CHENG JUAN v. DENG JUNJIE

HCA 1398/2018

[2021] HKCFI 1606

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1398 OF 2018

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JUDGMENT

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1.  This is the trial of the Plaintiff’s (“Cheng”) claim against the Defendant (“Deng”) in relation to the disposal of Cheng’s interest in Kingsford Global Capital Fund LP (previously known as Yue Xiu Great China Fixed Income Fund VI LP) (“Partnership”). Cheng says that by an Oral Promise made to her by Deng, the latter is liable to compensate her for the shortfall of the payment she received in the disposal of her interest in the Partnership which amounted to HK$5,241,286.

Background

2.  An Agreed Statement of Facts had been filed by the parties pursuant to the directions of the court in which the following undisputed backdrop of this case can be found. 

3.  The Partnership was established under the Exempted Limited Partnership Law (Revised) of the Cayman Islands.

4.  At all material times, Deng was a businessman from the Mainland and the Chairman of a company listed on the Stock Exchange of Hong Kong, ie, China Water Industry Group Ltd (“Water Industry”).

5.  On or about 1 June 2015, Cheng became a limited partner of the Partnership by entering into an Amended and Restated Exempted Limited Partnership Agreement (“Partnership Agreement”) and making capital commitment to the Partnership in the sum of HK$22,400,000. 

6.  Subsequently, Cheng informed Deng of her intention to realize her interest in the Partnership[1].

7.  On or about 13 May 2017[2], Cheng and Deng entered into a written agreement of that date (“May Agreement”) whereby Cheng agreed to, inter alia, extend the term of the Partnership for a further two years; consent to the change of General Partner (Manager) of the Partnership; and then transfer her entire interest in the Partnership to Deng or a third party appointed by him.  In return, Deng agreed to pay to Cheng a sum of HK$30,000,000 for the transfer.

8.  Following the May Agreement, Cheng entered into 4 agreements to amend the Partnership Agreement.  The last amendment was the Fifth Amended and Restated Limited Partnership Agreement dated 29 November 2017[3]. By these amendments, inter alia, the term of the Partnership was extended for a further two years and the General Partner of the Partnership was changed from Yue Xiu Investment Management Ltd to Kingsford Global Asset Management Ltd (“Kingsford”).

9.  On 15 June 2018, Cheng commenced this action against Kingsford and Deng.  The action against Kingford was on the basis that it had refused to process Cheng’s application to withdraw from the Partnership submitted to it on about 30 November 2017, and to distribute to her the amount which represented her Partnership interest. 

10.  On about 15 July 2018, Kingsford transferred to Cheng the amount of HK$24,758,714, which represented her Partnership interest, and Cheng formally withdrew from the Partnership.

11.  On about 3 September 2018, Cheng discontinued this action against Kingsford.

12.  Deng’s Amended Defence filed in answer to Cheng’s case on the Oral Promise contains little more than a bare denial.

Issues

13.  There is an Agreed List of Issues to be Tried filed by the parties.  The key issue in this case is a factual one :

“Whether [Deng] had made the Oral Promise to [Cheng] as alleged by meeting with [Cheng] in about late October 2017 to request [Cheng] to withdraw her entire interest in the Partnership with the assurance that [Deng] shall personally indemnify [Cheng] of any shortfall under HK$30,000,000 from the corresponding payout?”

14.  There are a number of other factual issues set out in the Agreed List.  They are, in truth, subsidiary factual issues which may be considered by the court in resolving the key issue. 

Partnership Agreement

15.  A number of terms contained in the Partnership Agreement (First Amended version signed by Cheng on 1 June 2015) should be noted :

(1)  The Partnership should continue to exist for two years commencing on 1 June 2015 (section 2.05);

(2)  The Partnership was managed and controlled by the General Partner (Yue Xiu Investment Management Ltd at the time) (section 3.01);

(3)  Each person whose subscription for interest in the Partnership had been accepted by the General Partner should upon execution and delivery of a counterpart of the [Partnership Agreement] become a Limited Partner (section 2.08);

(4)  Proceeds of investments by the Partnership would be distributed to the Limited Partners in accordance with their “Investment Percentages” calculated in accordance with the provisions in the Partnership Agreement (section 4.01); and

(5)  A Limited Partner might not withdraw from the Partnership prior to its termination (section 5.05).

