PENTA INVESTMENT ADVISERS LTD v. ALLIED WELI DEVELOPMENT LTD (formerly known as HENNABUN CAPITAL GROUP LTD)

CACV 222/2014 and
CACV 35/2015

(HEARD TOGETHER)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS. 222 OF 2014 AND 35 OF 2015

(ON APPEAL FROM HCA NO. 1656 OF 2012)

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REASONS FOR JUDGMENT

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Hon Cheung JA :

I. The appeals

1.1  The plaintiff succeeded in obtaining judgment on liability from Chow J in respect of the defendant’s breach of a deed of guarantee dated 24 June 2011 entered into between the plaintiff and the defendant (‘the Deed’).  The defendant appealed against that judgment in CACV 222/2014. 

1.2  Chow J assessed the damages recoverable by the plaintiff from the defendant’s breach at the sum of $210,366,448.  The defendant also appealed against that judgment in CACV 35/2015.  We dismissed both appeals with costs to the plaintiff at the conclusion of the hearing.  I now give reasons for our judgment.

II. Facts

2.1  I will gratefully adopt the summary of facts by the Judge.

2.2  The defendant (formerly known as Hennabun Capital Group Limited) was incorporated in the British Virgin Islands in 1996.  Its principal place of business is in Hong Kong.  It is an investment holding company and its subsidiaries are engaged in a broad range of activities in the financial services industry including commodities dealing, investment advice, proprietary trading, securities brokerage, fund management, research and analysis, money lending and investment holding.  One of its wholly owned subsidiaries is called Chung Nam Securities Limited (‘Chung Nam’), a company incorporated in Hong Kong whose principal activities are securities brokerage and financial services.

2.3  The plaintiff carries on business as a hedge fund manager.

2.4  Freeman Financial Corporation Limited (‘Freeman’) was a major shareholder of the defendant.  In December 2010 there were discussions between the plaintiff, the defendant and Freeman which eventually led the plaintiff to subscribe for 500 million shares in Freeman at $0.275 per share.   Although Freeman’s share price initially went up after the plaintiff’s investment, it fell significantly afterwards, and the plaintiff had suffered a heavy loss by May 2011.

2.5  In May 2011 there were further discussions between the plaintiff, Freeman and the defendant (represented by Mr   Eugene Chuang, the former permanent managing director) about the fall in Freeman’s share price and the plaintiff’s loss.  Freeman raised the topic of the plaintiff investing in Mascotte Holdings Limited (‘Mascotte’), a company listed in the Hong Kong Stock Exchange.  At that time, Mascotte was seeking to raise capital by way of placement of 5,000,000,000 new shares of $0.10 each.  Deutsche Bank AG, Hong Kong Branch was the principal placing agent and Chung  Nam was one of the sub‑placing agents for this placement exercise.  Freeman suggested this investment as an opportunity for the plaintiff to recoup its loss in the Freeman investment.

2.6  The plaintiff was prepared to subscribe for 550 million shares in Mascotte at the price of HK$0.40 each.  However, in view of the loss that it had suffered in the Freeman investment, the plaintiff wished to have a degree of comfort and protection being included in the terms of the Mascotte investment to protect it from further losses and to reassure it as to future recoveries. Various options were explored.  Eventually, Freeman by its managing director Mr Hui proposed that the defendant would act as the guarantor.  After carrying out a due diligence on the defendant, the plaintiff agreed to accept the defendant as the guarantor.

2.7  Thereafter, there was drafting and negotiation of the terms of the Deed by the plaintiff through Mr Pridjian, its director and chief financial officer and by Mr Hui and one Mr Pak (who was formerly a director of the defendant) on behalf of the defendant.

2.8  On 24 June 2011, the plaintiff signed a Placing Commitment Letter, agreeing to subscribe for 550 million shares of Mascotte at the placing price of HK$0.40 per share for a total consideration of HK$222,437,600 (inclusive of stamp duty, SFC transaction levy, trading fee of The Stock Exchange of Hong Kong and brokerage fee).  Subsequently, the plaintiff was allocated the full amount of the subscription and paid the consideration accordingly.

2.9  On 27 June 2011, Mr Pridjian signed a copy of the Deed (undated and unsealed) and sent a PDF version of it by email to Mr Pak for execution by the defendant.  Mr Pridjian placed his signature in a space underneath the words ‘In the presence of’, and also initialled at the bottom right hand corner of each of pages 1 to 5 of the Deed (consisting of a total of six pages).  The space where Mr Pridjian placed his signature was, on the face of it, intended to be signed by the person who witnessed Mr Pridjian’s execution of the Deed. 

