ASIA EQUITY VALUE LTD v. HQX (GROUP) LTD AND OTHERS

HCA 1966/2019

[2021] HKCFI 2593

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1966 OF 2019

_________________

_________________

_______________

DECISION

_______________

INTRODUCTION

1.  On 2 July 2020, Master Anthony HK Chan granted summary judgment against the 1^st to 5^th defendants in the sum of HK$192,500,000 with interest and costs.  The plaintiff’s claim is based on the re-amended statement of claim filed on 10 June 2020.

2.  This is the appeal by the defendants against the master’s decision. They ask for the judgment to be set aside and the summary judgment summons dismissed or, alternatively, they be given unconditional leave to defend.

3.  The plaintiff and the 1^st defendant are parties to an option agreement dated 9 May 2018, as supplemented by a letter agreement dated as of 7 May 2019 (“the Option Agreement” and “the Letter Agreement” respectively, and together “the Agreement”).  Under the Agreement, the 1^st defendant granted a put option to the plaintiff in respect of 110,000,000 shares in Xiwang Special Steel Company Limited (“the Shares”), a listed company in Hong Kong (“the Listed Company”).  The 2^nd to 5^th defendants are guarantors of the 1^st defendant’s liability under the Agreement.  Each of them signed a guarantee dated 9 May 2018 (“the Guarantees”). 

4.  The plaintiff’s case is that by its letter dated as of 11 September 2019 (“the Notice”), it exercised the put option; that under the Agreement, the 1^st defendant was obliged to pay the sum of HK$192,500,000 (“the Sum”) latest by 18 September 2019; and that the 1^st defendant has failed to pay up to now.  By summons dated 22 November 2019, the plaintiff applied for summary judgment for the Sum against the defendants.

5.  The defendants resist the application on two broad grounds.  First, they say that the claim as pleaded in the re-amended statement of claim is defective and the claim deviates materially from the case advanced in the plaintiff’s affirmation evidence.  For that reason alone, no summary judgment ought to be granted based on that pleading.  Secondly, in any event, there are issues which ought to be tried.

6.  Mr Lin Xiaozhe, a director of the plaintiff, made three affirmations in support of the application.  The defendants rely on the affirmation made by Mr Sun Xinhu, the Vice General Manager of the 2^nd defendant, to oppose the application.

LEGAL PRINCIPLES

7.  An appeal from a master to a judge under Order 58, rule 1(1) of the Rules of the High Court is by way of re-hearing.  I should treat the summons as if it came before me for the first time: Hong Kong Civil Procedure 2021 at 58/1/2.

8.  The principles governing summary judgment are well-known.   The following are of particular application in the present case.  They are extracted from Li Chuen Kwai v Po Lam Construction Development Ltd HCA 2376/2013, 24 September 2014.

9.  The statement of claim must be good and complete in itself.  Any defect or omission in the statement of claim cannot be corrected or supplemented by the plaintiff’s affidavit evidence.  If the defect is one of substance, the application for summary judgment will be dismissed.  Where the assertions in the plaintiff’s affidavit constitute a material deviation from his pleaded case or the two are inherently inconsistent, he will have failed to verify his claim as pleaded, and summary judgment should not be granted.

10.  The defendant shoulders the burden to satisfy the court that he has a real or bona fide defence or that there ought for some reason to be a trial of the plaintiff’s claim.  A complete defence need not be shown.  The defence set up need only show that there is a triable issue or question or that for some other reason there ought to be a trial.

11.  When evaluating the defence, the question for the court is not whether the defendant’s assertions are to be believed, rather it is whether those assertions are believable or capable of being believed.  If so, the defendant must have leave to defend.  The question should be answered not by taking those assertions in isolation bur rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute and testing them against the evidence disclosed, including contemporaneous documents, and the inherent probability of the defence.

12.  Mr Derek JY Chan, counsel appearing for the defendants, highlighted the Court of Appeal decision in Wong Chow Hoi Sze Elsie v Crown Wine Cellars Ltd CACV 262/2015, 15 April 2016.  The elementary rule that summary judgment can only be granted on the claims set out in the statement of claim is not an arid point on pleadings but a fundamental one, as it affects the state of the evidence put forward in the application: paras 10-11, per Lam VP.

13.  A point of contractual construction arises in the present case.  In this regard, Mr Charles Manzoni, SC, appearing for the plaintiff, highlighted the following principle.  Where an application for summary judgment turns on the terms of a written contract, it does not follow that the factual matrix of the contractual relationship can only be determined by a full trial. If there is no conflict of evidence on a relevant point of background matrix, it is only when there really are reasonable grounds for supposing that a fuller investigation of the facts as to the background might make a difference to construction that the court should decline to construe the contract in a summary judgment application: Hong Kong Civil Procedure 2021 at 14/4/22.

FACTUAL BACKGROUND

14.  The 1^st defendant was not the original party to the Option Agreement when it was signed.  The rights and obligations of the original party, Good Base Global Investments Ltd (“Good Base”), were novated to the 1^st defendant on the same date as the Letter Agreement.  At the same time, the 2^nd to 5^th defendants confirmed in writing that their liabilities under the Guarantees remained in full force.  Nothing presently turns on the novation.

15.  The dispute centres on whether the plaintiff was entitled to exercise the put option as of the date of the Notice.  In turn, it depends on the construction of the contractual provisions stipulating the circumstances in which the put option could be exercised, each of such circumstance is referred to as “the Put Option Exercise Event” in the Agreement.  The plaintiff says that four Put Option Exercise Events existed when the Notice was issued.  Further, the claim depends on whether the factual circumstances alleged by the plaintiff fall within the four alleged events. 

