HUNG CHEN, RICHAEL v. TOECA NATIONAL RESOURCES B V AND OTHERS

HCA 1683/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1683 OF 2009

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J U D G M E N T

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(Heard Together)

Background

1.  Mr Hung, the plaintiff in these proceedings (“Hung”), entered into an agreement on 18 July 2007, whereby he was to acquire the interests in a coal mine from a Mainland entity, Heilongjiang Northern Enterprises Group Co Ltd (“Mine Seller”), for RMB 140 million.  The agreement was known as a Framework Agreement, and was entered into between the Mine Seller and Wealth Gain Global Investment Ltd (“Wealth Gain”), a BVI company beneficially owned by Hung and which he used as the vehicle for the acquisition of the mine.  By a Sale and Purchase Agreement dated 25 September 2007, Hung agreed to sell the entire issued share capital of Wealth Gain, and hence its rights in the acquisition of the mine, to Sino Resources Group Limited (“Company”), a listed company in Hong Kong, for HK$700 million.  The dispute which is the subject matter of these proceedings stems from Hung’s purchase and resale of the interests in the coal mine.

2.  Hung is a graduate of Peking University, and had over 20 years of experience in management and investment in PRC and in Hong Kong.  Prior to 2007, Hung had been a director of two listed companies in Hong Kong.  He had known the 3rd defendant, Mr Joseph Wan (“Wan”) since 2001, having worked with him on a number of business transactions in Hong Kong and in the PRC.  They developed a trusted relationship and became close personal friends at one stage. At all material times, Wan owned and controlled the Baron group of companies (“Baron Group”), which include the 2nd defendant (“Baron Capital”) and the 4th defendant (“Baron International”).  Baron Capital was licensed to carry out regulated activities of dealing in securities and advising on corporate finance under the Securities and Futures Ordinance.  Wan had extensive experience in corporate finance, mergers and acquisitions, direct investments and project finance, and the Baron Group offers a full range of financial services to local and international clients.

3.  In June 2007, Hung had acted as a middleman when the Mine Seller was interested in injecting the coal mine into an overseas listed company.  Hung introduced Wan to the Mine Seller, and an engagement letter was signed whereby the Mine Seller engaged a company in the Baron Group to assist in the restructuring of the Mine Seller to achieve an overseas listing status and to raise funds overseas.  Hung signed the engagement letter as a middleman.  Under the engagement letter, the Mine Seller agreed to pay Baron International Consulting Services Ltd 10% of the funds to be raised as an arrangement fee, and to give 10% shareholding of the listed company to Baron International Consulting Services Ltd as the fee for acting as financial adviser.

4.  In July 2007, the Mine Seller decided to sell the coal mine to Hung instead of itself pursuing the overseas listing.  This led to the signing of the Framework Agreement between Wealth Gain and the Mine Seller on 18 July 2007. Hung procured the assistance and services of Wan and the Baron Group, to act as consultant in his acquisition of the coal mine and to introduce to Hung the listed company into which the coal mine was to be injected.  There is dispute between Hung and Wan as to the terms of the remuneration agreed.  According to Wan, Hung agreed to give to the Baron Group a 10% shareholding of the listed company, and to pay to the Baron Group 10% of the consideration to be paid by the listed company for the acquisition of the coal mine from Hung (the 10% shareholding and 10% of the consideration collectively referred to hereinafter as the “Fee”).  According to Hung, he only agreed to a fee of HK $8 million. 

5.  In July or August 2007, Wan introduced the Company to Hung.  Wan had assisted the Company in its listing in Hong Kong, and the Company was interested in investing in the energy sector.  The Company agreed to acquire the full ownership and control of the coal mine by acquiring the entire equity interests of Wealth Gain, and in September 2007, the Company appointed Baron Capital to act as its financial adviser in respect of its acquisition of Wealth Gain from Hung.  The Company agreed to pay to the Baron Group an introduction fee of HK $6 million, and ultimately, financial advisory fees of about HK $6 million.

6.  On 25 September 2007, a Conditional Sale and Purchase Agreement (“Wealth Gain Sale and Purchase Agreement”) was made between Hung and the Company, whereby Hung was to sell the entire issued capital of Wealth Gain to the Company for HK $700 million.  The sum of $700 million was to be paid in the following manner:

(a)  HK $20 million in cash was payable as a deposit on the signing of the Wealth Gain Sale and Purchase Agreement;

(b)  on completion, the Company was to issue 70 million shares in the Company to Hung, at an issue price of HK $0.50 per share (“Consideration Shares”);

(c)  on completion, the Company was to issue a convertible note in the principal amount of HK $345 million to Hung (“Convertible Note”), and Hung was to have the right to convert the whole or part of the outstanding principal amount to shares in the Company, at a conversion price of HK $0.50 per share; and

(d)  HK $300 million in cash was to be paid by the Company to Hung 3 months after the completion of the Wealth Gain Sale and Purchase Agreement.

7.  The Wealth Gain Sale and Purchase Agreement was supplemented by an agreement dated 26 October 2007.  Out of the HK $300 million payable by the Company to Hung under the Wealth Gain Sale and Purchase Agreement, HK $160 million (equivalent to RMB 140 million) was directed by Hung to be paid directly to the Mine Seller as the consideration for the acquisition of the coal mine. 

8.  On 25 September 2007, the Company paid the deposit of HK $20 million to Hung, pursuant to the terms of the Wealth Gain Sale and Purchase Agreement. 

9.  On 28 September 2007, Hung issued a personal cheque for HK $20 million, payable to Baron International.  Wan claims this was part of the Fee payable by Hung to the Baron Group, pursuant to the terms of his oral engagement of Baron Capital as financial consultant.  According to Wan, Hung had agreed that the Baron Group would have the first right to receive payment of the Fee from the consideration paid to Hung by the Company.  This is denied by Hung.  He claims that the HK $20 million was paid by him to Wan, at the latter’s request that the deposit should be held by Wan’s company in escrow for the time being, since Wealth Gain had not yet signed an acquisition agreement with the Mine Seller.  According to Hung, one informed him that the HK $20 million would be transferred back to Hung when Wealth Gain’s acquisition of the coal mine was completed.

10.  The Wealth Gain Sale and Purchase Agreement was conditional upon (inter alia) the execution of a Mine Acquisition Agreement by Wealth Gain.  Such condition was fulfilled on 30 October 2007, when the formal Mine Acquisition Agreement was entered into between the Mine Seller and Wealth Gain. 

11.  Later, on 31 March 2008, the Wealth Gain Sale and Purchase Agreement was completed between Wealth Gain and the Company, and Wealth Gain became a wholly owned subsidiary of the Company.  The Consideration Shares were issued and allotted to Hung, as was the Convertible Note.  Hung became a substantial shareholder of the Company as from 31 March 2008. 

12.  After completion of the Wealth Gain Sale and Purchase Agreement, a sum of HK $33 million was paid by the Company to Hung on 18 April 2008.  On 22 April 2008, Hung issued a blank personal cheque for HK $33 million.  This was paid into Wan’s personal account.  According to Wan, this was Hung’s further payment of the Fee.  According to Hung, he was again told by Wan that the HK $33 million was to be held in escrow by a Baron company, to be transferred back to Hung when the Company had completed its fund raising for payment of the consideration due under the Wealth Gain Sale and Purchase Agreement.

13.  In the meantime, to finance its acquisition under the Wealth Gain Sale and Purchase Agreement (“Acquisition”), the Company decided to issue 250 million new shares for placement with independent investors (“Placement”). On 6 November 2007, the Company entered into a Placing Agreement with Baron Capital, to procure up to 6 independent placees to subscribe for up to 250 million newly issued shares in the Company, at not less than HK $0.99 per share, in order to raise funds for the Acquisition.  This first Placing Agreement lapsed on 14 March 2008, without any placee having been found.  On 18 March 2008, a further Placing Agreement was entered into between the Company and Baron Capital, whereby Baron Capital was to procure not less than 6 independent placees to subscribe for the new shares at a reduced price of not less than HK $0.80 per share.

14.  In February 2008, Baron Capital established contact with Mr Marcel Boekhoorn (“Boekhoorn”) in relation to the prospects of the Placement.  Boekhoorn is a well known and successful investor and entrepreneur in the Netherlands.  He was at all material times the sole shareholder of Ramphastos Investments NV, which wholly owns the 1^st defendant (“Toeca”), a private investment holding company incorporated in the Netherlands.

15.  A meeting took place on 29 March 2008 at the offices of the Baron Group in Hong Kong, when the Placement was discussed with Toeca.  As a form of price protection for Toeca’s investment in the Company, a buy-back option was raised at the meeting and considered, whereby Hung as the major shareholder of the Company would buy back from Toeca its investment in the Company, and further give to Toeca the option to purchase more shares in the Company.

16.  As a result of negotiations which took place between Boekhoorn and Mr Van Wijngaarden (“Wijngaarden”) of Toeca on the one part, and Wan, Mr Majcher (“Majcher”) and Mr Ringo Hui (“Hui”) of Baron Capital on the other part, which negotiations took place between April and May 2008, agreement was made whereby Toeca was to invest in the Company.  Solicitors were instructed by Toeca in Hong Kong, and the structure of Toeca’s investment was discussed, and finally agreed.

17.  The following documents were executed in respect of Toeca’s subscription for 118 million shares in the Company under the Placement:

(1)  a Procurement Agreement dated 16 May 2008 (“Procurement Agreement”), made between Hung and Toeca, whereby Hung granted a put option to Toeca, entitling Toeca to require Hung to procure the placing of all or any portion of the 118 million shares subscribed by Toeca (“Placed Shares”) at a minimum price of HK $0.99 per share;

(2)  an undated Placing Agreement (“Placing Agreement”) between Toeca, Baron Capital and Wan, whereby (i) Baron Capital agreed to purchase or procure the purchase of such portion of the Placed Shares as notified by Toeca, at a price not less than HK $0.99 per share, and (ii) Wan agreed to indemnify Toeca from all damages, losses, costs and expenses incurred by Toeca as a result of Baron Capital’s failure to perform any of its obligations under the Placing Agreement;

(3)  a Supplemental Agreement dated 16 May 2008 (“Supplemental Agreement”), made between Toeca, Baron Capital, Wan and Hung, whereby the parties agreed that the Placing Agreement would not take effect unless and until the Procurement Agreement had been terminated in accordance with its terms, and written notice of termination is given to Baron Capital and Wan as soon as practicable;

(4)  a Call Option Agreement dated 16 May 2008 (“Call Option Agreement”), made  between International Gold Profit Ltd (“IGPL”, a company acquired by Hung in April 2008 and which held 100 million shares in the Company through Hung’s exercise of the Convertible Note in April 2008, and later transferred to Wan) as Grantor, Toeca as Grantee and Wan as Guarantor, whereby IGPL granted an option to Toeca, entitling Toeca to require IGPL to sell up to 47 million shares in the Company to Toeca at the price of HK $1.25 per share; and

(5)  an undated Shortfall Guarantee (“Shortfall Guarantee”) made between Hung, Mega Wealth Capital Ltd (“Mega Wealth”, a company owned by Hung), Baron Capital and Wan, whereby Hung and Mega Wealth agreed jointly and separately to pay Baron Capital and/or Wan the amount of the shortfall in the event that Toeca’s Placed Shares were placed at a price less than HK $0.99 per share.  Under the Shortfall Guarantee, Hung was to deposit 100 million shares of the Company held by Mega Wealth with Baron Capital as security, and Baron Capital was to retain the corporate documents of Mega Wealth.

