deposit of HK$625,000 to the Company upon the signing of the Formal Agreement.  Under the Formal Agreement, completion of the sale and purchase of the Property is scheduled to take place on or before 1 November 2016.

17. On 26 September 2016, the Formal Agreement was registered in the Land Registry against the Property.

18. On 4 October 2016, the plaintiff commenced the present action by way of a writ of summons.

19. On 20 October 2016, the plaintiff applied, ex parte without notice to either the defendants or the applicant, for an injunction to restrain the defendants from, inter alia, completing the Formal Agreement.  The application was granted by Wong J which resulted in the making of the Ex Parte Injunction Order.

20. The two summonses mentioned at the beginning of this decision came before me this morning.

21. On behalf of the plaintiff, Mr Leung sought an order in terms of the plaintiff’s summons.  The parties seem to have treated the plaintiff’s summons as an application to continue the Ex Parte Injunction Order, even though the order itself is expressed to have effect “until trial and judgment in this action or further order”.  As I remarked in the course of the hearing, the Ex Parte Injunction Order ought properly to have been expressed as having effect up to the return date or further order of the court.

22. On behalf of the defendants, Ms Verna Lui asked the court to discharge the Ex Parte Injunction Order on various grounds, including:-

(1) there is no serious issue to be tried, either because clauses 8 and 9 of the Provisional Agreement are to the effect that the plaintiff’s only entitlement would be compensation of a sum equivalent to the amount of the initial deposit paid by the plaintiff (in addition to a refund of the deposits paid), or because the plaintiff has, by conduct, accepted that the sale and purchase of the Shares had fallen through;

(2) damages would be an adequate remedy for the plaintiff; and

(3) the balance of convenience is against granting the injunction sought by the plaintiff, having regard to (inter alia) the fact that the Company has entered into a contract for the sale of the Property to the applicant, being a bona fide purchaser for value without notice.

23. On behalf of the applicant, Mr Benjamin Yu SC also sought an order for the discharge of the Ex Parte Injunction Order on the grounds that:-

(1) the plaintiff has not shown any triable issue for relief in respect of the Property;

(2) the applicant is a bona fide purchaser for value without notice of the plaintiff’s rights or interests (if any) in the Property, and has properly registered the Formal Agreement in the Land Registry against the Property;

(3) the applicant will suffer irreparable damage if the injunction sought by the plaintiff is granted (or continued), and the balance of convenience is clearly in favour of refusing to grant or continue the injunction sought by the plaintiff; and

(4) there has been material non disclosure on the part of the plaintiff in relation to the ex parte application made on 20 October 2016.

Discussion

24. In my view, the Ex Parte Injunction Order ought clearly to be discharged in the circumstances of this case.

25. First, the plaintiff is a purchaser of the shares in the Company owned by the defendants, but not a purchaser of the Property owned by the Company.  It follows that the plaintiff has no proprietary right or interest in the Property, and would not, as accepted by Mr Leung, be entitled to seek any proprietary injunction in respect of the Property.  It is possible that an argument may be constructed that the defendants are under an implied contractual obligation not to do anything to frustrate the substance or purpose of the contract that they have made with the plaintiff and the injunction is required to restrain the defendants from breaching such implied obligation. Alternatively, the plaintiff may seek to justify the injunction as a Mareva type of injunction in aid of his cause of action against the defendants for breach of contract.  However, the basis of the application was never made clear either in the two affirmations of Mr David Lam filed in support of the ex parte application, or counsel’s skeleton submissions dated 19 October 2016.  Neither did Mr Leung advance either of the two bases this morning in support of the plaintiff’s application.

