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HCA 1791/2010
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 1791 OF 2010
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BETWEEN
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SHANGHAI YIDU INVESTMENT CONSULTANTS COMPANY LIMITED
(上海亿都投資有限公司) |
Plaintiff |
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and
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MANDARIN INTERNATIONAL CORPORATE FINANCE LIMITED |
1st Defendant |
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LEE SING LEUNG ROBIN |
2nd Defendant |
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| Before: Deputy High Court Judge Whitehead SC in Court |
| Date of Hearing: 15 May 2014 |
| Date of Judgment: 21 July 2014 |
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J U D G M E N T
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THE BACKGROUND
1. The plaintiff is and was at all material times incorporated under the Laws of the People’s Republic of China, carrying on business as an investment company.
2. The 1st defendant is and was at all material times a company incorporated under the Companies Ordinance (Cap 32) of the Laws of Hong Kong.
3. The 2nd defendant was at all material times a director and shareholder of the 1st defendant, holding 90% of the issued shares in the 1st defendant.
4. On or about 28 December 2004, the plaintiff and the 1st defendant entered into an agreement known in these proceedings as the Lingbao Share Purchase Agreement (“the Agreement”). The Agreement provided, inter alia, that the plaintiff would provide a loan to the 1st defendant to be used for the purposes of subscribing in an IPO relating to Lingbao Gold Shares on behalf of the plaintiff. The Agreement further provided that the governing law of the Agreement would be Hong Kong law.
5. On or about 12 January 2006, the 1st defendant successfully subscribed the Lingbao Gold Shares for the plaintiff. Also on 12 January 2006, Lingbao Gold Company Limited successfully listed on the main board of the Hong Kong Stock Exchange.
6. By a later but undated Supplementary Agreement made between the plaintiff and the 1st defendant, the 1st defendant acknowledged that it had subscribed for 1.8 million shares of Lingbao Gold Company Limited on behalf of the plaintiff. It further acknowledged that after deducting related subscription fees, the purchase balance of HK$349,048.19 remained outstanding and payable by the 1st defendant to the plaintiff.
7. By an Undertaking Letter dated 12 February 2006 addressed to the plaintiff and signed by the 2nd defendant on behalf of himself and on behalf of the 1st defendant, the defendants undertook to perform the obligations under the Lingbao Share Purchase Agreement on or before 15 July 2006, and inter alia undertook to deposit the purchase balance into an account designated by the plaintiff on or before 23 February 2006.
8. On or about 14 July 2006 the 1st defendant sold the 1.8 million Lingbao Gold Shares on behalf of the plaintiff at a price of HK$7.75 per share in Hong Kong. After the deduction of relevant fees and commission, the share proceeds amounted to HK$12,668,301.
9. On 16 and 21 August 2006, the plaintiff wrote to the defendants requesting them to repay the purchase balance and the share proceeds. The defendants failed to do so.
10. On 10 January 2007 the 2nd defendant signed a Confirmation Letter for and on behalf of the 1st defendant and himself confirming, inter alia, that the total amount owing by the 1st defendant to the plaintiff was as of 31 December 2006, HK$13,873,385. The 1st defendant undertook to repay the plaintiff by 15 May 2007 with interest accrued on the total amount from 1 January 2007, at the rate of 13.8% per annum.
11. Furthermore, the Confirmation Letter provided:
“Should Mandarin International Corporate Finance Ltd fail to repay the above amount to Shanghai Yidu Investment Consultants Company Ltd before 15th May 2007, the additional breach of contract payment will be calculated at 0.1% per day on the unpaid amount. Mr Lee Sing Leung Robin (Hong Kong Permanent Identity Card No. A9735286) is willing to guarantee jointly the above repayment obligations of Mandarin International Corporate Finance Ltd.”
The Confirmation Letter was signed by Mr Lee, the 2nd defendant, as a guarantor.
12. On 11 April 2008 the 2nd defendant signed an Acknowledgment Letter for and on behalf of the 1st defendant and himself confirming, inter alia, that the 1st defendant owed an outstanding amount of HK$20,706,025 as of 31 March 2008.
13. Thereafter the plaintiff made repeated demands of the defendants for the repayment of the outstanding amount. Save for the sum of HK$500,000, no payment has been made.
