CHINA DING YI FENG HOLDINGS LTD v. HUANG QINGZHAN

HCMP 719/2019

[2020] HKCFI 484

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 719 OF 2019

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AND

HCMP 1102/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1102 OF 2019

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(Determined Together)

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D E C I S I O N

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1.  There are 2 applications before the court. They arose out of a Subscription Agreement dated 29 April 2015 (“Subscription Agreement”) made between China Ding Yi Feng Holdings Limited[1] (“Company”) as issuer and Mr Huang Qingzhan (“Huang”) as subscriber pursuant to which the Company issued 10 fixed interest rate notes to Huang (“Notes”). Huang contends that by reason of (1) the suspension on trading in the Company’s shares on 8 March 2019, and/or (2) the late payment of the first interest due on 31 March 2016, there was an event of default which entitled Huang to redeem the Notes. The Company takes issue on both grounds and contends that Huang is not entitled to seek an early redemption of the Notes.

2.  The substantive hearing of the originating summonses was  scheduled to be heard on 3 March 2020, but was adjourned due to the general adjournment of court proceedings announced by the Judiciary.  By joint letter dated 27 February 2020[2], solicitors for the parties agreed that the applications are suitable for determination on paper, thereby waiving their right to an oral hearing. 

3.  The evidence filed and the submissions lodged by the parties are all in English, but the Subscription Agreement and the Notes Instrument are in Chinese.  This notwithstanding, the parties agree that for the purpose of these applications, the court should consider the English version of the standard form Notes Instrument and the standard form Subscription Agreement in Schedules 2 and 3 to the Placing Agreement respectively, on the basis that their terms are identical in meaning and, even if there is any discrepancy between the Chinese version and the English version, the parties agreed under Clause 13.5 of the Subscription Agreement that the English version prevails.    

A.    BACKGROUND

4.  The fact relevant to the applications can largely be gleaned from documents and is either not in dispute or is indisputable.  Where the parties differ on the fact which is relevant to the issues requiring determination of the court, I shall set out the contentions of the parties. 

5.  The Company was incorporated in the Cayman Islands, and  is listed as an investment company on The Stock Exchange of Hong Kong Limited (“HKEx”) under Chapter 21 of the Listing Rules.    

6.  The Company entered into the Placing Agreement dated 26 March 2015 whereby China Rich Securities Limited, as placing agent, agreed to procure subscribers for fixed interest rate notes of up to HK$70 million to be issued by the Company.  The Notes carry fixed interest rate at 5% per annum and are redeemable on the 8^th anniversary of the date of issue. 

7.  Guoco Capital Limited[3] (“Guoco”) was a broker of the placing agent and procured Huang to be a subscriber of the Notes. 

8.  On 29 April 2015, the Company and Huang entered into the Subscription Agreement.  The particulars of Huang were set out in Schedule 5 thereto, which included:

(1)  his residential address at “福建省晉江市陳埭鎮[redacted] 36號” (“Mainland Address”);

(2)  his correspondence address in Hong Kong, at 12/F, The Centre, 99 Queens Road Central (“HK Address”);

(3)  his bank account used to make payment (“用於付款的經登記港元銀行帳戶”) at DBS Bank (Hong Kong) (“DBS”) no. 016-451-51-1833345, the account holder is Guoco (“Account”); and

(4)  his email address at [redacted] qq.com (“Email”).

9.  On 30 April 2015, the Subscription Agreement was completed (“Completion Date”), and the Company issued the Notes with certificate number 0021-0030 in the aggregate principal amount of HK$10 million to Huang (collectively “Certificates”). 

10.  Under the Subscription Agreement:

(1)  “[t]he Company represents, warrants and undertakes with [Huang] the terms set out in Part 1 of Schedule 2” (collectively “Warranties”) (Clause 5.1);

(2)  Amongst the Warranties, Clause 2.2 (“Clause 2.2 Warranty”) states that:

“股份於香港聯交所上市及買賣。本公司尚未收到香港聯交所有關撤回股份上市或取消股份上市資格之任何口頭或書面通知。”

(agreed translation: “Shares be listed and traded on the Stock Exchange of Hong Kong.  The Company has yet to receive any oral or written notification from the Stock Exchange of Hong Kong in respect of the withdrawal of the listing of its shares or cancellation of the listing”)

(3)  Clause 6.1, the Further Covenants:

“The Company undertakes to [Huang] that it will use its best endeavours to maintain its listing on the Hong Kong Stock Exchange for all the issued Shares for the time being and the Company further undertakes to give notice to [Huang] of any delisting of Shares by the Hong Kong Stock Exchange.”

(4)  Clause 12.1 provides:

“Any provision of this Agreement which is capable of being performed after any Completion but which has not been performed at or before such Completion shall remain in full force and effect notwithstanding such Completion. All Warranties and other representations and warranties and other undertakings contained in or entered into pursuant to this Agreement shall be deemed to be repeated every day between the date of this Agreement and the Completion Date.” (underlined added)

(5)  Clause 13.3 provides:

“Time shall be of the essence of this Agreement but no failure by any party to exercise, and no delay on its part in exercising any right hereunder will operate as a waiver thereof, nor shall any single or partial exercise of any right under this Agreement preclude any other or further exercise of it or the exercise of any right or prejudice or affect any right against the other. The rights and remedies provided in this Agreement are cumulative and not exclusive of any rights or remedies provided by law.”