2.10  Mr Pak asked his secretary to print and deliver a copy of the Deed (signed by Mr Pridjian) to Ms Cathy Lam (‘Ms Lam’), the personal assistant to Ms Liao, the then permanent managing director of the defendant, for execution by Ms Liao.  Ms Liao signed on the copy of the Deed underneath the words ‘In the presence of’.  The executed copy of the Deed was returned by Mr Pak to Mr Pridjian by email on 28 June 2011.

2.11  Later, Mr Pridjian signed two duplicate originals of the Deed.  The plaintiff’s seal was affixed on the two documents, which were then sent by courier and received by Mr Pak on or about 3 July 2011.  Mr Pak arranged for the two duplicate originals of the Deed to be signed by Ms Liao as on the previous occasion, and Ms Liao signed them, again underneath the words ‘In the presence of’.  Mr Pak then requested Ms Tong, the company secretary of the defendant who had custody of its common seal, to affix the seal on the two documents.  Ms Tong agreed, and gave the seal to a staff member to attend to Mr Pak’s request.  The two documents were then sealed.  Mr Pak arranged for one of the duplicate originals of the Deed, signed by Ms Liao and bearing the common seal of the defendant, to be returned to the plaintiff on or about 12 July 2011.

2.12  The Deed was dated 24 June 2011, the same date of the Placing Commitment Letter signed by the plaintiff.

2.13  Under the Deed, the defendant is required to make good to the plaintiff the difference between (i) HK$0.50 times the number of Mascotte shares remaining in the hands of the plaintiff on the 180^th day after completion of the share placement which the plaintiff elected not to continue to hold (‘the Disposal Shares’) and (ii) the gross proceeds of sale of the Disposal Shares.

2.14  As it turned out, the share price of Mascotte fell after the share placement.  The plaintiff decided to call upon the defendant to honour its obligation under the Deed by a letter dated 10 January 2012.  The number of Mascotte shares remaining in the hands of the plaintiff at that time was 481,564,000 and the plaintiff elected not to continue to hold any of those shares.  Hence, the number of the Disposal Shares was also 481,564,000.

2.15  At the beginning of 2012, there were discussions between the parties and Mr Hui regarding an alternative proposal to amend certain of the defendant’s obligations under the Deed and also on an agreed protocol for an orderly disposal of the Disposal Shares in the form of a supplemental deed. 

2.16  However, on 6 February 2012, the defendant, through its solicitors (Lam & Co), sent a letter to the plaintiff alleging that the defendant had never agreed to the terms of the Deed, and that the Deed was not duly executed by the defendant and not enforceable against it.  The letter stated, amongst other things, that when Ms Liao was given the Deed, she told Mr  Pak that she had no authority to do so without the proper authorization from the board and the shareholders of the defendant, and would only sign the Deed as a witness to the existence of the ongoing negotiations.  The letter also stated that there had never been any approval by the board of directors and/or shareholders of the defendant of the terms of the Deed or the execution thereof.   

2.17  On 11 September 2012 the plaintiff commenced the present action against the defendant. 

III. The defendant’s defence on liability

3.1  The defendant relied on the following three grounds of defence :

(1) There was no execution of the Deed by Ms Liao on its behalf.

(2) Even if Ms Liao did execute the Deed on its behalf, she had neither actual, nor ostensible, authority to do so.

(3) The plaintiff was put on notice that the Deed provided no benefit to the defendant but only to the plaintiff and, possibly, to Chung Nam, and was signed not for the defendant’s purposes.  Accordingly, the Deed is not binding on the defendant, or enforceable against it at the instance of the plaintiff.

3.2  The Judge found against the defendant on all three grounds.  

IV. The Judge’s decision on liability

1) Execution by Ms Liao on behalf of the defendant

4.1  The Judge rejected Ms Liao’s contention that she did not intend or execute the Deed for the following reasons :

‘ 42.1) It is clearly stated on page 5 of the Deed that it was meant and intended to be sealed with the common seal of Hennabun and “signed by Liao Miao Ling, Director”.

2) Ms Liao read the Deed before signing it and understood that it was a guarantee to be provided by Hennabun.  Further, Ms Liao knew, or must have known, that the Deed was presented to her for signing in her capacity as director of Hennabun, and not as “witness”.

3) It is completely disingenuous for her to say that she thought that her signature was required as “witness”. She knew full well that she did not witness any person’s execution of the Deed.

