XCHRX HABANERA LTD. AND ANOTHER v. FINECOM LTD. AND OTHERS

HCA7946/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.7946 OF 1998

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J U D G M E N T

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The Appeal

1. This is the Plaintiffs' appeal against the decision of the Master who, on the Plaintiffs' application for summary judgment, granted the Defendant unconditional leave to defend.

Facts

2. The facts are briefly this. Ease Maker Properties Limited ("the Company") is the registered owner of a property ("the Property"). The 1st Plaintiff ("Habanera") which is controlled by the 2nd Plaintiff ("Yeung") holds 5% of the shares of the Company. The 1st Defendant ("Finecom") holds 10% of the shares of the Company. Finecom is controlled by the 2nd Defendant ("Hau"). The 3rd Defendant ("Li"), through a company called MRT (Holdings) Limited ("MRT") holds 55% of the shares of the Company. The remaining 30% of the shares in the Company was held by a company called Nice Crown (HK) Limited ("Nice Crown").

3. On 17 November 1997, the Plaintiffs and Finecom entered into an agreement ("the Agreement") in which the Plaintiffs agreed to sell to Finecom for HK$1.8 million, Habanera's 5% shares in the Company together with a loan due to Habanera from the Company. $360,000 was paid on the signing of the Agreement, while the balance of $1.44 million was to be paid on the completion of the sale which was initially agreed to take place on 29th November 1997 but later extended to 31st December 1997. The Agreement provided that as a condition precedent to the sale, Hau and Li must provide a guarantee in favour of Habanera. By a Guarantee ("the Guarantee") of the same date, Hau and Li guaranteed the performance of Habanera's obligation under the Agreement, including the payment of $1.44 million. They further agreed to indemnify Habanera against loss that it might incur as a result of Finecom's default of the Agreement. Finecom, after paying $360,000, failed to pay the balance of the purchase price. The Plaintiffs seek specific performance of the Agreement against Finecom and also of the Guarantee against Hau and Li respectively.

The Defendants' case

4. The Defendants' case is that Li wish to sell the Property and at the end of October or early November 1997, he had a discussion with Yeung. At that time the price of property in Hong Kong had fallen drastically. The market value of the Property then was $30 million to $33 million. The Company bought the Property in 1993 for $10 million. Li wished to sell the Property so that profit could still be made from it. Initially, Yeung refused to sell. However, he finally agreed to sell on the following conditions :

1) He would find a buyer to the Property who would offer a price of not less than $36 million.

2) He would earn 1% commission from the sale.

3) The Defendants would find someone to buy his 5% shares in the Company.

5. On 17th November 1997, Yeung, Hau and Li agreed that Finecom would buy Yeung's shares in the Company. Hau and Li would also provide a guarantee to Habanera. Also on the same day, Yeung represented to Li that he had a known buyer who would offer $36 million to buy the Property and he might be able to convince this buyer to put up a higher price. Yeung assured Li that the agreement for the sale of the Property would be entered into by the end of November 1997, and that completion for the sale of his shares would be on 29th November 1997. Before that date, he would produce the agreement for the sale of the Property. Yeung further said that if he failed to produce the agreement at the time of the completion, Finecom needed not complete the purchase.

6. Based on the representation of Yeung, the Agreement and the Guarantee were signed by the Defendants. Yeung, however, failed to provide the buyer and the Defendants refused to pay up the balance of the purchase price on completion.

The principle

7. The test in a summary judgment application is whether the defence is credible. If yes, the Defendant is entitled to defend. If not, then judgment should be entered for the Plaintiff : Ng Shou Chun v. Hung Chun San [1994] 1 HKC 155.

Defendants' case is based on misrepresentation

8. In this case, the Defendants had filed a defence. I must say the defence was badly pleaded. However, the essence of the defence read together with the affirmations, is one of misrepresentation by Yeung.

Oral representation in the light of written agreements

9. Ms Cheng, Counsel for the Plaintiffs, submitted that the so-called representation was no more than a representation of intention and not a statement of fact which is needed to found an action on misrepresentation. There is much force in this argument. But in my view, it is not necessary to deal with this issue. It is necessary to take an overview of this case to see what the Defendants are trying to establish by way of defence. They are relying on an oral representation by Yeung in the face of two written documents prepared by lawyers and approved by lawyers. These written documents did not contain any provision for the so-called assurances by Yeung.

10. The terms of the Agreement are simple. The only condition precedent stated to be required is the Guarantee to be provided by Hau and Li. The Agreement also contains a provision that the Agreement contains the whole agreement between the parties. The Guarantee is also clear. Hau and Li agreed "jointly and severally, unconditionally and irrevocably, as a continuing obligation, to guarantee the due and punctual payment of the Guaranteed Amount and the due and punctual performance and observance" by Finecom under the Agreement.

Defence incredible

11. In the light of these clear words, the Defendants seek to rely on some oral representation which is pleaded in the vaguest terms. It is not as if Hau and Li are some ordinary people who are not familiar with the affairs of this world. They are business people. They are directors and shareholders in the Company. They had carried out business deals. The transaction in question was for $1.8 million. Shortly before this transaction, they had entered into another agreement with Nice Crown to acquire Nice Crown's interest in the Company together with the indebtedness of the Company to Nice Crown for over $10 million. In April 1997, Li's own company had obtained banking facilities from the Hongkong Bank in the sum of HK$2 million and US$1.8 million.