11.  The Notes Instrument was executed by the Company by way of deed poll and contained the following definitions:

(1)  “Approved Investment Bank” means “an investment bank or other reputable financial institution in Hong Kong selected by the Subscriber”.

(2)  “Completion Date” means “the date of Completion as agreed by the Company and the Placing Agent”.

(3)  “Register” means “the register of Noteholders required to be maintained pursuant to Clause 8”.

12.  Clause 8.4 of the Notes Instrument provides:

“The Company shall maintain and keep a full and complete register at such location in Hong Kong as it shall from time to time of the Notes and the Noteholders from time to time, such register shall contain details of exchange and/or cancellation and the destruction of any Note and the issue of any replacement Note issued in substitution for any mutilated, defaced, lost, stolen or destroyed Notes and of sufficient identification details of all Noteholders from time to time. The Company shall further procure that such register shall be made available to any holder of the Notes for inspection at all reasonable times.”

13.  The Certificates are identical in contents and contain, inter alia, the following statements:

(1)   “The Notes are subject to, and have the benefit of, the Instrument, which is enforceable severally by each Noteholder against the Company insofar as each Noteholder’s Notes are concerned.”

(2)   “The Company hereby certifies that the person whose name and address is specified below is, at the date hereof, entered in the register of Noteholders as the holder of the Notes in the principal amount indicated below”.  In the table, the name of Huang and his Mainland Address were stated under “Noteholders and address”.  (underlined added)

14.  The terms and conditions of the Notes are set out in the back of Certificates and the following Conditions are relevant:

“4. INTEREST

... Interest is payable semi-annually in arrears on 31 March and 30 September in each year (each an ‘Interest Payment Date’) subject to the deduction referred to below provided that the first Interest Payment Date shall fall on 31 March 2016 ...

5. PAYMENTS

(A) Method of payment

... Payments will be made in immediately available funds by transfer in Hong Kong dollars to the registered account of the Noteholder or by Hong Kong dollar cheque drawn on a bank in Hong Kong mailed at the risk of such Noteholder to the registered address of the Noteholder if he does not have a registered account. (underlined added)

(B) Registered Accounts

For the purpose of this Condition, a Noteholder’s registered account means the Hong Kong dollar account maintained by or on his behalf in the Approved Investment Bank, details of which appear on the Register at the close of business on the Business Day before the due date for payment, and a Noteholder’s registered address means its address appearing on the Register at that time. (underlined added)

(C) Payment Initiation

Where payments is (sic) to be made by transfer to a registered account, payment instructions will be given and, where payment is to be made by cheque, the cheque will be mailed, on the due date for payment.

6. REDEMPTION AND CANCELLATION

(A) Early Redemption by the Noteholder

Unless expressly provided herein, no Noteholder shall have the right to early redemption.

(B) Redemption on default

The Instrument provides that upon the occurrence of an event of default as stipulated in Condition 8 and at any time thereafter, the Noteholder may, unless such event of default has been waived in writing by it, by notice in writing require the Company to redeem the whole (but not part) of the outstanding principal amount of the Notes together with interest accrued thereon whereupon such sum shall become due and payable in the mariner (sic) provided in Condition 5 on the 15^th day following delivery of such notice”

...

8. EVENTS OF DEFAULT

Any Noteholder may give notice to the Company requiring the Company to redeem the whole of the outstanding principal amount of the Notes upon the occurrence of any of the following events and at any time thereafter:

(i)    Payment default: a default is made in the payment of the principal or in the payment of interest, in respect of any of the Notes when and as the same ought to be paid in accordance with these Conditions and such default continues for a period of 5 days; or

(ii)  Other default: a material default is made by the Company in the performance or observance of any covenant, condition or provision contained in the Subscription Agreement, the Instrument or in the Notes and on its part to be performed or observed (other than the covenant to pay the principal and interest in respect of any of the Notes) and such default continues for a period of 14 days next following the service by any Noteholder on the Company of notice specifying brief details of such default and requiring such default to be remedied; or

(iii) Breach of Warranties: a material breach of any of the representations and warranties made by the Company (as defined in the Subscription Agreement) in the Subscription Agreement or any agreement or other document executed or delivered pursuant thereto; or

(iv) ...” (underlined added)

15.  On 31 March 2016, the first Interest Payment was due.  The Company issued a cheque (no. 454874) in favour of Guoco in the amount of HK$459,726 (“Cheque”) and delivered the same (alongside with 3 other cheques) to Guoco under a cover letter addressed to “Mr Lawrence[4] Lok” (“Mr Lok”). 

16.  It is the Company’s case that in mid-May 2016, there was a call from Mr Lok asking for the return of the cover letter on which Guoco acknowledged receipt[5].