4) The suggestion made in Lam & Co’s letter dated 6 February 2012 that Ms Liao signed, or would only sign, the Deed as “a witness to the existence of then ongoing negotiations” makes no sense whatsoever.  On her own evidence, Ms Liao was unaware of any negotiation between Hennabun and Penta (or any other party) and did not witness any negotiation.  Further, I am unable to see how Ms Liao could, by signing on the Deed, signify that she was witnessing any negotiations.

5) I am also unable to see how the fact that Ms Liao did not put her initials on the bottom of each page of the Deed provides any support for the contention that she did not intend to, or did not, execute the Deed as director of Hennabun, but did so only as “witness”.

6) Equally, the fact that Ms Liao did not affix the common seal of Hennabun at the time of signing the Deed seems to me to be quite irrelevant to this issue.  Ms Liao did not have the custody of the common seal, but must have realised that the common seal of Hennabun would be affixed on the Deed after her signing, as in fact was the case.

7) I shall deal with the contention that Ms Liao had no authority or consent from Hennabun to execute the Deed later in this judgment.’

4.2  In rejecting the evidence of Ms Liao, the Judge also took into account the fact that the suggestion made in Lam & Co’s letter dated 6 February 2012 that prior to the execution of the Deed, Ms Liao had told Mr Pak she had no authority to sign the Deed without the proper authorization of the board and the shareholders of the defendant, (and repeated in paragraph 37 of the defendant’s Defence), was contradictory to Ms Liao’s own evidence.

4.3  Further, the Judge held that having regard to the background and negotiation leading to the execution of the Deed, objectively, Ms Liao’s signing of the Deed must be understood to have been in her capacity as director of the defendant, and not as a witness. That was also how it was understood by the plaintiff.  The Judge had referred to and accepted Mr Pridjian’s evidence that he did not consider that the execution of the Deed required witnessing since it was to be signed by a director and sealed with the common seal of each of the parties, and he put his signature in the place intended for the witness by mistake.  Mr Pridjian also said that the provision for a witness in the signature block was superfluous and should have been deleted prior to execution.

2) Authority of Ms Liao

(1) Actual Authority

4.4  As to the second defence, the Judge held that Ms Liao had actual authority to execute the Deed on behalf of the defendant by reason of two articles in the memorandum and articles of association of the defendant :

‘ Article 71C

So long as there is a Permanent Managing Director of the Company, the Permanent Managing Director shall control and manage the business and affairs of the Company in such manner as in his absolute discretion he thinks fit in the interest of the Company and shall have the authority to exercise all the powers, authorities and discretion by these presents expressed to be vested in the Directors generally and in case of conflict between this Article and Articles 85 to 90, this Article shall prevail…

Article 85(1)

The business of the Company shall be managed and conducted by the Board, which … may exercise all powers of the Company (whether relating to the management of the business of the Company or otherwise) which are not by the Statutes or by these Articles required to be exercised by the Company in general meeting…’

4.5  The Judge held that :

‘ 48. There is no dispute that Ms Liao was the permanent managing director of Hennabun at the time of execution of the Deed. There is no suggestion that the execution of the Deed was something which was required to be authorised by Hennabun in general meeting. In this regard, although Hennabun is a company incorporated in the British Virgin Islands, no evidence has been adduced on the laws of the British Virgin Islands. I therefore proceed on the basis that the laws governing the interpretation and effect of the articles of association of Hennabun are the same as Hong Kong laws.’

4.6  The Judge rejected the defendant’s argument that by reason of Article 114(1), Ms Liao had no authority to execute the Deed on the defendant’s behalf.  Article 114(1) provides that :

‘ Article 114(1)

The Company shall have one or more Seals, as the Board may determine.  The Board shall provide for the custody of each Seal and no Seal shall be used without the authority of the Board or of a committee of the Board authorised by the Board in that behalf.  Subject as otherwise provided in these Articles, any instrument to which a Seal is affixed shall be signed autographically by one Director and the Secretary or by two Directors or by such other person (including a Director) or persons as the Board may appoint, either generally or in any particular case.’

4.7  The defendant argued that, first, the only situation in which a single person may be authorised to bind the defendant in a deed is where he or she is appointed to do so by the board, either generally or for a particular case and, second, there is no evidence of any resolution of the board or of a committee of the board of the defendant which authorised the affixing of its common seal on the Deed.

4.8  In respect of the first argument, the Judge held that :

‘ 51. ……by virtue of article 71C, Ms Liao, as the permanent managing director of Hennabun, had the authority to exercise all the powers, authorities and discretion vested by the articles in the board. That would include the power to authorise herself to sign the Deed on her own. By signing the Deed in the circumstances as aforesaid, she must be regarded as having exercised such power.’

