HANGZHOU LIANLUO LIAISON INTERACTIVE INFORMATION TECHNOLOGY CO LTD (Also known as HANGZHOU LIAISON INTERACTIVE INFORMATION TECHNOLOGY CO LTD) v. CHINA DIGITAL CULTURE (GROUP) LTD

HCA 536/2020

[2024] HKCFI 3112

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 536 OF 2020

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J U D G M E N T

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Introduction

1.  This is a dispute arising from the Plaintiff’s investment by way of subscription to convertible bonds issued by the Defendant in about 2017.  Consideration in the sum of HK$412,500,000 was paid by the Plaintiff to the Defendant for the bonds due in 5 years with interest payable at 5.5% per annum.  The Defendant defaulted in payment of interest in the last quarter of the second year.  Despite repeated demands by the Plaintiff, the Defendant failed to repay the Principal Sum and the interest in arrears to the Plaintiff. 

2.  The Plaintiff commenced this action in May 2020 to pursue its claims against the Defendant by filing a Writ of Summons endorsed with a Statement of Claim.  In June 2020, the Defendant filed a Defence.  There were steps taken by the parties in due course to amend their respective pleadings.  The action proceeded to a stage in December 2022 when the parties confirmed that the case was ready for trial and leave was given to set it down for a 5-day trial with a pre-trial review. 

3.  On 9 January 2023, the Court issued a “Notice of Trial & Pre-Trial Review (Re: Trial (Debt))” to the parties via their respective solicitors, giving notice that the trial would be heard on 21 October 2024 with five days reserved and the pre-trial review on 29 July 2024.  On 25 July 2024, the Defendant’s solicitors ceased to act on its behalf.  The Defendant did not appear at the pre-trial review which was held four days later, nor at the subsequent hearings of a summons filed by the Plaintiff[1] which were held on 10 September 2024 and 19 September 2024 respectively despite notice of such hearings having been duly served.  The Plaintiff’s summons was dismissed and the trial was to commence as scheduled.

4.  On 30 September 2024, the Plaintiff served on the Defendant at its principal place of business and last known address the trial papers including the Plaintiff’s chronology, the Plaintiff’s list of issues and the Plaintiff’s dramatis personae. On 7 October 2024, the trial bundles together with the Plaintiff’s opening submissions and list of authorities (all marked for the trial on 21 October 2024 at 10 a.m.)  were duly served on the Defendant.  In the morning of 22 October 2024, a copy of the Plaintiff’s supplemental opening submissions (marked for the trial on 22 October 2024 at 10 a.m.)  was also served on the Defendant.

5.  The trial commenced before this Court on 21 October 2024 as scheduled and the Defendant failed to appear.  The Court was satisfied that the Defendant was aware of the trial dates but chose not to appear.  The trial was therefore held for two days in its absence for the Plaintiff to prove its case.  At the conclusion of the hearing, Judgment was reserved.  This is the Court’s Judgment. 

The Plaintiff’s case

6.  The Plaintiff was a Mainland company which was the ultimate parent company of Digital Grid (Hong Kong)  Technology Co. Ltd. (“HK Digital Grid”).  In around 2017, the Plaintiff invested in the Defendant by subscribing to some convertible bonds to be issued by the Defendant at the consideration of HK$412,500,000 (“Principal Sum”)  which was paid to the Defendant on 19 June 2017.  Key documents relating to the investment included the following (“Key Documents”):-

(i)  A Memorandum of Understanding entered into between HK Digital Grid and the Defendant and dated 30 December 2016 which evidenced the intention of the Defendant to issue, and that of HK Digital Grid to subscribe for, bonds of an aggregate principal amount of HK$412,500,000 convertible into 750,000,000 conversion shares at the conversion price of HK$0.55 per share, conditional upon the entering into a formal agreement;

(ii)  A formal Subscription Agreement (“Subscription Agreement”)  entered into between the Plaintiff and the Defendant and dated 8 February 2017 whereby the Defendant conditionally agreed to issue, and the Plaintiff conditionally agreed to subscribe for, convertible bonds of an aggregate principal amount of HK$412,500,000;

(iii)  An Instrument (“Instrument”)  executed by way of deed poll on 19 June 2017 by the Defendant in favour of the Plaintiff, setting out the Plaintiff’s rights as a bondholder and the terms and conditions; and

(iv)  A bond certificate no. 0009 (“Bond Certificate”)  issued by the Defendant to the Plaintiff as a bondholder on 19 June 2017 with the “Terms and Conditions of the Bonds” (“T & C”)  attached thereto.

7.  The Key Documents contained the following terms and conditions:- 

(i)  Both the Bond Certificate and Condition 4(A)  of the T & C provide that the bonds bear interest on the Principal Sum from, and including, the date of its issue at 5.5% per annum;

(ii)  Condition 4(C)  of the T & C provides that whenever it is necessary to compute an amount of interest for a period of less than a full year, such interest will be calculated on the basis of a 365-day year and, in the case of an incomplete month, the actual number of days elapsed;

(iii)  Clause 9.1.1 of the Instrument provides that the Company (i.e. the Defendant)  shall allow the Bondholder (i.e. the Plaintiff)  access to its audited accounts as well as those of its subsidiaries; and

(iv)  Condition 9(ii)  of the T & C provides:-

“If any of the following event or circumstances occurs, the Bondholder may give notice to the Company that the Bond is, and it shall on the giving of such notice immediately become, due and payable at its principal amount together with all accrued interest calculated in accordance with Condition 4 up to and including the date of repayment and all other sums payable under the Bond:-

