ZHENG LI FENG v. SUPER WORTH INTERNATIONAL LTD AND ANOTHER

HCA 1043/2012

[2018] HKCFI 1578

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1043 OF 2012

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D E C I S I O N

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I.   BACKGROUND

1.  In this action, the Plaintiff’s claim is based on various agreements whereby the 1^st and 2^nd Defendants allegedly promised to “buy back” certain shares in a listed company, which had been purchased in the first place by the Plaintiff from the 2^nd Defendant (or her corporate vehicles which will be referred to below).

2.  The Plaintiff resides in Foshan, Guangdong.  The 1^st Defendant is a limited company incorporated in the British Virgin Islands.  The 2^nd Defendant is the majority shareholder of Natural Dairy (NZ) Holdings Ltd (Stock Code: 462) (“the Company”) listed on the Hong Kong Stock Exchange (“the HK Exchange”).  The trading of the shares of the Company has however been suspended since September 2010.  The 2^nd Defendant holds the shares of the Company through corporate vehicles including the 1^st Defendant and another 2 companies, namely, Earn Cheer Limited and Flying Max Limited.

3.  The Plaintiff’s case is that shortly before 18 November 2010, the Plaintiff and the 2^nd Defendant (acting both for herself and also on behalf of the 1^st Defendant) orally agreed as follows:-

(1)  The Plaintiff shall acquire from the 2^nd Defendant (or her corporate vehicles) 24,000,000 shares of the Company at a total consideration of HK$40,000,000 (ie at a unit price of HK$1.67);

(2)  In return, the 1^st and 2^nd Defendants shall guarantee that the Plaintiff could resell the shares at an aggregate sum of at least $60,000,000 (ie at a minimum unit price of HK$2.50).

4.  According to the Plaintiff’s case, on 18 November 2010, the Plaintiff and the 2^nd Defendant had a meeting at the latter’s office and the 2^nd Defendant produced a draft agreement for the intended “buy-back” of shares (which contained the provisions which had previously been orally agreed) on the following terms (“the First Agreement”):

(1)  The Plaintiff shall purchase 17,700,000 shares of the Company from Earn Cheer Limited at HK$29,500,000, and 6,300,000 shares of the Company from Flying Max Limited at HK$10,500,000 (ie a total of 24,000,000 shares of the Company (“the Target Shares”) at HK$40,000,000 (see Preamble §(甲), Clause 2.1).

(2)  As a pre-condition (先決條件) for the above purchase by the Plaintiff, the 1^st Defendant agrees that it shall buy back the Target Shares at a later date (see Preamble §(乙), Clauses 2.1 and 2.2).

(3)  Upon full payment of HK$40,000,000, the Plaintiff shall have a one‑month period (“the Guarantee Period”) to sell the Target Shares on the HK Exchange.  The Plaintiff shall have the right to require the 1^st Defendant to buy back the Target Shares (or the remaining portion held by the Plaintiff) on the last day of the Guarantee Period at HK$2.50 per share, provided that the following conditions are met:

(a) The average closing price of the shares of the Company on the HK Exchange in the last five consecutive days of the Guarantee Period is less than HK$2.50 per share or public trading is not resumed within the Guarantee Period.

(b) The Plaintiff issues a written buy-back notice to the 1^st Defendant within 14 days upon the expiry of the Guarantee Period (“the Buy-back Notice”).

(c) The Plaintiff provides the 1^st Defendant with reasonably satisfactory proof (such as the Plaintiff’s trading record of the Target Shares) that the shares of the Company for the buy-back transaction are the Target Shares.

(d) The Plaintiff produces to the 1^st Defendant a complete trading record of the Target Shares from the day of purchase to the day of buy-back.

(e) Upon receipt of the Buy-back Notice from the Plaintiff, the 1^st Defendant shall buy back the Target Shares (or the remaining portion) at HK$2.50 per share.

5.  As alleged by the Plaintiff, at the same meeting on 18 November 2010, prior to execution of the First Agreement, the 2^nd Defendant indicated to the Plaintiff that the shares of the Company would resume trading in a few months’ time and she therefore requested to have 6 months (instead of 1 month) for the Guarantee Period, to which the Plaintiff agreed.  It is the Plaintiff’s case that the parties then agreed to post-date the written agreement to 5 months later (ie 18 April 2011), so that the 1^st Defendant would have a total of 6 months to buy back the shares from the Plaintiff, upon the Plaintiff’s acquisition of the same.  With the other terms remaining unchanged, the parties then signed on the postdated First Agreement.