4.9  In respect of the second argument, the Judge held that :

‘ 52. ……It seems to me that, again, the answer lies in article 71C. Ms Liao, as the permanent managing director of Hennabun, had the authority to permit the common seal of Hennabun to be affixed on the Deed. She signed the Deed under the words “SEALED with the Common Seal of HENNABUN CAPITAL GROUP LIMITED”, and must, in my view, be regarded as having authorised, by conduct, the common seal of Hennabun to be affixed on the Deed. Also, the evidence demonstrates that the common seal was used with the consent of the company secretary of Hennabun (ie Ms Tong) who had lawful custody of it. In these circumstances, I consider that the person who affixed the common seal of Hennabun on the Deed had the authority of the company to do so.’

(2) Alternative basis

4.10  The Judge further held that the Deed is binding on the defendant on two further or alternative bases :

(i) The Deed is binding on the defendant by virtue of the fact that it bears the common seal of the company and is thus to be regarded as the act of the company itself, applying the following statement of principle by Mason CJ in Northside Developments v The Registrar General 93 ALR 385 at 392:

‘ …The affixing of the seal to an instrument makes the instrument that of the company itself; the affixing of the seal is in that sense a corporate act, having effect similar to a signature by an individual, as I noted earlier. Thus, it may be said that a contract executed under the common seal evidences the assent of the corporation itself and such a contract is to be distinguished from one made by a director or officer on behalf of the company, that being a contract made by an agent on behalf of the company as principal.

Consequently, it has been held that, if the person dealing with the company receives a document to which the common seal has been affixed in the presence of individuals designated in the articles of association, he is entitled to rely on its formal validity.’

(ii) The Judge recognised that this principle is subject to the qualification that a third party cannot rely upon the formal validity of an instrument bearing the seal of a company ‘if the very nature of the transaction is such as to put him upon inquiry.  If the nature of the transaction is such as to excite reasonable apprehension that the transaction is entered into for purposes apparently unrelated to the company’s business, it will put the person dealing with the company upon inquiry’ : see Northside Developments at 393 per Mason CJ.  However, the Judge held that he did not see anything in the nature of the transaction relating to the Deed which was such as to put the plaintiff upon inquiry in the present case.

4.11  The Deed is further binding on the defendant by virtue of Article 85(2) of its articles of association, which states that :

‘ Any person contracting or dealing with the Company in the ordinary course of business shall be entitled to rely on any … deed … entered into or executed as the case may be by any one Director acting on behalf of the Company and the same shall be deemed to be validly entered into or executed by the Company as the case may be and shall, subject to any rule of law, be binding on the Company.’

3) Benefit to the defendant

4.12  The Judge also rejected the defence that the Deed provided no benefit to the defendant and was not for its purposes.  This is what the Judge held :

‘ 58. Hennabun was an investment holding company. One of its operating subsidiaries was Chung Nam. Chung Nam was one of the sub‑placing agents in relation to the placement of shares by Mascotte, and obviously would be remunerated for taking this job.

59. Mr Pak, who was called by Hennabun at the trial to give evidence on its behalf, was a former director of Hennabun and stated the following in paragraph 6 of his witness statement (which he adopted as part of his evidence):

“ … Mr. Hui told me that Mr. Wan’s main concern was the previous bad experience of Penta’s loss in the Freeman Investment. Mr. Wan suggested to Mr. Hui that if Penta was to go ahead investing in Mascotte shares, it would require some sort of security such as personal guarantee or corporate guarantee to make sure Penta would be protected from loss. I told Mr. Hui that Mascotte and Chung Nam were not in a position to provide guarantee and it would not be proper and legal for either of them to do so. On the other hand, since Chung Nam was the sub‑underwriter of the Mascotte placement, it would enhance the image of Mascotte and attract investors if Penta, whom I knew was a reputable US investment fund, would subscribe the Mascotte shares. It would make Chung Nam’s job easier in the sub‑underwriting exercise and be beneficial to Chung Nam if Penta would agree to subscribe the Mascotte shares. I was eager to find Penta some security to ease its mind. I had in mind to request [Hennabun] to provide the guarantee to Penta. I was the ex‑director of [Hennabun] and Mascotte was its shareholders. I then told Mr. Hui that if we wanted to procure the provision of a guarantee to Penta, [Hennabun] could be a suitable candidate.”

60. On this evidence and having regard to the fact that Chung Nam was one of the operating subsidiaries of Hennabun, it seems to me clear that Hennabun had a good commercial reason to provide the guarantee sought by Penta, and the Deed could not be regarded as providing no benefit to Hennabun or not being for Hennabun’s purposes.’