17.  By letter dated 24 May 2016 from Guoco to the Company, Mr Lok (who signed the letter) referred to the 4 cheques delivered by the Company on 31 March 2016 and said that Guoco was unable to receive them as it did not have any contractual agreement with the Company.  In the same letter, Mr Lok stated that he had in early April already informed Mr Yiu (a non-executive director of the Company) of the same and asked him to follow up on the matter.  Mr Lok requested the Company to collect the 4 cheques and return the letter counter-signed by Guoco as acknowledgement of receipt.    

18.  Thereafter, by letter dated 25 May 2016 addressed to Huang, Messrs  Troutman Sanders (“TS”), solicitors for the Company, stated that:

(1)   under the Subscription Agreement, Huang designated the Account to receive all payments, including interest, from the Company under the Notes;

(2)   on 31 March 2016, the Company attempted to present the Cheque “to the [Account]”, but was informed by DBS that owing to insufficient information the Cheque could not be accepted.  The Company then contacted the placing agent and was told to contact Mr Lok for further instructions on Huang’s behalf.  Mr Lok informed the Company that “he could and would accept the Cheque on [Huang’s] behalf” and asked the Cheque to be delivered to him, whereupon the Cheque (together with 3 other cheques) was delivered to Guoco on 31 March 2016. 

19.  On the face of the above letter of TS, it was sent to Huang at the HK Address (by post), the Email and the Mainland Address (by post).  The one sent to the HK Address was returned to TS on 30 May 2016 due to “incomplete address”.  The email was apparently not read by Huang.

20.  By another letter to Huang dated 20 June 2016 (stated to have been sent to the Mainland Address and the Email), TS referred to their previous letter of 25 March[6] 2016 and reiterated its contents.  TS stated that the Company had not been able to pay the first Interest Payment due through no fault of its own, and requested Huang to provide complete and accurate information of his bank account and, in the meantime, the Company would hold the sum on trust for Huang.  On this occasion, the tracking shows that the email attaching the letter of 20 June 2016 was read on the same day. 

21.  By a letter dated 22 July 2016 to the Company, Messrs Patrick Mak & Tse (“PMT”), solicitors for Huang, stated that a Madam Lin (林焱) had been authorised by Huang (and a Mr Chan) to receive the Interest Payment and to negotiate with the Company on the redemption of the Notes.  The Company was requested to inform Madam Lin of the amount of interest and the due date.  Appended to the letter was an authorisation letter dated 11 July 2016 signed by Huang, which stated that Huang had authorised Madam Lin to receive Interest Payment and to negotiate with the Company on the redemption of the Notes. 

22.  In response, by letter dated 29 July 2016 to PMT, TS enclosed their 2 previous letters to Huang and stated that upon PMT’s undertaking to provide the original receipt signed by Madam Lin within 2 working days of receipt of the cheque, the Company would send a cheque for HK$459,726 to PMT. 

23.  The receipt was not provided to TS.  Instead, by a letter dated 16 August 2016 to TS, PMT stated that if the Company had the alleged difficulty in paying interest to the Account (which Huang had yet to verify), it should have contacted Huang to ask for fresh instructions, given that the contact details of Huang had been set out in the Certificates and Schedule 5 to the Subscription Agreement.  As the Company had failed to contact Huang, he had not been able to receive the first Interest Payment.  The Company was in breach of Clause 4.1 of the Notes Instrument and Conditions and 8(i) of the Notes.  Pursuant to Condition 6(B) of the Notes, Huang required the Company to redeem the Notes and pay all interest due to his bank account at China Construction Bank (Asia) Corporation Limited.

24.  In their letter dated 23 August 2016 to PMT, TS stated that even if (which is denied) there had been an event of default, the same was waived by Huang when he instructed PMT to write to the Company in which he requested only for payment of interest.  A cheque payable to Huang in the amount of HK$459,726 was enclosed to the letter (“1^st Cheque”).

25.  In their letter dated 1 September 2016, PMT did not accept TS’s contentions, and requested the Company to redeem the Notes within 7 days of the letter.  In response, in their letter dated 6 September 2016, TS stated that the Company did not admit Huang’s contentions. 

26.  By a further letter dated 26 September 2016 to Huang (stated to have been sent to the Mainland Address, the Email and the HK Address and copied to PMT), TS stated that according to the Notes and the Subscription Agreement, Huang had designated the Account for receiving all payments including interest, and requested his instructions on the payment arrangement of the second Interest Payment by 28 September 2016, failing which it would issue a cheque in favour of Huang for his collection at the Company’s office on 30 September 2016.   

27.  In response, in their letter dated 28 September 2016 to TS, PMT referred to TS’s letter of 26 September 2016 and stated that they had been instructed by Madam Lin that: (1) as per their letter of 22 July 2016, the Company should pay interest to PMT which, in turn, would send the same to Madam Lin; and (2) as regards TS’s letter dated 23 August 2016 and the 1^st Cheque, TS should provide details on calculation of interest.