18.  On 21 May 2008, 118 million shares of the Company were placed to Toeca at HK $116,820,000.

19.  If things had gone well, all the contracting parties would have been happy.  The Mine Seller would have received its RMB 140 million from Hung’s company, Wealth Gain.  The Company would have acquired a coal mine.  According to Wan, at the time when the relevant contracts were negotiated, the investing public “loved mines”, and the price of the shares of the Company would have good prospects of rising many times as a result of the acquisition of the mine. Hung would have made a profit of over HK $560 million from the sale of the coal mine.  He claims that as he had to bear all the costs and expenses of seeking the requisite government approval and consent in Mainland China before the mine could be sold to a foreign investor, his actual costs of acquiring the mine were more than RMB 140 million, and that any profit that he could have made from the successful purchase and sale would be a mere HK $100 million.  Nevertheless, there would have been a profit for Hung.  Hung also became the majority shareholder of a listed Company.  On its part, Baron earned its introduction fees from both the Company and the Mine Seller, consultancy fees from both the Company and Hung, and placing fees in respect of the Placing.

20.  Problems, however, began to emerge.  No substantial placee could be found other than Toeca.  In August 2008, Hung was informed by Wan that after the placement of the Placed Shares to Toeca, there was still a shortfall of HK $60 million in respect of the payment to be made to the Mine Seller.  As no placees could be found, Wan suggested that the Company should obtain loans, but Hung did not agree to the terms of the financing proposed.  The effects of the global financial crisis in 2008 also began to set in, and by late November 2008, and as so stated in the Company’s public Announcement dated 23 November 2008, due to the lack of liquidity of the financial and equity markets, the Company was not able to finance the payment of the outstanding HK $158,600,000 payable to Hung under the Wealth Gain Sale and Purchase Agreement.  In turn, the Mine Seller did not receive the RMB 140 million under its agreement with Wealth Gain. 

21.  From December 2008, disputes arose between the Mine Seller and Wealth Gain and the Company as to whether the time for payment of the consideration of RMB 140 million had been extended, whether the applicable regulations had been complied with in PRC and the necessary approval obtained in relation to Wealth Gain’s acquisition of the interests in the coal mine, and whether the transfer of the interests in the coal mine to the Company was valid.  In January 2009, proceedings were commenced by the Mine Seller in PRC, seeking the return of the interests in the coal mine to the Mine Seller.  Trading in the shares of the Company in Hong Kong was suspended from 24 March 2009 to 15 May 2009.

22.  On 9 April 2009, Toeca served written notice on Hung of the exercise of its option under the Procurement Agreement, requiring Hung to procure the placing of Toeca’s Placed Shares.  On Toeca’s case, completion of the exercise of the option was due to take place on or before 9 July 2009, when Hung was required to pay or procure payment to Toeca of HK $116,820,000, with interest. In response, Hung denied liability, claiming that he had no recollection of signing the Procurement Agreement, the Supplemental Agreement or the Shortfall Guarantee.  Hung claims that if the documents had been signed by him, they were void by reason of non est factum, since he did not understand the English documents, and their contents, nature and effect were fundamentally different from what Wan and Hui had represented them to be, as “the usual documents for the Company’s placing of shares”.  Further, Hung claims that the disputed documents were not enforceable as they were induced by misrepresentations made by Wan and Hui.   

23.  Hung failed to procure the placing of the Placed Shares and refused to pay the sum of HK $116,820,000 claimed by Toeca.  As a result, Toeca terminated the Procurement Agreement by written notice dated 14 July 2009 served on Hung.

24.  Under clause 2 of the Supplemental Agreement, the Placing Agreement made between Toeca, Baron Capital and Wan would not take effect unless and until the Procurement Agreement was terminated.  Clause 3 of the Supplemental Agreement requires Toeca to serve on Baron, “as soon as practicable” after its termination of the Procurement Agreement, written notice setting out the event of termination and requiring consummation of the Placing Agreement on a date which is not less than 3 business days after the date of notice. 

25.  By written notice dated 31 July 2009, Toeca notified Baron Capital and Wan of its termination of the Procurement Agreement, and required consummation of the Placing Agreement. A subsequent notice dated 3 August 2009 was also issued and served on Baron Capital and Wan, after Hui raised query as to the applicable date specified in the 31 July 2009 notice, and the 3 August 2009 notice required consummation of the Placing Agreement on 7 August 2009.  On Toeca’s case, Baron Capital was obliged under clause 3.1 of the Placing Agreement to purchase or procure the placing of the Placed Shares at HK$0.99 per share by 3 September 2009.  Neither Baron Capital nor Wan as guarantor under the Placing Agreement paid to Toeca the sum of HK $116,820,000 and interest, as claimed.  They allege that Toeca had acted in breach of the express terms of Clause 3 of the Supplemental Agreement, in failing to serve notice of its termination of the Procurement Agreement “as soon as practicable” after its purported termination on 14 July 2009.

26.  Baron Capital and Wan further claim that Toeca was in breach of a collateral agreement made orally between Wan and Boekhoorn, that in case of Hung’s default on the put option, Toeca would “go after Hung first”, and Baron Capital and Wan would only be required to cover any shortfall thereafter.  It is also claimed that Toeca was in breach of an implied term of the Supplemental Agreement, that Toeca would take bona fide and reasonable steps to pursue Hung by legal proceedings and to maximize its recoveries first, before suing Baron Capital and Wan for the shortfall.

27.  In these proceedings, Hung seeks a declaration that the Procurement Agreement and all related agreements including the Supplemental Agreement, the Shortfall Guarantee and a Receipt (“Disputed Documents”) are null and void or unenforceable, and a declaration that Hung is entitled to rescind them for misrepresentation.  Hung further claims that Baron Capital and Wan should indemnify him for all loss and damage, and an order that they should pay damages for fraud and misrepresentation.  He seeks the return of the sum of HK$20 million and HK $33 million paid to Wan and Baron International, and further, a sum of HK $99 million which Hung claims to be payable by Wan to him as the price due for 100 million shares in the Company which Wan agreed to purchase from him at HK $0.99 per share, pursuant to an oral agreement made on or about 29 April 2008.

28.  On its part, Toeca counterclaims against Hung for payment of the sum of HK$116,820,000 under the Procurement Agreement.  Toeca also claims from Baron Capital an order for specific performance, that Baron Capital should complete its purchase of the Placed Shares in accordance with the terms of the Placing Agreement, and damages.  Further, it seeks against Wan payment of the sums of HK$116,820,000 and HK $1,947,000 under the Placing Agreement, or an order that Wan should indemnify Toeca of its loss and damage under the Placing Agreement.

29.  The essential issues in dispute for determination are:

(1)  whether Hung is bound by the documents which he signed;

(2)  the nature of Hung’s payment of HK $53 to Wan;

(3)  whether there was an agreement for sale of Hung’s shares in the Company to Wan;

(4)  where Toeca was in breach of the Supplemental Agreement;

(5)  whether there was a collateral agreement between Toeca, Baron Capital and Wan.

Whether Hung is bound by the documents which he signed

30.  The authorities are clear.  A lack of understanding of the contents, meaning, terms or effect of a document signed by a person of full age and understanding is not a ground to disown the document.  As Ribeiro PJ explained in his judgment in Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 334, at p 361:

“Reliance is universally placed on signatures appended to documents by persons of full age and understanding as signifying the signatory’s assent or adherence to what that document states. Where such a person has signed a document which purports to have legal effect, the law has never regarded it as enough to show that he signed without knowing its contents for the document to be disavowed. It is an everyday occurrence that people sign documents without reading the small (or even the large) print and therefore signed without actually knowing the terms (or all the terms) of the documents signed. But they are held to be documents which they have chosen to sign unless there is shown to be recognized legal basis for concluding that their apparent consent has been in some way vitiated or that reliance on the document by some other person falls into some category of unconscionable conduct justifying relief in equity.”

31.  In Bank of China (Hong Kong) Ltd v Fung Chin Kan (2002)  5 HKCFAR 515 at p 533, Litton NPJ also acknowledged :

“ …the fundamental principle that, generally speaking, when a person signs a legal document, he or she is bound by the act of signature: As a matter of general law, it is no defence to say that he or she did not understand the contents of a legal document; that person takes the chance of being bound by its terms, as he or she can take the simple precaution of not signing until its contents have been fully explained and understood.”

32.  Hung has fallen short of pleading that any of the Disputed Documents bears his forged signature.  He relies on non est factum, and fraudulent misrepresentation, in claiming that he should not be bound.  He has suggested in his evidence that, in relation to the part of a document which contains Chinese characters, that part might have been superimposed or inserted after his signature was put on the document.  The gist of Hung’s case is that he has no recollection of when and where the Disputed Documents were signed but to the best of his recollection, he had signed some documents at the office of Toeca’s solicitors, Jones Day, on about 13 May 2008.  He claims that on that occasion, he only signed 2 pages which were duplicate copies of one document, and he claims that he had signed on what appeared to be the execution pages of the document, in reliance on representations made by Wan and Hui that they were the “usual documents relating to the placing of shares in the Company” (paragraph 28 of his Statement of Claim), and that they had been “arranged and sorted out by Wan” (paragraph 30.4 of the Statement of Claim).  Hung also recalled signing some documents after midnight, in the early hours of 16 May 2008, in the lift lobby of his home.  On that occasion, he was informed by Hui that the documents were “to secure certain potential investors” (paragraph 31.1 of the Statement of Claim), and that “his signatures were necessary for the purpose of the share placement” (paragraph 31.3 of the Statement of Claim). 