14. This matter was set down for trial to begin on 15 May 2014. On 12 May 2014 solicitors for the 1st and 2nd defendants applied to this court for leave to cease to act on behalf of the 1st and 2nd defendants. This application was granted. At the trial of this action, neither the 1st nor the 2nd defendant attended the trial or participated in any way. No evidence was advanced by any witnesses on either the 1st or the 2nd defendant’s behalf.
THE PLAINTIFF’S PRIMARY CASE
15. Ms Rachel Lam, counsel for the plaintiff, submitted that the plaintiff’s primary case is a clear and straightforward one. Ms Lam submits that the two core contractual documents are the Confirmation Letter and Acknowledgement Letter which are based on the agreements in the underlying transactions, being the Lingbao Share Purchase Agreement, the Supplemental Agreement and the Undertaking Letter.
16. Ms Lam submits that all of these documents are undisputed as to their contents, and as to the fact that they have been signed by the plaintiff, the 1st and 2nd defendants. In this regard Ms Lam has referred me to the relevant parts of the defendants’ pleaded Amended Defence, and I accept that there does not appear to be any dispute in the pleadings as to the authenticity and effect of all of these documents.
17. Ms Lam thus submits that the plaintiff has established its primary case against the 1st defendant based on the Confirmation Letter and Acknowledgement Letter, and against the 2nd defendant upon the guarantee set out in the Confirmation Letter.
18. I pause at this juncture to note the obvious. Although neither of the defendants has participated in this trial, and neither defendant has called any evidence, it is still incumbent upon the plaintiff to prove its case to the requisite standard. In this regard Ms Lam has quite properly drawn the court’s attention to each of the Defences that were raised by the defendants in their Amended Defence. Ms Lam has painstakingly drawn the court’s attention to every possible matter which has been advanced in the defendants’ respective pleaded defences with the objective, inter alia, of demonstrating that her client has proven its case, and that despite the absence of the defendants in the trial, the court can nevertheless be satisfied that any matter which might have been advanced in favour of the defendants has been carefully considered.
19. I note further that whilst I have considered with care the submissions made by Ms Lam in relation to the defences advanced by the defendants in their pleadings, I have not had regard to the witness statements made by the defendants, nor their witnesses, as these have not been placed in evidence.
20. Ms Lam has addressed me on the four defences advanced by the defendants in their Amended Defence; they are:
(i) illegality;
(ii) mistake of fact;
(iii) an alleged settlement agreement; and
(iv) penalty clause.
21. I briefly consider each of these matters in turn.
(i) Illegality
22. The defendants alleged in their Amended Defence that the plaintiff as a Mainland company could not carry on any business activity unless it was authorized to do so by the company’s constitutional documents and its business licence. It is pleaded that the plaintiff would need to have prior approval from the Mainland government in order to carry on the business of foreign investment in stocks and shares outside Mainland China, and that the 1st defendant had no authority or approval to enter into the Lingbao Share Purchase Agreement, which was accordingly unlawful and unenforceable.
23. The short answer to this is that no expert evidence or indeed any evidence was adduced before the court to suggest that the plaintiff’s capacity to enter into the Lingbao Share Purchase Agreement would be adversely affected by any lack of authority and/or approval by the Mainland authorities.
24. Furthermore, in the absence of evidence of foreign law, there is a presumption that Hong Kong law applies see, for example, Excelling Profit Investments Ltd v Sera Ltd [1992] 2 HKC 262 at 268H. As noted the governing law clause is Hong Kong law, such that the lex causae is Hong Kong law.
25. Ms Lam further submits, and I agree, that the plaintiff does not need to plead or rely on any alleged illegality in suing on the Confirmation Letter, Guarantee, or Acknowledgement Letter.
26. In my view, proof of the plaintiff’s claims is in no way hampered by any aspect of illegality.
Mistake of fact
27. This matter can be dealt with shortly. The defendants have pleaded that the 1st defendant had already paid HK$2 million to the plaintiff in respect of the liability at issue, in two tranches, one on or about 30 June 2005 and another on or about 18 January 2006. Thus the defendants plead that they only signed the Confirmation Letter, and the Guarantee therein, and the Acknowledgement Letter under a mistake of fact.