28.  On 29 September 2016, TS referred to PMT’s letter of 28 September 2016 and stated that in reliance on their and Madam Lin’s representation referred to in PMT’s letters of 22 July 2016 and 28 September 2016, the Company would issue a cheque for HK$250,002 in favour of Madam Lin and deliver the same to PMT on 30 September 2016 upon PMT’s undertaking to provide original receipt in the form enclosed (which described the sum as “the interest due and payable on 30 September 2016 under the Notes), signed by Madam Lin within 2 working days of receipt of the cheque.  As regards interest calculation, TS simply referred to the Notes and the Subscription Agreement. 

29.  It appears that no undertaking was provided by PMT to TS.  Nevertheless, by letter dated 30 September 2016 to PMT, TS enclosed a cheque in the amount of HK$250,002 drawn in favour of Madam Lin (“2^nd Cheque”), being the second Interest Payment due on 30 September 2016.

30.  In their letter dated 3 October 2016 to TS, PMT stated, inter alia, that (1) the Company was liable to pay interest due on the Notes and could not impose any additional condition on such payment, and (2) Huang still did not understand why the first Interest Payment was HK$459,726.  In reply, TS stated in their letter dated 6 October 2016 that the Company had “already fully discharged its obligations under the Notes and Subscription Agreement by delivering the [2^nd Cheque] to your firm on 30 September 2016”.

31.  In their letter dated 11 October 2016 to TS, PMT provided a copy of the receipt signed by Madam Lin in respect of the 2^nd Cheque, and reserved Huang’s rights under the Notes.

32.  By letter dated 14 March 2017 to PMT, TS requested Huang to confirm whether Madam Lin had been authorised to receive the third Interest Payment due on 31 March 2017.  In their letter dated 15 March 2017 to TS, PMT confirmed that Madam Lin had been authorised to receive the Interest Payment, and requested the Company to redeem the Notes on the basis that there had been a breach of the Subscription Agreement and the Notes Instrument. 

33.  On 31 March 2017, TS enclosed the Company’s cheque issued in favour of Madam Lin (no. 176831) in the amount of HK$250,000 (“3^rd Cheque”), being the third Interest Payment.  On 3 April 2017, PMT provided a receipt signed by Madam Lin to TS. 

34.  By letter dated 3 October 2017 to PMT, the Company enclosed a cheque in favour of Madam Lin (no. 177140) in the amount of HK$250,000 (“4^th Cheque”), being the fourth Interest Payment.  On 19 October 2017, PMT provided a receipt signed by Madam Lin to the Company.

35.  The fifth, sixth and seventh Interest Payment each in the amount of HK$250,000 was paid by the Company to Madam Lin before their due dates (on 29 March 2018, 28 September 2018 and 29 March 2019 respectively).   

36.  On 8 March 2019, the Securities and Futures Commission (“SFC”) in the exercise of its power under s. 8(1) of the Securities and Futures (Stock Market Listing) Rules (Cap 571V) directed HKEx to suspend trading in the Company’s shares (“2019 Suspension”).  According to SFC’s press release on 20 March 2019, it had in mid-2018 started investigation into the suspicious trading in the Company’s shares which appeared to create a false market for its shares leading to an irrationally high share price. 

37.  In their letter dated 13 March 2019, Messrs Tso Au Yim & Yeung (“TAYY”), on behalf of Huang, alleged that the Company had been in breach of the Subscription Agreement and the Notes, and demanded the Company to redeem the Notes within the next 15 days at HK$10 million (together with interest accrued thereon) on the following grounds:

(1)   The Company failed to settle the first Interest Payment in immediately available funds by transferring in Hong Kong dollars to the designated account of Huang, thereby in breach of Condition 5(A) of the Notes;

(2)   If and to the extent that the information of the Account was incomplete, the Company failed to issue a cheque for the first Interest Payment and send the same to the Mainland Address, being Huang’s “Registered Address”, within 5 days of the due date (i.e. by 4 April 2016), thereby in breach of Condition 5(A);

(3)   Even if the matters stated in TS’s letters dated 25 May 2016 and 20 June 2016 were true, it was not open to the Company to pay the first Interest Payment to Mr Lok of Guoco, which was not an agreed form of payment;

(4)   By 20 June 2016, the Company still failed to deliver the cheque for first Interest Payment due on 31 March 2016 to the “Registered Address” of Huang, which constituted a breach of Conditions 5(A) and 8(i) of the Notes;

(5)   Even after TS stated in their letter of 29 July 2016 that they would accept Madam Lin’s authority to receive payment on behalf of Huang, the Company did not send cheque of HK$459,726 to her within 5 days (i.e. by 2 August 2016).  Instead, the Company waited until 7 October 2016[7] to deliver the 1^st Cheque to Huang as the first Interest Payment; and

(6)   The 2019 Suspension constituted a breach of the Clause 2.2 Warranty and Condition 8(iii) of the Notes.

38.  The Company, through its solicitors, Messrs Lau, Horton & Wise LLP (“LHW”), replied on 11 April 2019, denying all the claims made in TAYY’s letter of 13 March 2019.