The contemporaneous documents

33.  There are contemporaneous documents which show that Hung did have knowledge of the nature and content of the Procurement Agreement and the Supplemental Agreement which bear his signature. 

34.  The first is an e-mail dated 9 May 2008 sent by Hui at 7:17pm to Hung’s son, Raymond Hung (“Raymond”), whereby copies of the “confirmed” or final versions of the Procurement Agreement and Supplemental Agreement were sent to Raymond, for Raymond to pass them on to Hung in Beijing to sign on the last page.  At 8:31pm on 9 May 2008, Raymond sent to Hui from his e-mail address at rh@kenfairintl.com (“Address”) the signed pages of the Procurement Agreement and the Supplemental Agreement.  This suggests that between 7:17pm and 8:31pm on 9 May 2008, Raymond had sent the Procurement Agreement and the Supplemental Agreement to Hung and that Hung had signed them and returned them to Raymond, for return to Hui.  The e-mail and attachments were at the same time sent by Raymond to another colleague of Hui, Luke Ho.  Benjamin Kwan (“Kwan”), the solicitor at Jones Day responsible for the preparation of the draft agreements on behalf of Toeca and for the circulation to the parties, confirmed receipt of Hui’s e-mails enclosing the execution pages of the Procurement Agreement and the Supplemental Agreement, signed by Hung.

35.  Hung claims in evidence that he had never signed on the execution pages which were sent by Raymond to Hui.  He maintains that the incident never happened, and that he had made inquiries with Raymond, who had told him that he had no knowledge of his e-mail exchange with Hui, and further, that Raymond did not have such an email Address.  The Court was informed that Raymond had also made a supplemental witness statement to deal with the matter.  However, after Hung was confronted with evidence of other e-mails which had been sent from Raymond’s Address, the Court was informed that Raymond would not be called as a witness.  The retraction of Raymond’s evidence raises doubts as to the credibility of Hung’s assertions.

36.  Hung does not dispute that the signatures on the documents attached to Raymond’s e-mail are similar to his.

37.  Hung’s evidence, that he and Raymond had never received the Procurement Agreement and Supplemental Agreement from Hui, and that Raymond had never sent the signed copies of these documents to Hui, is totally incredible, and I reject it.  If Hung had received the documents on 9 May 2008, and had in fact signed them without bothering to read them, or to have them explained to him, I fail to see how he can complain later that he had no knowledge, or understanding, of the contents and effect of the Procurement Agreement and the Supplemental Agreement.

38.  In fact, Kwan did not accept Hung’s execution of the Procurement Agreement and the Supplemental Agreement on 9 May 2008, for lack of due attestation. According to Kwan, neither he nor his client, Toeca, had ever met Hung before 9 May 2008, and Kwan had no way of knowing, from the signed execution pages which Hui e-mailed to him on 9 May 2008, whether the agreements in question had been “genuinely signed” by Hung.  An appointment was accordingly made for Hung to sign the relevant agreements before Kwan again, at Jones Day’s office at 5pm on 13 May 2008.

39.  There are other contemporaneous documents emanating from Kwan which relate to the circumstances of Hung’s execution of the Procurement Agreement and the Supplemental Agreement on 13 May 2008.

40.  According to Kwan’s testimony, Hung visited Jones Day’s office on 13 May 2008, accompanied by Hui.  At the meeting, Hung was asked by Kwan to produce his Hong Kong identity card, and Kwan made a copy for retention in his file.  Kwan’s evidence is that he and Hung both spoke in Cantonese throughout the meeting, and he did not think that Hung had any problem communicating in or understanding Cantonese.  According to Kwan, he first told Hung that Jones Day did not act for him, as they represented Toeca.  Hung was then asked by Kwan whether he required independent legal advice in relation to the agreements which he was to sign.  Hung said there was no need, and that Baron had explained the documents to him.  However, Hung asked Kwan to briefly explain the contents of the documents to him again.  According to Kwan, he proceeded to do so, and explained to Hung the contracting parties and the nature of the Procurement Agreement and the Supplemental Agreement, the exercise period for the option under the Procurement Agreement, the number of shares concerned and how the option was to be exercised, the time for the completion and the consequences of Hung’s failure to complete.  Kwan further explained that if Hung defaulted under the Procurement Agreement, Toeca would require Baron to do the placing of the Placed Shares, but Hung would be responsible for any shortfall.  After Hung confirmed that he understood the documents, Kwan gave him the HK $1 which was expressed to be payable under the Procurement Agreement, and Hung signed the Procurement Agreement and the Supplemental Agreement before Kwan.  Hung also signed before Kwan an acknowledgment of receipt of HK $1 (“Receipt”), and a declaration in English and Chinese (“Declaration”) which had been prepared by Kwan before the meeting. 

41.  By the Declaration, Hung confirmed his understanding that Jones Day only act for Toeca in the transactions contemplated by the Procurement Agreement, as supplemented by the Supplemental Agreement, “relating to an option over certain shares in (the Company)”.  The Declaration also contained Hung’s written confirmation that, before signing the Procurement Agreement, he had “sufficient time and opportunities to seek independent legal advice on (his) rights, interests and liabilities in the transactions contemplated” by the agreements. Hung further expressly confirmed that he fully understood the terms and conditions of the Procurement Agreement as supplemented by the Supplemental Agreement, that he had considered all the relevant factors in detail, and had decided that it was not necessary for him to instruct legal representatives, or to seek independent legal advice.

42.  The Declaration was not only in English, but in Chinese as well.  If Hung did not understand English, there is no question of his ability to understand the contents of the Declaration, which are clear as to : (1) that Jones Day only act for Toeca; (2) that the transactions contemplated by the Procurement Agreement and the Supplemental Agreement relate to an option over shares in the Company; (3) that Hung had time and opportunity to seek independent legal advice on the transactions, but he did not consider such advice to be necessary; and (4) that Hung understood, fully, the terms and conditions of the agreements and his  rights and liabilities in connection therewith.  The Declaration bore Hung’s signature, and it is Kwan’s evidence that Hung signed the Declaration in his presence at Jones Day’s office on 13 May 2008.

43.  Leading Counsel for Hung attacked the credibility of Kwan’s evidence, and the documents he produced.  It was argued that the preparation of the Declaration is itself suspect, indicating that Kwan had something to hide, in that he was aware that the Supplemental Agreement placed Hung at an obvious disadvantage, that there was a conflict between the interests of Baron/Wan and those of Hung, and that Hung lacked understanding of the nature and effect of the documents that he had been asked to sign. 

44.  I do not consider the Declaration to be suspect in any way.  Kwan had received the e-mailed copies of the signed pages of the Procurement Agreement and the Supplemental Agreement, and he had considered them to be unacceptable for lack of proper attestation.  He had instead asked for Hung to appear before him on 13 May 2008 to sign the agreements before him.  In the course of the preparation, discussion and circulation of the drafts of the agreements, Kwan was aware of the fact that Hung did not have lawyers representing him.  He knew in advance that Hung was to attend his office to sign the agreements before him, but was acutely aware that his firm did not represent Hung and had no duty to advise Hung or to look after his interests.  I find it natural for any prudent and responsible lawyer in the circumstances to prepare an acknowledgment in writing, for Hung to sign and to state these matters on the record, as well as to acknowledge Hung’s understanding, not only of these matters but also of the agreements which Hung was to sign before Kwan, without an independent lawyer.  Whether the Declaration was prepared to protect the interests of Kwan or Jones Day is beside the point, so long as it correctly reflects the situation and Hung’s position.  Nor do I find anything untoward in having the Declaration prepared in English and Chinese, when Kwan did not know in advance the level of Hung’s understanding of English.

45.  There is a contemporaneous attendance note which was prepared by Kwan, in his writing, on the same day after his meeting with Hung at 5 pm on 13 May 2008. It records that Kwan had briefly explained the terms of the Procurement Agreement and Supplemental Agreement to Hung, of Hung’s execution of the documents, and of Hung’s acknowledgment of receipt of the HK $1 which was passed to him.

46.  Importantly, there is in evidence an e-mail sent by Kwan to Wingaarden at 9:13 pm on 13 May 2008, whereby Kwan reported this meeting with Hung to his client, Toeca.  This contemporaneous e-mail, prepared before any dispute arose between the parties, refers to Kwan’s earlier discussion with Wingaarden on Kwan’s meeting with Hui and Hung.  It records in writing and confirms that Kwan had explained to Hung that Jones Day did not act for him, that Hung should seek his own legal advice if he wished, but Hung had confirmed that there was no need for such independent legal advice.  Kwan further stated in the e-mail that he had been informed by Hung that prior to his meeting, Baron had explained to him the terms of the documents, but Kwan had briefly explained the Procurement Agreement and the Supplemental Agreement to Hung.  Kwan also confirmed in the e-mail that Hung re-executed the two agreements in his presence.

47.  I find Kwan’s evidence on Hung’s execution of the Procurement Agreement and the Supplemental Agreement to be credible.  There is no reason to believe that he would lie in court, and there is no evidence whatsoever to suggest that Kwan would be a party to a fraudulent scheme to deceive Hung into signing documents which would in effect protect his client’s investments in the Company, or to fabricate or tamper with documents.  I prefer Kwan’s evidence to Hung’s, where they conflict in relation to the circumstances of the execution of the relevant documents.  Kwan’s evidence is also corroborated by Hui, who had a distinct recollection of Hung being given HK $1 by Kwan.

48.  On the other hand, I find the evidence of Hung to be totally unreliable, and in many respects incredible.  His case is not simply that he had no recollection of signing the Supplemental Agreement, the Declaration, and the Receipt, but that the Declaration did not exist at all, and that the other documents were not signed on 13 May 2008 as Kwan claims.  He denied having given his identity card to Kwan during the meeting on 13 May 2008, but could not explain why Jones Day would have a copy of it in their files.  Hung even suggests that the Chinese words on the Declaration were only inserted after he had signed on the document.  His evidence on the Declaration is telling.  When asked whether it was a document signed by him, Hung’s testimony is that if he had known that by signing the Chinese Declaration, it would have such a significant implication, then he would not have signed it.  This shows that Hung’s denial of the Declaration was premised solely on the fact that it acknowledges clearly in Chinese that he had understood the nature and contents of the Procurement Agreement and Supplemental Agreement which bore his signature.