Evidence adduced by Cheng

16.  In addition to giving evidence herself, Cheng had called her boss, Mr Cai Kunming (“Cai”), to give evidence.  The evidence showed that Cai was involved in these matters from the beginning because he was at the meeting with Deng during which the May Agreement was signed.  Deng’s evidence was that he had known Cai for a long time.  Both Cheng and Cai reside in the Mainland. 

17.  Pursuant to the May Agreement, on 26 July 2017, Cheng received instructions from Deng’s agent, Mr Chen Rongbin (“Chen”)[4], to transfer her Partnership interest to Ms Cheng Xin, who was unknown to Cheng. Chen said that the consideration for the transfer should be stated at HK$20,255,319.  The reason given was to avoid any disagreement to the transfer by the other Limited Partners.

18.  Although there is a dispute as to whether Chen was acting as Deng’s agent or that of Cheng (according to Deng’s case), it is not an important factual issue to be resolved because Deng agreed in evidence that he gave instructions to Cheng via Chen for the transfer to be made in favour of Cheng Xin and that the stated consideration should be HK$20,255,319.

19.  Cheng spoke to Cai about Chen’s request.  She prepared a written Supplemental Agreement and asked Cai to speak to Deng and request him to sign the Supplemental Agreement.  Cai rang Deng in the presence of Cheng.  During the conversation, Deng confirmed his promise to abide by the May Agreement and to compensate Cheng for any shortfall below HK$30,000,000. In respect of the Supplemental Agreement, Deng told Cai that it was a small sum of money and his words were good enough. 

20.  A copy of the unsigned Supplemental Agreement was adduced as evidence by Cheng.  The stated terms were consistent with Cheng’s evidence.  In particular, it referred to the transfer of Cheng’s Partnership interest to Cheng Xin at HK$20,255,319, but the true price should be HK$30,000,000 as stated in the May Agreement. 

21.  By an email to the General Partner dated 26 July 2017, Cheng submitted an application to transfer her interest to Cheng Xin at HK$20,255,319. In cross-examination, Deng agreed that by 27 July 2017 Cheng had fulfilled her obligations under the May Agreement. 

22.  The Transfer Application was never processed by the General Manager.  Cheng accuses Deng to have obstructed the process.

23.  Cai had a number of communications with Deng after 27 July 2017 during which Deng said that he would fulfil his contractual obligations.  He also mentioned that he might pay for the price difference in RMB in the Mainland.

24.  Cai had produced to the court some WeChat records of his communication with Deng from 13 May 2017 to 1 February 2018.  Those records bear out Cai’s evidence that he was chasing for payment on behalf of Cheng, and Deng was reminded of his contractual obligations.  Such records showed that Deng kept asking for time to pay.  However, on 23 October 2017, Deng’s message referred to a “full scale takeover[5]” on the following week, Cai might apply for redemption that week and the money would reach their account in the middle of the following month :

“下周起动全面收购，你这周可以申请赎回，下月中钱可回到你们帐上”

25.  After receiving that message, Cai asked Cheng to go to Hong Kong to clarify the matter with Deng face to face. 

26.  On about the 28 October 2017, Cheng went with Chen to see Deng in his office at the Pacific Place.  She wanted to confirm two matters with Deng: (i) he wanted her to redeem her interest in the Partnership instead of transferring it (to Deng’s appointee); and (ii) he would make up any shortfall in redemption payment to her below HK$30 million.  In reply, Deng said yes and that he had already settled the matter (“說好了”) with Cai.  This constituted the Oral Promise.

27.  On 30 November 2017, Cheng signed the Fifth Amendment of the Partnership Agreement.  According to Cheng’s understanding, that Amendment was to allow her to withdraw from the Partnership prior to its termination.  By an application dated 29 November 2017 to the General Partner, Cheng applied to redeem her interest in the Partnership to be valued on 30 November 2017. 

28.  Kingsford failed to deal with Cheng’s application despite her repeated reminder.  It was only after the commencement of these proceedings that Kingsford processed the redemption application and paid Cheng HK$24,758,714 for the same.  There is thus a short of HK$5,241,286. 