12. It is against this background that one has to test the credibility of the defence when Li said that he did not bother to tell his lawyer about the oral assurances because "I believe that would only cause complications." In my view, this is simply incredible. What is the complication in providing in the Agreement that the completion is subject to Yeung fulfilling his assurances? When the purchase was not completed on the original date, and when the Plaintiffs' lawyers were pressing the Defendants to complete, again no mention was made by the Defendants of the so-called assurances by Yeung. Li's explanation was that by late 1997, he had found a potential purchaser to the Property. He wanted to proceed with the sale so that Yeung could be paid the balance of the purchase price under the Agreement and the matter could be resolved then. He stated that at that stage, he still elected not to mention about the oral assurances in order not to complicate matters. I find this incredible coming from the mouth of Li. Li had categorically stated that he and the other Defendants "had absolutely no reason for buying the 1st Plaintiff's shares had there not been a representation that there would be a buyer for the Property". This being the case, if at the time of the completion, Yeung had not performed his part of the bargain, then surely one would expect Li to raise this matter when the Defendants were being pressed to pay the $1.44 million. Instead, one finds this rather unreal suggestion that Li did not wish to complicate things by not mentioning this to his own lawyers. This is not how things are done in the commercial world.

Defence inherently improbable

13. Quite apart from the fact that there was no written contemporary document on the so-called assurances, more importantly, the defence is inherently improbable. The Defendants' case is that the oral assurances came about as a result of the discussion by the parties on the sale of the Property in October and November 1997. This is disputed by Yeung who said that Li offered to purchase his shares in the Company in April 1997. At that time Li requested an urgent meeting with Yeung. At the meeting he told Yeung that he needed Yeung's consent in order to mortgage the Property to the Hongkong Bank as security for the banking facilities granted by the Bank to his own company. He said if Yeung did not give his consent, then the Company would have to call for further contributions from the shareholders to settle the modification premium payable to the Hong Kong Government for the change of user of the Property and construction cost for the conversion of the Property, totalling $36 million. In order to procure Yeung's agreement to the mortgage, Li offered to buy his shares in the Company in September 1997 for $1.8 million.

14. Li denied Yeung's evidence about the April meeting. If the matter rests there, this would not carry the Plaintiffs' application for summary judgment further. However, the Defendants' case does not rest on the assurances given by Yeung in October and November 1997. Li said that after he had the discussion with Yeung, he discussed the matter with Hau, and they came to the conclusion that it would be best to sell the Property as soon as possible. Then at para.6 of his affirmation of 20th July 1998, he stated this :

".... As one Mr. Wong Pui Ng ('Wong') of Nice Crown had indicated a different view, we believed that the proposal to dispose of the said property would be met with opposition from other shareholders of Ease Maker. To avoid any unnecessary conflict and to smoothen the sale of the said Property, the 1st Defendant by its agent, the 2nd Defendant, decided to buy out Nice Crown."

Li then stated that they negotiated with Wong of Nice Crown and on 18th November 1997, Finecom and Nice Crown "executed the sale of Nice Crown's shares in the Company". He produced the deed of assignment, the instruments of transfer and other documents relating to the sale of the shares and the assignment of debt by Nice Crown to Finecom.

15. The overall picture painted by Li is that the discussion with Nice Crown came about as a result of Li's discussion with Yeung on the sale of the Property. Yeung had represented that a buyer would be found who would offer a price of not less than HK$36 million. Nice Crown was then bought out by the Defendants to smooth the way for the eventual sale of the Property. However, from the evidence disclosed in this case, Finecom had in fact entered into an agreement as early as 18th July 1997 for the purchase of Nice Crown's 30% interest in the Company together with the debt owned by the Company to Nice Crown for the sum of $10.8 million. This is well before the alleged assurance given by Yeung. A copy of this agreement in fact was provided by Li to Ms Law, who is the wife of Yeung and the solicitor handling the execution of the Agreement and the Guarantee. In fact, the form of the Guarantee was based on a guarantee executed by Hau and Li in favour of Nice Crown dated 18th July 1997.

16. If as early as July 1997, the Defendants had already entered into an agreement and provided a guarantee for acquiring Nice Crown's interest in the Company, then how did the oral assurances come into place? This contradicts their case that they negotiated with Nice Crown after the discussion with Yeung in October and November 1997. This magnifies the incredible nature of the defence. The Defendants had never explained the contradiction in this case. Further I find it incredible that the Defendants who were already majority shareholders and who had paid $11 million for Nice Crown's 30% shares in the Company, would somehow, only be prepared to acquire the remaining 5% shares held by Yeung because of his so-called oral assurances. Afterall it was Li who wished to sell the Property in the first place. The overall picture that emerged is that the Defendants bought out one shareholder after the other. But for reason best known to themselves, they were unable or unwilling to pay the $1.44 million and resorted to the so-called assurances as a defence to the Plaintiffs' claim. It is for the Defendants to show cause why they should be given leave to defend. In my view, they have failed to do so in this case.

Other issues

17. This being sufficient to dispose of the case, it is not necessary for me to deal with the other points raised by Ms Cheng, including her argument on the nature of the Guarantee by reference to the case of Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. [1978] 1 All ER 976.

Conclusion

18. The appeal is allowed. The Plaintiffs are entitled to judgment as claimed. The sale is to be completed within 14 days of this order. The Plaintiffs' claim for damages is to be assessed. Interests at judgment rate is awarded on $1.44 million from the date of the service if writ to payment. Costs nisi of the action to the Plaintiffs, to be taxed if not agreed.