SINO RESOURCES GROUP LTD v. HUNG CHEN RICHAEL AND OTHERS

HCA 2477/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2477 OF 2009

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D E C I S I O N

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Introduction

1.  These are respectively the defendants’ application for the discharge, and the plaintiff’s application for the continuation, of the ex parte injunction order granted on 22 January 2010.

2.  The action itself was commenced in December 2009.

Background

3.  In a nutshell, the plaintiff was the buyer of a company known as the Target company (see para. 6(a) below) while the 1^st defendant (“Hung”) was its seller.  It is the plaintiff’s case the sale and purchase was in reality for a coal mine in the Mainland (“the Coal Mine”).

4.  The 2 company defendants are said to be owned and controlled by Hung (“the company defendants”).  They are alleged to be the recipients of assets belonging to the plaintiff (being consideration paid by the plaintiff to Hung under the Agreement referred to in para. 6(b) below).

5.  The plaintiff is a company listed at the Hong Kong Stock Exchange but the trading of its stocks has been suspended at the time of the hearing.

6.  There were several agreements concerning the sale and purchase:-

(a) an agreement dated 18 July 2007 between a company owned and controlled by Hung (“the Target company”) and a Mainland company which owns another Mainland company which in turn owns the Coal Mine (respectively “the Mine Seller” and “the Coal Mine company”);

(b)    an agreement dated 25 September 2007 between the plaintiff and Hung for the sale of the Target company (“the Agreement”).  The price of the sale was HK$700 million (payable by cash and the plaintiff’s own convertible notes and stocks);

(c) an agreement dated 26 October 2007 between the plaintiff and Hung amending certain terms of the Agreement.  This was followed by other supplemental agreements;

(d)    an agreement dated 30 October 2007 between the Target company and the Mine Seller whereby the Coal Mine company was sold to the Target company for RMB140 million (“the 2007 Agreement”).

Apparently, the 2007 Agreement needed to be registered with the Mainland authorities.  But, unknown to the plaintiff or Hung, another agreement dated 25 March 2008 (“the 2008 Agreement”) was registered.  According to the plaintiff, some of its terms were different from those in the 2007 Agreement and this caused difficulties to the plaintiff’s ability to effect payment to the Mine Seller.

Proceedings Leading to the Applications

(a) Pre-22 January 2010

7.  There was only an indorsement of claim when the plaintiff obtained the ex parte order on 22 January 2010.  The plaintiff’s claim against Hung was then based solely on an alleged breach of the Agreement.

8.  The skeleton argument used for the ex parte application similarly put forth a case of breach of the Agreement, which was said to lie in Hung’s failure to enable the plaintiff to acquire ownership and control of the Coal Mine company.

9.  The skeleton argument also indicated misrepresentation would later be added as another cause of action.  Hung’s representations were in short:-

(1) the plaintiff could acquire ownership and control of the Coal Mine company;

(2) the plaintiff could take over the management of the Coal Mine company;

(3) the 2007 Agreement was the only mine acquisition agreement and it was binding and enforceable so as to enable the plaintiff to acquire ownership and control of the Coal Mine company;

(4) the Mine Seller had the power and authority to transfer the Coal Mine company to the plaintiff.

None of the above representations was true.

10.  The prayer for relief sought:-

(a) damages; and/or

(b)    payment

for breach of contract.

(b) Post-22 January 2010

11.  The indorsement of claim was amended pursuant to leave given on 5 February 2010.  The statement of claim was filed on 1 February 2010.  Apart from breach of contract, the causes of action were expanded to:-

(1) misrepresentation;

(2) unjust enrichment.

Instead of the relief set out in para. 10 above, the plaintiff now seeks the Agreement to be rescinded, and for the consideration (namely, its own stocks and convertible notes paid under the Agreement) to be returned (and other relief (including alternative relief)).

12.  To better understand the issues in these applications, a brief description should be given to the plaintiff’s pleading.  The statement of claim does not appear to be a model of clarity; I shall attempt to summarize the gist of the plaintiff’s case as best I can nonetheless.

