SUCCESS FOREVER ENTERPRISES LTD AND ANOTHER v. JUMBO UP GROUP LTD AND OTHERS

HCA 1189/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1189 OF 2012

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J U D G M E N T

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1. Under an agreement for sale and purchase (“Agreement”) made between the 1st plaintiff Success Forever Enterprises Ltd (“Success”), the 2^nd plaintiff Rich Shine Investments Ltd (“Rich”), the 1st defendant Jumbo Up Group Ltd (“Jumbo”), the 2nd defendant Union Rich Investments Ltd (“Union”) and the 4th defendant Jungle Eagle Ltd (“Jungle”), Success agreed to sell to Jumbo 70% of the issued shares of Boost Time Investments Ltd (“Boost”), and the rights and interests in the shareholders’ loan owed by Boost to Success (“Boost Transaction”). At the time of the Agreement, Jumbo and Jungle were respectively the owners of 20% and 10% of the issued shares of Boost. At the material time, Boost’s only asset was its 80% shareholding in Du Shi International Holding and Enterprises Company Ltd (“Company”), which in turn owned and operated a golf resort in Hainan in Mainland China. The consideration for the sale and purchase under the Agreement was HK $919,089,205.27 (“Boost Consideration”). An initial deposit of HK $50 million was paid upon the execution of the Agreement on or about 26 January 2010, and a further deposit of HK $50 million was paid by 25 February 2010.

2. At the same time, Rich agreed to purchase from Union 20% of the issued shares of another company, Newrich Holdings Ltd (“Newrich”), together with the rights and interests of a shareholders’ loan owed by Newrich to Union (“Newrich Transaction”).  The consideration for the Newrich Transaction was to be HK $252,151,424.26 (“Newrich Consideration”).  Clause 3 (9) of the Agreement expressly provides that in the event of Jumbo’s default in completing the Boost Transaction as agreed, the Newrich Consideration should be reduced from HK $252,151,424.26 to HK $168,100,949.57, with the difference of HK $84,050,474.79 (“Agreed Reduction”) to be refunded by Union to Rich.

3. For the purpose of securing, amongst other things, the due performance of the obligations of Jumbo under the Boost Transaction, and the obligations of Union under the Newrich Transaction, each of Jumbo and Jungle executed a Deed of Share Charge dated 26 January 2010 (“Charge”), as well as a deed of assignment of loan, in favor of Success.  Under the Charge, Jumbo charged its 20% shareholding and Jungle charged its 10% shareholding in Boost in favor of Success, and each of Jumbo and Jungle deposited with Success a blank instrument of transfer regarding the transfer of its shareholding, together with the undated board minutes of Boost approving the transfer of the charged shares from Jumbo and Jungle to Success, and Liu’s resignation from the directorship of Boost.

4. Clause 10 of the Charge expressly provides that the Charge shall become enforceable with, inter alia, a power to sell the charged shares in the event of Jumbo’s breach of the Agreement and/or if the balance of the Boost Consideration and the Agreed Reduction is not paid by Jumbo and Union in full upon its becoming due.

5. The 3^rd defendant (“Liu”) also executed a Deed of Guarantee dated 26 January 2010 (“Guarantee”) in favor of Success and Rich, whereby Liu guaranteed the performance of the obligations of Jumbo and Union under the Agreement.

6. It is not disputed that after payment of the initial and further deposits, Jumbo failed to pay the balance of the Boost Consideration and failed to complete the Boost Transaction.  Success accepted Jumbo’s repudiation of the Agreement, and forfeited the initial and further deposits in the total sum of HK $100 million.  By a Deed of Acknowledgment dated 19 September 2011 (“Deed”), each of Jumbo, Union, Jungle and Liu acknowledged that it was in breach of the Agreement and the Guarantee and that its breach had caused damage to Success and Rich.  On 21 June 2012 and by way of mitigation of its loss, Success caused Boost to enter into an agreement with Fortune Smile International Ltd to sell Boost’s entire shareholding in the Company, at a consideration of HK $850 million (“Fortune Sale”).  Completion has not yet taken place under the Fortune Sale.