28. In short the plaintiff’s case is that the payments of around HK$2 million were not related to the agreements between the plaintiff and the defendants, the subject matter of these proceedings. In this regard the plaintiff called Ms Huang Bao Ling to produce and rely upon her witness statement dated 27 December 2012 as her evidence in chief in this case. Ms Huang’s evidence makes clear that the sums in question were related to another transaction, and were in no way related to the transaction the subject matter of these proceedings. I saw no reason to in any way doubt Ms Huang’s evidence.
29. Accordingly, in my view, any suggestion of a defence of mistake of fact in no way impacts upon the plaintiff’s proof of its own case.
Alleged settlement agreement
30. Paras 17 to 32 of the defendants’ Amended Defence plead a settlement agreement in relation to monies owed by the 1st defendant to the plaintiff. In short, it is pleaded that in April 2008 the 1st defendant reached an oral agreement with a Mr Li Xun acting on behalf the plaintiff, whereby the 1st defendant agreed to transfer to the plaintiff 13,824,000 shares, and certain convertible bonds in respect of a company called Grand TG Gold Holdings Ltd. These shares and convertible bonds were, it is pleaded, at that time held by Lysaka Enterprises Ltd (“Lysaka”), and thus it is pleaded that the transfer of the shares and convertible bonds would be effected by a transfer of the entire shareholding of Lysaka to the plaintiff.
31. It is further pleaded that when Mr Li Xun ceased to be the legal representative of the plaintiff, Ms Li Ming (“Ms Li”) of the plaintiff in effect took up the oral agreement on behalf of the plaintiff, and facilitated the transfer of the shareholding in Lysaka to the plaintiff, and thus that the settlement agreement had been fulfilled.
32. It is then pleaded that at the end of 2009 or early 2010 Ms Li sought to renege on the settlement agreement, whereupon the plaintiff and 1st defendant reached a further oral agreement (through Ms Li on behalf of the plaintiff and the 2nd defendant on behalf of the 1st defendant), whereby it was agreed the 2nd defendant would help the plaintiff find buyers for the Grand shares and convertible bonds. The shares were, it is pleaded, eventually sold on 22 June 2010, but that prior to this the 1st defendant had advanced the sum of HK$500,000 to the plaintiff, as the 2nd defendant was confident that the proceeds of the Grand shares would well exceed HK$500,000.
33. In its Re‑amended Reply the plaintiff denied that Mr Li Xun had authority to enter into any such agreement with the 1st defendant. The plaintiff further pleads that there were negotiations between the 2nd defendant on behalf of the 1st defendant, and Ms Li on behalf of the plaintiff. That certain conditions for settlement were discussed and that during those negotiations and in order to demonstrate sincerity, the 2nd defendant offered to procure the transfer of the ownership of Lysaka to Ms Li. The parties would in effect then continue to “sort out” the conditions laid down by the plaintiff, which included the provision of evidence as to Lysaka’s ownership of the convertible bonds and ordinary shares in Grand TG Gold, and the value of these securities.
34. The plaintiff further pleads that the conditions precedent to a concluded settlement agreement were not complied with by the 1st or the 2nd defendant, and that in the event no settlement agreement was concluded. As to the HK$500,000 these monies were paid as part payment of the outstanding amount, and not as an advance payment of the proceeds of sale of the Grand shares.
35. Ms Li attended court and sought to produce her witness statements dated 12 December 2011, 30 April 2012 and 27 December 2012 as her evidence in chief in this matter.
36. I permitted Ms Li to produce the said witness statements as her evidence in chief save and except in relation to any matters that referred to the alleged settlement agreement. As appeared from the documentary evidence and confirmed by Ms Lam of counsel, the one share in Lysaka was in fact transferred to Ms Li. In these circumstances I felt some unease as to whether there had in fact been a settlement agreement, the transfer of the Lysaka share to Ms Li being some evidence perhaps of part performance of an already concluded agreement. In these circumstances, I decided that I needed to hear viva voce evidence from Ms Li as to the circumstances relating to the alleged settlement agreement.