Deng’s evidence

29.  Deng was the only witness for the defence. Apart from the absence of a positive case in his pleading, Deng’s witness statement is exceptionally short and uninformative.  He did not even attempt to address the events which took place after the signing of the May Agreement.

30.  In respect of Deng’s evidence in cross-examination, some of which will be covered in the evaluation below.

Evaluation of the evidence

31.  I find that Cheng’s case is supported by the documentary evidence and is consistent with inherent probabilities and common sense.  As a witness, I find Cheng to be reliable.  Her evidence was clear and considered, and her recollection was reliable.  I also accept the evidence of Cai, which is largely supportive to that of Cheng.  However, his recollection was not as good as that of Cheng, possibly due to the fact that he was in an assisting role in the matter. 

32.  The May Agreement was important because it underpinned the bargain struck by Cheng and Deng.  At the material time, the Partnership was coming to an end and Cheng wanted to get out of the investment.  I reject Deng’s evidence that he was merely trying to be helpful to Cheng and agreed to find a third party to take up her interest in the Partnership.  Such evidence flied in the face of the terms of the May Agreement. 

33.  I believe that Deng was trying to distance himself from the Partnership because he felt that his position as Chairman and shareholder of Water Industry presented certain sensitivity in his dealing with the Partnership, which was holding shares in that company.  Under pressure of cross-examination, Deng later revealed that he indeed had an interest in Cheng extending her investment for another 2 years (see clause 2 of the May Agreement) because he did not want the Partnership to dispose of its Water Industry shares.  Further, he could not acquire any interest in the Partnership himself due to conflict of interest.  Furthermore, he was willing to pay HK$30 million for Cheng’s interest in return for her agreement to the terms of the May Agreement. 

34.  Under clause 5 of the May Agreement, Deng provided a guarantee for the payment of HK$30 million by the transferee.

35.  Given the guarantee by Deng over the HK$30 million, and the subsequent request to have the transfer consideration stated at just over HK$20 million, Cheng’s request that a supplemental agreement be signed was reasonable and inherently probable.  I also find the acceptance by Cheng and Cai of Deng’s verbal assurance that he would honour his obligations reasonable in light of the existence of the May Agreement and the fact that Deng was apparently a person of wealth. 

36.  There is no direct evidence on why the transfer was not processed by the General Partner.  It is unnecessary to resolve the disagreement between the parties on this issue.

37.  However, it is plain from the WeChat messages as well as Deng’s own evidence that there was delay in the completion of the transaction.  Consistent with the evidence adduced by Cheng, Deng said that the delay was caused by the opening of a bank account in Hong Kong by Cheng Xin and the funding of the transaction.

38.  The kernel of Deng’s defence is that he had never agreed to the redemption of Cheng’s interest in the Partnership.  He said that he was not even told about the redemption.  With the redemption, Cheng was not able to transfer her interest to any appointee of his, and therefore he should not be liable to make up any shortfall.

39.  Deng’s defence flies in the face of his WeChat message referred to in para 24 above.  I reject his explanation that by redemption he merely meant that payment to Cheng would be made.  By his message, Cai was asked to make a redemption application that week.  The term “赎回” can be contrasted with “转让” used in the May Agreement.

40.  Further, if there was nothing said by Deng about applying for redemption, why would Cheng give up on the transfer to Cheng Xin when it was guaranteed that she would receive HK$30 million for the transaction?  Thus, the inherent probabilities are against Deng’s evidence. 

41.  Finally, I agree with Mr Chow, who appeared for Cheng, that Deng’s answers to the questions whether he had met Cheng and Chen at his office at the end of October 2017 showed that he was not a candid witness.  Instead of answering that there was never any such meeting, as he alleged after being pressed, his initial response was asking for the details of the meeting to help him to remember.  In assessing this part of the evidence, I bear in mind that the meeting was referred to in Cheng’s supplemental witness statement and could not be something which took Deng by surprise.

Conclusion and disposition

42.  For these reasons, I uphold the case of Cheng and give judgment in her favour in the sum of HK$5,241,286.  I award interest on the said sum from 17 July 2018 at prime rate(s) until today, and thereafter at judgment rate(s) until payment.  Costs of this action be to Cheng, to be taxed if not agreed.