7. On 10 July 2012, Success and Rich instituted proceedings for relief against the defendants.  On 12 September 2012, Success and Rich sought summary judgment under Order 86 RHC against Jumbo, Union and Liu only.  As against Jumbo, Success seeks final judgment for: (1) a declaration that the Agreement has been terminated and that Success should be discharged from further performance thereunder; (2) a declaration that Success was entitled to forfeit the initial and further deposits; and (3) interlocutory judgment for damages to be assessed in respect of Jumbo’s breach of the Agreement.  As against Union, Rich seeks final judgment for the Agreed Reduction in respect of the Newrich Transaction under the Agreement.  As against Liu, Rich seeks final judgment for the Agreed Reduction under Liu’s Guarantee.

8. The defendants do not dispute Success’s application for a declaration that the Agreement has been terminated and that Success is discharged from further performance thereunder.  However, they claim that there is a dispute over the valuation of Boost’s shareholding in the Company.  According to Liu, the assets of the Company are estimated to be over RMB5,438,000,000, and he claims that Success’s sale of Boost’s shareholding in the Company for HK $850 million is at an extreme undervalue.  Jumbo claims that Success, as chargee, owes to Jumbo a duty to account for the value of Jumbo’s 20% shareholding in Boost.

9. The defendants further claim that Success and Rich are barred from suing for damages or money due unless and until Success surrenders the charged shares to Jumbo and Jungle.  It is also claimed that there is a triable issue as to whether Success is entitled to forfeit the HK $100 million paid under the Agreement, as being penal.

10. It is trite that in resisting an application for summary judgment, the defendant must condescend upon particulars.  “A desire to investigate alleged obscurities and a hope that something will turn up on the investigation cannot, separately or together, amount to sufficient reason for refusing to enter judgment for the plaintiff” (per Megarry VC in Lady Anne Tennant v Associated Newspapers Group Ltd [1979] FSR 298).

11. The defendants have never disputed that they were in breach of the Agreement, and acknowledged by the Deed that their breach had caused damages to Success and Rich.  Success now seeks a declaration that the Agreement has been terminated and discharged by Jumbo’s breach, and for damages for breach of contract to be assessed.  The fact that the Fortune Sale has not yet been completed, and any query as to whether the Fortune Sale was at an alleged undervalue on the basis that the assets of the Company are worth more than RMB 5,438,000,000, does not constitute a defence to Success’s claim that Jumbo was in breach of the Agreement.  If, on assessment of damages after judgment on liability is entered, there is credible evidence that Success did not sustain any damage by virtue of the Fortune Sale or for any other reason, then damages may be assessed at nil.

12. I agree with Mr Chan SC that the defendants’ claim, that Success and Rich are barred from suing the defendants for damages for breach of the Agreement by virtue of the fact that Success had transferred the charged shares into its name under the Charge, is misconceived.  According to the Statement of Claim, clause 10 of the Charge executed by Jumbo and Jungle provides for the Charge to become enforceable and for Success to have power to sell the shares in the event of Jumbo’s breach of the Agreement.  Success pleads that by virtue of Jumbo’s breach, it became entitled to enforce the Charge on 20 August 2012, and that by transferring the charged shares to itself, it became the sole registered shareholder of Boost or alternatively the legal mortgagee of the shares of Jumbo and Jungle, and became entitled to sell and/or foreclose the charged shares.

13. Success does not seek, by summary judgment, an order for sale or foreclosure of the shares under the Charge.  Leading Counsel also confirmed that Success’s case is that in transferring the charged shares into its name, it was not foreclosing on the shares but was only perfecting its security under the Charge and the equitable mortgage of shares (constituted by the deposit of the blank share certificates and board minutes approving the transfer).  As Mr Chan has rightly pointed out, foreclosure can only be by an order of the Court (Re Farnol, Eades, Irvine & Co [1915] a Ch 22 at 24). 