16.  It is therefore necessary to set out the material contractual terms in detail.

The contractual terms

17.  In the Agreement, the plaintiff was granted the right to require the 1^st defendant to purchase the Shares at the price and on the terms set forth in the agreement.  The plaintiff may exercise the put option “by written notice” at any time during the “Put Option Exercise Period” or “[u]pon the occurrence of a Put Option Exercise Event”.  The latter term is defined to mean “any event or circumstance specified as such in Schedule 2” to the Option Agreement: see clauses 1, 2.1, 2.2, 3.1 and 3.2.

18.  It is common ground that the Notice was not issued within the Put Option Exercise Period.  (For background information, under the Option Agreement, the Put Option Exercise Period refers to a period of 20 trading days spanning across the “Maturity Date” which should fall on a day in 2019.  But the exact date is not disclosed in the evidence.)  In this claim, the plaintiff purported to exercise the put option based on four Put Option Exercise Events. 

19.  Clause 4 is entitled “Completion”.  It provides for the mechanism by which completion should take place once the put option is exercised.  In the Agreement, the plaintiff is referred to as “AEVL”.

“4.1 Completion shall take place as soon as practicable but in any event no later than the fifth (5th) business day immediately following the Exercise Date (or such other business day as may be agreed between AEVL and Good Base in writing) at the offices of AEVL’s Solicitors when all (but not some only) of the events described in this Clause 4 shall occur.

4.2 At Completion, and subject to Clause 4.4 below [not applicable], Good Base shall pay the Exercise Price to AEVL without any set-off or deduction. Unless otherwise agreed by AEVL, Good Base’s obligation to pay the Exercise Price shall be settled by the payment of an amount in United States Dollars equivalent to the Exercise Price on the date of payment. At Completion, AEVL shall then deliver to Good Base all the documents referred to in Schedule 1 to this Agreement.

4.3 For avoidance of doubt, AEVL is only obliged to complete the sale of the Option Sales (or, if the Put Option is exercised in respect of part of the Option Shares, the part thereof) when Good Base complies with its obligations pursuant to this Agreement in all material respects. …”

20.  The documents set out in Schedule 1 are, in essence, those documents required for the transfer of the legal ownership of the Shares to the plaintiff.

21.  The Option Agreement was supplemented by the Letter Agreement which was signed about one year later.  The material terms provided as follows:

“We [ie the 1^st defendant] hereby request your [ie the plaintiff’s] agreement to amend the Maturity Date to Sunday, 15 December 2019 (as amended, the “Maturity Date”), and thereby to defer, inter alia, commencement of the Put Option Exercise Period to such date.

In consideration of your agreement to amend the Maturity Date, we hereby agree that the meaning of “Exercise Price” shall be and is hereby amended as set out in Annex I hereto and, furthermore, any failure of the Company [ie the Listed Company] to pay AEVL the dividend recommended and announced by the Company on 25 March 2019 by 30 June 2019, shall also constitute a Put Option Exercise Event.”

22.  In other words, the terms of the Option Agreement were altered in three respects.  First, the Put Option Exercise Period was deferred to late December 2019.  Second, the formula for the exercise price was adjusted.  Third, a new “Put Option Exercise Event” in relation to non-payment of dividend by the Listed Company was added.

The Notice

23.  The plaintiff sent the Notice to the 1^st defendant.  There was an express acknowledgment signed by the 1^st defendant dated 11 September 2019.  The plaintiff wrote:

“We hereby notify you that a Put Option Exercise Event has occurred and pursuant to Clause 2.2 of the Option Agreement, we hereby exercise the Put Option.

Please immediately remit to us in United States Dollars equivalent the Exercise Price payable for the balance of 110,000,000 Option Shares in an amount of HK$192,500,000. Our remittance details are attached.

Upon receipt in full of all amounts payable by you, in accordance with Clause 4.2 of the Option Agreement, at Completion we shall deliver all documents referred to in Schedule 1 of the Option Agreement to you.”

The alleged put option exercise events

24.  As can be seen from the content of the Notice, it referred only to “a Put Option Exercise Event”.  Notwithstanding that, the plaintiff’s case in this action is that four Put Option Exercise Events had occurred prior to the issuance of the Notice.  They were referred to at the hearing as the “Dividend Event”, the “Shareholding Event”, the “Litigation Event” and the “Negative Pledge Event”.  

25.  It is common ground that the plaintiff needs only to prove any one of the four alleged events in order to establish its entitlement to exercise the put option.

THE DIVIDEND EVENT

26.  The contractual terms relating to the Dividend Event are set out in the following paragraph in the Letter Agreement:

“… any failure of the Company [ie the Listed Company] to pay AEVL the dividend recommended and announced by the Company on 25 March 2019 by 30 June 2019, shall also constitute a Put Option Exercise Event.” (underline added)

The plaintiff’s case

27.  As the defendants take serious issue with the pleas on this alleged event, it is necessary to set out the relevant paragraphs in the re-amended statement of claim below:

“9. On or about 7 May 2019 the Plaintiff and the 1^st Defendant entered into [the Letter Agreement] amending certain terms of the Option Agreement whereby, in consideration of the Plaintiff agreeing, inter alia, to extend the Maturity Date (as defined in the Option Agreement) … to 5 December 2019 and thereby to defer commencement of the Put Option Exercise Period … [it] was agreed that …

(a) …

(b) any failure of Xiwang Special Steel to pay to the Plaintiff the dividend recommended and announced by Xiwang Special Steel on 25 March 2019 (in its 2018 Annual Results) by 30 June 2019 shall also constitute a Put Option Exercise Event.