37. Ms Li gave evidence that in June 2008 she met with the 2nd defendant in an effort to sort out the monies owed to the plaintiff. The 2nd defendant did propose transferring Lysaka to Ms Li, to be held by her on behalf of the plaintiff, claiming that Lysaka held shares and convertible bonds in relation to Grand TG Gold Holdings Ltd. The 2nd defendant also proposed in addition repaying HK$5 million in cash.
38. The impression I got from Ms Li’s evidence was that by this time she was completely exasperated with the 2nd defendant and the repeated attempts that had been made to obtain payment of the monies owed to the plaintiff. She further said that before negotiating further she required proof that Lysaka held the convertible bonds and ordinary shares in Grand TG Gold, and evidence of their value, which the 2nd defendant agreed to provide, so that negotiations could then continue once this relevant information was available to the plaintiff.
39. Ms Li told me that it was agreed that the share in Lysaka would be put in her name at this stage because the 2nd defendant wished to persuade Ms Li that he was in effect serious about these negotiations, and that as a gesture of good faith he was prepared at that stage to arrange for the share to be placed in Ms Li’s name before further negotiations proceeded.
40. Ms Li described how she was then asked by the 2nd defendant to attend the offices D S Cheung & Co, solicitors, to sign various corporate documents to effect the transfer. She says however that she was not given the corporate documents at that stage. It was only some two years later that D S Cheung & Co. asked her to pick up the documents, and when she did not, eventually sent the documents to her.
41. Ms Li confirmed that although she continued to chase the 2nd defendant, he never provided any evidence that the shares or convertible bonds were held by Lysaka in Grand TG Gold, nor evidence of their value or of Lysaka’s liabilities. Nor did the 2nd defendant arrange payment of the suggested HK$5 million. Ms Li further confirmed that the eventual payment of HK$500,000 was a part payment of the monies owed to the plaintiff, and that this was nothing to do with the sale of the shares allegedly held by Lysaka.
42. Having listened to the evidence of Ms Li, I found her to be an intelligent and reliable witness. I have no doubt that the transfer of the share in Lysaka to Ms Li’s name was in no way a part performance of an already concluded agreement in relation to the 1st defendant and/or the 2nd defendant’s liability to the plaintiff. I accept that this was nothing more than a purported gesture of good faith and sincerity by the 2nd defendant in order to keep Ms Li and the plaintiff at the negotiating table. I further accept that the conditions laid down by Ms Li before further negotiations could take place were never met by the 1st or 2nd defendants.
43. I conclude that no settlement agreement was ever made between the plaintiff and the defendants. Indeed, aside from the documentary evidence as to the transfer of the shareholding in Lysaka, there is simply no evidence adduced or advanced by the defendants that there was in fact any settlement agreement.
44. As to the evidence contained in Ms Li’s witness statements and produced as her evidence in chief, I find no reason to doubt any of that evidence.
45. With respect to the alleged settlement agreement, Ms Lam advanced a further argument, that an agreement to accept part payment of a debt or liquidated demand is not binding because no consideration is furnished by the debtor. Ms Lam relies upon a series of cases beginning with Fokes v Beer (1884) 9 App CA 605.
46. In view of my finding based upon the evidence of Ms Li that there was no concluded settlement agreement, it is strictly speaking not necessary for me to consider this further argument. However, had it been necessary to do so, I would have accepted that there was no valid consideration in this case. The defendants’ pleaded case was that the sale proceeds of the Grand shares was in the sum of HK$500,000 and the value of the convertible bonds was in the principal amount of HK$8,064,000. As Ms Lam submits even adding the alleged part payment of HK$2 million (a matter I have rejected), the total sum alleged in the pleadings to have been advanced by the defendant is still considerably less than the amount owed to the plaintiff. Ms Lam has referred me to the rule of law that payment of a lesser sum than the amount of a debt due cannot be satisfaction of the debt unless there is some benefit to the creditor added, so that there is an accord and satisfaction. I can see no added benefit in this case, and in my view had the defendants’ pleaded case on the facts been established (which of course it was not), it would in any event have failed for want of consideration.
Penalty clause
47. As noted the Confirmation Letter dated 10 January 2007 provided that should the 1st defendant fail to repay the sum outstanding to the plaintiff, at that time HK$13,873,385, before 15 May 2007, an additional breach of contract payment would be incurred at 0.1% per day on the unpaid amount.
