JUMBO UP GROUP LTD AND OTHERS v. SUCCESS FOREVER ENTERPRISES LTD

HCA 179/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 179 OF 2013

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J U D G M E N T

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1. There are two summonses. One was issued by the defendant on 18 March 2013 under O 18 r 19(1)(a) of the Rules of the High Court and the inherent jurisdiction of this court to strike out the statement of claim on the ground that it discloses no reasonable cause of action.

2. The 2nd summons was issued by the plaintiffs on 16 April 2013 for leave to amend the statement of claim.

The case as set out in the statement of claim

3. The 1st and 2nd plaintiffs and the defendant are the shareholders of Boost Time Investments Limited (“Boost”).  The 1st and 2nd plaintiffs and the defendant hold 20%, 10% and 70% respectively of the shares of Boost.  These three parties and two other parties referred to below entered into a deed of sale and purchase dated 26 January 2010 (“the Deed”) by which the 1st plaintiff agreed to purchase from the defendant the 70% of Boost shares and the loans owed by Boost to the defendant (“the Boost Transaction”).

4. The only asset of Boost was its holding of 81.0319% of the shares of one Du Shi International Holding and Enterprises Company Limited (“Du Shi”).  Du Shi in turn held all the shares of a Sanya Hongtang Bay International Golf Company Limited (“Hongtang Golf”).  Hongtang Golf owned and operated a golf resort situated at Hongtang Bay, Sanya, Hainan province (“the Golf Resort”).

5. Du Shi also held all the shares of a Unitex Group Holdings Limited (“Unitex”).  Unitex in turn held all the shares of Sanya Hongtang Bay Real Estate Company Limited (“the Hongtang Estate”). 

6. Du Shi thus held indirectly the Golf Resort and the Hongtang Estate.

7. The Deed provided that the Boost Transaction should be completed by 4 May 2010.  The consideration was HK$990,089,205.27. It should be paid as follows:

(1)   an initial deposit of HK$50 million payable upon the execution of the Sale and Purchase Agreement (“Initial Deposit”);

(2)   a further deposit of HK$50 million payable on or before 25 February 2010 (“Further Deposit”);

(3)   HK$740 million payable upon completion; and

(4)   the balance of HK$150,089,205.27 payable by 26 January 2011.

The Initial and Further Deposits were paid on about 26 January 2010 and 25 February 2010 respectively.

8. The parties entered into a first deed of supplemental agreement (“First Supplemental Deed”) postponing the completion date to 31 May 2010.

9. The parties then entered into a 2nd deed of supplement agreement dated 14 July 2010 (“Second Supplemental Deed”) to further postpone the completion date to 19 July 2010 and require the balance of purchase price totalling HK$890,089,205.27 to be paid in full on completion.

10. I have mentioned above that there are two other parties to the Deed.  They are Union Rich Investments Limited (“Union”) and Rich Shine Investments Limited (“Rich Shine”).  Union held 20% of the shares of Newrich Holdings Limited (“Newrich”).  Union had also advanced a shareholder’s loan to Newrich.  Union had agreed to sell the 20% Newrich shares and the Newrich shareholder’s loan to Rich Shine for HK$252,151,424.36 (“the Newrich Transaction”).  The Newrich Transaction was completed on 26 January 2010 - the date of the Deed.

11. The Deed was thus made by five parties, namely the 1st and 2nd plaintiffs, the defendant, Union and Rich Shine.  The Deed also referred to the Newrich Transaction and provided that if the 1st plaintiff should fail to complete the Boost Transaction, the consideration paid by Rich Shine to Union under the Newrich Transaction would be reduced to HK$168,100,949.57 and Union had to refund to Rich Shine HK$84,050,474.79 (“Newrich Price Reduction”).