6.  The Plaintiff has pleaded in the alternative that there was an oral agreement between the Plaintiff and the Defendants on the same terms.  However, given that the First Agreement was made in writing, the alleged oral agreement does not seem to be of any great significance.

7.  There is no dispute that upon signing the First Agreement on 18 November 2010, the Plaintiff issued and delivered to the 1^st Defendant 2 cheques in the total sum of HK$40,000,000 for the acquisition of 24,000,000 shares of the Company.  Two additional cheques were delivered by the Plaintiff for payment of the relevant stamp duty for the purchase of the Target Shares.  All four cheques were dated 19 November 2010 (ie the day after the First Agreement was allegedly made).  Hence, the transfer of shares to the Plaintiff was completed.   On pleadings, it is admitted by the 1^st and 2^nd Defendants that on the photocopies of the first two cheques, there was a note written and signed by the 2^nd Defendant that if the Target Shares could not be transferred to the Plaintiff under his name, the amount paid by the Plaintiff had to be refunded to him.

8.  On the last day of the Guarantee Period (ie 18 May 2011), the shares of the Company still did not resume trading.  The Plaintiff continued to hold the entire lot of the Target Shares.   The Plaintiff claims that the 1^st Defendant had failed to buy back any part of the Target Shares or pay for any part of the buy-back price of HK$60,000,000 (being 24,000,000 shares x HK$2.50) (“the Buy-back Price”).

9.  According to the Plaintiff’s case, instead of proceeding to execute the buy-back transaction, the 2^nd Defendant (on her own behalf and on behalf of the 1^st Defendant) asked for more time.  The 2^nd Defendant proposed to pay the Buy-back Price by 2 instalments and to pay the Plaintiff an additional sum of HK$5,000,000 for his agreement to extend the time.  As alleged by the Plaintiff, the parties then entered into a Supplemental Agreement dated 22 June 2011 (“the Supplemental Agreement”) on the following terms:-

(1)  The 1^st and 2^nd Defendants shall pay the Plaintiff the Buy-back Price by 2 instalments.  The 1^st instalment in the sum of HK$20,000,000 was to be paid by the 1^st and 2^nd Defendants to the Plaintiff on 21 June 2011 (“the 1^st Instalment”) and the 2^nd instalment in the sum of HK$40,000,000 to be paid by the 1^st and 2^nd Defendants to the Plaintiff on 30 September 2011 (“the 2^nd Instalment”) (Clause 1).

(2)  The 1^st and 2^nd Defendants shall in addition pay the Plaintiff HK$5,000,000 as consideration for the Plaintiff’s agreement to extend the time for the buy-back (Clause 2).

(3) In the event that the Company could be relisted on the HK Exchange on or before 30 September 2011 and that the Plaintiff would be able to sell all the Target Shares on or before the said day, the balance of the Buy-back Price mentioned in Clause 1 of the Supplemental Agreement shall be adjusted accordingly, subject to the terms stated therein (Clause 3).

(4)  Should the 1^st and 2^nd Defendants fail to pay any part of the Buy-back Price of HK$60,000,000 and the consideration for the extension in the sum of HK$5,000,000, the 1^st and 2^nd Defendants should be liable to pay interest on the amount due and unpaid at a rate of 12% per annum from the date when the same became due until payment (Clause 6).

(5)  Should the 1^st and 2^nd Defendants fail to pay any of the 2 instalments of the Buy-back Price in accordance with the time limits set out therein, the remaining balance of the Buy-back Price shall become due and payable forthwith (Clause 5).

10.  The shares of the Company did not resume trading on or before September 2011 and such trading remained suspended up to the date of the trial.

11.  The 1^st Instalment in the sum of $20,000,000 has been paid by the Defendants to the Plaintiff. However, despite the letter of demand from the Plaintiff (through his then solicitors Messrs. Foo, Leung & Yeung) to the Defendants dated 17 October 2011, the 2^nd Defendant failed to pay any part of the 2^nd Instalment or the consideration for the extension of time of HK$5,000,000, which became due and payable on 30 September 2011.