10. Prior to 11 September 2019 various Put Option Exercise Events occurred, each of which gave rise to a right by the Plaintiff to exercise the Put Option. As at the date of this Re-Amended Statement of Claim the Defendants continue to breach their undertakings under the Option Agreement and Guarantees, which breaches have given rise to additional Put Option Exercise Events.

Particulars

The following Put Option Exercise Events occurred prior to 11 September 2019:

(a) The Plaintiff did not receive from Xiwang Special Steel Limited, and as at the date hereof has still not received, the dividend recommended and announced by Xiwang Special Steel in its 2018 Annual Results.

…

12. In light of the matters pleaded in 9(a) and 10(a) above, including but not limited to the Plaintiff not receiving the dividend recommended and announced by Xiwang Special Steel in its 2018 Annual Results, the Exercise Price of HK $192,500,000 demanded in the 11 September Notice was calculated by multiplying the balance of the 110,000,000 Option Shares by HK $1.75 per share.” (underline added)

28.  It is the plaintiff’s case that the Letter Agreement contained two mistakes and, as a matter of construction, it should read instead as follows (“the Correct Version”):

“any failure of the Company to pay AEVL the dividend recommended and announced by the Company on 29 March 2019 by 8 July 2019, shall also constitute a Put Option Exercise Event”

29.  In support, the plaintiff primarily relies on two pieces of evidence. 

30.  First, the announcement made by the Listed Company in respect of its 2018 annual results (“the Announcement”).  The Announcement was dated 29 March 2019.  It contained the following passage in relation to the payment of dividend:

“The Board recommended the payment of a final dividend of RMB12.8 cents per ordinary share, for the year ended 31 December 2018 to the shareholders of the Company whose names appear on the register of members of the Company at the close of business on Wednesday, 19 June 2019.  The payment of final dividend on Monday, 8 July 2019 are subject to the approval of the shareholders of the Company at the forthcoming Annual General Meeting of the Company (the “AGM”) to be held on Thursday, 6 June 2019.  …” (underline added)

31.  Second, the WeChat message sent by the defendants to a Huang Chunsheng, the broker acting for the defendants, who forwarded it to the plaintiff on 10 July 2019.  The message read:

“I re-audited our previous agreement and found several instances of inaccuracies regarding the agreed time, as indicated in the screenshot below. We did not file any announcement on March 25^th – our first public announcement on dividend distribution was enclosed in the March 29^th annual revenue disclosure and even then (in the March 29^th disclosure), we only disclosed the amount of the distribution but not the date. The date of the distribution was disclosed in the April 29^th annual report, which specified the distribution date as July 8^th. Given that the agreement contains the aforementioned inaccuracies, I wonder if a discussion can be arranged with the investor to amend the relevant agreements and change the dividend distribution date to September 6^th. Thank you!”

32.  In light of the above evidence, Mr Manzoni submitted that it is clear that the two dates in the Letter Agreement were mistakes and the unambiguous objective intention of the parties must be that when they signed the Letter Agreement, they were referring to the dates in the Correct Version. It is not in dispute that as of the date of the Notice, the Listed Company had not paid the dividend in accordance with the Announcement.  There is therefore no doubt that upon a correct construction of the Letter Agreement, the Dividend Event took place.   The plaintiff was entitled to exercise the put option.

The defendants’ case

33.  Mr Chan’s submissions are twofold.  First, the plaintiff’s pleaded case is fundamentally defective and hence not prima facie sustainable. Second, there are plainly triable issues as to the true effect of the Letter Agreement.

34.  On the pleading, Mr Chan submitted that there could not possibly be any failure to pay any dividend recommended or announced on 25 March 2019 as it is not in dispute that the Listed Company did not recommend or announce any dividend on that date.  Further, the case now advanced by the plaintiff in the reply affirmation deviates materially from the pleading and cannot salvage the plaintiff’s claim.  Lin alleged for the first time in his reply affirmation that the terms of the Letter Agreement were mistaken and that the Letter Agreement should have read as per the Correct Version.

35.  Mr Chan highlighted the following in the re-amended statement of claim: 

(1)   There is no mention of any mistake on the dates in the pleading. 

(2)   There is no plea in which the plaintiff contends what the true effect of the Letter Agreement should be. 

(3)   No material facts are pleaded in support of the true effect whether as a matter of rectification or interpretation. 

(4)   Where the effect of a document is material, it must be pleaded expressly.  There is no such plea.

36.  In sum, Mr Chan argued that the case which the plaintiff is now running is found only in the reply affirmation and does not form part of its pleaded case.  Because of that, the defendants have had no reasonable opportunity and, more importantly, are under no obligation to answer the latest reply evidence.

37.  For that reason alone, summary judgment ought to be refused.

38.  On triable issues, Mr Chan submitted that the plaintiff’s own evidence is problematic.  There is no evidence to suggest that either party referred to the Announcement when signing the Letter Agreement or that the date of 8 July 2019 had been agreed.

39.  Further, the defendants have adduced evidence to the effect that the reference to “30 June 2019” in the Letter Agreement was intended to be a reference to a quarterly cut-off and by mistake the parties had referred to the end of the second quarter rather than the end of the third quarter.  The date of 8 July 2019 for the distribution of dividends was not set in stone.  It is not incredible or even improbable that the parties agreed to a buffer period by reference to the third quarter date of 30 September 2019 (which is after the Notice was issued). 