39.  By letter dated 24 April 2019 to LHW, TAYY again referred to the 2019 Suspension and contended that it constituted a breach of the Clause 2.2 Warranty, and requested the Company to redeem the Notes within the next 7 days.   

40.  On 2 May 2019, TAYY served a statutory demand on the Company, requiring it to pay HK$10,041,666.67, being the principal amount of the Notes and interest accrued from 1 April 2019 to 30 April 2019 at 5% per annum.

B.    DISCUSSION

41.  Against the above background, on 17 May 2019, the Company issued an originating summons to seek determination of the court on the following 2 questions:

(1)   Whether the Company was in breach of the Clause 2.2 Warranty by reason of the 2019 Suspension, having regard to the provisions of Clauses 5.1, 6.1 and 12.1 of the Subscription Agreement and the fact that the Company’s shares have not been delisted; and

(2)   Whether Huang is entitled to seek early redemption of the Notes by reason of the 2019 Suspension, having regard to Conditions 6(A), 6(B), 8(i), (ii) and (iii) of the Notes.

42.  In the originating summons filed on 29 July 2019, Huang seeks determination of the court and claims against the Company as follows:

(1)   Whether Huang is entitled to seek early redemption of the Notes by reason of the late payment of the first Interest Payment due on 31 March 2016[8], having regard to the terms of Conditions 6(B) and 8(i) of the Notes and the terms of the Subscription Agreement;

(2)   If the answer to the first question is in the affirmative and/or the court finds in HCMP 719/2019 that there was a breach of the Clause 2.2 Warranty which entitles Huang to redeem the Notes, an order that the Company do return the principal sum of HK$10 million to Huang together with interest accrued at 5% per annum until judgment and, thereafter, at judgment rate until payment; and

(3)   Other consequential directions for effecting the above.

43.  In short, the issues which require the determination of the court are:

(1)   whether by reason of the late payment of the first Interest Payment, there was an event of default which entitles Huang to seek an early redemption of the Notes (“Interest Payment Issue”); and

(2)   whether by reason of the 2019 Suspension, there was a breach of the Clause 2.2 Warranty (“Suspension in Trading Issue”).

44.  I note that in counsel’s written submissions, they attempt to argue on some factual disputes primarily concerning the events surrounding the Interest Payment Issue.  In particular, Ms Chyvette Ip, counsel for the Company, makes much criticisms on the evidence filed by Huang where it differs from the evidence filed by the Company, and the fact that Huang has not applied to cross-examine the Company’s affirmant.  I do not find such criticisms to be helpful, given that the parties agreed that (1) the affirmations filed in both proceedings be adopted as evidence in the substantive hearing[9]; (2) the originating summonses are suitable for summary determination under O.28 of Rules of High Court and there are no triable issues[10]; and (3) the applications are ones which the court can determine on paper.  As will be seen further below, I do not find the factual dispute between the parties to be relevant to the issues I have to decide.   

B1.  Applicable principles

45.  Mr Derek Hu, counsel for Huang, refers to the well-known statement of principle regarding construction of contracts contained in the speech of Lord Hoffmann Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912H-913F as follows:

“The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] A.C. 749.

(5) the ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB [1985] A.C. 191, 201:

‘... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.’”

46.  The same principle was repeated in Jumbo King Ltd v Faithful Properties Ltd & Ors(1999) 2 HKCFAR 279 at 296D-I, where Lord Hoffmann said this:

“The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well. ... If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other ... But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail.”

B2.  Interest Payment Issue

47.  It is not in dispute that the first Interest Payment was due on 31 March 2016, but it was only until 23 August 2016 that the Company delivered the 1^st Cheque to Huang.   

48.  Mr Hu, counsel for Huang, essentially adopts the same arguments advanced in TAYY’s letter of 13 March 2019 (summarised in §37). His submissions may be summarised as follows:

(1)   The Company failed to pay the first Interest Payment within 5 days of the due date, as required by Conditions 4 and 8(i). 

(2)   Although the Company attempted to pay the first Interest Payment by delivering the Cheque to Guoco on 31 March 2016, such payment was not an agreed method of payment under Condition 5(A), which required either payment “in immediately available funds by transfer in Hong Kong dollars to the registered account of the Noteholder” or by a Hong Kong dollar cheque mailed to the Mainland Address.

(3)   Even if the Company mistakenly thought that Guoco had been authorised to receive the first Interest Payment on behalf of Huang, by mid-May 2016, the Company was aware that Guoco could not receive the Cheque on behalf of Huang, but no attempt was made to contact Huang (whether through his Mainland Address or his Email) or to tender the first Interest Payment by mailing a cheque to Huang at his Mainland Address. 

(4)   The late payment of first Interest Payment constituted an event of default under Condition 8(i), which entitled Huang to seek an early redemption of the Notes, and he exercised that right by serving a written notice on the Company through PMT’s letter dated 16 August 2016.