V. The defendant’s appeal on liability

5.1  It is against these findings that the defendant lodged its appeal on liability :

Ground 1 : Authority of Ms Liao to bind the defendant

(1) No consideration of benefit to the defendant

5.2  Mr Adrian Bell SC and Mr Minju Kim argued that Article  71C only grants power to Ms Liao to manage the defendant’s business in what she thinks fit in the interests of the company.  It does not empower her to take any step without considering whether or not the step is in the interests of the company.  The effect of Ms Liao’s evidence was that she did not consider whether or not executing the Deed would be in the interests of the defendant.  In the circumstances it was not open to the Judge to find that Ms Liao had authority to bind the defendant by virtue of Article 71C.  Mr Bell relied on the judgment of Lord Greene MR in Smith and Fawcett, Re [1942] Ch 304:

‘ The principles to be applied in cases where the articles of a company confer a discretion on directors with regard to the acceptance of transfers of shares are, for the present purposes, free from doubt. They must exercise their discretion bona fide in what they consider—not what a court may consider—is in the interests of the company, and not for any collateral purpose. They must have regard to those considerations, and those considerations only, which the articles on their true construction permit them to take into consideration, and in construing the relevant provisions in the articles it is to be borne in mind that one of the normal rights of a shareholder is the right to deal freely with his property and to transfer it to whomsoever he pleases.’ (Emphasis added)

5.3  In my view, although Ms Liao insisted that she signed the Deed as a witness, she did not attend any meetings dealing with discussions on the guarantee and when she was given the Deed to sign she had no idea what it was about, the Judge had clearly rejected her evidence that she only signed as a witness and not on behalf of the defendant.  By rejecting her evidence, the Judge must have come to the view that it is unimaginable that Ms Liao would have signed the Deed without considering that it was in the interests of the defendant to do so, particularly when the evidence of Mr Pak showed that when he presented the Deed to Ms Liao for execution, he had explained the background to the guarantee under the Deed and was satisfied that Ms Liao had clearly understood the purpose and details of the Deed. 

5.4  Furthermore the evidence of Ms Liao showed that she knew the role of Chung Nam as a sub-underwriter in the Mascotte placement and that securing investment in Mascotte shares would assist Chung Nam in avoiding having to take up the shares it had underwritten and in obtaining an underwriting fee which would ultimately be consolidated in the defendant’s consolidated financial statements.  Ms Liao agreed that it was the wish of the defendant that its subsidiaries did well and that it would do what it could to assist.  If Chung Nam was not required in its position as a sub-underwriter to buy all their shares itself it would not face the risk of the falling market.  And if it was able to find investors to acquire the shares it would also earn fees as well.  Accordingly, there must be an element of commercial interest on the part of the defendant (who wholly owns Chung Nam) in giving the guarantee.

(2) Absence of resolution under Article 89

5.5  Mr Bell then argued that the Judge had overlooked Article 89 which provides that:

‘ All cheques, promissory notes, drafts, bills of exchange and other instruments, …. shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as the Board shall from time to time by resolution determine.’ (emphasis added)

5.6  Mr Bell argued that Ms Liao was not authorised to execute the Deed by her signature absent a resolution authorising that mode of execution passed either by the defendant’s board, or by the permanent managing director exercising the board’s powers to pass such a resolution in accordance with Article 71C. There was no evidence that any such resolution had been passed either by the board or by the permanent managing director.  In my view, this is a non-point as Article 71C provides that it shall prevail in case of any conflict with Articles 85 to 90. 

(3) Absence of express appointment

5.7  Mr Bell argued that, pursuant to Article 114(1), the only situation in which a single person may be authorised to bind the company by signing an instrument bearing the company’s seal is where that person has been duly appointed to do so by the board, either generally or in a particular case.  By virtue of Article 71C, Ms Liao, as permanent managing director, was capable of exercising the board’s power to authorise a single person to sign such an instrument, whether it was the board exercising that power or Ms Liao, an express appointment was required.  No person can be regarded as having made such an appointment unless he actively considered whether such an appointment should be made. Mr Bell argued that in the circumstances, the objective evidence points to the fact that Ms Liao has failed to apply her mind at all as to whether she was appointing herself to sign the Deed for the proper purposes of the defendant.

5.8  Mr Bell further argued that Ms Liao had no authority to enter into the Deed and thus it was unenforceable as against the defendant as it was an improper exercise of power.