49.  Hung has not only evaded questions put to him in the witness box, but has also shown a tendency and readiness to lie in order to support his case.  He claims that as a result of the use made by Kwan, Toeca and Baron of documents which he had never signed, he had reported the matter to the police.  Hung sought to embellish this by claiming in court that he had also made a complaint to the partner of Jones Day.  However, from the e-mail produced by the partner, it is clear that Hung had in fact asked for a meeting with the partner of Jones Day to seek legal advice and representation for himself when he became embroiled in litigation with the Company in March 2010.  It is totally incredulous for Hung to suggest that he would wish Jones Day to act for him, after he had discovered in 2008 that a lawyer of Jones Day had deceived him into signing documents, as he claims, which were totally adverse to his interests. 

50.  I reject Hung’s evidence as unreliable, and find that when Hung signed the Procurement Agreement and the Supplemental Agreement, he knew and understood the nature of these documents.  It is Wan’s evidence that on several occasions prior to 13 May 2008, he had explained to Hung the nature of the intended agreements with Toeca, and the effect and consequences of the put option to be granted to Toeca.  According to Wan, Hung agreed to give the buy-back or put option to Toeca, as a form of price protection to complete the deal with Toeca, but did not agree to give Toeca a further option to buy more shares in the Company, which Toeca had also asked for.  Kwan had also explained the agreements to Hung at the meeting on 13 May 2008.  The contemporaneous documents referred to in the preceding paragraphs of this Judgment support Kwan’s evidence, and the Declaration signed by Hung acknowledges his understanding of the Procurement Agreement and the Supplemental Agreement as being related to an option over shares in the Company.  The arguments made, that Hung had no knowledge or understanding that the Procurement Agreement and the Supplemental Agreement created personal liabilities on Hung’s part in parallel to the Company’s share placement, or that by virtue of the Supplemental Agreement, Hung’s liabilities under the Procurement Agreement would be triggered before the liabilities of Baron Capital and Wan under the Placing Agreement, only concern knowledge and understanding of the effect and the detailed terms of the agreements.  I do not regard any such misconception to relate to the fundamental nature of the documents Hung signed - as being related to an option granted over shares in the Company and, on his own case, relating to the placing of shares in the Company.  In the words of Viscount Dilhorne in Gallie v Lee [1971] AC 1004 at p 1022:

“…the difference between what a document is thought to be may be in substance or in kind. It will not suffice if the signer thought that in some respects it would have a different legal effect from what it was; nor will it suffice if in some respects it departs from what he thought it would contain. The difference, whether it be in kind or substance, must be such that the document is designed entirely - the word used by Byles J - or fundamentally different from that which it was thought to be, so that it can be said that it was never the signer’s intention to execute the document.”

51.  Even if there is any shred of truth in Hung’s claim that his signature to any document given to him was procured from him without any explanation, and without his understanding of the nature and content of the document, I consider that Hung was extremely negligent if not reckless if he had signed the document in the circumstances.  He is a seasoned businessman on the Mainland and in Hong Kong, had been involved in the listing process of a company in Hong Kong, had experience in corporate finance, and had sat on the board of listed companies in Hong Kong.  He appeared intelligent and was cautious when giving evidence, and admitted that he is a careful person.  He should have understood the meaning and effect of putting his signature on a document, and on any commercial agreement.  His unfamiliarity with the English language does not absolve him of the duty to act responsibly and carefully in putting his signature to a legal document (Gallie v Lee [1971] AC 1004; Union Bank of Hong Kong Ltd v Ng Yin Hung [1975] HKLR 26), and I have no hesitation in finding that Hung failed to exercise the due care to be expected from him, when he signed documents without bothering to either read them, or have them explained to him.

Whether the disputed documents were induced by misrepresentations

52.  Hung’s pleaded case is that all the Disputed Documents signed on 13 May 2008 and dated 16 May 2008 were procured by misrepresentations made: (1) by Wan on the telephone that they were documents “relating to the placing of shares in the Company” (paragraph 28 of the Statement of Claim); (2) by Hui that they were documents which were “all arranged and sorted out by Wan (paragraph 30.4 of the Statement of Claim); and (3) by Hui that they were documents which Wan was waiting for in Europe “to secure certain potential investors” (paragraph 31.1 of the Statement of Claim).  Hung claims that he had signed the documents believing them to be the “usual documents relating to the placing of shares in the Company” (paragraph 30.5 of the Statement of Claim).

53.  On Hung’s case, the Procurement Agreement and the Supplemental Agreement did not relate to the placing of shares by the Company, but were side agreements creating personal liabilities on Hung’s part.  For the reasons set out in the preceding paragraphs 33 to 51 above, I consider that Hung had knowledge and understanding that the Procurement Agreement and Supplemental Agreement related to the grant of an option over the shares in the Company which were placed to Toeca.  Wan had played a major role in the negotiation of the structure of the Procurement Agreement, Supplemental Agreement, and the Placing Agreement.  Kwan had liaised with Wan and Baron’s solicitors in the preparation and finalisation of the agreements to be signed by Toeca in Europe, and by Baron Capital, Wan and Hung, for the Placed Shares.  Considered in the entirety, I fail to see how the representations as pleaded constitute any misrepresentation of fact.

54.  My finding on the evidence is that Hung had been told by Wan, and knew, that Toeca had been approached as a potential investor, and that Toeca wanted to have some form of protection for their investment in the Company, by seeking a buy-back option from the majority shareholder in respect of the Placement.  At the material time, both Hung and Wan were hoping that funds could be raised to complete the injection of the mine into the Company.  Both stood to gain if the deal should go through: Hung as a substantial shareholder of the Company and from the sale of his entire share capital in Wealth Gain to the Company at a potential profit of at least HK $100 million, and Wan in terms of the fees to be earned by the Baron Group and his shareholding in the Company.  The Placement had not been very successful before February 2009, and funds were required to complete the Acquisition and the purchase of the mine by June 2008. Toeca was considered to be an attractive target for the placement of the Company’s shares.  Its investment in the Company would not only bring funding for the Acquisition, but the participation of a major and credible investor such as Toeca in the Placement would also be beneficial to the prospects of the Company. 

55.  I totally reject the suggestion that either Hung, or Wan/Baron Group had no reason to enter into the transactions contemplated by the Disputed Documents, on the argument that these agreements had the effect of shifting the risk of any decrease in the price of the shares in the Company from Toeca to Hung and Wan. 

56.  From the evidence, both Hung and Wan had reason to be  optimistic in early 2008 that the Acquisition would go through, that the coal mine could be injected into the Company, and that the share price of the Company would be driven up as a result of the prevailing positive market sentiments.  Wan claims that the investing public “loved” mining shares at the material time in 2007 and early 2008.  On 13 May 2008 when the Procurement Agreement and Supplemental Agreement were signed, the shares of the Company were trading at around HK $1.20 to HK $1.26 per share.  Compared with the minimum placing price of HK $0.99 per share if Toeca’s option was to be exercised under the Procurement Agreement, the risk of the share price dropping below HK $0.99 would have been considered to be low, after the Company’s acquisition of the coal mine.  Hung’s bullish view of the price of the Company’s shares is demonstrated by his rejection of Toeca’s request for an option to buy more shares in the Company at HK $1.25 per share.  This also shows Hung’s understanding of the difference in the two options requested by Toeca. 

57.  For all the above reasons, each of Hung and Wan had every incentive to facilitate the conclusion and implementation of the series of agreements required to secure the Placement to Toeca.

58.  Hung and Wan were close business partners at the time, and had shared a trusting and friendly relationship for many years.  In all the circumstances, Wan’s evidence that he had kept Hung closely informed of his negotiations with Toeca on the Placement, to the extent of meeting with Hung 3 to 4 times a week, is credible.  There is no reason for Wan to conceal his discussions with Toeca, and it is more inherently probable that Hung had agreed to granting the buy-back option to Toeca because he thought, at the material time, that the risk of the share price of the Company going down after the injection of the mine was small, and because he had real commercial incentive in attracting Toeca to take up the Placed Shares, so that the Acquisition could be completed and his profit secured.

59.  Even if there had been any misrepresentation as claimed by Hung, I do not believe that the Disputed Documents had been induced by the misrepresentation, or that Hung had relied on the misrepresentation, as he was prepared and happy to offer the buy-back option to Toeca.  To that extent, I believe Wan’s evidence that Hung was not interested in the small details of the structure of the Placement, since Hung was himself very keen to place the Company’s shares with a reputable investor as soon as possible, and had no hesitation in agreeing to offer downside protection to Toeca.

60.  Leading Counsel for Hung argued that Wan had made only a partial and distorted disclosure of the nature and effect of the Disputed Documents to be signed by Hung, such that the partial disclosure constituted a misrepresentation.  It is claimed that Wan and Kwan had failed to disclose to Hung that the Procurement Agreement, Supplemental Agreement, Placing Agreement and the Shortfall Guarantee constituted a set of four interlocking agreements, which placed a personal liability on Hung before the liability of Wan and Baron Capital to Toeca, and that the final structure of the documentation, as agreed between Toeca and Wan, was not a “simple put option as such”.

61.  Partial disclosure has never been pleaded by Hung, whose case was that he had no understanding or knowledge at all of the nature of the documents which he had signed, save that they were the usual documents relating to the placing of shares in the Company.  I agree with Leading Counsel for the defendants that Hung should not be allowed, by Counsel’s Closing, to argue a case of partial disclosure, absent any pleading as to what material facts had been withheld or omitted, and how such withheld or omitted facts rendered the stated facts to be false or misleading.  This would have the effect of taking the defendants by surprise, and fall foul of Order 18 rule 8, RHC which requires a party to plead specifically any matter which he alleges makes any defence of the opposite party not maintainable. It would also be contrary to the spirit and objectives of the CJR, and its emphases on equality between the parties, openness and a level playing field, as well as the identification of issues at an early stage to facilitate cost-effectiveness and an efficient trial.

62.  Even if there had been any misrepresentation made by Wan or Hui as Hung alleges, which had led him to sign the Procurement Agreement and Supplemental Agreement on 13 May 2008, I do not consider that Toeca should be affected by such misrepresentation so as to enable Hung to rescind the Procurement Agreement and Supplemental Agreement.  Wan and Hui are not Toeca’s agent in any sense.  Hung is a seasoned businessman, the Chairman of a listed company in Hong Kong, accustomed to the wheeling and dealing of the financial market and the commercial world.  He is a far cry from the unsophisticated housewives and misinformed widows in the cases to which Counsel has referred, in seeking to argue that Toeca should be fixed with constructive notice of the alleged misrepresentations by Wan and/or Hui.