49.  In my view, the Company failed to pay the first Interest Payment due on 31 March 2016, which constituted a breach of Conditions 4 and 5 of the Notes, for the following reasons.

50.  It is not in dispute that under Condition 4, the Company was obliged to pay the first Interest Payment by 31 March 2016, and the Company could only pay such Interest using one of the two methods prescribed by Condition 5(A). 

51.  The first method required payment to be “made in immediately available funds by transfer in Hong Kong dollars to the registered account of the Noteholder”.  Ms Ip contends that the Company fully complied with this method in that it had on 31 March 2016 issued and delivered the Cheque to Guoco which, she submits, was the “registered account” stated in Schedule 5 to the Subscription Agreement.  I do not agree. 

(1)   There was nothing in Condition 5(A), 5(B) or 5(C) which permitted the Company to issue and deliver a cheque to the HK Address, in lieu of transferring the amount to the “registered account” on or before 31 March 2016. 

(2)   Even assuming the Account was the “registered account” of the Noteholder (I do not think it is, see §55 below), the Company was required to transfer the amount to the “registered account”, but the Company never did so.  This is reinforced by Condition 5(C), which makes clear that where payment is to be made by “transfer to a registered account, payment instructions will be given” on the due date for payment.  By contrast, where payment is to be made by cheque, the cheque will be mailed on the due date of payment.  The Company cannot re-write Conditions 5(A) and 5(C) and contends that the issue and delivery of the Cheque to the HK Address was a “transfer” to the “registered account”.   

(3)   Ms Ip submits that giving the Cheque to Guoco “would have effected a transfer of immediately available funds to the Registered Account and hence in full compliance with the [Conditions of the Notes]”[11]. I am unable to accept this submission.  Common sense suggests that unless and until the Cheque was presented, the fund would remain in the bank account of the Company.  Indeed, this was what happened – Guoco did not present the Cheque for payment and the fund never transferred to the “registered account”, whether on 31 March 2016 or at all. 

52.  Ms Ip then argues that the Company’s obligation was to pay the first Interest Payment on the due date.  There was no duty on the Company to ensure that Huang actually received the Interest Payment.  It was as a result of Huang’s own failings in having provided incorrect information on the “registered account” that he did not receive the first Interest Payment on the due date.  Therefore, Huang “cannot complain  if the Company’s breach (which is denied) was a consequence of his own failure.  See Phoebus D Kyprianou v Cyprus Textiles [1958] 2 Lloyd’s Rep 60.”

53.  I do not think that this provides a valid basis for the Company to deliver the Cheque to the HK Address in lieu of a transfer to the “registered account”.  Leaving aside the fact that it has never been made clear, let alone proved, why the information on the Account was incorrect or incomplete, once the Company became aware that the information on the “registered account” was incorrect, it could resort to the second method prescribed in Condition 5(A), as discussed in the next paragraph.   

54.  The second method required the payment to be made by a Hong Kong dollar cheque drawn on a bank in Hong Kong mailed to the “registered address of the Noteholder if he does not have a registered account”. I note that nowhere in Condition 5(A) (or, for that matter, Condition 5(B) or 5(C)) permitted the Company to draw the cheque to anyone other than the Noteholder.  More importantly, the “registered address” of Huang should be the Mainland Address.  This was confirmed by the information set out in the Certificates in particular, the table (see §13(2) above).  It was thus open to the Company to mail a cheque representing the amount of the first Interest Payment to the Mainland Address, assuming the Company is right in its assertion that the information on the “registered account” was incorrect. 

55.  I do not accept the Company’s contention that the Account was the “registered account” of Huang for the purpose of Condition 5(A) for the following reasons:

(1)   The term “registered account” was not defined in the Subscription Agreement or the Notes Instrument.  In Condition 5(B), a Noteholder’s “registered account” is defined to mean “the Hong Kong dollar account maintained by or on his behalf in the Approved Investment Bank, details of which appear on the Register at the close of business on the Business Day before the due date for payment...” (underlined added). 

(2)   The Company contends that the Account described in Schedule 5 was the “registered account” of Huang.  However, this ignores the definition of “registered account” in Condition 5(B), which makes it clear that it was the “registered account” appear on the Register of Noteholders which is determinative.  As the Company has not produced the Register, let alone the Register on the Business Day before 31 March 2016[12], there is no evidence in support of the Company’s contention that the Account was the “registered account” for the purpose of Condition 5. 

(3)   In any event, I do not find the wordings in Schedule 5  support the Company’s contention that the Account was the “registered account” designated by Huang to receive the Interest Payment.  In his affirmation, Huang said that the Account was used by him to pay for the subscription money of the Notes.  His evidence is consistent with how the Account was described in Schedule 5, viz., “用於付款的經登記港元銀行帳戶”.

56.  It follows that I do not accept the Company’s contention that it could not have used the second method prescribed by Condition 5(A) to pay the first Interest Payment, whether on 31 March 2016 or upon discovering the alleged incorrect information on the Account.

57.  The above holding is sufficient to dispose of the Interest Payment Issue.  For completeness, I will deal with the remaining arguments briefly.