5.9  This is a repetition of the arguments before the Judge.  I agree with the Judge’s view that Article 71C provides the answer to the defendant’s argument.  Furthermore, Article 114(1) does not support the contention that an express appointment is required for Ms Liao to appoint herself to sign an instrument on her own in accordance with that article.

Ground 2 : Authority to affix seal

5.10  Mr Bell argued that the Judge erred in paragraph 52 of the judgment in holding that the person who affixed the common seal of the defendant on the Deed had the authority of the company to do so.  The basis for this holding was his view that, by signing the Deed under the words ‘SEALED with Common Seal of HENNABUN CAPITAL GROUP LIMITED’, Ms Liao must be regarded as having authorised, by conduct, the common seal of the defendant to be affixed on to the Deed.  In fact, Ms Liao signed under the words ‘in the presence of’, some distance below the text referred to by the learned judge.  In any event, her signature on the document cannot on its own be taken as authorising the seal to be affixed : it did not constitute an unequivocal indication that she intended the document to be sealed.

5.11  Mr Bell argued that the Deed prescribed its own formalities for execution, involving (i) application of the seal; (ii) signature by Ms Liao as director; and (iii) attestation by a witness.  The parties cannot have intended to be bound unless all three of these steps were taken.  The defendant accepts that attestation is not automatically required under the general law; indeed, it is for this reason all the more significant that attestation was a formality which the parties specifically required in the present case, as shown by the terms in which the signature block was drawn up.  In the event, the Deed bore only one signature and the defendant’s seal, i.e. only two of the three prescribed formalities, and the document was thus not validly executed.

5.12  Mr Bell further submitted that the Judge placed no weight, or no adequate weight, on the fact that Ms Liao did not sign the Deed in the place indicated for her to sign as a director of the defendant, instead signing under the words ‘in the presence of ’, i.e. the place for a witness to sign.  In dealing with that point, the Judge noted that ‘it is clearly stated on page 5 of the Deed that it was meant and intended to be sealed with the common seal of the defendant’ and ‘signed by Liao Miao Ling, Director’.  However, he overlooked the fact that the Deed was also intended to be attested by a witness, and thus that in signing in the place intended for a witness (and not in the place intended for the director), Ms Liao could not have intended to sign as a director on behalf of the defendant.

5.13  In my view, the Judge had correctly addressed the arguments in paragraph 52 of his judgment.  Again, it is important to emphasise that the Judge had already rejected Ms Liao’s contention that she only intended to sign as a witness and not on behalf of the defendant.  Proceeding on that basis, I agree with submission of Mr Manzoni SC for the plaintiff that it is absurd to argue that nonetheless certain formalities must still be fulfilled before the Deed could be treated as intended to be signed on behalf of the defendant.  

5.14  Ms Liao’s evidence was that she was also aware that the document required the seal of the defendant.  She was aware of the provisions of the defendant’s memorandum and articles of association regarding the requirements for the use of the corporate seal.  This is more so when the Judge had accepted the evidence of Mr Pridjian that he did not consider that attestation was required for the execution of the Deed and that the provision for a witness in the signature block was superfluous and should have been deleted prior to execution.  I do not consider the Judge’s reliance on Mr Pridjian’s evidence offends the rule of construction that a party’s understanding as to the meaning of a term of an agreement is inadmissible.  Mr Pridgjian’s evidence does not touch on the meaning of the agreement itself but only what he perceived to be the mode of execution of the Deed.

Ground 3 : the Judge’s alternative basis as to why the Deed was binding on the defendant

(1) Northside Developments

5.15  Mr Bell argued that the Judge erred in holding that the plaintiff was entitled to rely on the formal validity of the Deed and to act on the basis that it was binding on the defendant because it bore the company’s common seal, affixed on the Deed with its authority in the presence of a person designated in the articles of association (namely its permanent managing director) in that the Judge failed to properly apply the principles in Northside Developments at 393, namely, the affixing of a Seal is not conclusive as to a company’s representing, through its Seal, that the relevant transaction is authorised.