The Shortfall Guarantee

63.  The documents signed at Jones Day’s office on 13 May 2008 did not include the Shortfall Guarantee.  Any alleged misrepresentation made by Wan and Hui at or before the meeting would not affect the Shortfall Guarantee.  Hung has not identified when he claimed the Shortfall Guarantee was signed under any alleged misrepresentation, but his evidence suggests that it was amongst the documents he signed in his pajamas in the lift lobby of his home in the early hours of 16 May 2008.  On that occasion, Hui had allegedly told him that the documents were required to secure certain potential investors, and were necessary for the purposes of the Placement.

64.  Hui claims that the documents which were signed by Hung in the lift lobby of his home were the incorporation documents of Mega Wealth and the transfer of shares in IGPL (which held 100 million shares in the Company) to ISIC, a company owned by Wan.

65.  I have found Hung to be an unreliable witness and I am not satisfied that his assertions, to the effect that he was not told about the requirement of any guarantee, or that he had signed the Shortfall Guarantee or any document under misrepresentation, can be believed.

66.  It is not disputed by Toeca and Baron that in addition to the buy-back or put option to be given by Hung as the major shareholder of the Company, Toeca had also asked for a price protection guarantee from Baron Capital and Wan, since Boekhorn had not met Hung, did not know if Hung could be pursued in the PRC, and only trusted Baron and Wan. 

67.  Wan claims it was unusual for a placing agent such as Baron Capital to give price protection guarantees to investors, but admits that he considered that the risks of Hung defaulting under the buy-back option to be given to Toeca were small, since the price of the shares in the Company would go up after the acquisition of the mine, the mine would be generating net profits of RMB 80 million a year, Hung as the major shareholder would be receiving sufficient dividends to cover any likely liability to Toeca, and that in any event, the shares could easily be sold over HK $0.99.  Wan also claims that he was prepared to give the price protection guarantee under the Placing Agreement to Toeca, as he and Hung were close friends at the time and Toeca would not have agreed to taking the Placed Shares without a guarantee from the Baron Group and Wan.  According to Wan, he asked Hung, in exchange, to provide a counter- guarantee to Baron Capital and himself, and Hung agreed. 

68.  On Wan’s case, the Shortfall Guarantee was signed by Hung at the office of the Baron Group 1 to 2 weeks after the Procurement Agreement was signed.  As security to fortify the Shortfall Guarantee, Hung deposited the share certificates of 100 million shares of HK $0.01 each in the Company, which were owned by Mega Wealth, together with signed instruments of transfer and contract notes, and the company kit of Mega Wealth.

69.  For all the commercial reasons to which I have referred, and which Wan in his witness statement admits to be applicable to a large extent, I find it to be more inherently probable that both Wan and Hung had little hesitation in giving the guarantees in question.  The stakes were high in terms of the likely profit to be made should the deals go through, but the risks of the price of the shares of the Company going down were considered then to be low.

70.  In summary, I reject Hung’s claims of non est factum on the basis of his alleged lack of knowledge and understanding of the nature of the Disputed Documents which he had signed, and of misrepresentation. Hung is clearly bound by the Disputed Documents.

Nature of Hung’s payment of HK $53 million to Wan

71.  Hung’s claim for the return of HK $53 million from Wan turns on the dispute between Hung, Baron Capital and Wan as to the remuneration payable by Hung for the services performed by Wan and the Baron Group.  According to Wan, Hung had agreed to give to the Baron Group 10% of the shareholding of the Company, and to pay to the Baron Group 10% of the consideration to be paid by the Company to him or Wealth Gain under the Wealth Gain Sale and Purchase Agreement.  Hung claims that he had only agreed to pay HK$8 million to the Baron Group.

72.  According to Wan, the 2 payments of HK $20 million and HK $33 million made by Hung to him in September 2007 and April 2008 respectively were part of the Fee payable by Hung under the Consultancy and Services Agreement made orally between Hung and Wan.  According to Wan, the Fee was based on what was specified in the engagement letter signed between the Mine Seller and Baron International (“Engagement Letter”), when the Baron Group was initially engaged by the Mine Seller to advise on its restructuring to achieve an overseas listing status and to raise funds from outside the PRC.  Wan was introduced to the Mine Seller by Hung, and Hung acting as middleman had signed on the Engagement Letter.  Under the Engagement Letter, the Mine Seller agreed to pay Baron International 10% of the funds to be raised, and to give 10% shareholding of the overseas listed company to Baron International. 

73.  When the Mine Seller decided to sell its interest in the coal mine to Hung, instead of itself pursuing the overseas listing, Wan claims that Hung adopted the Mine Seller’s original plan of injecting the coal mine into a listed company, and Wan and the Baron Group were engaged by Hung to perform consultancy services, and to assist Hung to find a listed company.  On Wan’s case, Hung agreed to pay the Baron Group the same percentage, and by the same structure, as that which had been agreed between the Mine Seller and Wan.  According to Wan, this means 10% of the shareholding of the listed company, and 10% of the consideration to be paid by the listed company for Hung’s interests in the coal mine.  Leading Counsel for Hung has drawn attention to the fact that under the Engagement Letter between the Mine Seller and Baron International, the former was to pay Baron International 10% of the funds to be raised.  I do not see any real distinction between that, and the agreement by Hung to pay 10% of the consideration, or price, to be received by Hung from the listed company.

74.  Hung sought to argue that he should not have to pay, and would not have agreed to pay, the Fee as claimed by Wan, when the Company had only paid HK$6 million to Baron International as an introduction commission.  This is tantamount to denying liability on the basis of his having made a bad deal, and it has never been the function of the Court to rewrite the parties’ contract for them, or to inquire into the adequacy or inadequacy of the consideration agreed between them. 

75.  I prefer Wan’s evidence to Hung’s in relation to the Fee arrangement agreed for the services to be provided by Wan and the Baron Group.  These include the sourcing of a listed company to acquire Hung’s interests in the coal mine, conducting due diligence on the coal mine and arranging for valuation of the coal mine.  Hung’s attempts to undermine Wan’s case on the Fee arrangement, by alleging that his intention was to operate the coal mine for several years before having the company listed in Hong Kong, are disingenuous and contradicted by the contents of the contemporaneous documents, namely, the proposal from Savills, which referred to the valuation of the coal mine for the purpose of acquisition by a Hong Kong listed company, as early as 27 July 2007.

76.  I accept Wan’s evidence that Hung’s payments of HK$20 million and HK$33 million to Baron International and to Wan on 28 September 2007 and 22 April 2008 respectively represented Hung’s part payment of the Fee.  These payments were made immediately or shortly after Hung had received payment from the Company pursuant to the Wealth Gain Sale and Purchase Agreement, which is consistent with Wan’s evidence that his agreement with Hung was that the Baron Group had the first right to receive payment for their Fee, but Hung would only have to pay the Baron Group after he received payment from the Company. 

77.  Further, Hung had disclosed on discovery Wan’s manuscript notes on a paper napkin, which notes had been made by Wan during one of Hung’s meetings with Wan when they discussed the Acquisition.  These notes were claimed by Hung to have been made by Wan in April 2008.  They include various figures and calculations, including “320” and “250”, and on Wan’s explanation, the figures support Wan’s case that HK $70 million was payable by Hung to Wan/the Baron Group, as 10% of the HK $700 million receivable from the Company.

78.  I reject Hung’s claim that the payments of HK $20 million and HK $33 million represented the Company’s payment of the deposit and further payments of the consideration under the Wealth Gain Sale and Purchase Agreement, which were held by Wan in escrow.  Hung’s evidence is that after he had received these amounts from the Company under the Wealth Gain Sale and Purchase Agreement, Wan suggested to him that they should be transferred to the Baron Group, to be held by Wan in escrow.  In respect of the HK$20 million, Hung claims that Wan’s explanation to him for the escrow arrangement was that the acquisition of the mine was not yet completed or approved by the PRC government.  In respect of the $33 million which the Company paid to Hung on 18 April 2008, Hung claims that Wan informed him that the money should be paid over to Wan’s company and be held by his company temporarily, and that when the Company had completed its fund raising by the Placement, the $320 million would be paid over to Hung by one lump sum, as provided for in the Wealth Gain Sale and Purchase Agreement.

79.  I agree with Leading Counsel for Baron that Hung’s evidence relating to the allege escrow payments is incredible.  If any part of the purchase price to be paid by Company should have been paid in escrow, then it would have been wrong for the Company to pay Hung first.  The Wealth Gain Sale and Purchase Agreement does not provide for escrow payments.  Further, if the money paid by the Company was to be held in escrow, it would have been so stated in the Company’s public announcements.  There was no mention whosoever in the Company’s announcement issued on 26 October 2007 in relation to the Acquisition, or in any other announcement by the Company. 

80.  In relation to the HK$33 million made by Hung to Wan on 22 April 2008, if, as Hung claims, the Company should not have paid the HK$33 million of the $300 million (the balance of the purchase price under the Wealth Gain Sale and Purchase Agreement) before the contract stipulated date, then the payment should have been returned to the Company, instead of being paid to Wan.  Moreover, if Wan had told Hung that the Company had to wait for the fund raising and the Placement to be completed before making the full payment to Hung, then the Company would not have issued to Hung the cheque for HK$33 million in the first place, and by Wan’s reasoning, the money should have been returned to the Company, and should not have been kept by Wan.

81.  Further, if there is any truth in Hung’s story, then, as Leading Counsel for Baron has pointed out, there was no reason why the Company would not have sought payment from Wan of the total sum of HK$53 million held in escrow by Wan, when the Company had to pay RMB 140 million to the Mine Seller in June 2008, and there was a shortfall of funds to complete the Acquisition.

82.  I reject Hung’s case on the escrow payments, and find that the $53 million was Hung’s part payment of the Fee payable to Wan and the Baron Group.

Whether there was agreement for sale of Hung’s shares to Wan

83.  It follows from my finding on the Fee arrangement agreed between Hung and Wan, that I accept Wan’s evidence that as part settlement of the Fee, the 100 million shares in the Company, held initially by Hung through IGPL, were transferred to Wan’s company through the transfer of IGPL from Hung to Wan.

84.  Hung’s case is that he had agreed to sell to Wan the 100 million shares held in the name of IGPL, at HK$0.99 per share.  Hung originally relied (in paragraph 57 of his Statement of Claim) on an oral agreement made on or about 29 April 2008.  Later, he changed his case to claim that the oral agreement was made on 15 May 2008.