13.  The breach of contract is premised principally on clause 6(A) and schedule 2 of the Agreement: para. 8 thereof.  The breach is said to be:-

(a) in short, failure to transfer the Coal Mine company according to Mainland law or to obtain all the approvals and consents of the authorities: para. 8(viii) (described as para. 8(h) at para. 14) thereof;

(b)    the Coal Mine company has liabilities other than those warranted by the Target company: para. 8(i) thereof;

(c) the plaintiff was not given unrestricted right to the Coal Mine: para. 8(j) (described as para. 8(k) at para. 14) thereof;

(d)    the 2007 Agreement is unenforceable and has been replaced by the 2008 Agreement without the plaintiff’s knowledge: para. 15 thereof (particulars e and g);

(e) the plaintiff could not acquire ownership and control of the Coal Mine company: para. 15 thereof (particulars n);

(f) the Mine Seller’s complaint against the plaintiff caused the plaintiff to incur legal costs of more than HK$3 million.

As stated in para. 14 below, the misrepresentation claim is based on the same matters.  But the alleged misrepresentation summarized in sub-para. (a) to (f) above is not entirely the same as that summarized in para. 9(1) to (4) above.

14.  The misrepresentation claim in essence repeats the matters summarized in para. 13(a) to (f) above.  The unjust enrichment claim is based on the defendants having obtained the plaintiff’s properties despite consideration for the same having totally failed.

15.  The statement of claim prays that:-

(1) the plaintiff is entitled to rescind the Agreement (para. 21 thereof);

(2) the consideration for HK$700 million has wholly failed and Hung received the same to the plaintiff’s use (para. 20 thereof).

16.  The defence gave notice of intention to defend this action on 18 February 2010.  Further, on 19 February 2010, Hung filed his affirmation indicating the defence would apply to discharge or set aside the ex parte order.

Issues in the Applications

(a) Material Non-disclosure

17.  The defence places great emphasis on what it describes as serious material non-disclosure.

18.  At the time of the ex parte application, the plaintiff relied mainly on a supporting affirmation and its skeleton argument.  The picture presented was essentially this:-

(a) (after a brief narration of the various agreements (including those summarized in para. 6 above)) the plaintiff performed the Agreement and paid Hung and allotted the convertible notes and stocks in his favour (during the period from September 2007 to July 2008);

(b)    Hung was appointed the plaintiff’s chairman and executive director;

(c) in June 2008, the plaintiff’s staff discovered the 2008 Agreement;

(d)    “[the plaintiff] was subsequently … advised by its PRC legal advisers that [the 2007 Agreement] did not accord with the PRC laws but [the 2008 Agreement] was the effective and valid Mine Acquisition Agreement”;

(e) despite a letter from the Target company’s Mainland lawyers was sent to the Mine Seller in June 2009, the Mine Seller did not respond;

(f) in July 2009, the Mine Seller sued the Target company for payment and money was paid into the Mainland court in July 2009.

19.  The defence submits that the plaintiff should have disclosed the following matters to the court on 22 January 2010.  The plaintiff does not (or at least does not substantially) dispute the existence of these matters.

20.  First, the same Mainland law firm which provided the legal opinion in December 2009 in support of the part of the plaintiff’s affirmation quoted in para. 18(d) above has earlier given an advice to the plaintiff in February 2009 to the effect:-

(1) the transfer of the Coal Mine company was valid;

(2) the Target company (by then a plaintiff’s subsidiary) had obtained legal title to the Coal Mine company;

(3) because the 2008 Agreement did not contain a provision that the said transfer would be invalid if the Target company did not pay the consideration, there was no legal impediment to the said transfer;

(4) the plaintiff believed it had not misled the investors by claiming ownership and control over the Coal Mine company and consolidating the assets and operating results of the Coal Mine company into the plaintiff’s financial statements;

(5) a certificate and a business licence issued by the Mainland authorities named the Target company as the shareholder of the Coal Mine company.

The said legal advice was disclosed in the plaintiff’s announcement to the Hong Kong public dated 18 May 2009 (which the plaintiff was required to make).

21.  Secondly, as regards para. 18(b) (Hung’s appointment as the plaintiff’s chairman of the board) and para. 18(d) (the legal opinion of the plaintiff’s Mainland lawyer) above, Hung was only appointed on 27 February 2009, about 3 weeks after the legal opinion was given.

22.  Thirdly, the plaintiff defended the Mainland proceedings referred to in para. 18(f) above based on essentially the same grounds summarized in para. 20 above.  In a judgment of 5 February 2010, the Mainland court decided against the plaintiff; but the court’s reasons were that the plaintiff had failed to adduce sufficient documentary evidence and that the Target company was out of funds and failed to settle the consideration on time.  It should be noted, by then, the plaintiff owned and was in control of the Target company.