58.  Mr Hu contends that even if the Company mistakenly thought that Guoco had been authorised to receive the first Interest Payment on behalf of Huang, by mid-May 2016, the Company was aware that Guoco could not receive the Cheque on behalf of Huang, but no attempt was made to contact Huang (whether thorough his Mainland Address or his Email) or to tender the first Interest Payment by mailing a cheque payable to Huang at the Mainland Address. 

59.  In response, Ms Ip submits that this suggestion is “unconstructive”, as “Huang could not have paid in the cheque without a suitable HK dollar account, and it is questionable whether the Registered Address was correct”[13]. As soon as the Company became aware that Huang did not receive the first Interest Payment and had authorised Madam Lin to receive the interest payable on the Notes, there was no delay.  The request for undertaking to provide the original receipt signed by Madam Lin was for the protection of Huang and the Company, to ensure that the Interest Payment was paid into the right hands. 

60.  On the Company’s own case, there was ample opportunity – from mid-May 2016 to 16 August 2016 (when Huang gave notice to seek early redemption of the Notes) – during which the Company could have mailed a cheque for payment of the first Interest Payment to the Mainland Address or sent it to Huang’s solicitors in Hong Kong.  However, the Company waited until 23 August 2016 to deliver the 1^st Cheque to PMT.  This however is not determinative of the Interest Payment Issue as there is no provision under the Subscription Agreement, the Notes Instrument or the Notes, which permitted the Company to rectify or cure a “payment default” under Condition 8.  To the contrary, Clause 13.1 of the Subscription Agreement provides that no delay in exercising any right shall operate as a waiver of or prejudice such right. 

61.  As the Company did not pay the first Interest Payment on 31 March 2016 in accordance with Conditions 4 and 5 and the default continued for more than 5 days, there was a “payment default” under Condition 8(i).  Under Condition 8, Huang was entitled to give a notice requiring the Company to redeem the Notes upon the occurrence of any event of default and “at any time thereafter”.  Accordingly, I hold that Huang was entitled to give notice to require the Company to redeem the whole of the outstanding principal of the Notes, which he did through PMT’s letter of 16 August 2016. 

62.  Condition 8 provides that upon any notice of redemption being given to the Company, “the whole principal amount of the outstanding Notes together with the accrued interests will become due and payable in the manner provided in Condition 5 on the 15^th day following delivery of such notice”.  As PMT’s letter was delivered to TS on 16 August 2016, the principal of HK$10 million, together with the interest accrued thereon at 5% per annum, became due and payable on 1 September 2016.  Given that the Company has already paid interest accrued on the Notes up to 31 March 2019, credit should be given for the amount received by Huang. 

B3.  Suspension in Trading Issue

63.  It is Huang’s case that the 2019 Suspension constituted a breach of the Clause 2.2 Warranty, which provides that the Company’s shares “be listed and traded” on HKEx.  This breach, in turn, constituted an event of default under Condition 8(iii). 

64.  The Company’s response is a simple one.  The Clause 2.2 Warranty relates “only to the listing and trading status of the Company’s shares at the time immediately prior to and on completion of the Notes on 30 April 2015”.  Thus, the 2019 Suspension could not constitute a breach of the Clause 2.2 Warranty.  I agree.

65.  Clause 5.1 of the Subscription Agreement provides that the Warranties (including the Clause 2.2 Warranty) was given by the Company as at the date of the Subscription Agreement. 

66.  Under the Clause 2.2 Warranty, the Company warranted that its shares “be listed and traded” on HKEx and the Company “has yet to receive” any notice in respect of the withdrawal or cancellation of the listing. 

67.  Under Clause 12.1, all Warranties made by the Company shall be deemed to be repeated every day between the date of the Subscription Agreement and the Completion Date.   

68.  Clause 3.1(b) provided that it was a condition precedent to completion that none of the Warranties had been breached in any material respect or was misleading or untrue in any material respect.  In other words, if any of the Warranties was untrue on the Completion Date, Huang had no obligation to complete the subscription of the Notes. 

69.  There is no dispute that the Clause 2.2 Warranty was true as at the date of the Subscription Agreement and the Completion Date.

70.  There is no provision, whether in the Subscription Agreement, the Notes Instrument or the Notes, which has the effect of extending the Clause 2.2 Warranty to beyond the Completion Date. 

71.  Mr Hu has not been able to identify any provision which supports his contention that the Clause 2.2 Warranty survived after the Completion Date.  Instead, he argues that “it is never expressly stated in Clause 12.1 that all warranties ‘contained in or entered into pursuant to this [Subscription] Agreement would cease to have effect following the Completion Date’”.  This turns the matter over its head.  It is Huang’s contention that the Clause 2.2 Warranty survived beyond the Completion Date.  To succeed in such argument, it is incumbent upon Huang to identify a contractual provision which has the effect he contends.

72.  Mr Hu further contends that “a reasonable person would understand Clause 12.1 to mean in the context of the circumstances highlighted below”.  The circumstances relies on are:

(1)   “Warranties” referred to in Clause 12.1 was defined as “the representations, warranties and undertakings under Clause 5.1 and Part 1 of Schedule 2”. 