85.  Hung’s case on the alleged agreement made with Wan on 15 May 2008, whereby Wan was to buy the shares from Hung, is not believable.  By May 2008, Baron Capital had been appointed as the Company’s placing agent in respect of the Placement.  If Wan had wished to purchase shares in the Company, he could have done so at the placing price of HK$0.80 per share.  Hung claims that on 15 May 2008, Wan told him that Wan had “inadvertently” converted 100 million shares for Hung, which had resulted in the need for Hung to make a general offer for all the shares in the Company.  To solve the problem, Hung claims that Wan made the suggestion that Hung should transfer 100 million shares to Wan, at HK$0.99 per share.  This story is incredible for many reasons. 

86.  First, as pointed out by Leading Counsel for Baron, Hung’s original claim is that the oral agreement was made on 29 April 2008.  By then, Hung had only made one conversion of 100 million shares under the Convertible Note, and his shareholding in the Company could not have exceeded 30%.  In any event, the second 100 million shares allotted by 15 May 2008 could not have been converted “inadvertently”.  As Hung accepts, he had to sign conversion notices to effect the issue of shares.  The conversion of shares would have to go through the Company’s secretary, who would be unlikely to have allowed the conversion in breach of the terms of the Convertible Note, which did not permit Hung to convert the shares if the resulting shareholding is over 29.9%.  Finally, if Hung’s shareholding had indeed exceeded 30%, the Stock Exchange would have required a mandatory general offer, even if the shares had been sold immediately thereafter.  The problem would not have been solved, as Wan had allegedly proposed. 

87.  Hung’s case of his alleged agreement for sale of the 100 million shares to Wan, as the solution for the “inadvertent” conversion of shares triggering a general offer, defies belief.  I reject his claim for HK $99 million as the purported price of the 100 million shares allegedly sold to Wan.

The Settlement Agreement

88.  It is not disputed by Hung, Wan and the Baron Group that on 30 December 2008, an agreement was signed by Hung on behalf of Mega Wealth, and Wan on behalf of Baron Capital (“Settlement Agreement”).  The Settlement Agreement refers to the Shortfall Guarantee and the 100 million shares of the Company held by Baron Capital and Wan as security.  Wan agreed to the discharge or cancellation of Hung’s covenants under the Shortfall Guarantee, and to return the corporate documents of Mega Wealth and the 100 million shares of the Company to Hung.  Wan and Hung, as parties to the Settlement Agreement, further agreed that “all transactions and payments (including but not limited to both parties’ affiliated companies and persons) executed and undertaken before (the Settlement Agreement) had been fully resolved and completed, and that neither party could claim against the other”.  (“雙方同意所有在本協議書前所簽訂及承諾之所有交易及金錢往來（包括並不限于雙方的關聯公司和人士) 已完全解決及完成，其後雙方再不可追究對方任何責任。”）

89.  In my view, the terms of the Supplement Agreement are perfectly clear.  Hung, Wan and their companies (including the Baron Group, Wealth Gain and Mega Wealth) acknowledged and agreed to settle, and to discharge the parties from, the agreements and transactions, monetary or otherwise, entered into by them prior to the date of the Settlement Agreement.  They acknowledged that their covenants and obligations under all such transactions had been fully resolved as completed.  The transactions and covenants include those under the Shortfall Guarantee given by Hung to Wan and the Baron Group, and Wan agreed to return to Hung the 100 million shares held by Mega Wealth, as well as Mega Wealth’s company kit.

90.  The Settlement Agreement by its terms extends to the compromise of the Consultancy and Services Agreement made between Hung and Wan in 2007, but makes no provision for the return of amounts already paid by Hung thereunder, before 30 December 2008.  This can only mean that the parties accepted the settlement on that basis, ie that there be no such return.  It is not for the Court to rewrite the contract whereby Hung and Wan agreed in December 2008 to settle their differences.

91.  I reject Hung’s claim for return of any part of the Fee paid to Wan and the Baron Group under the Consultancy and Services Agreement.

92.  Nor did the Settlement Agreement refer to the return by Wan or the Baron Group to Hung of the sum of HK $53 million which Hung claims should have been paid by Wan and was owing to him in respect of the alleged escrow payments made by Hung to Wan in September 2007 and April 2008.  It would have been natural to include these in the compromise when the Settlement Agreement was discussed and finally agreed on 30 December 2008, if they were indeed genuine claims.  Hung’s excuse, that the amounts were not included by Wan as they related to the listed Company, and not to the companies belonging to Hung and Wan, is not believable. In mid-December 2008, Hung’s demands for the return of the sums of HK $20 million and HK $33 million had been made against Wan, and not the Company. If Wan had indeed given such a reason to Hung for exclusion of the claim of HK $53 million from the Settlement Agreement, Hung would obviously have rejected such excuse.

93.  I also reject Hung’s claim that the Settlement Agreement was subject to a condition precedent that Wan would procure the release of Hung’s liabilities under the Disputed Documents, including the Procurement Agreement and the Supplemental Agreement made with Toeca (paragraph 33.2 of his Reply).  Given the fact that even on Hung’s own case, he had already discovered, before 30 December 2008, the Disputed Documents and his obligations thereunder, it is inconceivable that he would not make express provision in the Settlement Agreement for the discharge of his liabilities to Toeca under the Procurement Agreement and the Supplemental Agreement, if it was indeed to be part and parcel of the compromise.  By then, he already had a complete set of the Disputed Documents translated into Chinese by Li & Partners, and he should have been aware of the serious nature and consequences of the transactions with Toeca.  His relationship with Wan was no longer the trusted one which had existed before July or August 2008, and there was no reason for him, after discovery of the alleged fraud and misrepresentations, not to include the important condition for the release of his liabilities to Toeca in the Settlement Agreement, and not to record this important matter in writing in any way.

Toeca’s claim against Baron Capital and Wan

94.  The issues between Toeca, Wan and the Baron Group relate to, first, whether as a matter of construction, Toeca was in breach of its obligation under the Supplemental Agreement to serve on Wan and Baron Capital notice of its termination of the Procurement Agreement (“Notice”) “as soon as practicable” after its termination on 14 July 2009.  Wan and Baron Capital claim that as time was of the essence, the liability of Baron Capital and Wan did not arise, and the Placing Agreement did not become effective, by virtue of Toeca’s delay in service of the Notice until 31 July 2009.  Toeca had given Hung an extension of 14 days to complete the exercise of the put option under the Procurement Agreement.  To the extent that prejudice is required to be shown, Baron Capital and Wan claim that trading in the shares of the Company had become suspended on 28 July 2009, which rendered Baron Capital’s placing of the shares very difficult. 

95.  Toeca does not accept that on the construction of the Procurement Agreement, Supplemental Agreement and the Placing Agreement, time is expressly or by implication made the essence with respect to Toeca’s obligation under clause 3 of the Supplemental Agreement to serve the Notice as soon as practicable.

96.  Wan and Baron Capital further claim that there was a collateral agreement that Toeca would go after Hung first before looking to Wan and Baron Capital for any shortfall in the damages Toeca sustained (“Shortfall”), and that Toeca would not seek to enforce against Wan and Baron Capital their guarantee for the Shortfall until Toeca has taken bona fide and reasonable steps to pursue Hung by legal proceedings and maximize its recoveries (paragraph 36 of the Amended Defence filed in HCA 1913/2009).

Whether Notice was served as soon as practicable

97.  The rules of construction of a commercial document are not in dispute.  In the oft cited words of Lord Hoffman in Investors Compensation Scheme v West Bromwich [1998] 1 WLR 896 at 912:

“Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. The meaning which a document (or any utterance) would convey to a reasonable man is not the same thing as the meaning of it words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.”

98.  In the same vein, Lord Hoffman explained in Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279, 296:

“The construction of the document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve.”

99.  As part of the relevant factual matrix, the evidence shows that from the very earliest stage, Toeca had asked for and Baron had been agreeable to providing “protection for downside exposure”.  Immediately after their first meeting in Hong Kong on 29 March 2008, Majcher had sent an e-mail to Boekhoorn on 30 March 2008, in which he stated :

“…as discussed, if you decide to participate we will provide protection for downside exposure...”

100.  According to Toeca’s evidence, Boekhoorn had not done business in Asia before, and he was not enthusiastic about investing in the Company as it involved acquiring a minority stake in a listed company when Boekhoorn’s business normally involved investing in non-listed companies in which he could acquire a majority stake to influence the strategy and growth of the company.  Boekhoorn did not meet Hung in Hong Kong, and had not known him before the meeting, and it is inherently probable that he would be hesitant in taking shares in the Company without any form of protection or guarantee. 

101.  On the other hand, funds were urgently needed by the Company to complete the Acquisition of the coal mine which had a deadline of end June 2008.  Baron Capital had failed to locate any placees under its first mandate as the Company’s placing agent until it lapsed on 14 March 2008.  Toeca was the only substantial investor which was prepared to put funds into the Company, and Boekhoorn and Toeca were attractive to the Company, Hung and Wan as credible European investors.

102.  Wan acknowledged in his evidence that Boekhoorn was concerned that Toeca might not be able to enforce the put option against Hung in case Hung should hide in Mainland China.  Wan also admitted that Toeca had made it clear to him that it would only proceed with the Placement if Wan personally provided downside protection in addition to Hung.

103.  It is not disputed by Toeca, Wan and Baron Capital that the object and purpose of the entire set of the Procurement Agreement, Supplemental Agreement and Placing Agreement is for Hung, Baron Capital and Wan to give Toeca a put option, so as to effectively guarantee that Toeca would be able to recover its investment in the shares of the Company at the price of HK $0.99 per share.  The fact that these agreements relate to shares in a company being traded on the exchange, the price of which is likely to fluctuate, is only one of the matters to be borne in mind.  In considering the factual matrix for the purpose of construing the relevant agreements, I also bear in mind that Wan’s evidence is consistent throughout, that according to the structure he proposed to Toeca, the guarantees from Wan and Baron Capital were to be “behind” Hung, that Toeca would “go after Hung first”, that “Hung comes first” and the Baron Group were “only behind” in case of Hung’s default.  It was on that basis and for that purpose that the Supplemental Agreement was prepared: to provide for the Placing Agreement to come into operation only after the Procurement Agreement had been terminated in the event of Hung’s default and failure to make or procure payment of the sums due to Toeca on its exercise of the put option.