(i)  …

(ii)  Other default: the Company defaults in the performance or observance of or compliance with any of its other obligations set out herein which default is incapable of remedy or, if capable of remedy, is not remedied within 30 days after notice of the occurrence of such default by the Bondholder…” 

8.  At the trial, the Plaintiff called one witness, namely its in-house legal counsel Ms Xiong Ying, to prove its case.  According to Ms Xiong’s testimony, when the interest for the last quarter of the second year (from 19 March 2019 to 18 June 2019)  was to become due, the Plaintiff sent an email on 17 June 2019 to Mr. Tobias Hsu, the corporate financial director of the Defendant, to remind him of the interest payment obligation.  A formal payment notice was attached to the email particularizing the interest amount due for the said period, namely HK$5,718,493.16[2] (“Interest in Arrears”), and providing information on the bank account to which the payment was to be made.  Despite repeated demands, the Defendant failed to pay the Interest in Arrears.  That gave rise to an event of default under Condition 9(ii)  of the T & C which was not remedied by the Defendant.

9.  The Plaintiff thus instructed its lawyers to issue a pre-action letter to the Defendant on 21 August 2019.  In the letter, the lawyers identified and gave notice of, inter alia, a number of breaches of the terms and conditions of the Key Documents, including the failure to pay the Interest in Arrears.  The lawyers demanded the Defendant to make payment of the Principal Sum together with the Interest in Arrears plus further accrued interest within the next 7 days. 

10.  Apart from the default in interest payment, the Defendant also failed to provide its audited accounts and those of its subsidiaries to the Plaintiff as per its requirement made by way of two letters to the Defendant dated 22 August 2019 and 23 August 2019 respectively.  On 27 August 2019, the Plaintiff’s lawyers also wrote to the Defendant to demand for the audited accounts but to no avail.

11.  Despite the repeated demands, the Defendant’s defaults continued and the Plaintiff commenced this action in May 2020 to pursue its claims against the Defendant.

The Defendant’s case

12.  It is significant to note that no issue was taken as to the Interest in Arrears in the Amended Defence filed on 15 July 2022.  The Defendant’s case as pleaded in the Amended Defence is that there was an alleged agreement between an executive director of the Defendant Mr. Hsu Tung Chi (“TC Hsu”)  and the legal representative of the Plaintiff Mr. He Zhitao (“ZT He”)  that the Interest in Arrears would be settled by ZT He or had been waived by the Plaintiff against the Defendant, because ZT He owed a personal loan of RMB 9,000,000 to TC Hsu. 

13.  As the Defendant failed to appear at the trial, there was simply no evidence presented before the Court to support such a defence.  In any event, in her trial testimony, the Plaintiff’s witness Ms Xiang confirmed that the Plaintiff had never waived the Defendant’s obligation to pay for the Interest in Arrears nor accepted any arrangement for such interest to be settled by Mr. ZT He.

Discussion

14.  On the evidence of the Plaintiff’s witness Ms Xiang, I am satisfied that the Plaintiff has proved a breach of the Defendant’s obligation to pay interest on the bonds pursuant to the Bond Certificate as well as Condition 4 of the T & C.   Despite notice having been given, that default was not remedied by the Defendant within 30 days and it gave rise to an event of default under Condition 9(ii)  of the T & C, rendering a liability on the part of the Defendant to make immediate payment of the Principal Sum together with the Interest in Arrears plus further accrued interest.  Ms Xiang gave clear and credible evidence in that regard which is well supported by the Key Documents as well as the aforementioned email, notice and letters sent by the Plaintiff or its lawyers to the Defendant.  As the Defendant failed to attend the trial, there is nothing from the defence side to undermine the evidence given by Ms Xiang.  This Court is therefore satisfied that judgment should be entered against the Defendant on the ground arising from its default in interest payment. 

15.  For the record, the Plaintiff has pleaded a number of other grounds in its Re-re-amended Statement of Claim in seeking to obtain judgment against the Defendant, including (1)  misrepresentations before and after the entering of the Subscription Agreement; (2)  breaches of its conversion obligation; (3)  breaches of two supplemental deeds; and (4) breaches of provision of accounts obligation.  In its written opening submissions filed with the Court, the Plaintiff made it clear that at the trial, it would not rely on such pleaded grounds (1), (2)  and (3). During the trial, Counsel for the Plaintiff Mr. Chong also indicated that the Plaintiff would not insist on ground (4)  in the event of the Court entering judgment on the basis of the Defendant’s default in its interest payment obligation.  In light of the Plaintiff’s position at trial, the Court has therefore focused on the ground of default in interest payment in granting judgment for the Plaintiff and will make no findings in relation to grounds (1), (2), (3)  and (4)  as aforementioned.

Disposition

16.  I therefore make the following orders as per prayer §§2(a), 4 and 5 of the Re-re-amended Statement of Claim:-

(i)  Judgment be entered against the Defendant for:-

(a)  the principal sum of HK$412,500,000 (“Principal Sum”);

(b)  for interest in arrears on the Principal Sum in the amount of HK$5,718,493.15 (for the period from 19 March 2019 and up to and including 18 June 2019, calculated at the rate of 5.5% per annum);

(c)  for interest accrued on the Principal Sum for the period from 19 June 2019 and up to and including 6 November 2024, to be assessed at the rate of 5.5% per annum;

(d)  for further interest at judgment rate from 7 November 2024 (the date of Judgment)  to the date of payment; and

(ii)  An order nisi that the Defendant do pay the Plaintiff’s costs of this action, including any costs that have been reserved, with certificate for one counsel, to be taxed on a party to party basis if not agreed.

17.  I thank Mr. Chong for his assistance.