40.  The relevant evidence is to be found in Sun’s affirmation (at para 12):

“(b) It should be noted that no dividend was in fact recommended and announced by Xiwang Special Steel on 25 March 2019. …

(c) Xiwang Special Steel first announced its 2018 dividends only when it issued its 2018 Annual Results on 29 March 2019 … In that announcement, it is noted that the date for payment of the final dividend was tentatively set on 8 July 2019 (see page 41 of the announcement) and subject to approval of the shareholders of the Company at the AGM to be held on 6 June 2019. Prior to this, there had never been any announcement by Xiwang Special Steel to pay 2018 dividends “by 30 June 2019” (as stated in the Letter Agreement). …

(d) In any event, given the matters elaborated in paragraphs 12(b) and 12(c) above, throughout negotiations between the Plaintiff and the Defendants in April 2019 to May 2019 on including an additional Put Option Exercise Event, being the failure of Xiwang Special Steel to pay the Plaintiff a dividend to be recommended and announced by Xiwang Special Steel, I believe it could not have been contemplated between the parties that such dividend will be paid by the end of second quarter of the 2019 financial year (i.e. 30 June 2019 as recorded in the Letter Agreement). I believe that a failure to pay such dividends by the end of third quarter of the 2019 financial year, being 30 September 2019, was in fact what was in contemplation between the parties having regard to the surrounding background facts, in particular the fact that the 29 March 2019 announcement only had a tentative plan for payment of dividends in July 2019 at the earliest. The erroneous date of “30 June 2019” in the Letter Agreement was simply an oversight made by the parties. …” (underline added)

41.  The defendants contend that the issue of what should have been the correct date for the payment of the dividend as contemplated in the Letter Agreement is plainly a triable one.  There are reasonable grounds for supposing that a fuller investigation of the facts at trial might make a difference on how the Letter Agreement should be construed or rectified.

Ruling

42.  I shall first deal with the pleading point.

43.  I accept that some of the criticisms raised by Mr Chan on the re-amended statement of claim are validly made. 

44.  The present case run by the plaintiff is that the Letter Agreement contained two mis-stated dates.  It now contends that as a matter of construction the dates of “25 March 2019” and “30 June 2019” should have read “29 March 2019” and “8 July 2019”, respectively, instead.  That really is the crux of the plaintiff’s case in relation to the Dividend Event.  However, the pleader chose instead to simply reproduce the wrong dates, ie the original dates appearing in the Letter Agreement, in para 9(b) of the re-amended statement of claim.  (I should put on record here that the pleading was prepared by the plaintiff’s former solicitors.)  Furthermore, there is no explicit plea to state what the correct dates should be. 

45.  That said, however, if one looks at the pleading as a whole, I am satisfied that it can still be said that the pleading does disclose the present case run by the plaintiff.  I say so for a number of reasons.

46.  First, at the hearing, Mr Manzoni highlighted para 10(a), which effect is to link the failure to pay the dividend directly to the “2018 Annual Results” (“The Plaintiff did not receive ... the dividend recommended and announced by Xiwang Special Steel in its 2018 Annual Results”).  As such, the plaintiff has made it plain that it was the failure to pay the dividend as announced in the 2018 Annual Results which constituted the Put Option Exercise Event.  This is the subject-matter of the complaint.

47.  Secondly, apart from para 10(a), one can readily deduce from the express references to “its 2018 Annual Results” also appearing in paras 9(b) and 12 that the alleged failure to pay relates to the dividend which was recommended and announced in the 2018 annual results.  Again, from such references, it is clear that the subject-matter of the plaintiff’s complaint is the failure to pay as announced in the 2018 annual results. 

48.  Accordingly, if one looks at the substance of the plaintiff’s complaint in this regard and reviews the pleading as a whole, the pleading does disclose the case presently run by the plaintiff.

49.  Thirdly, while the re-amended statement of claim is open to the criticisms as set out above, I do not think that one can reasonably say it is so fundamentally defective as to be inadequate to support the plaintiff’s present case.  I ask myself the fundamental question – when faced with this piece of pleading, do the defendants know what case they are supposed to meet?  I would answer the question yes.  As Mr Manzoni put it in his oral submissions, here, everyone knows what everyone else is talking about.  I share that observation.

50.  I therefore reject Mr Chan’s submission that the re-amended statement of claim is prima facie unsustainable to support the plaintiff’s claim.  Viewed on its own, summary judgment can prima facie be granted on the strength of the pleading, subject to the issue of triable issues.

51.  In light of this conclusion, I must also reject Mr Chan’s submission that the plaintiff’s present case, as disclosed in the reply affirmation, represents a material deviation from the re-amended statement of claim.  On the contrary, the reply affirmation is entirely consistent with the plea.

52.  In fact, as early as in the supporting affirmation, Lin had already made it clear that the Dividend Event would take place if the dividend was not paid by the date referred to in the Announcement.  A copy of the Announcement was indeed exhibited to the affirmation.  The page in which the dividend was reported and the date of 8 July 2019 was mentioned was expressly referred to by its page number in the body of the affirmation.

“On or about 29 March 2019, Xiwang Special Steel released its “Annual Results Announcement for the Year Ended 31 December 2018” (the “2018 Annual Results”).  At page 41 of the 2018 Annual Results Xiwang Special Steel announced that the Board of Xiwang Special Steel had recommended the payment of a final dividend of RMB12.8 cents per ordinary share for the year ended 31 December 2018 to the shareholders of Xiwang Special Steel.  At pages 119 to 162 of “LXZ-1” is a true copy of the 2018 Annual Results.

…

The consideration for the extension of the Maturity Date was very important to AEVL.  It only agreed to the extension of the Maturity Date, and the reduction of the Exercise Price to HK$1.60 per share, on the strict condition that Xiwang Special Steel would make payment of the dividend announced in the 2018 Annual Results by the date referred to therein.  In turn, AEVL protected itself against the possibility of the dividend not being paid by putting in place an accelerated Put Option Exercise Event allowing it to exercise the Put Option at a higher Exercise Price (namely HK$1.75 per share).” (underline added)

53.  It is true that in his first affirmation, Lin did not expressly say that there were mistakes in the Letter Agreement.  But that point was obviously not lost on the defendants.  In the opposing affirmation (as extracted in para 40 above), Sun himself referred to the date of “30 June 2019” as “erroneous” and described it as “an oversight made by the parties”.  The issue as to what the correct date should have been was already at the heart of the dispute when affirmation evidence was filed by both sides. 