12. In order to guarantee the completion by the 1st plaintiff of the Boost Transaction and, failing which, the refund by Union to Rich Shine of the Newrich Price Reduction, the 1st, 2nd and 3rd plaintiffs executed the following documents in favour of the defendant and Rich Shine:

(a)   the 1st plaintiff executed a deed of share charge dated 26 January 2010, charging its 20% shares of Boost in favour of the defendant, and depositing with the defendant an undated board minutes of Boost approving the transfer of the 20% shares from the 1st plaintiff to the defendant and the resignation of the 3rd plaintiff from the directorship of Boost, and a blank instrument of transfer regarding the said transfer;

(b)   the 2nd plaintiff executed a deed of share charge dated 26 January 2010, charging its 20% shares of Boost in favour of the defendant, and depositing with the defendant an undated board minutes of Boost, approving the transfer of the 10% shares from the 2nd plaintiff to the defendant and the resignation of the 3rd plaintiff from the directorship of Boost, and a blank instrument of transfer regarding the said transfer;

(c)    the 3rd plaintiff signed and delivered to the defendant an undated resignation letter resigning from the directorship of Boost;

(d)   the 1st and 2nd plaintiffs executed a deed of assignment of loan dated 26 January 2010 assigning to the defendant absolutely the right and interest of their shareholders’ loans respectively made to Boost, Du Shi and Unitex as of 26 January 2010, which were owed by Boost to the 1st and 2nd plaintiffs respectively; and

(e)    further, the 3rd Plaintiff also executed a deed of personal guarantee dated 26 January 2010 in favour of the defendant and Rich Shine for the guaranteed obligations.

13. Save the Initial and Further Deposits totalling HK$100 million, the 1st plaintiff has not make any more payment to the defendant and failed to complete the Boost Transaction.  Union has also failed to refund to Rich Shine of the Newrich Price Reduction.  The defendant through its solicitors accepted on 1 March 2011 the 1st plaintiff’s repudiation of the Deed as varied by the two Supplemental Deeds. 

14. The plaintiff then without the knowledge or consent of the three plaintiffs procured Boost to enter into an agreement on 21 June 2012 with one Fortune Smile International Limited (“Fortune”) to sell Boost’s entire shareholding in Du Shi (81.0319%) to Fortune for HK$850 million (“the Du Shi Transaction”).

15. The defendant then enforced on 20 August 2012 the two share charges executed by the 1st and 2nd plaintiffs in respect of their shares of Boost.  The defendant thereupon became the legal mortgagee of these shares and effectively the sole registered shareholder of Boost.

16. The defendant and Rich Shine also commenced HCA 1189 of 2012 against the three plaintiffs herein, Union and another party.  The action was for forfeiture of the Initial and Further Deposits, interlocutory judgment against the 1st plaintiff herein for damages to be assessed for its failure to complete the Boost Transaction and final judgment against Union and the 3rd plaintiff herein for payment of the Newrich Price Reduction.  Mimmie Chan J granted summary judgment for the relief on 11 April 2013.

17. The plaintiffs pleaded in the statement of claim that the defendant, in procuring the Du Shi Transaction, had committed breaches of its duties to the 1st and 2nd plaintiffs as chargors and to the 3rd plaintiff as guarantor.  They further pleaded that the defendant, in procuring Boost to effect the Du Shi Transaction, had failed to exercise its power of sale in good faith and/or failed to secure the best available price and/or true market value of the assets underlying the charged shares.  The underlying assets are said to be Boost’s shareholding in Du Shi that corresponded to the charged shares. 

18. The particulars of breach as pleaded are the defendant’s failure to cause Boost to conduct a valuation of the shareholding of Du Shi, the value of the Golf Resort as held by Hongtang Golf was valued at RMB5,438 million as at 31 July 2012, and Boost’s 81.0319% shares of Du Shi had a value of about RMB4,406,514,722 or HK$5,459,671,740 by reference to the value of the Golf Resort alone.  The plaintiffs therefore pleaded that the consideration of HK$850 million for the Du Shi Transaction was an excessive undervalue of Boost’s entire shareholding of Du Shi. 