14. Nor do the defendants dispute that Success has rights under the Charge, including the right to “forfeit” and sell the charged shares (paragraphs 5 and 6 of Liu’s affirmation filed on 3 October 2012).  Liu only claims that having forfeited and converted Jumbo’s shares in Boost, Success is bound to account for the value of the shares, and that Success and Rich are somehow unable to sue Jumbo, Jungle and any of the defendants for damages and sums payable for breach of the Agreement, unless Success surrenders the charged shares to Jumbo and Jungle.  Counsel for the defendants argued that when Success sued Jumbo, Jungle and Liu on their personal covenants to pay, the mortgagor’s right to redeem the security through payment of the debt is automatically revived, and that upon payment of the mortgage money, a mortgagee is bound to deliver the security over to the mortgagor.

15. To deal shortly with the last two points raised by counsel for the defendants, none of Jumbo, Jungle or Liu has paid any sum claimed by Success to be due to it under the Charge.  Any argument that a right to redeem the charged shares has arisen or revived is simply academic.

16. As to whether Success, as legal or equitable mortgagee, is entitled to sue Jumbo and Jungle for payment of the sums due to Success under the Agreement and as secured by the Charge, it is clear that once a mortgagee has become entitled to exercise its remedies, the mortgagee is entitled to pursue all or any of such remedies concurrently against the debtor, his assets, or the incumbered estate (para 26.11, Fisher and Lightwood’s Law of Mortgage 12th edition, citing China & South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536).  As Mr Chan has highlighted, Success has not obtained, and is not seeking, a Court order for foreclosure of the shares, and I agree that so long as any part of the debt due to Success remains unpaid, Success can claim for payment of the sums due to it under the Agreement and secured by the Charge, for possession, and for foreclosure, at the same time and in the same claim.  Success further has the right to pursue its remedies against Liu as the guarantor. 

17. I cannot see how the arguments raised in relation to the Charge can affect the relief sought by Success against Jumbo.

18. Nor can I see how the arguments concerning the Charge raise any triable issue in relation to the claim for the Agreed Reduction as made by Rich against Union, and against Liu under the Guarantee, in the event of the admitted breach by Jumbo in failing to complete the Boost Transaction.  Union is not a party to the Charge and is not in a position to raise any right to redeem any security. In any event, there is no order for foreclosure of the charged shares, and Jumbo and Jungle can at any time redeem the charged shares by payment of the sum due under the Agreement and the Charge.

19. As for Rich’s claim against Liu under his Guarantee to Success and Rich, Liu guaranteed the obligations of Jumbo and Union as principal obligor.  His liability to indemnify Success and Rich under the Guarantee is not dependent on the continuing liability of Jumbo and Union (paragraph 1-91, The Modern Contract of Guarantee, O’Donovan and Phillips).  On the evidence, I fail to see any triable issue as to Liu’s liability.

20. Finally, the defendants allege that the provisions of the Agreement entitling Success to forfeit the initial and further deposits are either penal, or unreasonable as earnest money, and should not be enforced as a genuine pre-estimate of Success’s damage.

21. The Boost Consideration under the Agreement was HK $919,089,205.27. The initial deposit and further deposit total HK $100,000,000, which is 10.1% of the purchase price.  Counsel for the defendants acknowledge that the parties have not filed any evidence at all as to whether the HK $100 million paid and forfeited is unreasonable, or whether it is justifiable in the circumstances of the Agreement.  If the defendants claim that Success is not entitled to forfeit the initial and further deposits, on the basis that they were in terrorem, or unreasonable when compared with the conventional amounts usually payable for the sale and purchase of shares in a company, it is for them to file the necessary evidence in these respects.  There is no such evidence in this case, whether factual or expert evidence.  It is not sufficient, for the purpose of resisting summary judgment, for the defendants to say that the issue should be investigated and can be resolved later  after all the evidence has been produced at trial - the oft-cited passage of Megarry VC in Lady Anne Tennant (quoted above) is clearly applicable.

22. For all the above reasons, I conclude that the assertions made by the defendants do not constitute any arguable defence, and do not raise any triable issue in relation to the claims which are the subject matter of the application for summary judgment. 

23. Accordingly, I grant judgment in terms of the draft Minutes of Order attached to the summons issued on 12 September 2012.  The order for costs will include certificate for counsel.