104.  On the meaning of the phrase “as soon as practicable”,  It was argued for Baron Capital and Wan that it was “practicable” for Toeca to serve the Notice on 14 July 2009, on the same day as Toeca served its notice on Hung to terminate the Procurement Agreement.  Drafts of both the notice to Hung and of the Notice to Baron Capital and Wan had been prepared, and were available to Toeca on 14 July 2009.  The Notice served on Baron Capital and Wan on 31 July 2009 in fact referred in its body to Toeca having written to Hung “today” to notify Hung of the termination of the Procurement Agreement.  Leading Counsel emphasized that Wijngaarden admits in his evidence that Toeca made a conscious decision to give Hung further time and not to serve the Notice to Baron on 14 July 2009, but to wait until 31 July 2009.  It was also pointed out by Counsel that there is a difference between “reasonable” and “practicable”.

105.  Recital D of the Supplemental Agreement states that it “shall form part of the Procurement Agreement and the Placing Agreement”.  Baron claims that clause 14.1 of the Procurement Agreement and clause 10.1 of the Placing Agreement, which provide for time to be of the essence, extend to and form part of the Supplemental Agreement, and Toeca’s obligation to serve the Notice thereunder as soon as practicable.  The relevant clauses read:

“Any date or period mentioned in this Agreement may be extended by agreement between the parties hereto failing which, with regard to any such dates or period, time shall be of the essence of this Agreement.”

106.  Even if I accept that clause 14.1 and clause 10.1 form part of the Supplemental Agreement, it still remains to be construed whether, on the facts of this case, Toeca had served the Notice in accordance with clause 3 of the Supplemental Agreement.

107.  The relevant clause 3 of the Supplemental Agreement reads:

“The parties hereby expressly agree that, as soon as practicable after Toeca has terminated the Procurement Agreement in accordance with the provisions thereof, Toeca shall serve a notice in writing to Baron setting out the event of termination and requiring for consummation of the Placing Agreement on a date (the “Effective Date”) which is not less than three (3) Business Days after the date of notice whereupon the Placing Agreement shall become effective as and from the Effective Date.  Toeca shall be entitled to date the Placing Agreement with the Effective Date accordingly.” (Emphasis added)

108.  I agree with Leading Counsel for Toeca that the Court should not construe “ as soon as practicable” under Clause 3 of the Supplemental Agreement to mean simply “as soon as possible”, or to mean that the Notice should be served as soon as it was physically capable of being served.

109.  Counsel has referred to the following passage in the judgment of Scarman LJ in Dedman v British Building and Engineering Appliances Ltd [1974] 1 WLR 171, at 179:-

“The word practicable is an ordinary English word of great flexibility: it takes its meaning from its context. But, whenever used, it is a call for the exercise of commonsense, a warning that sound judgment will be impossible without compromise. Sometimes the context contemplates a situation rarely to be achieved, though much to be desired: the word then indicates one must be satisfied with less that perfection: see for example, its use in section 5 of the Matrimonial Property Act 1990. Sometimes, as is submitted in the present case, what the context requires may have been possible, but may not for some reason have been ‘practicable’. Whatever its context, the quality of the word is that there are circumstances in which we must be content with less that 100%: and it calls for judgment to determine how much less.”

110.  Counsel also referred to the judgment in Owen v Crown House Engineering Ltd [1973] 1 CR 511, at 516:-

“The first question then is this: if an employer, during the course of negotiations, asks an employee not to make an application for compensation for unfair dismissal while he, the employer, considers making an increased offer of severance pay, is it practicable in all the circumstances for the employee to ignore that request and puts in his application? It is important not to equate ‘practicable’ with ‘possible’. When considering whether a course of action is possible, it is not permissible to consider the results of that course of action; if it can be done, it must be done. But when considering whether a course of action is practicable, it may be permissible to look at the end result. Like so many words in the English language ‘practicable’ will take considerable colour from the context in which it is used.”

111.  Leading Counsel for Wan and Baron Capital stressed that the above cases deal with interpretation of “as soon as practicable” in the context of the specific statutes concerned, and on specific facts and circumstances.

112.  Turning particularly to the Supplemental Agreement in this case, clause 3 does not say that Toeca shall serve the Notice “forthwith”, or “immediately after” or “on the same day as” its termination of the Procurement Agreement.  It does not state a specific period of time, or the number of days after Toeca’s termination of the Procurement Agreement, for its service of the Notice on Baron Capital.  Clause 3 states that Toeca has to serve the Notice “as soon as practicable after” it has terminated the Procurement Agreement.  If the parties had intended that the Notice should be served on the same day or at the same time, or within a certain period after the termination of the Procurement Agreement, they could have so specified in clause 3, but they did not.

113.  I agree that in construing the phrase “as soon as practicable” under Clause 3 of the Supplemental Agreement, the Court should not simply consider whether or not it was physically possible for Toeca to serve the Notice on 14 July 2009, or at any other time.  Having given heed to the context in which the remarks of Scarman LJ and Sir Hugh Griffiths were made in Dedman and Owen, I agree that “practicable” should not be equated with “possible”, that “practicable” should be given greater flexibility, and that as in any case of construction, the factual matrix of the case must be considered. 

114.  So far as the meaning of the individual words used is concerned, the fact that the parties had chosen to use “practicable”, which means “able to be put into practice” (Shorter Oxford English Dictionary), as opposed to “possible”, indicates that the parties acknowledged that the “practice”, practicalities, or putting into effect of the service of the Notice have to be considered.  I agree that the likely practical consequence of the course of action is relevant to the consideration of whether it would be “practicable”.

115.  So far as the factual matrix of this case is concerned, Wan insists that the structure of the agreements between Hung, Toeca, Baron Capital and Wan was that Toeca should go after Hung first, and that Wan and Baron Capital were to be behind Hung’s obligations.  I accept Toeca’s evidence that after Toeca had exercised its option in April 2009 under the Procurement Agreement, Wan and Baron Capital had on various occasions persuaded Toeca to take action against Hung, and had assured Toeca that it was in Toeca’s best interests to enforce its rights under the put option against Hung as the primary target, rather than to pursue Wan and Baron Capital, as their interests were aligned with Toeca’s.  Toeca relies on Wan’s e-mail to Wijngaarden of 10 July 2009, as well as an email from Majcher to Wijngaarden of 22 July 2009, in which Majcher assured Toeca that Hung would soon be in a position to settle the matter with Toeca, and that Wan was planning a conference call with Toeca to discuss the next steps regarding Hung.  If the service of the Notice was put into practice on 14 July 2009, it might not only have adverse and disrupting effects on Hung’s settlement of Toeca’s claims made against him, but would trigger the liabilities of Baron Capital and Wan under the Placing Agreement, such that their interests might not be aligned with Toeca’s.

116.  Against this background, and considering the Placing Agreement as part of the Procurement Agreement and Supplemental Agreement, I am satisfied that the Notice issued on 31 July 2008 (and replaced by the one on 3 August 2009) can be regarded as having been issued “as soon as practicable after Toeca has terminated the Procurement Agreement” on 14 July 2009, as these words would reasonably have been understood by a person having all the background knowledge reasonably available to the parties at the time of the contract.  On 31 July 2009, Hung in fact issued these legal proceedings against Toeca, Baron Capital and Wan by HCA 1683 of 2009, and it became clear to Toeca that Hung would not be settling its claims, that interests could no longer be aligned in all practicalities, and the Notice was served on Baron Capital and Wan.

Whether there was a collateral agreement between Wan and Toeca

117.  Wan and Baron Capital claim that they had orally agreed with Toeca in May 2008, that should Hung default on the put option, Toeca would “go after Hung first”, and would not seek to enforce the guarantee from Baron Capital and Wan until after Toeca has taken bona fide and reasonable steps to pursue Hung by legal proceedings and maximize its recoveries thereunder.  It is claimed by Wan and Baron Capital that Toeca is in breach of such collateral agreement and that their liabilities under the Placing Agreement and Supplemental Agreement had not arisen, since Toeca has failed to take bona fide and reasonable steps to pursue Hung by legal proceedings and to maximize its recoveries.

118.  I reject the claim of the collateral agreement, since Clause 10.4 of the Placing Agreement has an entire agreement clause, which provides:

“This Agreement constitutes the entire agreement between the parties to this Agreement inter se in respect of the matters referred to in this Agreement, to the exclusion of all other agreements, conduct, arrangements or warranties, whether expressed or implied, and therefore supersedes any prior agreements, conducts, arrangements or warranties between the parties or any of them in respect of such matters of any nature whatsoever.”

119.  As Lightman J held in Inntrepreneur Pub Company v East Crown Ltd [2000] 2 Lloyd’s Rep 611, at 614:-

“The purpose of an entire agreement clause is to preclude a party to a written agreement from thrashing through the undergrowth and finding, in the course of negotiations, some (chance) remark or statement (often long forgotten or difficult to recall or explain) upon which to found a claim, such as the present, to the existence of a collateral warranty. The entire agreement clause obviates the occasion for any such search, and the peril to the contracting parties posed by the need that may arise in its absence to conduct such a search. For such a clause constitute a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that, accordingly, any promises or assurances made in the course of the negotiations (which, in the absence of such a clause, might have effect as a collateral warranty) shall have not contractual force, save in so far as they are reflected and give effect in that document. The operation of the clause is not to render evidence of the collateral warranty inadmissible in evidence; it is to denude what would otherwise constitute a collateral warranty of legal effect.” (Emphasis added)

120.  In Natamon Protpakron v Citibank NA [2009] 1 HKLRD 455, Cheung JA stated that whether an entire agreement clause applies to exclude a collateral contract depends on the construction of the clause, and that the clause can be waived by the contracting parties.

121.  As a matter of construction, I consider that Clause 10.4 of the Placing Agreement is sufficiently wide to exclude the alleged oral agreement made by Wan and/or Majcher with Boekhoorn, or any warranty or agreement by Boekhoorn, that Toeca would go after Hung first, or take bona fide and reasonable steps to pursue Hung, before exercising any of Toeca’s rights and remedies under the Placing Agreement.   There is no pleading of any waiver of the entire agreement clause.

122.  In any event, apart from the entire agreement clause, there cannot in my view be any enforceable collateral agreement, simply because the exact meaning of Toeca’s alleged obligation to “go after Hung first” lacks sufficient certainty and precision to enable enforcement by the courts.  Majcher, to whom Boekhoorn had allegedly given the assurance “to go after Hung first”, during their trip to Macau in March 2008, was not called to give evidence as to what the alleged understanding was.