(2)   “Representation” and “undertakings” referred to in Clause 12.1 were not defined in the Subscription Agreement. 

(3)   “When one examines the Subscription Agreement and the Notes carefully, other than Clause 5.1 and Part 1 of Schedule 2, many clauses appear to fall within Clause 12.1 being ‘... other representations and warranties and other undertakings contained in or entered into pursuant to this [Subscription] Agreement’”.  These included (i) the covenants contained in the Notes Instrument, (ii) the representations, warranties and undertakings under Clause 5.2 and Part 2 of Schedule 2 to the Subscription Agreement, (iii) the further covenants under Clause 6, and (iv) the terms and conditions of the Notes.

(4)   If Clause 2.2 Warranty did not survive beyond Completion Date, it would mean that all the other clauses mentioned above “would also be caught and rendered ineffectual on the Completion Date”.

73.  The argument is wholly misconceived.  The question whether any of the other Warranties, representations or covenants survive beyond the Completion Date must be construed having regard to the plain meaning of the words used, the effect of the specific provisions dealing with such Warranties, representations or covenants and the context of the relevant provisions. It has nothing to do with the separate question as to whether there was any provision in the Subscription Agreement to extend the Clause 2.2 Warranty beyond the Completion Date.

74.  Mr Hu then argues that in the absence of any warranty that the Company’s shares be listed and traded on HKEx until the maturity of the Notes, “no reasonable investor such as Huang would make loan to a limited company without security”.  The argument must be rejected.  It is not open to Huang to ask the court to re-write the Subscription Agreement by adding a provision to extend the Clause 2.2 Warranty beyond the Completion Date when the parties themselves chose not to do so.   

75.  Further, Mr Hu seeks to rely on the following matters which, he submits, constituted a material breach of the Clause 2.2 Warranty and hence an event of default under Condition 8 (collectively “Post-Completion Events”):

(1)   the suspension in trading from 16 December 2015 to 12 January 2016, and from 1 April 2016 to 24 July 2016, each of which he says involved “many serious allegations” against the Company;

(2)   the 2019 Suspension was directed by the SFC and the subsequent restriction notices issued on 20 March 2019 and 25 June 2019; and

(3)   the Company being removed as a constituent of the Hang Seng Family of Indices on 16 March 2019. 

76.  Except the 2019 Suspension, I do not think it is open to Mr Hu to rely on the Post-Completion Events, given that (1) they were not relied on as an event of default in the notice of redemption contained in PMT’s letter of 16 August 2016, or the subsequent notices contained in TAYY’s letter of 13 March 2019 and 24 April 2019, and (2) were not referred to in the questions identified in the originating summonses. 

77.  In any event, in view of my holding that the Clause 2.2 Warranty did not extend beyond the Completion Date, none of the Post-Completion Events could constitute a breach of such Warranty. 

78.  Lastly, Mr Hu submits that by reason of the 2019 Suspension, the Company committed a material breach of Clause 6 of the Subscription Agreement, as it “has failed to make its best endeavours (namely by doing all it reasonably can) to maintain its listing on [HKEx]”, and the Company “has not offered any evidence as to what has been done to meet its best endeavours obligations” under Clause 6.  Again, the point has never been raised in the redemption notices or the originating summonses.  It is unfair for Mr Hu to raise this as an event of default in his submissions.

C.    DISPOSITION 

79.  In summary, in respect of the 2 issues identified in the originating summonses, I hold that:

(1)   The Company failed to pay the first Interest Payment to Huang on 31 March 2016, which constituted a breach of Conditions 4 and 5.  As the breach continued for more than 5 days, there was a “payment default” under Condition 8(i).  Huang was entitled to seek early redemption of the whole of the outstanding principal of the Notes, which he did through the notice of redemption contained in PMT’s letter of 16 August 2016. 

(2)   The 2019 Suspension did not constitute a breach of the Clause 2.2 Warranty.  Huang was not entitled to rely on the 2019 Suspension as an event of default under Condition 8. 

80.  Consequently, the outstanding principal of the Notes in the amount HK$10 million, together with the interest accrued thereon at 5% per annum, became due and payable on 1 September 2016 (being 15 days following the notice of redemption).  As the Company has already paid interest accrued on the Notes up to 31 March 2019, interest on HK$10 million should only accrue from 1 April 2019 up to the date of judgment at 5% per annum and, thereafter, at judgment rate until the date of payment.

81.  As Huang, being the successful party, has not submitted any draft form of order, I direct the parties to try to agree on the form of order within 5 days of this judgment.  If no agreement is reached within this time, the solicitors for Huang shall submit a draft order, identifying the areas of disagreement, and the parties have liberty to put in an explanatory submissions on the areas of disagreement, not exceeding 2 pages, within 3 days thereafter.  I will determine the form of order on paper. 

82.  As for costs, I make a costs order nisi that there be no order as to costs as each party succeeds in its/his originating summons issued.