54.  I therefore reject the defendants’ contention that they had had no opportunity to address the issue fully.  The issue did not emerge only when the plaintiff filed its reply evidence.  It has been an evident issue since the pleading was served and the first supporting affirmation filed.  The pleading was not crafted as explicitly as one would reasonably hope.  But for the defendants to now suggest that they did not know what case they were to meet is unreal.  That suggestion ought to be rejected.

55.  I now turn to the triable issue point.

56.  The principles on the construction of a contract are well-established. The question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean.  The courts do not easily accept that people have made mistakes in formal documents.  In some cases, however, the context and background would drive a court to the conclusion that “something must have gone wrong with the language”.  In such a case, the law would not require a court to attribute to the parties an intention which a reasonable person would not have understood them to have had.  It requires a strong case to persuade the court that something must have gone wrong with the language.  But where such a case is established, the court may correct the mistake as a matter of construction.  Before it does so, it needs to be satisfied, first, that there is a clear mistake on the face of the document and, secondly, it must be clear what correction ought to be made in order to cure the mistake: Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at paras 14-15, 22-25, per Lord Hoffmann.

57.  The present case turns on the construction of the two dates in the Letter Agreement.  The plaintiff’s case is that they were mis-stated.  The correct dates should have been 29 March 2019 and 8 July 2019. 

58.  As regards the first date, I would consider that it is indisputable that it should have read 29 March 2019, as contended by the plaintiff, as a matter of construction.  The objective background facts are that the Listed Company did not make any announcement concerning dividend on 25 March 2019 but it did on 29 March 2019.   Against that factual backdrop, a reasonable person would have no doubt in his mind that the first date was a mistake and the correct date should be the date on which the Listed Company actually issued the Announcement.  That must be the objective intention of the parties.  I do not understand the defendants to be holding a different view. 

59.  The material question is what the second date should have read.  The plaintiff contends that it should be construed to mean 8 July 2019.

60.  In the construction exercise, I am required to look at the context of the Letter Agreement and the surrounding factual circumstances in which it was made.  Here, the context is that the parties were incorporating a new Put Option Exercise Event which related to the payment of dividend as announced in the 2018 annual results of the Listed Company.  The relevant passage in the Announcement is reproduced in para 30 above.  It expressly referred to the date of 8 July 2019.  It is true that it was a tentative date as that was subject to the approval of the shareholders in the upcoming annual general meeting. However, apart from that caveat, the Announcement referred to no other date. It would follow that in the absence of any other evidence suggesting a different date, objectively speaking, when the Letter Agreement was entered into (in early May 2019), the parties must have contemplated that 8 July 2019 was the relevant date for the new Put Option Exercise Event.  The plaintiff’s case is fully supported by the Announcement, which is of course a piece of contemporaneous document.

61.  The defendants accept that the date of 30 June 2019 was a mistake.  But they contend that based on the evidence of Sun, what the correct date should be is an issue that needs to be tried.  It is worth reminding ourselves the exact scope of Sun’s evidence in this regard.  He said:

“I believe that a failure to pay such dividends by the end of third quarter of the 2019 financial year, being 30 September 2019, was in fact what was in contemplation between the parties having regard to the surrounding background facts, in particular the fact that the 29 March 2019 announcement only had a tentative plan for payment of dividends in July 2019 at the earliest.”

62.  There is no immediate logic why the surrounding background facts would lead to the conclusion reached by Sun that the parties were contemplating 30 September 2019 to be the relevant date.  It is no more than a bare assertion. Sun did not elaborate why he came to this belief.  He did not refer to any discussion between the parties which would suggest that to be the case.  He did not refer to any specific context which would support his belief. 

63.  Here, the relevant timeline is this.  On 29 March 2019, the Listed Company issued the Announcement.  It referred to a tentative payment date of 8 July 2019.  On 7 May 2019, the parties concluded the Letter Agreement, agreeing to a new Put Option Exercise Event relating to the non-payment of the dividend as announced by the Listed Company.

64.  Against this timeline, it seems inherently implausible that the parties would have contemplated 30 September 2019 to be the relevant date as it was much later than 8 July 2019 which was the date recently announced by the Listed Company.  Sun has not suggested any background context which would explain why the parties were contemplating 30 September 2019.  In the absence of such an explanation, Sun’s assertion goes contrary to the objective contemporaneous document.  The assertion is inherently implausible and hence factually incredible.

65.  I accept Mr Manzoni’s submission that in light of the indisputable factual background and objective contemporaneous document, the present case is one in which summary judgment can be given straightaway and there is no need for any further investigation of the facts as it is not reasonably expected that it would make a difference to the construction of the Letter Agreement.  Here, it is agreed that the date of 30 June 2019 was a mistake and, taking into account the relevant factual matrix, it is clear that the correct date, as a matter of construction, should be 8 July 2019.  The different date suggested by the defendants is not arguable as it is not supported by any evidence save for Sun’s bare assertion which is inconsistent with inherent probabilities and the contemporaneous document.

66.  I should mention that in the construction exercise, I have not given much weight to the WeChat message relied upon by the plaintiff.  That message was sent after the event and, as such, the light it may shed on the issue is arguable.  Furthermore, on the face of it, the message itself seems to contain some mistakes.