19. Alternatively the plaintiffs pleaded that the defendant had committed a breach of its duties to the plaintiffs in failing to respond to an offer by the 3rd plaintiff made to it on 3 October 2012 for purchasing its 71.91% shares in Boost at HK$900 million.  But I note that this offer came long after the Du Shi Transaction.

20. The plaintiffs then pleaded that they would suffer loss and damage if the Du Shi Transaction should proceed to completion. They therefore seek an injunction to restrain the defendant from causing Boost to proceed with the transaction.  They also claim damages from the defendant.

The plaintiffs’ summons to amend

21. The plaintiffs by their summons to amend propose to add to the statement of claim several additional claims.  The first proposed claim says that the defendant in causing Boost to enter into the Du Shi Transaction and/or to proceed with it has breached its duties to the plaintiffs because the value of the charged shares would be diminished by the Du Shi Transaction.

22. The 2nd proposed additional claim is by the 1st and 2nd plaintiffs for redemption of their charged shares upon payment by them of the amount that may be due and outstanding under the Deed and/or the two share charges with interest.  They are ready, willing and able to redeem and have offered to do so, but the defendant had not responded to them.

23. The 3rd proposed additional claim says that the forfeiture clause in the Deed empowering the defendant to forfeit the Initial and Further Deposits is a penalty clause.  But this proposed plea was abandoned by Mr Wong, leading counsel for the plaintiffs, at the hearing.

The defendant’s application to strike out

24. Mr Chan, leading counsel for the defendant, submitted that the statement of claim in this action does not disclose any reasonable cause of action and should be struck out.  He advanced several grounds. 

25. He submitted that the defendant had not exercised the power of sale as the chargee of the charged shares.  The charged shares of Boost had not been disposed of by the defendant by virtue of the Du Shi Transaction.

26. Furthermore, the defendant had always been able to procure Boost to sell the Du Shi shares held by Boost as the defendant was holding 70% of the shares of Boost.  The defendant, in procuring the sale by Boost of the Du Shi shares, did not have to rely on the charged shares.  The Du Shi Transaction was entered into on 21 June 2012 and the defendant only enforced the charges on the charged shares on 20 August 2012. 

27. However, the most important reason advanced by Mr Chan is that the loss allegedly suffered by the plaintiffs is a reflective loss and cannot be claimed as a matter of law.  He referred to the decision of the Court of Final Appeal in Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370.  Lord Millett NPJ said in that case with the concurrence of the other members of the court:

“47. A company is a legal entity separate and distinct from its members. It has its own assets and liabilities and its own creditors. The company’s property belongs to the company and not to its shareholders. If the company has a cause of action, this represents a legal chose in action which represents part of its assets. Accordingly, where a company suffers loss as a result of an actionable wrong done to it, the cause of action is vested in the company and the company alone can sue. This is the first rule in Foss v Harbottle (1843) 2 Hare 461. No action lies at the suit of a shareholder suing as such, though exceptionally he may be permitted to bring a derivative action in right of he company and recover damages on its behalf: see Wallersteiner v Moir (No 2) [1975] 1 QB 373 CA at p 390; Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 CA (Prudential) at p 210; Johnson v Gore Wood & Co [2002] 2 AC 1 at p 61 et seq.

…

82. I explained the rationale of the principle in Johnson v Gore Wood & Co (supra) at p 62, where I said:

If the shareholder is allowed to recover an respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders.  Neither course can be permitted.  This is a matter of principle; there is no discretion involved.  Justice to the defendant requires the exclusion of one claim or the other; protection of their interests of company’s creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder.”