123.  As for Wan’s evidence on the collateral agreement, he had in fact visited the office of Jones Day, Toeca’s lawyers, on 25 April 2008, after receipt of the preliminary drafts of the agreements, and had personally explained to Kwan the structure of the deal with Toeca and Hung, and what he wanted and meant as to Baron Capital being “behind Hung”. As a result, further drafts of the Procurement Agreement, Supplemental Agreement and Placing Agreement were prepared and circulated by Jones Day.

124.  Wan was an experienced businessman in the financial market, and obviously a skilled salesman and negotiator.  He admits that the agreements prepared by Jones Day and the solicitors for the Baron Group did not reflect the oral agreement allegedly reached between Boekhoorn and himself in May 2008. Nevertheless, he admits that he did not insist on including, in any of the documentation prepared, the terms which are now claimed to be part of the collateral agreement, but was happy to proceed and did proceed with the structure and contents of the agreements as they evolved between end-April and mid-May 2008, and were eventually signed.  His excuse, that he had not asked for the inclusion of the oral terms of the collateral agreement out of courtesy and respect for Boekhoorn, is clearly an after-thought when litigation had commenced and was pursued.  As Lightman J observed in Inntrepreneur Pub Company v East Crown Ltd [2000] 2 Lloyd’s Rep 611, the prima facie assumption in such circumstances must be that the written contract signed includes all the terms the parties intended and wanted to be binding between them, and none other.

125.  Further, even if there was any binding and enforceable collateral agreement that Toeca would “go after Hung first”, my view is that such agreement referred to and had been complied with by the design and structure of the Procurement Agreement, the Placing Agreement and the Supplemental Agreement, whereby Toeca was to look to Hung under the Procurement Agreement first, and for the Placing Agreement to be triggered only in the event of Hung’s default under the Procurement Agreement, and upon Toeca’s service of the Notice on Wan and Baron Capital.

126.  It was argued for Baron Capital and Wan that “going after Hung first” does not simply mean the sequence of the operation of the Procurement Agreement, Supplemental Agreement and Placing Agreement, and the sequence in which the liabilities of Hung, Baron Capital and Wan would arise, but the enforcement of Toeca’s claims or rights as well. If it was used in the context of enforcement of claims, “going after Hung first” can equally mean going after Hung first in the enforcement of any judgment obtained by Toeca against Hung, Baron Capital and Wan. In this context, Toeca cannot be said to be in breach of the collateral agreement by starting legal action and proceeding to obtaining judgment against Hung, Baron Capital and Wan at the same time. This simply goes to show the uncertainty of any agreement to “go after Hung first”.

127.  To the extent that reasonable steps have to be taken by Toeca to go after Hung first or to pursue Hung, then Toeca had done so by giving Hung 14 days before serving the Notice to trigger the Placement Agreement and the liabilities of Baron Capital and Wan thereunder.

128.  In my view, what Wan meant in his discussions with Boekhoorn and Kwan by “going after Hung first”, was simply the structure of the Procurement Agreement, Supplemental Agreement and Placing Agreement, and this has been aptly reflected in the agreements, which is why he was happy to accept them after his meetings with Toeca and Kwan.

129.  I reject the claim that “going after Hung first”, or that Toeca should take bona fide and reasonable steps to pursue Hung by legal proceedings and to maximize its recoveries, are implied terms of any of the Procurement Agreement, Supplemental Agreement and Placing Agreement.  The alleged terms are neither necessary to give business efficacy to the set of agreements, which are effective and workable without the implied terms, nor is it obvious that they should be implied.  The terms are patently incapable of clear expression, as to the extent to which Toeca should be required to look to Hung or to enforce its claims and remedies against Hung, before it can pursue its claims and remedies against Baron Capital and Wan. They further contradict the express terms of the Placing Agreement which sets out the rights and remedies of Toeca against Baron Capital and Wan.

Duty not to injure the interests of Wan/Baron Capital

130.  Finally, it is claimed that Toeca is in breach of the collateral agreement, or an equitable duty, not to injure the interests of Wan and Baron Capital.  In this regard, Baron Capital and Wan claim that Toeca had failed to enforce Hung’s obligation to appoint Baron Capital as the placing agent under the Procurement Agreement, or to itself appoint Baron Capital as the placing agent. 

131.  For all the reasons set out in the preceding paragraphs, I reject the claim of a collateral agreement.  As for the alleged equitable duty, Baron Capital and Wan rely on Black v Ottoman Bank (1862) 15 Moo PCC 472, at p 483, where the Privy Council held that a surety would be discharged if there was “some positive act” done by the creditor to the prejudice of the surety, or “such degree of negligence as…to imply connivance and amount to fraud”.  Counsel highlighted that in this context, “fraud” has been defined as conduct which is unfair to a surety (Mayor of Durham v Fowler (1889) 22 QBD 394 at 419).

132.  Leading Counsel for Toeca relies on the following passage at p 483 of the judgment in Black v Ottoman Bank:

“From these cases it is clear that, upon the point now in dispute, the rule at law and in equity is the same, that the mere passive inactivity of the person to whom the guarantee is given, his neglectto call the principal debtor to account in reasonable time, and to enforce payment against him, does not discharge the surety; that there must be some positive act done by him to the prejudice of the surety, such degree of negligence as, in the language of Vice Chancellor Wood in Dawson v Lawes, to imply connivance and amount to fraud.” (Emphases added.)

133.  I agree that any failure by Toeca in this case, to “enforce Hung’s obligation under the Procurement Agreement to appoint Baron Capital as placing agent”, is at most passive inactivity, as opposed to any positive act of the type envisaged in Black v Ottoman Bank to be capable of discharging the surety.  Further, I am not satisfied that such failure on the part of Toeca constitutes negligence which implies connivance, or amounts to fraud, in the sense of assisting an act which must be detrimental to the surety ( per Denman J in Mayor of Durham v Fowler). 

134.  On the available evidence, there had been e-mails and telephone discussions between Toeca and Baron Capital between late May 2009 and 31 July 2009 (when Toeca served the Notice on Baron Capital and Wan), as to ways to either persuade, or pressurize, Hung to come to terms of settlement, or otherwise complete the purchase of the Placed Shares under the Procurement Agreement.  There were also discussions and assurances made to Toeca as to the prospects of such settlement or completion by Hung.  Majcher of the Baron Group informed Toeca in late May 2009 that Hung had approached Wan to discuss the resolution of his obligations to Toeca, and expressed confidence that Wan would be able to assist Toeca to recover its investment.  In his e-mail of 26 May 2009 to Wingaarden, Majcher indicated that he understood that Wan was “the next in line”.  From these, it can be seen that Baron Capital and Wan were throughout aware of Hung’s position and stance in relation to his obligations to Toeca under the Procurement Agreement, whilst at the same time giving assurances to Toeca as to a likely resolution or compromise.  I do not consider that Toeca’s inactivity can be said to constitute any negligence in all the circumstances of the case.

135.  I also bear in mind that under clause 8.2 of the Procurement Agreement, the event of default which triggers Hung’s liability to Toeca, and in turn triggers the termination of the Procurement Agreement (and the operation of the Placing Agreement upon Toeca’s service of the Notice) is Hung’s failure (in accordance with clause 7.2) to complete the purchase of Toeca’s Placed Shares by payment or procuring payment to Toeca of the Aggregate Placing Price, or the Minimum Placing Consideration, as defined in the Procurement Agreement, and interest (and additionally, the shortfall, if the Aggregate Placing Price is lower than the Minimum Placing Consideration of HK $0.99 share).  Even if Hung should fail to appoint Baron Capital as placing agent under the Procurement Agreement, he would not be in breach if he should make or procure the appropriate payment to Toeca upon completion, in accordance with clause 7.2 of the Procurement Agreement.  Hence, I do not consider that Toeca is under any duty, contractual or otherwise, to compel Hung to appoint Baron Capital as placing agent.  The Procurement Agreement expressly provides for Toeca’s rights and remedies in the event of Hung’s breach of his obligations under the Procurement Agreement: which are, simply, to terminate the Procurement Agreement if Hung fails to complete in accordance with clause 7.2.

136.  To the extent that it is suggested by Baron Capital and Wan that Toeca has the duty to take legal action against Hung to compel him to appoint Baron Capital as placing agent under the Procurement Agreement, before Toeca can claim against Baron Capital and Wan, I agree with Leading Counsel for Toeca that this is simply not feasible, and could not have been contemplated by the parties.  As Counsel has pointed out, under the Procurement Agreement, there is only a window of 3 months after the option is exercised by Toeca for Hung to complete the placing or purchase of the Placed Shares by payment of the sums due under clause 7.2.  It is simply not possible for Toeca to take legal action and obtain any form of final order against Hung to compel him to appoint Baron Capital as placing agent in this interval of time specified under the Procurement Agreement.

Conclusion

137.  I dismiss the entirety of Hung’s claims against Toeca, Baron Capital, Wan and Baron International in HCA 1683/2009. I have rejected all of Hung’s claims as incredible, and it is clear to me that his claims of non est factum and misrepresentation have no basis, and should never have been brought to trial. I make an order nisi that Hung should pay the costs of the action on an indemnity basis, with certificate for two counsel.

138.  I allow Toeca’s counterclaim against Hung in HCA 1683/2009, for the sum of HK $116,820,000, with interest at the contractual rate of 5% per annum, and costs of the counterclaim, with certificate for two counsel.

139.  Although the Placing Agreement relates to the sale and purchase of shares in the Company which is listed, on the facts of this case, trading in the shares of the Company had been suspended for a long time. The shares of the Company were either of nil value during the time when trading was suspended from 28 July 2009 until 1 February 2011, or trading at around HK $0.10 on 8 November 2012. On any view, damages would not be an adequate remedy for Toeca in respect of the breach of either the Procurement Agreement by Hung, or the Placing Agreement by Baron Capital and Wan.

140.  In relation to Toeca’s claims against Baron Capital and Wan, bearing in mind that the Placing Agreement was for Baron Capital to guarantee that the Placed shares could be purchased at HK $0.99 per share, irrespective of the actual or market price of the Shares, the just order would be for Baron Capital, and Wan as guarantor of Baron Capital, to pay to Toeca the sum of HK $116,820,000, and interest in the sum of HK $1,947,000 as claimed, and for the Placed Shares in the Company to be transferred to or to the order of Baron Capital upon payment, all in accordance with the Placement Agreement. 

141.  Toeca is also entitled to interest on the judgment sum until payment.

142.  I will make an order nisi that Baron Capital and Wan are to pay to Toeca the costs of HCA 1913/2009, with certificate for two counsel. 

143.  Finally, I wish to thank all Counsel involved, for their detailed submissions.