67.  The only issue between the parties in relation to the Dividend Event is resolved in favour of the plaintiff.  The plaintiff has therefore succeeded in establishing its entitlement to exercise the put option under this ground.

THE SHAREHOLDING EVENT

68.  The relevant contractual provisions relating to the Shareholding Event are to be found in the Guarantee:

“The Guarantor shall at all times remain a Controlling Shareholder of the Company and the beneficial owner of not less than 66.35% of the total issued shares of the Company.” (Clause 6.1(e))

“Each of the events or circumstances set out in this Clause 8 shall constitute a Guarantor Event of Default:

…

(c) the Guarantor fails duly to perform or comply with any of the obligations expressed to be assumed by it under any other provision of this Guarantee and, if capable of remedy, such failure is not remedied within fourteen (14) days after AEVL has given notice to it or it becomes aware of the failure to perform or comply;” (Clause 8(c))

69.  In short, the structure of the Agreement is this.  The guarantor has undertaken to comply with clause 6.1(e).  But a failure to do so in itself does not yet amount to a “Guarantor Event of Default”.  By virtue of clause 8.3(c), if it is capable of remedy, the guarantor has a grace period of 14 days to remedy.  If, however, the failure persists after the grace period, it becomes a “Guarantor Event of Default”. Under the Agreement, a Guarantor Event of Default constitutes a Put Option Exercise Event.

The plaintiff’s case

70.  The plaintiff’s case is straightforward.  As of the date of the Notice, the 2^nd defendant was not the beneficial owner of at least 66.35% of the Listed Company.  In support, the plaintiff relies on the Corporate Substantial Shareholder Notice filed by the 2^nd defendant with the Hong Kong Stock Exchange showing that in fact since 12 December 2018 it only beneficially held 66.12% of the shares.  The 2^nd defendant must be taken to have been aware of the shortfall in its shareholding in violation of clause 6.1(e) of the Guarantee when it filed the Notice itself.  Even assuming that the breach was capable of remedy, the 2^nd defendant did not remedy it within the 14-day grace period allowed under clause 8(c) of the Guarantee.  Hence that amounted to a Guarantor Event of Default, which is a Put Option Exercise Event.

71.  Hence the Shareholding Event existed as of the date of the Notice.  The plaintiff was entitled to exercise the put option on that day.

The defendants’ case

72.  Similar to the Dividend Event, Mr Chan, again, took issue with the pleading and further submitted that there was a triable issue as to whether the Shareholding Event had occurred.

73.  In the re-amended statement of claim, the relevant plea appears in para 10(b)(i):

“The 2^nd Defendant committed the following Guarantor Events of Default:

(i)         it no longer (indirectly) beneficially owns 66.35% of Xiwang Special Steel Limited, in breach of clause 6.1(e) of the D2 Guarantee;”

74.  Mr Chan submitted that there is nothing in the pleading to suggest either that the plaintiff had given notice to the 2^nd defendant or that the 2^nd defendant became aware of the failure to comply with clause 6.1(e) prior to the issue of the Notice.  The plaintiff should not be allowed to rely on un-pleaded facts in support of the summary judgment application.

75.  On the substantive merits, Mr Chan argued that there is a dispute of fact which cannot be disposed of summarily.  First, it is arguable that the shortfall in the shareholding can be remedied by the 2^nd defendant.  Secondly, the 14-day grace period only starts to run from the day when the 2^nd defendant becomes aware of the failure to comply.  Sun said in his affirmation that the shortfall was insignificant and immaterial and that this “pure technical breach” could be easily remedied had the 2^nd defendant been made aware of this on the day of the Notice. 

76.  On the issue of awareness, Mr Chan submitted as follows:

“The provision [in clause 8(c)] requires that D2 “becomes aware of the failure to perform or comply”, and it is at least reasonably arguable that on a proper construction of this provision, D2 must not only have knowledge of the bare fact that it was the beneficial owner of less than 66.35% of the total issued shares in ListCo, but that it was aware that such a state of affairs was in contravention of the provisions of the D2 Guarantee. Given the very small shortfall (of less 0.23%) it is not surprising that D2 was not aware that it had fallen foul of the requirement under Clause 6.1(e) as deposed by Mr Sun.” (original emphasis)

77.  Given that there is a triable issue as to whether the 2^nd defendant had become aware of its breach as of the date of the Notice, no summary judgment should be given in respect of the Shareholding Event.

Ruling

78.  In my view, there is no merit in the defendants’ opposition, whether on the pleading or on the merits.

79.  While the plea with regard to the Shareholding Event is a short plea, there is no ambiguity as to what the plaintiff means and what case the defendants are supposed to meet.  If the defence is that the breach had not yet materialised by operation of clause 8(c), it would be for the defendants to reply to that effect.  I do not think that in the present case, it is incumbent on the plaintiff to anticipate potential defences in its pleading.

80.  On the merits, I should first note that it is admitted by the defendants in evidence that the shareholding of the 2^nd defendant as of the date of the Notice in fact fell below the 66.35% threshold.  I am also prepared to proceed on the basis that the breach was capable of remedy as the 2^nd defendant arguably would have the resources to purchase enough shares in the market to make up the shortfall. 

81.  However, I am unable to agree with Mr Chan that it is arguable that the 2^nd defendant was not aware of its breach of clause 6.1(e) such that the 14-day grace period did not start to run before the issue of the Notice.

(1)   By filing the Corporate Substantial Shareholder Notice on 12 December 2018, the 2^nd defendant must be taken to have been aware of its own shareholding in the Listed Company.

(2)   Being a party to the Guarantee, the 2^nd defendant must be taken to have been aware of its terms, including clauses 6.1(e) and 8(c).