28. Mr Wong submitted for the plaintiffs that the loss allegedly suffered by the plaintiffs is different from the loss suffered by Boost.  The 1st and 2nd plaintiffs’ loss was caused by the defendant’s breach of duty to the chargors whilst the loss suffered by Boost was caused by the breach of the defendant’s duty as a shareholder of Boost.  However, in whatever way Mr Wong may wish to dress up the alleged loss of the 1st and 2nd plaintiffs, it is the reflective of the loss suffered by Boost.  It is thus irrecoverable as a matter of law. 

29. Mr Wong also submitted that Boost is now under the sole control of the defendant and hence it will not sue the defendant for procuring it to sell its Du Shi shares at an undervalue.  Boost, being a shareholding company, has no creditor.  Hence, no creditor will be prejudiced by allowing the 1st and 2nd plaintiffs to sue the defendant for Boost’s loss.

30. Mr Chan, however, referred to para 87 of the judgment of Lord Millett in Waddington which directly deals with this argument:

“87.    The Court of Appeal may have assumed that the principle established in Johnson v Gore Wood & Co.is not engaged where the company has lost the right to sue.  But the House of Lords expressly applied the principle not only where the company had the right to sue but also where it had declined or failed to sue.  There was nothing new in this.  In Prudential (supra) it had been submitted that a personal action at the suit of the shareholder will lie to recover reflective loss if the company’s remedy is for some reason not pursued.  The Court of Appeal countered the argument (at p.223) by posing the rhetorical question: ‘How can the failure of the company to pursue its remedy against the robber entitle the shareholder to recover for himself?’”

Decision on the application to strike out

31. I agree with Mr Chan’s submissions that the statement of claim is for reflective loss which the law does not permit.  I hold that the statement of claim does not disclose a reasonable cause of action.

The application to amend and decision thereon

32. Regarding the proposed claim of diminished value of the charged shares which the plaintiffs wish to include by amendment, the value of the charged shares is diminished because of the diminution of value of the assets of Boost.  This proposed claim is thus a claim for reflective loss though given a different name (see also Thomas v D’Arcy [2005] QCA 68 at paras 9, 15, 18, 21, 30, 31 and 37).  I will not give leave for this claim to be included by amendment.

33. The last matter is the 2nd proposed claim for redemption.  The plaintiffs’ case is that they are ready, willing and able to redeem and have made an offer of redemption which the defendant has not responded to.  They therefore claim an account from the defendant of what is due from the 1st and 2nd plaintiffs to the defendant by virtue of the Deed and/or the two share charges.

34. However, Mr Chan again pointed out rightly that the defendant does not dispute that the plaintiffs are entitled to redeem the charged shares.  There is thus no need to make such a claim.  The plaintiffs need only make a valid tender, which they have not done so far, in order to redeem (see Hong Da Development & Investment Holding Co Ltd v China Aoyuan Property Group Ltd & Ors, HCA 1377/2011 (unreported, 19 December 2011) at paras 143 and 144).

35. On the question of the account of what is due from the 1st and 2nd plaintiffs to the defendant as sought in the proposed additional prayer for relief, Mr Chan submitted that there is no need for such account as the assessment of damages in HCA 1189/2012 pursuant to the interlocutory judgment will quantify the amount due.

36. The defendant has also estimated its loss at around HK$300 million.  The plaintiffs are invited to pay into court in the meantime the Newrich Price Reduction and HK$300 million pending the assessment of damages in HCA 1189/2012.  I think if the plaintiffs should regard the defendant’s invitation as unreasonable, they can take steps to expedite the assessment of damages in HCA 1189/2012 so that they can redeem the charged shares as soon as possible.

37. In the premises, I agree that there is neither need nor basis for the redemption claim to be made.  I will therefore decline leave for it to be included by amendment.

38. Since the statement of claim discloses no reasonable cause of action and the proposed amendments are not allowed, I dismiss the plaintiffs’ summons to amend and allow the defendant’s summons to strike out.  I also make a costs order nisi that the plaintiffs do pay the defendant the costs of both applications with certificate for two counsel.