48. This term, if valid, has a very significant impact upon the amounts that may be claimed by the plaintiff in this action. Ms Lam has provided the court with calculations which show that the amount claimed at the contractual rate of 13.8% per annum would, as at 15 May 2014, amount to HK$29,241,010.51. By contrast the amount claimed when incorporating the 0.1% additional interest would as at 15 May 2014 amount to HK$82,999,266. At para 16 of the Amended Defence the defendants have pleaded that this provision is a penalty clause which is unenforceable in law.
49. Ms Lam puts her case in this aspect on two bases:
(i) The additional compensation clause is a genuine pre‑estimate of loss suffered by the plaintiff.
(ii) Even if it may not be a genuine pre-estimate of likely loss, then in the context of default interest, such clauses are not penal if they operate prospectively only, and if the very fact of the borrower’s default makes him a less good credit risk from the time of default, and therefore provides a good commercial reason for the increase. In such circumstances, the same will not be regarded as penal except where the increase is an “exceptionally large one”. See Treitel: The Law of Contract, 13th Edn, p 1076, para 20‑135.
50. The law on penalty clauses which are not enforceable, and liquidated damages clauses which are enforceable, is well established. I note that even if the clause in question is not strictly speaking a pre‑estimate of the likely loss, as long as it was commercially justifiable, and its dominant purpose was not to deter the other party from breach, the clause will not be void as a penalty.
51. In respect of Ms Lam’s first argument, genuine pre‑estimate of loss, the plaintiff has pleaded in paragraph 19 of the Re‑amended Reply that the additional breach of contract payment was the compensation to be made to the plaintiff for its opportunity costs if the 1st defendant failed to repay the outstanding amount by 15 May 2007. With respect, I cannot accept that that is so. I have before me no responsible evidence of what these “opportunity costs” might have been.
52. In my view, Ms Lam’s first argument fails in that it appears to me that the additional compensation clause is not a pre‑estimate of loss, and that the dominant purpose of this additional breach of contract payment was to deter the other party from further breach of its contractual obligations.
53. As to Ms Lam’s second argument and viewing the matter in the context of default interest, this argument will not succeed where the increase is “an exceptionally large one”. One only has to compare the figure absent the additional 0.1% interest, of HK$29,241,010.51, with the amount claimed by incorporating the 0.1% additional interest, of HK$82,999,266, to readily conclude that the increase is an exceptionally large one, and hence in my view is penal in nature.
54. Furthermore, in light of the fact that the 1st defendant was already liable to pay 13.8% per annum until the date of repayment, I cannot in any way conclude that it was “commercially justifiable” to then add a further breach of contract payment provision which resulted in a very substantial increase in the 1st defendant’s liability upon the principal debt.
55. I find that the clause in the Confirmation Letter relating to the additional breach of contract payment calculated that 0.1% per day on the unpaid amount is a penalty, and as such is unenforceable.
CONCLUSION
56. I find that the plaintiff has established its primary case against the 1st defendant under the terms of the Confirmation Letter and the Acknowledgement Letter, and against the 2nd defendant under the terms of the guarantee set out in the Confirmation Letter.
57. In concluding that the plaintiff has proven its case I have, with the able assistance of counsel for the plaintiff, considered each of the defences that were pleaded by the defendants to determine whether any of these defences may have impacted adversely upon the proof of the plaintiff’s case. Save for the question of the penalty argument, I find that they do not.
58. As indicated I have determined that the additional breach of contract payment calculated at 0.1% per day is a penalty and as such is unenforceable.
59. There will be judgment for the plaintiff and against the 1st and 2nd defendants in the sum of HK$29,241,010.51 being the sum outstanding as at 15 May 2014. Interest thereon and thereafter will be at the prevailing judgment rate. The liability to the plaintiff for this sum and for any further interest that may be payable, together with any costs ordered by the court is, as between the 1st and 2nd defendants, joint and several. The defendants shall pay the costs of and occasioned by this action, to be taxed if not agreed.
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(Robert Whitehead SC)
Deputy High Court Judge
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Ms Rachel YK Lam, instructed by Hogan Lovells, for the plaintiff
The 1st and 2nd defendants, in person, absent
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