26. Second, it is clear, on the evidence before me, that the applicant is a bona fide purchaser of the Property for value without notice of the plaintiff’s rights or interests (if any) in the Property.  Mr Leung argued that the applicant had either actual or imputed knowledge of the Provisional Agreement because (i) Centaline acted as “agent” in both transactions, and (ii) the applicant carried out a general litigation search against the Company and its directors/shareholders prior to entering into the preliminary agreement.  As for the former, I agree with Mr Yu’s submission that:

(1) the fact that Centaline acted as estate agent in the two transactions cannot mean that it was an agent of the applicant for the purpose of passing on knowledge to her about the plaintiff’s Provisional Agreement with the defendants;

(2) there is no evidence that the same estate agent was involved in the two transactions; and

(3) in any event, there is no evidence on Centaline’s knowledge as regards the status of the plaintiff’s transaction with the defendants.

27. The fact that the applicant took the precaution of carrying out a general litigation search against the Company and its directors/shareholders plainly cannot mean that the applicant had knowledge about the plaintiff’s Provisional Agreement with the defendants.

28. Third, by the plaintiff’s own conduct in demanding for the return of all deposits paid on 15 August 2015, the plaintiff himself treated the Provisional Agreement as having come to an end.  He can therefore no longer pursue any claim for specific performance.  His only remedy, if any, would be a claim for damages.

29. There is, in my view, no basis on which an injunction could properly be granted to restrain or prevent the completion of the applicant’s purchase of the Property form the Company.

30. It is also clear in the circumstances of this case that damages would be an adequate remedy as far as the plaintiff is concerned, while the balance of convenience is clearly in favour of refusing to grant or continue the injunction sought by the plaintiff.

31. I also consider that there has been material non-disclosure by the plaintiff in at least three important aspects:-

(1) the existence and potential relevance of clause 8 of the Provisional Agreement;

(2) the fact that on 15 August 2016, the plaintiff in fact demanded for the return of the deposits, thereby bringing the Provisional Agreement to an end, with the result that, on any view of the matter, the plaintiff would not be entitled to seek specific performance of the Provisional Agreement; and

(3) the plaintiff has no proprietary claim in respect of the Property.

32. Leaving these matters aside, there was also no proper basis on which the plaintiff could have applied, ex parte without notice to either the defendants or the applicant, to the court for an injunction.  The plaintiff knew about the Formal Agreement on 3 October 2016.  He was plainly aware that both the defendants and the applicant would have an interest to oppose the ex parte injunction sought by the plaintiff.  The plaintiff was also aware that Messrs Chan and Cheng were acting for the applicant, as shown by the fact that immediately after it had obtained the Ex Parte Injunction Order from Wong J, the plaintiff (though his solicitors) gave notice of the same by a letter to Messrs Chan and Cheng dated 20 October 2016.  Even if it be assumed that there was a degree of urgency in the matter such as to justify an ex parte application to be made, I am unable to think of any valid reason why prior notice of the application was not given to the defendants and the applicant.  In my view, the failure to give notice of the ex parte application to the defendants and the applicant was inexcusable and, on this ground alone, would justify the discharge of the Ex Parte Injunction Order obtained by the plaintiff.

DISPOPSITION

33. For the foregoing reasons, the plaintiff’s summons dated 24 October 2016 is dismissed with costs to the defendants, to be taxed if not agreed, on an indemnity basis.

34. In respect of the applicant’s summons dated 25 October 2016, I make an order that the applicant be joined as an additional defendant for the purpose of applying to set aside the Ex Parte Injunction Order, and I further make an order setting aside the Ex Parte Injunction Order.  The applicant shall have the costs of her summons, to be taxed if not agreed on an indemnity basis with certificate for 2 counsel.  I am persuaded by Ms Yu that this is a proper case for certificate for 2 counsel to be given because of the urgency of the application and, more significantly, the importance of this matter to the applicant, who purchases the Property for self-occupation and has already been granted a mortgage loan by Standard Chartered Bank for the purchase of the Property.

35. Lastly, I also order that the proposed registration of the writ herein against the Property, currently pending registration in the Land Registry, be vacated, because I can no basis for the registration of the instrument.