12.  The Plaintiff asks for, amongst others, specific performance (or damages in lieu or in addition to specific performance) of the Supplemental Agreement, interest on the sum of HK$45,000,000 as well as costs.

13.  The Defendants do not dispute that the Plaintiff had in fact purchased the Target Shares at the price of HK$40,000,000 and had issued and delivered the cheques to the 1^st Defendant.

14.  However, the Defendants deny that there was any meeting on 18 November 2010.  The Defendants do not agree that any draft agreement was provided to the Plaintiff on the same date or that the parties reached any oral agreement.

15.  The Defendants contend that the First Agreement was in fact signed on 18 April 2011 (as opposed to 18 November 2010 as the Plaintiff contends).  The First Agreement is, as alleged by the Defendants in their pleadings, unenforceable for the following reasons:

(1)  The transfer of the Target Shares to the Plaintiff from Flying Max Limited and Earn Cheer Limited was completed in November 2010.

(2)  The First Agreement was not signed by the Plaintiff and the 1^st Defendant until 18 April 2011.

(3)  The Plaintiff therefore did not provide any consideration in support of the 1^st Defendant’s alleged promises under the First Agreement.

(4)  Alternatively, the consideration (if any) moving from the Plaintiff to support the First Agreement was a past consideration (as the Plaintiff’s purchase of the Target Shares was completed well before 18 April 2011) which is not sufficient in law to support the First Agreement.

16.  In relation to the Supplemental Agreement, the Defendants have failed to provide any explanation as to why and how this document came into existence. The Defendants however contend that the Supplemental Agreement is unenforceable against them because:-

(1)  the Supplemental Agreement was signed by the parties purportedly to regulate the rights and liabilities of the Plaintiff and the 1^st Defendant under the First Agreement;

(2)  since the 1^st Defendant does not have any obligation to fulfill any of the terms of the First Agreement (including to buy back any part of the Target Shares) which is unenforceable against them, there is also no obligation on their part to fulfill any of the terms of the Supplemental Agreement which is made supplemental to the First Agreement.

II.    ISSUES

17.  In view of the above factual background and each party’s position, the issues in this case can be summarised as follows:

(1)  When was the First Agreement entered into?  Was it signed on 18 November 2010 (as the Plaintiff contends) or 18 April 2011 (as the Defendant contends)?

(2)  Was there any consideration in support of the First Agreement?

(3)  The enforceability of the Supplemental Agreement which turns on the Court’s decisions in respect of the above two issues.

(4) There are also questions arising from the relief sought by Plaintiff (in the event that liability is established against the Defendants.

II(A):    When was the First Agreement entered into?

18.  On 6 April 2018 (ie about 2 working days prior to the commencement of the trial), solicitors then acting for the 1^st and 2^nd Defendants on record applied to cease to act.  On 10 April 2018, shortly before the trial began, I granted the order sought.

19.  Both the 1^st and 2^nd Defendants were absent at trial.  There was no reason why the trial should not proceed in their absence.  The Plaintiff was the only witness who provided oral testimony and his evidence was not challenged.  The Plaintiff’s evidence has sufficiently dealt with the circumstances in which the First Agreement and the Supplemental Agreement were entered into between the parties and also the fact that the Defendants failed to perform their obligations set out therein.  I have no hesitation in accepting the Plaintiff’s case in respect of the issues outlined above.

20.  On the question regarding the date of the First Agreement, I find the Defendants’ case unbelievable.  It is clear that the Plaintiff’s purchase of the Target Shares and the intended buy-back arrangement were closely connected and the two must be treated as a “package deal”.  Otherwise, there is no reason for the First Agreement to state that the Plaintiff agreed to and shall purchase the Target Shares without mentioning at all that such purchase had in fact been completed (as alleged by the Defendants).   Further, as mentioned above, the First Agreement emphasises that the buy-back arrangement was a “pre-condition” for the Plaintiff’s agreement to purchase the Target Shares.  Had the purchase already been completed on its own before the signing of the First Agreement, the parties would not have considered it necessary to specify such a “pre-condition”.  Further, as submitted by Mr Anthony Cheung (acting for the Plaintiff), it would make little commercial sense for the Plaintiff to agree to buy the Target Shares at the time when the trading of the Company had been suspended by the HK Exchange without the assurance provided by the buy-back arrangement.  I agree. This is another reason why the Defendants’ case that the First Agreement was signed on 18 April 2011 (well after the Plaintiff’s purchase of the Target Shares) cannot be accepted.  In any event, the Defendants have failed to adduce any evidence to establish their case.