5.16  He submitted that the Judge was wrong to hold that there was nothing in the nature of the transaction relating to the Deed which was such as to put the plaintiff upon inquiry.  The effect of the Deed (if it had been validly executed) would have been to impose upon the defendant the obligation to guarantee the performance of shares in Mascotte, a company in which the defendant had no direct or indirect shareholding.  In the circumstances, the Deed, even if held intra vires, should not have been held to be valid as it was not made for the purposes of the defendant but for the benefit of the plaintiff only.  Furthermore, he submitted that in the present circumstances where the plaintiff was put on notice that there was no commercial reason for the defendant to have executed the Deed (when it conferred no benefit on the defendant but only benefited the plaintiff) it was irrational for the plaintiff to have believed that Ms Liao had the requisite authority to sign the Deed.  Mr Bell relied on Criterion Properties Plc v Stratford UK Properties LLCand others[2004] 1 W.L.R. 1846 at paragraph 31 where Lord Scott of Foscote stated that :

‘ 31 Both Hart J and the Court of Appeal thought that the SSA was clearly contrary to the commercial interests of Criterion. Hart J thought that Oaktree must have known, or be taken to have known, that that was so. I do not wish to be taken to be saying that knowledge of this sort on the part of Oaktree, or knowledge by Oaktree that Mr Glaser and Mr Palmer were, in signing the SSA, in breach of the duty they owed to Criterion, would be irrelevant to the authority issue. If a person dealing with an agent knows that the agent does not have actual authority to conclude the contract or transaction in question, the person cannot rely on apparent authority. Apparent authority can only be relied on by someone who does not know that the agent has no actual authority. And if a person dealing with an agent knows or has reason to believe that the contract or transaction is contrary to the commercial interests of the agent’s principal, it is likely to be very difficult for the person to assert with any credibility that he believed the agent did have actual authority. Lack of such a belief would be fatal to a claim that the agent had apparent authority.’ (emphasis added)

5.17  There is no dispute by the defendant that Mason CJ correctly stated the principle of law in Northside Developments.  The only issue here is whether the Judge was correct to find that there was nothing in the nature of the transaction to have put the plaintiff on enquiry.  This issue really depends on whether the plaintiff knew or had reason to believe that the contractual transaction is contrary to the commercial interest of the defendant.  The starting point (which I have earlier mentioned) is that the Judge in paragraphs 58, 59 and 60 had found that the defendant had a good commercial reason to provide the guarantee and the Deed could not be regarded as providing no benefit to the defendant or not being for its purposes.  The Judge held that the defendant was an investment holding company.  Chung Nam was one of its wholly owned subsidiaries.  Chung Nam was one of the sub-placing agents in relation to the placement of shares by Mascotte and would be remunerated for taking this job.  The Judge referred to the evidence of Mr Pak to the effect that it would enhance the image of Mascotte and attract investors if the plaintiff, which was a reputable US investment fund, would subscribe for the Mascotte shares.  It would make Chung Nam’s job easier in the sub-underwriting exercise and was beneficial to Chung  Nam.  Mr Pak said that if the plaintiff would agree to subscribe for the Mascotte shares, he was eager to find the plaintiff some security to ease its mind and he told Mr Hui that the defendant would be a suitable candidate for the guarantee.  The evidence also showed that Mascotte is a minority shareholder of the defendant.  In my view, in the light of this evidence the Judge was clearly correct in his finding that there was nothing to put the plaintiff on enquiry.

(2) Article 85(2)

5.18  Mr Bell further argued that the Judge erred in holding that the Deed was binding on the defendant by reason of Article 85(2). This article provides that :

‘ Any person contracting or dealing with the Company in the ordinary course of business shall be entitled to rely on any … deed …entered into or executed as the case may be by any one Director acting on behalf of the Company and the same shall be deemed to be validly entered into or executed by the Company as the case may be and shall, subject to any rule of law, be binding on the Company.’

5.19  Mr Bell submitted that this article has no application to the present case for the following reasons :

(i) the plaintiff was not dealing with the defendant in the ordinary course of its business.  The transaction set out in the Deed was an onerous and unusual one for the defendant, and thus not one entered into in its ordinary course of business.

(ii) The Deed was not ‘executed ... by any one Director acting on behalf of the Company’. The Deed was not validly executed.

(iii) Article 85(2) can have no application in circumstances where the document in question required on its face some further formality for execution beyond execution ‘… by any one Director acting on behalf of the Company’.  The Deed prescribed its own formalities for execution, and it was clear on the face of the document that not all of those formalities had been complied with.

5.20  Mr Bell accepted that these three reasons are repetitions of the previous grounds he had advanced on behalf of the defendant. In light of my decision on the earlier grounds this challenge must fail as well.

VI. Assessment of Damages

6.1  Having found liability on the part of the defendant the Judge then proceeded to assess the damages suffered by the plaintiff as a result of the breach by the defendant.  