23.  Fourthly, the plaintiff was kept aware of the progress of the privatization and re-organization of the Coal Mine company.  Public announcements were made by the plaintiff regarding this from time to time.

24.  Fifthly, the Target company (as a plaintiff’s subsidiary) and the Mine Seller signed various agreements to provide instead for the payment by instalments of the consideration payable under the 2009 Agreement.

25.  Sixthly, the plaintiff formed a special committee in January 2010 to review the dispute between it and the Mine Seller (before Hung was appointed as chairman).

26.  Further to the above matters, I also note the plaintiff’s failure to mention the following at the ex parte hearing:-

(a) para. 18(c) above mentions the discovery of the 2008 Agreement by the plaintiff’s staff.  The plaintiff did not state that the “staff” was some of its high-ranking officers; apart from Hung, they were the (then) plaintiff’s chief financial officer and financial controller.  Up to now, the plaintiff has not explained why their own senior officers did not report the discovery until Hung did so about 6 months later;

(b)    the final payment (of $100 million) to Hung was effected in December 2008 after Hung disclosed to the plaintiff the 2008 Agreement;

(c) although the plaintiff indicated the intention to add misrepresentation, it did not mention that the intended additional cause of action is actually based on essentially the same set of facts: para. 14 above and 30 to 31 below.

27.  The significance of para. 26(c) above is this.  The so-called misrepresentation may be no different in nature from a breach of contract.  Such being the case, the plaintiff may not be entitled to rescind the Agreement unless it pleads (and can prove) that there has been a breach of the essential term(s) of the Agreement: Chitty on Contracts (1999) 28^th Ed., para. 12-019 (text to n. 74), 12-025, 25-017 and 25-038 (text to n. 98) (see also para. 30 to 33 below for details).

(b) Good Arguable Case

28.  The plaintiff’s case seems to be riddled with several problems.

29.  One, as stated above, the two causes of action (breach of contract and misrepresentation) are founded on essentially the same facts.

30.  But the misrepresentation relied on in this action is not that distinctly given during the course of negotiation (and which has not been incorporated into the contract): Chitty, para. 6-002.  On the contrary, there is substance in the contention it is expressly incorporated into the Agreement: clause 6(A) and schedule 2 thereof.  This is especially so when those terms are read with the “entire agreement” clause whereby the parties agreed that the Agreement set forth the entire agreement and superseded and cancelled all previous agreements, understandings and the like: clause 11(G); see also Chitty, para. 6-002 (text to nn. 3 and 4).

31.  If this should turn out to be a pure case of breach of contractual term(s), whether the plaintiff is entitled to rescind the Agreement will depend on whether it involves essential term(s).  Short of this, it is unlikely the plaintiff can successfully establish a total failure of consideration for it to seek the return of consideration already paid.  There are the following further possible related lines of defence.

32.  The parties’ conduct may well give rise to an argument there was no breach of the Agreement by reason of variation or waiver by conduct.  The relevant events include:-

(1) the discovery of the 2008 Agreement by the plaintiff’s “staff”;

(2) the final payment to Hung was effected after the plaintiff itself was informed of the 2008 Agreement;

(3) Hung was appointed as the plaintiff’s chairman after the plaintiff (i) formed a special committee to review the transfer of the Coal Mine company and (ii) was advised by its Mainland lawyer about the 2008 Agreement;

(4) the plaintiff (through the Target company) entered into further supplemental agreement with the Mine Seller in March 2009;

(5) the plaintiff adopted the stance since December 2008 to at least July 2009 (as against the Mine Seller and as regards the Hong Kong public) that the transfer of the Coal Mine company was valid.

33.  Alternatively, because the plaintiff has chosen to continue to perform the Agreement, it might have irrevocably affirmed the breach (if any): Chitty, para. 25-002, 25-003, 25-006 to 25-008 and 25-009.

34.  Two, the plaintiff indicated at the hearing before me misrepresentation would be relied upon as the main cause of action.  But even if that be the plaintiff’s proper cause of action, affirmation may still be a defence: Cartwright: Misrepresentation, Mistake and Non-disclosure (2007), para. 4.48 to 4.49.