(3)   Putting the two together, it must follow that the 2^nd defendant must be taken to have been aware of its own breach of clause 6.1(e) latest by 12 December 2018.  That means that the 14-day grace period had long lapsed prior to the issue of the Notice.

(4)   In Mr Chan’s submissions, he said that the 2^nd defendant was not aware that it had fallen foul of the requirement in clause 6.1(e) as deposed by Sun. 

(5)   I do not think that Sun did unequivocally say that the 2^nd defendant was not so aware.  But even if he did say so in his affirmation, that evidence is simply beside the point. 

(6)   Even if, factually, it did not occur to anyone within the 2^nd defendant that the shortfall amounted to a breach of the Guarantee, it would be the 2^nd defendant’s own internal problem. It offends common sense for one to suggest that the 2^nd defendant needed to be told that it was in breach in order for it to “become aware of” its breach when at all times it was in possession of all the information relating to its own breach.

82.  The Shareholding Event is clearly established on the objective evidence.  The defence raised is unarguable.  The plaintiff is entitled to exercise the put option also under this ground.

THE LITIGATION EVENT

83.  The relevant contractual provisions relating to the Litigation Event are to be found in the Guarantee:

“The Guarantor shall supply to AEVL: (i) promptly upon becoming aware of them, the details of any litigation, arbitration or administrative proceedings which are current, threatened or pending against it and any of the Guarantor’s subsidiaries (if any), and which if adversely determined, are reasonably likely to have a material adverse effect; …” (Clause 6.1(h))

84.  Unlike clause 6.1(e), there is no grace period allowed for the clause 6.1(h) undertaking. 

85.  Having considered the parties’ submissions, I am of the view that the defendants have raised triable issues as to whether the Litigation Event is made out.  In light of that and given my earlier ruling that the plaintiff was entitled to exercise the put option based on the Dividend Event and the Shareholding Event, I shall be brief in my reasoning under this ground.  The reasons below are not exhaustive.

86.  The plaintiff’s case is that the 2^nd defendant failed to notify the plaintiff of litigation in respect of itself and that is in breach of clause 6.1(h).  In terms of evidence, the plaintiff relies on a credit reference report prepared by Tianyancha, a credit reference agency.  Lin deposed in his affirmation that the report discloses “multiple cases of litigation commenced against the 2^nd Defendant” between the date of the Option Agreement and the date of the Notice.  Lin did not say anything about whether these cases would likely have a material adverse effect on the 2^nd defendant.

87.  Mr Chan pointed out, correctly, that the plaintiff made no effort at all to set out in its evidence which of the litigation cases identified in the credit reference report are relevant.  Further, upon a review of the cases, it was revealed that:

(1)   One case was commenced after the date of the Notice.

(2)   A number of cases were brought by the 2^nd defendant, not against it.

(3)   Some other cases had been withdrawn by the respective claimants.

88.  It is plainly arguable that these cases do not come within the scope of clause 6.1(h).  In this summary judgment application, the plaintiff ought to have identified the relevant litigation cases in its evidence.  It did not do so.  Instead it simply exhibited the entire report to the affirmation, without distinguishing the relevant cases from the irrelevant ones.    

89.  In light of the above revelations and in the absence of any prima facie evidence at all on the materiality of the rest of the litigation cases, it seems clear enough that the Litigation Event needs to be tried.  A fuller investigation of the facts is needed before the court can adjudicate on the claim properly.  Summary judgment should not be entered under this ground.

THE NEGATIVE PLEDGE EVENT

90.  The relevant contractual provisions relating to the Negative Pledge Event are to be found in the Guarantee:

“The Guarantor shall not and shall procure each of the Guarantor’s subsidiaries (if any) not to permit to exist on any of its assets or undertaking any Security Interest save as permitted by the Transaction Documents or as disclosed to AEVL and approved by AEVL in writing.” (Clause 6.1(k))

91.  Like clause 6.1(e), clause 8(c) of the Guarantee applies to the clause 6.1(k) undertaking.  This provides for a grace period of 14 days.

92.  Having considered the parties’ submissions, I am of the view that the defendants have raised triable issues as to whether the Negative Pledge Event is made out.  In light of that and given my earlier ruling that the plaintiff was entitled to exercise the put option based on the Dividend Event and the Shareholding Event, I shall be brief in my reasoning under this ground.  The reasons below are not exhaustive.

93.  The plaintiff’s case is that the 2^nd defendant was in contravention of the negative pledged stipulated in clause 6.1(k).  Since 29 August 2019, almost all of its shares in its majority owned and controlled subsidiary, Xiwang Foods Co Ltd, has been pledged to Shandong International Trust Co Ltd.  This is evidenced by public disclosures made in the PRC.

94.  The defendants raise a number of defences.  They say, most notably, that even if the pledge constituted a breach of clause 6.1(k), it is capable of remedy in that the 2^nd defendant may take steps to discharge or release the pledge.  Further, clause 8(c) applies such that the breach does not constitute a Guarantor Event of Default until the expiry of at least 14 days upon notice being given to the 2^nd defendant or the 2^nd defendant becoming aware of the breach.  Mr Chan submitted that given that the breach took place on 29 August 2019, it cannot possibly constitute a Guarantor Event of Default until 12 September 2019 at the earliest, which is one day after the issue of the Notice.  Hence, the plaintiff was not entitled to exercise the put option under this ground as of the date of the Notice.

95.  I am of the view that whether the breach is capable of remedy is a factual issue which should go to trial.  It is simply not possible for the court to come to a definitive view one way or the other without a fuller investigation of the factual circumstances surrounding the pledge.  On that basis, if the defendants succeed on the “capable of remedy” issue, the Notice would be one day short.  The plaintiff would not be entitled to rely on the Notice to exercise the put option based on this event.  Summary judgment ought not to be granted under this ground.