6.2  Clause 5 of the Deed provides that :

‘After the Confirmation Date, [the defendant] can instruct [the plaintiff] to dispose of the Remaining Shares either on the stock exchange maintained by The Stock Exchange of Hong Kong Limited or to a designated party or parties (including giving instructions on the price or price range at which to dispose), provided that [the defendant] must ensure that [the plaintiff] will have disposed of all the Remaining Shares by the 30^th day after the Confirmation Date (including that date) (the ‘Final Disposal Date’).  [The plaintiff] shall use its reasonable endeavours to follow the instructions given by [the defendant] under this Clause.’

6.3  Clause 6 of the Deed provides for the calculation of the Guarantee Amount according to a stated formula.  The plaintiff claimed that applying the formula, the Guarantee Amount is :

(481,564,000 x HK$0.504032) - HK$32,357,218.40=HK$210,366,448

6.4  There is no dispute on the mathematics of the calculation.

6.5  The Judge held that :

‘ 20. In my view, clause 5 of the Deed should be read as imposing a contractual obligation on Hennabun to give instruction for the disposal of the Disposal Shares in accordance with the provisions of that clause. As it happened, Hennabun refused to do so, thereby committing a repudiatory breach of the Deed and entitling Penta to a claim for damages.

…….

25. The measure of damages for a breach of contract is well established: the innocent party is to be placed, in so far as money can do so, in the same position as if the contract had been performed: see Johnson v Agnew [1980] AC 367 at 400H, per Lord Wilberforce.

26. Had the Deed been duly performed by Hennabun, Penta would have been paid the amount calculated in accordance with the formula in clause 6 of the Deed.  Although Amount B in that formula can no longer be precisely ascertained now, assessment of damages is not an exact science.  I regard the amount of the Sale Proceeds as a reasonable estimate for Amount B.’

6.6  Mr Bell argued that the repudiatory breach did not cause the plaintiff any loss as the plaintiff was able to, and did, procure a disposal of the Disposal Shares without the need for any prior instruction from the defendant.  He argued that in order to justify an award of substantial damages the plaintiff must satisfy the Court both as to the fact of damage and as to the amount and the plaintiff had failed to do so in this case.  There has been an infraction of a legal right which only gives rise to nominal damages.  

6.7  I disagree.  As the Judge had observed, had the Deed been duly performed by the defendant (meaning the defendant giving instructions for the disposal of the Disposal Shares in accordance with clause 5), the plaintiff would have been paid the amount calculated in accordance with the formula in clause 6.  In other words the loss to the plaintiff was its inability to recover the Guarantee Amount under clause 6.

6.8  The second point made by Mr Bell was that the plaintiff was only entitled to recover the Guarantee Amount if it had suffered some economic loss as a result of itself acquiring and still holding some of the Disposal Shares at the confirmation date whose value had fallen below the placement price under the share placement.  But as the Judge held, the plaintiff had not acquired any shares and accordingly it had suffered no loss.  

6.9  This is a new point raised by Mr Bell that had not been canvassed below in the assessment.  However the short answer to this point is that under the terms of the Deed, namely, Recital 1, Clauses 1, 4 and 7, it was contemplated by the parties that the shares would, or might be, subscribed for by the plaintiff for or on behalf of funds that it may manage instead of by the plaintiff itself as principal.  

6.10  Recital 1 of the Deed states that the plaintiff

‘ on behalf of the funds and managed accounts it advises with the assistance of its sub-adviser, Old Peak Ltd., has agreed to subscribe or procure subscription for 550 million shares in Mascotte Holdings Limited (“Mascotte”) under the share placement ... in reliance on the covenants and undertakings given by [the Defendant].’

6.11  Clause 1 provides that the plaintiff

‘ will subscribe (or procure the subscription for) the Investment through accounts owned by the funds and managed accounts advised by the [plaintiff] (the “Designated Account”) maintained at one or more prime brokers or replacement prime brokers…..’

6.12  Clause 4 provides that :

‘ After market close on the 180^th day after the Completion Date (the “Confirmation Date”), both parties will confirm the number of Mascotte shares still being held in the Designated Account (“the Remaining Shares”).’

Clause 7 provides that the defendant

‘ will pay the Guarantee Amount to [the plaintiff], or pursuant to payment instructions provided by the [the plaintiff] designating the funds and managed accounts advised by, [the plaintiff], in the form of cheque(s), cashier order(s) or bank transfer(s) ….’

6.13  Hence, the mere fact that the plaintiff itself did not acquire the shares is an irrelevant consideration.

VII. Conclusion

7.  Accordingly, the two appeals were dismissed with costs to the plaintiff.

Hon Yuen JA :

8.  I agree with Cheung JA’s reasons for judgment.

Hon Chu JA :

9.  I agree with reasons given by Cheung JA.