35.  Three, the plaintiff still appeared to have difficulty identifying when it actually rescinded the Agreement when query about this was raised during the hearing before me (the pleading only avers that it was entitled to rescind the Agreement: see para. 15(1) above).  The plaintiff could only say that it took place no later than 19 January 2010 (that is, the date of the plaintiff’s affirmation for use at the ex parte hearing).

36.  Having said so, the determining test for this aspect is accepted to be “good arguable case”.  It is trite law this means:-

“All that has to be seen is whether he has prospects of success which, in substance and reality, exist.  Odds against success do not defeat him, unless that are so long that the plaintiff can have no expectation of success, but only a hope.  If his prospects are so small that they lack substance and reality, then he fails … ”: Hong Kong Civil Procedure 2010, Vol. 1, para. 29/1/0 citing in support Mothercare Ltd. v. Robson Books Ltd. [1975] FSR 466, 471.

37.  Despite the above potential difficulties, I cannot conclude the merits of the plaintiff’s claim unquestionably fall below the relatively low threshold.  Accordingly, I find that the plaintiff has established a good arguable case.

Conclusion

(a) The Ex parte Order

38.  By reason of the matters set out above (especially those under the sub-heading “(a) Material Non-disclosure”), I find the plaintiff has been guilty of serious material non-disclosure.  Matters which can be regarded as inconsistent with the plaintiff’s case (such as arguable conduct of variation, waiver or affirmation and the like) are clearly material, and ought reasonably to be known to the plaintiff.

39.  For this reason, the ex parte order must be discharged.

(b) Re-grant of Order

40.  The guidelines for exercising the discretion regarding re-grant have been laid down in numerous authorities including:-

(a) Cheung Kam Wah v. Cheung Hon Wah, CACV 53/2004 (11 January 2005), para. 49 to 66 (especially at para. 66);

(b)    Yau Chiu Wah v. Gold Chief Investment Ltd., HCA 807/2001 (15 May 2001), especially at para. 43 to 44.

41.  With considerable reluctance, I conclude that this is a case where the ex parte order should be re-granted.  The factors I have taken into account include the following.

42.  Although there has not been full and frank disclosure, at least some of the matters favourable to the defence have already been mentioned (though even in relation to those, they were not given proper prominence).  There is insufficient basis for concluding the non-disclosure must have been deliberate.

43.  The ex parte order resembles a Mareva injunction order; but it is much more restraint in scope.  The properties which the defendants are enjoined from disposing of are the plaintiff’s convertible notes and stocks issued to the defendants (no restriction was placed upon the defendants’ other assets).  The practical effect is merely to preserve the status quo and the defendants are unlikely to suffer any real harm (none has been suggested).  This is particularly so in view of the defence assertion that the plaintiff is financially impecunious.  If true, the price of the plaintiff’s convertible notes and stocks is unlikely to appreciate substantially before trial.

44.  On the other hand, any disposal of the plaintiff’s convertible notes or stocks may irreversibly alter the plaintiff’s capital structure.

45.  The defence has not offered any undertaking in lieu of an injunction.  No evidence has been adduced to dispute the plaintiff’s alleged risk of disposal of the said assets.  In fact, the affirmation of Hung (filed in relation to a petition for the plaintiff to be wound up) states in effect that he has been looking for potential investors to invest in the plaintiff (probably by taking up some of the plaintiff’s stocks).

Other Matters

46.  The defence also argues the plaintiff’s financial position ought to be fully and frankly disclosed.  It further contends that the plaintiff is financially impecunious.  However, with the undertaking now being fortified by payment-in, it should no longer be a factor of much weight.

Costs Order Nisi

47.  In relation to the ex parte order, there is no apparent reason to depart from the usual rule that costs should follow the event.  There will accordingly be a costs order nisi pursuant to Ord 42 r 5B(6) that the costs of and occasioned by the ex parte order be paid by the plaintiff to the defendants.

48.  The costs relation to the re-grant of the injunction are more complicated.

49.  Having re-granted the injunction, the plaintiff has succeeded to that extent.  There is insufficient reason to justify ordering the plaintiff, being a successful party (at least in principle), to pay the costs forthwith.  However, the ex parte order is only re-granted with reluctance; and there is at the same time a need to make it apparent any material non-disclosure is discouraged.

50.  Accordingly, the most appropriate costs order nisi in relation to the costs of the re-grant appears to be the defendants’ costs in the cause.

51.  To assist those concerned with taxation, I assess that four-fifths of the hearing were related to the discharge of the ex parte order and the remainder related to the re-grant.