II(B):    Lack of consideration/past consideration

21.  Given my ruling above that the First Agreement was entered into in November 2010, the Defendants’ pleaded case on lack of consideration or past consideration will inevitably fall apart since it is clear that the First Agreement was supported by a valid consideration. In any event, the Defendants’ argument in this regard is wholly untenable. Even assuming that the Plaintiff’s purchase of the Target Shares had been completed before the First Agreement was signed by the parties, he still provided valid consideration by agreeing to sell such shares to the 1^st Defendant. Further, there is no doubt that the parties all along treated the First Agreement as a valid and binding agreement; otherwise, it would not have been necessary for them to come up with the Supplemental Agreement which contained revised terms for the purpose of implementing the buy-back arrangement and also the Defendants’ promise to pay the Plaintiff a sum of HK$5,000,000 for the extension of time granted for the completion of the buy-back arrangement.  In particular, it is stated in the Supplemental Agreement that the Defendants had failed to pay the buy-back price of HK$60,000,000 in accordance with the First Agreement and the parties therefore entered into a new set of arrangements (including the time extension granted).

II(C):    Validity and enforceability of the Supplemental Agreement

22.  Since the Defendants’ argument on the validity and enforceability of the Supplemental Agreement turns primarily on the outcome of the above two issues, it has now become wholly academic and has no substance at all, given my rulings above.  Further, as mentioned above, the Supplemental Agreement clearly sets out the reasons for such an additional agreement and also the obligations of each party with a view to implementing the unfinished buy-back arrangement.  Further, the Defendants have already paid the 1^st Instalment in the sum of HK$20,000,000 in accordance with the Supplemental Agreement.

23.  Moreover, in view of the evidence provided by the Plaintiff, I am therefore satisfied that the 1^st and 2^nd Defendants were in breach of the Supplemental Agreement.

II(D):  Relief sought

24.  Apart from the payment of the 1^st Instalment in the sum of HK$20 million, the Defendants have failed to pay any part of the balance of the remaining HK$40,000,000 to buy back the Target Shares under the Supplemental Agreement.  Further, they have also failed to pay the sum of HK$5,000,000 for the time extension granted under the Supplemental Agreement. The Plaintiff therefore asks for the following relief:-

(1)  judgment in the sum of HK$5,000,000 with interest from 30 September 2011 at 12% per annum (which has been agreed under the Supplemental Agreement);

(2)  specific performance or damages in lieu of specific performance (to be assessed); and

(3)  costs.

25.  Specific performance is not generally ordered in respect of contracts for shares in a listed company, which are readily available in the market as damages are considered to be an adequate remedy in these circumstances (see Chitty on Contracts, 32 Ed, Vol 1, §27‑010). However, I agree with Mr Cheung that although the Target Shares are shares of a listed company, the Company’s trading has been suspended and, as a result, such shares were not readily available in the market at the time when the parties entered into the First Agreement and the Supplemental Agreement.

26.  Although specific performance was sought in both the Statement of Claim and the Plaintiff’s Opening Submissions, Mr Cheung in his closing submissions asked for damages in lieu, apparently because it was contemplated that it would be extremely difficult to compel the Defendants to perform the Supplemental Agreement, in view of the fact that their former solicitors did not manage to take instructions from them and that the Defendants did not attend the trial.

III.   ORDER

27.  I therefore make the following order:-

(1)  judgment in the sum of HK$5,000,000 be entered against the 1^st and 2^nd Defendants;

(2)  an order nisi that interest from 30 September 2011 be paid by the 1^st and 2^nd Defendants at 12% per annum until payment;

(3)  an order that the 1^st and 2^nd Defendants shall pay damages in lieu of specific performance, to be assessed; and

(4)  an order nisi that costs of this action be paid by the 1^st and 2^nd Defendants.

28.  For the avoidance of doubt, the 1^st and 2^nd Defendants shall be jointly and severally liable for what has been ordered above.  The orders nisi shall become absolute upon the expiry of 14 days from the date of this judgment.