THE RELIEF

96.  The plaintiff has succeeded in showing its entitlement to exercise the put option by the Notice.  The remaining question is what relief should be granted in this action. 

97.  The plaintiff asks for judgment for the liquidated sum of HK$192,500,000 (ie the Sum).  The figure represents the “Exercise Price” which is payable by the 1^st defendant upon the exercise of the option.  It is calculated in accordance with the formula set out in the Letter Agreement.

98.  At the end of the hearing, I raised the question whether the claim should be for a liquidated sum or for unliquidated damages. In the latter case, the proper relief would be for judgment to be entered on liability only, with damages to be assessed. 

99.  Generally speaking, a put option, once exercised, is analogous to an agreement for the sale and purchase of the subject-matter of the put option.  If the buyer fails to pay the purchase price, the seller may sue for damages.  Prima facie the measure of damages would be the contract price less the market price at the contractual time for completion.  This would normally be able to put the seller in the position he would have been in had the contract been carried out, since he can sell the shares in the market: McGregor on Damages (20^th ed) at para 29-009.

100.  Hence, at first blush, the plaintiff’s claim for the full Exercise Price, which is the equivalent of the full contract price in the sale and purchase situation, seems to be incorrect as this seems to have ignored the plaintiff’s own obligation to deliver the Shares. 

101.  Mr Manzoni stated at the hearing that the plaintiff is still holding on to the Shares and it will be in a position to deliver once it receives the Sum from the defendants. 

102.  The Shares being listed shares, their value is expected to fluctuate from time to time.  I do not know the market trend for the Shares since 18 September 2019.  Under Mr Manzoni’s suggested approach, arguably, the parties would not be put back in the same position as if the breach had not occurred on 18 September 2019.  This is because when the Shares are eventually delivered to the 1^st defendant (if payment is made), their market price at that time may be higher or lower than the market price as at 18 September 2019. 

103.  I therefore asked parties to lodge further submissions on what the proper relief should be.

104.  Having further reviewed the relevant contract terms, I have come to the view that the position adopted by the plaintiff is in line with the contractual intention of the parties and is correct as a matter of law.

105.  The measure of damages set out in para 99 above is by way of general observation having regard to the generic nature of a put option.  However, in each particular case, one should go back to the contractual document to examine precisely what the parties have agreed.

106.  In the present case, the parties agreed to the express terms in clause 4 of the Option Agreement, which provided for how completion should take place.  I have reproduced clauses 4.2 and 4.3 in para 19 above. The important point here is that under clause 4.2, it was expressly agreed that the 1^st defendant shall pay the Exercise Price and the plaintiff “shall then deliver” the transfer documents (which, in essence, represent the Shares).  By using the word “then”, it is tolerably clear that the parties were not contemplating simultaneous exchange at completion.  Rather, the parties intended that the 1^st defendant should pay first and only then should the plaintiff deliver the transfer documents. 

107.  If there is any doubt about the sequence of events contemplated by the parties, clause 4.3 definitively removes that doubt.  It provided that the plaintiff “is only obliged to complete the sale of the Option Shares … when [the 1^st defendant] complies with its obligations pursuant to this Agreement in all material respects”. 

108.  Hence, I am of the view that when clauses 4.2 and 4.3 are read together, the parties intended, objectively, that the plaintiff’s obligation to deliver the Shares only arises after, and not at the same time as, the 1^st defendant has completed its obligation to pay the Sum.

109.  In the present action, the plaintiff makes its claim based on the 1^st defendant’s breach of its obligation to pay pursuant to clause 4.2.  The amount payable is calculated in accordance with a pre-determined formula.  The claim is therefore a liquidated one.  As long as the Sum remains unpaid, the plaintiff’s obligation to deliver does not arise.  That being the case, the plaintiff should be entitled to the liquidated sum.  Under the contractual framework, the market value of the Shares as of 18 September 2019 is simply irrelevant, given that the contract did not provide for simultaneous exchange at completion.

110.  Mr Manzoni also pointed out that the Agreement has not been terminated as of now.  Once the Sum is paid, the plaintiff is obliged to perform the rest of the contract.  There is no reason right now for the court to impose any condition on the judgment, such as entering judgment subject to an undertaking from the plaintiff to deliver the Shares afterwards. 

111.  I agree.  That is in accordance with the objective intention of the parties, as deduced from the terms of the Agreement. Furthermore, when faced with the 1^st defendant’s breach, it is open to the plaintiff to elect to treat the Agreement as continuing as the contract remains executory: Chitty on Contracts (33^rd ed), para 24-001.  The plaintiff has done just that.

112.  The proper relief which should be granted to redress the 1^st defendant’s breach is therefore to enter final judgment for the Sum. 

113.  The master awarded interest on the Sum at the contractual rate from 19 September 2019 until the date of full and final payment.  Costs were awarded against all defendants on an indemnity basis.

114.  At the hearing, I asked Mr Chan whether he would take any issue with the interest and costs sought by the plaintiff and ordered by the master.  He answered no.  For that reason, I would not disturb the master’s decision in this regard.

ORDERS

115.  I uphold the master’s decision to grant summary judgment.  I dismiss the defendants’ appeal.

116.  I make an order nisi that the plaintiff do have costs of the appeal, which will be summarily assessed on an indemnity basis.  The plaintiff has lodged its statement of costs.  If the defendants have any comment, they should lodge a list of objections, not exceeding 3 pages, within 14 days of the handing down of this decision.  The summary assessment will be conducted on the papers after the deadline.